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EarningCall_1000	Good morning and welcome to the Crown Castle Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ben Lowe, Senior Vice President. Please go ahead. Thank you, Kate and good morning everyone. Thank you for joining us today as we discuss our fourth quarter 2022 results. With me on the call this morning are Jay Brown, Crown Castleâs Chief Executive Officer; and Dan Schlanger, Crown Castleâs Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investors section of our website at crowncastle.com that will be referenced throughout the call this morning. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties and assumptions and the actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors sections of the companyâs SEC filings. Our statements are made as of today, January 26, 2023 and we assume no obligation to update any forward-looking statements. In addition, todayâs call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investors section of the companyâs website at crowncastle.com. Thanks, Ben and thank you everyone for joining us on the call this morning. As you saw from our results, 2022 was another successful year for Crown Castle and the positive trends across our business remain intact. With fourth quarter 2022 results coming in as we expected and no changes to our 2023 outlook, I plan to keep my prepared remarks brief before handing it over to Dan to talk through the numbers in a bit more detail. As I reflect on 2022, I am proud of what our team accomplished. We led the industry again with nearly 6.5% organic tower revenue growth as our customers upgraded existing tower sites with additional spectrum and added equipment to thousands of tower sites they were not previously on to support nationwide deployment of 5G. And we deployed 5,000 small cells to support initial network densification efforts while growing our fiber solutions revenue by 2%. The positive operating trends in 2022 exceeded our initial expectations for the year and offset the impact of the rapid increase in interest rates, demonstrating the resilience of our business model and strategy. As a result, we were able to deliver strong bottom line growth that supported more than 9% dividend per share growth. As we discussed when we initially provided guidance in October, we believe that a positive operating momentum will carry into 2023, driving another year of expected strong growth with 5% organic growth in towers and a doubling of our small cell deployments to 10,000 nodes. With respect to tower leasing trends, the established national wireless operators are deploying mid-band spectrum in earnest as a part of the initial phase of their 5G build-out. To-date, only about half of our sites across our top three customers have been upgraded with mid-band spectrum, providing a significant opportunity for additional revenue growth as additional sites are upgraded over time before their focus will likely shift to more infill with new co-locations. Adding to the substantial long-term growth opportunity, we continue to support DISH with their nationwide build-out of a new wireless network. And I believe we are in a great position to continue to capture an outsized share of that opportunity. Turning to small cells, we expect to double the rate of small cell deployments this year to 10,000 nodes with over half co-located on existing fiber to meet the growing demand from our customers as 5G networks will require small cells at scale. With approximately 60,000 nodes on air and another 60,000 contracted in our backlog, I believe 2023 will represent the first year in a sustained acceleration of growth for our small cell business. We also continue to see opportunities to add to the returns we are generating from small cells by leveraging the same shared fiber assets to pursue profitable fiber solutions growth and we expect to return to 3% growth as we exit 2023. Looking at the bigger picture beyond this year and why I am so excited about our growth opportunity, we are still in the early innings with 5G as the industry is only a couple of years into what we expect will be a decade-long growth opportunity. Our customers are seeing significantly higher levels of monthly data consumption as consumers upgrade to 5G, providing the need for significant network investment for years to come to keep pace with this persistent growth in mobile data demand. As we have seen in our industry throughout its history, generational upgrades to the wireless network occur in phases with an initial push to provide nationwide coverage followed by periods of continued network augmentation and densification that has led to long periods of sustained growth. We believe we are in the initial phase of the 5G build-out with many phases to follow over the coming years. Consistent with their past practice, we believe our customers will first deploy their spectrum on the majority of their existing sites as they are currently doing before shifting their focus to cell site densification to get the most out of their spectrum assets by reusing it over shorter and shorter distances. The nature of wireless networks requires that cell site densification will continue as the density of data demand grows and we expect 5G densification to require both towers and small cells at scale to fill in the network. With that view in mind, we have invested more than $40 billion of capital to-date in towers and more recently, small cells and fiber that are mission-critical for wireless networks to capture as much of this growth opportunity as possible. Importantly, we are already generating a 10% return on our total invested capital with the opportunity to increase that return over time as we add customers to our tower and fiber assets and grow our cash flow. As a result, I believe Crown Castle is an excellent investment that will generate compelling returns by providing investors with access to the most exposure to the development of next-generation networks in the U.S. with our comprehensive offering of towers, small cells and fiber, providing the opportunity to benefit from the best growth and lowest risk market, an attractive total return profile with a current yield of 4% and a long-term annual dividend per share growth target of 7% to 8% and the development of attractive new assets that we believe will extend our runway of growth and create shareholder value. Thanks, Jay and good morning everyone. We generated another year of solid growth in 2022 and we expect the strong operating trends across our business to continue as we see a long runway of 5G investment in the U.S. The elevated leasing activity across our customers contributed to another year of industry leading tower revenue growth in 2022 of nearly 6.5% and to 9% growth in our annual dividends per share. Before discussing the 2022 results and 2023 outlook, I want to draw your attention to some enhancements we made this quarter to the disclosure in our supplemental information package. In response to feedback we have heard from our investors, we provided organic billings growth detail by line of business for towers, small cells and fiber solutions to help investors better understand the composition of organic growth trends. This enhanced disclosure includes historical organic growth information going back to 2019. In addition to expanding our disclosure, we also reorganized the supplemental information package, in many cases, by line of business to make it easier for readers to follow. We hope you find this additional information and the new layout to be helpful. Now turning to the full year 2022 financial results on Slide 4 of our earnings presentation, site rental revenues increased 10%, adjusted EBITDA growth was 14% and AFFO increased by 6% for the year. The 10% growth in site rental revenues included 5% growth in organic contribution to site rental billings, consisting of nearly 6.5% growth from towers, more than 5% growth in small cells and 2% growth in fiber solutions. Turning to Page 5, our full year 2023 outlook remains unchanged and includes site rental revenue growth of 4%, adjusted EBITDA growth of 3% and AFFO growth of 4%. We also expect organic billings growth of approximately 4% when adjusted for the impact of the previously disclosed Sprint cancellations. The 4% consolidated organic growth consists of 5% growth in towers, 8% growth in small cells and flat revenue in fiber solutions. As we discussed last quarter, we expect the rationalization of a portion of Sprintâs legacy network to result in some movements in our financial results that are not typical for our business. Our expectations for non-renewals and accelerated payments associated with this network rationalization activity are unchanged with approximately $30 million of new non-renewals and $160 million to $170 million of accelerated payments during 2023. We expect the majority of the non-renewals to occur in the first quarter and therefore impact year-over-year billings growth in each quarter this year. We expect the accelerated payments associated with this decommissioning activity and related services work to be concentrated in the second quarter. As a result, we expect the second quarter to represent the high watermark for adjusted EBITDA and AFFO in 2023. Turning to financing activities, we finished 2022 with leverage in line with our target of approximately 5x net debt to adjusted EBITDA. For full year 2023, our discretionary CapEx outlook is also unchanged with gross CapEx of $1.4 billion to $1.5 billion or approximately $1 billion net of expected prepaid rent. Based on our current backlog of small cells that includes a significant mix of co-location nodes, which have higher returns and require less capital relative to anchor builds, we expect to be able to finance our discretionary capital with debt while we are maintaining our investment grade credit profile. Earlier this month, we added to our strong balance sheet position when we issued $1 billion in senior unsecured notes with a 5% coupon to term out borrowings under our revolving credit facility. Following this financing transaction, we have more than 85% fixed rate debt, a weighted average maturity of over 8 years, limited maturities through 2024 and approximately $5.5 billion in available liquidity under our revolving credit facility. So to wrap up, we are excited about the strength of our business and our ability to execute on our strategy to deliver the highest risk-adjusted returns for our shareholders by growing our dividend over the long-term and investing in assets that will help drive future growth. We have delivered 9% compound annual and dividend per share growth since we established our 7% to 8% dividend per share growth target in 2017. And I believe that we are positioned well to return to 7% to 8% dividend per share growth as we move beyond the Sprint decommissioning impacts in 2025. Thanks and good morning. And also, I just want to say thank you for the additional disclosures. Very helpful. Two topics if I could. First, on small cells, if you â a little bit more color on the small cell leasing that you experienced during the fourth quarter? And then when you look at the backlog and consider the typical 18 to 36-month cycle that you described to install a small cell for your customers, whatâs the opportunity to further accelerate that 10,000 deployment pace into â24 and 2025? Thanks. You bet. Good morning, Mike. Thanks for the comments. On the first question around leasing, as you noted and I made a mention of this in my prepared remarks, we did increase the total number of nodes on air and under contract by 5,000 during the fourth quarter. So we didnât sign any large deals with customers, but this is just ongoing activity that represents additional commitment for nodes beyond the large commitments that we previously announced. And to my comments around cell site densification, we believe we are going to continue to see this throughout the 5G cycle of upgrades and deployments and beyond as the carriers move past touching the sites, the tower sites that they are on and starting to look at densification of their network. And I think the activity that we saw in the fourth quarter is representative of exactly those longer term plans, which ties really closely to your second question around the backlog and the timeline. I think we see and have visibility to what they are going to need in their network, particularly in small cells, 24 to 36 months in advance of when these nodes will actually be put on air. And as I mentioned in my comments, we think the acceleration that we are seeing in 2023, doubling the number of nodes that we expect to put on air from 2022 to 10,000, we think thatâs the start of an acceleration of growth and deployment of small cells. So I am not really ready to give guidance on how many we will put on in â24 and â25. But given the backlog and the timing, we do think this is the start of an acceleration of growth in that business. Hi, guys. Good morning. Thanks so much for taking the questions. I guess along related lines, so two questions on this small cell topic, I guess, Jay, one is you have got these large scale relationships on small cells and as you say, visibility on these next 2 to 3 years. There are some carriers that you donât have these relationships with. And I was wondering if you could elaborate a little bit on why you think that is? Is that because counterparty plans arenât as evolved? They might be like less evolved in terms of the total size of their network build and not ready for densification or is it the other way around, which is that they have chosen to go the self-perform route and is that impacting the market opportunity that you foresee? I guess the second question would be related to with respect to what you do have in the backlog, how do we think about how you are budgeting for the upfront CapEx contribution portion of that? Is it a constant drumbeat thatâs already known? Is it going to be on a case-by-case basis? Obviously, relevant to the cash flows and how we think about the runoff of prepaid rent amortization over the coming years? Thank you so much. Good morning, Dave. On your first question around the agreements with the carriers, I think you are going to see over time in that business, a combination of large scale agreements with the carriers where whether they give us whole markets or a number of markets, we will probably see large-scale agreements with carriers over time. We expect those large-scale agreements to be lumpy. So we wouldnât expect to see them every quarter or even every year, but it will be dependent upon the way that the carriers are thinking about the network and where the holes are and where the need is. I think there is value in some of those large-scale agreements, particularly with respect to securing the resources when concentrated in some â in a few markets. So I think you will continue to see those. I also think you will continue to see what we saw in the fourth quarter, where carriers give us business and they are not at large scale and we do them in smaller chunks. So I think both are going to be there. I donât think one or the other is representative of an underlying trend or nature of the business. The carriers, I think, as I say, will contract with us, I think on both basis. And I think over time, big picture and we have talked about this for years, because of our disciplined and rigorous approach to capital allocation and our view of where small cells are going to be needed, everywhere that small cells are needed is not necessarily attractive for us to put capital to work. So weâre going to pick and choose where we decide to put capital to work, which means the carriers are either going to need to find other providers who are willing to deploy capital at lower return thresholds than what weâre comfortable with or alternatively, theyâll self-perform. And today, we have seen the carriers self-perform in â for the most part, in places where we were not willing to do it. And I think that will continue. Youâll continue to see self-perform for the carriers. Again, I donât think thatâs indicative of the business. I think itâs more indicative of the way that we think about return thresholds and our desire to both grow the dividend, elongate the timeline of returns and be thoughtful about the risks that we underwrite. On the second question around the backlog and carrier CapEx contribution, the way the agreements are structured relates to the â pricing is related to the return based on the underlying cost to deploy nodes. So the CapEx will move, the CapEx contributions from the carriers will move in unison with the way that itâs â the cost of actually deploying the networks that weâre deploying in the locations that weâre deploying them. So in a market where they are more expensive to deploy, the capital contribution is going to be higher. In places where itâs less expensive to deploy, those capital contributions will be less. I donât think at this point beyond the guidance that weâve given around CapEx for calendar year â23, weâre not going to provide guidance for â24 and â25. But as we give outlook for each individual year, we will give you a view of whatâs the backlog, what do we think weâre going to turn on air and then break out for you what we think our total CapEx for the year is going to be and then what portion of that will be carrier CapEx, carrier contribution offsetting that play. And then, Jay, just â and maybe this is a question for Dan, but just to follow up real quick on how the mechanics work. So the CapEx comes in during the 24 to 36-month period, you recognize that contribution CapEx, but you donât start amortizing that contribution until after the lease begins. And so there is a window between where youâve got the money and then where you start amortizing it through the income statement. Is that right or wrong? Youâve articulated it correctly. So we will receive cash as we go through the process of deploying the nodes and incurring capital expenditures. And then we would start to run it through the income statement once weâve completed the work of â the operational work necessary to complete and deliver the node to the carrier. At that point, we would then amortize it over the term of the lease. One thing I would I would say, and Iâm not sure exactly what youâre trying to decipher in terms of this question. Youâve articulated it correctly. Maybe one additional piece of information thatâs helpful, the backlog and the timeline to build when we talk about 24 to 36 months to build is our average. Obviously, there are nodes that take longer than that, [Technical Difficulty] construction period of time is relatively short. And it occurs at the back half of the last portion of that long-dated period of time. So the majority of the costs that we incur up until construction are soft cost, and they would be a smaller percentage of the overall CapEx. So you shouldnât expect â just to be extreme, you shouldnât expect on a 36-month timeline to construct a node that we would have significant CapEx in the first 12 months of that and then receive carrier contributions at that time. Most of the actual outlays would be towards the back half of that process and the cash being received. So the timeline between receipt of cash and booking the node is not 36 months or not likely. Great. Thank you very much. Jay, thank you for the color on the phases of densification. That was helpful. Perhaps you could just help us with this transition as Verizon and T-Mobile wind down their 5G builds. Is it normal that we have like a pause and digest on the macro side? Or do they go straight into cell site densification on the macro side? Have you got any color on what the carriers are starting to think about once they â particularly in the urban areas and suburban areas have already put up the antennas? And then just a related point, any comments, any updated thoughts on M&A? Obviously, itâs been a long time since youâve done anything inorganic of scale, but there is always market opportunities out there. So Iâd just love to get your latest thoughts on that. Sure. On your first question, I donât want to comment specifically on Verizon and T-Mobile. Iâll let them comment on their longer-term network plans. As I mentioned in my comments, we think about half of our sites have been touched for the mid-band spectrum at this point. They are obviously across the board, all of the carriers are working on touching the vast majority of the rest of those. And that will take some period of time in order for that to be accomplished. Weâre 2 to 3 years into the work thatâs been done to date, and itâs taken about that long just to touch half the sites with just the mid-band spectrum. So I think youâre going to see other spectrum bands that are going to be deployed for 5G on existing sites as well as the completion of the mid-band spectrum across the balance of the sites. Each of the carriers will think about how they deploy capital, how they budget that capital a little bit differently. But those offsets generally over a long period of time in the tower business have mostly offset each other to the point where we just havenât seen a lot of movement and a lot of movements up and down in terms of the overall CapEx. And I think we will see in spending and focus on network deployment, I think we will see a similar thing during 5G. Thus far, as I made in my â pointed to in my comments, thus far, 5G has looked relatively similar in terms of its deployment activity as what we saw when 2.5G, 3G, 4G were deployed where the carrier is focused on upgrading the sites that they were already on and then the discussions start to move towards the second half of it and start to think about infill sites. I think whatâs different about 5G that weâre seeing, obviously, in our small cell business as alluded to previously on the increase in the number of nodes that we signed as well as the larger transactions that we announced previously, those infills are going to come from a combination of both tower sites and small cells. So I think the unique thing about 5G, we saw a little bit of this at the end of 4G, but the unique thing about 5G is the necessity in those infill sites to use both towers and small cells. And weâre starting to see the real beginnings of that as we start to accelerate. So similar to past and excited about our forward growth, excited about our 5% plus organic tower growth this year. We think there is a long runway of continuing at that level of north of 5% growth in tower site. Yes. On the M&A side, no change to the comments that weâve made historically, we are focused on making sure we deploy capital at very high returns that increase the dividend and elongate our opportunity for growth. We have chosen based on the opportunities and price sets that have been in front of us and assets that we have looked at. Weâve made the decision that the best opportunity has been to invest in assets that weâre building. But we think about acquisitions the same way we think about CapEx. We look at it as whatâs the best alternative for that use of capital. And thus far, we think the best opportunity at scale for the use of capital has been to deploy fiber and small cells. And so we will continue to look, and we would be open to it if we found an asset that was â met our return criteria for what I articulated previously of growing the dividend and elongating the growth rate could be interesting to us and â but really excited about the opportunity for us to continue to invest capital to deploy small cells. Thanks for your time. Just to follow-up on some of the small cell stuff. How many do you think will be upgraded versus about half are done today? And anything shifting in the small cell expansion mix of overlay versus 5G â overlay of 5G versus new locations? And when do you think infill should start to ramp? Thank you. Yes. On the tower side, I think we will see the second half of the other half of the towers be upgraded to mid-band spectrum. Took about 2 to 3 years to do the first half. So I think thatâs probably a reasonable assumption that it will take that long to do the second half of the assets roughly on the tower side. I think the announcements that weâve made previously with small cell commitments to be constructed are already a combination of overlaying on nodes that they were previously on with other technologies and upgrading those two technologies as well as infilling sites along the same fiber, increasing the number of nodes per mile, if you will, in a given geography. Weâre already seeing infill and densification on that front. Weâve talked about in the two large announcements that we made with the T-Mobile nodes, the committed T-Mobile nodes that the vast majority of those were co-located on existing fiber. So those largely represent upgrades and densification and then a mix of about 50-50 on the Verizon nodes, a combination of upgrades, co-location on existing fiber. And then the other component would be where weâre building new sites and new locations. So I think, we will continue to see a mix as we said in our comments. For 2023, we think the vast majority of the nodes that will turn on air will be on existing fiber. Thanks, guys. And one more if I can. On services, talk about the current pace, is this sort of a normal level, do you think or are there particular projects driving the strength? Thank you. No, itâs a pretty normal pace, Phil. And the only thing I would point out is something I said in my prepared remarks that the second quarter will likely be the high watermark because we have some decommissioning work that comes with services activity that will hit in the second quarter, but a relatively normal pace where we are today. First, echo Mikeâs comments. Thanks so much for the extra detail on the segments, but also hope you and the team are okay with all the weather issues in Houston. Great to hear youâre okay. I want to follow-up on the small cell side, obviously, a comment today. I think previously, you had said the $30 million Sprint cancellation churn item was maybe $20 million small cells, $10 million fiber. How many more should we expect that $20 million equates to? And then was it a total of 5,000 nodes, they were going to turn off over a multiple year period, is that still the case? Yes, thanks. You are correct. We did say there is about $30 million of â Iâm sorry, $40 million of churn that we expect in our fiber segment and split about equally between small cells and fiber solutions in calendar year â23. The churn expected, you correctly stated, of about 5,000, we expect about half of those to churn in calendar year 2023. The balance would be in â24 and beyond. Okay. Now not only have the extra details, it seems like there is maybe a normal level of churn within small cell. What should we think that â is that kind of like a 1% to 2% normal level of churn small cell that we should be baking into our long-term forecast? Yes, I think thatâs probably right, somewhere in the neighborhood of 1% to 2%. I mean, honestly, to date, we really have not seen hardly any churn in that business, except for the event of the consolidation of Sprint into T-Mobile. Churn has been near zero or very low other than that event. So â but I think long term, it probably plays itself out like towers. So if youâre thinking about your long-term model, assuming churn of 1% to 2% is probably right. Great. And final question for me, you mentioned small cell, look for profitable fiber solution items. T-Mobile has talked about their high-speed Internet project they might move beyond fixed wireless access and consider buying capacity of fiber from other people. Is that a type of profitable business in the areas where youâve been deploying fiber and small cells that the T-Mobile might be an interesting return case? Itâs possible. A good portion of our fiber business is leases that we have with the carriers where they use our fiber. So depending on the locations that T-Mobile were to desire, then our assets could be very attractive for that. But itâs a case-by-case, location-by-location analysis that would have to be done. Hi, guys. Thanks for taking the questions. And appreciate the disclosures as well. I was hoping you could talk us through the run rate in terms of tower core leasing throughout â23. Is first half any stronger than second half? And maybe the other way to ask the question is, as you look at the backlog of new lease applications that youâre receiving today, are those trending up or down at this point? Thanks. Yes. Thanks, Brandon. The run rate tower leasing is relatively flat through the whole year. There may be a little bit of a skew towards the front half, but itâs not anything I would say is going to impact the numbers very much at all. And that would imply that the applications are relatively flat as well. So I would â if youâre trying to figure out how to model it or how to think through the activity levels and the leasing in 2023, Iâd say itâs pretty even quarter-to-quarter. Your second question on the trends weâre seeing in the backlog, no change in what weâre seeing from what we talked about in October, so seeing good demand across all three of our business lines, towers, small cells and fiber solutions. The pipeline, you heard my comments in my prepared remarks, but we think by the back half of this year, weâre going to exit 2023 with fiber solutions back at kind of a 3% growth area. And tower leasing, as Dan just mentioned, we think thatâs going to be really similar across the year. So not back half loaded, but level loaded across the year. And then small cells, we obviously had a good fourth quarter in â22. And we will see what builds over the course of â23 and update you as we get orders on that front. Great. Thanks. Just wanted to touch on the M&A comments you mentioned, and you choose to build rather than buy per se. Does that imply that private fiber multiples just remain stubbornly high? And are they coming down to any degree? And do you foresee them coming down in the next few quarters? Second question is just actually on cable. Weâve been fairly dismissive that they are going to be touching the towers per se, but more on CBRS deployment on their own air strands, but there is possible conversations of cable getting more aggressive and a more macro facilities-based network and just wanted to see here if you had any updates on conversations with cable? Thanks. Sure. On your first question, I would say itâs â on some level, itâs probably a function of price. Itâs more likely a function of our targeted approach to which assets we want to own. In order for a fiber asset acquisition to be attractive to us, it needs to be in dense urban areas. It needs to have high fiber strand count, and we need to have visibility that those areas are going to have or likely to have significant lease-up for small cells. And the reason why you havenât seen us do any fiber acquisitions in the last 5 years is much more related to the fact that we havenât seen anything meet those criteria than, frankly, it is price. We just havenât seen the opportunity to acquire assets that meet the criteria thatâs going to drive long-term growth from the wireless carriers from the deployment of small cells. And we are going to remain disciplined on that front, continue to believe the vast majority of the fiber that we will accumulate over time will be as a result of building it rather than acquiring it because we just donât see a lot of assets in the market that meet our criteria for assets that we would want to own. On your second question, I believe that cable over the long-term is a very attractive opportunity for us to increase our growth rates and think that we will see leasing from the cable operators. We will see some of that on macro side. Frankly, I think we will probably see more of that in our small cell business, given the places that they tend to deploy infrastructure as they think about the density of population and users. So, I think itâs more likely that we will benefit from the deployment of network by the cable operators using their various spectrum bands. We will see â we are more likely, I think to see that in small cells over a long period of time than we are in macro sites, but do think macro sites will benefit from cable. Hey. Good morning guys. Jay, you noted that about half the sites on your towers have been upgraded with mid-band 5G spectrum, very interesting statistics. So, thanks for sharing that. I guess do you see any meaningful differences in that percentage between more urban towers versus suburban towers versus more rural towers, or is it reasonably consistent across the board? And I guess maybe to build on some of the previous comments you have made, what does your work suggest with respect to how high that number needs to get before carrier starts to pivot more noticeably towards co-locations? Sure. On the location point, I probably would not draw a lot of distinction between central business districts and urban, more suburban areas that are densely populated. The usage, as you think about it on a per subscriber basis, while there is some differences over time, there has been less of a differentiation by the consumer in terms of usage. And therefore, the network reflects that. So, when we see the carriers deploy the first phase, there are a mix of dense suburban markets as well as what you would think of as the most dense part markets down in the central business district. We will see leasing in both of those kind of areas initially. Less likely for us to see that leasing early â in the early phases of deployment of a generational change. Less likely to see that in more rural applications or rural assets. So, we have not seen that as much. To the second part of your question, how far do they need to go before they start to do infill, itâs â some of it is a matter of how they allocate their capital and the need to provide geographic coverage. The other part of the answer is where do they see traffic growth and where are the holes in the network that they need to do infill in order to improve the network. And there is not a big picture answer really, frankly, to give to that question. It varies market-by-market. And so in some markets, 2 years or 3 years ago at the very beginning of the launch of 5G, they already knew where they were going to need infill sites. We started seeing small cells and demand for small cells as they started to think about infill long before even devices were out and usage has started to increase. So, they had a view based on population usage, their customer base, etcetera, that there was going to need to be an infill of sites in certain geographies. And so in other geographies, we havenât seen that yet. So, it really is â itâs not a big picture question that I could give you an answer that would be helpful. But itâs driven by underlying data usage. And that is why so often in my prepared remarks, I talk about what we are seeing in terms of data usage, what the carriers are seeing in terms of data usage because that long-term is the driver of the need of our infrastructure. And we believe that macro trend is very healthy and will continue. And we will continue to see the need for both macro sites and small cells from an infill standpoint. Okay. Thatâs helpful. And then maybe one more if I can. Just thinking back, itâs been a little over 2 years since you struck your deal with DISH. It was a new and unique structure on the tower side and had a fiber component to it. Now that itâs been in force for some time, I was just wondering if you could comment on your satisfaction with that novel structure you chose and the degree to which itâs accomplishing and what you hope to accomplish? Well, first, we are doing everything we can to help DISH get launched, and we have got teams of people that are very focused on that. DISH has been working hard to get their nationwide network deployed. And I hope that they would say about us, we have been a good partner to help them get there. I know our teams are focused on it 24/7, 365. So, itâs been a good partnership with them, and we are happy to have them as a customer. It has accomplished what we expected. We expected that the fact that we got them locked up first would mean that our network would benefit from them designing their network around our existing assets. We have seen that play out. We believe we have gotten an outsized share of the overall opportunity as they deploy the network. And I think the nature of our agreement with them, we have the opportunity to continue to get an outsized share of their network deployment. So, I think in that respect, it has accomplished exactly what we had hoped. And as we said at the time, and I think this has played out, our visibility to that network with the combination of providing fiber as a part of their backbone as well as providing tower sites has deepened that relationship and deepened our understanding of how they are thinking about the deployment of the network and probably led to us being able to capture more opportunities than we would have had if we were towers only. Thanks. So, you mentioned half of your tower sites have been upgraded with mid-band. And I think itâs implicit in the answer to one of the earlier questions, but do you expect that to get to 100%, or is there an end state thatâs maybe a little less than 100% in terms of portion of sites that have 5G mid-band? Hey. Good morning Jon. I donât know that it will get all the way to exactly 100%, but we would expect, over time, it will get pretty close to about 100% of the network will be upgraded, yes. And then did you see â on just the towers, did you give a split between colos versus amendments? And if not, can you tell us what that number was? And then maybe what you anticipate that mix to be, again, just in your tower portfolio towards end of this year? Yes. Consistent with my comments around the vast majority of the activity is on sites that they are already on. The vast majority of the total activity that we are seeing from the carriers is amendments to existing sites where they are adding additional equipment. And therefore, we are getting rent added to the leases that we already had. We are seeing some first-time installations on sites as a part of their desire to infill. But the vast majority of the activity that we are seeing would be from amendments. So, no pivot from 3Q into 4Q in terms of that mix shift? I know itâs majority amendments, but no noticeable change? No, we didnât â we havenât seen any change from kind of middle of last year. And certainly, as we are sitting here today in early 2023, havenât seen any change from our expectations when we laid them out in October of last year. And then lastly, in the fiber business, a lot of â so non-mobile tenants, a lot of products that you listed around wavelengths, Ethernet, fiber, managed services. And just given the growth that you are seeing there and the mix of revenues that it represents, any way to give us a little bit of color as to what the different demand drivers that you are seeing, which products are maybe getting more traction on, say, services versus others? Yes. The biggest driver there is the increased traffic, overall data traffic thatâs happening in the market. I mean our business and our focus for customers is mostly large enterprise, universities, hospitals. And in those markets, the primary driver of what drives our revenue growth is data traffic and the movement of â in essence, the movement of data among their facilities, locations, offices, etcetera. And thatâs the biggest corollary. Lastly, just any update on Edge? And itâs been a number of years since you announced the Vapor IO investments and any kind of updates on your thoughts as it pertains to the sorts of opportunities and traction, gains thus far? Sure. We continue to be optimistic about the long-term opportunities around Edge. I feel like our assets are really well positioned to capture that opportunity. In order for Edge to work, you have got to have connectivity, and you have got to have power. And our hub sites for small cells and our towers are both ideal locations for aggregating the traffic out of mobile networks at the Edge. And think that opportunity will develop as 5G ultimately develops. I think you probably heard us say a number of times that the first benefit from the activities that will ultimately lead to the benefit around the Edge, we think we will see in spades in the deployment of small cells and a lot of activity related to it with small cells. And then the follow-on will be the opportunity around the Edge. So, we certainly believe itâs there. And I think we are really well positioned to capture that opportunity when it does materialize as the applications that need increased data and compute power move to the very edge of mobile networks, when that â when those applications are starting to be used both on an industrial level as well as the consumer level, feel like our assets are really well positioned to capture that opportunity. Thanks for taking the question guys. Just a quick housekeeping question first on small cells. So, itâs a backlog of 60,000, and it takes 24 months to 36 months to go through the construction process. Does that suggest like a very material acceleration from the 10,000 that you are going to do this year in â24 and â25? Like you are going to get through 60,000 over the course of the next 3 years? Yes. We didnât provide specific guidance on when we will get that done. But as I mentioned in my comments, we think that â23 is the start of an acceleration of growth in small cells. So, it does imply that there will be an acceleration beyond the 10,000 nodes per year that we expect to do in calendar year â23. But I wouldnât â I would caution you not to expect that because we have those in our backlog right now that 24 months now or 36 months from now, all of them will be built. It is an average. And so I would not just make the leap that after 2023, there is 50,000 left, which means that we have to do 25,000 in each of â24 and â25. Thatâs not the way the business rolls out. Itâs an average, and it takes some time in order even to get into that average as we go back and forth with our customers to cite the actual small cell nodes where they need to be built. So, as Jay said, we believe there can be an acceleration, but I would caution you against expecting itâs going to jump to 25,000 nodes each year of â24 and â25. Can you give me just a little bit more color on why it isnât sort of complete within 3 years? Is it the carriers are really looking sort of 4 years or 5 years out in terms of what they are contracting for small cells today? Sure. When we did the two agreements with Verizon and T-Mobile, where they made large commitments, those were multiyear commitments. So, the expectation was that they would identify the nodes while we had ideas on what markets they were going to use. The actual location of the node goes through an identification process over time. And so we do not expect in that backlog while itâs committed, contractually committed and the rent will be there, it doesnât speak to. As Dan was saying, thatâs why you canât take the backlog and say, okay, all of that backlog will be completed in 24 months or 36 months. Okay. Got it. And then is there a way to contextualize what DISH is contributing to growth at the moment? And have they reached a steady state with you at this point, or do you think that their contribution could still accelerate for you? Well, I think we will continue to see the benefit of DISH deploying their network, but being really specific with the number of sites and their percentage contribution, we do our very best to stay away from giving that level of specificity among any of our customers in their network and just let them speak to the number of sites and where they are in their deployment cycle. Okay. And then last one for me. You spoke about the sort of the three phases of network deployment. And the first phase is lots of sites of amendments and then just sort of the next big phase is moving to. I would assume, fewer sites a bit with 4x or 5x the revenue per site. As you look through the sort of the multiyear period that â as you work through these phases, is the revenue growth you get similar in the first phase and the second phase and the third phase, or is it heavily weighted towards the first phase just because of the number of sites that they are touching? Our experience has been that revenue growth over those various phases stays relatively stable and similar. As we talk about our long-term expectation of â around growth and organic growth in towers, we have said that we think that stays maybe a little bit above the 5% level. We think we can sustain that for a period of time. It also ties into our long-term target of being able to grow the dividend 7% to 8%. So, we think there is an elongated runway of growth thatâs driven by that top line opportunity. As the carriers go through the various phases of deployment, we see good opportunity to lease both towers and small cells, and we think that extends the runway of growth. And as we look at kind of the current environment that we are in, really excited about where we are and excited about the top line growth that we are seeing and the consistency of the demand from our customers to need to improve their networks and ask for additional leases on our assets across all three of our businesses. You bet. Well, thanks everybody for joining. Kate thanks for your help on the call this morning. I do want to thank our team as we wrap up 2022. I realize everyone is already really focused on what we are able to deliver in 2023, but I did want to take the opportunity to congratulate our team for a job well done in 2022, navigating to a great outcome through some pretty difficult challenges over the course of the year. You all did a great job for our customers, and I know they appreciate it. So, thank you to the team and excited about what we will do in â23, and look forward to talking to everyone next quarter.
EarningCall_1001	Good day, and welcome to the Origin Bancorp Fourth Quarter and Full Year 2022 Earnings Call. My name is Brett, and I'll be your [Aver] (ph) call coordinator. The format of the call includes prepared remarks from the company, followed by a question-and-answer session. [Operator Instructions] At this time, it's my pleasure to turn the call over to Chris Reigelman of Origin Bancorp. You may now begin. Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this call. Please refer to Page 2 of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures. For those joining by phone, please note the slide presentation is available on our website at www.origin.bank. Please also note that our safe harbor statements are available on Page 7 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; President and CEO of Origin Bank, Lance Hall; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crotwell; our Chief Accounting Officer, Steve Brolly; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. As I review 2022, our successful year was a year of major accomplishments that significantly strengthened our company. We finished a strong fourth quarter with an enhanced management team that is laser-focused on strategic decisions that will impact long-term performance and value. The overall condition of our company, as we begin 2023, positions us very well to take advantage of our markets in a meaningful way. Our strength starts with our executive team and filters throughout our organization across all of our markets in Texas, Louisiana, Mississippi. This is reinforced this year with Origin being recognized as the second best bank to work for in the country by American Banker. We take great pride in our culture and the competitive differences it creates. One of the major highlights for us in 2022, as I've discussed, was a partnership with BTH Bank. I've often said how BTH is unicorn, and this has remained the case two months post conversion. Culture will always be the foundation with any partnership we develop. Our shared culture of putting people first and delivering for our employees, customers, communities and shareholders is what has made this partnership so successful. I am pleased that we have successfully kept intact the BTH organization. I'm very excited about the growth opportunities that East Texas presents. In 2022, we saw strategic growth throughout our footprint. Excluding mortgage warehouse, loans grew over 24% organically and nearly 50%, including BTH. As liquidity moved out of the system during 2022, we experienced a highly competitive deposit environment. Our teams took advantage of the market to reduce our exposure to high-cost non-core deposits, thus strengthening our core deposit base. We reduced non-relationship deposits by $300-plus million, while mortgage warehouse experienced a reduction of $100-plus million. On an average basis, we grew deposits 5.5% without including BTH. Our bankers remain laser-focused on deposit growth in 2023, and we are proud of our balance sheet position with a loan/deposit ratio of 88%, excluding mortgage warehouse. We finished the year with $9.7 billion in total assets. And as we planned, we strategically managed the balance sheet below $10 billion. The asset sensitivity of our balance sheet was highlighted by net interest margin expansion in each of the past three quarters. Wally will provide more color around NIM. As I've mentioned in the past, the Texas growth story for Origin has been impressed, and the addition of BTH has created an incredible opportunity to drive value in a meaningful way. As you can see in our presentation, our Texas franchise represents approximately 70% of loans held for investment, excluding mortgage warehouse and 54% of deposits. Lance will talk more in detail about the success we are having. But I think it's important to point out that our investments in infrastructure and people in these dynamic Texas growth markets have and will continue to pay off for our company. As proud as I am about our production, I'm even more proud of our current credit metrics. Jim Crotwell, our Chief Risk Officer; Preston Moore, our Chief Credit Officer, along with their teams, have done an amazing job of managing credit risk. Jim will talk about the details later, but it's more than just the credit metrics, it's about the comradery, the trust that our producers and credit teams have with each other that helped us perform so well in 2022. And even more importantly, puts us in a position of strength as we head into uncertain economic environment in 2023. I'm extremely proud of how we performed as a company over the past year. We remain committed to the Origin vision of combining the power of trusted advisers with innovative technology to build unwavering loyalty by connecting people to their dreams. Drake mentioned this is being recognized as the second best bank in America to work for, this doesn't need to get overlooked. I'll get into the numbers from a production standpoint, but it's important to understand what we're building and what is taking place over the last 12 months. Our culture and geographic management model creates an environment that attracts high-quality people who are committed to building valuable long-term relationships. This past quarter, we made several strategic hires in the East Texas market, and in total for 2022, added 21 new producers, primarily in the Texas market, who are driving meaningful growth on the deposit and loan side. Certainly, there is an expense to this investment, but the long-term impact of these strategic hires, coupled with the incredible talent that we already have gives me tremendous optimism for Origin in the future. Drake mentioned our impressive loan growth for the year, and this took place across all of our markets. Excluding mortgage warehouse and BTH, our bankers delivered over $2.9 billion in new loan production, up 37% from 2021. We saw 10% growth in North Louisiana, 8% in Mississippi, 24% in North Texas, and 55% in our Houston market. The Dallas-Fort Worth and Houston markets each delivered over $1 billion in new loan production. This growth reinforces our strategy of attracting the best-in-class bankers across our footprint and their ability to drive long-term growth for our company. We're all aware that the deposit climate is extremely competitive. Deposit growth has been and will continue to be a strategic focus for us. One of the strengths of this organization is our core deposit franchise, and we've talked often about how we are uniquely positioned with sticky rural deposit relationships fueling growth into our metro markets. The addition of our East Texas market further exemplifies our deposit strategy and is a key differentiator for Origin. We are clearly in the midst of a change in the rate cycle. And because of this, we took steps in the fourth quarter to bolster our deposit product offerings and have positive momentum in the traction we are seeing. In our presentation, you can see detail as it relates to our deposit betas. While the steps we took in Q4 resulted in an acceleration in deposit betas to 23% on a cumulative basis, we remind you that we are still better than the range of prior tightening cycles, where our total deposit betas range from 27% to 37%. We are hopeful that we can maintain relatively strong deposit betas in 2023. We are watching trends closely, and we'll react accordingly to drive strong deposit performance. As we continue to execute on our strategic plan, I see opportunities for Origin to enhance our investments in talented people, core deposits and technologies to drive efficiency and a superior customer experience. To assure that our investments and plans are being executed in a meaningful way, it is critical that we continue to deeply measure our activities. As highlighted on Page 4 of our Investor Day, we presently measure employee engagement and culture through our Glint surveys, our community support through employee volunteerism, customer satisfaction through Net Promoter Scores, and efficiency through our robotics automation processes. The tremendous success that we achieved in all these categories, along with the continued improvement in our financial performance, makes us believe that Origin can be the best bank in America. As reflected on Slide 14, our loan portfolio continued its strong performance in the fourth quarter. Past due loans held for investment as a percentage of total loans held for investment were at 0.15% at quarter-end. We are extremely pleased with the continued reduction in the level of nonperforming loans held for investment as a percentage of total loans held for investment, which ended the year at 0.14%, down from 0.20% as of the prior quarter and down from 0.49% a year ago. Classified loans remained stable at 1.05% of total loans held for investment. Lastly, and perhaps the best evidence of the resiliency and strength of our portfolio is reflected by our annualized net charge-offs for the quarter, which was only 0.01%. During the quarter, we increased our allowance for credit losses $3.8 million to $87.2 million, increasing from 1.21% to 1.23% as a percentage of loans held for investment. We determined that our reserve increase for the quarter was appropriate, given the balance between the strong position of our portfolio and the continued economic headwinds. A particular note is the increase in our reserve as a percentage of nonperforming loans, increasing to 877% as of quarter-end compared to 594% for the prior quarter and 259% a year ago. As we shared last quarter, we are closely monitoring the impact of inflation, rising rates and the likelihood of an economic recession on our portfolio, as well as continued geopolitical concerns and its impact. We continue to believe that the markets we serve will be impacted to a lesser degree by a recession than other areas of the country. In summary, our focus on relationship banking, along with sound underwriting and credit structure continue to result in our well-diversified and resilient portfolio. Turning to the financial highlights. In Q4, we reported diluted earnings per share of $0.95. On an adjusted basis, Q4 earnings per share were $0.99 after excluding $1.2 million in pre-tax merger-related expense. Net interest margin expanded 13 basis points during the quarter and 75 basis points from last Q4 to 3.81%. Excluding $1.9 million in net purchase accounting accretion, our adjusted net interest margin expanded 12 basis points to 3.73% from 3Q, and expanded 81 basis points from last Q4 when excluding $3.8 million in PPP fees from that period. Margin expanded for the third consecutive quarter in Q4, demonstrating the asset-sensitive positioning of our balance sheet and despite a marked increase in deposit pricing competition during the quarter. On fee income, we reported $13.4 million in Q4, down slightly from $13.7 million in Q3, which included $1.7 million in gain on sale of securities and a $2 million impairment on our Ginnie Mae MSR, which we have subsequently entered into a contract to sell at current carrying value. Excluding the gain on sale of securities and MSR write-down, our fee income decline was driven primarily by a seasonal decline in insurance fee income combined with a slight loss in limited partnership investments following a slight gain in Q3. Our noninterest expense increased to $57.3 million from $56.2 million in Q3. However, excluding merger-related expense, our noninterest expense increased to $56.1 million from $52.6 million. This increase was due primarily to the additional month of BTH expense when compared to the prior quarter and was slightly better than our $57 million to $58 million guidance as we were able to pull some BTH-related vendor cost saves forward into Q4. Turning to capital. It is worth noting the roughly $15 million improvement in our AOCI balance given the shift in rates during the quarter, which helped increase our TCE ratio back above 8%. Our regulatory capital ratios all improved during the quarter, and we remain well capitalized, allowing us flexibility from a capital perspective to take advantage of any potential future capital deployment opportunities to drive value for our shareholders. We have a lot to be excited about based on what we accomplished in 2022 and where we are positioned moving into this year. We have the right team in place with incredible employees who know and understand our clients. I am pleased about where we are from a credit perspective and the credit culture that is in place. I'm confident in our ability to manage liquidity and our capital levels allow us to take advantage of opportunities in our market. There is strength in our local and regional economies. Our Texas market continues to benefit from domestic migration and strong economic growth. And our teams are laser-focused on driving strategic profitable loan and deposit growth. We have proven throughout a history that we can capitalize on opportunities in uncertain times. I know we will do the same in 2023. Thank you to our employees and our shareholders for a great year, and thank you for being on the call today. I want to start with the margin and the NII. We saw some improvement in linked quarter, but still little below consensus forecast. Would love to hear your updated thoughts on deposit pricing and deposit betas from here? And then, kind of given the incremental deposit pricing pressure that we're seeing across the industry, I'm curious if you now think we've seen a peak in the NIM at Origin. And if so, any color on where you think that margin could land in the near term? Thanks. Yes. Thanks, Matt. Before I turn it over to Wally, obviously, for the industry and especially us, we recognized early on that this liquidity would be pulled out of this market and that we would get back into a situation where we're highly competitive. I think as we've discussed in the past, as we've been able to grow this institution through an organic strategy, it's been very important that we ran a higher loan deposit ratio to cover up some of the cost of organic growth, especially our de novo growth. As we went into 2022, strategically, we made the decision that we were mature enough in our life cycle that we needed to adjust from a liquidity perspective, how we ran this institution. And certainly, want to be sub-9% on loan/deposit ratio. So, we got very aggressive with our teams, and we talk about lift-outs and we talk about the teams that we bring on. I do want to remind everyone that in these teams, we always had a deposit focus, a business development focus, deposit experts that we brought on. So, we feel very good about where we are. We're still in a competitive environment. We're seeing some easing of that pressure from a rate standpoint as we came out of the fourth quarter. And we certainly did what I think was an excellent job. But on top of everything, NIB, our commercial -- our commercial clients are using their funds. They're using them to pay down debt to do projects, to do a number of different things as we see this liquidity to come out of the market. So that was expected on our part. We knew there'd be a remix of the deposit categories, and we are managing that, what I think, in an exceptional way. We think, and I will tell you that I'm highly confident in our ability to continue to grow core deposits. But I always talk about the Texas plus aspect of our business. That plus is the core deposit markets that we have in Louisiana and how beneficial they are, that's going to prove itself and show some real value as we go through the first couple of quarters in '23. So, as we look at margin, I'm going to let Wally get into that, because we're doing a lot of work around where we think we are. Yes, we could have seen a topping out of our margin for now, because there is certainly some opportunities for us to continue progressing through the quarter. So, I'll turn it over to Wally for some specifics. Thanks, Drake. So, Matt, you probably heard Lance referenced in his prepared remarks that we did make some moves during the quarter as we saw our commercial customers paying down some of their cash balances. We saw and we strategically made the decision to protect our deposit balances as best we can, and we increased our rate sheet across the board. That was in early to mid-November. So that's where we started to see the pressure on the deposit betas. Moving into the first quarter, we expect that, that decision will continue to pressure the deposit betas in January. In our modeling, we are assuming that the Fed gives us a 25 basis point hike next week, and we think that the corresponding increase to loan yields will help to offset some of the pressure from the deposits. So, overall, for the first quarter, we think the pressure on the deposit side does trump the loan yields. We think net interest margin will probably be down kind of mid-single digits. But as the quarter progresses, we think the loan yields start to trump the deposit pressures, and we are actually anticipating margin will start to expand again in the second quarter. Another hike from the Fed might help that. But you can imagine, we are watching our deposit balances on a daily basis, and we'll continue to be strategic to try to make sure that we are protecting our deposit base. And Matt, from a strategic perspective, everything that we are focused on today, we focus on from a longer-term perspective and driving long-term growth. We have an excellent deposit base. We've looked at those customers. Are we losing customers? No. Are we losing credits, or are we losing commercial customers? No. They are utilizing the resources at this point. So, I hope that answered your question. Yes. Drake and Wally, that's helpful on the details there. Just a follow-up on some of those comments. If some of those commercial customers are kind of paying down their debt and moving liquidity out of the bank, help me appreciate why the loan growth at Origin still remains very strong. Yes. And I'm going to let Lance talk about that. But again, we're seeing some real results out of the teams that we brought on in 2022. Lance? Yes. Thanks. Hi, good morning, Matt. No, our bankers have continued to produce at a high level, and honestly, because of the strong economies in North Texas and Houston. We continue to see great growth opportunities. The lift-out strategies have worked exactly as we thought we did. I actually looked at it this morning. On the commercial lending side, the new hires produced over $200 million in loan growth as they're continuing to bring their relationships over from their old banks. And we've talked about it. We like that from a pricing perspective. We love it from a credit perspective, because of the history and the knowledge these bankers have of these relationships going back years and years. So, we want to keep following that strategy. We feel our pipeline remains very strong. The 21 new hires that we hired last year are continuing to introduce us to their clients, which both on the loan and the deposit side has been incredibly helpful. We continue to believe that we've built a company that's going to be a 10% annual grower. Now, I will say in 2023, as we look at what the effect of higher interest rates are going to be to loan growth and what the looming recession could be to loan growth that we're -- in our budget, we've sort of modeled mid-single digits on the loan side, and we expect our deposits to outpace our loans in 2023. And that's really going to be driven by sort of the mix of the bankers that we have and our incentive plans. I mean, we've talked a lot in the past about -- we have been a company that has incented $1 of deposits equal to $1 of loan growth. In 2023, we will shift those weights a little bit and deposits will be incented at a higher level than loans will. And then, inside of our incentive plan on the loan side, it's going to be really C&I-focused and owner occupied. And so, that just continues to pay off. Our bankers understand our purpose. They understand what we're trying to accomplish, the strategic discipline around our client selection and our pricing. And I just -- I'm incredibly optimistic of our continued growth this year. And, Matt, I want to give you a couple of examples. So, we are bringing over new clients, and we're seeing that loan growth. But two of relationships that I'm very close to: $32 million balance, today, they have a $22 million balance, because they utilized funds on the project; another one, very strong customer of ours, that's a manufacturer, had -- was running $25 million, $26 million. They went ahead and paid off $18 million worth of debt. But we're still seeing these new -- this new client growth as these teams bring them over. Maybe a better way to ask kind of a similar question. It sounds like the new producers are kind of building to the team and adding the loan growth. Any change in the utilization rates you're seeing more recently, if there are some customers paying down some of their debt? Well, it's a little interesting, because we've continued to have such good growth, even though we are seeing some of that down, we've actually seen a slight uptick in the utilization on the line. We've historically averaged like 48%, 48.5% utilization on our revolvers. At the end of the quarter, we were at 51%. Matt, I would just say it this way, like Houston and Dallas do what we thought Houston and Dallas were going to do. I mean we had three of our existing Houston bankers that are dynamic create over $100 million in loan growth last year each for individuals that produced over $1 million in fees. I mean, these markets are just strong growing dynamic, and it's exactly where we thought it was going to be. Okay. And then, going back to the margin, I think the market has growing concerns that the Fed could cut rates later in 2023. If this did happen, I'm curious what your thoughts are what this would mean for Origin? And what are some leverage -- what are some options that you consider pulling in 2023, if that was a scenario? Hey, Matt, it's Wally. We are paying very close attention to the forward curve and are well aware of what the curve is telling us about, what they think the Fed will do. We have spent a considerable amount of time educating ourselves on what opportunities there are to hedge interest rate risk for when and if the Fed starts to take rates down. There are several options that we have in front of us from floors to collars to swaps, we are considering all of the options. Right now, the pricing on hedging instruments is relatively expensive. We watch the curve every day and feel like we've educated ourselves enough that we can take advantage of any changes in the curves and any change in the cost to these instruments, and we'll take advantage of them if they present themselves. So, we are, obviously, asset sensitive, and we're aware of that, and we will do what we can to begin to position ourselves for when and if the Fed starts to take rates down. Okay. Thanks, Wally. And just lastly for me, maybe on credit for Jim. Classified loans pretty flat linked quarter. But obviously, investors are becoming more focused on credit. Would love to hear any updated thoughts that you have, Jim, on the portfolio you're most focused on, maybe from an industry perspective or geography, kind of what your focus is on maybe overall in the industry, and then maybe specifically within Origin Bank, what you're most focused on? Thanks. Good morning. Yes, we -- I think what we're seeing now is the real benefit of the relationships from the -- that Lance spoke to the lift-out. I mean these are customers that are well known to our bankers. And so that's where our growth is. And I think we're also seeing the benefit of being true to who we are, relationship focused, focused on primary, secondary and tertiary source repayments. When we looked at it and we talked about it before, as we went through the pandemic, and we did deep dives in the sectors, we continue that process. And I'll just look at office right now, because I know that's a sector that everybody is really paying close attention to. For our portfolio, it's very granular. We don't have any offices that are, say, they're just downtown business district. It's very diversified. One of the things we looked at when we talk about secondary source repayment, the average LTV in that sector for us is about 53%. So that kind of tells you where we are in our underwriting. One other factor, if we go to the tertiary component of that, we have about $385 million in nonowner-occupied office, the combined liquidity of our guarantor supporting those credits is almost exactly the same as $350 million. And if you look at where we are, we have no nonperforming loans and no past dues at all in that sector. And so that kind of gives you an idea. And when you look at the other areas, sectors, if you will, very similar results. And I think that is, again, a manifestation of us being very diligent. And we do not do enterprise value lending. If we do, it's going to be very limited. And so that's consistent throughout. One of the things that we've also done is we've looked through our portfolio is to go through an exercise from a stress-testing standpoint of evaluating cash flow coverages, if you will, particularly from an interest rate rise perspective. And we're very pleased with the results, particularly if you take the next step, if you identify credits that maybe have maybe would have some strain from an overall debt service, then you go to what I just spoke to secondary source repayment. And we're in really good shape there because of being very diligent from a loan-to-value standpoint. We've navigated very successfully through various economic cycles, and we feel that we're very, very well positioned. As you can see, our level of past dues, which is early indicator. Our level of nonperforming loans is extremely low. And so, I feel really, really good about where we are from an overall portfolio position, given this time of uncertainty. Last thing I would say is that when we look at our markets, we -- as I said in the call, we feel really good about our markets that we serve as well, and that they will be less impacted if there is an economic downturn. And from what we're seeing, hopefully, if there is one, it will be fairly brief and maybe three quarters and we'll come back out of this very quickly. Matt, I'm going to add a little bit to something one of my concerns, and I voiced this through the last several years have been credits that are consumer spending dependent. And we've done a tremendous amount of work around understanding those type of stresses in how they would impact if we continue to see a breakdown in consumer spending. And I will tell you, very pleased with what Jim has brought to the table. Preston talks about this. And I'm confident of where we are through '23. And we're preparing ourselves for any type of deterioration received. But at this point, and I know it's going to come to some level, but we're just not seeing deterioration at this point. Hey, good morning, guys. Hope you all are doing well. Matt touched on a bunch of my questions, but I did want to touch on expenses. Obviously, the revenue is a little bit lower than I think we were looking for, but so were the expenses. Last quarter, you guys had kind of talked about using the fourth quarter run rate and growing that, I think, about mid-single digits, just given the inflationary pressures that we're seeing maybe some offsets, maybe you're not going to be as aggressive in hiring. Just wanted to get a sense of what you think about expenses as we move through 2023? And then, just how much of the cost saves from the acquisition have you realized to date? Thanks. Yes. Michael, thanks. I appreciate. We are so expense focused right now. But on the same hand, we're doing, as Lance talked about in his prepared remarks, strategic investments in technology, technology that is going to drive efficiency, and I don't want to get into it today, but our bot process and what we're seeing from there and the reduction in costs that we think we'll see, but the technology investments also to drive a superior customer experience. We're also making investments that are included in these numbers in strategic locations, that are going to allow us to not only address making sure that we serve the communities, but put us in a position where I think we will see strong deposit growth in those markets. Again, strong bankers -- and we don't build facilities just to build a facility and location, we build facilities around teams and people, and that's what you're seeing. So, we've got three coming on, another one that came on earlier last year. So, we are doing the things necessary to make sure that we reduce expense and have a run rate that I think is going to see mid-single-digit run rate through '23. But yet at the same time, do some things that we think, and we'll start talking about those that reduces cost and cost allow us to do more things that we're talking about from a technology people and locations. So, this is -- and I'll say it, and I know it's kind of corny, but -- we look at everything strategically through models that show long-term value build. And that's the focus that we have, but yet we're going to manage expenses. You saw a slight reduction in our efficiency ratio. Lance is -- I mean, he's challenged with continued pushdown efficiency. We think we have to get to a certain efficiency number to be a high performer from a performance standpoint. Those are the things that we're going to continue to focus on in '23. I'll just add a couple of kind of puts and takes to that mid-single-digit growth in 2023. We have a couple of relief valves from incentive accruals in 2022. Our organic loan growth was over 20%. We're not budgeting for that level of growth in 2023. But we have invested strategically in new people, and we've also made some strategic investments in real estate that will offset some of those. As far as your cost saves questions, we pulled forward a little bit from some technology contracts. We have a couple left that will impact us in the first quarter positively, but that will be about the extent of the cost saves. Okay. So just given some of the revenue headwinds, do you think there's room to bring down the efficiency ratio from here? Or should we expect it to kind of flatline to maybe increase just given the challenges that are out there? Thanks. Yes. In '23, Mike, I think we'll see a little bit of flatlining. I still think we have possible reduction, but we're budgeting and we're looking for a successful year would be one that we were flat from an efficiency standpoint and see a kickoff in '24. Okay. Helpful. And then maybe just finally for me. It does sound like you're -- I'm going to slow the loan growth here a little bit. I think you said mid-single digits. I think last -- third quarter, you said kind of high-single digits, completely understand. But as we think about capital build here, I mean, that should just further the acceleration. Can you just give us an update on what your strategic priorities are? And if you would look to actually use the authorization you have in place just given where the stock is trading, [even that] (ph) looks pretty attractive. Thanks. Yes. And thank you. It's -- we going into a cloudy economic cycle in '23. Certainly, capital is king, and we're going to continue to build capital in a positive way to ensure that we can weather whatever storms coming our way. Feel comfortable with where we are. We do have a share buyback. We see a continued slip and slower growth than I think that we would be active in buying that stock back, because it is -- like I joke about, it is on sale right now. So, this is something that is a tool in our tool chest. I think you could potentially see us get active, but we do have authorization and we could use it. Great. Very interesting to hear the comment on the chatbot. Maybe you can use that to replace your newly-hired CFO. Just kidding. Thanks, guys. Yes, thanks for taking my question. I appreciate all the color. If I heard you correctly, you expect deposit growth to outpace loan growth. Just wanted to kind of think about the size of your balance sheet. Do you think, one, you could stay under $10 billion again in '23? And then, second, how should we think about the bond portfolio? I guess would that potentially remain more stable now as you maybe put some of those excess cash flows back to work? Or where might you put the liquidity that you're going to gain from the better deposit growth might pay down borrowings? Just wanted to kind of get a sense of what your plans are there. Yes. This is Lance. I'll take the first part of that. As we said, we're kind of projecting mid- to high-single digits on loans and deposits. And so, the net dollars of that would be an increase in deposits over loans, obviously. That being said, staying under $10 billion is not our goal. We are sort of built to grow, and we have a lot of competitive individuals in our markets and a lot of strong economies. At the same time, when we model it up, I think it's very possible that you see us stay under $10 billion, just the way some of the levers we have to pull, the way that we can use the runoff from our investment portfolio. So, we think that's a real possibility, although that's -- we're not going to do anything to slow the growth of building core relationships. Yes. And I'm going to add a little color to that, if you don't mind. If today, we're sitting at $9.5 billion, and we have $450 million of growth, which in -- from a loan/deposit standpoint and very active in making sure that we continue to keep teams engaged. We continue to take care of our clients. We add quality relationships. You add all that up, we have $300 million worth of deposits that we can push off overnight if we need to. There is a very clear path of opportunity for us to stay under $10 billion for '23 plus, add on that $170 million of securities that will mature and come back -- can flow back in that we could pay debt off. So, a lot of levers, as Lance said, it's a strategy, but we're not going to jeopardize the momentum and growth of this company just for that reason, but I do have some confidence that we have an opportunity. Okay. Maybe just a follow-up to ask more specifically, if I was planning -- assuming that you reduced the securities book in '23, that might not necessarily be the case anymore given some of your deposit growth aspirations? Yes. And I'm sorry. Okay. I'm trying to understand that question. I'm sorry. I didn't -- so we -- with our deposit growth aspirations, and I'm not saying this, but in reality, I believe in our markets, we have more opportunity to grow loans at 6.5%. But as strategically to manage this to where liquidity stays intact, our loan/deposit ratio was below 90%. We think that we should grow deposits to cover up any type of loan growth. So that maturities in the investment portfolio would come back in either to reduce cost, put back in the loans or pay down debt towards the end of the year. I'm doing good. I just had a follow up on the NIM discussion from earlier. In regards to the expected decline in the first quarter, I'm assuming that was talking about the core margins, so excluding any accretable yield? Okay. And then for the potential for the margin to rebound a little in the second quarter, is that just a function of the fixed loan portfolio repricing higher? Is that sort of the tailwind -- the potential tailwind to the margin there? No. We put -- we are modeling -- in our models, we are assuming that we get a Fed hike next week, and that's really the primary driver. So, we'll lap the pressures from the move across our entire deposit base after January. And then, if the Fed hikes next week, that will benefit the 57% of our loans that float. Thank you, Woody. It appears there are currently no questions. Handing it back to Drake Mills of Origin Bancorp for final remarks. I real quickly want to talk about our company from a 2022 highlights, the BTH partnership, the process we went through, the relationships that we've built, how we went through that process was amazing. Pristine credit, we continue to build what we think is a better balance sheet, a fortress balance sheet, focusing on loan/deposit growth and liquidity. Strong growth in '22, the Texas story plus Louisiana deposits, 70% of our loans today are in Texas, 54% is in deposits with East Texas coming on. We really are excited about that partnership. Management strength. We've added Derek McGee and Wally Wallace, or William J. Wallace, to the team, and really have started to look at where we are today moving forward. Second best bank in America to work for, we're going to put the performance on top of that. We continue, and we'll always continue to invest in people and technology to make us better, but also core deposit growth. So, as I look at this, I am extremely confident. In my career, if I could replace us with someone else or put us in a different market, I wouldn't do it. So confident where we are, what we're doing, the quality of this organization, our footprint, even though we're in trying times, this is where we have shined in the past. I'm extremely confident in our ability. I appreciate the interest in this organization. Thank you, Drake. This concludes today's AVer call. A replay will be made available shortly following today's call. Thank you, and have a great day.
EarningCall_1002	Good morning and good afternoon, and welcome to the Novartis Q4 2022 Results Release Conference Call and Live Webcast. Please note that during the presentation all participants will be in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions] Please limit yourself to one question and return to the queue for any follow-ups. A recording of the conference, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Mr. Samir Shah, Global Head of Investor Relations. Please, go ahead, sir. And thank you very much, operator. And thank you to everybody for participating on what is a very busy day for reporting in pharma, European pharma. Before we start, just reading the safe harbor statement. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. For a description of some of these factors, please refer to the company's Form 20-F and its most recent quarterly results on Form 6-K that, respectively, were filed with and furnished to the US Securities and Exchange Commission. Thanks, Samir, and thanks, everyone, for joining today's conference call. I really appreciate your interest in the company and our update for the full year 2022. If we move to slide four, this year, as you saw in our earnings release or in 2022, we delivered what we believe is really robust core operating income growth and margin expansion. From a sales standpoint, you saw Q4 sales up 3%, with IM delivering Q4 sales of 3% [indiscernible] sales. Productivity standpoint, we had a 15% core operating income growth in quarter four, and Harry will go a little bit further through the dynamics that drove that. But for the full year, that led to 8% core operating income growth ahead of our guidance. And that leads us to have now a margin, for IM in quarter four, of 36.4%, and on the full year, 36.9%. And as a reminder, taken together, inclusive of corporate costs, we are well on our way now towards our 40% core margin guidance for the medium term. Now in terms of innovation, some important milestones, we'll go through those in a bit more detail. And we continue our journey on ESG, sustainability-linked bond. We continue to progress towards our 2025 targets. We had 31 million patients in our Novartis flagship programs, and we continue to have solid ratings across the key ESG rating agencies. Now moving to slide five. You'll remember that in September at our Meet the Management, we rolled out our new focused strategy, and we've been diligently -- diligently been implementing this across the company: five core therapeutic areas, two plus three technology platforms, four priority geographies, a mindset to really focus on high-value medicines to accelerate growth, delivering the return profile we believe the company can achieve, and you saw that already in quarter four and a continued commitment to culture, data science and building trust with society. Now moving to slide six. And as a reminder, as you all well know, over the last five years and really over since 2014, we've been on a journey to really focus Novartis as a pure-play innovative medicines company. And through number of actions we've taken, most recently with the announced planned spin-off of Sandoz, we're on our way to becoming a 100% innovative medicines company. And when you look at the right-hand side of the slide, we believe that a simplified organizational model will allow us to have greater focus, leverage our scale and really uniquely position us as a global pure-play, large scale innovative pharma company versus our peer set. And over time, hopefully, also rerate the company given the growth profile we intend to deliver. Now moving to slide 7. We've also guided to improve financials with this new focused company, with 4% sales growth, a goal of core operating income margin of 40%, as I previously stated, continued improvement on free cash flow, and importantly, an improving and attractive return on invested capital profile. That will allow us to continue to invest across our capital allocation priorities, which Harry will go through in a bit more detail later on in the presentation. Now moving to slide 8. In each of the five therapeutic areas that we've outlined, we have core large scale commercial assets and have multiple pipeline assets that are now progressing. And we focused our R&D organization around these five areas. We're streamlining the pipeline. I think you'll see over the coming quarters us exiting additional assets as we really try to prune out non-core areas, and put all of our scientific firepower and ingenuity towards building out a deep set of pipeline assets in each of these therapeutic areas. We'll look forward to showing that progress over the coming year. Then moving to slide 9. In terms of capital allocation priorities and the strong balance sheet that we have, continue to invest in the organic business and pursue value-creating bolt-on, we look at the full range of M&A possibilities, but our focus is on sub-$5 billion assets where we believe we have the opportunity to generate strong returns and find the most value when we look at M&A opportunities. And we also remain committed to our growing our annual dividend, and Harry will outline that in a little while. But we have paid out $7.5 billion in 2022. Our proposed dividend is another growth in the 3.2% Swiss franc and 3.9% US dollar range. And even after the proposed Sandoz spin-off, there will be no rebasing of that dividend. We'll continue to grow off of the current base. And we're continuing to implement our $15 billion share buyback program. We have $4.9 billion still to be executed. And we'll continue to look at doing additional share buybacks over the coming years when the opportunities present themselves. Now moving to slide 10. And I want to turn now to our innovation story and where we are and continuing to improve our overall R&D productivity. I think it's been well recognized, we are a leader in terms of generating approval, the leading company over the last 20-plus years in generating drug approvals in the United States and around the world. Our focus now is to improve the value per asset, identifying assets earlier that have significant potential, investing in those assets more aggressively, pursuing more life cycle management indications. And with that, a goal to increase the success rate and reduce the cycle times and generate larger assets. Maybe not winning the game of generating the most assets, but really focused on high-value, high-impact medicines that could impact patients and the company's financial performance. Moving to slide 11. I wanted to walk through some of the readouts that we have coming up in the near-term and then in the mid-term. Now I think as you all are well aware, Kisqali continues on track. We'll go through this in a bit more detail in a few slides for a readout in the second half. Iptacopan is progressing nicely, with multiple readouts over the course of this year, a planned FDA submission in PNH and then readouts in both IgAN and C3G. And then Pluvicto, where we've already read out the topline in the early prostate cancer, early metastatic setting with a planned regulatory submission in the second half. And I'll give you a bit more detail on each of these three in a few slides. But going to the next slide, when you look at 2024, 2025, we expect to have an increased pace of readouts of potential multimillion-dollar medicines. Medicines such as pelacarsen in outpatients with elevated Lp(a). Ianalumab, where we have now moved this medicine hematological indications, first and second-line ITP readouts in 2025. We have additional hematology and immunology indications we're pursuing now with this medicine. So, you'll see with ianalumab a broad range of Phase III programs initiating over the coming periods. Remibrutinib, we have a CSU readout in 2024 ahead of our planned MS readouts in the coming years. And then we continue to progress with -- at OAV-101, which is our gene therapy for SMA in the intrathecal setting, as well as the first-line Scemblix program with a readout planned in 2024. Now, moving to slide 13, going into a bit more detail. NATALEE continues to progress well following the first interim analysis and we continue to guide to a final readout in the second half of 2023. As a reminder, this is a broad population, including both Stage 2 and Stage 3 patients, so the broadest population study to-date. We have longer duration with which we provide therapeutic to patients, three versus two years, a lower dose to try to improve the overall tolerability profile. And when you look at where we are in the study, final analysis is expected with 500 IDFS events at the end of 2023. We've completed the first interim analysis as we noted earlier this month, and study continues unchanged. The second interim analysis would happen after 85% of IDFS spends are complete. Now, moving to slide 14. And turning to Pluvicto, where we announced late last year that we demonstrated statistically significant and clinically meaningful radiographic PFS benefits in this patient population. Now, we're continuing to follow these patients with the second -- towards the secondary OS endpoint analysis in 2025. We plan -- are on track to file in the second half of this year. We have had discussions with the FDA and clarify the OS fraction. The fraction of patients that FDA would like to see has reached an OS endpoint prior to filing. We expect to reach that later around the middle of this year, which would then enable the filing in the second half. Now, with that guidance from FDA, we've made the decision to hold the publication or presentation of further data until the second half of this year. I know some of you have been looking for ASCO GU and some of the other congresses in the first half, we will be presenting this data in the second half after we've reached that next threshold that FDA has outlined for us. We have alignment then consistent with what FDA has told to other companies in the prostate cancer space, to then be able to file in the second half with that data set. Now, moving to slide 15 and why that's so important is, as I'll talk about when we get to the commercial section of the presentation, Pluvicto is continuing to demonstrate, I think, really impressive uptake in the United States market. And the opportunity is to move first with the PSMAfore study into the pre-taxane setting, which would expand the patient pool from an estimated 27,000 patients to 42,000 patients. Then with the PSMA addition study, which we expect to read out next year, that would expand us further into the hormone-sensitive setting. And then we continue to evaluate how best to pursue Pluvicto further into the biochemical recurrence setting or the localized prostate cancer setting. So stay tuned as we continue to look at the further expansion. But I think this really demonstrates the possibilities of Radioligand therapy, and we look forward to continuing to generate a broad set of data to support Pluvicto's use in as many prostate cancer patients that could potentially benefit from the medicine. Now moving to Slide 16. Turning to Iptacopan, and as I noted in the second half of last year, we first provided an update that â and provided the full data set at ASH, of the APPLY data set, which I think showed really outstanding efficacy for all prime -- for both primary and secondary endpoints, superiority to standard of care in patients with residual anemia. In the Phase 3 APPOINT study, where we have demonstrated, again, us really strong results, and we'll be presenting that data at a congress in the first half of this year. And then we continue to progress across a range of indications, IgAN and C3G, which will read out in 2023, atypical hemolytic uremic syndrome, where we expect the submission enabling men in 2025. And then a number of other indications, IC-MPGN, Lupus Nephritis, immune thrombocytopenia, amongst others. Moving to the next slide. And just as a reminder, when you look at the data set that we showed at ASH, I think very impressive data in these patients with residual anemia, some of the notable data when you look at increase in hemoglobin from baseline 51 out of 60 patients versus zero out of 35, so 82.3% versus 2% against the control arm; hemoglobin greater than 12, similarly impressive results, 42 out of 60 versus zero out of 35. Again, transfusion avoidance, you can see an impressive 70.3% improvement and a tenfold lower rate of annualized clinical breakthrough hemolysis. So this is in that refractory setting. We'll present the data in the frontline setting. We've also initiated a study of patients who -- to demonstrate we can switch off of MPC5 [ph] directly on to iptacopan in patients in that frontline setting. So building out a broad data package within PNH. Now moving to Slide 18. We wanted to also provide a little more clarity on our approach within IgA nephropathy. In this -- sorry, this is still in PNH, excuse me. So -- and this is the outline of the data set for APPOINT, where we'll present this data shortly. And you can see again the design of the study has the potential to be practice-changing in PNH. And as I said, we'll be looking forward to outlining this primary endpoint and secondary endpoint in an upcoming congress. Moving to Slide 19. Now turning to the IgAN study APPLAUSE for iptacopan, we wanted to clarify that our current filing plan aligned with the FDA, that's a nine-month analysis, to assess superiority in reduction of proteinuria at nine months. A statistical plan has been agreed. This would support a US Subpart H approval for accelerated approval. We would then continue to follow these patients to look for the more definitive endpoint and to look at flowing progression for IgAN, which would take to the end of the study in 2025, enabling the approval to convert to a full approval. So that's the approach we'll take with IgAN, and we'll look forward to sharing that data towards the end of this year. Now moving to Slide 20. I did want to highlight a couple of earlier-stage assets where we're continuing to progress now really with a focus on large potential assets in the pipeline. These include drugs like XXB in cardiovascular disease. This is an NPR1 agonist given infrequently a monoclonal antibody for resistant hypertension and heart failure. YTB, our T-Charge platform, where we presented additional data at ASH, where we are now pursuing this both in the front line large B-cell lymphoma, but importantly, also in multiple immunology indication on the back of data, suggesting that we can take refractory patients into remission, at least in small-scale studies, and that's something we're looking at more carefully. Additional radioligand therapies, including in breast cancer and glioblastoma. PPY, which is our gene therapy in ophthalmology for geographic atrophy, which we acquired as part of the Gyroscope acquisition. And lastly, DLX, the partnered compound analysis, oral Î±-Synuclein inhibitor for Parkinson's disease. All high-risk projects, as is always the case in the stage of development, but all with the potential, if they were to work to be very transformational medicines. Now, moving to slide 21. Now turning to the growth profile of the company, and why we believe we can deliver that 4% growth. We have these six in-line brands, these three major launch assets, Pluvicto, Scemblix and Iptacopan, and these additional pipeline assets that I've outlined. And that's why we continue to believe that we have the firepower in-house with the assets we have to be able to generate that 4% growth, with that 40% margin and create a very attractive profile in the coming years. Now moving to slide 22. The drivers of our growth in this year or this past year were primarily Entresto, Kesimpta and Kisqali, with major contributions from Pluvicto as well as, to a lesser extent, Scemblix and Leqvio. And we expect those assets to continue to have robust growth over the coming years. Now, importantly, we'll discuss a bit more detailed Cosentyx and some of the dynamics there. But the critical element for our Cosentyx story will be life cycle management and the next wave of indications, as well as continued growth in Europe and China, and I'll go through that in a moment. Now, moving to slide 23. When you look at Entresto, continued strong performance, 44% growth quarter-on-quarter. You can see the US weekly TRx continue to climb, demonstrating that Entresto really now is the treatment of choice for patients with preserved â with heart failure, meeting the guidelines within the label and the relevant cardiovascular guidelines. You see the NBRx is up 16%. We continue to see strong growth in Europe. In China and Japan, we also have contribution from intrusive use and resistant hypertension. And we remain confident in the ongoing growth profile as we continue to penetrate in heart failure, continue to generate additional real-world data, and we see that launch momentum in Asia as well.\ Now moving to slide 24 and turning to Cosentyx. I think as many of you have already seen, Cosentyx Q4 sales were impacted by a revenue deduction true-up related to prior quarters. This was related to a higher level of Medicaid utilization than we had expected. This is a delayed data that we receive from the various Medicaid channel sources. And that led to a higher revenue deduction for the previous quarters, which we took fully in quarter four. When we fully neutralize for that, we saw the US actually declined 6%. And when we look at all of the puts and takes, we see the US largely being in line right now with respect to Cosentyx performance in 2022 versus the prior year. We would expect, in the US for 2023, to continue to see in line growth. So that's â when we look at all of the dynamics. You will see in the first half of the year some declines in Cosentyx as we lap the fact that in the previous year you had these deductions, which were not factored in. But underlying, we expect Cosentyx to be able to hold its current performance in the US. And then growth that really enables us to get to that mid single-digit growth will be driven by Europe and China, where we continue to see strong growth -- double-digit growth in China overall. And that will enable us to be well set up for what will come next, which is primarily the life cycle management of this brand. And turning to life cycle management. When you go to the next slide, Slide 25, really for Cosentyx now to continue its trajectory to get to the $7 billion, which we remain confident in, it will be around launching these next wave of indications successfully. For hidradenitis suppurativa, we expect the approvals in Europe in the first half of this year and in the US in the second half of this year. This is a large indication where only one competitor product is approved, the TNF, so we'll be first to market as a novel agent in this whole setting. And so it's an exciting opportunity to bring this new therapy to this patient population. We have the intravenous US launch, where we'd be the first novel post-TNF medicine to be available in an intravenous formulation. We expect that launch in the second half of 2023. A new auto-injector. And then the continued work we have on giant cell arteritis and lupus nephritis, again, indications where Cosentyx has generated, I think, compelling data. So taken together, when we look at this profile for life cycle management, the profile we have ex US and the stabilization of the US business, we feel confident we'll get to that $7 billion peak sales potential over time. Then moving to Slide 26. You saw that Kesimpta is continuing its strong growth trajectory with 28% constant currency growth, primarily driven by the US, though we now start to see a pickup as well outside the United States. Importantly, the key driver for this is the ongoing utilization of Kesimpta in patients who were previously on braces or were naive to any multiple sclerosis therapy. It's important to note that in the B-cell share of the total market is only about 50%, so half the market continues to receive older therapies. Our Kesimpta exit share was 30%, and we plan to continue to grow that with a goal to get to 50% share of B-cell patients over time, so really good [Technical Difficulty] profile, strong convenience profile. So we'll continue to look forward to launching Kesimpta around the world and driving that dynamic US performance. Now moving to Slide 27. Kisqali had strong growth across all geographies. And when you look at that 33% growth, that's driven by a recognition that Kisqali really is the agent with the best data sets in the metastatic breast cancer setting today. And that's, I think, been really captured by the NCCN guideline update that happened just a few days ago, where Kisqali was named the only Category 1 treatment for first-line metastatic breast cancer patients with a aromatase inhibitor, which is the majority of patients in the metastatic setting. So with that NCCN guideline update now and as we continue to communicate that to physicians, this hopefully will give us continued momentum, as you can see with Kisqali now getting to 27% in NBRx share. And hopefully, we'll see in that metastatic setting, that continued climb on the back of the data sets that we've presented, NCCN guidelines, broad momentum coming out of the San Antonio Breast Cancer Congress as well. And then that will flow into, of course, the NATALEE readout, which we've already discussed, and the ongoing HARMONIA head-to-head study we have ongoing versus Ibrance. Notably as well, we did achieve an approval in China for Kisqali, which will be another growth driver for this brand going forward. Now moving to Slide 28. Zolgensma maintained the leading share in patients with SMA less than two years of age. But Q4 growth was muted, and this was really because we've now penetrated a lot of -- most of the bolus and not the entire bolus, the prevalent patients in most of our key geographies. And growth now is largely dependent on adding additional countries in emerging markets around the world. And so we expect with this brand to stabilize in the $1.5 billion range until we get the readout and hopeful approval in the intrathecal setting. We'll continue to work to increase newborn screening. Importantly, in Europe, that's at 45%, and we have the opportunity, we believe, to drive that up further, it would be a source of growth as well as adding on additional markets in Latin America, the Middle East and other parts of the world. But the key next inflection point for Zolgensma will certainly be the readout of the STEER study of intrathecal patients and the STRENGTH study in the use of IV Zolgensma patients in two to five years of age. Those studies are enrolling on track, and then we'll hopefully have data sets to share in the coming years. Moving s slide 29. I wanted to turn to Leqvio and give you an update on where we are now as we continue to build a strong foundation for this brand to become a significant cardiovascular medicine for the company. With respect to access, we're now at 76% of patients covered at/r near label. In terms of adherence, we're seeing 75% of patients today coming in for their second dose. We now have 1,700 centers that have ordered Leqvio. And we've been able to increase between Q3 and Q4 about 50%, the number of HCPs who prescribed Livio either through a paid dose or through our free trial offer to now 7,200 physicians. So we continue to build that strong base, continue to generate important data. The ORION-3 data was recently published. Our Phase 3secondary prevention studies are enrolling well. We've launched now our primary prevention studies, which we'll expect to start in the first half of 2023 and continue to build out a robust data set for this medicine. Now moving to side 30. When you look at where Entresto is and compare it to where -- sorry, where Leqvio is and compared to where Entresto was in the US, we're largely in line with what we saw in the Entresto launch. A slow ramp as we build up awareness amongst physicians, get all of the various elements in place and really build momentum in the cardiovascular community for use of a new medicine, or in this case, a new approach to controlling cholesterol. So we're on track versus the Entresto ramp, and that's the ramp we would expect to see over the course of the coming months with respect to Leqvio with a goal, of course, to accelerate wherever we can. When you look at the US, the key accelerators are going to be new facilities, getting more depth in our existing prescribers, and continuing to educate HCPs on the Part B reimbursement process. We also would expect over the course of this year to get additional conversion from the free trial offer that we rolled out in the second half of last year. Outside the United States, a big focus at the NHS is to get a broader prescriber breadth in the UK. And then we'll have the hopeful approval in the back half of this year in China, which will allow us to have a major geography where we can further accelerate global Leqvio performance. Moving to slide 31. Pluvicto, I think, as you've all seen, is off to an outstanding start in the United States. And this is reflective of very strong demand we're seeing for this medicine. $179 million in quarter four, full year sales of $270 million, almost entire -- all of that was in the US. We are seeing NBRx share at 18%, and that continues to climb in the post-taxane mCRPC setting, 160 unique accounts. We have very good payer coverage, permanent A code is now in effect. We're approved in Europe. So this is a story now where we continue to see very strong demand in the US, and we see strong demand in Europe. And we're scaling our manufacturing capacity to meet that demand. And when you look at the next slide, our Pluvicto manufacturing capacity is going to expand over the course of 2023. Our expectations are, we'll be able to move across four facilities that weâll have online for this medicine versus a single facility right now that's the primary source area today. We're working hard to bring Melbourne online by the middle of this year, which will allow us for another capacity expansion, then later this year, an automated brand-new facility in Indianapolis with substantial capacity. And then for the rest of the world, Zaragoza facility in Spain, which would then further expand our capacity for Europe. We're also evaluating adding additional manufacturing sites in Asia at this time. With the four facilities you have here, we're targeting capacity of over 250,000 doses annually in 2024 and beyond. And then we'll continue to expand that capacity by adding additional facilities if the demand warrants it. Now moving to slide 33. Scemblix is off also to a strong start. You can see the sales here $150 million on the full year, NBRx share at 29%. And probably the most important element here of this story will be the ASH preferred study, which we're enrolling ahead of plan. We expect to read out in 2024, which will enable us to potentially move this medicine in the first-line setting and potentially be used as an alternative to imatinib or some of the other first and second-generation TKIs. Yes. Thank you, Vas. Good morning, good afternoon, everyone. I'm now going to talk you through some of the financials for 2022, as well as provide you with our 2023 guidance. As always, my comments refer to growth rates in constant currencies, unless otherwise noted. So next slide, please. I would like to begin by comparing our performance with the latest guidance we provided in October last year. As you can see, we generally met our guidance across the divisions and at group level, with a notable beat for group core operating income, which was largely driven by Innovative Medicines performance. As you can see, Sandoz top line also returned to growth, with core operating income impacted by higher-than-expected inflationary pressures on input cost. Next slide, please. Taking a step back for a moment, you see that our 2022 performance was a continuation of our strong track record for Innovative Medicines. Over the last three years, we have delivered a 5% CAGR growth in sales and double of that at 10% CAGR on core operating income. Obviously, this performance has resulted in margin improving from approximately 33% beginning of this time period to now 37%, an increase of 480 basis points in constant currencies over three years. In short, we are delivering consistent performance against our financial targets and intend to continue to deliver improved financials, of course. Turning to slide 37. I will focus on the full year numbers on the right-hand side. For the full year, as Vas has laid out, sales grew 4% and core operating income, 8%. Operating income was down 13%, mainly due to the higher restructuring costs related to the implementation of our streamlined organizational model. Net income was $7 billion, with the comparison versus 2021 impacted by the Roche stake divestment income. Recall, we had a one-time gain of $14 billion when we sold the Roche stake in -- for $21 billion. Core EPS was $6.12, growing 14%, excluding the prior year Roche impact. Free cash flow was $12 billion for the full year, of course, also impacted by currency movements, but overall a solid free cash flow performance. Speaking of free cash flow, let's talk about the next slide. Of course, one of my favorite year-end slides. Given our solid 2022 free cash flow, we are pleased to propose the 26th consecutive dividend increase to CHF3.20 per share. This is up 3.2% versus the CHF3.10 last year, a dividend yield of 3.8%. Of course, this increase is fully in line with our policy of increasing our dividend per share every year in Swiss francs. Now to slide 39, please. Thank you. Now let's get into some further details about our 2022 margin performance by division. Overall, for the full year, core margin for the group increased 130 basis points to 33% of sales, driven by IM margin, which also increased by 130 basis points to 36.9%. And we'll talk about Sandoz in detail on the next slide. So here you see the summary of the Sandoz 2022 performance. It was a good year for the division returning to top line, with sales up 4%, driven by the biopharma growth of 9% and retail growing 4%. Core operating income was essentially flat for the full year, disproportionately affected by inflationary pressures on input costs. As we look in the future, we expect continued share gains across geographies and two potential biosimilar US approvals in the second half of 2023. With respect to the planned spin-off, we remain on track to complete this in the second half of the year, pending the required approvals. Next page, please. As we anticipate a spin-off of Sandoz in the second half of the year, we thought it would be useful to give guidance for Innovative Medicines, Novartis excluding Sandoz, and Novartis including Sandoz to allow for the respective modeling that no doubt you will do. So for Innovative Medicines, we expect sales to grow low to mid-single digits, and core operating income to grow mid to high single digits. Novartis, excluding Zandoz has, of course, exactly the same growth guidance as Innovative Medicines, because the only difference between the two our corporate cost. Now Novartis, including Sandoz, which is essentially today's group, the group guidance is assuming here that Sandoz would remain with the group for the entire year, we would expect sales to grow low to mid-single digit and core operating to grow mid-single digit. On the next slide, I detail a bit more the Sandoz guidance. So for 2023, we expect the top line for Sandoz to grow low to mid-single digit and the core operating income to decline low double digit. Now this core profit decline reflects the required standup investments and transition costs to separate Sandoz and some continued inflationary pressures. Clearly, with this setting, 2023 would be the trough year for Sandoz core margin, given the expected added cost to stand up a public company. Looking ahead, with respect to Sandoz midterm potential, sales are expected to grow low to mid-single-digit CAGR and the core margin is expected to expand to the mid-20s, driven by continued sales growth and operational efficiencies, especially as a standalone lean generic company. On slide 43, I would like to add some perspective on the other key financial elements of our expected core net income performance. In short, we expect both core net financial result and core tax rate to be broadly in line with 2022. On the next slide, I would like to go into a little more detail about the tailwinds and headwinds facing core operating income growth in 2023. So the expected drivers of future core operating income growth include, of course, continued performance of our end market growth drivers and the acceleration of recent launches, such as Pluvicto and Leqvio. We also expect China growth to accelerate, benefiting from a return to normal in the second half of the year. Additionally, our simplified organizational structure is expected to continue delivering SG&A savings. And, of course, we will continue our ongoing productivity programs. Growth will be partly offset by inflationary headwinds, which are expected to continue in 2023. On inflation, some further details as we saw it in -- finalizing in 2022. In 2022, the inflation impact you saw was a bit higher than expected in quarter four. So for the total company, we estimate that the 2022 inflationary impact was approximately $350 million. However, this was, of course, more than offset by cost control and productivity savings. In 2023, we expect the inflation impact to be slightly higher, also including some above-normal merit increases and approximately $0.5 billion. This has been fully considered in our 2023 bottom line guidance. The other headwinds are generic erosion of Gilenya in US and potentially to Sandoz in the EU, and the standup investments, as discussed, related to the likely Sando spin-off. Despite the headwinds, we continue to anticipate further margin expansion in 2023 and beyond, due to the expected sales growth and productivity progress. Finally, on slide 45. We thought it would be helpful to go into some detail regarding the currency impacts expected, especially given the significant fluctuations of the last months. As you saw in quarter four, currency had a negative 7% point impact on net sales and a negative 9% impact on co-op inc. If late January rates prevail for the remainder of 2023, we expect the full year impact in 2023 of currencies to be much lower. On the top line, it would be zero to positive 1%, and on the bottom line, slightly negative with minus 1%. As a reminder, we update this, given the volatility monthly on our website. Great. Thanks, Harry. Moving to slide 47. I just wanted to make a note that we continue to focus on our goal to be one of the leaders in impact sustainability and our approach to ESG, as well as just delivering on our core purpose. 290 million patients reached with our Innovative Medicines and our global health portfolio, 453 million patients reached with Sandoz, a broad pipeline across various technology areas, numerous new drug approvals and multiple recent innovation highlights. Just to highlight that we think the greatest contribution we make to the world is based on our ability to discover, develop and ultimately scale and launch new medicines to people across the planet. Then moving to slide 48. In closing, eight priorities that will really determine our path going forward. We're transforming the company to a pure-play IM company, five core TAs, five core technology platforms and our core geographic focus is a focus on the US, nine multibillion-dollar potential brands, a real emphasis on improving our R&D productivity towards high-impact assets and high-value assets, a focus on key TAs and building depth in those TAs, improving our financials, as you've seen with the margin delivery and the ongoing efforts we have to continue to improve the overall financial picture, shareholder focused capital allocation as we've shown with our dividend increase share buybacks and continued approach to how we dispose or move forward with assets such as Sandoz to our shareholders and continuing to strengthen our foundations with ESG and human capital. So with that, we can open the line for questions. If the colleagues on the line could limit themselves to one question, weâll try to make it through the list a couple of times. Thank you. [Operator Instructions] And the first question comes from the line of Matthew Weston from Credit Suisse. Please go ahead. Your line is open. Thank you very much. I'm going to go with a big picture question to start with, because I'm sure others will dig into the detail, it's on drug pricing. The incoming chair for pharma in 2023, I'd love your perspective on whether the industry sees any success in normalizing the nine versus 13 exclusivity for small molecules versus biologics. And also your thoughts on EU pricing pressures. There seem to be a lot of pressures building in a number of your core markets, in Germany and France and others, and also some worrying legislation in front of the European Commission. I'd very much love your thoughts given the vast exposure there. Okay. Thanks, Matthew. So first, our guidance already factors in the various headwinds we see in pricing around the world. So that 4%, 40% and then also the guidance in 2023 already factors this in. So that's an important, I think, caveat. So to your first question on -- in the US, there's three core priorities that we have as an industry to take forward now. One is to correct the distortion of the nine versus 13 small molecule, or NDA versus BLA. Second is a focus on PBM reform. And the third is continuing to improve the 340B program, so that it can actually deliver on its intended purpose for patients in low income settings and who benefit from various programs from federally qualified health care clinics. Now on your specific question on the nine versus 13, I think we have very good arguments as to why this creates an unintended long-term innovation distortion, which disadvantages small molecule and related medicines for the Medicare population, indication expansions in cancer, medicines that take longer to ramp in cardiovascular disease or in respiratory disease. So all things that need to be considered. I think the key thing will be when, in the coming years, there's a legislative vehicle for us to be able to pursue that. But it's a top priority of the industry. And I think, at least my belief is our industry, when we come together, to really focus on a topic and have a very clear compelling policy case and a relatively small pay for from a congressional standpoint, that we can make it happen, that's going to be our total focus as a sector in the US. Now on the EU pricing pressures, it's a little bit of a mixed bag. Certainly, we are concerned by some of the actions in the UK, actions -- proposed actions in France. Germany has had some headwinds. But overall, the German environment, we'd say is relatively positive and workable. But I'd say, broadly speaking, I think, we as a sector need to do a better job clarifying the policymakers that, in order to invest in innovation in Europe, we need a pricing environment that rewards innovation, particularly when it improves outcomes for patients. And this can be seen as a place to constantly cut costs, especially relative to the rest of the world. So that's going to be our focus to try to educate. But for us, I think, Germany remains most attractive market. And therefore, I think from a financial outlook standpoint, we feel comfortable with the guidance that we've given. Thank you. Your next question comes from the line of Graham Parry, Bank of America. Please, go ahead. Your line is open. Great. Thanks for taking my question. So it's on Pluvicto. So it's now annualizing over $700 million, which I think was pretty close to your peak guide for the vision-labeled indication. So is that a steady state number, or can you see growth expanding from this quarter-on-quarter? So have you hit your supply capacity constraints now until you get more supply coming online? And could you just underestimated the vision population here, given it's penetrated so quickly? And then on your capacity into next year, you said that the number of doses around 250,000. Correct me if I'm wrong, that would equate to around 50,000 patients, which is over $8 billion of revenue potential at US prices. So perhaps just give us a feel for what you think the top peak numbers for this drug could be in the context of the 2 billion that you've been putting into the slides for PSMAfore and PSMAddition. Thank you. Yes. Thanks, Graham. So first, I think from a demand standpoint, I would say our initial estimate of the vision population have underestimated the potential of this population and the demand would suggest to us that there are a greater number of patients and providers interested in this medicine. So we certainly have not fully penetrated the vision population in the United States. And really, it's a question of us continuing to expand our capacity to meet what is a much larger interested population than we initially expected. And so, we're working towards that. As I mentioned, we're working with multiple sites to have online over the course of this year. Ideally, and if according to plan by the middle of this year, but that's dependent on regulatory action and then additional sites towards the end of this year as well. So we would expect if we can meet the demand that there will be continued growth from the vision population in and of itself. Now, I think beyond that, with the PSMAfore, PSMAddition, we certainly see this medicine becoming a very significant medicine for the company, assuming the data reads out positively over the coming readouts. That will take, of course, the readouts have to come through, but we're preparing from a capacity standpoint to have this be a very large medicine for Novartis. And you see that, I also mentioned we're preparing as well as to add additional facilities in Asia. We have advanced already planning on those two additional facilities. So we'll be ready to make this medicine around the world available to many prostate cancer patients as we can. And so just to be clear, have you reached capacity already, or is there further capacity that you can still fill with increased demand? We have further capacity versus Q4, but we certainly need to continue to work -- to further expand the capacity given the size of the opportunity, the size of the demand that we're seeing. We have some limited additional capacity versus Q4, but we need to expand further to fully meet the demand for sure. So I think from how you model this, I think in the first half of this year, it should be modest growth as we work to expand the facilities. And then assuming we get to facilities online, we would hope a ramp up then in the second half as those -- that additional capacity comes online. And then moving into next year, of course, we have the additional capacity, additional geographies and then, hopefully as well, the PSMAddition population as well. Thank you. Your next question comes from the line of Stephen Scala from Cowen. Please go ahead. Your line is open. Thank you very much. We noted that the Phase 2 data for your obesity agent, MBL949, is due in May. I don't believe Novartis has stated the mechanism other than it's not an incretin. Can you confirm that it targets anti-ACTR3? And is it the same as or similar to the molecule you previously out-licensed? And I'm also curious on the same topic, why you didn't highlight it on slide 20, are you not excited about this target, or are you not excited about obesity? Thank you. Yeah. Thanks, Steve. So it's -- I can say definitively, it's not related to BYM, the molecule that we out-licensed. We are not disclosing the mechanism of action. You are correct that we do expect the readout in quarter two. And the simple reason we didn't highlight on the slide is we view it as a high-risk, high-reward program. Now they're all high risk, high reward, but I think particularly for agents of obesity, the key is can we find a dose and schedule that leads to both profound weight loss and a tolerability profile. And I don't know -- I've not seen the data, so I don't know. But I mean, that's the key question, and that's why we didn't chose not to put it on the slide until we have further data, which we'll have in the second quarter. And then, of course, we'll provide an appropriate update at that time. Thank you. Your next question comes from the line of Tim Anderson, Wolfe Research. Please go ahead. Your line is open. Thank you. On Cosentyx, what's driving the higher Medicaid channel mix? And could that somehow increase further, or might it actually reverse out as Medicaid enrollment numbers potentially shrink with the US declaring that the pandemic is over? And then an update on formulary positioning in 2023 in terms of lives covered and a preferred spot? And also, if you can comment on whether there's any new access restrictions and what the rebating was like in 2023 relative to prior periods? Yes. Thanks, Tim. All great questions. So first, on the Medicaid increase. First, it's important to note, with a brand like this, $3 billion of net sales, significantly more gross sales, the actual percentage variation here is not huge. Nonetheless, we don't have a great handle on why exactly the Medicaid came up a bit more. But one of the drivers with certainly -- we had certain special higher discount agreements with certain Medicaid plans. Those have now expired. And so, those would no longer be in play for the coming years. And so, I think, overall, we expect to see the mix goes up and down year-to-year. But, overall, we expect to see the mix stabilize back to what we've historically seen prior to this situation we had in 2022. In terms of formulary, it's largely in line with what we had in 2022. We see no significant shifts or changes in terms of formulary position, access. Overall, given the overall scheme of things, when we look at gross to net, they're in line with 2022. So that's why we'll feel good in the US that on an annual basis, we will be able to deliver sales that are in line with what we saw in 2023 with what we saw in 2022, and then the growth would come from the new indications. Again, I just want to highlight that for the first half of this year, because of the fact we took all of that Medicaid charge in Q4, and when you lap the prior years, the base is not fully adjusted. So you are going to see a lower relative Cosentyx sales in Q1 and Q2 because of the base effects of taking all of that Medicaid rebate into quarter four. But I think the bigger picture on this brand is our ability to deliver new indications, new formulations. That's really where we have to focus. And then the continued expansion in Asia and China as well as in Europe. Thank you. Your next question comes from the line of Florent Cespedes from SociÃ©tÃ© GÃ©nÃ©rale. Please, go ahead. Your line is open. Good afternoon. Thank you very much for taking my question. On slide 30, on Leqvio, there is a chart showing the sales that -- and the Entresto sales as well, the mostly sales. Do we have to understand that the Leqvio should continue to trend with the same pace as Entresto, or, as you suggested last year, we should see an inflection later this year given the fact that we expand the number of sites that could prescribe the product? So some color on that would be very helpful. Thank you. Yes. Thanks, Florent. I think, the -- we just want to overall indicate that the launch is in line with other major cardiovascular launches, where we've been able to generate very large medicines, and you've seen how Entresto continues to perform. I don't exactly -- we continue to hope for the inflection point certainly in the second half of the year. It's hard to predict exactly when it would happen. There are a few things that give us confidence. We should see some acceleration in the back half of this year. One is the free trial offer program that we had rolled out, will expire, and we hope that those patients will convert into paying patients in the second half. Second, with that 7,000-plus physicians that I mentioned, we expect to get greater depth in those physicians over time, which should also drive greater growth as well. We also see an increasing comfort with buy and bill versus the alternative injection centers. And as that happens as well, we generally see physician sites prescribing more of Leqvio, because they can do it in-house without having to refer a patient out. So all of those would be the positive tailwinds we would see towards the second half of the year. I think broadly speaking, we feel comfortable with where consensus is on Leqvio for the full year 2023. And then our goal remains to make this into a very significant multibillion-dollar medicine over the coming five to 10 years. Thank you. Your next question comes from the line of Peter Welford from Jefferies. Please go ahead. Your line is open. Hi. Thanks. I have a question on oncology. Just, obviously, there was a lot of emphasis on radioligand therapies, and that was highlighted some of the new and upcoming ones you have as well that are coming through Phase 1/2. There are relatively few other priorities in oncology highlighted within the pipeline. And so I wonder if you could still say, first of all, if you just view on your KRAS and the opportunity there, given also what we've seen develop in that market. But also ociperzumab, is that now discontinued, or is it just delayed as you continue to evaluate TIGIT? And so more broadly, is this still an area, which you could see further business development, or do you think this is an arena obviously less focus from Novartis? Thank you. Yeah. Thanks, Peter. So I think on oncology, I mean, it remains a huge focus for the company. 40% of our R&D budget is focused on developing the next wave of oncology medicines. Within solid tumors, in addition to the radioligand therapies, where we have now a growing portfolio across neuroendocrine prostate, we have a range of other indications we're taking Lutathera into, we have the anti-Integra, the bond basin. We recently are hopefully bringing in a folate as well. So we have a broad portfolio within RLT where we see a significant opportunity. We continue to also pursue the TIGIT through the deal we have with BeiGene, and we have that as an option deal. We also are assessing what other lines of therapy to take that TIGIT into given the competitive landscape, and that's something we're actively evaluating. And then in terms of other active programs that are in Phase 3, certainly the KRAS and the KRAS G12C are continuing. Our overall perspective is a critical thing now is to demonstrate efficacy in a combination setting. We think we've seen now from the sales performance of the mono G12C inhibitors. While important for a certain group of patients that have the mutation, much more important is can you ultimately demonstrate tolerability and efficacy of the G12C with a PD-1, with a ship to with other agents. And that's something that we're working through to see. And that would really, I think, give us more confidence that this could be a very significant medicine. Now earlier stage within the NIBR portfolio, we have a range of different assets that we're pursuing. We have a few targeted protein degradation agents that are advancing now into Phase 1/2, a couple of novel targets in non-small cell lung cancer as well as other solid tumors. So that whole space continues to progress. As you know, oncology has a high level of failure rate. So I don't want to oversell it, but I think we're certainly working to continue to find the next wave of solid tumors. And then we are active in the BD&L space. And I think if we could find attractive assets within our core cancers; lung cancer, prostate cancer, the gastric GI cancers, et cetera, those are certainly things we would actively look at. I would say in hematology now between Scemblix, Iptacopan, ianalumab, we have some pretty -- building on the legacy, of course, of Gleevec, Tasigna and Promacta/Revolade, we have a pretty good portfolio in hematology. And then, of course, with now YTB [ph] moving into the first-line setting in large B-cell lymphoma, a nice portfolio to continue to keep -- maintain our strength in hematology over time. Thank you. Your next question comes from the line of Seamus Fernandez from Guggenheim Securities. Please, go ahead. Your line is open. Great. Thanks for the question. So can you maybe just give us a sense of what the team is doing to extend the IL-17 franchise beyond Cosentyx exclusivity in 2029? There's obviously a number of high-value immunology assets out there in development, we're just interested to know what Novartis is doing beyond that. And maybe if you could, would you mind commenting on how you see the HS landscape evolving going forward, given some of the data that we've seen for bimekizumab and then potential competitor moonlike as well. Thanks so much. Yes. Thanks, Seamus. So first on IL-17A and the Cosentyx portfolio overall, of course, I think we're actively working on and looking at Cosentyx LOE 2029. We have additional patents that go into the 2030s, which will, of course, actively prosecute as well. We have a range of oral antiimmunological agents we're pursuing in-house. So oral IL-17A and as well as other oral agents. And of course, actively looking at external opportunities as well in that space, if we see compelling data. So I think that's going to be really critical for us to look at. But of course, we have time and thatâs something we'll work through over the coming years. I also would say that, in immunology between ianalumab, remibrutinib, as well as other programs we have now advancing through the pipeline, we're also prepared to pivot not to be -- not just focused on psoriasis, PsA and AS, but also try to move into -- really be a leader in areas like SjÃ¶gren's, SLE and other immunological illnesses, as you mentioned, like HS. Now, HS, our view is that, our 52-week data is very compelling. We think this will really be a space where a long-term data is what really matters. We think our 52-week data relative to the TMS are very good. We're aware of other IL-17A is coming. I think what's important to note is, this is a very, very undertreated patient population. These patients generally have given up and generally are not coming in for therapy. So the real opportunity here is to get these patients to know that there are better therapies available, and that will create, I think, a large market opportunity, where multiple players can be successful. Given that these agents are looking like they have better efficacy and safety than the anti-TNF [ph]. [indiscernible] anything to say about other mechanisms at the moment. In-house are pursuing other mechanisms as well against HS to try to make sure that we cover our bases. We have evaluation of our anti-CD40 ligand. We're evaluating remibrutinib, our BTK inhibitor. So we have a range of efforts looking at HS, and of course, we'll see which ones pan out in-house. Next question, operator. And Iâve been advised to really remind everyone, please limit yourself to one question. Appreciate it. Next question, operator. Thank you. Your next question comes from the line of Andrew Baum from Citi. Please, go ahead. Your line is open. Thank you. Question is on Pluvicto. Looking at your patient access, Vas, demand clearly materially exceeds supply currently for the product in the US. Could you just outline your confidence of FDA approval for the mid and end year for the new facilities? Just given the recent track record of Leqvio, plus you have a new facility, what is the risk of that dragging on? And connected to that, how should we think about the future competition from Point and Lantheus with their existing isotope in prostate? Thank you. Yeah. I think with respect to the files, we're ready to file the site and we're in discussions with FDA to have filed the Millburn site. And the time if we okay to file, there's a four-month review clock for that additional facility. Our Indianapolis facility with multiple large-scale automated lines, we plan to file in quarter three as well to the NDA. And again, it would be an addition of additional sites. So we would expect a four-month approval time. And so we're doing everything we can to make that a reality. And we plan right now for those sites, our base plan is for those sites to come online this summer and then later on this year. And then we'd have adequate supply to fully meet the demand of the vision population as well as the PSMAfore population. Now I think in terms of the competition, it's important to note this is extremely difficult manufacturing. This is a just-in-time manufacturing that requires really logistics expertise. We currently source the entire US market out of an Italian site and do it successfully. And we believe we've built up substantial know-how and expertise with the relevant sites to give us a strong competitive position. Now other players, of course, are going to come in and try to launch a question will be do they have the same scale and expertise that Novartis does to be able to navigate that complexity and really ensure that they can meet the demand. So that's our outlook right now. We feel good about -- by the middle of this year, we'll be in a very strong position to meet the supply. I would also note for Leqvio, because I noted your comment on that product, I mean, we have a large-scale line now that's up and running in Switzerland, which makes us the largest producer of siRNAs in the world. So I think we're good on gene therapy, RLT and sRNA manufacturing. We feel very good with the approach we've taken. And I think we're in a very good place on all three of them. Thank you. Your next question comes from the line of Keyur Parekh from Goldman Sachs. Please go ahead. Your line is open. Hi. Thank you for taking. One big picture one for you've, Vas. With the proposed separation of Sandoz, kind of, Novartis will become a focused innovative medicines company. Once that transaction is done, are you done with the process of changing the shape and structure of Novartis, or do you think there is more, kind of, you want to do relative to the size and the shape of the Innovative Medicines company that will be left at the end of the Sandoz transaction? And just linked with that, I know kind of Ronny Steel [ph] has been hiring the higher some people like Dr. Yang, et cetera. But just more broadly, how far along the process of building that kind of growth and strategy functions set under Ronny is kind of Novartis today? When do you think that might be done? Thank you. Yeah. Thanks, Keyur. So broadly speaking, our strategy was to get to become a pure-play innovative medicines company, design the company in the right way. We started that journey in a principled way five years ago. Of course, there was a pandemic for 2.5 years in the middle of that, so it got a little more complex. But I think we have the right set up post the Sandoz spin with a geographic focus on the US and ex-US. And from a commercial standpoint, really committed and renewed leadership in R&D and then the strategy and growth function to really identify external and internal opportunities that can drive the growth. So, I think, post that time period and post seeing through the transformation program we announced last year and the relevant restructuring, I think, we'd be then in a position to really just focus on execution. We need to execute on our launches, execute on our pipeline, execute on our productivity, continue to generate that mid-single-digit sales growth and that attractive core margin over time. And then, that becomes the core of what we do day-in and day-out, continuing to look at attractive external assets to add on over time. Ronny's team is getting built out, I think. Off to a strong start. A much more integrated -- the most integrated approach now that we've had that I'm aware of, at least in 20 years, is the R&D portfolio management, it all falls under one roof now in terms of how we look at the R&D portfolio, an integrated approach to taking commercial input into the earlier stages of research, much more focused on key TAs and being much more disciplined in saying no to projects that are off strategy. So, I think, all of that's coming together, it's been four or five months for Ronny, it's been two months for Fiona Marshall, but I feel really good that this is a great team that can deliver that innovation horsepower we're going to need as a pure-play company. Thank you. Your next question comes from the line of Emily Field from Barclays. Please, go ahead. Your line is open. Hi. Thanks for taking my question. I just wanted to ask a question about Iptacopan. All this US filing in the first half of this year include both PNH trials. And then -- because I know you mentioned that you're running the SWITCH study for the frontline patients as well. Just trying to get a sense of commercialization strategy across the PNH spectrum. And then, just, I know you have BTD for this asset, just how long of a regulatory review you might be expecting? Thank you. So with Iptacopan, yes, we'll be following both studies, both the refractory and frontline study as part of the package, and that's aligned with FDA. We do have used a priority review voucher as well for this asset to really ensure that it's approved in a rapid time frame. Even though we had breakthrough therapy designation, we don't want to take any risks with respect to this particular filing to make sure that it happens as fast as possible. With respect to our overall strategy with Iptacopan, when you look at this market, we believe that it's 60% to 70% of patients who, on current anti-C5 based therapies, are not adequately controlled, and those patients could be switched to Iptacopan based on the data we presented at ASH and assuming the final label supports it. And so, that's a substantial opportunity for the medicine. We know that potentially up to 60% to 70% of diagnosed PNH patients are not on a therapy today. And they come on, I think, in a few different categories. Some are subclinical or not quite clinically severe enough. And the question is, with a twice a year safe oral, is there an opportunity to get more of those patients on therapy, because it may be physicians or patients were holding off wanting to be on regular infusions. So could an oral therapy open up that market. I think there's a set of patients also who have gone back to taking transfusions, having now failed prior therapies. That's another opportunity. And then there's probably a set of patients as well that are just in the watch and wait mode. So that will be an opportunity for the medicine as well. So we think there's multiple places. It will take us time to drive this launch. So this will not be fast, given the strength of the incumbent position. And then, also that this -- a significant group of patients not on therapy has to get mobilized. And we believe over time with the compelling data that we have and the recognition that a twice-a-day oral could be a really compelling option. We can build a very significant medicine on PNH, then expand into C3, IgAN, AVOS, IC-MPGN and then subsequent indications thereafter. Thank you. Your next question comes from the line of Richard Vosser from JPMorgan. Please go ahead. Your line is open. Hi. Thanks for taking my question. Just going back to Kesimpta and obviously, very strong. We're going to see another launch for another CD20 this year and coming around now from TG Therapeutics, obviously an IV, but lower price. How do you see that impacting Kesimpta this year? And maybe also we're going to see subcutaneous KRAS data, how do you see that as well in the future around the launch? Thanks very much. Yeah. Thanks, Richard. So the way we look at the MS market, the one, as I mentioned, you have 50% of patients that are not on B-cell therapies and 50% on B-cell therapy. So there's a substantial market opportunity just to get more patients in the first-line, first-switch setting on to high-efficacy B-cell therapy. So there's plenty of room for growth just for Kesimpta and getting some more of those patients. The second thing based on our understanding of the market is that there are sets of facilities and health systems that prefer infused medicines, and there are those that prefer providing patients subcu medicine. And we see those as very stable. So really, this market is a split market. You have a market of physicians who want to give infused medicines and there is a large proportion of the market who want to give patients the opportunity to have at-home subcu administration. Within that subcu, we don't see any at-home administration relevant competition for the coming years, and that's very much our focus area. Within the IV segment, there is now competition and I think that competitive dynamic will be an important one for us to observe. And I think to your point, Richard, will the opportunity of having subcu physician-administered medicines expand the number of centers that might be interested in a physician administered approach, we don't know. Nonetheless, the market opportunity ahead of us, with the 50% of patients not on B-cell therapies and the substantial number of physicians who prefer providing an at-home administration, that's the opportunity for this medicine, and that will give us plenty of room to grow over the coming period. Thank you. Your next question comes from the line of Simon Baker from Redburn. Please go ahead. Your line is open. Thank you for taking my question. Just going back to Leqvio. Vas, you briefly touched on buy and bill. I just wonder if you could give us a little bit more detail on the progress you're making there. I ask because, on one hand, there was a fairly negative article earlier in the month on [indiscernible]. But we on the other hand, we see in September and December last year, quite a significant uptick in traffic to the Leqvio-access website. So I just wonder if you could give us the latest picture there? Thanks so much. Yeah. Thanks, Simon. Look, there's no question that buy and bill is a new approach that cardiologists need to understand and get implemented to their office. That said, we know there are many specialties that have successfully done that; ophthalmology, oncology, rheumatology, neurology. So this is something that can be done. Is it -- does it take time? Yes. Do you have to work through many hurdles? Yes. Do you have to get office staff to understand a new approach? Yes, absolutely, but it can all be done. And as I noted, now that we have over 7,000 physicians that have taken action on Leqvio, 1,800 facilities ordering Leqvio, a steady increase in conversion from facilities that were previously using alternative injection centers to now implementing buy and bill in their facility for Leqvio. I think we're getting to a place now where physicians are getting more and more comfortable with the concept. And what we generally see is, once a physician has one patient go through the process and they understand that it is something that's manageable, then it becomes something relatively straightforward for their office and then they take it on relatively quickly. So we have to get up that curve, but we're seeing, I think, positive trends. And we'll just keep working through it, keep also hopefully having clinics be able to educate one another about the experience of how buy and bill ultimately works and get that further implemented. So I wouldn't read too much. And you can always find probably a physician to tell you any process is onerous and terrible. But I think, broadly, when we look at a large-scale data set, we see steady progress on this front. Thank you. A question for Harry, please. Just going back to the Sandoz operating expenses into 2023. I mean, that's the biggest delta that your consensus really looking at the composition of numbers for this year. Harry, how much of these expenses are standup costs? And how much is sort of prepping for manufacturing shift as well? This just seems a meaningful amount that is coming into the P&L. Is that purely just separation costs, or is that already including sort of longer-term expenses that already hit 2023? Thank you. Yes. Thank you, Michael. So, overall, I would say, if we take out these standup and transitionary costs, the co-op inc Sandoz in 2023 would be flat. So a slow double-digit decline comes from that. If you think about, right, Sandoz delivered $1.9 billion co-op inc in 2022, so we talk about roughly plus/minus $200 million of cost block. Out of that $200 million, about $70 million to $90 million will be real standup costs, corporate costs and so on that Sandoz needs to operate as a separate public company. And the other half, if you will, will go away over time, as the fully transition to a public company. That would naturally go away as these transition costs are not any more needed after a couple of years. Of course, also the corporate cost -- there will be corporate costs. But clearly, Sandoz has plans to reach in the mid-term the mid-20s margin by then streamlining the overall operations, SG&A structures as they are a stand-alone company. So I hope that gives you a bit more flavor on that guidance for this year, which really should be a trough year. And then after the separation, relatively quickly come off that, including, of course, taking over transitional service costs, like for IT over time, quite quickly, usually maximum two years on such services. Thank you. Your next question comes from the line of Emmanuel Papadakis from Deutsche Bank. Please, go ahead. Your line is open. Thank you for taking the question. Perhaps, I'll take one on Kisqali. You've reiterated the over $3 billion pre-sales potential for the end of an indication. So perhaps you could just help us understand how important do you think a clinically meaningful benefit in both of the two key subpopulations in the trial as intermediate risk and higher risk in terms of realizing that potential deal is steady positive? And how would you define clinically meaningful in terms of the absolute relative iDFS benefit in that population? And indeed, is that something you actually disclose with the headline or have to wait until details are presented? Thank you. Yeah. Thanks, Emmanuel. So the trial right now is overall designed for an endpoint across both patient populations. And so there -- in order to hit the primary endpoint, we need to hit across all populations. Now the question would be would FDA parse the data and say that it was driven by the high risk population and then potentially take a different approach, we can't judge. But the way designed and powered the study is across the entire group. And so from a pre-specified analysis on the primary endpoint, it would be for both the intermediate and the high risk, of course, with the relevant secondary end points. I'd also note that we've aligned with FDA that key for us is to show no detriment in OS, as long as we can demonstrate no detriment in OS at the time of that readout, that would be the case. So I think you could expect a headline on, whenever it comes, on the iDFS. And then if relevant OS or not relevant the -- we would not say anything on the OS. And then we'd have to have the discussion with the agency to determine how they would like us to cut the data. From our competitor data, there was a threshold that was applied for a certain subpopulation Ki-67 and then later adjusted. So these are all things that we'll have to determine as part of the review process. Thank you. Your next question comes from the line of Mark Purcell from Morgan Stanley. Please go ahead. Your line is open. Yeah. Thank you. It's Mark Purcell from Morgan Stanley. Thanks for taking my question. On Iptacopan, first, could you help us understand, when you say the nine-month analysis could potentially support US subpart H filing, how should we think about the probability of moving forward at that point versus, obviously, out of 2025 or so and slowing progression of IgAN before you can approach the FDA with your package? And then related to that, obviously, a much bigger population in IgAN versus PNH and C3G, et cetera, should we think about sub-population of the 185,000 patients you estimate with IgAN, which would be a target hill, or would you launch this as a completely separate brand? I'm trying to think about what Novartis' broad ambitions might be to build out a portfolio of primary care and rare renal assets given your commercial capabilities across the platform. Yeah. Thanks, Mark. So first on the endpoint for IgAN. We saw in the Phase 2 data, Phase 2b data, I think reduction in proteinuria across the very statistical analysis that we've done. And that's the basis for us designing the Phase 3 study. So we feel good that if we hit the required slope of reduction that we target that, that would allow us to file with the FDA. Though I imagine it will also come down to the totality of the data. But certainly, our base case is that if we hit the primary end point on proteinuria that should give us the basis to file. And then, of course, we would look at eGFR and other endpoints in 2025 that would be more meaningful after further follow-up. Broadly speaking, for our factor Technical Difficulty] so focus on PNH, C3G, aHUS, IC-MPGN, Cold Agglutinin Disease and the related spectrum of illnesses, when we're in a more common illness like IgA nephropathy, our focus is on more severe patients to be able to maintain the ultra rare pricing. We do have follow-on factor B inhibitors that we plan to take forward in broader indications. You'll know that we do have a program for Iptacopan evaluated in geographic atrophy and related retinal diseases. And if successful, we would actually use the backup compound for those broad indications, and that's how we're thinking about splitting out across the whole factor B enterprise. Thank you. Your next question comes from the line of Richard Parkes, BNP Paribas. Please, go ahead. Your line is open. Hi. Thank you very much for taking my question. It's just another one on Pluvicto. You've outlined obviously, you'll have manufacturing capacity to allow you to address the majority of the PSMAfore population by 2024. Could you talk about the other hurdles and limitations on your ability to penetrate that population, including referral patents, proportion of patients care in the community and access to nuclear medicine facility, just so that you can help us scope out the opportunity? Thank you. Yes. Richard, what we've seen thus far is, there's about 500 facilities we believe we would need to be able to provide Pluvicto, at least in the US market, to reach the demand -- the potential patient population across the three indications that we have. We're able to -- weâre currently servicing a little over 200 of them, and we expect that to expand over time. I think what's going to be the next challenge, because the demand, as we've noted throughout the call, are much higher than we expected, and I think folks on the call expected, frankly, is actually having the centers have enough infusion chairs to be able to provide the therapy to enough patients. So that's the next constraint beyond once we relieve our supply constraint later in the middle of this year to then work with the centers to have a better estimate of what the number of patients they think they will need to provide radioligand therapy to a day and ensure they have adequate chair or bed capacity to be able to do that. Because I think that will be, as we get into broader and broader patient populations, that will be the next constraint we'll have to then work through. There seems to be a lot of enthusiasm in the urology and nuclear medicine community to do that, so I expect it will happen. But that's something we're going to have to work through over the coming quarters. Hi. I assume you're calling on Steve Scala. So I'm just wondering, what is your specific assumption for the profile of Merck's oral PCSK9, for which data is coming very near-term, in terms of both its LDL lowering and its safety. I assume your view is very cautious, which supports your high enthusiasm for Leqvio, but what role do you think an oral PCSK9 ultimately could have in this marketplace? Thank you. Yeah. Thanks, Stephen. I'm glad you asked that question. Our view -- and we had an oral PCSK9 program, which we've deprioritized. We are pivoting cardiovascular research into -- in Novartis and to infrequently administered SiRNAs, ASOs, et cetera, to get to -- first, as you know, we have PCSK9. We have combination programs, of course, we have Lp(a), follow-on programs with various combinations. And the goal would be to say, can you get to combinations at six months or long-acting at one year, with the belief that over the last 25 years, we've learned that compliance to orals in this market is low. Statins are 30%, other therapeutics are in a similar range. And if we really want to tackle cardiovascular disease scale, we need to get to infrequent administration. So we have Leqvio as a starting point. We're going to work very hard to extend past -- not get the nine to 13. But we're anyway going to have life cycle management working on long-acting Leqvio, working on combinations with Leqvio. And our goal will be very much to have a combination siRNAs that can cover the relevant mechanisms of action for cholesterol lowering, so that patients won't need oral drugs anymore. Because we think that's where medicine is heading and we think that's what siRNAs, long-acting ASOs and similar technologies can deliver. Thanks Steve. All right. Very good. Thank you all for joining, and we look forward to updating you further at quarter one. Take care.
EarningCall_1003	Welcome to Atlas Copco Q4 Report for 2022. [Operator Instructions] Now, I will hand the conference over to CFO, Peter Kinnart. Please go ahead. Thank you, operator. Good afternoon, ladies and gentlemen, to this quarterly earnings call for the fourth quarter 2022 for Atlas Copco; welcome to the call. Before we start with the official part in the presentation, I would already now like to remind you that when the Q&A session starts, we would like you to strictly stick to only 1 question at a time in order to make sure that all participants in the call will have an opportunity to raise at least 1 question. Should, of course, we have made full circle, of course, you can get back in line for other questions to ask afterwards. So thank you for that in advance. And with that, I would like now to hand over to Mats RahmstrÃ¶m, our CEO, who will guide you through the earnings presentation. Thank you, Peter. Hopefully, everyone can see a very nice picture. And if you read the report already, you will see that the Gas and Process division did really, really well. And this is 1 of their products. Yes, this is thick with natural gas application. So this is about to be shipped to 1 of our customers and this is what they look like when they say refer to bigger machines sometimes. So if we start on the Slide number 2. We said in the heading that we had a mix demand and orders received were SEK36 billion. After 8 consecutive quarters with growth, it was minus 7% organically. But if you look at the graph, you can see that this level SEK36 billion is still what we would refer to as fairly strong, even if this SEK currency should be down but it's still a strong orders received compared to historical data from 2019 and forward. CT to grow 3% organically. Industrial Technique driven by the electric vehicle transformation was very strong at 18%. Power Technique was down 6%. But if you recall, Q4 last year, they actually had the best quarter which is unusual for them which is normally in Q1. So this tough comparison, so they did very well. The down was the VT, Vacuum Technologies which was linked to the semiconductor industry. Breaking it down a little bit in vacuum. We can see that it's memory that is the weaker part, more activity on logic. And at the same time, we can see that the Industrial division and the Scientific division is doing really well. On industrial compressors, we say flat. And here, we include the bigger oil-free machines and oil-injected machine and we can still see a positive trend on the bigger machine with a single digit and a declining trend on the smaller machine with a single digit as well. As I mentioned in the beginning of the call, Gas and Process, it did really, really well. All in all, they represent approximately 10% of revenue for the year and this is mainly linked to different sustainable application, liquid natural gas, carbon capture and applications like that. And ITBA Industrial solutions, very closely linked to the EV transformation but also General Industry did quite okay. And pleased to see that we continue the journey, strong journey on service for all business areas. So OpEx was still strong among our customers. Sequentially, as expected, down, slightly down. And then we could also see that we had considering the number of issues we have in supply still, I was happy to see that we had record revenues at SEK40 billion and 16% organic growth. CT, up 15%. Vacuum Technique also up 14%, Industrial, 16% and Power Technique, 24%. So that was really, really good. Then if we change to next slide and the confirmation of the numbers but you can also see the operating margin. We did SEK7.8 billion and a margin of 19.5 and adjusted for the long-term incentive program, SEK8 billion and 20%. The SEK7.8 billion is the second best quarter we have ever done, of course. CT, very good at 23.6%. And Power Technique also very good at 18.2%. And then to some disappointment, I think, on VT for ourselves, we still have a lot of operational issues at 18.2 and Industrial Technique had some onetime cost this time, so they ended up at 18. If you then go to the full year which is on Slide number 4. Looking at the graph, of course, it was an exceptional year for us, helped by currency but also strong organic growth. So record orders at SEK158 billion, 8% organic growth and revenues at 141, plus 12 and the operating profit also at a record SEK30 billion and a margin of SEK21.4 billion. And you can see equipment order growth in all our business areas with the exception then of Vacuum Technique and that is still linked to [indiscernible] divisions in the semi. Continued strong growth for service which is beneficial, strong presence and success in all regions. And this year -- last year, as you say now, we did 30 acquisitions. For those that were at the Capital Markets Day, the 17 of them that are the character more of a roll-up, distributor getting access to markets and segments and there were 13 of those were new technology platforms that we buy into widening our scoop of supply. So quite pleased with the development there. And then, the Board of Directors proposed a dividend for the year which is an increase of 21% [ph]. We go to Slide 6. So this is all received in local currency. Starting with Europe in the light blue, we can see 3% up and this is helped by the [indiscernible] acquisition in Europe but CT was flat, VT down, Industrial Technique was positive and also Power Technique was positive. So quite okay for Europe. Then you can see the only bigger red number is then Asia, where we were down 10%. But actually, it was only Vacuum Technology where we have the main part of our semiconductor sales that was down. All the other business as was up to double digits. So quite successful quarter for most of our business areas. More activity in Africa and Middle East, strong compressor development in the rig and also strong for Power Technique. And South America, up 3%. We had strong compressor technique mainly. And in Americas which is flat, CT very strong. Semi, down and Industrial Technique, up and also PT down, they had all these strong orders last year for rental companies. So they were down as well. So a little bit of a mixed picture. We go to Slide 8. And there, you have the bridge still helped by the currency on orders received 10% and revenues at 14%. But of course, with the changes we have seen in currency, it's still revaluations in the result. Page 9 gives the pie of the development. Of course, the declining part here is Vacuum Technologies that was growing over the last 2 years, a strong development for Power Technique with the acquisitions they have done and also for Industrial Technique. And of course, bigger piece is still Compressor Technique with 44%. Then we are at Slide number 10 which is the Compressor Technique business. If you look at the graph, we have had 4 quarters with very strong development on orders received, although this growth was 3% then versus last year, sequentially down but still on a very, very strong level. And as I said earlier, the project business with the bigger machine is still positive development and a smaller business is down single digits and very, very strong business for gas and process and it looks like that trend has continued throughout a number of quarters now. Continue with a very good development of service and its growth in all regions. Record revenues and an operating margin at SEK23.6 million. I was happy with the acquisitions in the quarter. We talk a lot about being more local for local. And -- was an on-site gas for industrial application, happy with that. And Shandong on medical gases as well. So being present locally to our customers that gives us an advantage. We [indiscernible] as well which is called the H2 Power or Hydrogen to Power. It's a modular system that you can use for pipelines, for hydrogen, for example. So strengthening the portfolio of products for the hydrogen market. We switch to Vacuum Technique. Same thing here, although orders were down 33%. If you look at the graph, we can still see that we have a good level, significantly above 2019, 2020. And -- but we cannot keep up. And we know this is a partly cyclical business. And if we look at the semi outlook a little bit, we also look at different parameters. And of course, you see that the expectation for CapEx is down for 2023, although that level that is indicated by our customers is still probably the third biggest year in CapEx investment. So it's not that it's completely dry out. I think there is a lot of orders to fight for this year as well. And we have seen memory and some other projects being moved further in time even into the 2024 and therefore, we've also seen some cancellations. Pleased to see that our journey to strengthen the Industrial business and the Scientific business continues and it's mainly driven by innovative products that we bring to the market. And a solid growth for service that also helps us out. Record revenues, the still, as you can see in the result, a number of problems with specifically electronics. And also the service level that we give to customers time to work on the orders on hand that we have that we run double shift, we run weekends. And then we are running out of components. So it's a very inefficient way of running operations. And you can see either as a service to our customers to make sure that we get products to them on time. But I think we are reaching a level now that we can make this a little bit more efficient in the coming quarter. We have a positive price development in Vacuum. It doesn't compensate for the inefficiencies that we have in our operations, as you can see, with an operating margin of 18.5%. And we are at Slide number 12, Industrial Technique. They came in very strong with 18% growth. It's actually growth in all divisions. It's not only out of but also in General Industry. If we look at the CapEx spend in the auto industry, it's driven by the transformation to EV and hybrids. Solid group for service that continues also all those same here, difficulties will mix, 16% up on revenues. And with some onetime effects, spot market, I might to is more operational but you can see the margin at 18% [ph]. Power Technique. If you look at the graph, it doesn't look like they had a sequential down but is that we had the LEWA only 2 months in Q3 and now Q4, so they are down slightly. And this is also if you look at Q4 in 2021, you can see that they had the best quarter there which is now benchmarked and that's why we say it's down but it's actually quite a strong number for orders received. You see big demand in Europe, maybe not surprisingly to generators that we help out in many areas and also specialty rental which is good for the mix, continue with the success and broadening the portfolio of what they do. And also, we're getting better traction for our service business in Power Technique and record revenues, 24% up. We have also here secured a second supplier for Engine which has been 1 of the problems earlier for the smaller machines. We are internally quite pleased about that and a very strong margin for them at 18.2% [ph]. And the recent acquisition LEWA is doing quite well as well. Return on capital was 25% [ph]. Then we come to the process profit and loss. We give you the EBITDA at 20.7% [ph] and you see the operating margin then at 19.5% [ph]. Thank you, Mats. Starting then from the operating profit of SEK7.8 billion [ph], we had somewhat higher financial -- net financial items. This was basically related to financial exchange rate differences on revaluation of mostly cash positions across our different subsidiaries in the world, mostly dollar related. Then we ended up with a profit before tax of SEK7.6 billion, 19% of revenues and a tax expense of SEK1.6 billion of that which is then an effective tax rate of 20.5%. And that was actually a rather low tax rate, one might say but that was mainly driven by partly, let's say, onetime effects that occurred but also a very positive contribution from the innovation income reduction plan, et cetera, that we are making use of with all the R&D efforts that we are doing across the globe, of course. When it comes to the effective tax rate, I would also give you, let's say, a little bit of a heads up when it comes to 2023 that based on the change of the nominal tax rate across the globe, et cetera, that you would expect this tax rate to go up rather than down. And we believe that the tax rate will be somewhere in the lines of 22.5% to 23% approximately depending, of course, [indiscernible] also of the business across different tax territories. The profit for the period after tax is then SEK6.1 billion compared to SEK4.9 billion a year ago with basic earnings per share of SEK1.24 compared to SEK1 in last year which is, of course, corrected for the redemption and the share split. The return on capital employed reached 29% compared to 27% last year. Admittedly, the change from 27% to 29% was mostly attributed to currency-related improvements and the return on equity landed at 32% compared to 30% a year ago. If I then move on to Slide number 15, where we will take a closer look at the profit bridge for the fourth quarter, explaining a little bit how we moved from 21.2% a year ago for the same quarter to 9.5% this year. Then you can see, of course, that currency had a slightly positive effect, much less positive than it had been prior -- I will come back to that in a second. The acquisitions were also dilutive. As you can see, based on the profit margin on the acquisition revenues. But then the biggest impact came then from the drop through related to volume, price mix and other. And that was mainly resulting from the continued stress in the supply chain that we are experiencing. I think we have also mentioned that in previous communications that we did not see really any improvement in the supply chain. This is very much related to electronic components, particularly also other components in different business areas, some different ones but the main problem that we are still facing are the electronic components. We also -- we have seen continued strengthening of our pricing efforts. And that has been very helpful. But unfortunately, it has not -- it has been strong enough, at least, to compensate for what we refer to as structural cost increases. We have seen whether it is material prices, labor costs that, of course, have also gone up as well as energy costs that were quite a lot under stress lately. But then the supply chain constraints caused a number of effects, including, for example, spot market buying that we continue to do in order to secure certain components for our electronics but also quite a significant impact on efficiency in our operations, both for the manufacturing part as well as for the service operations. Of course, in December, there was also some impact from COVID, for example, due to the fact that particularly in China, then quite a lot of absenteeism have to be noted. And then last but not least, maybe in this list, there's also an impact from our very focused efforts in product development which we, of course, continue to consider a very important investment in the future. It is not only the R&D we do in our existing platforms that we have been for many, many decades but also all these new initiatives that we have shown in the Capital Markets Day that will, of course, also require product development in order to make sure that we have the portfolio to be able to be competitive. And then maybe a last point on currency. If I compare the current quarter to the third quarter this year and you would look at the same bridge for that period, then you will notice that the currency in the third quarter was quite positive. And that in this quarter, it is close to 0 almost. And that is mainly related, if not exclusively to the revaluation of balance sheet items, particularly receivables as well as trade liabilities. And that had quite a significant impact, as you can see in the financial statements in the quarterly report as well. And that, of course, didn't give us the same kind of support in the margin as it has done in the third quarter, for example. When it comes to that currency, what is the outlook for our currency development. We do believe that even in the first quarter, it is likely to continue to be positive but even less so than it has been this quarter. So we expect, based on the current exchange rates, that the currency impact will continue to diminish steadily over time but most likely still be positive at the end of Q1. If I then move to Page number 16, then there's a little bit more detail of all the different business areas. I would say in -- you can see currency support that is still positive. The acquisitions are dilutive as well. And we have there also a small negative drop-through or, let's say, a margin that is positive but then affecting the operating margin negatively from one quarter to the other slightly. In Vacuum Technique, we see, of course, quite big impact, both currency as well as acquisitions, are here slightly negative. But the biggest impact here is again from the volume price mix and others. And here, when we talk about pricing efforts, we have been more successful than before in implementing price increases but not to the same level as we see in some of the other business areas which is a little bit typical of the segment with very few customers and rather long-term contracts with strict clauses in those contracts, allowing very little room to change the prices also particularly because of this -- copy exact concept that they tend to implement. Then on Industrial Technique, we see basically no impact from the acquisitions very small negative impact from the currency and then a bigger negative impact also here on volume, price, mix and others. In Industrial Technique, also here, the supply chain constraints have been -- continue to be challenging. Also here, spot market buying is used quite actively in order to secure the electronic components, for example, is leading them to the drop-through as we see it here. And then finally, Power Technique with, I would say, nothing less than a fantastic performance from 16.3 to 18.2, with a small positive currency effect here, slight dilution from the acquisitions, of course, especially considering the size of these acquisitions. This is maybe more important for Power Technique in the total margin but then a very strong performance from organic revenue volumes. And with that, I think that summarizes the comments on the detailed profit which is on Page 16. Then I go to the balance sheet on Page 17. I think if we compare to the last quarter, then there are no dramatic changes comparing year-on-year. A big impact that we see in the movement is, of course, the currency impact here as well by about SEK14 billion. That was a bit higher even in the third quarter. So that has come down over the last quarter by about SEK3 billion. And that SEK14 billion is predominantly almost half linked to the intangible assets. And then the rest is, you could say, largely linked to inventories and receivables in relatively equal terms. Of course, the balance sheet is also affected by the fact that we did a number of acquisitions over the years. So if you compare December 31 last year with this year, there's quite a significant impact there. Then if we go to the liability side, on the equity, there is, of course, an increase which is related to our profit that we have generated over the year but then also a translation difference on our holdings in subsidiaries that is quite substantial as you can see in the details of the quarterly report. The interest-bearing liabilities went up due to some increase in short-term funding and the noninterest-bearing liabilities are predominantly almost exclusively linked to the increase of trade payables which when we look at the third -- fourth quarter, you could say that the increase in working capital in the fourth quarter has mainly been on the receivable side related to the high level of invoicing while the inventories increase has been fully compensated by an equal increase roughly in the payables. Then I move to Page number 18 to give you a few insights on the cash flow. A few important points maybe to comment upon here or to start with the high operating cash surplus generated to the operations of SEK10.3 billion compared to SEK7.6 billion the same quarter last year, quite a substantial difference. We also see that the taxes paid are a little bit higher than what we saw last year. That is mostly related to timing difference, I would say, in how these payments are executed. And then the change in working capital which was SEK1.4 billion compared to a positive of SEK0.5 billion a year ago. On the working capital, I think it's important to compare also to the SEK7.4 billion for the full year. So there is still an increase in our working capital, as I said, mostly linked in the last quarter to the receivables but the pace of the increase is much, much lower than it was at the early stages of 2022, where we saw much to see more significant amounts. That gives us a cash flow from operating activities of SEK6.8 billion compared to SEK8 billion. And then we also see, as we have in the previous quarters, the increased expenditures on the investments in property, plant and equipment related to the many initiatives that have been initiated around building additional production capacity mostly on the Vacuum Technique side but also in Compressor Technique and other smaller initiatives across the other business areas. In total, I would say that the expenditures on investments have doubled this year compared to the previous year looking at the full year numbers. And that then gives us, in the end, total cash flow -- operating cash flow of close to SEK6 billion compared to SEK6.7 billion last year. And then we have spent, let's say, roughly SEK1 billion of that operating cash flow into acquisitions throughout the fourth quarter, bringing the total acquisition expenditures for 2022 to SEK11 billion almost. On Slide 19, just a few highlights on the earnings dividend and redemption, historically. Earnings are at SEK4.82 per share as you can see here and the dividend that will be proposed to the Annual General Meeting for approval will be SEK2.30 per share. That dividend will be paid out in 2 installments as has been the case over the last number of years. Equal installments of SEK1.15 per share each time. The record day of those payments will be May 2 and October 20, 2023. And that would give us a total amount of SEK11.2 billion that would be paid out to the shareholders in 2 installments of SEK5.6 billion each. And with that, I conclude the cash flow and the dividends and I would like to give the word back to Mats RahmstrÃ¶m for the near-term outlook. When we look at the near-term outlook, then we are trying to qualify then the activity level between Q4 and Q1 among our key segments in the market. And as you can see then that we said that the activity level will remain at current level. This is, of course, an uncertain environment that we operate in right now. With the pandemic in China, we see the inflation and the energy prices. And of course, some of the new regulation that has not helped full impact and like the [indiscernible]. But based on what we see in the activity level right now and the quotes we have out, this is support this statement and the forward-looking statements. Mats, Peter, Klas from Citi. So if I had to ask one, I'm going to focus a bit on Vacuum Technique in the backlog. When we met you at the recent CMD in November. I think are said that he felt the backlog was supported, that there hadn't been any cancellations. Now I think you alluded to, Mats on the memory side, that there has been some cancellation. To what extent is this widespread across several customers? Do you have any indication whether these cancellations will intensify? Or was this more of a one-off? It is right that we have seen cancellations. And it's in the area of SEK1 billion for the group. And the lion's share of that is within semi. And the first one, of course, to move production days have been with customers that are focused on memory. And I don't want to speculate but I think we have seen a number of -- a handful of customers that have delayed into 2024. And then, of course, they cancel that project with us. And it's not lost business, you would expect to get that back when they reactivate those programs again. I just wanted to try and, I guess, pick up on the VT and the IT margins. You've obviously provided some kind of detail around some of the challenges and some one-off effects in IT. But I just wanted to pick up on VT, I think sort of -- on your comments on the margin. I think you talked about now getting to a position where you felt that some of those challenges would be behind us. And therefore, I guess, should we expect the Q1 to already be moving back to, I guess, the sort of levels of margin that we've seen in Vacuum more than maybe the last sort of 12 to 24 months? And then I guess, similarly, on IT, you alluded to some onetime effects and I appreciate some of that is probably supply chain. But again, should we again in the Q1, expect IT to sort of move back to, again, the sort of trajectory that, that was on prior to the Q4? If we start with Vacuum, then. There are a number of issues with electronics. And since you are aware, we have quite a lot on orders on hand still to be delivered to our customers. And to gain those and win those orders, of course, we have committed to delivery dates. And we have and have done our utmost to deliver on those states to customers they are running. That means that we are running evening shift, double shifts, weekend shifts. And then we utilize our staff, of course, in an inefficient way because suddenly we don't have components. And that is actually what happens physically on the floor. And then we have the option then to say, okay, should we not take this cost to support our customers or should we -- actually I'd say that we would do back to more normalized shifts. And I think over time now that we've seen a little bit less of activity and demand. I think we will normalize a little bit to operations. But the biggest challenge is still for us then to deliver on time with the lack of secure supply chain for electronics. Then you might ask a little bit why is it too much difficult here? Why don't we fix it easily? Peter mentioned it before that many of these big customers work with something called copy exact. That means that we cannot change any components in a product without getting qualified by the customers. So to get the second source for something, we actually need to bring that component and get that qualified at customers. And of course, then we are limited to 1 source as well. So it's not easy bargaining with pricing either. So I think it will take a little bit more time to recover. And we have compensated ourselves for some of these things that is more related to pricing or components material but not fully to this adjustment that we think is more on our side than our customer sides. We don't for that price increase to our customer. Yes. On IT, I think it's a mix of different things. There is, I think, similar to what we see in VT, although it's, of course, a different segment. But also there, the pricing component is not as strong as it is in Compressor Technique and Power Technique, for example and that is also again related to the segment and the limited -- the very concentrated customer base in motor vehicle industry particularly. The supply chain issues are also there, quite important. And again, the electronics is also there, the key issue. And so with the pricing that we are able to push in and which we are improving compared to the last quarter and the previous quarters, we still are not fully -- compensate there for these kind of effects that we see. And then on top of that, there are, as you mentioned, a couple of onetime items which are more related to difficult procedures that we do in the last quarter of the year and that required us to make some adjustments across the different divisions. And in ITBA, those, I think, were a little bit more significant. And therefore, we took we felt that it was relevant to mention them in the explanation in the quarterly report as well. And maybe you can say in general, when it comes to electronic supply with order volumes that we place with our suppliers today, we're constantly really pushing the envelope to the maximum of their capacity. So it is difficult for them without machine investments to catch up. And of course, if volume will go down to something more normalized, we wouldn't have any issues. So we have sort of -- it's really that pushing to a new level of supply that is struggling to get that right. I'll stick with 1 as requested. I was wondering if you could give us some visibility on how much your backlog extends, really? How many quarters or months you have across your business? The reason I'm asking is, when we look at your book-to-bill, it's 1 of the lowest, I guess, we have to go way back probably 2009 but obviously, you might have accumulated a lot. So as we look about thinking how we should model the next couple of quarters, can you shed some light on how much visibility ahead you have in each of the businesses now after what you've accumulated given the supply chain issues? I think on the revenue side, of course, we continue to push very, very hard to get as much output as we can out of the factories because as you, of course, know, we do have quite a significant orders on hand position. And we have those commitments to customers. We will do everything possible to continue to get the maximum invoicing and output based on the expectations of our customers. So if we can continue to boost revenues, we will not hesitate to do so. Then on the orders, of course, it will depend quite a lot on the activity level in the market and that we expect to be similar to the previous quarter. Sorry, I might not have expressed myself maybe correctly. So as for your point on what you have on hand, how much does it cover far out in the future? Is it -- does it cover 1 year of visibility? Does it cover 6 months? If you could give some color per provision? Because we have the orders but we don't have the backlog, especially if you had some cancellations. We, of course, well aware exactly what we have orders on hand per division and per -- but we are not willing to share that fully with the market at this point. Let me ask about more conceptual question on longer-term margin [ph]. How feasible do you think it is to expect them to recover to the historical 24%, 25% range which is above even compressing margins, given that you're obviously deliver into a relatively more concentrated client base and the proportion of aftermarket is lower than what it is in compressors? For us, it's, of course, the benchmark for us to get back to the table that you have seen in the past, there's not really any reason why we shouldn't be able to -- there is no structural changes in the marketplace. The only caveat -- a caveat here is that we have the pricing that we work with and in some time -- in some cases with the copy exact, we also delivered the same product. And of course, there is as much as the market accept as a price increase. I mean sometimes, it takes a generation of products then with better efficient, better value generation to get back to the same gross margins as we have seen in the past. And I think that might take -- so it's not done overnight thing. And I don't think you will see it in Q1, if that's what you're expecting. I think it's just like Atlas Copco is grinding away on both our operational issues. And of course, on pricing. And I think the more of the short term is more that the fixed operations and adjustments in our profit and loss. So we take it step by step. And of course, we you see that as a benchmark presence to get back to those levels. Mattias Holmberg, DNB, here. I was curious to hear a bit more on the comment that you've seen activity levels in several end markets weakened in the quarter. If you can make any comments on the cadence, perhaps if the run rate was improving or worsening through the quarter? And also, if there were any specific end markets in addition to what you said here that could be interesting to mention? I mean if you look at the different businesses of ours, of course Q4, from an orders received perspective, we expect it to be sequentially down every time. But the main difference in demand is, of course, in the memory sector's on semi. And the strong side is all the sustainability applications, both in Compressor Technique but also then in Industrial Technique with electric transformation. So I would say from our perspective then, we are in a strong position when it comes to changing application to more sustainable applications. We have more products than we have had in the past. So even in the slower climate, I think we challenge ourselves at least to grow in those segments. But the main downside in the report is on the semi side and specifically on the memory side. Well, I think China, I think, is the only one. I don't know exactly. We have the numbers on Asia in front of us but -- of course, we had at its worst, we had 48% of our people and I think that relates to our customers and to our suppliers as well. So I assume that there was very little activity. And we can see in some of our factories that we had very little output during December as well. And I think that we need to give China and Asia really look at that in the beginning of the year because we are normally down in China and it seems like they have new funding coming into the new year. So for us, Q1 in Asia will be extremely important for our performance in 2023. I just wanted to ask about the compressor division and the regional trends and specifically on Industrial because I was slightly surprised to see that kind of orders have grown in Asia and Africa but had decreased in all of the other regions. I would have thought because of the disruption in China that Asia would have been a bit weaker. So could you maybe talk about in your sort of shorter-cycle businesses when you look at what is happening in Europe, what is happening in North America? Are there anywhere kind of in your sort of small and midsized compressors where you are seeing weaker activity? And how would you sort of characterize how that has evolved? Because it looks like from the outside that volume growth is now negative and particularly in places like Europe that is now declining in your short-cycle businesses. So could you talk a little bit about how that's evolved for industrial compressors specifically? I think for industrial compressors, especially the smaller ones, we have indicated that we have seen a single-digit decline. And I think that's particularly in Europe, something we have seen. And it's often, of course, related to the fact that this business is also going through indirect sales channels, distribution channels which normally have built up a certain amount of stock and the moment that they see some kind of hesitation in decision-making processes of their customers, they will typically be very hesitant to place new orders. And as a result of that, of course, that will have an impact on -- for those type of machines. Also typically, even with direct customers, you would have quite short decision cycles and, of course, an owner that is feeling the impact of maybe lower confidence level in the economy. We'll be feeling that very quickly in his own pocket and therefore, will be also quite quickly to decide against a new investment rather soon. Whereas on the large project, of course, we see typically longer discussions, also multiple departments involved more technical evaluations. And then those decisions have usually already been taken and continued to be executed even at a significantly later stage. I would say Europe was the main area where it was softer. North America, a little bit less and then Asia still. These smaller compressor could also be influenced if we have announced price increases to distributors that actually place orders a little bit early before those to stock up a little. Do you have any sense of inventories across your distributors? Are you able to check with them kind of what inventory levels they're running with? And do you get the sense that those are elevated and that might be part of it as well? Or is that not really the case? No, we don't really have information on that with our distributors. But it is generally a fact that, of course, as business is growing they tend to build up stock. They want to be able to deliver fast to their customers. That's usually 1 of their main sales arguments as well that they have it available and they can simply deliver it immediately. And so typically, they will have a significant stock amount when the business is really booming. And then, of course, when things start to turn in the other did they will, of course, be hesitant to order. And what typically happens is that the customer would order from the distributor, the distributor would deliver but would then not be inclined to replenish that stock right away. And so he will wait for the next order for that type of machine to come before he will order to us, let's say, in this case. When we say that we don't know, we mean that we don't consolidate it on our level, of course, the local customer center and the sales teams are well aware of what they have in inventory. Sorry for drilling again into the cost issues. What surprised me a little bit was the fact that you seem to those cost rises for suppliers for electronics only now, where many other companies saw it already in April, May 2020, so more than 2 years ago. What has changed now in Q4 that it makes it so different? Why do you have to buy spot market now? And why was that not the case in the past? Maybe you can shed some light on that issue? I think that is probably a miscommunication from our side or a misunderstanding on your side. I think we had talked about the spot market buying several quarters and it's been a factor for us to make sure that we can supply to our customers. We have the choice between not supplying or buying to extremely high prices of electronics and it's been ongoing for quite a number of quarters. I think it's been in our report as well. And also, if you compare the bridge for the Q3 with the bridge for the Q4, then you will see that the cost impact in relative terms at all that different from what it was the previous quarter. The big difference between the 2 quarters is actually more related on the currency side. With that being said, I don't want to indicate that we are hiding behind currency to not talk about some issues that we need to tackle. But I think this is quite similar from my perspective as it has been in last quarter and previous quarters, I think -- so I think that is nothing new really that we see this quarter. But it seems to be quite persistent and continues to affect our profitability also this quarter. Maybe could I just have a clarification on something you said earlier. And then the question. Just on your order cancellations, the SEK1 billion, do you adjust your orders negatively to net down for the SEK1 billion cancellation? Or do you show your orders gross excluding that? That's just a clarification. And then my question is, could you scale the impact on the margin in PT from the one-off spot buys and the obsolescence, please? Yes, James, I think a very relevant question. The orders that are canceled or recorded as negative orders received. So they reduced the number of the total value of the orders received and they are not excluded from that orders received numbers. Secondly, I'm not 100% sure what you mean with the second part of your question because in Power Technique, we also do have some of these effects just like in all the other business areas, in fact but they are not as prevalent and we don't really have significant onetime items or one-offs in Power Technique. My apologies then. I thought it was in Power Technique which was the division that had the particular inventory adjustment, obsolescence adjustment? I think for Industrial Technique, like I mentioned, we basically have done -- as we do in many of our different organizations, we do, of course, typically in the course of Q4, a lot of stock takings in order to prepare also for our audit together with our auditors. And then we also recalculate our provisions for slow-moving items. In the case of Industrial Technique, across the different divisions, this was a little bit more significant than it was for the other BAs. And in ITBA was roughly somewhere around 1.5% of the Industrial Technique revenues for the quarter. A quick question on your pricing strategy. Correct me if I'm wrong but you seem to be intentionally reluctant to charge your customers from what you call nonstructural cost inflation, so that's spot buy in inefficiencies in your own operations. Obviously, this question is relevant to Compressor Technique and Power Technique and not Vacuum and IT, where you have sort of a concentration of customers and sometimes this copy exact thing. So it just feels that you potentially leaving some pricing on the table. Please if you can have any clarification there. It might sound like that. But of course, we are trying to price all our products according to the value we generate for our customers. So we try our best to increase prices. But when we benchmark a little bit, we can see, you're right with that, that there are a number of components pricing material prices that we successfully have compensated for. But then we have some other areas where it's also difficult for our customers to accept a price increase. And obviously, these are things that the operational will arrange anyway, so we get back to the margin where we would like to be. But it's not like we are not trying to increase our prices and we always try to price our product according to value. And the biggest opportunity for us is always the innovation, bringing new value, transforming the market to something new, this is why we can have a higher margin than most industrial companies. So this is what we continue to do with [indiscernible] but we are not hesitating to increase prices. I just have 1 question regarding the FX impact. You mentioned the revaluation of working capital during the quarter. Is that a one-off item? Or was it simply that the effect was positive in the third quarter and more normalized in the fourth quarter? Or -- could you help us interpret the revaluation effect? Yes. I think if you compare the bridge for the different quarters, let's say, the third quarter and the fourth quarter to be precise. And you calculate the impact on the margin of the currency effect between those 2 quarters, then I think you will get to a difference of approximately minus 1.6%. I think we had a positive impact on the margin in Q3 of 1.9%. And in Q4, only 0.3%. And basically, you can say that the entire difference between those 2 quarters is actually related to the revaluation of receivables and trade payables. And that is, of course, has to do with the fact that if we look at our currency basket, we were at an absolute summit when it comes to the weak Swedish krona versus very strong dollar and other currencies in the world. That has changed quite dramatically over the fourth quarter and that has resulted in a revaluation of our balance sheet position at the period end rate of December versus period end September and that was quite a substantial impact. Is this a one-time item or is this something that will recur in the future? Well, that depends very much on the exact currency development. If the dollar remains on the current and the Swedish krona remain on the current levels, then basically there is 0 impact on revaluations but should the dollar weaken further and the Swedish krona strengthen, then it is possible that -- or it is normal that we would have new revaluation impacts. Then the question is, of course, how big that will be and that will depend very much on the exact exchange rate that unfortunately, I can't predict yet. With that, we have come to the end of our quarterly earnings call. We thank you all for your participation and for the very good questions. And we hope that we've been able to give you a good answer to some of those questions you have had.
EarningCall_1004	Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Year Ended 2022 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Sherry, and I am your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded. Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year ended 2022. Joining me this morning are Dave Brager, President and Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the Company's Annual Report on Form 10-K for the year ended December 31, 2021. And in particular, the information set forth in Item 1A risk factors therein. For a more complete version of the company's safe harbor disclosure, please see the Company's earnings release issued in connection with this call. Thank you, Christina. I just want to make a quick comment before I start my prepared comments, but we're experiencing a little bit of a windstorm down here in Southern California, so I apologize if there is a little background noise, we can't turn off the wind unfortunately. But good morning, everyone. The Bank generated full-year and fourth quarter earnings -- the record full-year and fourth quarter earnings. Full-year net income in 2022 was $235.4 million, which represents an 11% increase over 2021. For the fourth quarter of 2022, we reported net income of $66.2 million or $0.47 per share, representing our 183rd consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the fourth quarter of 2022 or a dividend payout ratio of approximately 42%. This dividend represented our 133rd consecutive quarter of paying a cash dividend to our shareholders. Fourth quarter net income of $66.2 million or $0.47 per share, compared with $64.6 million for the third quarter of 2022 or $0.46 per share and $47.7 million or $0.35 per share for the year-ago quarter. For the fourth quarter of 2022, our pre-cash, pre-provision income was $95.4 million compared with $91.9 million for the prior quarter. Pretax pre-provision income grew by approximately 43%, when compared to the $66.8 million earned in the year ago quarter. We recorded a provision for credit losses of $2.5 million for the fourth quarter of 2022, compared to $2 million for the third quarter and no provision for the year-ago quarter. As previously mentioned, net income was $235.4 million for the year ended 2022, a $22.9 million increase, compared to 2021. Diluted earnings per share were $1.67 for 2022, compared with $1.56 for 2021. Pretax pre-provision income grew by 25% from $272 million for 2021 to $339 million in 2022. In 2022, we provisioned $10.6 million for credit losses, which compares to a $25.5 million recapture of provision for credit losses in 2021. Continued expansion in our net interest margin contributed significantly to our earnings growth for both the full-year and fourth quarter of 2022. Our net interest margin grew by 23 basis points, compared to the third quarter of 2022, while growing by 33 basis points over the full-year 2021. Our 2022 full-year average earning assets grew by more than $1.3 billion, compared to 2021, which included the acquisition of Suncrest Bank that occurred in January 2022. However, fourth quarter average earning assets decreased by $521 million from the third quarter. This quarterly decrease in average earning assets reflects the decline in our funds held on deposit at the Federal Reserve, which declined for more than $2 billion on average in the fourth quarter of 2021 to approximately $125 million on average for the fourth quarter of 2022. In contrast to the decline in our Fed balance both our loans and investment portfolio have grown throughout 2022. Now let's discuss loans in more detail. Total loans at year-end were $9.1 billion or $1.2 billion or 15% increase from the end of 2021. Our new loan production remained strong in the fourth quarter and throughout 2022. New loan commitments were approximately $480 million in the fourth quarter, which compared with approximately $450 million in the third quarter. After excluding loans acquired from Suncrest and PPP loan forgiveness, year-over-year loan growth was $634 million for a growth rate of approximately 8%. From September 30 to December 31 of 2022 loans grew by $305 million or 3.5%, while average outstanding loan balances grew by $160 million -- $169 million or 2%. After excluding PPP loan forgiveness and the seasonal increase in dairy and livestock loans, fourth quarter loan growth was $189.7 million or approximately 9% annualized. Dairy and livestock loans increased by $123.8 million from the prior quarter as many of our dairies choose to further mill proceeds into the first quarter of the following year and/or prepay their expenses. The core loan growth from the end of the third quarter was led by continued growth in commercial real estate loans, which grew by $199.7 million or 3% annualized. Construction loans increased by approximately $12 million from the prior quarter, as many of our lines had increased usage as projects progress. C&I loans decreased by $3.5 million despite the overall line utilization rate for C&I loans increasing modestly from 32% to 33% at year-end. Agribusiness loans declined by $13 million and SBA loans decreased by $14 million, including an $8 million decrease in PPP loans. Only $9 million in PPP loans remained from the $1.5 billion in loans we originated. We remain cautiously optimistic about our ability to grow high quality loans in 2023. Although higher interest rates and uncertain economic conditions could impact the level of growth, we achieved this year. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $4.9 million, compared with $10.1 million for the prior quarter and $6.9 million for the year-ago quarter. At quarter end, we had no OREO properties and the $4.9 million in non-performing loans represented 3 basis points of total assets. During the fourth quarter, we experienced credit charge-offs of $127,000 and total recoveries of $143,000, resulting in net recoveries of $16,000, compared with net recoveries of $379,000 for the third quarter of 2022. For the full-year of 2022 we experienced charge-offs of $197,000 and total recoveries of $1.1 million, resulting in net recoveries of $893,000. Classified loans for the fourth quarter were $78.7 million, compared with $63.7 million for the prior quarter and $56.1 million for the year-ago quarter. The increase in classified loans from prior quarter was the result of a downgrade and a $13 million loan on a senior living facility acquired from Suncrest. As of December 31, 2022, classified loans included $22.8 million in loans acquired from Suncrest, which approximates the increasing classified loans from the end of 2021. Now I'd like to discuss our deposits. A decline in deposits started in November, which is not unusual as we typically see seasonally low in deposits -- seasonal lows in deposits from November through February. In addition to this typical seasonality, some of our customers deployed excess funds with our Citizens Trust Group and the slowing housing market has negatively impacted the deposit totals in our specialty banking group that focuses on escrow title and property management customers. Additionally, our customers continue to experience an inflationary environment, which is contributed to the cash burn. During the fourth quarter, non-interest-bearing deposits averaged $8.7 billion, a $307 million or approximately 3% decrease from the average balance in the third quarter. Year-over-year we had a $377 million increase in average balance, when compared to the fourth quarter of 2021, including the $513 million in non-interest-bearing deposits acquired from Suncrest at the beginning of 2022. Total deposits and customer repos were $14.2 billion on average in the fourth quarter of 2022, a $524 million or 3% decrease, compared with the prior quarter. While being $497 million higher than the fourth quarter of 2021. Non-interest-bearing deposits were approximately 63.6% of our average deposits for the fourth quarter, compared to 63.4% for the prior quarter and 63.8% for the year-ago quarter. At December 31, 2022, our total deposits and customer repos were $13.4 billion, compared with $14.3 billion at September 30, 2022 and $13.6 billion for the same period a year ago. At December 31, 2022, our non-interest-bearing deposits were $8.2 billion, compared with $8.8 billion for the prior quarter and $8.1 billion from the year ago quarter. The bank's funding is primarily core to customer deposits and customer repos, which combined had a total cost of 8 basis points in the fourth quarter. This 8-basis point cost of deposits, compared with 5 basis points in the prior quarter and 3 basis points for the year-ago quarter. In comparison, the Fed funds rate has increased by 425 basis points, since the fourth quarter of last year. The combination of seasonal growth in dairy and livestock loans seasonal deposit declines and the impact of cash burn on deposits from inflationary pressures resulted in borrowing overnight from Federal Home Loan Bank, averaging $161 million for the fourth quarter and peaking at year-end at $995 million. With slowing loan demand, the cash flow from our investment securities and the normal historical inflows of deposits we experienced from the beginning of the year, we expect borrowings to moderate in the first half of this year. I will now turn the call over to Allen to discuss our investments, the allowance for credit losses and capital. Allen? Thanks, Dave, good morning, everyone. Our investment portfolio declined by $70.2 million from the end of the third quarter to $5.8 billion, primarily due to the decline in investment securities available for sale or AFS securities. AFS securities totaled $3.26 billion at end of the fourth quarter, which was inclusive of a pretax net unrealized loss of $500 million. The decline in AFS securities reflects principal cash flows, which offset a $28 million increase in market value. It is highly unlikely that we would sell any AFS securities as the bank has ample off-balance sheet sources of liquidity, including more than $3 billion of unused borrowing capacity at the end of 2022. Investment securities held to maturity or HTM securities, totaled approximately $2.55 billion at December 31, 2022. Cash flows from HTM securities were reinvested in the purchase of approximately $32 million in municipal securities with tax equivalent yields on these HTM securities greater than 5%. The growth in our investment portfolio over the last year resulted in HTM investments increasing by $628 million and AFS securities increasing by $71 million. Securities have grown as a percentage of average earning assets from approximately 33% in the fourth quarter of 2021 to 39% on average in the fourth quarter of 2022. In addition to the increase in the size of our securities portfolio, the tax equivalent yield on the portfolio grew from 1.52% in the fourth quarter of 2021 to 2.12% in the third quarter of 2022 and now to 2.36% in the fourth quarter. Our Fed balance averaged approximately $125 million for the fourth quarter of 2022, compared to $625 million in the third quarter and $2 billion in the fourth quarter of 2021. At December 31, 2022, our ending allowance for credit losses was $85.1 million or 0.94% of total loans, which compares to $82.6 million or 0.94% of total loans at September 30. For the fourth quarter ended December 31, 2022, we recorded a provision for credit losses of $2.5 million, compared to $2 million for the quarter ending September 30, 2022. There is no provision for credit losses in the year ago quarter. The provision for credit losses in the fourth quarter was driven by loan growth, which resulted in a $190 million of core loan growth, after excluding temporary seasonal growth in dairy and livestock loans, as well as the decline in PPP loans. For the full-year 2022, we had a provision for credit losses of $10.6 million, compared to a recapture provision for credit losses of $25.5 million in 2021. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These U.S. economic forecasts include a baseline forecast, as well as downside forecast. We continue to have the largest individual scenario weighting on the baseline forecast with downside risk weighted among multiple forecasts. As of December 31, the resulting weighted forecast assumes GDP will increase by 0.3% in 2023, including a decline in GDP for the first half of 2023. Followed by modest growth of 1.3% for 2024 and then to grow by 2.8% in 2025. The unemployment rate is forecasted to be 4.8% in 2023, 5.1% in 2024 and then decline to 4.5% in 2025. Now turning to our capital position. For the year shareholders' equity decreased by $133 million to $1.95 billion at the end of 2022. Equity increased from the end of 2021 by $197 million for the issuance of 8.6 million shares to the former shareholders of Suncrest. Equity also increased due to year-to-date income of $235.4 million, which was offset by $108.1 million in dividends, representing a 46% dividend payout ratio. Interest rates increased during 2022, resulting in an increase in the unrealized loss on our available for sale securities and a $351 million decline in equity from the end of 2021. In combination, the ASR and the 10b5-1 stock repurchase plans, we initiated in 2022 have resulted in the year-to-date repurchase of approximately 4.9 million shares at an average share price of $23.40, which reduced our common stock by $115 million. Our overall capital position continues to be very strong. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers. At December 31, 2022, our common equity Tier 1 capital ratio was 13.5% and our total risk-based capital ratio was 14.4%. The company's tangible common equity ratio at December 31 was 7.4%. Thanks, Allen. Net interest income before provision for credit losses was $137.4 million for the fourth quarter, compared with $133.3 million for the third quarter and $102.4 million for the year-ago quarter. Fourth quarter earning assets decreased by $521 million on average from the third quarter, due to a decrease of $500 million in average funds on deposit at the Federal Reserve. Our earning asset yield increased by 31 basis points, compared to the prior quarter. The increase in our earning asset yield was the result of a 24-basis point increase in investment yields, the 22-basis point increase in loan yields and a shift in the composition of earning assets with average loans growing from 56.6% to 59.7% of average earning assets, while our average amount of funds at the Federal Reserve declined from 4% to approximately 1% of earning assets. Our loan to deposit ratio was 70.7% at quarter end, including the level of seasonal dairy and livestock borrowing. We anticipate funding future loan growth with cash flows from our investment portfolio, which approximate $150 million per quarter. Our tax equivalent net interest margin was 3.69% for the fourth quarter of 2022, compared with 3.46% for the third quarter and 2.79% for the fourth quarter of 2021. The increase in our net interest margin was the result of the increase in our earning asset yield, while maintaining a low cost of funds that migrated from 5 basis points in the third quarter to 13 basis points in the fourth quarter. During a period of time the Federal Reserve increased the Fed funds rate by 125 basis points. Loan yields were 4.78% for the fourth quarter of 2022, compared with 4.56% for the third quarter and 4.29% for the year-ago quarter. Yields on new production during the fourth quarter exceeded the overall portfolio yields, averaging greater than 5%. Current loan projection is generally close to 6%. Our cost of deposits and customer repos were 8 basis points for the fourth quarter and our total cost of funds for the fourth quarter was 13 basis points. Interest-bearing deposits and customer repos decreased on average by $216.9 million from the third quarter, while non-interest-bearing deposits decreased by approximately $307 million on average. We continue to experience modest pressure to increase deposit rates, due to the recent increases in market rates. Recent declines in deposit levels including the typical seasonality have been impacted by customers using excess liquidity accumulated during the pandemic for ongoing business needs, which have been negatively impacted by inflation. Over the last four quarters the Fed has raised short-term interest rates by 425 basis points, while our cost of funds and our cost of deposits and repos has increased by 5 basis points. Our total cost of funds has risen by 10 basis points from the fourth quarter of last year when factoring in the average overnight borrowings during the fourth quarter of 2022 at an average rate of 4.49%. Moving onto non-interest income. Non-interest income was $12.5 million for the fourth quarter of 2022, compared with $11.6 million for the prior quarter and $12.4 million for the year-ago quarter. Our customer-related fees including deposit services, international and Merchant BankCard services increased by $500,000, compared to the third quarter and increased by $1.3 million or 28%, when compared to the fourth quarter of 2021. Income from Bank Owned Life Insurance or BOLI, decreased by $570,000, compared to the prior quarter as death benefits declined by $1 million. Income from community development investments, some of which are impacted by mark-to-market adjustments increased from the prior quarter by approximately $700,000. Our trust and wealth management fees were flat, compared to the prior quarter while decreasing by $245,000 year-over-year. Market conditions have continued to negatively impact assets under management and trust fee income. As we discussed in the past, a large trust relationship with more than $800 million in assets -- excuse me, transitioned to a financial institution outside of California. The transition was completed by the end of 2022 and we'll have the impact of decreasing our trust fees by approximately $425,000 this year. Offsetting this transfer of assets and the impact of the market on our assets under management and administration, we did grow managed assets with $350 million customer deposits that are now being managed by CitizensTrust in various liquidity strategies. Now expenses. Non-interest expense for the fourth quarter was $54.4 million, compared with $53 million for the third quarter and $48 million for the year-ago quarter. Non-interest expense totaled 1.32% on average assets for the fourth quarter of 2022. This compares with 1.25% for the third quarter and 1.19% for the fourth quarter of 2021. Our efficiency ratio was 36.31% for the fourth quarter of 2022, compared with 36.59% for the prior quarter and 41.8% for the fourth quarter of 2021. Employee-related expenses increased by $921,000 or 2.8%, compared to the third quarter of 2022. This quarter-over-quarter growth was primarily due to the distinct items such as our year-end holiday awards, final year and adjustments to bonus and commission accruals, severance accruals and increased valuations of performance RSUs that vested in early 2023. Employee expense grew by $4.6 million or 15% over the fourth quarter of 2021, which includes the impact of the Suncrest acquisition, as well as inflationary pressures, unemployed compensation. We continue to invest in technology to further automate and scale processes within the bank, resulting in a 4% or $119,000 increase in software expense, compared to the prior quarter and a $299,000 or 10% increase over the prior year quarter. There was also a year-over-year increase of approximately $390,000 in consulting expense to support system upgrades and new technology implementations. Occupancy and equipment expense was essentially flat quarter-over-quarter, but grew by almost $1 million over the fourth quarter of 2021, which includes the net addition of the remaining five banking centers from Suncrest. With the easing of pandemic restrictions, marketing expenses grew by $224,000 over the prior quarter and $470,000 over the fourth quarter of 2021. Legal fees increased by $130,000 over the prior quarter and $177,000 over the fourth quarter of 2021 as well. We are pleased with our results in 2022 and remain committed to the mission and vision of Citizens Business Bank. The fourth quarter and full year of 2022 represented record quarterly and annual earnings for the Bank, and we ended the fourth quarter with a return on average assets of 1.60% and a return on tangible common equity of 23.65%. Our focus on banking the best privately held small to medium-sized businesses and their owners has stood the test of time. We reported 183 consecutive quarters of profits and just paid our 133rd consecutive quarterly cash dividend, which was increased twice during 2022. We will continue to keep a watchful eye on the overall economy and business environment in order to best serve our customers and associates. We've seen the impact on the bank as well as on our customers from a tight labor market, wage inflation and overall inflationary pressures. We are committed to supporting our customers, associates and shareholders and our communities as everyone continues to face potential economic uncertainty. I would like to thank our associates for their hard work and dedication, our customers for their business and ongoing loyalty and our shareholders for their continued support and trust. As we move into 2023, we will remain disciplined in our approach and we will strive to maintain consistent earnings, strong capital levels and solid credit quality. Thank you. [Operator Instructions] Our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open. Hey, good morning. Thank you. Maybe just first around the margin in the related outlook, I'm trying to get a sense for your deposit costs here coming into 1Q. Do you have the spot rate on interest-bearing deposits or total deposits at the end of the year? And then if you have it, the average margin in the month of December? Yes. We actually don't -- put the -- this spot rate at the end of the year, there has been, I mean, I'll start and then I'll let Allen sort of jump in. But just a couple of thoughts here. Number one, I understand the question, but we're originating new loans, like I said, very close to 6% and in some cases over 6%. We're allowing the cash flow, the investment securities to run-off and utilize that to obviously pay down the borrowings and fund new loan growth. We will continue to have some deposit pressures, but we've been very fortunate and we've really done it on a rightful approach, Matthew. We haven't had to make wholesale changes to our deposit rates. So I feel pretty confident that we'll continue to have best-in-class deposit cost and funding costs overall. But I get a little concerned, just making wholesale changes to the deposit rates, if I believe that the borrowings are going to be shorter term. Shorter-term being two quarters, three quarters, somewhere in that range. So I think we're going to defend our margin the best we can. But I do think there is definitely pressure on the deposit side. So I expect that increase to what extent I can't tell you exactly. Yes. I mean, Matthew, certainly in the next couple of quarters the cost of overnight borrowings will weigh a little bit on our margin overall. But as Dave said, as we get into the latter half of the year, we do foresee deposit growth impacting positively our overall cost of funds and then the shift in our earning assets should also improve our earning asset yield. So might be a little choppy the first two quarters, maybe a little bit longer than that, but we're pretty confident of the more medium term. Okay. Yes, I mean, that's where I was headed. It seems like these -- you run the math, I mean, the borrowings are pretty costly. But it sounds like there'll be here just for two to three quarters, which is great. And it kind of suggests your margin is going to be probably lower over the next couple of quarters before it turns around. Maybe just on, I guess, what gives you confidence on the deposit side and what drove a lot of the run-off in non-interest-bearing and what gives you confidence that we kind of start to rebuild here in the second half? Yes, it's a great question. We've done a lot of analysis around the deposits. And first I'd like to say, we haven't lost any significant relationships. And the advantage that we have with CitizensTrust, which we move somewhere between $300 million and $400 million over the year really accelerating in the last couple of quarters to our CitizensTrust group for our customers to get higher yields. So we've kept those deposits in the family, so to speak. And I anticipate is as things change and if the Fed begins to slow or decrease rates that money is still here in the family. The second thing is the slowdown in the real estate markets have really impacted our Specialty Banking Group and deposits there have also declined pretty significantly particularly in Title Escrow. People obviously are refinancing their houses and there is not a lot, not as many sales transactions going on. So escrow deposits are pretty significantly down. I think we actually peaked in our escrow deposits in the second quarter and there has been a steady decline since the second quarter of 2022. So those are both things that have happened. And I've been saying this in the past, I think just the cash burn of the -- of our customers deposits is something that's real, Allen is going to laugh at me a little bit, but the average deposit account, checking deposit account at the bank and thereâs more than 60,000 of them has decreased by about -- around $12,000, $13,000. And I think, if you just take that multiply by the 63,000 plus accounts, there is a significant impact there. Overall in the fourth quarter, typically, and we went back and looked like the last four years, pre-pandemic we have a 4%, 3% to 5%, 6% decrease in our average deposits every fourth quarter. So we don't think this is a long-term thing. We haven't lost the relationships. So, I feel good about that. That the thing we've done on the sales side, last year if you did $1 million well, if you're a salesperson here relationship manager or manager. If you did a loan or if you did a $1 million loan or $1 million deposit your incentive was basically the same. This year, 2023, which they already have the plans. In 2023, if you do a deposit, you actually earn about three times the incentive that you do, is if you are -- as you get $1 million loan? So we -- sort of reallocated the focus to deposits which it's always been on deposits. But I think that should help drive some additional opportunities for us as well. Thank you. One moment for our next question. And that will come from the line of Gary Tenner with D.A. Davidson. Your line is open. Good morning. This is Clark Wright on for Gary Tenner. Thanks for the question. To start maybe if you could talk about expense growth. So maybe just on your expectations for 2023, as it relates to staffing costs and other inflationary pressure, that you already mentioned. The incentive structure, is there anything else going on in terms of initiatives to control expenses going forward? Yes, I'm going to let Allen, take the bulk of the answer here, but just one quick comment I will make. We've been running a pretty high vacancy rate over the past year, year and a half and that's starting to come down slightly. So that's a little bit of the impact. Obviously the Suncrest acquisition was an impact and the easing of pandemic. But Allen can give you a little more color, just overall. Yes. So, Clark, if you look at the fourth quarter and you adjust for some of the items Dave noted in his prepared remarks, you're looking at about a 1% quarter-over-quarter growth in expenses. And that -- so annualized that 4%, we'll continue to probably see some growth in salary expense, which is natural, I mean, salary increases, usually happen in the middle of every year. Of course, our payroll taxes are always at their peak in the first quarter, keep that in mind. We're going to continue to invest in technology, both from customer perspective and including efficiencies internally and year-over-year in â22 we did grow by 10%. So I would just highlight those things and then also keep in mind the FDIC's setting their assessment rates higher in â23. So that will be also a headwind for us from an expense standpoint. Got it. Awesome. And then maybe shifting over to loan growth, I mean, you talked already about the seasonality of it and then you also led to the pipeline. I mean, you've had strong growth up until fourth quarter. Maybe if you could talk about the pipeline at year-end? And then as bank operator even more cautious. Do you see any opportunities for additional growth moving forward from any particular segments? Yes. So a couple of comments I want to make on this. I mean, last year was really an unbelievable year for us, I mean, it was not the norm for us. And I think some of that came from the fact that we remained open during the pandemic and our bankers were still calling on customers and we had some very good success on the loan growth side, averaging 8%. And I'm excluding all the noise, the PPP and the seasonality in dairy and all of those things. So we had a 9% annualized growth rate in the fourth quarter, 8% annualized for the year. So that was really I'd say higher than our typical growth. We are still focused on that mid -- low mid-single-digit growth number, the pipelines have definitely slowed down, there is no question about it. I actually just went through this yesterday with our sales leaders, just kind of trying to get an idea of where we saw that going. So we funded over $2 billion in total loans last year, which was the highest loan growth or loan fundings in the history of Citizens Business Bank. I would be extremely shocked if we did that again this year, because as I said, the pipelines have started to slow. I think the rate increases have started to impact people's decisions. There is not as much refinance activity that's occurring. There is still purchase activity that's occurring. So, that's on the kind of headwind side. On the tailwind side, we won't see as much refinance activity of our loans of other people offering lower rates, I don't believe. And so we just remain disciplined in the pricing, and in the credit underwriting and that really generally equates to that kind of low- to mid-single digit loan growth for us. And I think that's where we're going to end up in 2023. Thank you. One moment for our next question. And that will come from the line of Kelly Motta with KBW. Your line is open. I would like to, kind of, throw in a bead of reinforcement circle back to kind of the size and mix of the balance sheet. I appreciate the color that you're going to fund out of cash flows of your securities book. And I understand some of the deposit run-off is seasonal, so it will backfill those borrowings. But as we look ahead with -- I know you changed your incentive structure to gather -- incentivize more deposits. But looking ahead with the pressure on the funding, do you expect to be able to grow the balance sheet over the course of the year or is the idea, the notion is really more of a flat side of your balance sheet? Any color on that would be really helpful. Yes. I mean, we -- our goal is to grow every year, obviously, with all of the excess deposits that occurred over the last couple of years and all the enormous amount of stimulus that occurred, a lot of that I would say is not real and it's starting to sort of run-off. So that is definitely something. But I think for us, we have a very narrow focus on a certain type of customer. So the overall growth in the market is not necessarily what we look to do. We're very focused on the right type of customer for our bank. And so that's always a challenge, because every financial institution out there is looking for that same customer. But we believe we have a very good process and a very good story to tell. So our goal is to grow the balance sheet, but there will definitely be headwinds with respect to that, specifically the cash burn in customerâs accounts. But I do think, that we will perform well relative to our peers and a lot of different areas and be able to grow the bank. Thanks so much for the color. Next one on credit, I mean, there is almost nothing to speak of NPAs, are super low, no net charge-offs. Just wondering, just given kind of where we are in the cycle? Are you starting to hear any concern or chatter from your borrowers, like are they starting to feel pressure now after the amount of rate hikes we had on cash flow? And any sort of color on that, because it feels like there is only one direction that credit cost can go, but it looks so good. So is there any color on that would be helpful. Yes. So I think for us, there really is only one direction credit cost can go, because you know we've had -- we had net recoveries last year and we have very low non-performing assets. So that's all positive. But to your broader question and point, yes, we are hearing a little bit more. We're seeing a little bit more. But for the most part, our customers are very strong and well-heeled and have the ability to withstand some of this -- that is recurring. And remember, we only have a 33% utilization rate on our C&I loans. So we don't see a lot of borrowings at this point. I do think that the impact of those borrowings, I should say. And I do think that, we will continue -- that will continue to impact our customers, that will continue to drive some concern and we're just paying a close eye, I mean, we're very disciplined in how we evaluate credit, not just when we're making it but following up. I've mentioned this in the past, and I know my predecessors have mentioned this as well, but we have a very strict monitoring program that we track very closely to make sure we're very close to our borrowers. We just don't want any surprises. And I think that as we get through this year, we'll probably see some more. But I really don't anticipate it to be anything material impacting us. But there will be some more challenges. And I've said in the past too and I'll repeat it, I think this is a consumer small business, small operating company, bigger impact and on the larger companies and customers. Thank you. [Operator Instructions] One moment for our next question and that will come from the line of Eric Spector with Raymond James. Your line is open. This is the Eric on the line for David Feaster. Congrats on another solid quarter. I'm just curious what segments of CRE drove the strength this quarter and what's your appetite for growth here, just given the uncertain economic outlook backdrop? Just any color on what segments you are providing good risk-adjusted returns from your standpoint? Just any additional color on that would be great. Yes. So, commercial real estate was the primary driver of the growth. It's been kind of typical with almost two-thirds of our loans in commercial real estate. And I think that has been, and then if you want to get a little more into the asset classes within commercial real estate, it's really kind of the -- I'll say the big three, and the big three has been industrial, multifamily and to little bit lesser extent, office. We are still seeing very solid credit. We have turned away things that we would not normally look at. And so I think that's been something that has been pretty consistent in our history and will be consistent going forward. We have a great -- in our investor deck on page 29, it gives you a lot of color around the types of deals that we're originating, while our overall portfolio looks like the largest segment being industrial, office being second, with a good amount of that being owner occupied. And we're still seeing more sub-urban and rural opportunities. We're not doing office loans in Downtown LA, that's not what we do. And then multifamily has been growing pretty fast there as well. So underwritten it, low loan to values at origination. With some tenure and obviously amortization on those loans, I think puts us in a pretty good spot. And then we focus on operating companies, so that's part of the reason why we have the strong deposit base, because our operating deposits and they generally stay. And so we want to continue to drive that owner occupied operating company type loan. Okay. Yes, that makes sense. Thank you. And I just wanted to touch on capital. I know last quarter you kind of talked about, with the stock rallying up, that you kind of put it on pause, just with the appreciation in the stock or the depreciation stock over the last month or so, just curious what your capital priorities are going forward? Well, we still have a active 10b5-1 plan and it has different price threshold. So it is -- I think possible, quarter ago we would instead of unlikely and I think at this point, as you mentioned with our stock down a little bit, it is possible we could see some modest buybacks, but not much, I would say, this is not going to be material. Okay. Thanks. And then kind of shifting gears, just curious if you could provide an update on some of the tech initiatives and like what's on the docket to be added in near-term and then any color on efficiencies they'll be able to drive? Yes. I'm saying this is a joke, Iâm a tech experts, so I'll take this one. So, as I have a bunch of paper in front of me and they make fun of me. But no, I think that for the most part, we're on track with our tech initiatives. Really as Allen mentioned, it's around efficiencies, robotic process automation we're rolling out more and more processes with that which allows us to do things, create that capacity and operate without having to hire more people as we grow. And so I think those initiatives are on track and we're going to continue to focus on that. The costs associated with that is really minor, relative to the benefit that we get out of it, which again is why our efficiency ratio remains kind of in that 36% range. And so we'll continue to look for opportunities to do that and to improve that the efficiency there and continue to drive automation. Thank you. One moment for our next question. And that will come from the line of Tim Coffey with Janney Montgomery Scott. Your line is open. Hey, I appreciate the opportunity to ask question. Dave, I want to talk, see if you could provide some color on the opportunities to acquire new clients in the current environment. Clearly, the balance sheet is well suited to do it. And we've already seen in certain parts of the lending market where banks have started to pull back. How do you view this current environment in terms of adding new clients? Yes. I think the way you characterize it, is absolutely true. We're seeing more opportunities, we're not doing more necessarily, we've sort of -- that's our pipelines as I mentioned earlier sort of slowed down. But I think it's a perfect opportunity for us. Although the loan to deposit ratio, the opportunity to continue to lend for the right borrowers, we're seeing a lot of opportunities even on the deposit side today. Our -- we sort of unleashed the hounds a little bit in our municipal group and in our Specialty Banking Group to really go out and get those deposits. And I think the environment is right, we just have to execute. And I think that's something that we talk about daily. So we're working hard to do that. But I agree with your overall assessment. Yes, it depends. I mean, in a Specialty Banking Group and the government services group, it's a little bit longer cycle, but we foresaw some of this coming and actually unleash that in early to mid-last year. And so some of those relationships are going to start coming on now. So I think, it really just depends. If you're talking about an operating company that sales cycle could be a year or two years of just constantly touching them and talking to them and offering information and help for them. But the real estate sales cycle is much slower, just because generally people have a closing date that they have to get to. But for the type of client we go after it's generally a little bit longer. And there is continuous, I should say, to the disruption in the market, especially with some of the previous mergers and acquisitions that have been announced and that's creating opportunities for us. But we don't want all their customers, we just want the ones that fit the type of client we go after. Thank you. [Operator Instructions] And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Dave Brager for any closing remarks. Thank you very much, Sherry. As always, Allen and I appreciate all the questions and we want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in April for our first quarter 2023 earnings call. And then you can always reach out to Allen and I, if you have any questions. Have a great day, and thank you for listening.
EarningCall_1005	Hello and welcome to today's Popular Fourth Quarter 2022 Earnings Call. My name is Bailey, and I will be the moderator for todayâs call. [Operator Instructions] I would now like to pass the conference over to our host, Paul Cardillo, Investor Relations Officer at Popular. Please go ahead. Good morning, and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez; our COO, Javier Ferrer; our CFO, Carlos Vazquez; and our CRO, Lidio Soriano. They will review our results for the full year and fourth quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that on today's call, we may make forward-looking statements that are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and are detailed in our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. Good morning, and thank you for joining the call. Our results for the quarter in the full year were solid and reflect the strength of our franchise. Our record annual net income of $1.1 billion reflects an increase of $168 million above our 2021 annual net income of $935 million. The increase was largely driven by the benefit of the Evertec Transactions, and the partial reversal of the DTA valuation allowance. The results also reflect higher net interest income, partially offset by higher provision expense and higher operating expenses. The 2021 results included a provision benefit of $193 million. During the summer, we've completed the acquisition of key customer facing channels from Evertec, and also made important changes to our contractual relationship with them. Leveraging these transactions, we have embarked on a broad based multiyear technological and business process transformation. The needs and expectations of our clients as well as the competitive landscape has evolved, requiring us to make important investments in our technological infrastructure and adopt more agile practices. Our technology and business transformation will be a significant priority for the company over the next 3 years and beyond. We believe that there continues to be opportunity for growth in our primary market as well as within our existing customer base, and these efforts will help capitalize upon that opportunity. We are confident that these investments will make us a stronger, more efficient and profitable company. Throughout 2022, we continue to return capital to our shareholders. During the year, we repurchased 8.25 million shares of common stock for $631 million, which surpassed our original expectation of $500 million. We also increased our quarterly common stock dividend to $0.55 per share, representing nearly $164 million in dividends paid in 2022. Credit quality remains strong throughout 2022. We are pleased with how our portfolios have continued to perform, particularly with net charge-offs well below historical levels and a lower level of nonperforming loans. Our capital levels are strong with year-end common equity Tier 1 ratio of 16.4%. Our tangible book value ended 2022 at $44.97, a 31% decrease year-over-year, primarily due to unrealized losses on investment securities. However, during the fourth quarter, tangible value increased by 16%. Please turn to Slide 4. Our quarterly net income excluding the partial reversal of the DTA valuation allowance was $189 million, or $7 million lower in the adjusted third quarter net income of $196 million. Fourth quarter results were impacted by lower net interest income, which reflected higher loan income that was more than offset by the higher cost of public deposits, as well as a higher provision for credit losses. Loan growth was strong and broad based during the quarter, both geographically and across most loan segments. Total loan balances held in portfolio grew by $560 million. Commercial loan growth, particularly it was healthy at most banks in the fourth quarter. Our net interest margin decreased by 4 basis points to 3.28% in the quarter. Higher deposit costs, particularly in our Puerto Rico public deposit portfolio and at Popular Bank impacted the margin. This was offset in part by an improvement in asset mix to loan growth and a reduction in the investment portfolio. Credit quality trends remain favorable during the period. Nonperforming loans decreased in the quarter and net charge-offs have remained well below pre-pandemic levels. Please turn to Slide 5. Our customer base in Puerto Rico grew by approximately 28,000 during the year, reaching 1.98 million unique customers. Adoption of digital channels among our retail customers continues to be strong. Active users on our Mi Banco platform exceeded 1.1 million or 56% of our customer base. Additionally, we continue to capture 1 in 60% of our deposits through digital channels. This trend remains significantly higher than pre-pandemic levels, and well above our Island peers. Commercial loan growth was strong. Commercial loan balances at BPPR and Popular Bank increased by $118 million and $255 million, respectively. Credit card and auto loan and lease balances at BPPR increased by $53 million and $31 million, respectively. In the fourth quarter, the dollar value of credit and debit card sales of our customers increased by 11% sequentially and were 6% above the fourth quarter of 2021. As on the Mainland, mortgage originations in Puerto Rico have been impacted by rising rates and limited inventory of available properties. The dollar value of mortgage originations at BPPR decreased by 29% compared to the fourth quarter of last year, driven by lower repayment activity due to the interest rate environment. However, loans to finance the purchase of homes decreased only 11% during the same period. The local economy continues to perform well during the fourth quarter, and business activity has remained strong. We remain encouraged by solid employment levels. In December, total non-farm employment in Puerto Rico increased slightly from its level in September and was 4% higher than in December of 2021. New auto sales increased by 3% in the fourth quarter, compared to the same period in 2021. While auto sales declined by 4% in the year, 2022 was the second highest year of sales since 2006, easily surpassing pre-pandemic levels, evidencing continued robust demand for cars [technical difficulty]. The industry is forecasting new car sales of 118,000 with 2023 well above pre-pandemic levels. The tourism and hospitality sector continues to be a source of strength for the local economy, as Puerto Rico is a popular destination for Mainland residents. Airport traffic has remained robust. Year-to-date through December, total passenger traffic increased by 7% compared to 2021. Hotel demand has also remained strong. Occupancy rates were up more than 500 basis points in 2022 and the average daily room rate continues to compare favorably to historical results. In short, we are pleased with the results for the year, particularly our robust loan growth and continued strength in credit quality. We are mindful of the global economic uncertainty and market volatility, but remain optimistic about the future of Puerto Rico, our primary market and our ability to manage any potential challenges that may lie ahead. Thank you, Ignacio. Good morning. Before we turn to fourth quarter results, let me expand on Popular's 2022 full year performance, which is included in the appendix to this presentation and today's press release. In 2022, we report a record annual net income of $1.1 billion, $168 million above our 2021 annual net income. The increase was largely driven by the benefit of the Evertec Transactions and the partial reversal of the DTA valuation allowance, somewhat offset by provision expense. Our net interest income increased by 11% year-over-year to $2.17 billion due to higher rates, loan growth and the change in the mix of earning assets. For the year, we reported an $83 million provision for credit losses, which compares to a provision benefit of $193 million in 2021. Non-interest income increased by $254 million year-over-year, primarily driven by the impact of the Evertec Transactions. Operating expenses increased 13% in 2022 to $1.75 billion with higher personnel, technology, professional fees and regulatory cost. Please turn to Slide 6. Net income for the fourth quarter was $257 million. This compares to $422 million in Q3. Excluding the impact of the Evertec Transactions in Q3 and the DTA reversal in Q4, net income decreased $7 million to $189 million in Q4. Net interest income for the fourth quarter was $560 million, a decrease of $20 million from Q3. Interest income grew by $62 million from loan growth of both banks as well as higher yields on loans and investment securities. This was more than offset by higher interest expense on deposits, resulting from increased deposit rates, mainly from Puerto Rico public deposits and to a lesser extent Popular Bank. Non-interest income was $158 million, a decrease of $268 million from Q3. The results of the third quarter included a $258 million pre-tax gain on the Evertec Transactions and a favorable fair value purchase price adjustment of $92 million related to the U.S equipment finance business we acquired in 2021. Excluding these items, remaining various non-interest income resulted mainly from lower deposit service fees. The fourth quarter non-interest income results fully embed the changes in our [indiscernible] policies and the reduction in equity pickup for the sale of our Evertec shares. The results also include an $8.2 million gain on the sale of a previously written-off investments. Excluding this gain, the non-interest income for the quarter would have been approximately $150 million. For 2023, we expect non-interest income to continue around this $150 million per quarter run rate or approximately $600 million for the year. The provision for credit losses in the fourth quarter was $50 million compared to $40 million in the third quarter. Total operating expenses were $462 million in the quarter, a decrease of $14 million from the prior quarter. Q3 included $17 million expenses related to the Evertec Transactions and a $9 million goodwill impairment on our U.S equipment finance business. Excluding these items, expenses increased by $12 million, mostly resulting from a $10 million increase in technology expenses, seasonally higher business promotional expenses by $4 million, higher other processing and transactional services by $4 million, mainly due to higher network incentives received during the prior quarter and higher professional fees. For 2023, we expect annual expenses of approximately $1.87 billion, compared to our expenses $1.75 billion during 2022. The drivers of the $120 million increase will be: first, continued increase in personnel expenses, driven primarily by the previously announced increase in our minimum hourly wage from $13 to $15, which took effect on January 1. This will add approximately $15 million to expenses in 2023. Additionally, the market salary adjustments that were made effective on July 1 of last year will be in effect for the full year 2023. There will also be a 2023 merit increase that traditionally is granted in the summer. These two items will add approximately $24 million to expenses in 2023. These actions are necessary to keep our compensation competitive. Second, we expect that the FDA sees 2 basis points increase in assessment rate to all depository institutions will add $14 million to expenses. Pension and retirement health care expenses will also increase by $19 million. Finally, as Ignacio described in his opening remarks, weâve undertaken a significant multiyear corporate transformation initiative. As part of this transformation, we need to expand our digital capabilities, modernize our technology platform and to implement agile and efficient business processes across the entire company. Since completing the Evertec Transactions on July 1, through the end of last year, we invested $24 million towards this effort primarily in professional fees and technology expenses. In 2023, we anticipate transformation-related expenses of $50 million. These technological ways of working and operational investments will result in an enhanced data experience from our clients as well as better technology and more efficient processes for our employees. We expect these efforts to contribute to higher earnings and a better efficiency, resulting in a sustainable 14% ROTCE target by the end of 2025. To facilitate the transparency of our progress in some of these efforts we have now separated technology, professional fees and transaction activities as standalone items in our income statement. Our effective tax rate for the quarter was a benefit of 24% compared to an expense of 14% in the third quarter. The income tax benefit in Q4 was mainly due to the $68 million partial reversal of the DTA valuation allowance of the U.S. operation. Excluding this impact, the effective tax rate for the fourth quarter was 12% compared to 14% in the third quarter. This partial reversal was based on our evaluation of the sustained profitability of the U.S. operation over the last 2 years as well as evidence of stable credit metrics while considering the remaining life of the net operating losses. As of December 31, 2022, the DTA related to the U.S. operations was $278 million, net of our valuation allowance of $423 million. For the full year 2023, we expect the effective tax rate to be in a range of 18% to 22%. Please turn to Slide 7. Net interest income was $160 million. On a taxable equivalent basis, it was $622 million, $25 million lower than in the third quarter. Net interest margin decreased by 4 basis points to 3.28% in Q4. On a taxable equivalent basis, NIM was 3.64%, a decrease of 7 basis points. The decrease is driven by higher interest expense on deposits due to a significant, though anticipated, 159 basis point increase in the cost of public deposits. This was partially offset by higher loan balances and yields, plus an improved mix of earning assets. At the end of the fourth quarter, public deposits were roughly $15.2 billion, a decrease of $2.2 billion from Q3. We expect public deposits to be in a range of $13 billion to $15 billion during 2023. Over the next couple of quarters, the balance of our deposits should increase during the cyclical nature of tax collections. However, the balances should decrease during the second half of 2023. Excluding Puerto Rico public deposits, deposit balances declined by $1.4 billion in the quarter, mainly from excess cash balances of corporate clients. These declines are reflective of clients pursuing better yields on excess liquidity. Popular continues to have a strong relationship with these clients. Our Puerto Rico commercial deposit balances remain $5 billion higher than they were in December of 2019. We will continue to actively manage the cost of commercial deposits, taking into consideration the overall client relationship and our liquidity position. Retail deposit balances remain stable. Our ending loan balances increased by $560 million or almost 2% compared to Q3 and are up by $2.8 billion or just under 10% year-to-date. Commercial loan growth was particularly strong, and all other loan segments were higher in the quarter, except for construction. We are encouraged by credit demand at BPPR and PB. We will continue to take advantage of opportunities to extend credit, thereby improving the use and yield of our existing liquidity. While we expect to see continued strong loan growth in 2023, we do not anticipate it will replicate 2022's exceptional growth rate. Please turn to Slide 8. Year-to-date, our retail deposit franchise, particularly Puerto Rico, has continued to track below these historical beta. Commercial deposit betas have remained low, but are now tracking slightly above the prior cycle. Combined, retail and commercial, deposits represent a lower proportion of total deposits compared to the last rate cycle due to the increase in public deposits. As we discussed last quarter, during the rapid shift to higher interest -- short-term interest rates, we expect a significant increase in the cost of public deposits. In the fourth quarter, the cost increased by 159 basis points. We expect the magnitude of the increase in cost of public deposits to moderate in Q1 to approximately 120 basis points. As we have described in the past, the deposit pricing agreement with Puerto Rico public sector clients is market linked with the like [ph]. This source of funding resulted in an attractive spread under market rates. Please turn to Slide 9. In 2022, we reported a decrease in fair value of the investment portfolio that we expect to be temporary. Our investment portfolio is almost entirely comprised of treasury and agency mortgage-backed securities which carry minimal credit risk. The bond portfolio has an average duration of approximately 2.8 years. As the positions roll down the yield curve, their fair value will convert to par and the mark will go down to zero. As discussed in our last webcast, given the rapid increase in interest rates in 2022 as well as the uncertain outlook for interest rates, in October, we transferred to held to maturity $6.5 billion of U.S. treasuries in the 4 to 6-year term, thereby reducing the future impact of rates on tangible book value. At the time, this action reduced AOCI exposure to interest rates by about a third. When transferred to HTM, these positions had a pre-tax unrealized loss of $873 million, which will be amortized back into capital throughout the life of the transferred positions. As of the end of the fourth quarter, the balance of the unrealized loss stood at $832 million, a reduction of $42million. We expect a similar quarterly amortization through 2026. The yield on transfer securities remains the same and no losses were recognized as a result of this move. This transfer doesn't have a material effect on our liquidity as we continue to maintain a large available-for-sale portfolio in short-term treasuries and cash at the Fed. The changes in realized gains and losses in AOCI have an impact on the corporation's tangible capital ratios as well as those of our wholly owned banking subsidiaries, but they do not impact regulatory capital ratios. Please turn to Slide 10. Our return on tangible equity was 19.2% in the quarter. Regulatory capital levels remain strong. Our common equity Tier 1 ratio increased by 35 basis points in Q4 to 16.4%. In December, we completed our previously announced $231 million ASR, repurchasing approximately 3.2 million shares at an average purchase price of $72.66. To summarize our capital actions last year, we repurchased $631 million common stock or 8.25 million shares via two separate ASRs and increased our quarterly dividend by $0.10 per share to $0.55 per share. Annual book value at quarter end was $44.97 per share, an increase of $6.28 per share from Q3, driven mostly by quarterly net income of $257 million and a favorable variance of $183 million in unrealized losses on securities available for sale. This is partially offset by dividends of $40 million declared in the quarter. Our outlook on capital return has not changed, anchored in our strong regulatory capital ratios. Over time, we expect our regulatory capital ratios to gravitate towards the levels of our Mainland peers plus a spread. Given the continued economic uncertainty, we still plan to revisit our future capital actions in the second half of 2023, once we have more clarity around the outlook for interest rate and the economy. Thank you, Carlos, and good morning. Overall, Popular continues to reflect stable credit quality trends with low levels of net charge-offs and decreasing nonperforming loans. We remain encouraged by the performance of our loan book post-pandemic, specifically, early delinquency, net charge-offs and nonperforming loan formation continue to trend significantly below pre-pandemic levels. We also believe that the improvement in the risk profile of the corporation's loan portfolio positions Popular to operate successfully on the more difficult economic conditions. We remain vigilant and continue to closely monitor changes in borrower performance and the macroeconomic environment, given potential economic headwinds rising interest rates and geopolitical uncertainties. Turning to Slide #11. Nonperforming assets decreased by $18 million to $520 million this quarter, driven by an NPL decrease of $40 million, coupled with an order decrease of $4 million. In Puerto Rico, NPLs decreased by$8 million driven by lower mortgage NPLs of $10 million and lower commercial NPLs by $5 million, in part offset by higher order NPLs by $7 million. In the U.S., NPLs decreased by $6 million, mainly due to a $9 million charge-off on a previously reserved commercial borrower in the health care industry. Compared to the third quarter, NPL inflows, excluding consumer loans, decreased by $3 million, driven by the U.S. health care relationship mentioned previously that was placed in nonaccrual in the prior quarter, offset in part by higher mortgage inflows in Puerto Rico. At the end of the quarter, the ratio of NPLs to total loans held in portfolio remained flat at 1.4% compared to the previous quarter. Turning to Slide #12. Net charge-offs amounted to $31 million or an annualized 39 basis points of average loans held in portfolio compared to $18 million or 24 basis points in the prior quarter. The results for the quarter were impacted by the $9 million charge-off on the previously reserved health care relationship in the U.S. Excluding this item, net charge-off ratio was comparable to last quarter at 28 basis points. In Puerto Rico, net charge-offs remained stable, increasing by 1.5% quarter-over-quarter mainly driven by higher consumer charge-offs by $5.5 million, mostly due to the order portfolio, in part offset by lower mortgage net charge-offs by $4 million. The corporation allowance for credit losses increased by $17 million or 2.5% to $720 million, driven by changes in macroeconomic scenarios, higher loan volumes and changes in credit quality. The ratio of allowance for credit losses to loans held in portfolio remained stable at 2.25% compared to 2.23% in the previous quarter. The allowance for credit losses to NPLs held in portfolio was 164% compared to 155% in the prior quarter. The provision for credit losses was an expense of $48 million compared to $40 million in the previous quarter, reflecting the changes in allowance for credit losses and the net charge-off activity. In Puerto Rico, the provision for credit losses was $44 million compared to $29 million in the prior quarter. And in the U.S., the provision was $44 million compared to $11 million in the prior quarter. Please turn to Slide #13. As discussed in prior webcast, we leverage Moody's analytics for the U.S. and Puerto Rico economic forecast. Notwithstanding general economic uncertainty, Moody's baseline outlook remains for the U.S. economy to continue recession free. Moody's fourth quarter forecast, however, reflects a slowdown in the economy with lower 2023 GDP growth for both Puerto Rico and the U.S. The baseline scenarios assume a 2023 annualized GDP growth for Puerto Rico and the U.S. of 1.3% and 0.7%,respectively, compared to 2.2% and 1.5% in the previous quarter. The reduction is due to the expected slowdown in the economy as a result of tight monetary policy. The 2023 average unemployment rate remained consistent quarter-over-quarter. Our framework for the allowance incorporates multiple economic scenarios. In the fourth quarter, we assigned the highest probability to the baseline scenario, followed closely by the more pessimistic recession scenario, S3. The quarter-over-quarter difference in the allowance for credit losses was driven by the macroeconomic scenarios and portfolio changes, which includes loan growth and changes in credit quality. To summarize, our loan portfolio continues to exhibit strong credit quality metrics in the fourth quarter with low net charge-offs and decreasing nonperforming loans. We remain attentive to the evolving environment, but remain encouraged by the post-pandemic performance of our loan book. Thank you, Lidio and Carlos, for your updates. 2022 was an outstanding year for Popular. In addition to record earnings, we achieved strong credit quality, continued customer growth, closed the Evertec Transactions, launched our transformation and successfully executed on our capital actions. Our franchise provides a powerful platform to go beyond serving our customers. It also affords us the opportunity to possibly impact the lives of our colleagues and communities and create value for our shareholders. In 2022,we reached key milestones including participating in the Bloomberg Gender Equality Index issuing our ninth Corporate Sustainability Report, also following Hurricane Fiona, we provided immediate relief to the -- to affected communities and clients and assisted impacted employees. Looking ahead, I am optimistic about the economic outlook in Puerto Rico, our primary market. While we are aware of the macroeconomic headwinds related to inflation and geopolitical risk, we are confident that given the amount of stimulus support from federal funds, Puerto Rico will continue its growth path, albeit perhaps at a slower pace. 2023 marked Popular's 130th anniversary. Since 1893, we have successfully adopted and led through changing conditions, and we are proud of our history and the legacy that made Popular what it is today, a strong vibrant organization with [indiscernible] values. Leveraging these strengths, we will continue to transform our organization to ensure success for many years to come. This entails meeting the rapidly changing needs of our customers providing our colleagues at work place [indiscernible], promoting progress in the communities we serve and generate sustainable value for our shareholders. The team is energizing -- is energized and looking forward to another strong year. Thank you. [Operator Instructions] Our first question today comes from the line of Timur Braziler from Wells Fargo. Please go ahead. Your line is now open. Maybe starting on expenses and the technology and business process transformation that has been laid out, I guess on the back end of that, how should we think about Popular? Is this investment in kind of standing up Evertec and getting that investment kind of up to where you expect it to be? Or is this getting Popular more broadly on pace with the broader group? Or do you expect the back end of '25 for Popular to be an industry leader when it comes to tech and innovation? Yes. I think -- this is Ignacio. I think -- thank you for the question. I think Evertec was the initial phase. It's more than just Evertec. Obviously, Evertec has positioned ourselves to be able to begin to transform our technological foundation. So it's more than just taking over the services Evertec was providing for us. That was an essential step. But obviously, our goal is to be able to compete with the different entities that are coming to the market, especially in terms of giving digital options to our clients. So yes, we aspire to be not best-in-class, top quartile in terms of the services and the products we can offer our clients. And Popular has traditionally been a leader in technology in Puerto Rico, and given what's happening now, I think it's more important than ever that we take this initiative on. Okay. And then in terms of investing into this initiative, is the expectation kind of $50 million per year through '25? Or does that ramp higher as you get closer to completion? Yes. I'm not sure we being able to nail that down at this point in time, Timur. I think the -- what we expect will happen over time is that the expense will shift from the present expense, which is more weighted towards professional services and consultants and people that are trying to help us stand up and set up what we want to do and where we want to go, it will shift to execution. So again, we haven't nailed down the number looking forward in the composition of the expense will change into execution and putting in place the systems and the technology that we are designing and selecting right now. Okay, great. And then maybe moving to NII and NIM. It looks like the inflection point happened here in the fourth quarter, just maybe an outlook for the magnitude of the remaining inflection as those public funds continue to lag already happened in interest rate hikes. And then more importantly, kind of once that lag is complete, what's the outlook for NII and NIM growth from there? Yes. The components that led to our margin coming down this quarter, those pressures still exist for the first quarter. Moving forward, you described them properly that the most important one being the increase in cost of public deposits. We -- as we said last quarter, we expect NIM to retake an upward trend in 2023. Exactly in '23, it happens -- will depend on the interaction of the drivers. And you know what the drivers are, the rate of loan growth, the rate of change in interest rates and deposit balances are the biggest three drivers. And the interaction between those three will -- this take exactly what happens in the year, but we do expect NIM to retake an upward trend in the year '23. Okay. Then maybe one last one for me, if I can. Just circling back on fee income, the guide for around 150 a quarter, I'm just wondering when does that inflect? And when do we start seeing some of the positive attributes from the combination with Evertec and getting those assets back in-house? Well, the biggest driver of the move down from our prior guidance to this '23 guidance is the change in the fact that we don't own the shares Evertec anymore, number one; and number two, the change in overdraft policies and number three, the change on our practice of setting mortgages that we are not setting anymore. So those are the biggest drivers of the shift down to 150 per quarter roughly. Obviously, remember, there's always some seasonality in that number. So it goes up and down for different things during the year, but that is the right range. We continue initiatives on our business initiatives to try to continue to move rates up in different fronts. So hopefully, as those initiatives succeed, we can start moving rates up from the 150. And some of those are already being designed and implemented if everything works well, we may start seeing some of that in '23, but our best guess right now is 150 per quarter. Thank you. Our next question today comes from the line of Alex Twerdahl from Piper Sandler. Please go ahead. Your line is now open. I just want to ask some of the questions the team I just asked a little bit differently. I'm just -- I'm curious, when you put out a target for 2025, why 2025? Does that represent sort of an inflection point or an end point in some of these initiatives? Or how can you pick that date for that year? This is Ignacio. Basically, we think that year. The transformation initiative is going to be an ongoing effort. It's the way -- it's going to change the way we work. But obviously, to sort of measure our success, we wanted to take an initial 3-year period, where we see where we are going to be at the 3-year period. And basically, that's how we reached '25. It was kind of arbitrary, but we felt 3 years gave us enough time to implement the measures that we're doing to give them time to bear fruit. So -- and that's how you picked it. But obviously, this is all going -- and obviously, we expect all these efforts to be sustainable, not only sustainable, so it's not like we are going to reach that and stop, but keep growing incrementally over time. Right. And then is Popular a leaner institution at that point? Or like what's going to be different? I mean, obviously, every bank is investing in technology meaningfully, but does it allow you to operate with a reduced branch count or sort of what -- like what would we see that would be different at that point? I'm not sure branch count is the thing you expect to see the most. I mean that will depend on traffic. We can talk about branches separately. But I think, obviously, we are aiming to do a lot more things digitally, and we are also aiming to do a lot more things self-service. So for example, making our underwriting more automatic, so you don't have to have as much manual intervention, this is across, especially our businesses, but it will apply to everything. But hopefully, we will do -- it will help us with our compliance. We're investing also in technology, which is very manual today, very people-oriented, so really, I can't give you a specific date, but definitely over time, we should see a lot less manual intervention in many of our processes, be the underwriting, be the compliance, be the everything. So I think that's the goal. The goal is to be more digital, more -- have more self-servers for our clients. And hopefully, over time, that's going to impact us favorably. Okay. Are there any sort of chunks of the initiative that might hit at any certain point in time? You mentioned that a lot of the fees right now are being conducted towards the planning phase, and then there's going to be implementation phase, which maybe is more of a 2024 thing. But are there segments that you kind of -- we can sort of look at over the next couple of -- maybe even more in the near-term to sort of get a good sense for how to track the progress. Well, I'm not sure within the near-term, but one of the things that we obviously are going to want to be able to report to you is what percentage of our loan applications will be digitally enhanced -- and obviously, that we will be able to give you numbers on that. We will be tracking that. And obviously, that will reflect in efficiencies. We've already implemented some things that are less technology oriented because again, this is more than just technology, it's also process improvement. In terms of how do we make sure that our pricing strategy for products and services, including cash management are coherent across the organization. We expect that to bear fruit pretty much immediately. [Indiscernible] should be a game changer, but that will bear fruit immediately [ph]. So we will be watching very carefully that in terms of revenues that we are getting from cash management, we are going to make important investments in that area. Now the technological area on cash management will take us a few years. I mean when you change your system for cash management, that will be a couple of year process. But we are very hopeful that will drive benefits for us. But again, we will be following and closely tracking that and think about digitally enhanced applications, self-service applications. So those are things that we will be tracking. Yes. I mean, Alex, one of the things that we have a very strong belief that there is still a lot -- a big opportunity for growth in Puerto Rico -- with -- by deepening the relationships we have with our existing clients. So a lot of the effort that's going into transformation is for us to execute on that belief meaning that we will be in a position to provide clients quicker, better service to offer them products that fit their needs in a more efficient way. And with that, we increased the satisfaction of our clients, and that means we have more happy clients, we have more employees that can actually execute with excellence, what we are trying to do as far as client service and all those things add up to positive outcomes as far as the contribution of all those clients to the bank. As Ignacio said, these are incremental efforts. Some small things will start happening in a few months. Other things will start happening next year. So the bigger things are technology dependent, will probably be sort of a bit back-ended, because we have to maintain investment and implement the systems to achieve what we want to achieve, but we expect that there will be some quick wins starting soon. Yes. Add to what Carlos was saying, I mean one of the big initiatives is designed at what we call personalization and segmentation. And therefore -- and that involves a lot of investment in our data abilities also. But the idea is that we will be able to offer our clients products that they need faster. As you know, we have, by far, the largest client base in Puerto Rico, both retail and commercial. And if we can just penetrate that market, the cost of -- our cost of acquisition will be much below any possible competitors. So we are going to put a lot of effort to the personalization and segmentation. And the last comment for you to get a sense of what we are talking about, -- we believe, we think we have to build the best digital banking offering in Puerto Rico already. But what we are seeking is to be able to provide more products and services to our clients through that offering and to allow us to roll out new offerings a lot faster than we can do it now. So we are changing the architecture of what is a market-leading digital offering so that we can be a lot more effective in providing more and new services quicker to our clients than we are today. So the client will never see the change in impact and architecture, but they will see the more efficient and bigger offering once we've done that. Okay. And then with the 14% ROTCE, obviously, there's a lot of pieces to that, and it could mean a lot of different things. So can you give us some of the assumptions on capital levels, or like anything else to kind of help us really figure out what it actually means for profitability? No. At this point in time, we've chosen that one because it's our encompasses the result of everything, Alex. And you are correct, there's a lot of pieces that compose that. We are not in a position to talk about the pieces specifically yet. or right now. But again, we think this is the most comprehensive nature of everything that we do. So we've chosen to hang our head on that one for the moment. But at this point in time, we haven't disclosed the components that we will get us there. There's a lot of things that probably can change and underweight as well. Okay. And then just one final one for me before I get back in the queue. You gave us the increase in the government deposits in the first quarter of 120, assuming we get two more hikes, where do those peak out? I mean can you just spell it out for us? I'm afraid, where they peak out, you'll have to ask the Fed. If it's true that they go down to two more 25 -- and that's it. And then they sit tight, then a quarter after that, you'll see [indiscernible] of 50 basis points more expenses. But it really is market linked, so depend on the Fed. Again, our best guess of the Fed increases will give us 120.Again, roughly, if it's still more 25, that will end up being about 50 basis points higher in the quarter after that. And once if the rates start moving in the other direction, then we'll see that we start seeing the benefit of the quarter after that. So I would love to be able to answer your question, but I can't read the mind of the Fed very well. But they do peak out below, I mean, last time they peaked at 125 basis points, but below where the Fed peaked out. Is that a reasonable assumption for this tightening cycle? It is timing. I mean we -- ultimately, the question you're asking is what's the spread that we make on the deposit. We have never answered that question purposely, and we're not going to start today. But obviously, we do make a positive spread on these deposits. Thank you. [Operator Instructions] The next question today comes from the line of Kelly Motta from KBW. Please go ahead. Your line is now open. Hi, good morning. Thanks for the question. I -- may be asking the government deposits question a little bit differently. I appreciate the color around margin and how you expect that to, I believe, it start to inflect at some point this year. Does that commentary there require a certain amount of roll-off of the government deposits? Or is that irrespective of levels? Just trying to get a sense of how much that may be a driver of that inflecting NIM you speak of? No. That commentary incorporates the outlook we expressed on the balance of the current deposits that they will remain between $13 million and $15 million for the year. Again, it's not a constant 13 to 15. They're probably going to be slightly higher than that in the first half of the year and then maybe slightly lower than that in the second half of the year. But that is what is incorporated in the components of that commentary. Thank you. Appreciate it. And just a point of clarification on your expense guidance that $1.87 billion that you gave, I just want to confirm that includes the innovation stuff that you're doing and that $50 million is on top of that 1.87. Okay. Excellent. Thank you so much. Maybe last one for me. I appreciate the time it is on capital. I know you reiterated that you plan to revisit your capital plans in the second half of this year. Wondering if that kind of your decision to do that is there's a certain level of TCE where you would feel comfortable stepping back in. Is there any sort of parameters around that you'd be willing to share? And -- that's part one. And then part two of the question is, by second half of the year? Do you think maybe by sometime in July, given the accretion back on AOCI, is that kind of the timing we're looking at here? Yes. So I answer both questions. There is no TCE target that would trigger us to do something or not do something. What -- I think, if anything, what will be more important on how we think about this is, again, getting a more clear consensus of what's happening with the economy and what's going to happen with interest rates moving forward. So I think those two components are probably more important. There's -- again, there's no magic number of TCE that will get us there. As Ignacio said last quarter, our best guess is that we will get that clarity we are looking for in the summer, and that's where our comment comes from the second half of the year. But if that clarity comes in May, then we're a couple of months ahead. If that clarity comes in September, we may be a couple of months behind. But no specific target, the outlook and there being consensus outlook on the economy and interest rates are probably the two most important inputs into the timing of our revisiting of the capital plan. Again, these overall view of capital is unchanged. We are only slightly adjusting the timing here and when we execute, not our intent of what we like to do. Thank you. The next question today comes from the line of Gerard Cassidy from RBC. Please go ahead. Your line is now open. Happy New Year to you, too. Carlos, on the OCI or AOCI, I should say, when you look at it, you had in the available-for-sale portfolio, about $1.8 billion of unrealized losses. Can you share with us what kind of interest rate environment would we need to see for that number to fall materially from here. Lower. I agree with that. No, I mean the portfolio has about a 2.8-year duration. So that can give you some sensitivity on the entire piece, right? So you could probably run some calculations based on the duration and the size of the portfolio should give you an idea of, roughly speaking, were unrealized good move. Yes. The -- obviously, the as [indiscernible] said, the portfolio is [indiscernible] on the short end. So we are the biggest bang for the buck. You'll probably get short-end rates -- an intermediate rates moved lower. I think AOCI only happy, if the 30 year comes down, but the 30 year does not have big effect on our AOCI as the shorter and into medium terms. The other thing is there's a significant amount of bonds that mature every quarter. So the portfolio is laddered out all the way up to 6 years. In fact, we probably have about $1 billion or so that mature every given quarter. So that also shows the duration as time passes. Got it. And even though -- yes, Iâm sorry go ahead. Right, right. The reason I asked is that I noticed that the agency portion of the portfolio, which has the largest unrealized loss because the majority of 7.5 years and even though I know the total AFFS is under three. I didnât know that Men port of the portfolio, the longer into the curve, is something we are going to watch. Yes. That piece -- that portion of the portfolio is mostly agency pass-throughs. So we put the weighted average life of the instruments. It's a mix of 15-year and 30-year mortgage-backed securities. That has a slightly different basis than treasury. So that will be a function of where intermediate rates move as well as where the mortgage back to treasury basis moves as well. So we had some relief for that in the fourth quarter. If those trends continue, that would be a positive news for that. But again, it will all be subject to where the market sees the risks. Very good. And then following up on the technology commentary that you guys gave us, Ignacio, I think you said in your prepared remarks or actually in response to a question that Popular has traditionally been a leader in technology in Puerto Rico. So it's somewhat surprising that this overhaul is coming, but me as it is, were you guys seeing -- or are you seeing evidence that other entrants are making headway against your core customers and you're starting to lose some of these customers? Or what was the real -- or is that part of the reason for the big spend that's coming? No, I think that when I say we are a traditional [indiscernible] leader in the technology, that's true, but we feel the world is changing much faster. And we may have been a little bit behind where we normally would be on this kind of a curve. We haven't lost customers yet, but we are not going to wait to lose customers. We are seeing -- there are certain areas where you see more U.S. entrants, for example, credit cards, where you see more of the U.S. issuers coming in with features and different things that we may be a little bit behind, but really, we want to get ahead of this. We don't want to leave ourselves open to future digital entrants taking away our clients. So basically, we think -- we really think that if we offer a top-notch digital experience and you combine that with our branch network, and you combine that with the diverse services we offer a client that we have an unbeatable solution. If we fall in any of those areas, then we could become [indiscernible], and we are not about to let that happen. So yes, we know that technology is a tough game, and we may not be able to match the investments of some of the bigger huge banks. But we have to stay at least given our clients what they expect in today's world. And our clients in Puerto Rico are just like anywhere else. They expect a better digital experience, and they expect a more personalized digital experience. And we're going to work hard to give them that. To give some more color on Ignacio's comment, Gerard, when I talked about our data offered to our clients, I said it was market-leading, which it is. And I spoke about the back end, the architecture of it, we find ourselves wanting to roll out more things at a faster speed than our present architecture allows us to do. So again, what we're doing is doing a lot of work in the back end. The client will never even new. This was happening, but it will -- the client will feel it because the speed at which we'll be able to offer new things and more things will go up. So that is the kind of thing we're talking about. It is improving the core of our technology. And again, the client may not see that in their phone app but they'll see it in our capacity to offer them more personalized offerings for personalized services and new services faster than we can do today. Very good. And then, Lidio, you mentioned you gave us some insights into credit and credit obviously, has been strong for you folks and your peers. Two questions. One, you gave us some of the assumptions, I think, in the Moody's outlook on real GDP growth what kind of unemployment rates are you factoring in? I think you said they're constant, but what are those numbers? And two, are there any sectors within the portfolio that you're currently spending more time really focusing on just to make sure nothing gets tripped up if we go into some sort of shallow recession. We have on a yearly basis, you have on Page 13 of the deck, the assumptions for unemployment rates, also Puerto Rico and the U.S. under the baseline, stronger growth and recession scenarios. So I will leave you to look at those as to what's the second part of the question? I'm sorry, Gerard? That's okay. And -- and just what parts of the portfolio are you guys really focused on to make sure that if we do go into a shallow recession, you're prepared to handle it. I would say small business lending is an area of focus. I mean we continue to be pleased how the Popular has continued to behave post-pandemic or is an area where increasing interest rate inflationary pressures, increases in energy prices could have a potential higher impact than other sectors. I think it's important to highlight that one area where we see a lot of press in the U.S. in terms of office space, we don't have any significant exposure to the office space in Puerto Rico to the U.S. Thank you. The next question today is a follow-up from Alex Twerdahl from Piper Sandler. Please go ahead. Your line is now open. I just wanted to ask for the loan growth that you guys are seeing, what kind of yields new production is coming on in the various categories? Yes. I don't have that number right now, Alex. We can try to dig it out, but I don't have that off the top of my head or in my notes, my apologies. You can see that the overall yield of loans, the overall loan yield of our book did go up 31 basis points on [indiscernible] in the quarter. So obviously, we are originating our new [indiscernible] at higher rate, but I don't have the answer to your question. We will get back. Okay. Are you able to give us a little bit more color, like if you look at the commercial growth sort of the percentage or just a rough breakdown of what might be the larger corporate customer that's based off of [indiscernible] and we saw some press releases this quarter on sort of pricing that maybe we could apply to that in Puerto Rico versus what might be more tied to prime? Yes, the -- and Lidio, maybe correct me, the take-up of sulfur in Puerto Rico has been pretty limited -- pretty slow. So I think big picture assumptions for the moment, Alex, is that whatever part of our book is floating is still linked to the old floating rates. Again, the pickup of sulfur has been slow so far. Okay. And then I just wanted to clarify your comments on the timing for capital return. It sounded like you guys go through this process every year where you engage the Fed and then a quarter later or 4 months later, you windup actually telling us what you guys have all decided for the capital return. Is it the second half of this year that you gave the Fed? Or do you intend to have an announcement in the second half of the year. Yes. I think our plan would be to do both, we would engage the Fed at some point, but the announcement, I think when we talk about second half of the year would be an announcement. Okay. So you engage the Fed at some point in the next couple of months. And realistically, July, we could still, a expect a capital update. What we -- we will make the decision of what we want to do once we have clarity on the outlook for interest rates and the economy, Alex. So that is the starting point. So again, our guess is that, that point in time will come in the summer and that we ended up talking about the second half of the year. So that's the starting point. And from there, we would do our modeling and discuss the opportunities on the alternatives with our regulator, we would have to decide how we want to execute anything we want to execute. We want to revisit what has been our practice in the past of having very structured every January, we have an announcement, we may choose to change that moving forward. So we're going to -- again, the underlying thing we want to do that has not changed, which is to move in the direction of our Mainland peers as a buffer, but exactly how we execute that will be revalued and we may decide to execute in a different path than we did in the past, okay? So don't assume we will be back to January announcement and that's it for the year. Again, we may choose to manage our capital return to slightly different moving forward. If and when we choose to make a change, obviously, we will discuss over the market. Okay. But it is the same process that you've gone through. There's nothing changing about how often are the regularity that you would engage the Fed to include in this. And I guess the question that I got from a lot of investors after last quarter is why not go through the process as normal last year and then get approval but just say we are not going to implement it as quickly. Maybe we will wait and not do an ASR. But we have it and the Fed is comfortable with our capital levels and all these things that seem exceedingly healthy from the surface. You are describing some of the alternatives that we are considering as we revisit how we want to do this. I always caution everybody, when we speak about this, the Fed does not give conditional approvals to anything. They will only approve things when you request an approval and they will not approve things as long as things work out in the future this way. So again, we try to manage the Fed, the best way we can. I think over the last 4 or 5 years, we've been pretty effective in our dealing with the Fed, and we will try to continue that. But some banks manage it differently. Some banks have quarterly capital plans. I discussed with the Fed instead of a yearly capital plan, which has been our practice in the past. Again, we want to go and revisit all those alternatives, Alex, to be frank with you. So we will be doing that when we reengage. Again, we think what we did in the past has been pretty successful for us as far as dealing with the Fed. We will analyze if there is a path that is even better for us and for our shareholders moving forward. Thank you. The final question today is a follow-up question from Gerard Cassidy from RBC. Please go ahead. Your line is now open./ Thank you, Actually, I didn't pull myself out of the queue. I didn't understand the instructions. I'm also, thank you Carlos. That concludes today's question-and-answer session. So I'd like to pass the conference over to Ignacio Alvarez for any closing remarks. Please go ahead. Okay. Thank you for joining us today and for your questions. We look forward to updating you on our progress in April. Thank you.
EarningCall_1006	Good day, and thank you for standing by. Welcome to the A. O. Smith Corporation's Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Helen Gurholt. Ms. Gurholt, please go ahead. Good morning, and welcome to the A.O. Smith fourth quarter and full-year conference call. I'm Helen Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer; and Chuck Lauber, Chief Financial Officer. In order to provide improved transparency into the operating results of our business, we provided non-GAAP measures. Free cash flow is defined as cash from operations less capital expenditures. Adjusted earnings, adjusted earnings per share, adjusted segment earnings, and adjusted corporate expenses exclude the impact of non-operating, non-cash pension income and expenses, as well as legal judgment income and terminated acquisition-related expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our Web site. A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning's press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. We will be using slides as we move through today's call. You can access them on our Web site at investor.aosmith.com. Thank you, Helen, and good morning everyone. I'm on slide four and our full-year results. Our team delivered record-setting sales and year-over-year improvement in earnings on an adjusted basis despite lingering supply chain headwinds, inflation, and a significant U.S. wholesale residential channel inventory destocking activity that took place in the third quarter, and began to normalize in the fourth quarter. Residential industry volumes increased 15% in the fourth quarter compared to the third quarter. Despite the destocking activity, North America sales were up 11% compared to 2021 primarily due to inflationary pricing and strong demand for our commercial and residential boilers and water treatment products. Our Rest of World segment delivered consistent performance in 2022 despite headwinds in the economy and currency exchange. Segment operating margins improved 120 basis points driven by our China team improving their full-year operating margins to almost 11%. In India, our sales grew 28% in local currency in 2022, and continued to be profitable. As expected, we settled the majority of our pension liabilities in December of 2022, which resulted in a non-cash pre-tax expense of $417 million or $1.60 of EPS. This expense is excluded from adjusted earnings and adjusted EPS. With our divided and share repurchases, we returned $581 million of capital to shareholders. Please turn to slide five. Our Global A. O. Smith team delivered record sales of $3.8 billion in 2022, and adjusted EPS of $3.14, a 6% increase over 2021. We achieved this strong performance as a result of effective execution from our team. North America water heater sales grew 10%, in 2022, due to 2021 pricing actions implemented in response to rising material and logistic costs, and acquisition-related revenue that was partially offset by lower residential volumes. After two years of greater-than-average growth, residential unit industry demand decreased approximately 12% compared to 2021 primarily due to a wholesale channel inventory destocking that occurred during the second and third quarters. The order reduction we experienced from our customer was driven in part by our improved performance in delivering residential product and reducing our lead times. Commercial industry units decreased approximately 17% year-over-year. A large portion of the decrease was due to a continued weakness in electric products greater than 55 gallon, which was impacted by a regulatory change at the beginning of 2022. We don't expect that product category to rebound to pre-2022 levels. Despite the 2022 contraction in both the residential and commercial industries, we are pleased with our market share strength in both residential and commercial water heaters. Our North America boiler sales grew 28% driven by higher volumes and previously announced price increases to offset higher costs. Our supply chain improvement efforts allowed us to reduce our record backlog in the second-half of 2022. Our focus on innovation, efficiency in decarbonization contributed strong demand for our high-efficiency condensing boilers, particularly our Hellcat CREST boilers with O2 sensing technology. North America water treatment sales grew 10% in 2022 due to pricing actions and higher volumes, particularly in our dealer and specialty wholesale channel. Our strategy is to pursue this market with an omni-channel approach as we work to grow our share through product development and acquisition opportunities. We view our independent water quality dealers have been outperforming the market and gaining market share. In China, full-year sales decreased 5% in local currency compared to 2021 due to impacts from COVID-19-related disruptions. Our core water heating products performed well in a down market. Our water treatment business, comprised of residential, commercial, and filter replacement consumables grew nearly 4% in local currency, and now represents almost 40% of our overall business, with repeatable consumable filter sales representing over 25% of overall water treatment sales. For the year, operating margins in China were 10.7%. As a result of actions taken over the past several years to right-size the business and manage discretionary spending, China has achieved operating margins above 9% in each of the past seven quarters. I'm now on slide six. We released our third ESG report in December. We have made significant strides in our commitment to ESG, including progress towards our GHG emission reduction goal of 10% by 2025, preventing almost 500,000 metric tons of carbon emissions in 2021 through sales of our highly efficient water heaters and boilers, and WAVE verification, a process developed by The Water Council, as an initial step in creating a strategy to improve our water stewardship performance. ESG concepts are embedded within the foundation of our 149-year history. The ESG report demonstrates our commitment to our values of being a good citizen, a good place to work, emphasizing innovation, and preserving our good name, and achieving profitable growth. I will now turn the call over to Chuck who will provide more details on our full-year and fourth quarter performance. Thank you, Kevin. Good morning, everyone. I'm on slide seven. Full-year sales in North America segment rose to $2.8 billion, an 11% increase compared with 2021. Pricing actions, largely on water heaters, were partially offset by lower volumes of residential water heaters. Higher volumes of boilers and water treatment products also added to segment sales growth. Giant acquired in October, 2021, added incremental sales of $94 million. North America segment adjusted earnings, of $611 million, increased 5% compared with 2021. The earnings benefit of inflation-related price increases and higher volumes of boilers and water treatment products was partially offset by higher material and freight costs and lower residential water heater volumes. Adjusted operating margin of 21.7%, a decline of 120 basis points year-over-year, was driven by inflationary headwinds and volume-related production inefficiencies. We exited 2022 with our highest quarterly adjusted operating margins of the year at 23.3%. Moving to slide eight, Rest of the World segment sales, of $966 million, decreased 7% year-over-year and 2% in constant currency basis. Currency translation unfavorably impacted segment sales by approximately $49 million, $36 million of which impacted China sales. Our sales decrease was primarily driven by lower sales in China as consumer demand was negatively impacted by COVID-19-related restrictions. India sales grew 28% in local currency in 2022, compared to 2021, as we continued to outperform the market. Rest of the World segment earnings, of $96 million, increased 5% compared to segment earnings in 2021. In China, the impact from lower volumes was more than offset by lower selling, advertising, and incentive expenses. Segment operating margin improved to 10%, an increase of 120 basis points compared to 2021, primarily as a result of improved management of discretionary spending in China. Please turn to slide nine. Turning to fourth quarter performance, we delivered sales of $936 million in the fourth quarter of 2022, down 6% year-over-year, driven by lower residential water heater volumes in North America and lower consumer demand in China that more than offset inflation-related pricing actions. Adjusted earnings in the fourth quarter were $0.86 per share, compared to adjusted earnings of $0.85 per share in the fourth quarter of 2021. Please turn to slide 10. Fourth quarter sales in North America segment were $692 million, a 3% decrease compared to record sales in the fourth quarter of 2021. We saw quarter-over-quarter improvement of residential water heater demand; however, water heater volumes were still below the record industry levels in the fourth quarter of 2021. Our fourth quarter sales benefited from pricing actions and stronger boiler sales growth of 36% driven by backlog reduction. North America segment adjusted earnings, of $161 million, decreased slightly compared with 2021. The earnings benefit of inflation-related price increases, higher boiler volumes, and lower steel costs was offset by lower residential water heater volumes. And improved price-cost relationship resulted in higher adjusted segment operating margin of 23.3% compared with the 2021 adjusted segment margin of 23%. Moving to slide 11, fourth quarter, rest of the world segment sale of $250 million decreased 13% year-over-year, primarily driven by the impacts of unfavorable currency translation and lower consumer demand in China due to COVID-19 related restrictions. Currency translation unfavorably impacted China sales by approximately $24 million. In local currency, China sales decreased approximately 7% year-over-year. India sales grew 16% in local currency in 2022 compared to 2021. Rest of the world segment earnings was $32 million, was slightly higher than Q4 2021 segment earnings. In China, lower incentives and selling expenses offset lower volumes and currency translation headwinds resulting in segment operating margin of 12.7%, a significant improvement over segment operating margin of 10.6% in the fourth quarter of 2021. Please turn to slide 12. We generated free cash flow of $321 million during 2022; lower than in 2021 as higher adjusted earnings were offset by lower customer deposits in China, higher 2021 incentive payments made in 2022. And working capital cash outlays primarily related to higher inventory that more than offset the lower accounts receivable balances. Our cash balance totaled $482 million at the end of December. And our net cash position was $137 million. Our leverage ratio was 16.5% as measured by total debt to total to capital. Now turning to slide 13, in addition to returning capital to shareholders, we continue to see opportunities for organic growth, innovation, and new product development across all of our product line geographies. We continue to target strategic acquisitions that meet our financial metrics that are accretive to earnings, in the first year, return across the capital in three years. The strength of our balance sheet allows us to pursue a strategic acquisition even in times of economic uncertainty. Earlier this month, our Board approved their next quarterly dividend of $0.30 per share. We have increased our dividend for 30 consecutive years. We repurchased approximately 6.6 million shares of common stock in 2022 for a total of $404 million. The strength of our balance sheet also allows us to maintain our strong track record of delivering returns to shareholders. Over the past two years, we have returned $1 billion to shareholders through our dividend share repurchases. Please turn to slide 14, and our 2023 earnings guidance and outlook. As previously discussed, we terminated our defined benefit pension plan at the end of 2021. The termination followed the strategy and measured glide path to derisk our fully funded exposure to pension liability. The plan which was previously sunset for benefits earned in December 31, 2014 represented over 95% of the company's pension plan liability. The terminated plan's pension liability was annuitized in 2022. The pension settlement, which we completed in the fourth quarter, accelerated the recognition of $417 million of non-cash pre-tax pension expenses. Tax benefits associated with the pension settlement were $168 million. And include amounts recorded at historical tax rates, and results in an after tax EPS impact of $1.60. We are pleased to introduce our 2023 outlook with an expected EPS range of $3.15 and $3.45 per share. The midpoint of our EPS range represents an increase of 5% compared with 2022 adjusted EPS. Our outlook is based on a number of key assumptions including our guidance assumes that steel prices in 2023 on an annual basis will improve approximately 40% to 45% compared to 2022 including a sequential improvement of approximately 20% to 25% from the fourth quarter of 2022 to the first quarter of 2023. We have seen a flattening of the steel index. And therefore, our outlook does not project a further meaningful sequential reduction in steel costs through 2023. Regarding other costs outside of steel, we have generally seen flattening in cost at elevated levels. While we do expect a shift in buying power to move from neutral towards a buyers market as we progress through the year, our outlook does not assume significant improvement in non-steel material costs in 2023. We saw continued improvement in our supply chain in the second half of 2022. While challenges still persist, disruptions are limited. We remain in close contact with our suppliers and logistics providers to manage and resolve supply chain issues as they arise. We expect to generate strong free cash flows between $550 million and $600 million. For the year, CapEx should be between $70 million and $75 million. Corporate and other expenses are expected to be approximately $55 million. Our effective tax rate is estimated to be approximately 24%. And we expect to repurchase approximately $200 million of our shares of stock resulting in outstanding diluted shares of 150 million at the end of 2023. I'll now turn the call back over to Kevin who will provide more color on our key markets and top line growth outlook and segment expectations for 2023 staying on slide 14. Kevin? Thank you, Chuck. We project 2023 sales to be approximately flat to 2022 at the midpoint with a range of plus or minus 3%, which includes the following assumptions. We'll be the majority of our customers exited 2022 with near normal inventory levels. While we believe that new home construction remains a deficit, we expect it will be a headwind in 2023. Therefore we project that 2023 residential industry unit volumes will be down approximately 2% to 5% compared to last year. We project commercial water heater industry volumes to be flat to slightly up as supply chain constraints ease the market correction related to the regulatory change in commercial electric water heaters greater than 55 gallons is largely behind us. In China, while we expect there could be COVID-19 related surges, related to Chinese New Year travel, we see the recent lifting of the Zero COVID Policy as a positive step to improve the economic environment. We believe they will take time the economy in China to improve and then weaken consumer confidence and a challenged real estate and housing market, we project that our sales in China will go 3% to 5% of local currency in 2023. Our guidance assumes volumes in China improved sequentially throughout the year. Our forecast assumes that the currency translation impact on sales will be similar to 2022. We expect our North America boiler sales will increase approximately 10% to 12% in 2023. Our expectations are driven by an industry growth of 3% to 4%. The transition to higher energy efficient boilers will continue particularly as commercial buildings improve their overall carbon footprint. A year after launch, our CREST commercial condensing boiler with Hellcat Technology is quickly becoming the industry standard. We expect to see continued benefits from pricing actions implemented in 2022. Our boiler backlogs are at normal levels as we entered 2023. We project approximately 5% to 7% growth in sales of North America water treatment products, which is lower than our growth expectation of 10% per year, largely as a result of a reduced backlog as we exited 2022. We will have pricing benefits and the mega trends of healthy and safe drinking water, as well as reduction of single use plastic bottles will continue to drive consumer demand for our products. Based on these factors, we expect our North America's second largest will be approximately 23% and Rest of World segment margins to be approximately 10%. Please turn to slide 15. We remain focused on our key strategic priorities to advance our position as a leader in heating and treating water around the world. Those priorities are, expand and enhance our high efficiency product portfolio, including heat pumps for space and water heating, expand our global water treatment capabilities by investing in technologies, people and distribution, deploy capital effectively by investing in ourselves, acquisitions, and returning capital to shareholders. As we enter 2023, there are economic uncertainties ahead of us. However, there are positives. We believe the 2022 inventory adjustments in the wholesale residential market are behind us. We expect more normalized unit volumes in 2023. Our fourth quarter 2022 North America adjusted operating margin, of 23.3%, improved over previous quarters as we exit the year with a favorable price-cost relationship and our plants are running more efficiently after the third quarter volume adjustments. In China, the lifting of Zero-COVID policy is a positive step to an improved economic environment. In 2023, we expect a strong rebound in free cash flow as China emerges from COVID-19-related disruptions and a dedicated focus on inventory reduction across our North American operations. We remain focused on servicing our customers. Our strong brands across the portfolio, combined with technology-driven innovation and new product development will enhance our market leadership. We are confident in our ability to capitalize on opportunities as we continue to execute our strategy. Good morning. So, just touching on the outlook for residential water heaters to be down to 2% to 5% this year, can you talk about how much of that is related to new home [source] [Ph] replacement, how are you seeing in -- about proactive replacement this year? And then impact as we start to lap the housing downturn? Thanks. Good morning, Saree. This is Chuck. So, as we're looking at next year, I mean we're coming off a year where we're down about 12% on the residential market with the inventory correction. Housing, we expect a headwind in housing of maybe 15% to 20%. Just -- we've got an 80% to 85% replacement market, so housing is in that 15% to 20% range, which will be a headwind. And that's kind of how you get down to the 2% down. Where we're looking at for proactive replacement, it's pretty strong on proactive replacement going into next year. We saw that tick up, historically proactive replacement as we measure it through a third-party survey, runs 20% to 25%. During the past couple years it's been in that 30% to 35%. And our last survey still has it above 30%. So, we're still projecting, going into next year, a fairly strong proactive replacement portion of the replacement market. Great. And then, I guess, I know you guys don't like to talk pricing a lot, but just on the residential water heater pricing in the retail channel, do you expect to see prices decline for the indexed contracts? And if so, how do you just think about the balance in pricing in retail versus the wholesale channel? Well, hi. This is Kevin. When you look at both those channels, one, they're -- they are two different business models, but they compete for a lot of the same customers. And traditionally, you're going to have some conflicts between the channels of a periodic -- it's kind of regional. But as we look at it and as we -- as value at our pricing structure to both channels, we feel that they're going to be competitive. Historically, at how we manager our pricing, hasn't changed. So, again, we look at that both channels will be in the market competing at an equal level. So, that's kind of where we're at right now, and we'll see how things play out the rest of the year. Thank you. [Operator Instructions] Our next question will come from Michael Halloran of Baird. Your line is open. Hello, Mr. Halloran, if your line is mute, please unmute your line. Yes. Thanks, everyone. Appreciate the time. So, first, on the guide and how you're thinking about sequential, couple things. First, is the embedded assumption, relatively normal seasonal patterns as you work through the year? And then secondarily, when we think about kind of 1H load for second-half load, obviously the year-over-year comps get a lot easier in the back-half of the year. So, maybe talk about how you think growth cadences as we look through the year? Sure, Mike. We have it laid out in our outlook to be pretty much back to normal. When you look at the residential volumes, it's usually 52%-48%; front-half of the year, 52%, back-half of the year, 48%. And we believe it's going to get back to that normal cadence. Boilers, typically strongest in third quarter, so we have it laid out a bit like that, similar to prior cadence. China, we've got China starting out a bit slow with the COVID disruptions. As you know, the first quarter is always a challenge with the Chinese festival for volumes. And we just got -- we got China a little bit lighter in the first quarter, but improving as we go through the year. And normal cadence again on China as fourth, the strongest, we would expect improvement on the COVID situation about fourth quarter, back to our normal routine of that being a strong retail quarter for us. And might as well stay on China, then maybe just talk about how things are tracking from a competitive dynamic, share component to it, the market share component to it, but also how the high end of the market is performing versus the rest of the market? Feels like things are stable, but any commentary on the competitive landscape would be appreciated? Yes, Mike, hi, it's Kevin here. Share is always a difficult when we talked about how the omni-channel hedges go in together, we don't have great visibility to all the different channels. But what I would tell you, that we believe we're happy with our sales, we're happy with our average pricing. We believe we're getting our fair share of the market and continue to get that introducing new products, as we always do, and bringing products to the market that consumers are willing to pay for. When it comes to the high end of the market, it continues to have that sleeve that makes sense, and it keeps ticking up a little bit. But again, it's still on a smaller base. We hope as we get through the Zero-COVID lifting and the consumer activity grows in the market, that will improve. Consumers, right now in China, are -- so, our record is -- are saving the highest rate that they have ever. So, we look at there could be some pent up demand as we go forward. And again, just looking at China in general, there is some discussions about some consumer stimulus by the government; nothing specific today. Thanks for helping out some of the housing sectors to build up some of their inventory. So, that there's a lot of positives, but again I think it will take some time as the consumer recovers from three years of, basically, inactivity and lockdown, and starts to get more comfortable. And that's why, as Chuck pointed out, we're looking at sequential improvement through the year, but there's more positives than we've seen in a long time in our China market. And just to add to that, I -- we said it in our prepared remarks, we're really pleased with the consistency, as you noted, Mike, of our performance quarter-over-quarter, that the discipline towards managing our discretionary spend where our outlook for '23 has us back in a growth mode on constant currency. So, we're pleased to be -- kind of hopefully turning a corner, growing in that 3% to 5% in local currency. Yes, so I just want to come back on price. I think your comment, Kevin, was both channels are going to be competitive. But formulaically, I think you go negative on price with your material price formulas on the DIY side. So, I'm wondering if your comment implies that there's some pricing pressure on the wholesale side or do we stick more there? And if we do, what the upside is to maybe North America margins given the fall-off in steel? Thanks. Well, steel has stabilized now for a while. So, and through the process it -- there's also been many non-steel related cost that as Chuck had mentioned in our remarks as stabilized. But, they haven't come down. So, we have made the appropriate adjustments there in both channels. And as we continue to reiterate, we are going to keep the channels competitive. Again, historically as I look back over the last year, we are managing our business as we have in the past. And we are a similar view as we go forward. So, our goal is to remain competitive in both channels. We do a lot of business with customers in both channels and that's our commitment. And again, we look at more of stabilization as we go forward since it looks like materials and steel have kind of plateaued and kind of stabilized. So, don't see a competitive issue between the channels or as we go forward into 2023. There is always some historic price paid. But, it's nothing different than we have seen in the past. Yes. I mean I understand that the steel stabilization. But, I think you mentioned 40% to 45% kind of decline. And I guess relative to past cycles that's a much bigger kind of increase and then decrease. So, I am just wondering if the behaviors are any different. Yes. I mean that's decline, I think I'll just going comment that if you would have stayed at that the peak, we would have probably been really challenged on the margin profile in North America. But what happened is we kind of grew into a little better margin profile as steel retreated a bit. And, we come out of the fourth quarter and steel does take another tick down maybe 20% to 25% in Q1. And then kind of flattens out. So, we had quite a bit of headwind in '22 on North American margin because of some of the higher steel cost earlier in the year. Okay. And then, just one last one, I think the last couple of years you signed up for $400 million buyback. I think you are stepping it down to $200 million. And just anything that informs the kind of the lower buyback versus the past couple of years? Yes. I mean where we are looking at is and we committed to $200 million as a buyback. And we are a little bit shy of our cash conversion target of 100% cash conversion in 2022, did that consciously, built inventories, worked our backlogs down. Pleased with that, now we will be working on reducing inventories in the next year. But as we entered 2023, we paid $200 million as the target that we are committed to. We are going to looking at kind of how '23 rolls out from really an acquisition perspective as we go through the year. We may revisit that as we go through the year. And as we work down inventories and see our cash potentially grow a bit. But, we are going to revisit it as we go through the year with the opportunities we think still to be out there on M&A. Hi, good morning. This is Will Jellison on Matt Summerville. I wanted to ask both questions today about capital allocation priorities. And starting off with organic growth, I was wondering if you can provide any more insight into what sorts of capital expenditure projects and investments you are considering making in 2023? And how those support the business and its growth moving forward? Yes. On the organic growth I mean just a couple of comments around that. So, we always invest in innovation, product development. From a capital perspective, some of those support new product developments. I would say when you get into the developments of the heat pumps, some of the other growth categories where we might have to support that. And when we break down the capital, we look at it from a growth perspective maintenance as well, we will be at some pretty large facilities that we have to invest back in. And there is also a pretty large cost reduction component as we invest in automation, new technologies, and so forth and efficiencies in our factory. So, those are three buckets that I would say that there is no specific major expense outside our normal. But, there is a consistent spend in all three categories under company. Understood, okay. And then pivoting to capital allocation conversation to acquisitions, can you speak to actionability of the pipeline? What kind of things you are observing in the market for potential targets out there? And what's your overall thought is for how many of those could be acted upon in 2023. Let's just talk about the environment, which is a bit -- is a bit strange right now, what the, some of the potential higher interest rates to talk of Recession and so forth. And what I can tell you that multiples haven't really changed, maybe ticked down a little bit, but there's a lot of wait and see approach out there with I would say, targets. So, we're continuing to stay close to our potential targets and stay active in the pipeline. And we look at this as an opportunity as you get an uncertain times with our balance sheet. These are nice opportunities, but again, needs to play out a bit, we need to get through some of the uncertainty. But we feel good about our pipeline, we feel good about the companies that are in it. And we're going to continue to work on driving some of those closures. As far as actionability, it always depends on the person saying yes, as we go forward, and -- we'll keep working through there, but we've made small acquisitions each still last few years. Hopefully, we'll be able to bring a couple of those across the finish line in 2023. Thank you. And one moment please for our next question. And our next question will come from Susan Maklari of Goldman Sachs. Your line is open. Yes, I guess my first question, I would like to go back to the North America margin outlook for 2023. And it's going to help us walk through the trajectory of the margin throughout the year, obviously, we're going to have water heater volumes, probably deleveraging in the first half. And then coming back, obviously, gradually throughout the year, but also, if you think about the price cost, you mentioned that nonsterile category should improve through 2023. So, is it fair to expect maybe a gradual ramp in the margins throughout the year? Yes, first to comment on Q4, we're really pleased where we came up in Q4 in North American margins is 23.3. And I do want to kind of call out the fact that we did have some pretty strong boiler volumes in that quarter. So, that's, that's coming off, we're pleased where we're coming off, but we got some help on some higher margin boiler, commercial boiler, product sales that helped us come out of that. So, the gains for the year on the margins is, it possibly expands a little bit, but we've got our outlook fairly even through the year, the way the balancing kind of occurs. And I talked a little bit earlier on the cadence that it's 52:48 for residential, a little lighter, we have boilers that are usually strongest in the third quarter. So, it's fairly smooth for the year we don't have non-steel costs in our assumption and outlook, coming down a great deal at the back half of the year, potential opportunity as we look at it, but we just, we see some opportunities, but we haven't got much of that opportunity baked into our outlook. Got you. That's a good color there. And then my follow-up on the boiler sales guidance for '23, a 10% to 12% sales growth, that's impressive considering the significant growth you've seen in '22. Can you expand maybe on the drivers of the growth there or volumes versus price? And may be the initiative, supporting industry volume growth, considering the weakening that we've seen in the commercial or non-residential indicators over the span of the last few months? Yes, I mean, we did had some great growth in 2022, on the boiler side, and again particularly in the fourth quarter was helped by drawing down our backlogs which we exited the year pretty normal, in that 10% to 12% growth that we see for next year, at 50% to 60% of that is price. So, carry over prices is a little over half of that 10% to 12%. The rest of the growth is on, it's on volume. Yes, I would just maybe add on to that. We came up some strong growth again, a lot of that had to do with bringing the backlog down, but our orders remain pretty stable, quoting activity in the market is still strong, institutional education, so we feel there's still a positive momentum in the Boiler segment in 2023. And so far as we've seen orders come in over the last month, that's indicating that that's where we should be again being stable. And what's really great is now our lead times are back to normal, we're able to get product out the door in a timely fashion. So, overall we still feel really good about the boiler market. And the whole commercial side of the business tends to lag residential. So, 2023 still seems like could be a solid year for our boilers business. Yes, good morning everyone. My first question is just with respect to the supply chain and looking back on 2022, is there any way to estimate what supply chain disruptions cost you in 2022 in terms of revenue and EBIT? And does it become an incremental positive in '23? I mean, you mentioned the boiler backlogs got normalized, but I'm just wondering if there's any kind of a throw forward benefit into 2023 from that normalization. From a volume perspective, I would say no, we had some, starts and stops when you have some interruptions, particularly the front half of the year. But we've made all that up, we're back to normal these times on the residential side, we're back to a fairly normal backlog on boiler side and backlog is pretty normal on the North American Water Treatment side, too. So, don't think on a volume side, from a cost perspective a little bit harder to quantify some of those disruptions we saw in the fourth quarter an improvement in our plants operating efficiencies, and that's a result of less disruption in volume that we saw in Q3 and a bit on just more normal cadence to operating volumes. Yes, I'll just add on to that. All of our plans throughout the year, really, supply chain did improved throughout the year, and we only had sporadic outages that really didn't impact our productivity all that much. The only exception was in China towards the fourth quarter, but overall supply chain is really kind of very much stabilized. And we're chasing one and two items now, not the entire portfolio. Okay. And just with respect to the '22 impact, there isn't a way to sort of come up with some kind of an estimate on what it might have cost in terms of revenues, realize you're saying the 2023 impact is going to be de minimis, but the 2022 any? I can tell you about 2022 is Q3 was a tough quarter for us on residential water heater side, just because of the drastic drop in volume. But overall, we were building up those efficiencies. I don't see them being exceptionally different in 2023. Supply chain in us catching up on backlog carrying a little more inventory, it actually helped volumes a little bit on the boiler and water treatment side in 2022 because we couldn't work our backlog down with better supply chain. Okay, that's interesting. My second question is on China, and obviously a good quarter with Rest of the World margins at 12.7%. With China local currency sales down 4%, too, which is good, obviously a lot of work being done on managing costs. Can you just talk about the margin opportunity in China over maybe the next 12, 18, 24 months? And what specific drivers would be and I'm guessing with progress in India, and maybe some of these other smaller lines within ROW, it looks like you're now back to the kind of that 12 and you're approaching anyway, the 12 to high 13s range that you last achieved in 2013, 2018, is there further upside or changes in price point mix and regional market mix and level of competition just created structural limitations that are going to hold you to those levels again? Well, I'll tell you that a lot of variables right there. But I will tell you that from our perspective, thank you for the question by the way, just kidding with you. I will tell you, the number one is going to be volume. As we start to lift out of that Zero COVID. And the consumer activity increases and durable goods become more important as they get through all the restaurants and entertainment they're going to do in the first quarter now that they're out about. It's going to be volume related. And we've been volume challenged now for three years there. And we're positioned really well from a structural standpoint. But volume is new products, but it will come down to that consumer getting back in the market and feeling comfortable to start investing back in their homes and buying new home. So, from my perspective, it's one variable is going to be really volume, the rest of the business is really positioned well. Thank you. And one moment please for our next question. And our next question will come from Lawrence De Maria of William Blair. Your line is open. Hey, thanks. Good morning, everybody. Just to follow-up in North American margin outlook, could you maybe distill it down into, what's driving it for '23, is essentially the positive carryover price and benefits of the exiting lower steel costs. Anything else in there, maybe mix and then related to that, how would you frame the downside risks to margins in '23 North America based on potential for a price concessions and is there much pushback yet? Thanks. Well, so our outlook -- and you'll notice we didn't provide a range in North America margins for next year, we've had 23%, just as kind of a midpoint as a point estimate. We feel pretty comfortable to managing to that 23%, carryover pricing, there'll be some but not a great deal of carryover pricing in the water heater side next year, we've got our material costs holding fairly and resilient going into next year. Conversion costs, we expect the plants to operate a little more smoothly, but just embedded in that our higher operating costs overall. So, the biggest puts and takes are we expect, we expect to continue to have a reasonable relationship on the price cost relationship for North America water heaters, we have had some carryover pricing in other parts of our business, like boilers and water treatment in North America. Okay, that's helpful. Thank you. And then if I could just add one more then, the 5% to 7% water treatment growth, what's really underpinning that, it sounded like in your prepared comments, it's mostly price. But given the weakness in residential markets, just kind of curious how to build up their works? You are correct. It is mostly price going into next year. Again a bit like the boiler side of the business, we brought our backlogs down, we saw a bit of inventory adjustment in the channel on the water treatment side of the business in 2022. So, next year, I mean, we certainly, we have confidence in the underlying trends in North America water treatment, but most of the volume next year is driven by price. And we could potentially see some pressure on consumer spending as we head into 2023. Can you give a little more color into how you're thinking about the commercial water heater market in '23? I know you mentioned flattop and regulatory overhang, mostly behind you in electric commercial water heaters, maybe sort of what's going on electric versus gas, what's your channel partners are telling you I think you answered about the commercial markets overall, hanging in there, but any more color would be helpful. Again, we have a flat to slightly up or, we still have a lead times that are a little bit more extended than we'd like. So, we normally like to be around 15 days, we're around 25. We believe that the gas market and it's just, there're some inventory deficits out there, there's still some upside on some replacement. So, we look at the market is just artificially, 17% was just artificial, because of the greater the 55 gallon. But underneath that, the market was down mid-single-digits. And that was with a supply chain issue and components and it's going to normalize and we see it being slightly positive as we go through the year, particularly on the gas side of the commercial business. Helpful. And then I know you introduced the Voltex heat pump in Q3, can you talk about your early penetration into the market with that particular heat pump and I know heat pump is still a small part of your business, but how might they become a factor later in '23 and '24 as IRA implications also impact the business? Yes, again, you're looking at it is, as I talked about, one of our priorities is certainly on the heat pump side of the business is both residential and commercial. And you are right, residential heat pumps represent about 2% of the entire market today. It's got a really nice growth rate of 35% to 40%. And that's a positive trend, but it's going to take some time to move forward. There's some upfront costs to this that are expensive. There's some parts of the installation that are a little more difficult than the normal replacement but if you look out forward, a heat pump will become a bigger part of our commercial and residential portfolio. So that that's going to move forward, again, it's not going to go at the pace where it takes over the market next year or two, but long-term it's one of the best value propositions. It's got a great decarbonization message. It's been promoted by a number of states. And of course, when you look at the Inflation Reduction Act that's still working its way out, but there'll be a component there that will hopefully help and provide some stimulus as well. So, overall, and then I would tell you, our Voltex has been out a few months. It's done quite well, but it's a little early, we just feel real good about the UF of greater than four and the different features and benefits that it brings to the market to zero clearance. It's a terrific product that can go into just about any application that it needs to. And so far it's been received really well. But again, heat pumps in the early stages, but it will continue to grow at a greater accelerated rate year-over-year. Thank you. This will end the Q&A portion of the conference. I would now like to turn the conference back to Ms. Helen Gurholt for closing remarks. Thank you everyone for joining us today. Let me conclude by reminding you that our Global A. O. Smith team delivered record sales and strong adjusted earnings in 2022. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at three conferences this quarter. Citi on February 21, Loop on March 14, and UBS on March 23. Thank you and enjoy the rest of your day.
EarningCall_1007	Good morning and welcome to the ADM Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for todayâs call, Megan Britt, Vice President, Investor Relations for ADM. Ms. Britt, you may begin. Thank you. Hello and welcome to the fourth quarter earnings webcast for ADM. Starting tomorrow, a replay of this webcast will be available on our Investor Relations website. Please turn to Slide 2, which says that some of our comments and materials constitute forward-looking statements that reflect managementâs current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These statements and materials are based on many assumptions and factors that are subject to risks and uncertainties. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in the presentation. To the extent permitted, under applicable law, ADM assumes no obligation to update any forward-looking statements as a result of new information or future events. On todayâs webcast, our Chairman and Chief Executive Officer, Juan Luciano, will discuss our full year accomplishments and share detail on our priorities for 2023. Our Chief Financial Officer, Vikram Luthar, will review the drivers of our financial performance at the segment level and review our cash generation and capital allocation results. Juan will have closing remarks regarding our planning framework for 2023 and then he and Vikram will take your questions. Thank you, Megan. This morning, we reported very strong fourth quarter adjusted earnings per share of $1.93. Adjusted segment operating profit was $1.7 billion. Our full year adjusted EPS of $7.85, adjusted segment operating profit of $6.6 billion, and trailing fourth quarter average adjusted ROIC of 13.6% demonstrate once again the great work of our global team of dedicated colleagues who manage unprecedented market disruptions to deliver an outstanding year. Our full year operating cash flow before working capital was $5.3 billion. This strong cash flow and the disciplined management of our balance sheet allow us to continue to reinvest in our business, with $1.3 billion in capital expenditures and return cash to shareholders. In total, we returned $2.3 billion to our shareholders in the forms of dividends and share repurchases in 2022. Next slide, please. With the expectation of continued strong cash flow, today, we are announcing a 12.5% increase in our quarterly dividend to $0.45 per share. We are proud of our record of 91 years of uninterrupted dividends and 50 consecutive years of annual dividend increases. And Iâd like to thank our shareholders for their continued support of ADM. Next slide, please. When I examine 2022, our ability to drive structural growth in earnings and improvement in ROIC was supported by key strategic accomplishments across the enterprise, particularly the progress we made on our productivity and innovation objectives. Our productivity work in 2022 included enhancing our operational resilience, including through stabilizing our plant operations and streamlining our operating systems. In order to meet growing customer demand and drive efficiencies, we delivered multiple projects to enhance our operational footprint, from modernization to improving and scheduled downtime to capacity expansions. We completed our Marshall, Minnesota modernization, opened a new mill house in Clinton, completed our Quincy refinery expansion and improved output and yields at our Rondonopolis diesel plant in Brazil. We also continued to optimize our North American milling footprint. As you know, we also introduced a new $1 billion challenge in 2022. There is no clearer demonstration of how our colleagues and culture are driving returns than the fact that thousands of ADM team members from around the globe took the initiative, step up and identified opportunities that unlocked more than $1.6 billion in cash in 2022. On innovation, our accomplishments include a focus on capturing the benefits of organic growth investments and M&A as we continue to get closer to our customers and extend our capabilities to meet growing global demand for our products. Our Nutrition business continued to outpace the industry, with 18% constant currency revenue growth for the full year. We delivered an impressive 26% in year-over-year revenue growth in BioSolutions. The portfolio of acquisitions we made in the prior year continued to deliver OP above our financial projections and we advanced targeted production capacity expansions to meet growing customer demand. We announced expansions of our alternative protein capabilities in Decatur, Illinois, and starch production in Marshall, Minnesota. We completed our alternative protein expansion in Serbia and are able to launch our expanded probiotic capacity in Valencia, Spain. And we continue to expect our joint venture crush and refining facility in North Dakota to be operational by this yearâs harvest. Slide 6 please. Now letâs look ahead. We have a robust plan for driving enduring value creation in 2023 and beyond. In productivity, our work has a common theme, changing the way we work by standardizing, digitizing and automating our manufacturing plants and our offices alike. I previously mentioned our successful Marshall modernization. That was the blueprint for our wider work to unlock value across our production footprint through enhanced automation, more sophisticated control systems and the increased use of analytics. We have now approved the scope for the first 2 years of the program, encompassing 18 manufacturing facilities. We continue to expect double-digit returns from this important initiative. And we are continuing to advance 1ADM, which is enabling us to improve our processes and expand capabilities across the value chain. 2022 was an important year for our 1ADM business transformation. We completed several rollouts and we are seeing benefits in areas ranging from indirect procurement to go-to-market strategies to grain merchandising. In 2023, we will continue to expand the breadth and scope of this work, which is empowering our businesses to deliver profitable revenue growth and higher margins. Next, we are focused on maintaining our structural growth momentum via our innovation work. As you might recall, we have spoken in the past about our strategic growth platforms: sustainability, differentiated grain, alternative proteins, BioSolutions, microbial solutions and microbiome modification. These growth opportunities go through a natural evolution. When new, we launch them at the corporate level. As they mature, they become more embedded in our businesses. Differentiated grain is now firm part of our Ag Services and Oilseeds segments everyday work. BioSolutions is growing within carbohydrate solutions. Alternative proteins and microbiome are pillars of nutrition. With these efforts maturing in the businesses, we are able to focus on other opportunities. One of the most important is decarbonization, which is a critical component of our sustainability growth platform and is driving the evolution of our carbohydrate solutions business. Our goal is to reduce the carbon intensity of our assets and value chain in order to be the preferred partner in low-carbon intensity feedstocks for a growing demand base. We have made several announcements to mark milestones towards this goal in recent years, including our regenerative agriculture efforts, which enrolled 1 million unique acres over the past year; our Strive 35 goals; our initiatives to connect and expand our carbon capture and storage capabilities; and our heat and energy project indicator. We are looking at multiple other pathways to reducing our carbon intensity, like more sustainable energy sources for our facilities. And our efforts arenât just in the U.S. We have plans for other regions as well, including some EMEA projects we hope to speak about in the future. All of these projects contribute to our ability to offer low carbon intensity feedstocks and that is allowing us to continue to advance our work to transition our dry mills to produce sustainable aviation fuel; help scale up the scaled food products with new sustainable attributes, like the ingredients we will sell to Pepsi from the regenerative agriculture agreement we announced last year, and propelled the expansion of BioSolutions with joint ventures like with LG Chem. And even as we advance our decarbonization plan, we are always looking at new ways to help solve our worldâs challenges for food security, health and well-being and sustainability. For example, we are continuing to explore opportunities around precision fermentation, which we used to call microbial solutions, in which microbes rapidly grown in fermenters fed by dextrose, transform the sugars into a wide variety of products for food, feed and fiber. Thatâs a longer term horizon for ADM, but it gives us a hint of the kind of opportunities we see in the years ahead. Thank you, Juan. Please turn to Slide 7. The Ag Services and Oilseeds team capped off an outstanding year with substantially higher year-over-year results in Q4. Ag Services results were higher than the fourth quarter of 2021. Low water conditions reduced North American export volumes, partially offset by the South American team, which executed well to deliver higher margins and volumes. Global trade results were lower than the strong fourth quarter of 2021 with lower ocean freight results partially offset by higher results in EMEA origination and destination marketing. The business benefited from a $110 million legal recovery related to the 2019 and 2020 closure of the Reserve Louisiana Export facility. Crushing results were more than double those of the prior year period. In North America, strong export volumes for soybean meal and growing domestic demand for renewable diesel contributed to strong margins. In EMEA, oil demand powered strong rapeseed margins more than offsetting higher energy costs compared to the prior year. Expanding margins drove negative timing impacts in the quarter of approximately $40 million. RPO results were significantly higher year-over-year as the business continued to execute well to meet demand for food oil, renewable diesel in the U.S. and biodiesel globally. Equity earnings from Wilmar were much higher versus the fourth quarter of 2021. Looking ahead, we expect AS&O results for Q1 to remain strong, similar to last yearâs very strong quarter led by continued strength in crush margins and RPO. Ag Services is likely to be lower year-over-year, particularly in light of very strong global trade results in the prior year quarter. Slide 8, please. Carbohydrate Solutions had a strong 2022, with full year results higher than 2021. For the quarter, results were substantially lower than the fourth quarter of 2021 due to pressured industry ethanol margins. The starches and sweeteners sub-segment, which includes ethanol production from our wet mills, delivered much higher year-over-year results. The North America business delivered solid volumes and strong margins in both starches and sweeteners, partially offsetting lower ethanol margins. The EMEA team effectively managed risk and delivered improved results on better margins in a continued dynamic environment. The global wheat milling business delivered higher margins driven by solid customer demand. Vantage Corn Processors results were substantially lower as higher ethanol inventory levels pressured margins especially compared to the very strong margin environment in the fourth quarter of 2021. Looking at the first quarter for Carbohydrate Solutions, we expect continued solid demand and strong margins for starches, sweeteners and wheat flour. Ethanol margins are currently pressured due to high industry inventory levels. If industry stocks come back down, results for the quarter could be similar to Q1 of 2022. If margins remain pressured, results would likely be lower. On Slide 9, the Nutrition business continued its strong growth trajectory in 2022. ADM demonstrated that it remains the provider of choice in Nutrition for systems as our growing pipeline and continued strong win rates delivered full year revenue growth of 18% on a constant currency basis. The business continued to outperform industry growth levels and delivered 11% higher profits for the full year on a constant currency basis. For the fourth quarter, revenues grew 11% on a constant currency basis. Q4 operating profits were significantly lower than the prior year quarters. Human Nutrition results were lower than those of the fourth quarter of 2021. Flavors results were similar to the prior year as strong revenue growth helped offset demand fulfillment challenges. Specialty Ingredients continued to see strong demand for its product portfolio, including plant-based proteins, offset by inventory adjustments. Health & Wellness was higher year-over-year, driven primarily by the bioactives portfolio, including the results from the Deerland acquisition. Animal results were substantially lower than the prior year quarter, primarily due to the lower margins in amino acids, driven by recovery in the global supply of lysine. Pet Nutrition volumes were lower in Latin America, partially driven by demand fulfillment challenges. Feed results were stronger driven by APAC and Latin America partially offset by the impact of softer demand in EMEA. As we look ahead, we expect overall Nutrition results in Q1 to be lower than the prior yearâs record first quarter, with Human Nutrition delivering similar year-over-year results on strong flavors and SI growth and lower Animal Nutrition results primarily due to weaker margins in amino acids. I want to take a moment to expand on our view of Nutrition in 2023. Nutrition is expected to continue on a positive growth trajectory for full year 2023, including 10% plus profit growth and a similar level of revenue growth. The growth is likely to be led by Human Nutrition and to be weighted in the back half of the year as the first half will see headwinds in Animal Nutrition due to the continued impacts of weaker margins in amino acids and because we will see increasing recovery in demand fulfillment as we move through the year. Slide 10, please. Other business results for Q4 was significantly higher than the prior yearâs fourth quarter. Higher short-term interest rates drove improved earnings in ADM investor services, and captive insurance experienced favorable underwriting results and lower claim settlements versus the prior year. In the corporate lines, unallocated corporate costs of $299 million were higher year-over-year due primarily to higher IT operating and project-related costs and higher costs in the companyâs centers of excellence related to growth initiatives. Other corporate was favorable versus the prior year primarily due to higher contributions from foreign currency-related hedge activity and lower railroad maintenance expense. Corporate results also included losses related to the mark-to-market adjustment on the Wilmar exchangeable bond and severance totaling $6 million. Net interest expense for the quarter increased year-over-year on higher interest rates. We expect corporate cost for 2023 to be around $1.5 billion, driven primarily by inflation and higher interest expense. Other business performance should be higher than 2022, offsetting a significant portion of the increased corporate costs as higher interest rates positively impact our ADM IS business. The effective tax rate for the fourth quarter of 2022 was approximately 16% compared to 21% in the prior year. The decreased rate was driven primarily by changes in the geographic mix of pretax earnings in addition to lower discrete tax expense versus the prior year. Our full year adjusted tax rate was 17%. For 2023, we expect our adjusted tax rate to be between 16% and 19%. Next slide, please. Year-to-date operating cash flows before working capital of $5.3 billion are up significantly versus $3.9 billion over the same period last year. Our net debt to total capital ratio is about 25%, and we continue to have ample available liquidity. Our strong cash flows and balance sheet have enabled continued investment in the business, with $1.3 billion in capital expenditures for the full year. We currently plan to maintain capital expenditures at about $1.3 billion in 2023 and continue to have significant financial capacity to pursue strategic growth objectives. We have been continuing to return capital to shareholders. We distributed $900 million in dividends and repurchased almost $1.5 billion of shares in 2022. We are planning $1 billion in opportunistic buybacks for 2023, subject to other strategic uses of capital. Juan? Thank you, Vikram. Next slide, please. 2022 was a truly outstanding year for ADM. As we look forward to 2023, we expect another very strong year. There are a number of market factors that we see as relevant for shipping our performance. We still see tightness in supply and demand balances in key products and regions. We see strong demand for vegetable oil, driven largely but robust demand for biodiesel and renewable diesel. Resilient food demand should drive higher volumes and margins in starches, sweeteners and wheat milling. We see continued strong demand for ethanol, including positive discretionary blending economics. And as Vikram mentioned, we expect 10% plus constant currency OP growth from Nutrition. We have a strong playbook powered by our deep expertise and our unparalleled footprint and capabilities to manage a dynamic market environment. Our healthy balance sheet provides ongoing optionality as we continue to pull the levers under our control to deliver results. And we expect positive contributions from productivity and innovation initiatives across the company that will help us drive value in 2023. Taken together, we expect to deliver another very strong year in 2023. Thank you. [Operator Instructions] Our first question today comes from the line of Ben Bienvenu from Stephens. Please go ahead. Your line is now open. So I want to ask in the Nutrition segment. Your guidance, I think, Juan, you said 10% growth in constant currency. Two questions I have. One is at the current exchange rate levels, what would that imply in just a reported growth rate? And then secondarily, just thinking strategically, youâre talking about some of the expansions that youâre making in organic growth investment. What does your appetite for M&A look like in that segment? And how fertile is the landscape for potential M&A? Yes. Thank you, Ben. Listen, that business has been a very successful story at the customer level for many, many years. We continue to drive higher growth rates than the industry we participate in. So that has not changed, the robust pipeline growth there, and we have achieved all that then through a very disciplined strategy of bolt-on acquisitions and organic growth. So we did 4 bolt-ons in 2021. We took the time in 2022 to integrate them and digest them. At the same time, in 2022, we started many projects that I highlighted in my initial comments on organic growth. So I would say that will be the pattern that you should expect to us. I mean we have stated many years in our balanced capital allocation, and in this nutrition pace, if you will, of bolt-on and M&A and taking some time to digest some of those things. Very pleased to report that the four acquisitions we made in 2021 are executing or delivering ahead of their business model. So weâre not planning to change the pace or the strategy that we have had so far. The projects that we are making selective expansions on or bringing to life soon are all going well even despite the long time â long lead time equipment and sometimes you face in the industry. Weâve done that in anticipation of all that. So we feel very good about being able to support, with capacity, the growth in demand that we see in the marketplace from our participations. Yes. So effectively, Ben, we donât assume a lot of change in currency for 2023. Yes, youâve seen some weakness in the U.S. dollar, but you can assume that, even on a reported basis right now, we assume similar growth rates in OP. Okay. I actually want to shift gears a little bit and pivots to Starches and Sweeteners, that business was fantastic in the quarter. Your forward commentary sounded quite constructive as well. Could you give us a little bit more color on how you see that evolving into 2023? And do you think you can achieve margin expansion there? So based on the customer contracting weâve seen in the Sweeteners and Starches portfolio, Ben, we do see strong volumes and margins. And with the improved mix, we talked about BioSolutions expansion, we actually have 26% year-on-year growth, and BioSolution margin remained very robust. And with the improved mix we actually see a potential, in the Sweeteners and Starches business, to have higher volumes and margins in 2023. Clearly, ethanol remains uncertain and weâve seen recently inventory levels remain high, and thatâs actually pretty similar to January of last year as well. But weâre still constructive in terms of outlook for ethanol, given whatâs happening with the RVO framework, the fact that gasoline demand is expected to be roughly flat versus 2022, blending economics remain very favorable. And frankly, export volume should be similar to last year, around 1.4 billion gallons. So thatâs a quick snapshot of our outlook for 2023. The next question today comes from the line of Adam Samuelson from Goldman Sachs. Please go ahead. Your line is open. So I wanted to hopefully tie together some of the forward comments that you made and see just to help calibrate kind of us on the net impact of that at the earnings level. So Nutrition is going to have kind of 10% constant currency profit growth, not much FX right now. Other â and other and corporate and interest kind of basically seemingly netting out to roughly flat year-over-year. Tax rate, flat to maybe up slightly year-over-year. So I guess the two pieces of the puzzle that are missing from their Ag Services and Oilseeds profit in Carbohydrate Solutions. I think ethanol remains somewhat of a wildcard on carbohydrates, although the rest of Starches and Sweeteners, you sound generally constructive. So can you help us, Juan, Vikram, just thinking about kind of a range of outcomes on Ag Services and Oilseeds based on where crush margins are today kind of assuming, letâs say, an average U.S. crop, no enormous supply dislocation coming out of the U.S. in the second half of the year? Just how kind of the profit outlook would be tracking in Ag Services and Oilseeds, and if there is anything else on a year-on-year basis, you want us to be considering, that would be really helpful. Yes. Thank you, Adam. I think you captured the situation well. I think we continue to see a very strong margin environment in Ag Services and Oilseeds. 2022, we hit in all cylinders. I think that every piece of our business hit records. When we look at the 2023, we continue to see very strong demand. If you look at North America, North America had a strong meal demand and certainly very strong domestic demand for oil, driven by all the factors, driven by sustainability that you know. We see a strong potential for crush margins in Europe, given the bad crop in Argentina and the fact that Europe will continue to export biodiesel to the U.S. given the need that we have here. So all in all, we continue to see strength. Certainly, RPO, weâre going to see the strong demand. Biodiesel and all that is going â weâre seeing strong margins and very good volumes for next year. We do have visibility into this â into the next year, given our book, so we feel good about that business. As Vikram mentioned in the commentary may be Ag Services that weâre planning it a little bit slower than last year, given the exceptional results that we had last year. And â but as difficult as it is to pinpoint a number, Adam, given that we have China uncertainty, war that has been going on for a year and, certainly, weather events, that we still need to build the U.S. crop, and we still need to finish the Latin American crops. I would say we favor more range scenarios. And in the range of scenarios, 2023, falls into a very strong range for us. So I donât know â I will not venture to pinpoint a specific number, but certainly strong range. When you go to Carb Solutions, when we talk to our customers, demand for the products is stable. Weâve been able to have strong margins in all that, whether itâs sweeteners and starches or whether itâs wheat milling. When we look at BioSolutions, it continues to grow, like 26% of revenue. And then we see EBITDA margins in the 20% for that business, which is a very profitable business that is growing their contribution into Carb Solutions as part of the total UP. So that is a business that Vikram called the question mark of â the more volatile part of it probably is ethanol. And thatâs â right now, like a little bit like in the last year, we start with this time of the year with low margins. And â but we think that weâre going to have very good incentive for people to blend ethanol, the numbers are there. RINs balances are tight, will encourage people to blend. So I think that given the prices that they have, I think that expecting export in the range of 1.4 billion to 1.5 billion gallons per year is reasonable. And you saw these days, Petrobras in Brazil, increasing the gasoline prices by 7%, so they are going to be less flow from there to here in all these. So weâre still planning for a little bit softer, maybe Carb Solutions in light of our ethanol forecast. But conditions are â could change in ethanol and it could make it a close year. So all in all, we continue to see a very strong year for 2023. The next question today comes from the line of Ben Theurer from Barclays. Please go ahead. Your line is now open. Just wanted to quickly follow-up on the Nutrition dynamics you seen in the fourth quarter and how that translated into 1Q and somehow if you could frame it for that medium-term growth algorithm youâve laid out a little over a year ago during your Capital Markets update. So fair to assume that there was obviously a lot of specific issues around fulfillment, some very specific demand items that kind of impacted in the fourth quarter, and you expect this, obviously, to continue into the first half and then recover into the second half. Now clearly, the 10% youâve laid out and what youâve talked about of growth in 2023 is kind of below the algorithm. So can you help us frame how â23 kind of fits within your â25 strategy and where you want to go? Is that just a small dip can then be recovered? Or would you need some M&A to get back on track to the target of 1.2 at least by 2025, so that we understand how to think about the specific headwinds that can potentially be offset versus what might be more of a structural challenge within Nutrition? Yes, Ben, in terms of Q4, the issues that affected Q4, Iâd say, are kind of a little more temporary, right, that we think we will be able to work through over the course of 2023, as I talked about. Specifically, whatâs important for you to know that the demand is very, very strong, right? So that is â we talked about the strongest-ever pipeline in the Human Nutrition business and very strong win rates. So across every category that we play in, almost weâve got strong demand. Yes, there is some softening in certain parts of the business, right? We are aware of dietary supplements that being a little softer. Plant-based protein growth may moderate a bit from the pace weâve seen historically. But nevertheless, our growth has been very strong in Human Nutrition. The challenge weâve had is the demand fulfillment. Thatâs going to take us a while to address and overcome. Animal Nutrition, on the other hand, we benefited from strong margins in lysine, but in Q4, the compression in margins were sharper and faster than we expected, and thatâs going to continue over the course of 2023. So weâve got to offset that plus drive growth, and thatâs what gives us a slightly below trend line growth for 2023 around 10% plus. Having said that, the outlook remains robust. And maybe, Juan, do you want to talk about the 2025 perspective? Yes. Thank you, Vikram. Ben, listen, I think we have been â you have been witnessing how we built this nutrition business over the years. This is a business that, if I take over the last 3 years, it has been growing OP by 20%, CAGR if you will. So, itâs a business that we continue to add layers of capabilities so we can continue to win at the customer front, whether it is we go from individual ingredients to systems, where we bring functionality to those systems through bioactives, whether we bring sustainability benefits to that through our decarbonization or regen Ag. So, we continue to add layers to continue to help customers excel at the consumer level. And we see that in our win rates, and we see that in our pipeline. So, we have visibility into that. As Vikram said, maybe some of the categories soften a little bit, but our ability to gain share, to win faster than those categories, has been demonstrated. I think this year, we grew revenue significantly higher than the market. So, when we look forward, as I said in my â I think one of the earlier answers, we continue to expect bolt-on and M&A â bolt-on M&A and organic growth. We had four companies in 2021. We are building capabilities and new capacity in 2022 that we are going to see on the stream in â23, and we are going to continue to grow that. So, we havenât deviated from our 2025 plan. And I donât think it will require massive M&A to achieve there. It will â you will see this steady state. But this is a business that we are building in the middle of a lot of volatility in the market. This is of course, versus the legacy ADM business, itâs more complex in the number of SKUs that we have, in the number of customers that we have, in the number of plants and categories that we manage. So, when supply chain issues happen or market volatility happen, itâs a little bit more complex to fix in this business. And thatâs why we expect a first half thatâs going to be a little bit subdued when you add the demand fulfillment issues and some of the capability building, with the fact that also lysine is coming down, if you will, in prices, at least for the moment. So, I would say nothing that deviated. Certainly, if you ask me personally, and I think the management team, are we happy with Q4, I mean of course, Q4 underperformed our own expectations. I mean thatâs nothing new for a business that, again, has been growing 20% per year CAGR. And â but we think that this is just a trajectory in the business that continued to win faster than what the market gives us at this point in time. We donât expect a deviation to our long-term plan at this point. Thank you. Our next question today comes from the line of Manav Gupta from UBS. Please go ahead. Your line is now open. Congrats on the beat and the dividend hike, shareholder returns matter and you have continuously rewarded your shareholders. My quick question here is, and you have kind of alluded to it also is we are seeing a lot of new capacity start up on the renewable diesel side. I think major projects starting up even last quarter. And then your outlook for both soybean oil and soybean meal, it seems pretty strong right now, any risks to that? And how do you see the year progressing from the perspective of both soybean oil and soybean meal? Thank you, Manav. Thank you for the question. We continued to see very strong demand across the world, not only for all the oils. I think that if you take the four oils, demand is running harder than production, if you will, globally. So, even I would say before renewable green diesel happened, we had already a tight balance sheet from an oils perspective, and that has continued. When you think about the capacity that renewable green diesel is installing, itâs going to have a huge pull in soybean oil. And we have found that there is â we have found relatively easy to place the mill in the export markets. And if you look at the market overall, the meal market is a market of like 175 million metric tons and growing. So, if you calculate by 2026, we need to have 20 million tons more soybean meal, just to catch up with the demand. And if you look at everything that we are building through the RGD and the capacity expansions, we are estimating about 15 million tons of supply on soybean meal. So, itâs still we have â we are still covered in only 75% of the expected soybean meal demand out there. So, we are looking at this as you can understand very carefully. Remember, as I always mentioned, it took us 2 years to assess Spiritwood and start building it. I am happy to report that is going to come online for the harvest. So, I would say we look at this, but the demand on both sides on the soybean meal and soybean oil clearly can support all this capacity. So, we continued to see an environment in which crush margins will be strong and highly supportive for many, many years. Thank you. The next question comes from the line of Steve Byrne from Bank of America. Please go ahead. Your line is now open. Yes. Thank you very much. This is Salvator Tiano filling in for Steve. So, firstly, I wanted to ask a little bit about China and specifically, you mentioned mill demand. So, a little bit short and long-term view. In the short-term, I guess the re-openings there, etcetera, do you see actually a positive momentum for demand for soybean meal or soybeans versus what you saw in the past couple of years with COVID zero? And then long-term actually is we have been reading how Chinese population dropped last year, essentially, it seems to have peaked much than itâs expected. And there are articles talking about what could be the long-term trajectory of food demand there, including protein demand and therefore, what would be the demand for feed. So, how are you seeing the long-term outlook in China for soybean meal and other products that you make? Yes. Thank you. Good questions. So, on the short-term part of the question, we see China will continue to increase imports. If you look at domestic grain prices are at historically high levels, especially now that we are â that they are reopening. Of course, a reopening of China could be a game changer for a variety of commodities, not just grains. We look at domestic vegetable oil stocks have been at relatively low levels. And we have seen, during the second half of 2022, an increase in domestic pork prices since, I would say, last spring. So, that prompted farmers to increase their herd. So, we see that demand in the short-term. But again, I think the variability here may be on the upside on how much of the reopening is bringing people to consumption. Of course, people have been in lockdown almost for 2 years in China. And there is a â you are going to find the same pent-up demand that we saw ourselves maybe since last year when everybody came out of COVID. So, I think at this point in time, short-term, China will be probably a positive upside, if anything, to our forecast. When you look at the long-term and the demographics of China that you described, probably about 50% of the Chinese population is middle class or what you will consider middle class, and they are in this process of increasing their protein consumption. But still historically, if you look at what the U.S., we consume about 270 pounds per year of proteins. China is at the 170 pounds per year level. So, they are still far from our level of consumption. And again, if you look at our lifestyles are converging slowly. So, you will expect their protein per capita consumption to grow significantly during this period. The other thing you need to remember is that we are still going to be 10 billion people in the planet by 2050, which is one of the issues that serves our â or drives our purpose, which is trying to increase the carrying capacity of the planet, trying to feed all that. And whether itâs in China or whether itâs in Africa or whether itâs in Southeast Asia, we are a global company, we have a global footprint, and you have seen us continue to expand our destination marketing footprint to serve customers around the world. So, we will serve â we will serve the feeding of growing population of the world, whether itâs in China or somewhere else. But as I said, I donât expect China to have a decline in the next probably two decades in terms of their demand for protein consumption. The next question today comes from the line of Robert Moskow from Credit Suisse. Please go ahead. Your line is now open. Hi. Thank you. I was hoping to get a little more detail on your forward outlook for ASO. In the slides in the pack, you indicated that the front month board crush is at $75 a ton, and thatâs lower than where it was on your third quarter growth [ph]. Does that influence your outlook for forward crush and the fact that itâs come down a bit? And how can I relate that to what happened in calendar â22? Yes. Rob, I couldnât hear you very well, but I get the gist of the question. So, listen, I think at this point in time â and as I said before, we have visibility for probably the first quarter and big part of the first half, 2023 will be another strong year for crush, certainly above the long-term guidance that we provided at our global Investor Day. We also are planning to have an improvement in our process volumes that given some of the operational resilience initiatives. And we are going to have Spiritwood online in Q4. And hopefully, by in a couple of â maybe in a couple of weeks and a month, we will resume crush in Paraguay. We continue to have good crush margins in Europe. Certainly, Europe will be helped by the small crop in Argentina. Also, I think energy prices have moderated a little bit in Europe given the warm summer. So, we are also shifting in Europe as much to soybean crush as we can as there is margin there. We are also going to have this year that we didnât have last year, better canola margins. Canola crush margins certainly and now that we have a Canadian crop, are more in the $120 to $140 per ton in North America, maybe $70 to $75 in Europe. So, I would say, we are having good crush rates. We are having good mill export demand in the U.S. We are having very strong soybean oil demand here in the U.S. So, I will say, in general, we donât see any clouds in the horizon for crush. The crush business will have a very strong year in 2023. As I have said before, Rob, I wouldnât pinpoint a specific number given the China reopening, given the issues in Ukraine that whether itâs not driving crush margins that may drive energy prices. And certainly, the crops, we are expecting that Brazil needs to have a big crop that will offset the decline in Argentina. And we hope that the U.S. will have a big crop as well, but we still need to go through the weather in both instances. So, again, I will just reiterate a very strong environment for crush as far as we can see. The next question today comes from the line of Eric Larson from Seaport Global Securities. Please go ahead. Your line is now open. So, yes, my question comes down to, we have talked a lot about the bean markets globally and domestically here. But one of the big kind of hangovers right now in the grain market is corn demand. And obviously, I think Brazil is going to be running out of corn here pretty quickly. We may have seen some new Chinese demand coming in here for corn. But how do you look at â and we have been on competitive, I think just from a currency basis â from everything else. But could you talk a little bit, Juan, about the corn market and how you see the export situation with that particular commodity? Yes. I think you called it well. I think that when we had the low water levels in the Q4 that hurt us, of course, we lost some bean business. But the corn business basically is going to be with us until the crop in Brazil â the harvest in Brazil comes, so itâs like middle of the year. So, we see that as a very strong business in Ag services for North America. We also have, unfortunately, I think Ukraine Grain Association has come up with a statement that they donât believe corn for â23 will exceed 18 million tons, which is a far cry from the 29 million tons or 30 million tons that they used to produce or we expected. So, demand continues to be solid out there. And we still â as a world, we need Brazil to have a good crop. Of course, if there are rains and delay a little bit the harvest of soybeans, that may delay a little bit the planting of the next crop. But we hope that in your farm and everybodyâs farm, corn is growing strongly because we need it. And again, the U.S. will be exporting a lot of that from here until probably July. The final question today comes from the line of Steve Byrne from Bank of America. Please go ahead. Your line is now open. Yes. Thanks. Just wanted to ask about the press release that was out a couple of days ago about the new biostimulant of ADM released, the data for rating sold. And I know that you do have a business where you work with farmers to provide them fertilizers, etcetera. But I think this seems to be the first time that you are actually rolling out one of your own proprietary products. So, I am just trying to understand a little bit about your strategy here. Will you invest more in products for nutrition and crop protection, especially biologicals? And what do you think is the potential market and actually the earnings potential for ADM? Yes. Thank you for the question. Listen, I think that we continued to enlarge our relationships with customers, but also with farmers. And as we continue to increase our digital engagement with them, we also increased the bartering and exchange of many, many products. And we have a good relationship with farmers. We have the trust of the farmers, and so every now and then, they bring challenges to us. And I think the challenges of biologicals, if you will, given that we have some work in precision fermentation and things like that is, we are always interested in doing that. So, there is always division out there in ADM exploring and extending a little bit our franchises and our engagement. So, I wouldnât be surprised to see experiments or tests here and there. And we do that a lot. We do that in products at our B2C. We do that in products that are biologicals. We do that in products related to the farmer. And we continue to expand. These are things that, over the years, they turn out into big businesses. At one point in time, we started with destination market and now itâs a big part of our franchise. At one point in time, we started with BioSolutions and now we are making more $0.25 billion of EBITDA on that. At one point in time, we started with the differentiated grain that now we call regen Ag, and now we are in the million acres of that. So, I think itâs just the innovation part of ADM, and you are going to see green shoots at that. I am glad you are paying attention to that. And we are going to see expansion of those things into the future. So, thank you. So, with that, I think that was the last question for the call today. I would like to thank you for joining us. Please feel free to following up with me if you have any other questions. Have a good day and thanks for your time and interest in ADM.
EarningCall_1008	Good afternoon, and welcome to the Ethan Allen fiscal 2023 Second Quarter Analyst Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note that this conference is being recorded. It is now my pleasure to introduce your host Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin. Thank you, Camilla. Good afternoon! And thank you for joining us today to discuss Ethan Allen's Fiscal 2023 Second Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call for your questions. Before we begin, I'd like to remind the audience that this call is being recorded and webcast live under the News and Events tab on the Investor Relations page of our www.ethanallen.com website. There you will also find a copy of our Press Release, which contains reconciliations of non-GAAP financial measures referred to in the release and on this call. A replay of today's call will also be made available via phone and on our website. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. Thank you, Matt, and welcome to our second quarter fiscal 2023 earnings call. We are pleased with our results. Our sale of $203.2 million were the result of many factors, including strong offerings and interior design destination; 75% products made in our North American workshops; a unique logistics network where we provide personal in-home delivery at one delivered price to our clients in North America. Combining the personal service of our interior designers with technology has been a game changer. We were also helped by a stronger backlog of orders. Our gross margin increased to 61% and operating income margin increased to 18.2%. Our adjusted earnings per share of $1.10 grew by 15.8%. We ended with strong cash of $140.4 million and no debt. Our unique vertically integrated structure continues to be strengthened, and after Matt provides a brief overview of the financials, I will review our focus and opportunity going forward. Matt? Thank you, Mr. Kathwari. As a reminder, we present our financial results on both a GAAP and non-GAAP basis. Non-GAAP results include restructuring initiatives, impairments and other corporate actions and are further detailed in our press release. We believe that these non-GAAP presentation better reflect underlying operating trends and performance of the business. Our consolidated net sales of $203.2 million were helped by strong backlog pricing actions taking and the positive effects of product mix, partially offset by lower unit volumes. The prior year second quarter was one of the largest historical second quarters for net sales, which led to a difficult comparison. Compared to the second quarter of fiscal 2019, which is pre-pandemic and more reflective of historical norms, our consolidated net sales were up 3%. We ended the quarter with wholesale backlog of $78.5 million, down 36% from a year ago as we were able to reduce the number of weeks of backlog, bringing it more current. We remain 57% higher than pre-pandemic wholesale backlog levels. Wholesale segment written orders were down 20.2% for last year and down 18.6% to the pre-pandemic second quarter of fiscal 2019, primarily due to lower international orders and the timing of incoming GSA orders. Our retail orders were down 16.3% due to a strong prior year comparable. However, when compared to Q2 of 2019, retail orders were only down 1.5%. Consolidated gross margin grew 220 basis points to 61% in the quarter from product pricing actions, a favorable product mix, disciplined promotional activity and lower inbound freight costs, partially offset by a change in our retail wholesale sales mix and a decrease in unit volume. We had expected this percentage of retail sales to consolidated sales to moderate towards normalized levels and this began to take shape in Q2. Retail sales were 84.5% of consolidated sales, down from 86.3% last year, as we delivered out more of our wholesale order backlog. Adjusted operating margin increased from 15.7% last year to 18.1% in the current year second quarter, due to the wholesale gross margin improvement and maintaining a disciplined approach to cost savings and expense control, partially offset by lower net sales and high retail delivery costs. Our SG&A expenses decreased from 43.1% of net sales last year to 42.9% this year, reflecting our ongoing operating leverage despite a declining net sales environment. Adjusted diluted earnings per share was up 15.8% to $1.10 due to improved gross margins and a reduced expense base. Our effective tax rate for the quarter was 25.7%, the same as last year Now turning to our liquidity and capital resources. As of December 31, 2022, we had cash and investments of $140.4 million with no outstanding debt. Our sources of liquidity include cash and cash equivalents, short-term investments and amounts available under our credit facility. We generated $2.5 million in cash from operating activities during the quarter, bringing our total up to $40.9 million during the first half of 2023, an increase from $22.7 million in the prior year period due to higher net income and an improvement in working capital. Capital expenditures were $5.3 million for the quarter and included investments in various areas within manufacturing, technology and retail. In November, our Board declared a regular quarterly dividend of $0.32 per share, which was paid on January 4, and just yesterday, as announced, we declared another regular quarterly dividend of $0.32 per share payable on February 21. In summary, we increased gross margin, operating margin, operating income, net income and diluted EPS during our just completed second quarter despite operating in the current environment. All right, Matt. Thanks. We have substantially strengthened our offerings and new products will be introduced in the following six months. During the last three years, while we introduced only limited new products, the good news is we were busy developing strong new products. We have also greatly enhanced our marketing, combining the traditional mediums increasingly with digital mediums. Our supply side is stronger. About 75% of our products are made in our North American workshops and about 75% made custom on receipt of orders. Our production capacity in North America has been increased with two very important factors: first, addition of qualified workforce and continued investments in technology. We are in a good position to service our clients. Our design centers are being refreshed and reintroduced as an interior design destination with very talented interior designers. We are reinventing the projection of our design centers with more fashionable and relevant projections. Our plan is to convert most of the 173 design centers in North America in the next 12 months to this very exciting projection. We also plan to review the projection with our international partners. Combining technology with personal service of our crafts persons in our manufacturing and interior designers in our retail network has been a game changer. We are in a good position to continue our progress and maintain strong financial results. Thank you. [Operator Instructions]. And our first question will come from Brad Thomas with KeyBanc Capital Markets. Please proceed with your questions. Well, congratulations on the strong earnings here for this quarter. I thought the gross margins were particularly impressive. I was hoping you could talk a little bit more about how you're thinking about gross margins going forward and if you feel like the industry is getting more competitive and if that's a risk for you? Yes Brad, we have had as you said, very strong gross margins, which is of course a combination of higher volume and also reflects the improvements that we have made through technology. In terms of â for instance, in our manufacturing, just to give you a perspective, just from 2019 till now we have increased our sales actually over 7%, while our headcount overall has gone down by about 24%, very important, which is a result of having better quality people and technology at our manufacturing, at our retail. So, those are the factors that have helped us become more productive. Then of course, also higher volumes do benefit gross margins, especially from the manufacturing side. But I think going forward, I think where we are in gross margins, our objective is to continue with that. That's great. And Farooq, with you know the orders starting to slow a bit, of course the whole industry benefit from volume during the during the pandemic and the orders have slowed a bit. How do you think about the cost structure of the business and the levers that you might pull if we see sales declining going forward here? Yes. Our backlogs are of course, very, very high. Well, the good news is that while we have been able to increase our production, deliver the products, reduce our backlogs, our backlogs are still decent to start with. However, yes, we are watching very carefully the business, watching very carefully the environment, and we always have operated as you know, you might say lien. We'll continue to do that, but at this stage, with our structure in place, both in terms of much fine-tuned manufacturing, fine-tune retail network, our logistics. You know just keep in mind, it was not that many years back, we used to have 30 manufacturing plants. Now we have Vermont, North Carolina, Mexico and Honduras and that is producing twice as much the 30 did in North America. Similarly our logistics, we used to have 10 major national distribution centers, now we have two. So we have done a lot of work in terms of becoming more efficient, which is going to help us Brad as we go forward. But however, we are watching very carefully the markets, the sales, the consumer attitudes, and so we will have to make some adjustments if sales don't hold up. Hi! Good afternoon Farooq and Matt. I had a couple of questions. Can you provide more color on what you saw around demand, the order intake for the quarter, how did it progress? Were there any categories or product lines that were more affected than others or any regions? Any callouts would be helpful. Yes. Of course you know when we compare this last in terms of the written business compared to the previous year, the business of course was down from very, very high levels we had in the previous year. But overall we have had a very strong business in our upholstery business. Our upholstery has held up quite well. But also we saw an increase in our extend programs to support the work that our interior designers are doing, where of course the major factor has been the interior designers ability to utilize technology to help. That has really been a very important factor, and when they do that, they then are able to provide a much, you might say, a more total solution rather than selling items and products. Because of that, we have seen, we have maintained a good business in our various categories from our, you might say, our living room to dining room, bedroom and accents. So I think we're going to continue to see that, because our business has more and more gone towards interior design. That's why Cristina I said, and in fact I'm sure you've seen in all our marketing and communication, our message is we are an interior design destination. Because we have today about â when we look at our designers, we have about 30% less designers than we had four or five years back, but more qualified, more talented, and in the last two, three years we have invested a great deal, and we're going to continue to invest a great deal in providing technology to them as we have been doing in our manufacturing. That's what we see Cristina, going forward. That's helpful. I had a second question, which is a follow-up on Brad's question about the cost structure. If quarters were to remain at this level and sales eventually go back to the pre-pandemic level, that was around $750 million annually, what level of operating margin do you think you can achieve in this scenario with the changes you've made to the cost structure? Well, that's a good question and I think that when you take a look at our gross margin for instance, even when you go back to the pre-pandemic levels, you know they were at about 55%, 56%. When you look at our operating margins, our operating margins were also at that time 11%, 12%. So we and of course comparing 11%, 12% to 18%, I think we have an opportunity. Those were really on the lower side, which of course when you look at the industry, 11% is a pretty high margin. So I think we have an opportunity of maintaining higher margins. Whether we can maintain it at 18% or so will depend upon our sales and how much we are able to deliver, but we have a good opportunity of maintaining stronger margins, because of the fact of strengthening our retail network, strengthening our operations, our manufacturing, we have spent a lot of time on our logistics, so our cost structure today is lower with higher volume than it was four or five years back. But of course, it will also depend upon sales going forward. Okay, that's helpful. And then the last one was on the refreshes for the interior design centers that you talked about, can you provide more specifics, exactly what will be new or refreshed you know in the stores? Yes, I think that's a very important development. In fact, in March we are going to have our Danbury design center, and also one in Manhattan, which is a new one that will open up. It will really project what we are talking about the next Ethan Allen projection of design centers. We've been working on it, and that projection is going to be stylish, it's going to be more designer oriented, and that will then, as we do it in Danbury we are also right now planning that in the next one year almost all our 174 design centers in the country, that's our plan to renovate them to the new projection. The projection is higher end. The projection is style, color, and I'm sure that we are already doing a lot of it. And if you take a look at our advertising, I donât know if you're getting our printed magazine, and in fact today I didn't talk much of marketing, but we are sending out nine million digital magazines every two weeks. It was impossible to think five years back, it used to take us two months to make up a 32 page magazine. But today with digital advertising, we have a really strong photo studio here, and then we also fortunately were able to use one in Ukraine, which does an amazing job in terms of providing us with digital photography. So digital is tremendously important. Our designers today are able to work with clients, whether it's in their homes, whether they are in the design center. So combining personal service and technology is tremendously important. And that's what we see Cristina in the next year or so. That is, our design centers are going to be more design center rather than a furniture store. And sorry, but one last one. Is there a CapEx increase or like how much do you see investment you need to make to refresh all the design centers? It is not going to be major, because most of the work â I mean our design center is in good position. Most of it, the refreshing is going to be paint, color and new products. [Operator Instructions]. There are no further questions at this time. I would like to turn the floor back over to Mr. Kathwari for closing comments. All right, well thank you very much. Look forward to continuing our journey. You know I was just mentioning to Matt that â and Matt was mentioning to me that this is our and mine 108th consecutive quarterly meeting. So it's great to see you all, to talk to you, and I always say we're just getting started. Thank you. And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation today.
EarningCall_1009	Greetings and welcome to the Varex First Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Christopher Belfiore, Director of Investor Relations. Thank you, Christopher. You may begin. Good afternoon and welcome to Varex Imaging Corporation's earnings conference call for the first quarter of fiscal year 2023. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varexâs website at vareximaging.com/news. The webcast and supplemental slide presentations will be archived on Varexâs website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the first quarter of fiscal year 2023. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the first quarter of fiscal year 2023 to the fourth quarter of fiscal year 2022. Finally, all references to the year are to the fiscal year and not calendar year, unless otherwise stated. Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, Risk Factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of todayâs date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On todayâs call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with, nor are they a suitable for GAAP financial measures. We provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. Thank you, Chris, and good afternoon, everyone. We are pleased to report sales of $206 million for the first quarter consistent with our expectations. This was a result of a more balanced operating environment, driven by good demand, and improved supply chain and our internal supply chain initiatives. That said, while demand levels were as expected, product mix was less favorable in the quarter and as a result gross margin was lower than what we had originally anticipated. With that, let's discuss our results for the quarter. Revenue in the first quarter was down 11% sequentially, but up 3% year-over-year. Revenue in the Medical segment declined 12% sequentially, while the Industrial segment revenue declined 9%. Non-GAAP gross margin in the first quarter was 32%, which was below our expectation, due to a shift in our product sales mix to mid and lower tier products during the quarter. Sam will talk more to this during his prepared remarks. Adjusted EBITDA in the first quarter was $25 million and non-GAAP EPS was $0.21. We ended the quarter with $108 million of cash, cash equivalents and marketable securities on the balance sheet, down $5 million from $113 million in the prior quarter, this was primarily due to higher inventory in the quarter. Now let me give you some high-level insights into the market environment based on an assessment of demand that we are seeing for different modalities and applications. Medical segment revenues increased 3% year-over-year and decreased 12% sequentially. Across our product portfolio, we believe our customers are exhibiting cautiousness as they asses an uncertain economic environment ahead. Many of them are still facing challenges fulfilling their backlog, primarily due to material shortages. As a result, demand globally for CT tubes were soft, while demand in other medical modalities including fluoroscopy, oncology and mammography was flat to down. Demand for dental and radiographic products were stable to up. Revenues in our Industrial segment increased 5% year-over-year and declined 9% sequentially. Demand for industrial tubes and detectors remained strong in the quarter, led by strength across non-destructive inspection products. Security markets continued to slowly improve as our customers converted their prior period tender wins into orders for us at a higher rate. Throughout Varexâs history, we are focused on investment in R&D and innovation in the field of X-ray imaging. We see the X-ray based imaging industry continuing to evolve and as long-term component supplier to imaging OEMs, we are at the center of this evolution. This is very evident as we met with our customers at RSNA this year. As you may know, each November, we attend the Annual Radiological Society of North America Conference in Chicago. This is the largest radiology trade show of the year and is well attended by both our OEM customers and our peers. With over 31,000 participants in attendance, this conference provides us a significant opportunity to take the pulse of the markets we participate in. This year, RSNA was a very meaningful event for Varex as our customers returned to the show with a pre-COVID level presence and enthusiasm. Specifically, we saw a significant shift from conversation centered around supply chain woes to active conversations around new product development and our role as a component supplier to them for these future products. Photon counting technology stood out as a key highlight of our discussions at the conference with many customers interested in our technology and how it could be integrated into their new products. The focus was mainly on performance, resolution, image quality of photon counting technology, as well as dose reduction and spectral imaging capabilities. We believe there is a significant opportunity with our photon counting technology for both medical and industrial applications and we continue to make progress with our CT customers for potential integration into their systems. With regard to some of our other detector products, customers continue to show a high level of interest in our dynamic detector platform called Azure. A number of our customers are already using this platform across various modalities and we expect continued integration given the level of interest we saw. Our radiographic customers remain excited about our LUMEN detectors, which continue to gain interest. LUMEN is a highly competitive radiographic detector platform currently targeted at the approximately $400 million segment of radiographic market where we have low market share. We are excited about the LUMEN family of detectors and are working on a number of projects in 2023. While AI software has been part of our RSNA in the past, it felt more palpable this year with a very large exhibit footprint dedicated to this technology. A key area of interest was AI software related to lung screening. As we have highlighted in the past, we believe our AI aided lung cancer screening software Veolity will benefit from a global focus on proactive lung screening. Last year, we installed six Veolity platforms in various locations in British Columbia. All of these systems are working well and have provided runway to be involved with a tender process in Manitoba. In Ontario, we have a test installation that could also lead to a tender process. The conversations with current and prospective customers support our view for the continued evolution of the X-ray industry towards new technologies. While some of these products are several years from being commercialized, there is no doubt that the industry is evolving into a higher technology arena in line with where we have dedicated R&D dollars. With over 70-years of expertise in the imaging industry and strong customer relationships, we are a critical player in making this evolution a reality. Turning back to the quarter, while demand in the first quarter was per our expectation, as we start the second quarter, we're seeing a softer demand environment. We expect this change in market dynamic to lead to revenues that will be flat to slightly up for the year. Further, we expect the less favorable product mix we experienced in the first quarter to continue into the second quarter. Thanks, Sunny, and hello everyone. As a reminder, unless otherwise indicated, I'll provide sequential comparison of our results for the first quarter of fiscal 2023 with those of our fourth quarter of fiscal 2022. In the first quarter, demand and supply came in balance. As a result, we are reporting sales of $206 million at the midpoint of our guidance. Non-GAAP gross margin was 32% below our expectations, primarily due to lower margin product mix. Non-GAAP EPS was $0.21. First quarter revenues were down 11%, compared to the seasonally high fourth quarter of fiscal '22. Medical revenues were $160 million and industrial revenues were $46 million. Medical revenues were 78% and industrial revenues were 22% of our total revenues for the quarter. Looking at revenue by region, Americas decreased 7% sequentially, while EMEA decreased 13% and APAC decreased 14%. This was against a seasonally strong fourth quarter. Sales to China were 17% of our overall revenue for the quarter. Let me now cover our results on a GAAP basis. First quarter gross margin was 31%, 100 basis points lower than the prior quarter. Operating expenses were $50 million flat, compared to the fourth quarter of fiscal â22 and operating income was $13 million, down $12 million. Net earnings were $3 million and GAAP EPS was $0.08 based on fully diluted 41 million shares. Moving on to the non-GAAP results for the quarter. Gross margin of 32% was down 100 basis points sequentially driven primarily by low margin product mix. While demand in the quarter was in line with our expectations of a product mix in the medical segment changed. We saw reduced sales of higher margin, higher-end CT tube and certain detector products. In the Industrial segment, we saw lower service revenue, which typically carries a higher margin profile. This product mix shift caused approximately 100 basis points of margin compression in the quarter, compared to the fourth quarter. We believe some customers are taking a more cautious stance either due to the macroeconomic environment or challenges fulfilling their backlog, due to supply chain shortages. R&D spending in the first quarter was $20 million flat, compared to the prior quarter. It was 10% of revenues at the high-end of our targeted 8% to 10% range, due to seasonally low sales level in Q1. SG&A was approximately $27 million flat compared to the prior quarter as a result as G&A was 13% of revenue. Operating expenses were $47 million or 23% of revenue, which was flat sequentially. Operating income was $18 million, down $11 million sequentially, due primarily to the lower gross margin. Operating margin was 9% of revenue, compared to 13% in the fourth quarter of fiscal 2022. Tax expense in the first quarter was $2 million or 15% of pretax income, compared to $4 million or 17% in the fourth quarter of fiscal 2022. We are now modeling 25% tax rate for full fiscal year 2023, due to certain tax reform related favorable items, as well as increasing R&D and foreign tax credits. Net earnings were $8 million or $0.21 per diluted share, down $0.22 sequentially. Average diluted shares for the quarter on a non-GAAP basis were $41 million. Now turning on to the balance sheet. Accounts receivable decreased by $15 million from the prior quarter, due to lower sales in the quarter, compared to the prior quarter and DSO increased two days to 70 days. Inventory increased $17 million in the first quarter. As a result of this, days of inventory increased to 203 days. While it is common for our inventory to increase in our first fiscal quarter, we expect inventory to decrease going forward. Accounts payable increased by $8 million and days payable was 55 days. Now moving to debt and cash flow information. Net cash flow from operations was a use of $4 million in the first quarter, due to an increase in inventory, employee incentive payments and the biannual coupon payment on our debt. We ended the quarter with cash, cash equivalents and marketable securities of $108 million, a decrease of $5 million from the fourth quarter of fiscal 2022. Gross debt outstanding at the end of the quarter was $450 million and debt net of $108 million of cash and marketable securities was $342 million. Adjusted EBITDA for the quarter was $25 million and adjusted EBITDA margin was 12% of sales. Our net debt leverage ratio was 2.5 times at quarter end. Now moving on to guidance for the second quarter. As we talked about earlier, we are providing outlook for revenue in fiscal 2023 to be flat to slightly up, compared to the prior year. Separately, we believe hospitals are seeing good patient and elective procedure volume. However, higher in capital expenditures and long-term payback projects are being reevaluated. This phenomenon is cascading over to us as a somewhat unfavorable product mix. As a result for the second quarter of fiscal year 2023, revenues are expected between $205 million and $225 million and non-GAAP earnings per diluted shares are expected between $0.05 and $0.25. Non-GAAP earnings guidance includes an anticipated $2 million payment for technology transfer milestones in R&D. This would equate to approximately $0.04 in non-GAAP EPS. Our expectations are based on non-GAAP gross margin in a range of 31% to 32%, non-GAAP operating expenses in a range of $48 million to $49 million, temporarily high due to the anticipated R&D milestone payments. Tax rate of about 25% for the second quarter and the rest of fiscal year 2023 and non-GAAP diluted share count of about 41 million shares. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Young Li with Jefferies. Please proceed with your question. All right, perfect. I guess maybe just to start on the cautiousness from customers' comments. I was wondering if you can expand upon that a little bit more, which products, end markets, geographies are more impacted? And what's holding up better? I mean, it sounds like some of your customers are maybe seeing some more deferrals or cancellations as well? Hey, this is Sunny. The cautiousness comes from just the general conversations that we've had with customers and the actual softening in order intake rates of the call offs as we call them that we're seeing from them. And without exception, every conversation that we've had with our customers, they've indicated to us that they're sitting on a backlog of whip that they can't get out of the door, because they're missing some component in their systems that they're building. These are not in our tubes or detectors; these are other parts and components that they're missing. So -- and that's causing them to rebalance some of their inventory and enhance the orders to us. Now that's what's driven us to look at our forecast for the rest of the year and we've indicated that we're seeing some softening. All right, great. Very helpful. I guess maybe one more on I guess, the China market is attractive and important. I guess, what are you seeing and hearing on the ground related to the COVID disruptions during the quarter? And how has that changed, if any, in January? And how long do you think that market might take to sort of normalize? Li, what we're seeing in China, first of all, with COVID, there was disruption across the board for most of our customers. They're trouble getting people to work and get product out of the door. So there is somewhat of a similar situation as I described earlier with -- unable to get product out of the door, but in their case, it was a lot of it was also tied to labor. We motor through it, we managed to deliver all the things that were needed. In terms of CT and our strength in China is heavily -- we've been very heavy on CT and doing well with CT. There's been a lot of CT buying and although the Chinese government continues to reinforce their investment in healthcare. This year, we expect that there'll be some softening in demand and going down from the traditional just [kinetic] (ph) buying to more traditional growth rates. So again, early signs, early indicators, there's no sign of slowing down of overall investments in healthcare and CT buying we expect will continue. And for us, it's a two-pronged, right? One is new sockets that we get through a lot of these activity. By the way, there's been continued activity with R&D and new design wins as the Chinese OEMs continue to bring out new models. So one -- first prong is new sockets and the second prong is we've now sold quite a bit of new sockets into China. We expect their replacement revenue stream from that to continue and should help us in the future. Great. Thanks and good afternoon or good evening. Just a follow-up just on the demand or the questions on the somewhat lower at least from a high level of the revenue outlook. So it seems like it's a combination of things. I guess, it's some -- just supply chain issues that are continuing and you mentioned just things caught up in the whip. But I guess also the hospital spending over capital expenditure sort of reassessment. That seems to be somewhat of a newer phenomenon, I guess. And how does that flow to the OEM like, are there orders? It sounds like the OEM orders are still good, so I'm just trying to figure out does this hospital slowdown? Is that like a next step? So, does that maybe make this slow down a little bit longer? Just trying to kind of connect the dots there. So, hi, Larry. This is Sam. Yes, so what we are hearing from hospitals and the CEOs, what they're saying is that although they are seeing very good patient volume and elective procedure volume. And as you know from prior history, we have -- we are connected to the hospital CapEx somewhat particularly to the elective procedure volume overall. And what they are saying is that they are under tremendous profit pressure, so to say, in the sense their expenses are running quite high. And so in order to maintain their profits, they are looking at everything. And this is what we've heard more from the United States based hospitals. And as they look at it, they're scrutinizing their capital expenditures and also everywhere that they can manage their expenses better. And in this scenario, what we are hearing is that longer term ROI type of projects which are much higher in terms of capital layout. Those are probably being deferred or delayed. And anything that can increase patient volume, et cetera, is already being taken care of. So we believe that is causing a little bit of push out on the higher end products or higher end machines and that is cascading over to us. That's what we believe it's happening over there. Of course, we are one step removed, but that's what we mean. Right. Okay. So it sounds like itâs obviously end market demand is all based on -- well patient volumes to sure drive your long-term business? But I guess you can never -- customer behavior can shift around and maybe they can decide to hold less CT machines or whatever in the long run. But I guess that's very hard to decide for -- in a couple of quarters. And then just on China, so just trying to get a little better read on that. I feel like -- I put China in the govern, they're still behind this initiative in terms of the CT machine build out. And then I thought that was sort of accelerating in 2020 to have all these freestanding centers that are just CT centers or imaging centers including CT. So how would that slow? Like, to me, two years, it doesn't seem like catch up that fast as to where they'd be slowing down noticeably up to you guys at least. So I'm just trying to get a little more, yes color on that. Yes, if you look at our growth in China, that's been at very high clip 20%, 30%-ish type of growth in terms of the buying. So this month is holiday month in China. There's New Year, so hard to call it a trend. But in general, we're not seeing a slowing of government investment. We're not seeing a slowing in expansion of healthcare. So the question becomes and is it going to continue -- how long is it going to continue at 305 pace? That's the part that I think as we look ahead, we can see a couple of quarters. We can't see beyond that, but we're just putting it in that same bucket of the softening to same. If the trends are probably global trends, so -- but CT continues to be strong and right behind CT in China is cardiovascular and oncology. Those are the newer modalities that are starting to pop up. So overall, prospects of China for us continue to remain strong. Okay. That's fair. So I mean, just a growing -- growth rate. I mean, you can't grow 30%, 40% forever, I get that. So, but selling is still growing there. And then just clarify the COVID related shutdowns in Q4 or calendar Q4? I know we did then talk from some other manufacturers and stuff that, that normally that quarter is more of accelerated manufacturing and overtime and whatnot because then they know there's sort of a slowdown in Chinese New Year. So it's kind of a double whammy. But I feel like you guys haven't been impacted that much by the COVID shutdown. There is always the CT build out over the last couple of years during -- even the heart of COVID. So was that -- did that have any play on your results for this quarter or this quarter's outlook? Yes. So Larry, the medical products were exempted all through that process. And so yes, there was somewhat of a disruption, but not major. We continue to produce all through the last many quarters. And so it was neither a big -- it was not something that impacted us very much. And so we are not expecting that, that opening up would increase significantly for us either, because it really did not impact us significantly that way. And as I said, our products were exempted and so we've been continuing to produce through and ship them. Yes. Right. Okay, if I could just squeeze one more, just to revenue slower, maybe little -- it sounds like inflation still hurt you guys in labor costs aren't fair, but hopefully those are going in the right direction. I'm just trying to set; are there any leverage you can pull? Or you guys done a good job last couple of years sort of keeping costs down and where you can in a tough environment. So if revenues outlook is a little slower, can you -- is there any offsets maybe over the next few quarters you could or you sort of just not much you could do on that side? Yes, so I think there are certain levers, but there is always a timeline associated with those levers, Larry. So what's happening is that the price cost drag on the P&L, cost increase happens sooner than price improvements get realized on the P&L, that's the price cost drag. That's kind of hurting us about 200 basis points right now. And in the December quarter, freight was high. Freight is beginning to improve as we speak since January. So that was a drag of about 100 basis points on our gross margin. So hopefully in couple of months, freight begins to improve. And we talked about mix, and I'm hoping mix is a shorter-term phenomenon and maybe it impacts us in the first half and gets to improve from the second half onwards. We -- mix is very difficult to predict or difficult to control, but that is how I'm thinking. Mix is impacting about 100 basis points. So overall in terms of us improving our gross margins and us improving our financials, we are laser focused on improving manufacturing efficiencies and that supply chain pressure get eased a little bit and they are, they have been improving steadily now for a few months. So as that gets eased, our manufacturing efficiency should come back into play. And so the volume, we are still expecting flat to slightly up as we said in our prepared remarks. So it is still a positive for us, but maybe not as much as we thought about it three or four months ago, but we -- the offsets would be manufacturing efficiencies hopefully mix comes back. And I'm thinking as a few quarters go by, the price cause drag that gets more in shape. And then finally, in our inventory, we have some high-priced semiconductor chips in our inventory that will roll through. So my thinking is by the end of calendar year, the price cost drag and the high margin -- high-cost chips have rolled through the inventory and that's how I'm looking at it. Hope you guys are well. So Sunny, Sam, obviously you guys made a lot of commentary about forward-looking outlook. Sunny, maybe specifically, I want to compare and contrast, if I could. So if you look at the commentary from GE Healthcare, right, they presented quite a bullish outlook in terms of cash spend, imaging and sound across the spectrum. And if I remember correctly, there wasn't that level of caution. You guys have a relatively sort of forward-looking contracts, a significant portion of your revenues are recurring help us reconcile? On one hand, there is caution and from you guys, but on the other hand, some of the bigger players are -- its guns blazing. What are we missing in this picture? I'll get started and I'll ask Sam to add more color. Our OEMs their schedule and of where they are with their orders and order -- their cycles of order to delivery versus ours are slightly different, right? So the OEMs had a strong bookings quarter, let's say, last couple of quarters. And if they're sitting on inventory right now of stuff that they haven't shipped yet, haven't been able to ship yet, that includes our components. So our current quarter is -- might be -- is softer and slower because their output is slower, it has already has our stuff in it. Then as that moves -- as that whip moves through the system, then we would expect certain amount of order input, progress, call offs for us than in the future quarters. So as we sit in Q2, we're expecting that softness, because I think our OEMs are sitting in that position of working through their whips. And so as then -- as that whip clears, as time goes by, I think then we end up progressing through the year. So with that in mind, we're looking at our run rates of revenues and that's why as we did all the math, we're saying this is likely to be more like flattish to up versus growth, because it starts to then bunch up towards the second half. And then as we look at recessionary environment and what we're hearing from -- also from customers is that they're having trouble scheduling delivery of some of the larger modality products. The smaller products are going in between, sort of, the capital budgeting process and are making their way into the hands of the customers. But anything that requires facility modification is getting scheduled out further out, because of CapEx squeeze and other variety of different competing priorities at our -- their customers. So with all that and we try to paint a picture for ourselves of what does we only get visibility so much visibility, two quarters worth. But this is as we look further out, we're trying to paint this picture and hence our cautionary note. I think Suraj, I would also like to add here is that my understanding or belief is that hospitals are carrying six to nine to 12 -- not hospitals, sorry, our customers are carrying six to nine to 12 months of backlog, whereas we are carrying four to six months of backlog. So the backlog is the buffer that enables our customers to kind of ship through to their customers. Whereas us with less than two quarters of backlog, we see it a bit sooner. That would be one way to also think about the difference between us and our customers. Got it. And Sam specifically for you, I'll hop back into queue after this. You made some comments in terms of the gross margins. Obviously, they came a little softer than our expectations. Maybe I missed it, Sam. Was there any shift in customer credit terms, DSOs, any additional line-item color would be greatly appreciated. Gentlemen, thank you for taking my questions. Thanks, Suraj. Yes, now there wasn't really any change in terms of customer credit or DSO. DSO, increased by one or two days, so largely remained flat. I think at this point the credit or customer credit or that type of an issue is not at play here. As I mentioned that the gross margin did come below our expectations, as well and that was mostly around the mix. And mix can change for us and it is also very difficult to get a visibility on for us. So it was really mix that caused the gross margin to come in a bit lower than our expectation. And I'm hoping and we are guiding Q2 with that same somewhat unfavorable mix at this point. But we are thinking mix -- if our thinking is right, we believe mix should come back -- should improve back again after Q2, that's what our current thinking is. Oh, apologies. Line was muted. Good afternoon, Sunny and Sam. Maybe just staying on the theme here, the outlook. And to really splice it a little bit finer geographically. It sounds like it is broad-based? In other words, that you're seeing similar sort of trends, whether it be in Europe and the U.S. specifically and maybe a little bit better as it relates to trends in China, although they're currently going through COVID in the current quarter. So maybe just to fine tune it a little geographically, are the headwinds that you're hearing from customers more acute in the U.S.? Are they more acute in Europe? How are they faring in China? And then I have a follow-up. Sure. Anthony, it feels fairly broad-based, I would say. The variability right now we see is more in by modality. So modalities like dental, we did -- we saw strength in dental, the fluoroscopy and oncology in these other mid-tier model. The non-CT modalities, they're flat to down. And these are pretty heavy modalities that high price points and require a lot of work. And by the way, for those, our customers are in all regions of the world. And then CT felt, CT was soft, and not as much by geography. I don't know if that helps to -- answer your questions more by modality. And China is -- their strength this is probably just a cyclical thing or just a consumption issue and COVID all that tied into some level of softness we're not expecting anything dramatically different there. And then maybe more near-term in the first half, some of the chip companies and AMD and Intel called out just some lingering headwinds in 1Q, but that toward the back half of the year, the outlook for chips improves a bit. I mean, should we expect some of the pressure as you relate to your full-year guidance to be more front end loaded instead of back end loaded? Yes, just one quick comment. We tend to be about 90, 120 days ahead of everyone else ahead of OEMs, right? Because of where we sit in the supply chain process. So if the OEMs end up clearing up their whip backlog that they're currently stuck on, then things will start to open up for us in the second half. But again, that's a bit unknown, because you can only see six months or so. Yes. And then, Anthony, I can add if your question was also referring to cost side or the Intel, AMD pricing perspective and then how it goes to us on the cost side. We are also -- we -- when we are procuring chips, not just FPGAs, all kinds of chips, we go out many years. So -- and many years, I mean, 12 to 24 months and in some cases even beyond 24 months. So of course, as the chip situation improves then what we would be procuring in second half, that would be favorable. But right now, what we have in inventory already is at high cost and that is what I think I mentioned in an answer to Young question before is that, that high-cost chips are in inventory now and they are rolling through. And based on our projections, most of that would have rolled through by -- towards by the end of this calendar year. So that's our situation. But whatever Intel, AMD, et cetera, are saying that would definitely help us in the future periods. Hi, good afternoon. Thanks for taking the questions. First one on inventory, the increase in inventory, I guess two questions, why now? And now that you have inventories at this level, are you confident that you won't have any stock out issues for the remainder of the year? Do you have all the key components you need for fiscal 2023? Yes, Jim. Hi, Jim. Yes. So there are a couple of reasons for growth in inventory and inventory has increased for at least for a few quarters now. So as we began Q1, we were planning for a higher growth rate and so we were positioning our inventory accordingly. Going forward, we will adjust it somewhat to adjust the new forecast or new projections that we are planning. But I do want to remind you, because Q1 is a seasonally low revenue quarter for us, and that's more on demand supply side and right now demand and supply are largely in balance. So the Q1 results were mostly a reflection of the demand levels. But from an inventory management perspective, we have to go on an even keel. So if you look at many -- if you look at our prior Q1s and inventory performance there. Generally, inventory in the last four, five years has grown by about $20 million. So in Q1, inventory grows by $20 million on where it ended in Q4. It's because generally we grow in Q2, Q3 and Q4 is generally the high quarter for us. So growth of $17 million is not unusual for us from an inventory growth perspective. But I do accept that inventory was a bit high already. And so -- and because as I said, we were driving towards a little bit higher revenue and so we're now going to adjust it. And it should come down partially, because of our adjustment actions, but then also as revenue growth and the midpoint of our guidance is higher than Q1 actual revenue. So all of those things should help to bring down inventory going forward. So that's the situation on inventory. I hope, I answered your question, Jim. Okay. Yes, yes. And then we -- following up on that, so I would assume and you'll see positive cash flow from operations for the remainder of the year. As you start to work down that inventory? Jim, generally, we do not guide cash flow from operations or cash balances. But provided, we are successful in bringing inventory down. That should provide -- that should be a good factor to bake in for the cash performance of the company for the remaining quarters. In general, you're thinking right, but I could not say that -- I could not guide you to that, but in general, inventory should provide a positive response to cash as opposed to be a downward pressure on cash. Okay. And then is there any update on the joint venture with Micro-X and the expansion into Southeast Asia and India? Yes. So Jim, on the Micro-X question, that is we -- the Micro-X announcements that we had done. We have five milestones for through R&D to pay them for the technology transfer. It is in a way than acquisition financed through the P&L. In a way, you could look at it that way. So we are expecting one milestone was completed and we are expecting two more milestones to be completed in Q2. That is why our operating expense guidance in Q2 is a bit higher. And then after that two more milestones would be left; I do not have a specific view at this time when the remaining two milestones would be completed. So that's that on -- on that collaboration. And then your second question about Southeast Asia, that really South Asia and I believe you're referring to our initiatives in India. Is that right? Yes. So in India, we're making progress. We've made incremental progress at this time; we've made certain payments to the government for acquiring the land. We are just in the final phases of completing that purchase. Hopefully, we have made the payments and now we are trying to work towards getting the position and those type of agreements done. And so progress is full speed on that initiative. And look forward to having good things come out of that initiative in 12 to 18 months, more like 18 months, I would say. Okay. And then the last one for me, can you just repeat comments you made regarding interest expense and share count for the second quarter? Yes. In terms of share count, given our EPS guidance range used for -- due to ASU 2026 or yes, because of that, our share count for EPS calculation purposes, toggles between 41 million shares or 49 million shares. So for the Q2 guidance range for EPS, we are using 41 million shares. And then what's the second question, Jim? Interest expense, I would just model, I did not provide any guidance on interest expense, but they should at least at this point. No change from Q1 really, whatever debt we are carrying, $200 million on convertible that is at 4% and about $243 million on high yield note. That's about 7.875 interest rate. So that should continue. I just want to remind you, maybe you heard our comments, I just want to remind you that coupon on both the debts is payable in the same quarter. So we pay coupon interest payments in Q1 and Q3. And so maybe that is what you're asking. So we're not expecting a cash coupon payment in Q2, but of course, we would recognize the expense over Q2 for that. Hey, guys. How are you doing? Just looking at -- you guys are carrying a fair amount of cash or have been? And then I saw some comments at the recent equity conference that you were at. How are you viewing the capital structure? I know you've caught the bonds a couple of times; I think you have one claw available left. Are you just going to stockpile cash until you, sort of, debt closer to that convert maturity? Or how are you guys thinking about the cap structure and your use of cash in regards to that? Yes. Thanks Mike. So what we have said that we want to keep $100 million of cash as operating cash and we reported about $108 million of total cash at the end of December quarter. So we do not have that much more cash that we are carrying at this time, compared to the cash levels that I would like to carry for. Just general operations. I want to remind you that our cash is distributed across various geographies. We are a multinational company and movement of cash, et cetera, sometimes may have bad tax consequences. And so as a result, cash is not at one place. So that said, your comment in terms of one tranche that is possible for us to pay that is true. Every calendar year, we can pay down 10% of our high yield notes. So that is at this point about $243 million, so that gives us an opportunity to pay down about $24 million in debt as and when we have sufficient cash to pay that down and provided our Board of Directors approves that. So pending those two things, we can do that. We have highlighted that retiring that is a high priority for us. And that said, as we look towards our business, typically, we generate cash. So as our cash from operations improves our cash balance. We would like to, overall, bring down the overall debt levels. Right now, the debt levels are about $450 million on the company. And we would like to bring it down by about $100 million. When is the right time for that? Depends on various factors, but that is what something we would like to get to. At the right time, when the environment is right, and when we can execute towards that. Okay, great. And then so you did mention that your coupons are both coincidentally in the same quarters Q1 and Q3. So Q2, Q4 should be sort of a cash influx, right, relative to sort of what we saw this quarter, right, because the coupon doesn't get paid. So your high watermarks on cash generally going to be Q2 and Q4, does that sound right? In general, from a modeling perspective, that is right. But from tactical, prospective AR, AP, and then et cetera. And it pertains to that, but in general, your thinking is right. But we would like to make sure we have sufficient windage over that in terms of tactical movements. But in general, your thought is on the right direction, Mike. Thank you. There are no further questions at this time. I'd like to turn the floor back over to Christopher Belfiore for any closing comments. Yes. Thank you, Chris. So in closing, I mean, the quarter was largely as expected and outside of the gross margin pressure from the -- from revenue mix. Economic uncertainty is creating caution across various industries. But as we continue to view the healthcare industry, we participate in as a stable -- we see the healthcare industry as a stable grower over the long-term. I'm very proud of the effort our employees are making globally on a daily basis in this uncertain environment. And I appreciate you're taking the time for us to join -- for joining us today and for your continued interest in Varex. Thank you. Thanks, Sunny. And thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference will be available through February 14 and can be accessed at our website vareximaging.com/investors or by calling 877-660-6853 from anywhere in the U.S. or 201-612-7415 from non-U.S. locations. The replay conference call access code is 13735486. Thank you and goodbye.
EarningCall_1010	Thank you, Emma. Good morning, everyone, and welcome to Caterpillar's fourth quarter of 2022 earnings call. I'm Ryan Fiedler, Vice President of Investor Relations. Joining me today are Jim Umpleby, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division; and Rob Rengel, Senior IR Manager. During our call, which will extend to 8:40 AM Central, we'll be discussing the fourth quarter and full-year earnings release we issued earlier today. You can find our slides, the news release and a webcast recap at investors.caterpillar.com under Events & Presentations. The content of this call is protected by US and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We'll also make assumptions that could cause our actual results to be different from the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or, in aggregate, could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate US GAAP numbers, please see the appendix of the earnings call slides. Today, we reported profit per share of $2.79 for the fourth quarter of 2022 compared with $3.91 of profit per share in the fourth quarter of 2021. We're including adjusted profit per share in addition to our US GAAP results. Our adjusted profit per share was $3.86 for the fourth quarter of 2022 compared with adjusted profit per share of $2.69 for the fourth quarter of 2021. Adjusted profit per share for both quarters excluded mark-to-market gains for remeasurement of pension and other post-employment benefit plans as well as restructuring items. Adjusted profit per share for the fourth quarter of 2022 also excluded a goodwill impairment. Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out 2022. I'd like to start by recognizing our global team for another strong quarter. Our results reflect healthy demand across most end markets for our products and services. We remain focused on executing our strategy and continue to invest for long term profitable growth. In today's call, I'll begin with my perspectives on our performance in the quarter and for the full year. In today's call, I'll begin with my perspectives on our performance in the quarter and for the full year. I'll then provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey. Overall, there was another strong quarter as demand remained healthy for our products and services. Sales rose by 20% versus the fourth quarter of 2021, better than we expected. Supply chain improvements enabled stronger-than-expected shipments, particularly in Construction Industries, and supported an increase in dealer inventories. We achieved double-digit top line increases in each of our three primary segments and saw sales growth in North America, Latin America and the EAME, while Asia Pacific was about flat. Adjusted operating profit margins increased to 17% in the fourth quarter, an all-time record, as we saw our margins improve both on a sequential and year-over-year basis. Adjusted profit per share was $3.86, which includes an unfavorable $0.41 per share of foreign currency headwind, largely due to ME&T balance sheet translation. This was caused by the rapid decline in the US dollar late in the year and reversed much of the favorable impact we saw in the first three quarters of 2022. We generated a 17% increase in total sales to $59.4 billion in the year. Services also increased by 17% to $22 billion. Adjusted operating profit margin for the full year was 15.4%, a 170 basis point increase over the prior year. Although we did not achieve our Investor Day margin targets for the year, which I'll discuss more in a moment, I'm pleased that we increased adjusted operating profit by over $2 billion and grew absolute OPACC dollars, which is our internal measure of profitable growth. For the year, we achieved adjusted profit per share of $13.84, also an all-time record. In addition, we generated $5.8 billion of ME&T free cash flow, firmly in our target range. Finally, despite the strong sales in the fourth quarter, backlog grew by $400 million in the quarter to end the year at $30.4 billion, a 32% year-over-year increase. As I've mentioned, we did see some improvement in certain areas of the supply chain in the fourth quarter. However, pockets of challenge continue, particularly with some suppliers related to Energy & Transportation and Resource Industries. Similar to previous quarters, our sales would have been higher, if not for these supply chain issues. Our global team delivered one of the best years in our nearly 100-year history, including record full-year adjusted profit per share. Despite the supply chain challenges, our team achieved double-digit top line growth and generated strong ME&T free cash flow. We remain committed to serving our customers, executing their strategy and investing for long term profitable growth. Turning to slide 4. In the fourth quarter of 2022, sales increased 20% versus last year to $16.6 billion. The increase was due to favorable price realization and volume growth, which included dealer inventory increases in growth in sales of equipment to end users. Compared with the fourth quarter of 2021, sales to users increased 8%, broadly in line with our expectations. For machines, including Construction Industries and Resource Industries, sales to users rose by 4%, while Energy & Transportation was up 19%. Sales to users in Construction Industries were up 1%, in line with expectations. As a reminder, non-residential represents approximately 75% of Caterpillar sales in Construction Industries. North American sales to users increased as demand remained healthy for both non-residential and residential despite some moderation in residential. Latin America saw higher sales to users, while EAME and Asia Pacific declined slightly in the quarter. However, excluding China, sales to users in the Asia Pacific region increased. In Resource Industries, sales to users increased 13% which was lower than anticipated, mainly due to timing issues related to outbound logistics and commissioning. The segment sales to users increased primarily due to heavy construction in quarry and aggregates. In Energy & Transportation, sales to users increased by 19%, slightly above our expectations. In the fourth quarter, oil and gas sales to users benefited from continued strength in large engine repowers. We also saw strong turbine and turbine-related services. Power generation and industrial sales to users continue to remain positive due to favorable market conditions. Dealer inventory increased by about $700 million in the fourth quarter, which is above our expectations, compared to a decrease of about $100 million in the same quarter last year. As I mentioned, supply chain improvements enabled stronger-than-expected shipments, particularly in Construction Industries, and supported an increase in dealer inventories. We saw increases in each of our primary segments. And within Construction Industries, dealer inventories are now in their typical historical range of three to four months of projected sales. In Construction Industries, the largest dealer inventory increase came in North America, which had benefited our most constrained region. Over 70% of the combined year-end dealer inventory in Resource Industries and Energy & Transportation is supported by customer orders. As expected, we generated improved adjusted operating profit margin in the quarter, both year-over-year and sequentially. Our adjusted operating profit margin increased by 550 basis points versus last year to 17%, which does not include the non-cash goodwill impairment charges and restructuring costs associated with the rail division. I'll provide more detail on rail later in my remarks. Turning to slide 5. I'll now provide full-year highlights. In 2022, we generated sales of $59.4 billion, up 17% versus last year. This was due to favorable price realization and higher sales volume, driven by the impact from changes in dealer inventory, increased services, and higher sales of equipment to end users. As I mentioned, we generated $22 billion of services revenues in 2022, a 17% increase over 2021. Services growth in 2022 benefited from our ongoing initiatives and investments as well as price realization. We now have over 1.4 million connected assets, up from 1.2 million in 2021. We delivered over 60% of our new equipment with a customer value agreement and the launch of our new app called Cat Central to help drive growth in ecommerce sales to users. We also had the highest level of parts availability in our history. Overall, our confidence continues to increase that we'll achieve our $28 billion services target in 2026. Our full-year adjusted operating profit margin was 15.4%, 170 basis point increase over 2021. Although we significantly increase margins in the fourth quarter versus last year, overall, they did not improve enough for us to achieve our full-year Investor Day margin targets. Our margins in 2022 were impacted by supply chain inefficiencies, ongoing inflationary pressures within manufacturing costs and our conscious decision to continue to invest for profitable growth. As I mentioned during our last earnings call, our margin targets are progressive, which means we expect to achieve higher operating profit margins as sales increase. In a higher inflationary environment, where a relatively larger portion of the sales increase is due to price realization, there's less operating leverage, which makes the delivery of those progressive margins more challenging. Andrew will provide more information about our operating profit margin targets. Moving to slide 6. We generated ME&T free cash flow of $5.8 billion for the full year, which was in line with our investor day range of $4 billion to $8 billion. We returned $6.7 billion to shareholders or 115% of ME&T free cash flow, which included $4.2 billion in repurchased stock and $2.4 billion in dividends to shareholders. We remain proud of our dividend aristocrat status and continue to expect to return substantially all ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on slide 7, I'll share some high level assumptions on our expectations moving forward. While we continue to closely monitor global macroeconomic conditions, overall demand remains healthy across our segments, and we expect 2023 be better than 2022 on both top and bottom line. Just to remind you, our internal measure of profitable growth is absolute OPACC dollars. We believe increasing absolute OPACC dollars will lead to continued higher total shareholder returns over time. We expect to achieve our updated adjusted operating profit margin targets and ME&T free cash flow target range of $4 billion to $8 billion during 2023. Now I'll discuss our outlook for key end markets this year, starting with Construction Industries. In North America, overall, we see positive momentum in 2023. We expect non-residential construction in North America to grow due to the positive impact of government related infrastructure investments, healthy backlogs and rental replenishment. Although residential construction continues to moderate due to tightening financial conditions, it remains at a healthy level. In Asia Pacific, excluding China, we expect growth in Construction Industries due to public infrastructure spending and supportive commodity prices. As we mentioned during our last earnings call, weakness continues in China in the excavator industry above 10 tonnes. We expect it to remain below 2022 levels due to low construction activities. In EAME, business activity is expected to be about flat versus last year based on healthy backlogs and strong construction demand in the Middle East, offset by uncertain economic conditions in Europe. Construction activity in Latin America is expected to be flat to slightly down versus the strong 2022 performance. In Resource Industries, we expect healthy mining demand to continue as commodity prices remain above investment thresholds. That said, our customers remained capital disciplined. We anticipate production and utilization levels will remain elevated and our autonomous solutions continue to gain momentum. We expect the continuation of high equipment utilization and a low level of park trucks, which both support future demand for our equipment and services. We continue to believe the energy transition will support increased commodity demand, expanding our total addressable market and providing opportunities for profitable growth. In heavy construction and quarry and aggregates, we anticipate continued growth, supported by infrastructure and major non-residential construction projects. In Energy & Transportation, we expect sales growth due to strong order rates in most applications. In oil and gas, although customers remain disciplined, we are encouraged by continued strength in demand in order intakes for the year. New equipment orders for solar turbines continue to be robust. Power generation orders are expected to remain healthy, including data center strength. Industrial remains healthy, with momentum continuing for 2023. In rail, North American locomotive sales are expected to remain muted. We anticipate strength in high speed marine as customers continue to upgrade aging fleets. During the fourth quarter, we took in a $925 million non-cash goodwill impairment charge related to our rail division, which is part of the Energy & Transportation segment. The impairment was primarily driven by a revision in our long-term outlook for the company's locomotive offerings. We believe opportunities exist for new locomotives, overhauls, repowers and modernizations, but at lower levels than previously forecasted and occurring over a longer time horizon. In addition to the goodwill impairment charge, we also incurred restructuring cost of $180 million in the quarter, primarily related to non-cash inventory adjustments within this division. Importantly, our rail services, including track signaling and freight car, remain robust. Private rail plays an integral part in supporting and maintaining rail infrastructure in countries around the globe and rail remains one of the most efficient ways of transporting goods across the land. We will continue to offer tier four solutions to our customers. However, strategic investments in new locomotive products will continue shifting to competitive, sustainable solutions that help customers meet their carbon reduction initiatives, including hybrid, full battery electric and alternative fuel power sources, including hydrogen. These alternative power solutions for rail will leverage modularity and scale across Resource Industries, Construction Industries, and Energy & Transportation. We believe these enterprise-wide investments will provide Caterpillar with a strategic advantage over time. Moving to slide 8. We continue to advance our sustainability journey in the fourth quarter of 2022 as we strive to help our customers achieve their climate related objectives. In November, Caterpillar announced the successful demonstration of its first battery electric 793 large mining truck prototype with support from key mining customers participating in Caterpillar's Early Learner Program. The truck performed at the same specification as a diesel truck on our 7 kilometer course, achieving a top speed of 16 kilometers per hour carrying a full load and 12 kilometers per hour with that same load at a 10% grade. In addition to the truck, we also unveiled plans to create a working and more sustainable mindset of the future at our Arizona based proving ground. This includes installing and utilizing a variety of renewable energy sources, leveraging technologies from our electric power division and new electrification and advanced power solutions division. We also invested in Lithos Energy, Inc., a lithium ion battery pack producer that manufactures battery packs for the types of demanding environments our Cat equipment thrives in. This collaboration supports our commitment to delivering robust electrified products and solutions to our customers. Lastly, in 2022, we continued to advance our autonomous journey, achieving an industry first at moving over 5 billion tons autonomously across 25 mine sites worldwide. During the fourth quarter, we announced our first autonomous solution in the aggregates industry. We'll collaborate with Lux Stone, the nation's largest family owned and operated producer of crushed stone, sand and gravel, to expand these solutions beyond mining. We'll utilize Cat MineStar Command for hauling system on 777 trucks, contributing to continued improvements in safety and productivity for our customers. These examples reinforce our ongoing sustainability leadership, and how we help our customers build a better, more sustainable world. We look forward to issuing our 18th annual sustainability report during the second quarter. Thank you, Jim. And good morning, everyone. I'll begin by covering our fourth quarter results, including the performance by our business segments. Then I'll cover the balance sheet and ME&T free cash flow before concluding on high level assumptions for 2023, including the first quarter. Beginning on slide 9. Sales and revenues for the fourth quarter increased by 20% or $2.8 billion to $16.6 billion. The sales increase versus the prior year was due to strong price realization and volume, partially offset by currency impacts. Sales were higher than we expected as supply chain constraints eased in some areas and we were able to ship more product. Operating profit increased by 4% or $69 million to $1.7 billion as strong price realization and volume growth were mostly offset by a goodwill impairment charge, higher manufacturing costs and restructuring expenses. Our adjusted operating profit was $2.8 billion, up $1.2 billion versus the prior year, and the adjusted operating profit margin was 17.0%. This was an increase of 560 basis points versus the prior quarter due to favorable price realization and volume growth, which outpaced manufacturing cost increases. Fourth quarter margins were lower than we were targeting as well as being lower than where we needed them to be to meet our full-year Investor Day margin target. I will talk more about that in a moment. Adjusted profit per share increased by 43% to $3.86 in the fourth quarter compared to $2.69 in the fourth quarter of last year. Adjusted profit per share in the fourth quarter excluded goodwill impairment charge of $925 million or $1.71 per share related to our rail division, as Jim has explained. This charge is held at the corporate level and does not impact Energy & Transportation segment margins. Adjusted profit per share figures also exclude mark-to-market gains for the remeasurement of pension and OPACC plans and restructuring items. Restructuring costs of $209 million or $0.29 in the quarter were primarily related to non-cash inventory write-downs within our Rail division. Again, these charges impact at the corporate level and the inventory write-downs are within cost of goods sold in the income statement. For the full year, restructuring costs were about $600 million. Last quarter, we told you that a non-cash charge of approximately $600 million could slip into 2023, which it did. We expect to close on the divestiture of longwall business in early February and the non-cash charge will be included in our first quarter 2023 restructuring charges. The provision for income taxes in the fourth quarter excluding the amounts relating to mark-to-market, goodwill impairment and other discrete items reflects at a global annual effective tax rate of approximately 23%, as we had expected. Finally, our fourth quarter results including unfavorable non-cash foreign currency impact within other income and expense of $0.41 related to ME&T balance sheet translation in the quarter. To explain, many of our foreign entities are US dollar functional. These entities are generally in a net liability position, causing a favorable translation impact in periods of US dollar strength. Within each of the first three quarters, we saw some benefit as the dollar sequentially trended stronger. However, within the fourth quarter, this trend reversed. Given the significant weakening of the US dollar within the fourth quarter of 2022, the negative impact to profit was sizeable. As you would imagine, our forward-looking assumptions do not include expectations for currency fluctuations. To give a bit more context, other income and expense excluding the impact of pension mark-to-market adjustments has trended around $250 million of income per quarter for all of 2021 and for the first three quarters of 2022. This is reflected in a number of offsetting items, including currency. In the fourth quarter, excluding pension mark-to-market, other income and expense swung to a $70 million expense. The majority of that change is due to the foreign exchange translation adjustment, which is why we have highlighted this. Overall, sales were better than we had expected, as we had anticipated margins increase, but as I said earlier, not by enough to meet our Investor Day margin targets. Adjusted profit per share rose by 43%, but that was moderated by the $0.41 non-cash foreign currency balance sheet translation charge that I mentioned a moment ago. Moving on to slide 10. The 20% increase in the top line was driven by favorable price realization and higher sales volume. Volume was supported by the $800 million year-over-year impact of changes in dealer inventory and an 8% increase in sales to users. From a sales perspective, currency remained a headwind, given the strength of the US dollar. As I mentioned earlier, sales were higher than we expected in the quarter, mostly due to some improvements in the supply chain, which enables stronger shipments particularly in Construction Industries. The increase in dealer inventories reflects the improved shipments in Construction Industries and customer delivery timing in Resource Industries and Energy & Transportation. Moving to slide 11. Fourth quarter operating profit increased by 4%, impacted by the goodwill impairment charge and restructuring expenses. Adjusted operating profit increased by 78% as favorable price realization and higher sales volume continued to outpace higher manufacturing costs. Manufacturing costs increased primarily due to higher material costs and unfavorable costs absorption as we decreased our inventories in the fourth quarter compared to an increase in the prior year. Related to our recent price cost performance, keep in mind that we are still catching up from the increases in manufacturing costs, which have occurred over the last few years. In particular, material freight costs have increased by about 20% since 2020 and as full-year gross margins remain below our 2019 levels. Our fourth quarter adjusted operating profit margin of 17% was a 560 basis point increase versus the prior year. As Jim has mentioned, this is our highest ever quarterly adjusted operating margin. As I said earlier, we did not achieve our Investor Day margin targets. As Jim said, in a high inflation environment, you do not get the benefit of operating leverage that you would normally expect when sales increases are volume driven. You will recall that our margin targets are progressive, which means that the top end of the range, for every $1 billion in sales incremental revenues, we need to deliver close to 40 percentage points of that through adjusted operating profit. This is challenging to achieve in a high inflation environment when sales are increasing due to price realization designed to mitigate increases in manufacturing costs. Also, please keep in mind that we made a conscious decision to continue to invest for future profitable growth. We have not seen inflation anywhere near double digit levels since the targets were introduced in 2017. In a low inflation environment, productivity improvements can be made to offset inflationary increases, so nominal targets remain effective. In the current high inflation environment, you cannot achieve the level of productivity. So we are adjusting the target for sales range to reflect the inflationary increases we've seen in 2022. On slide 12, we've updated our margin target slope to account for the impact of inflation as depicted on the chart. We still have the same aspirations for margins. However, the corresponding level of sales and costs are generally around 9% higher than they'd have been in a non-inflationary environment. As you can see, the low end of the sales range is now $42 billion, while the top end is $72 billion. This compares to the previous bookends of $39 billion and $66 billion, respectively. The key point is that, despite the inflationary impact on sales and costs, which impact margins, our expectations for profits and cash generation have not changed and we remain focused on delivering increases in absolute OPACC dollars. Depending on the inflationary environment that we see in 2023, we'll have to revisit the range next January. Moving to slide 13, across our three primary segments, sales and margins improved in the fourth quarter versus the prior, supported by price realization and sales volume. As expected, price more than offset manufacturing costs in all three segments. Starting with Construction Industries, sales increased by 19% in the fourth quarter to $6.8 billion, driven by favorable price realization and sales volume, partially offset by currency. Volume increased primarily due to changes in dealer inventory and higher sales to users. Dealer inventory increased in the quarter compared to a reduction last year. Sales in North America rose by 34%, due mostly to strong pricing, the positive change in dealer inventory and higher sales to users. Sales in Latin America increased by 39% on strong price realization and higher sales volume, the latter due mostly to a favorable change in dealer inventory. In the EAME, sales increased by 10% on price realization and sales volume, partially offset by unfavorable currency. Sales volume was supported by positive year-over-year change in dealer inventory as the decrease in the prior year's quarter was larger than this year's decline. Sales in Asia Pacific decreased by 10%, mostly due to unfavorable currency impacts, partially offset by stronger price realization. Lower sales volume also contributed to the decline as dealers decreased inventory during the fourth quarter compared to an increase in the prior year. Fourth quarter profit for Construction Industries increased by 87% versus the prior year to $1.5 billion. Price realization and higher sales volume drove the increase. Unfavorable manufacturing costs largely reflected high material costs, unfavorable cost absorption and increased freight. The segment's operating margin of 21.7% was an increase of 780 basis points versus last year. The margin for the quarter was better than we'd expected on strong volume, price and moderating material costs. As a reminder, the fourth quarter is usually the weakest quarter for margins in construction industries, but the with the benefit of price realization, the reverse was true in 2022. Turning to slide 14. Resource Industries sales grew by 26% in the fourth quarter to $3.4 billion. The improvement was primarily due to favorable price realization and higher sales volume. Volume increased due to the impact of changes in dealer inventories and higher sales of equipment to end users. Dealer inventory increased more during the fourth quarter 2022 than the prior year due to the timing of customer deliveries, which includes the impact of outbound logistics delays and commissioning. Fourth quarter profit for Resource Industries increased by 110% versus the prior year to $605 million, mainly due to favorable price realization and higher sales volume. This was partially offset by higher manufacturing costs, primarily material, freight and volume related manufacturing costs. The segment's operating margin of 17.6% was an increase of 700 basis points versus last year, strengthening versus third quarter, as we had expected. Now on slide 15. Energy & Transportation sales increased by 19% in the fourth quarter to $6.8 billion, with sales up across all applications. Oil and gas sales increased by 38% due to higher sales of turbines and turbine related services, reciprocating engines and aftermarket parts. Power generation sales increased by 12% as sales were higher in large reciprocating engines, supporting data center applications. Sales increased in small reciprocating engines, turbines and turbine related services as well. Industrial sales rose by 19%, with strength across all regions. Finally, transportation sales increased by 6%, benefited by marine applications and reciprocating engine aftermarket parts. Rail services were offset by lower deliveries of locomotives. Fourth quarter profit for Energy & Transportation increased by 72% versus the prior year to $1.2 billion. The improvement was primarily due to higher sales volume and favorable price realization. Higher manufacturing and SG&A and R&D costs acted as partial offset. Manufacturing cost increases largely reflected high material costs and volume related manufacturing costs. SG&A and R&D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth. The segment's operating margin of 17.3% was an increase of 530 basis points versus last year, strengthening versus third quarter as we had expected. Moving to slide 16. Financial Products revenue increased by 10% to $853 million, benefited by higher average financing rates across all regions. Segment profit decreased by 24% to $189 million. The profit decrease was mainly due to a higher provision for credit losses at Cat Financial and an unfavorable impact from equity securities in insurance services. The increase in provisions reflects changes in general economic factors, rather than company specific economic factors. Despite these changes, our leading indicators remain strong. Past dues were 1.89% compared with 1.95% at the end of the fourth quarter of 2021. Also, this was an 11 basis point decrease in past dues compared to the third quarter of 2022. Retail new business volume declined versus the prior year, but remained steady compared to the third quarter. As I mentioned last quarter, Cat Financial is not seeing slowing business activity, but continues to see strong competition from banks due to higher interest rates and more customers willing to pay cash for their machines. Used equipment demand remains strong, with inventories at historically low levels. We continue to see high conversion rates as well, as customers choose to buy at the end of the lease term. Now on slide 17. ME&T free cash flow in the quarter increased by about $1.2 billion versus the prior to $3 billion. The increase was primarily due to higher profit. On working capital, our inventory decreased by about $600 million in the quarter. Improved availability of some components benefited shipments as we decreased our work-in-process inventory. We also saw strong shipments of solar turbines in the quarter. As Jim mentioned, we generated $5.8 billion in ME&T free cash flow for the year, inclusive of CapEx of about $1.3 billion. We are pleased with the strong free cash flow we generated in a year where we paid $1.3 billion in short term incentive compensation and increased our inventories by over $2 billion. Our liquidity remains strong with an enterprise cash balance of $7 billion and another $1.5 billion and slightly longer-dated liquid marketable securities, which generate improved yields on that cash. Now on slide 18. I'll share some high level assumptions for the full year, followed by the first quarter. As we begin 2023, demand remains constructive given the strong order backlog and improving supply chain dynamics, although we do not expect the benefit of a dealer inventory tailwind like we saw last year. As a reminder, dealer inventory rose by $2.4 billion in 2022. Around 40% of the increase related to Construction Industries, with the balance reflecting the timing of deliveries to customers in Resource Industries and Energy & Transportation. As Jim mentioned, about 70% of the combined end dealer inventory in Resource Industries and Energy & Transportation is supported by customer orders. For the full year 2023, we anticipate increased sales supported by price realization. Although we expect stronger sales to users in 2023, the headwind from the $2.4 billion dealer inventory build in 2022 will moderate volume growth. Our planning assumption is that we do not expect a significant change in dealer inventory by the end of the year. We do expect service sales momentum to continue after reaching $22 billion in 2022. From a sales seasonality perspective, we expect a more typical year with lighter first quarter for total sales. For the full year, we expect our adjusted operating profit to increase, reflecting higher sales, and we expect to be within our updated adjusted operating margin ranges. Pricing actions from 2022 will continue to roll into 2023, and we will evaluate future actions as appropriate to offset inflationary pressures. We currently expect to see a moderation of input costs inflation as the year progresses, and therefore a corresponding moderation in price realization as we move through the year. Price, though, should still more than offset manufacturing costs for the year. Increases in SG&A and R&D expenses are expected to exceed the benefit of lower short term incentive compensation expense this year as we continue to invest in strategic initiatives, such as services growth and technology, including digital, electrification and autonomous. Below operating profit, we anticipate a headwind of approximately just over $800 million or about $80 million per quarter in other and income and expense at the corporate level related to pension expense due to higher interest costs, given higher interest rates. This is a non-cash item. For the full year of 2022, the strengthening US dollar acted as a tailwind of $189 million relating to the ME&T balance sheet translation impact that I spoke about earlier. This would not recur if the weakening we've seen in rates thus far continues. Based on current rates, we'd see a headwind of around about $80 million in the first quarter. Remember that 2022 was not a typical year for us as margins increased sequentially through the year as the benefit of price realization was stronger in the second half of the year. Also, manufacturing volumes were impacted by supply chain issues, which did impact absorption rates from quarter to quarter. These factors will mean that we do not expect to return to our normal seasonal margin patterns in 2023. Moving on, we expect to achieve our ME&T free cash flow target of $4 billion to $8 billion for the year, with CapEx in the range of about $1.5 billion. We'll have about a $1.4 billion cash outflow in the first quarter related to the payout of last year's incentive compensation, slightly higher than we saw in the first quarter of 2022. We anticipate restructuring expenses of around $700 million this year, the majority of which is related to the long haul divestiture charge that I mentioned earlier. Now on to our assumptions for the first quarter. In the first quarter compared to the prior year, we expect sales to increase on price and slightly stronger volume, reflecting higher sales to users. With regard to dealer inventory, we expect a typical seasonable build in the first quarter of this year. As a reminder, dealers increased inventories by $1.3 billion in the first quarter of 2022, and we expect a lower build in the first quarter of 2023. Sales should increase across the three primary segments in the first quarter versus the prior. Compared to the fourth quarter, we anticipate lower sales in the first quarter at the enterprise level, following our typical seasonal pattern. We expect lower sales sequentially in each of our three primary segments as well. To provide some color. Construction Industries is following an abnormally strong fourth quarter, where shipments exceeded our expectations. Resource Industries had a strong fourth quarter, with its highest quarterly shipments since 2012, and expects lower sequential sales in the first quarter due to the timing of shipments which, as you know, can be lumpy. Energy & Transportation sales should be sequentially lower as well, following normal seasonal patterns. Keep in mind that solar turbines had a strong fourth quarter. Specific to the first quarter versus the prior year, keep in mind that first quarter margins last year were very low. We expect substantially strong enterprise and segment margins in the first quarter on favorable price and volume. Price realization should more than offset manufacturing costs above the [Technical Difficulty] primary segment levels as well. Also, we could see headwinds related to pension and currency below operating profit, as I have just mentioned. Compared to the fourth quarter of 2022, we expect adjusted operating profit margins to be flattish to down for the first quarter of the year at the enterprise level. Keep in mind that our fourth quarter of 2022 adjusted operating profit margins were our highest quarterly margins ever. By segment, in Construction Industries, we normally see higher margins in the first quarter. However, coming off a very strong fourth quarter, we expect lower volume to weigh on margin sequentially. This is the business which usually drives the enterprise-wide sequential margin improvement from the fourth quarter to the first. Similarly, lower volumes should drive sequentially lower margins in Resource Industries. And in Energy & Transportation, we expect lower margins sequentially following a strong fourth quarter, which is the normal pattern for this business. Turning to slide 19. Let me summarize. Sales grew by 20%, led by strong price realization and volume gains across three primary segments. The adjusted operating profit margin increased by 560 basis points to 17%. ME&T free cash flow was strong at $3 billion for the quarter, and we continue to return cash to shareholders on a consistent basis. Service revenues were $22 billion for the full year, a 17% increase as momentum built in 2022. The outlook remains positive with improving supply chain dynamics and the backlog up around $400 million to over $30 billion. We've updated our margin target scope to account for the impact of inflation on sales and costs and we expect our 2023 adjusted operating margins to be within our updated range. Despite the inflationary impact on sales and costs, our expectations for profit and cash flow generation have not changed, and we will continue to execute our strategy for long term profit growth. I want to confirm that full-year 2022 restructuring costs were about $300 million for the year. So apologies if we made an error in the call. Just wanted to appreciate all the color on dealer inventory. I guess it looks to me like about a billion dollars of the build is in construction. A good chunk of that is in North America. And retail sales here have been, call it, flattish over the past three quarters or so. So I guess I'm curious, as you think about Q1 and you think about that seasonal inventory build, where do you expect that to occur? Is the channel stocked enough in North America construction? And how comfortable are you with dealers actually being able to put through this inventory to end users in 2023? We typically see an increase ahead of the spring selling season. So that's why we think it'll be a traditional kind of increase. We've talked about what we see happening in the various markets again, the strength in infrastructure, which is 75% of CI. It's a moderation in residential in North America, as we discussed. But again, North America really had been our most constrained region. So we're pleased to see healthier dealer inventories in North America. And we're now in that typical range of three to four months. And again, we've talked about the fact that RI and E&T typically don't hold a lot of dealer inventory, hoping to get an order. Over 70% of the year-end dealer inventory for RI and E&T is tied to customer orders. I'm going to ask about turbines within E&T. Obviously, the global energy mix is shifting on nat gas to Russia and so forth. Are you able to say â the orders have been strong, I assume related partly to that. Is the solution sort of already in the pipeline for solar? Or there are a lot of projects underway and/or under consideration, they expect to keep that segment elevated for the next several years? Rob, it's always tough to make a multi-year prediction. But I will say that order rates are quite strong for solar, as is quotation activity. And of course, solar is very involved in the natural gas value chain, compressing a lot of gas to LNG facilities for export around the world. There has been an under investment, I'd argue, in oil and gas over the last few years and that is starting to be reversed now, and that has a positive impact on both our Cat oil and gas business and our solar business. So again, very difficult always to make a multi-year projection, not knowing what's happening in the economy. But based on what we see today, business is quite strong for solar, both on the services side and on the new equipment side. And one of the things we have seen, there was a â for a while there, after the decline in oil prices a few years ago, we saw a decline in international projects. That's picked up for solar. So we're seeing more international projects. We're also seeing strength in North American gas compression for solar as well. I guess my question, can you talk for 2023 where's your opportunity to put through incremental price and where you see deflation? And the question just comes from, Jim, just the incremental margins that you've put up in the fourth quarter were fairly impressive. So I'm just wondering how big sort of the price cost tailwind can be in 2023 with the strong pricing actions and supply chain easing and potentially deflation in some areas. Well, Jamie, certainly, when we think about price actions, we take a number of things into account. Certainly, we take into account the increases from our suppliers in cost. We also, of course, pay very close attention to competitive market and always striving to provide more value to our customers. So it's difficult for us to make a prediction as to what will happen. And we demonstrated the ability to pass along price when we need to because of inflationary factors. But again, we always keep competition in mind as well. So again, pleased at how we're doing so far and the way we're managing that balance. As I think we've said from a planning assumptions perspective, obviously, there is some carryover price impacting us, in particular in the first half of the year. As we expect to go through the year, we expect that benefit of price to moderate in the second half. But also, we expect the increases in manufacturing costs to continue to moderate as we go through the year. But, obviously, that's a planning assumption. And as always the case, that is predicated on the assumption that input inflation does moderate. And as Jim said, we'll obviously keep an eye open on that and take pricing actions accordingly. I'm wondering if you'd just talk about your production plan in Construction Industries? What are you folks looking for in terms of decision to potentially curtail production if we do continue to see dealer inventory builds ahead of expectation? Just if you could just touch on the key indicators that you're looking at and how can we gradually affect that production slowdown if that's indeed what we need to do over the course of 2023? Certainly, again, we obviously pay very close attention to what's happening in the marketplace. We pay attention to STUs. Dealers or independent businesses make their own decisions about inventory. But, certainly, we do work with them. And the last thing we want to do is to have too much inventory in the channel. As it occurs today, as we mentioned earlier, we're now back in our normal typical range. And still, we still have many dealers that would like more equipment from us to support customer orders. So we talked about the fact that non-resi is 75% of Construction Industries. And it is still quite robust and strong, and we expect it to grow. Yes, some moderation in residential. But, again, 75% is non-resi. So, again, as we always do, we'll pay close attention to the market and we'll modify our production plans as appropriate. But there are still some products that we need to produce more of, quite frankly, and we're still dealing with some supply chain issues in some areas. So it's not a one size fits all answer. We talked about the fact that China is slow and we expect it to continue to be slow, below 2022 levels, but in many areas demand is still quite strong. My question relates to the first quarter guidance. Normal seasonality on sales, EBIT margins usually go up a couple hundred basis points. That's sort of a $4.50 EPS number. What you're implying is a little closer to $4. The margins, in particular, you mentioned pension, and I know CI is at a high level. So the comp is tough sequentially. But on price cost, what are you assuming on price cost first quarter versus fourth quarter, if you could just give us some color. It's just to see the margins flat to down sequentially, even with a tough comp, is a bit unique. And just if you could help us flesh out sort of the price cost. And part of the reason why I highlighted that CI margins were actually very, very high in the fourth quarter, part of that was because normally, in the fourth quarter, you don't see a dealer inventory build as big as we did see in the fourth quarter and the fact that that release did help overall CI margins come in a little bit better than we expected as well. Obviously, what that does mean is, normally â yes, correct, we normally get a 200 to 300 basis points bump in the first quarter based on production and ramping up production. Obviously, those production rates aren't quite the same as they would normally be fourth quarter to first quarter because, obviously, we're looking at a very different profile, particularly given that, obviously, we were building production through 2022, particularly in CI. So that is the biggest challenge and that's probably the biggest single factor which will drive margins sequentially lower. On price cost, we still expect strong price in Q1. It will not be as big as Q4 for the simple reason we are lapping price increases that we put through at the beginning of 2022. So that will be coming down slightly, but we do expect price cost to be favorable for the first half of the year. Again, that's just going to create a little bit of noise in the margin structure quarter-on-quarter. Unfortunately, we are not going to go back to the normal lower margins in Q1, higher margins in Q4, which you guys are going to be able to model is going to still be a little bit different as we go through 2023. Obviously, 2022 was the opposite. I'm trying to understand the volume commentary for this year. Since you expect sales to end users to be stronger this year versus last year, but you don't expect dealer inventory stocking benefit. Does that mean dealer inventory could actually decline again from current levels to support the stronger sales to end users? No, that's an assumption at the moment, Tami. At the moment, as a planning assumption, as is always the case, the dealer inventories will be flattish for the year and should not increase or decrease. Effectively, what that does mean, though, is obviously the headwind exists from our shipments on the $2.4 billion of dealer inventory that got built in 2022. Remind you, a big chunk of that, around about 60% is in E&T and in RI, which is related to customer orders, which will be fall through into sales to end users in due course. But overall, we expect, again, sales to users to be up year-over-year and the dealer inventory headwind will moderate that level of increase the volume that we will see in our shipments, as I said in my remarks. Just following up on the solar comments in the oil and gas portfolio. E&T was a dominant driver of earnings seven to eight years ago with leading margins for Cat. It's one of the only segments you're not getting that double digit pricing right now. It's lagged the others. Do you see room for that to pick up following this reversal of underinvestment the last few years? And is there anything structurally keeping Cat from returning to those prior peak margins in E&T? You may recall that we put through price increases later in E&T than we did with machines just based on the market dynamics that existed at the time. So having said that, as I mentioned, particularly in oil and gas and power generation, market is quite strong. And we expect our volumes, certainly in oil and gas, to increase. And we're dealing with in kind of oil and gas still some supply chain challenges. So we're dealing with that. That factor was your ramp up. So, our, again, I mentioned earlier, very strong fourth quarter, but still very robust order rates coming in and a lot of quotation activity. So, again, we do expect that E&T to improve in 2023. And I won't try to compare it to where they were a few years ago. I'm going to say that the business is strong and improving. I just wanted to dig into the manufacturing cost side of the price cost equation. It sounds to me, reading through the comments you made in response to an earlier question, that you still expect manufacturing costs to be a headwind year-on-year in 2023. Can you just kind of talk through the big components of that, materials versus freight, and why we shouldn't expect at some point in 2023 for manufacturing costs to become a tailwind? There's a couple of factors, obviously, that come into that. Material costs will still be a headwind, we expect. Some of that is material is cost inflation that we're still seeing through this year. Some of that material cost inflation is not just necessarily commodity costs. Some of it will be labor cost and some of it will include energy costs. So, all of those factors we are anticipating will moderate as we go through the year. We are starting to see signs of lower levels of requests for price increases coming from suppliers. So that's a positive sign. And hopefully, as things unwind through the year, some of that will moderate. Again, we have not â in our planning assumptions, we base our pricing actions on what we're assuming from a manufacturing cost perspective. And obviously, we'll take action as appropriate if we need to, if there are greater increases than we're currently expecting in manufacturing costs in 2023. In China, I know you mentioned that you're expecting levels to be below 2022, at least on the end market perspective, but maybe you could talk about just what you're seeing in your â in the channel from an inventory perspective relative to, I guess, normalized levels? And then, how should we think about the business, now that you have the GX series for a full China's cycle. Again, just to reiterate, we had a couple of really strong years in China in 2020, 2021. And we had saw softening in 2022. And again, we don't see signs of improvement at this point. We continue to invest in new products to try to maintain our competitiveness with new products. So that's continuing. And we've been pleased with the response to those new products, including the GX. But that above 10 ton excavator market, we do expect to be weaker in 2023 than it was in 2022. And the inventory in the fourth quarter versus the build in the prior year is lower. Yeah. So we actually had a reduction in dealer inventory in Asia-Pac this year in CI versus a build in the previous year. Jim, maybe just a follow-up on the just mining outlook within RI, the point about the miners being capital disciplined, which has been in place for some time, but just on the back of what appears to be strong results and outlook from a competitor in Asia overnight, maybe just say a bit more about kind of the outlook and your views on the mining piece of RI for 2023. We've been talking for a number of years in our earnings call about what we expect in the mining industry, which was moderate growth year-on-year. And as opposed to what we saw going back, thinking about 10 or 12 or 15 years ago, where we saw some wild cycles up and down, and really I believe that's a function of our mining customers remaining capital disciplined. And that's a very positive thing, I think, for them and for us, and what we've been saying for a number of years now in our earnings calls, that we expect a year-over-year moderate increase. And that's exactly the way it's playing out. So we're very encouraged by our quotation activity with customers, the conversations that are going on. We have a strong backlog, which we feel good about. Parked trucks remained at low levels. There's high utilization of equipment. And customers make decisions on a whole variety of factors as to whether or not they're going to rebuild or they're going to buy new trucks and we benefit from either one of those things. We're very encouraged by our autonomous solution. And we firmly believe we have the best solution in the industry. And that's been demonstrated by the decision, the purchasing decisions that our customers are making. And as a reminder, of course, RI also includes quarry and ag, which trends there are positive as well. A lot of that's driven by infrastructure spending and anticipated infrastructure spending. So, again, we feel good about the mining business. Again, quotation activity is very strong and we're having very good conversations with customers. I was hoping you guys can provide us with some more insight into the strength you're seeing in the Middle East. And related to that, but longer term, Saudi Arabia has big plans in both construction and, more recently, mining. Are there any meaningful incremental opportunities for you guys there? I believe we mentioned in our prepared remarks that EAME, which is Europe, Africa and the Middle East, is expected to be about flat. And we said that strength in the Middle East is offsetting some uncertainty in Europe. So, certainly, when oil prices are elevated, that tends to provide the investment capabilities for customers in the Middle East, it's for oil and gas business or for construction. So, again, it is certainly a bright spot and a positive one and one that we feel will continue through 2023. Just curious what was different about the supply chain in construction, which sounded like it's pretty smooth versus E&T and Resource, which sounded like were still a little challenging? Is it just still the randomness that's out there? And then last quarter, you talked about some of the manufacturing inefficiencies due to supply chain? Just curious how that played out in Q4 and what you expect for that in 2023? Certainly, we have a diverse group of suppliers and a diverse product line and we did see some improvement in the quarter, but there are still some areas of strength. And it's very different product by product. And even though you'll see a number of suppliers in better shape, all it takes is one component to prevent you from shipping an engine or machine. And part of it's just the nature of the beast, I think, as to what's happening in various industries. And if we look at our large engines, it's more of a struggle, frankly, than it is with some of our construction machines at the moment. And these things ebb and flow over time. But that's where we are today. We still see some semiconductor availability challenges. I know with the higher end chips, that's improved significantly in the industry based on industry reports, but for the semiconductors that we use, it continues to be a challenge. And so, in the fourth quarter, we certainly did still experience inefficiencies associated with supply chain challenges. And that had an impact on us because we're still doing things like workarounds. And it's not anywhere near as smooth as it needs to be. I think if you look out for the rest of the year, what we do expect is, obviously, we start to lap those in the second half of the year, those inefficiencies. So we should either see a moderation or actually a reversal of some of that supply chain inefficiency we saw in the second half of the year. I wanted to follow up on the services growth. You reported now $22 billion, on track to meet that $28 billion target by 2026? Can you just talk to us about some of the growth drivers in that business and maybe provide us with an update on customer value agreement take rates? Again, we are encouraged, as I mentioned, about our progress and services. And we mentioned, when we threw that target out that it wouldn't be a straight line, it wouldn't be linear. And we knew we had to make investments to make it happen. And we are continuing to invest in a whole variety of things. We've gotten more connected assets now, 1.4 million, up from 1.2 million last year. We're investing significantly in our ecommerce capabilities. That's one more arguably, I'd argue, we were a bit behind. But we made great progress and very proud of what the team is doing there. And those sales are increasing. To answer your question on customer value agreements, over 60% of new equipment in 2022 was delivered with a CVA. And that's really important because it creates that customer touch point and it gives us the ability to demonstrate that value that we can provide. And also, we're investing heavily in AI. We have what are called prioritized service events. So what that does is allows us to give dealers a lead on aftermarket service and repair in advance. And it provides value to our dealers, of course, but it also provides value to our customers because it allows them to avoid unplanned downtime. So, that's really positive as well. Also, we're working on parts availability. We need to have the right parts at the right place at the right time. And that's one of the benefits of having connected assets and also utilizing AI with those connected assets to ensure that we anticipate where those parts will be needed. And that's a key enabler as well. My question is on inventory. The Cat inventory on your balance sheet was up $2.2 billion or something roughly in 2022? And I'm sure some of that was price. But is there an opportunity to sort of draw that back down as supply chains improve? Or are we in sort of a new reality where we need a little bit higher inventory because of the vagaries of all the supply chains and international trade, et cetera. We're not running as lean as I would like us to be. And certainly, that is a consequence of the supply chain challenges we're having. And like I mentioned in previous calls, the term decommit is one that I hadn't been familiar with until COVID hit and where customers in a very short notice decommit and don't give us components when we need them. And so, that's created inefficiencies. It's also resulted in more inventory. So, I wouldn't say it's a permanent condition. As the supply chain situation improves, I do expect us to become leaner again and to be able to reduce our internal inventory. All right. And thank you all for joining us. I really do appreciate your questions. Just to summarize here, I'm very proud of our global team. They delivered one of the best years we had on record. Strong overall top line growth. Services grew 17%. We generated strong adjusted operating profit and ME&T free cash flow in the year. And we achieved an all-time record for adjusted profit per share. As we think about the year, we're encouraged by the strong quotation activity, our $30 billion backlog, and as we mentioned, we believe 2023 will be an even better year than 2022 on both the top and bottom line. And we continue to remain focused on supporting our customers and executing our strategy for long-term profitable growth. Thank you, Jim, Andrew, and everyone who joined us today. A replay of our call will be available online later this morning. We'll also post a transcript on our Investor Relations website as soon as it's available. You'll also find a fourth quarter results video with our CFO and an SEC filing with our sales to users data. Click on investors.caterpillar.com and then click on financials to view those materials. If you have any questions, please reach out to Rob or me. The investor relations general phone number is 309-675-4549. We hope you enjoy the rest of your day. Now I'll turn it back to Emma to conclude the call.
EarningCall_1011	Good day, everyone. Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2022 Earnings Results Conference Call. Your host will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question-and-answer session. Please also note today's conference call is being recorded. Thank you, Jamie. Good morning, and thank you all for participating in Packaging Corporation of America's Fourth Quarter and Full Year 2022 Earnings Release Conference Call. Again, I'm Mark Kowlzan, Chairman and CEO of PCA. And with me on the call today is Tom Hassfurther, Executive Vice President, who runs our packaging business; and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of our fourth quarter and full year results, and then I'm going to be turning the call over to Tom and Bob, who'll provide further details. And then I'll wrap things up, and we'd be glad to take questions. Yesterday, we reported fourth quarter 2022 net income of $212 million or $2.31 per share. Excluding special items, fourth quarter 2022 net income was $215 million or $2.35 per share compared to the fourth quarter of 2021 net income of $262 million or $2.76 per share. Fourth quarter net income -- fourth quarter net sales were $1.98 billion in 2022 and $2.04 billion in 2021. Total company EBITDA for the fourth quarter, excluding special items, was $409 million in 2022 and $463 million in 2021. Excluding special items, we also reported full year 2022 earnings of $1.04 billion or $11.14 per share compared to 2021 earnings of $894 million or $9.39 per share. Net sales were $8.5 billion in 2022 and $7.7 billion in 2021. Excluding special items, total company EBITDA in 2022 was $1.9 billion compared to $1.7 billion in 2021. Fourth quarter and full year 2022 net income included special items primarily for certain costs at the Jackson, Alabama mill for paper to containerboard conversion-related activities. Details of all the special items for the year 2022 and 2021 were included in the schedules that accompanied the earnings press release. Excluding special items, the $0.41 per share decrease in fourth quarter 2022 earnings compared to the fourth quarter of 2021 was driven primarily by lower volumes in our Packaging segment $1.14 and Paper segment $0.02. We also had higher operating costs of $0.48, primarily from inflation on energy, chemicals, labor and benefits, supplies, repair materials and services and other indirect and fixed costs. Freight and logistics expenses were unfavorable $0.13 along with higher depreciation expense, $0.09, higher converting costs, $0.06 and higher scheduled maintenance outage expenses of $0.01. These items were partially offset by higher prices and mix in the Packaging segment of $1.18 and Packaging segment -- and Paper segment rather of $0.21. A lower share count resulting from share repurchases $0.08; lower interest expense, $0.04 and a lower tax rate, $0.01. Results were $0.13 above the fourth quarter guidance of $2.22 per share, primarily due to higher prices and mix in the Packaging segment, lower freight and logistics expenses, a lower share count resulting from share repurchases and a lower tax rate. Looking at our Packaging business. EBITDA, excluding special items in the fourth quarter of 2022 of $392 million with sales of $1.8 billion resulted in a margin of 21.7% versus last year's EBITDA of $461 million and sales of $1.9 billion or a 24.5% margin. For the full year 2022, Packaging segment EBITDA, excluding the special items, was $1.8 billion with sales of $7.8 billion or a 23.8% margin compared to full year 2021 EBITDA of $1.7 billion with sales of $7.1 billion or a 23.9% margin. Demand in the Packaging segment was below expectations for the quarter, causing us to run our containerboard system to these lower demand levels. Our employees did a very good job with their cost management and process optimization efforts at these lower production rates to offset the negative volume impact. Total economic-related downtime for the fourth quarter was approximately 231,000 tons. The scheduled maintenance outage and conversion work at our Jackson, Alabama mill was completed successfully during the fourth quarter, and we restarted the mill earlier this month after being down as a result of the lower demand. The number three machine achieved its first phase design capacity and is producing a very high-quality virgin linerboard. However, based on current containerboard demand levels, we decided to move the second phase of the conversion work from this spring to next year in 2024. Thank you, Mark. Domestic containerboard and corrugated products prices and mix together were $1.19 per share above the fourth quarter of 2021 and flat compared to the third quarter of 2022. Export containerboard prices and mix were down $0.01 per share compared to the fourth quarter of 2021 and down $0.02 per share compared to the third quarter of 2022. Corrugated product shipments were down 8.7% per work day and down 10.2% in total with 1 less workday compared to last year's fourth quarter. Outside sales volume of containerboard was 131,000 tons below last year's fourth quarter and 38,000 tons below the third quarter of 2022. The lower demand in our Packaging segment was driven by several items. The inventory correction in both boxes and our customers' product has been more prolonged than what we originally anticipated at the start. Inflationary pressures on the consumers have also added to the problem by reducing the consumers discretionary spending capabilities. In addition, consumer behavior changed very quickly as we exited the extreme COVID period, resulting in more of a preference towards travel, entertainment and experience versus that of tangible goods. Containerboard and box demand continues to be negatively impacted from the deterioration in U.S. and global economic conditions, rising interest rates and a cooler housing market. As we move from the fourth quarter into the first quarter, we estimate the rate of shipments per day to be fairly similar as we expect many of these conditions to continue. However, there are 4 additional shipping days in the first quarter, so total actual shipments will be higher when compared to the fourth quarter of 2022. In spite of the numerous issues currently impacting demand, we continue to perform at levels above pre-COVID and anticipate our first quarter shipments to exceed first quarter 2019 shipments by approximately 6% on a per day basis. Thanks, Tom. Looking at our Paper segment. EBITDA, excluding special items in the fourth quarter was $39 million with sales of $154 million or a 25.7% margin compared to the fourth quarter of 2021 EBITDA of $26 million on sales of $143 million or an 18.4% margin. For the full year 2022, Paper segment EBITDA, excluding special items, was $132 million with sales of $622 million or 21.3% margin compared to the full year 2021 EBITDA of $72 million with sales of $600 million or a 12% margin. Prices and mix were up 21% from last year's fourth quarter and moved 3% higher from the third quarter of 2022 as we continue to implement our previously announced price increases. Sales volume was about 11% below last year's fourth quarter, primarily due to paper sales from the Jackson Mill's #1 machine, which we included in last year's results as well as having -- we optimized our product and customer mix since that time as we transitioned away from paper volume at Jackson mill. As expected, volume was down approximately 11% versus the seasonally stronger third quarter of 2022 and that also included the remaining inventory from the Jackson mill. The management team and all of the employees of the Paper business have done a tremendous job over the last several quarters to optimize our inventory, product mix and cost structure in order to deliver outstanding results for 2022, and I'm confident that we can maintain this momentum through 2023. I'll now turn it over to Bob. Thanks, Mark. Cash provided by operations during the quarter totaled $420 million with capital expenditures of $247 million and free cash flow of $173 million. Other cash payments during the fourth quarter included dividend payments of $116 million, cash tax payments of $56 million and net interest payments of $31 million. We also spent $380 million during the quarter to repurchase just over 3 million shares of our common stock at an average price of $126.70 per share. That brings our total repurchases, over the last 5 quarters, to almost 5.5 million shares at an average price of $130.62 per share. Repurchases of our outstanding stock and dividend payments made during the past year, represent 63% of cash from operations or 91% of net income that was returned to shareholders in 2022. For the full year 2022, cash from operations was $1.5 billion. Capital spending was $824 million, with free cash flow of $671 million. Our final recurring effective tax rate in 2022 was 24.5%, and our final reported cash tax rate was 20%. Regarding full year estimates of certain key items for the upcoming year, we expect total capital expenditures to be approximately $475 million, and DD&A is expected to be approximately $485 million. We estimate dividend payments of $450 million and cash pension and post-retirement benefit plan contributions of $53 million. Our full year interest expense in 2023 is expected to be approximately $72 million and net cash interest payments should be about $74 million. The estimate for our 2023 book effective tax rate is 25%. Currently, planned annual maintenance outages at our mills in 2023, including lost volume, direct costs and amortized repair costs, it's expected to be in total, $0.67 per share versus $0.99 per share in 2022. The current estimated impact by quarter in 2023 is $0.11 per share in the first quarter, $0.14 in the second, $0.22 in the third and $0.20 per share in the fourth quarter. I'll now turn it back over to Mark. Thank you, Bob. The hard work of our employees, along with strong relationships between us and our customers and suppliers delivered outstanding results for PCA in 2022. New annual company records were achieved for revenue, cash from operations, net income and earnings per share. And as Bob just mentioned, 91% of our net income was returned to our shareholders from dividend payments and stock repurchases. We successfully completed or substantially completed significant cost reduction and process improvement projects at our mills including a 30-megawatt steam turbine and first phase of the #3 machine conversion to containerboard at the Jackson mill. This effort included fiber flexibility projects at the Wallula and Jackson Mills and many other key initiatives. We also completed numerous high return and high efficiency improvement projects in our corrugated products plants that will allow us to better optimize our entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders. The significant capital investments we've made during the year had complete involvement of PCA personnel from project conception, preliminary and detailed engineering, all the way through to project implementation and start-up. These projects and initiatives achieved numerous tactical and strategic benefits while improving our industry-leading return on invested capital to just under 20%. As we've discussed on these calls many times before, by the end of 2022, we would be winding down several years of significant strategic capital investments that position us very well to meet the future needs of our many customers in a very cost-effective manner. We also finalized the optimization of our paper business while delivering excellent financial results that we expect to sustain us well into the future. As economies around the world continue to deal with numerous issues and uncertainties, virtually every individual industry is being negatively impacted in some manner. At PCA, we will continue to maintain a strong balance sheet which provides the financial flexibility to react quickly to most situations or opportunities in the future. We will also continue our commitment of a balanced approach towards capital allocation in order to maximize our profitability and returns to our shareholders. Looking ahead, as we move from the fourth and into the first quarter in our Packaging segment, as Tom mentioned, we expect box demand on a per day basis to be similar to the fourth quarter levels, although we expect higher total volume with corrugated products plants having 4 additional shipping days. Prices will move lower as a result of recent decreases in the published domestic containerboard prices and we're assuming lower export prices as well. Paper prices should move slightly higher with sales volume fairly flat. Labor costs and certain indirect costs will increase as some containerboard mill operations were temporarily idled during the fourth quarter. In addition, we anticipate higher labor and benefits costs and other timing-related expenses that occurred at the beginning of a new year as well as higher prices for many chemicals, particularly starch and caustic soda. However, we expect lower wood and recycled fiber prices, lower energy prices and lower scheduled maintenance outage expenses. Lastly, we expect higher interest and nonoperating pension expenses and a higher tax rate, but we will see some benefit from our recent share repurchases. Considering these items, we expect first quarter earnings of $2.23 per share. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward-looking statements. The statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K and in subsequent quarterly reports on Form 10-Q filed with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. Thanks for the details. Congratulations on very good performance in a very, very challenging quarter, at least from our estimation. Mark, my first question, to the extent that you can comment, you took a significant amount of downtime. Production was down sharply, from our own rough calculations it would seem like your inventories now are fairly well balanced relative to your needs, but if you had to qualitatively talk to them, would you say your inventories are normal, below normal, above average? How would you have us think about that? Well, again, it depends on what time period you're looking at. We're living in a dynamic world right now. And if you went back to 2020, let's go back and take a look at what happened there, as the pandemic settled in, and we got into the fall of 2020, and demand picked up dramatically in that period of time, we found ourselves at, quite frankly, an unsustainably low level of inventory per our demand. And it took us the better part of 2021 to drive that inventory to a much more comfortable level. Obviously, part of that was the transportation dilemma that was taking place throughout North America between truck drivers availability and rolling stock availability with the pandemic going on. And then just the demand pressures that were in place. But through the end of 2021 into the early part of 2022, we did achieve the -- what we felt were comfortable levels of inventory to supply our system. As the year 2022 rolled on, we also anticipated certain end-of-year activities with annual outages through the year and then different marketplace conditions into the third and fourth quarter. What we saw happen, obviously, in the fourth quarter was the falloff in demand and so we were able to readjust what we didn't believe should be our new inventory targets understanding that demand was falling off faster than we had anticipated. But also, we had the capacity now with our system improvements and with the Jackson mill being completed that we had a much higher comfort level that we could supply outside sales and our own box plant needs by running to a lower level, which again was a prudent financial decision for us. A couple more, I'll make them quick. The mix given our calculations was quite strong. Is there one thing you would point out or a couple of things you'd point out in terms of what allowed you to put up some fairly strong realizations per ton realizing quarter-to-quarter things can move around. And the same thing on operations and cost if there was one or 2 things, you had to point out that allows you to put up the quarter that you did. What were the 2 highlights be? Then I'll turn it over there. Yes. Well, our mix was solid again, George. Of course, we don't -- with 18,000-plus customers spread across a lot of different industries, it was a relatively strong mix, and we were pleased with that. And I would just -- Yes, go ahead. So is that more execution than, Tom, as opposed to any one driver? Is that what you're kind of getting at there? Yes, yes, I think so. And Mark will talk a little bit more about the cost side. But I think we're also seeing some big benefits from all the investments that we've made, especially in our box plants over the past number of years. And so from a cost basis, we were incredibly good and performed very well. To that point, George, in 2021, with the new organization that we put in place in 2019, and we've been doing all of these capital projects in the mills and box plants. But 2021, we worked on probably 53 of our box plants with various sized capital projects going on from big projects and -- to small projects for retooling, recapitalizing converting lines, corrugating operations, significantly improving the unit labor productivity in these facilities. Same thing in the mills we've worked for decades, and we continue to do that every day on improving the efficiencies throughout the operations. And so that was another thing. I think if you look at the cumulative benefit of what Tom just said with the projects that we put in place in the box plants, the ongoing efforts that we continue to perform in our mills, we were able to pivot during the latter part of the year. And even though we took machines down and idled the Jackson mill, we're able to really wring out some efficiencies because of how we operate day-to-day and how we understand where these opportunities are. Again, it's -- it reflects on the organization and how we look at our business 24 hours a day, 7 days a week. Just on Jackson, how do you plan to operate that mill going forward? Obviously, the first phase is behind you. You've postponed now the second phase to 2024. Given that demand remains challenging, as you've noted, you operate that convert line? And do you have the flexibility if the manner remains challenging to operate white paper on it given still strong line paper markets? No, the Jackson mill now is a containerboard operation. That mill, for all intents and purposes, will not make any white paper ever again. It's truly the work we just completed in terms of the scope of work that we set out has achieved everything that the first phase was supposed to. We are now running very efficiently, very effectively. We started up just the week before last, and we ran last week, and we've been producing Grade A paper converting it in our box plants, but we'll be able to take advantage now of the project's cost benefit opportunities. There's the work that was done, and we talked about this last year would help us on the input cost side of the equation with energy usage, labor-type impacts, fiber yield, and so we will see those benefits. Now it depends also on how much production we see on the big machine. We're also ramping up the machine as we speak. The machine for the last 1.5 years from when we converted it in 2021 and ran through 2022, we were producing probably 1,275 tons a day average in that range. And right now, currently, we're somewhere in that 1,300-ton a day range and just getting comfortable with all of the new equipment. Essentially, we have a new paper machine on our hands here and then the pulp mill has been significantly rebuilt and new OCC plant. So there's a lot of new infrastructure in the mill that we're getting used to running, but we're also going to look at what the opportunity is. The second phase of work that we can choose to do when the timing is right, involves 23 new additional high-pressure dryer cans, a new forset reel at the dry end of the paper machine and then a new shoe press in the press section to enhance pricing and improve the drawing. That will take place when we need the tons. So that's to be determined, but we have the luxury of deciding that when we need to decide that. But the first phase of the work has been done extremely well. We're very pleased with what we see. So now we'll take advantage of what we have in place. And as we've done for many years, we'll wring out these benefits and these efficiencies from day to day here. So I'm pretty optimistic on what we have at Jackson. The #1 machine, the smaller machine is down. It's idle temporarily. It will be available if demand determines that we should run that. And so again, I think current times, we will continue to run to demand. The entire system, we also have the annual outages coming up starting next month with our DeRidder and Counce mill. So we have to think about where we need to be with inventory levels and what we have to do to supply our box plant needs. So in that regard, I think Jackson is in a good place, but a lot of opportunity there. Just quickly, as Jackson started and running obviously it seems to be meeting or exceeding expectations, have you adjusted your operating posture elsewhere just to account for the demand environment? And then just my last question is with inputs coming off, as you noted, have you seen any change in behavior from any of your competitors with respect to downtime or production discipline? I'm not going to talk about our competitors. We just -- we're running to demand. We'll continue to run to demand. The Jackson machine is an opportunity for us to provide low-cost, high-quality containerboard into that Southeastern region. But it also means, as you could well assume, the rest of the system will run as we need to run it. But keeping in mind what I just said that we have our big annual outages coming at our 2 biggest mills being DeRidder and Counce, Tennessee, so our plans were to run a little bit extra inventory build over the next couple of months to ensure that as we go through these big outages, we will supply our needs appropriately. Following up on George's question to some extent. You had talked about how the capital projects really helped on the and capital, particularly the converting operations. You've also talked about how your price mix was really strong in the fourth quarter. And frankly, it's been really good for the last like 2 years. You've just been doing extraordinarily well, price/mix. How the capital projects help to improve your -- the mix in terms of like more higher value-added packaging that you're providing your customers? Or has your extraordinary performance been kind of just execution also your focus on smaller, more local accounts. Mark, this is Tom. I'll handle that. I mean, keep in mind that we've always said that our customers drive what we do and especially in the box plants, they drive our capital investments. So we grow with them, and we adapt to whatever they need and what they're looking at, and we try to align ourselves with customers that are going to grow going forward, whether they're small or large. So I think that all of that kind of comes together. And our objectives are not only from a cost standpoint, but to satisfy those customers and puts us in a good position, I think, to take advantage of whatever the market opportunities present. And so sort of getting to the next -- so would you say that the product that you're producing and selling to the customer has changed much? Or it's really -- so the mix has sweetened that way over the last couple of years? Or it's just you've been very, very successful in getting higher pricing? Well, I'll give you an example. Our customers are continually having to change to be successful in the marketplace. And if you look at the retail market, as an example, it's very different today than what it was even 5 years ago. And during COVID, a lot of things occurred, especially inside the big box stores as an example. How do we get the customer back in there? What are they buying? What are they looking for? How do I promote my products and things like that. So there's been a lot of changes, and we assist a lot of our customers in helping make those changes and keeping track of what those trends are. Okay. Great. And then lastly, obviously, demand kind of -- to me at least, it's been astoundingly weak in the last couple of quarters. And you've pointed out the various drivers. Do you have any sense as to how impactful in particular, say, the inventory correction has been in terms of the magnitude of decreases? And are you getting any clarity from customers where we might be in that process? Because it sounds like we're going to continue to see weakness in the first quarter at a minimum. And then a tough question, but are you getting any indications from your customers as to what to expect for the full year? Or is it just not enough visibility? Okay. Let me tackle a couple of these at a time. I think, first of all, let's see if we can help get ourselves calibrated here properly. We're coming out of COVID now, which had a tremendous amount of government stimulus pumped into a market which created, in my opinion, quite a bubble in terms of demand. If you look back historically and you look at box demand historically, it was always pretty level at that 1% to 2% range per year. And all of a sudden, we're jumping up into now double digits and some other things during the COVID years. So that's why I drew the correlation with what happened in -- how we compare now to 2019 and being 6% or maybe slightly above 6% compared to 2019 being up, clearly, some of the errors come out of that bubble, but not all by any means. So it's still a quite healthy demand, in my opinion, when you compare it to pre-COVID. And relative to the inventory correction. Yes, there was a huge inventory correction, and that's still continuing to some extent, as a combination of 2 things. Still, the supply chain is a big issue for our customers. And as you know, China just recently reopened. So there is still an enormous backlog of products waiting to be shipped and just waiting for parts whether it's in the auto sector or any other consumer product sector. There's quite a big backlog. So we're still waiting for that to correct. I thought it would have been corrected a little bit sooner than what it appears. And that's why we're taking a relatively conservative approach to our forecast for the first quarter because we really can't predict when that's going to catch up to some extent. But I would say overall, our customers feel pretty good about where they are and about the full year, if we may have a mild recession, we hopefully have a soft landing, those sorts of things. And hopefully, the Fed backs off a little bit on the interest rate increases. Those are all, I think, important to our success in '23, and we'll just have to wait and see what happens. But overall, I think when you really compare it to pre-COVID, we're still in a pretty healthy position. Hope you're well. Mark, one more on the conversion delay. When did you arrive at that decision, and why -- you mentioned you're postponing the second phase by year. Why a year as opposed to, I don't know, 6 months, 9 months, 15 months or just indefinitely and whenever demand gets better, we'll do it as opposed to we're planning to do it a year from now. Adam, if demand picked up next month and all of a sudden, we needed the tons, we could pull the plug on that project, and we could do it in the spring time if we wanted to. That's the luxury that we have. We have all the equipment in our hands sitting in the warehouse at the mill. We have all the engineering done. So when we need the tons, we will do that project, and that's the benefit that we have there. So there's no secret formula. There's no magic in terms of what's driving this decision except the marketplace and our customers. And as Tom mentioned a few minutes ago, we grow with our customers' demands, and we're in a good place to do that, but also being mindful of our uses of cash and our capital spending, there's no need to spend the remaining portion of that capital on a project that's not earning any return currently as opposed to perhaps another use of that cash this year. Adam, this is Tom. Let me -- Adam, this is Tom. Let me just add something here real quick because I think this is really important, and we've been very, very consistent about this. We're not a company that builds it and hope they will come. Hope is not our strategy, has never been our strategy. Our strategies are built around our customers and what they see and what they need. So that's never going to change and we see the reality of the marketplace out there. And as we've said many times, there's not a huge open market, the export markets are under some duress right now around the world. There's not an immediate place to go to with these tons. And so we're going to be flexible and adapt to whatever the market conditions are. And our customers appreciate the fact that we will always be there for them, and we'll be prepared, and we're ahead of the curve. Adam, what Tom just said and this plays into what we've always done, our competitors typically would have done one big project, got the entire project done at one time and had all of this capacity and had all of this complexity to deal with. We determined 2 years ago; we would do this project in phases. And if you go back decades, go back 20 years, we've always done our projects in multi phases. Now there's reasons for that. Besides capital effectiveness and uses of cash and prudent management of our cash, there's also risk mitigation and then growing with our customers' needs. And so it all plays into our historical behavior on how we go about projects and how we grow our business. Yes. That makes perfect sense, Mark. Tom, just back to the box demand issue. So your -- you said you're running about 6% above 2019 -- 1Q '19 levels on a per day basis. So it sounds like demand is not at particularly depressed levels for you. So when you talk about per day shipments, expecting those to be flattish sequentially, is there a lot of destocking in there that you can see? Or do you think that that's a reasonably "normalized" level of demand for you if you get my drift? That's the million-dollar question right there. Let me tell you. I'd like to be able to predict that perfectly. Obviously, I can't. As I said, I said that's we're taking a pretty conservative approach in the first quarter to our projections because we really don't know when this destocking is going to end. I think we're clearly past the midpoint in that. I know that for a fact, and I can feel that. But to what extent it goes further, I really can't tell you, but I think even with this conservative approach, my point about comparing to 2019 was, it's still pretty solid compared to 2019, just to get us all calibrated as to where we are. Right. And just to be clear, when you talk to your customers, you don't have a firm sense of whether they've done 90% of whatever destocking they're going to do or 70%, it's just not clear. Well, I think some of -- when we talk to specific customers, I mean, we get kind of a mixed bag is what we get. Some have completely -- some are completely destocked and others still have significant inventories and significant issues. And even on their side, they've got a lot of product of their own sitting there in warehouses that was prepared for a COVID environment, and now we're post COVID, and it's a different environment. So they're making their adjustments as well. And I did mention the supply chain issues that a lot of them are still dealing with. Yes, I appreciate that. And just one last one for me on the wood cost issue. Can you help me with what magnitude of declines you're seeing sequentially in wood costs? I appreciate that it's regional. So it varies by the mill. But overall, what you're seeing, how much is transport related? How much is weather related, just any -- the percentage decline you're experiencing? Any -- if you can flesh that out because it's not the most transparent of issues for us. Adam, this is Bob. What we said in our release and in our prepared remarks is we were talking about wood prices, not necessarily wood cost. Wood cost sequentially is fairly flat because typically, as you go into the much colder months, your wood yields and so forth aren't as good. So you see some usage going the other way. But the pricing improvement that we're seeing is, it is -- it was a bit drier than normal. The weather cooperated at least as far as wood supply goes over the last few months. So we're in a good place with our inventories and the price of that wood. And demand, quite frankly, there's a lot -- there has been downtime when the industry, as everyone knows, so demands and that helps you with price. So wood typically does not jump around a lot, and it's -- but I do think overall for the year, we think it will be -- should be down slightly on a price basis and maybe costs fairly flat for the full year. I just had one on capital allocation. And I know that you reserve the right to spend is warranted in terms of returns and things like that. But you made the comment that you've come out of a couple of years of elevated spend. This year's CapEx is $475 million. Is it appropriate for us to sort of think about, I don't know, $450 million to $500 million in CapEx as normalized. And then on the capital allocation side, Mark, you also said, "Hey, we want to take a balanced approach. But I can't help but look at history when you guys have been aggressive buyers of your shares. It seemed to be opportune and give you a nice return. So can you just talk a little bit about how you internally talk -- think about returns on capital as it relates to projects versus share repurchases? First of all, starting off for the last 5 or 6 years, we've had historically high capital spending to retool our -- primarily our box plant system and then take care of the mill big conversion projects and some of these big efficiency opportunities. But in my prepared statements, I commented that we've made clear to the investment community that this year, in particular, would be a reset down to more normalized levels of capital coming off those big highs, and so as we look at this year, we're coming down probably $350 million off of last year's $824 million capital spend. And so as we get into the $400 million area, I think for the next couple of years, that's going to be the range we're into. We've got some work to finish up in the box plants. We've got some big opportunities. We're finishing this year as an example. And then when we finish up Jackson, that will be one piece. It's not an extraordinarily large amount of capital, but it will finish up. But I think we're in a very comfortable period of time going forward now that we will be able to maintain our assets in very good condition. We'll be able to continue to take care of customer growth opportunities with capital installations on converting pieces of equipment. We have obviously the capacity in our mill system to supply that growth in a very, very cost-effective manner. So I think, again, the new capital trend going forward is significantly lower than it has been, which bodes well again for or what we do with the cash and how we deploy cash to provide return to our shareholders. And then in terms of how we look at returns on investment, we've always had probably the highest hurdle rate in the industry in terms of what we set internally as our target of acceptable returns for projects. Now some of these projects, obviously, you're growing with customers, but you're growing with valuable, high profitable added box business. But again, I'm not going to give you the return targets we set, but you can assume, and we've always said this, that we set some very high hurdle rates on our expectations on $1 spent on what we expect for that return. And that reflects itself in the return on invested capital number. It's not only the highest in the industry, but in manufacturing industrial sector alone, it ranks amongst the highest. Does that help you? It does. It absolutely does. And then maybe the low-hanging fruit just to make sure we kind of have math calibrated right. If I extrapolate out the comment that you guys made it seems to imply maybe 16 million square feet for the first quarter or down 4% to 5% or so on a year-over-year basis. I'm assuming that whatever your experience has been thus far in January, went into that calculation, and it's the best estimate in terms of backlogs and what you have line of fight to. Just a couple of follow-ups for me. I wanted to just ask more specifically on the work that you're doing at Jackson. I'm wondering, does that change PCA's capability and product offering at all? In other words, are there new market opportunities from that project? Or is it more just about optimizing your existing book of business? Cleve, what it does is it enhances some of our proprietary capabilities. That's how I would put it. And we need that, quite frankly. So that's the big short-term objective. And then obviously, we talked about the longer-term objective in Phase 2 being that ability to grow with our customers. Okay. That makes sense. And then just a couple of quick follow-ups, inventories, you talked about them a couple of times. I just explicitly like where are inventories relative to where you would like them versus your plan in containerboard. Well, we never give absolute numbers. Again, we dropped down 60-some-odd thousand tons from the third quarter to the end of the fourth quarter. We're going to build, again, some extra inventory in January, February period to get ready for the outages at the DeRidder, Louisiana mill and the Counce, Tennessee mill. It's not an extraordinary amount of inventory. It's just a little bit of insurance cushion here for making sure that we take care of the box plants. But I think I will say it this way. What we ended the year 2022 with, we're in a good comfortable range of where we need to be now going forward with what we're seeing in the marketplace demand and our capabilities now. So this lower inventory certainly meets the current requirements. But with just a little bit extra build to get us through these big outages. Annual outages are always an uncertainty. You never know what could happen. Obviously, we're very good at what we do, but we always plan to try to mitigate some risks and the risk mitigation comes in a little bit of an insurance policy with some extra inventory on hand to make sure the box plants are well taken care of and our outside customers. Right. I think that makes a lot of sense. And that's very clear. And then I know you said that the #1 machine is down at Jackson is idled temporarily. I mean, are you expecting to take any other economic downtime in Q1? Or is it really more about maintenance in the first quarter? Just a couple of follow-ups, Mark or Tom, the second phase of the Jackson conversion that you're postponing from spring, maybe until next year or beyond, sorry if I missed this, is there a capacity number that you would kind of associate with that second phase or any kind of finer point you can put on that? Well, I'll go by historically what we said in the last 2 years. The ultimate project at Jackson would on paper, get us a 2,000 ton a day containerboard machine. It would be one of the largest machines in the Western Hemisphere in terms of productivity and if you could understand and appreciate our efficiencies, it will not only be one of the largest, most productive virgin kraft linerboard machines in the Western Hemisphere, but it will be one of the lowest cost machines. And so I said we started up last week. We're in that 1,300 ton a day rate right now. We're obviously -- we'll probably push the machine and see what we -- like having a new toy. We're going to see what it will do for us over the next month or two. What are the limitations and making sure we haven't missed anything from a process point of view. And if we missed anything, then we have ample time to correct it over the course of the months ahead of us. But ultimately, the final phase will give us the extra drying and the speed on the paper machine to take us from let's just say we could run 1,500 tons a day right now with the machine we have. the last phase of work gets us that extra 500 tons a day, just to help you with some math. Okay. That's very helpful. And then just another quick question. You talked about the fiber flexibility projects. And with those done, where does that put your fiber mix or your ability to maybe flex from Virgin to OCC? And then just maybe a related question. I mean, I think historically, you've talked about the customer preference and the benefits of kraft liner, it seems like the price spread between kraft liner and recycled has kind of moved up a bit or moved out a bit. Are your customers -- do you see any specific trend in terms of increased demand for recycled or vice versa? Or just kind of how is that dynamic playing out? And what do your capabilities look like now to move between the two. I'll answer part of that, and I'll let Tom answer part of that. We talked about some of these fiber flexibility projects. The biggest ones at the Wallula Mill, we over a 2.5-year period, we added a big OCC plant out there and then did completely rebuild the woodyard and improved our chip handling, chip screening and fiber yield capability in the woodyard but now Wallula has the ultimate flexibility to push OCC at very high rates if the pricing and availability is there. And then we just finished up the big OCC project at Jackson in conjunction with the rest of the work at the mill. And so Jackson, Counce, DeRidder, Wallula in terms of our linerboard mills primarily linerboard, even though DeRidder and Jackson and Wallula can make medium, but they have incredible opportunity to flex the amount of OCC, DLK that goes into the furnish depending on pricing and opportunities to take advantage of various fiber sources. And so I think if you did the math, and I'm not -- I don't have this right now, Bob might have this, but we're probably still around 20% in total -- of our total makeup of what would be OCC, DLK and virgin fiber. But we have now improved significantly by mill, what we can use in any given day. Yes, yes. I'll just add, Anthony, from a customer point of view, what do our customers want? They want the same thing we want, and that is performance. And one of our advantages being primarily virgin is that we have a lot more opportunity to hit the performance numbers at particular basis weights that I think give us a distinct advantage so that we can take advantage of all this fiber flexibility that we have, and we can also minimize some chemical use and some other things in that process. So that's really how we view our -- what our output from our mills is performance-based, and I mentioned some proprietary products that we have, and those are all based around performance. It's actually Phil. I guess a quick question. Great results in a tough backdrop. I guess my first question is normal cadence of prices moving higher with -- on the container wood side, we kind of have a good feel for how that kind of flows through your P&L. Does that dynamic from a timing perspective accelerate when prices fall, and in this current environment, have you seen more business actually put up off for bid lately? The answer to that is no, that does not accelerate when prices fall. In fact, it probably is the other way around. And our feedback from our customers is that they're not -- they haven't been anticipating it and they're not -- they're interested in being aligned long term. This is not a short-term play or anything like that. So we haven't seen any uptick in bids or anything like that either. That's really encouraging. And it's great to see you guys take such a disciplined approach in terms of running your mills. Tom, I think you were talking about the macro, there's a lot unknown right now. Let's say -- let's assume it's more of a soft-landing backdrop. There's a decent amount of capacity coming on in the next 12 months. How do you kind of see that playing out for the industry? And then more importantly, how do you kind of see PCA position in navigating through that backdrop? Well, number one is the capacity adds that are coming on really have very little impact for us. And I think you have to look back historically and see what happened in the past when there's been adds of capacity that have come on. I think about the Verso mill up in Jay, Maine when they converted a machine to virgin kraft. That did not succeed. That mill is not even open anymore. Midwest Paper was another one that had -- it's -- as we've said a long, long time, the open market is very small in the U.S. And so those that add, they're going to have to look outside the United States for the most part. This is a very, very integrated market, the open market that does exist is under long-term contracts, typically or certain relationships like we have with our outside market buyers. So it's -- that has very little impact in my opinion. So when you hear us say we're running to demand and demand is what it is. And just to produce additional board for the sake of producing it, is basically like a death wish and it doesn't do you any good. So I hope that gives you a little flavor for where we're coming from. I just wanted to go back to boxes at demand. And just wondering if you can give us a little bit more details on what you're seeing by end market in that business. Any end markets that are really still working to the destocking and a bit weaker that we should really monitor here versus other end markets that have gone through this impact already? Well, the only thing I could say about some of these end markets, obviously, there anything anybody in durables got a big, big jump during those COVID years and they've come down dramatically. Consumers only need so much of some durable goods. And so that, therefore, that's come down quite significantly. The other thing that has impacted us is in the ag business, Florida is an example with the 2 hurricanes. I mean, have wiped out some seasonal crops, the Pacific Northwest has had a lot of difficulty. You've got droughts in some other places. So the ag business took a pretty big hit this year, but that will definitely bounce back and that, and that should bounce back in pretty good shape. Other than that, across all of our segments and sectors, there's all sorts of puts and takes and some are in better shape than others, and that's just -- that's kind of the normal seasonal activity that takes place anyway. Got it. And then you're fairly active in share repurchases this past quarter. Can you just talk about your thought process there? And should we expect you to continue to be active throughout 2023, given your healthy balance sheet and maybe just how you weigh those decisions versus any potential acquisitions? Again, we'll be opportunistic as we've always been looking at these opportunities, whether it's a great acquisition came along and it made sense to us. We have the ability and the flexibility to take advantage of that type of use of cash. Same thing with share repurchase and dividends will continue to be something we keep in front of us and look at how do we provide the best return for our shareholders and also at the same time, be in a position to take care of our customer needs. So again, as I said in my prepared comments, as we go forward, we're in a great position to maintain the flexibility with our uses of cash and maintain a very strong balance sheet. And so none of that's changed. It's just part of our norm every day. When he asked about the cadence of how price adjustments flow through the P&L. And I think you suggested that it was not faster on the way down than it is on the way up. So I guess that kind of begs the question. So of the $50 that has already been reflected by PPW, is a significant share of that anticipated to already be showing up in the box prices in the first quarter? Or is a meaningful portion of that yet to come in the second quarter if we were just to assume prices were in PPW flat from here? Well, Mark, as you can well imagine, I mean, the $50 has just come, has come in increments, I mean, may or may not hit a rate at which the price would change based on the contracts. All these contracts are very different and very different timing mechanisms. So that's why I said it's -- there's no -- you can't say that it's going to go down faster than it went up or vice versa. I mean it's just; it is what it is. And as these things cycle in, they'll cycle in uniquely, we've got some customers who have even asked us just to hold off at the moment because they're not confident of what may be taking place in reality. So we'll just have to -- I mean, as I said, it just -- it factors in and meters in a little differently than I'd say on the way up just because of the small incremental moves that take place. Is there any color you can help us with in terms of the proportion based on what you're seeing now, you would think would show up in the first quarter versus what might slide into the second, recognizing situations can change. Mark, it's Bob. So I would use sort of -- as Tom was indicating, based on how these things flow through and there's obviously different timing mechanisms and so forth. But however, I'd say roughly 1/3 or so you would see in the first and then of what's happened so far showing up in the second quarter. Yes, I'd like to thank everybody for taking the time and look forward to talking with you with Tom and Bob and I in the April call. Take care. Have a good day. Bye-bye. Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
EarningCall_1012	Good morning, and welcome to the MarineMax, Inc. Fiscal 2023 First Quarter Conference Call. Today's call is being recorded. All participants have been placed in a listen-only mode. [Operator Instructions] We will have a question-and-answer session at the end of todayâs prepared remarks. At this time, I would like to turn the call over to Scott Solomon of the company's Investor Relations firm Sharon Merrill. Please go ahead, sir. Thank you, and good morning, everyone and thank you for joining us. Hosting today's call are Brett McGill, Chief Executive Officer and President of MarineMax; and Mike McLamb, the company's Chief Financial Officer. Brett will discuss the company's operating highlights. Mike will take you through the financial results. Brett will make some concluding comments and then management will be happy to take your questions. By now, you should have received a copy of the earnings release issued today. If not please e-mail our IR team at hzoinvestorrelations.com and a copy will be e-mailed to you. Thank you, Scott. Good morning, everyone and thank you for joining this call. I'd like to start by reminding you that certain of our comments are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Any forward-looking statements speak only as of today. These statements involve risks and uncertainties that could cause actual results to differ materially from expectations. These risks include, but are not limited to; the impact of seasonality and weather, global economic conditions and the level of consumer spending, the company's ability to capitalize on opportunities or grow its market share, and numerous other factors identified in our Form 10-K and other filings with the Securities and Exchange Commission. Also on today's call, we will make comments referring to non-GAAP financial measures. We believe that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results. These metrics can also help investors who wish to make comparisons between MarineMax and other companies on both a GAAP and a non-GAAP basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in today's earnings release. Thank you, Mike. Good morning, everyone, and thank you for joining this call. Let me begin by thanking the entire MarineMax team for driving record December quarter revenue and gross margins, while maintaining our commitment to customer service. Our team continues to deliver despite industry choppiness caused by a return to seasonality and by a more challenging economic environment. We executed well in the first quarter delivering revenue of nearly $508 million and gross margin of 36.8%, a significant increase over last year's December quarter record. The margins were certainly aided by IGY, but new boat margins and our higher-margin businesses generally demonstrated resiliency and contributed to the performance. This shows the success of our long-term growth strategy of adding high-quality higher-margin businesses to our portfolio. And to that point, it has been less than four months since our acquisition of IGY Marinas and the business is performing on plan. IGY has a great team and they do an exceptional job building long-standing relationships with their clients by consistently delivering a world-class customer experience. In December, IGY hosted the Caribbean Charter Yacht Show at our incredible Yacht Haven Grande property in St. Thomas. The event was met with an outstanding response from charter brokers and managers who attended the show and the turnout exceeded expectations. Plus the IGY team is currently in discussions with respect to several potential growth opportunities. IGY is the leading global brand for marinas and we will work to expand using this new growth platform. We are already starting to see strong synergy with Fraser Northrop & Johnson with the exclusive IGY Trident program. We are continuing the IGY integration and look forward to capitalizing on the best practices and resources to drive growth. It is clear from industry data and trends that the seasonal patterns of the industry have returned. It is also clear that the increased economic challenges are impacting buyers. Buyers of premium and larger products still seem less impacted, which has been the historical pattern as well. Admittedly, it is difficult to get a precise gauge on the granular market trends between what is seasonality and what is softness, but both are impacting the industry. Our comparable store sales declined about 1% in the first quarter, which when compared to strong comps last year, is great to see. While our unit volume was down more than we had expected, the strength of the premium segment continues to insulate us from the majority of the unit pressure affecting the overall industry. And our backlog, by historical measures, remains very strong. From a supply chain perspective, there is clear improvement in smaller less complicated product. And that type of inventory is building. But some of the larger more complicated international product still has various issues, which should keep overall inventory levels for that type of product reduced as we move through 2023. Inventory is up both on a sequential and year-over-year basis, driven largely by smaller product growth. Overall, I am proud of the strong earnings and cash flows generated in the first quarter. Adjusted EBITDA is close to flat to last year's record quarter, despite the more challenging environment. Plus our team is focused and working to drive further improvements to our operations as we progress through 2023. While I am proud of our financial results, I continue to be most impressed with our team's ability to take excellent care of our customers. This has always been a critical strategy of ours and it has never been more important. This strategy is what leads to future business and market share gains. Turning to our recent highlights since our year-end earnings call. We have continued to focus on strategy growth initiatives. In the first quarter, we completed the acquisition of Midcoast Marine Group, a full-service marine construction company based in Tarpon Springs Florida. The addition of Midcoast Marine benefits us two ways. First, we gained both the skilled team and equipment to cost effectively address our own marina construction needs and new service offerings. Second, the acquisition includes waterfront real estate along the Anclote River in Tarpon Springs, property that has multiple benefits for us in the important West Florida market. We also continue to build our digital capabilities. We recently launched New Wave Innovations, a new business developed to invest in and grow our technology-related products and services. Innovation and technology are the centerpiece of our strategy, to be an integrated leader in marine products, services and experiences. New Wave Innovations is the engine designed to enable us to achieve that vision. To help fuel that technology engine, we recently acquired the remaining interest we did not already own in Boatzon, the world's only 100% online boat and marine digital retail platform. By giving consumers the ease and convenience to browse for, finance, purchase and insure a boat online, Boatzon has the potential to dramatically improve the boat buying experience. We are also excited about the momentum of our manufacturing businesses, Intrepid Powerboats and Cruisers Yacht. Both are continuing to perform well and have been great additions to MarineMax. We look ahead with confidence that our resilient business model will enable us to continue to deliver strong results for our shareholders. Our strong balance sheet provides the flexibility to capitalize on attractive opportunities, while continuing to invest in and drive organic growth. Thank you, Brett, and good morning, again, everyone. I'd also like to start by thanking our team for producing a strong start to fiscal 2023. For the quarter, revenue grew to a new December quarter record of $508 million. The increase was largely due to the October acquisition of IGY, as well as revenue from both Intrepid and Cruisers Yachts, which are excluded from the same-store sales calculation. Same-store sales declined modestly by 1%. But due to a combination of a return to seasonality, as well as a more difficult economic environment, our units declined double digits. Our unit decline, while substantial, was less than that of the industry, indicating share gains. Our average unit selling price expanded significantly, mostly driven by a greater mix of larger more premium product. Most in the industry believe a lot of the unit decline is evidence of a return to seasonality. That appears to be supported by generally positive trends at Northern boat shows. I would add our same-store unit trend is about flat to our unit trend in the December quarter of 2019 with premium product generally showing growth. Gross profit dollars increased to $187 million, an increase to a new December quarter record of 36.8%, up 140 basis points. The growth was driven primarily by the acquisition of IGY, reflecting our strategy of adding higher-margin high-quality businesses to our portfolio. Absent IGY our margins were flat to last year's record, which is encouraging in this environment while also reinforcing our focus on the premium segment of the market. Total SG&A expenses rose about $20 million when removing the unusual costs in the quarter. Well over half of that increase was due to the acquisition of IGY and most of the remainder was likely due to our infrastructure being built greater sales than we delivered seasonally. SG&A also was impacted by the timing of internal sales of Cruisers Yachts to our stores versus to retail buyers. In essence that results in SG&A expenses with no benefit of revenue or gross profit until a sale to a third party by our stores. Having said that our team is focused on aligning costs where we can, while still ensuring we are taking care of customers. As mentioned on our October call and as noted in the release because of the IGY acquisition, we are expanding our financial disclosures to include adjusted EBITDA and adjusted net income. In addition to non-floor plan interest, taxes, depreciation and amortization, adjusted EBITDA excludes stock comp expense, acquisition costs, the change in fair value of contingent consideration, hurricane expenses and foreign currency changes. We think it's a better measure to see how the company is performing. For the quarter, adjusted EBITDA was $53.2 million compared with $55.3 million in the same period last year. Ignoring currency, adjusted EBITDA for the quarter was $55.6 million. Interest expense for the quarter was $9.5 million or 1.9% of revenue, up $8.8 million due to rising rates increased inventory and the long-term debt related to IGY. On the bottom line, we generated GAAP net income of $19.7 million or $0.89 per share. On an adjusted net income basis, excluding acquisition costs, Hurricane Ian expenses, the change in fair value of contingent consideration and intangible asset amortization, net income for the first quarter was $27.3 million or $1.24 per diluted share. Moving on to our balance sheet. We ended the quarter with cash of $178 million, down from the same period last year due primarily to the acquisition of IGY. Our inventory at quarter end was up 86% to $605 million from last year. Close to 20 points of that increase is due to an increase in boats in transit that can't be delivered as well as greater deposits with manufacturers than a year ago. But as mentioned earlier industry inventory as well as ours has built back quicker than expected. Most of the build is in smaller more seasonally-sensitive product. It is nice that our stores finally have some product to show customers to help get them into the boating lifestyle quicker and easier than the last few years. Consistent with the comments we made on our year-end call in October, we continue to expect leaner inventory on larger more complicated product. Compared to December 2019, we now have about 58% of what we carried then in terms of units on a same-store basis. Our balance sheet at December 31st reflected over a $280 million increase in property. The increase is primarily related to the purchase of IGY and a couple of smaller acquisitions. Looking at liabilities, our short-term borrowings rose more than $225 million largely reflected in the increased inventories and timing of payments. Customer deposits not surprisingly decreased sequentially from September and also versus last year. However, the level of deposits and our backlog are historically very high. Consistent with the guidance on our fourth quarter earnings call, debt to EBITDA net of cash was less than one times at quarter end. Our balance sheet reflects the $400 million of term debt used to finance the purchase of IGY. Available borrowings at December 31 totaled about $250 million. Turning to guidance. Based on our first quarter results and the most recent industry data showing greater softness in new boat registrations, than we had anticipated, along with building inventory faster than expected, we believe that it is prudent to lower our 2023 guidance. In general, the retail registration data suggests the industry has returned to its historical seasonal buying patterns, combined with tougher economic trends given the Fed's continued interest rate hikes, although admittedly it is hard to determine the difference between softness and seasonality. Where we originally thought the year would see mid-single-digit unit declines, we now believe it is prudent to think that a high single digit unit decline is more likely for the industry. Likewise, where we originally expected our same-store sales to be flattish, we now anticipate a modest decline. We do believe our SKU to premium product will help protect us from the larger industry trends. We expect margins to be consistent with our past guidance, which was a modest decline from 2022, but still in the mid-30s. SG&A will be slightly elevated, but should improve seasonally. We also are assuming interest expense remains elevated due to increased inventories, as well as rates. We assume a share count of 22.7 million shares and a tax rate of just over 26%. The tax rate increased due to assumptions around geographic sources of income, certain rate changes and fewer deductions from stock-based compensation. On the bottom line, we now expect our full year 2023 adjusted earnings per share guidance to be in the range of $6.90 to $7.40. In addition, we are forecasting 2023 adjusted EBITDA to be in the range of $275 million to $300 million. Looking at current trends, January was strong last year and this January looks like it will be later last year, but in line with our guidance overall. Those who follow the industry will recall that March is by far the biggest month of the quarter, and historically has been as big as January and February combined. Boat show season has started and early reports are encouraging. Lastly, underlying demand remains healthy especially for the premium segment. Thank you, Mike. At MarineMax, our mission is clear to provide the world's best pleasure boating experience by consistently exceeding the greatest expectations of our customers, our team members and our shareholders. Across our organization, we continue to capitalize on the significant surge in people enjoying the boating lifestyle that has happened over the last few years. It's why we are so focused on service and why I am so proud of our team's performance at keeping our customers happy, which ultimately yields greater future business. This combined with our strategy focused on gross margin expansion will continue to yield significant cash flow growth. Recreational boating is a $57 billion industry in the US alone. And as a global company, MarineMax is just beginning to tap into the full potential of this fragmented market. We continue to execute on our strategic growth plan to drive sustainable value for stakeholders through a diversified business model built on premium brands, global marinas, world-class services and innovative technology. We are well positioned for 2023 and beyond. Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of James Hardiman with Citi. Please proceed with your question. Hey good morning. Thanks for taking my call. Good morning. So, I just want to get sort of an order of magnitude of the ASP benefit that you're getting here. I know Mike you said, units, I think you said were down double digits, but better than the industry, which I think was down I don't know 30% somewhere in there. Can we sort of narrow that range down a little bit? Just trying to get a feel -- it seems like there was a big ASP benefit in the quarter just trying to triangulate that? Hey, thanks, James. Actually I think if you look at the segments that we primarily operate in the industry is probably down something like 35% or more in the December quarter. And if we're at a negative 1% same-store sales and I said that our unit growth was a heck of a lot better, if you assume we're maybe in the mid-20s in terms of units down, we had a very significant increase in average unit selling price in the quarter. It reflects really the migration to larger product more premium product, which is really the -- how MarineMax has changed over the years. That's kind of how our business model is these days. Got it. And then you basically lowered guidance by about $1. We didn't actually have what your expectation was for the first quarter, but I'm just trying to figure out how I should think about how that $1 is distributed between what's already happened and how you're thinking about the rest of the year? Yes. It's basically the miss if you will from last year deflated a little bit for the revised guidance that we had when this year started. Plus as I mentioned we had some elevated costs, although, seasonally they should align a little bit better. Plus we are expecting inventories to be higher this year just given how fast the supply chain is built back and then a little bit softer retail expectations. And then our tax rate changed from 25% to just in the low 26s has an impact also. So when you factor in those different variables along with the same-store sales decline that I mentioned in our prepared remarks versus flattish being down just a little bit has an impact on EPS. You should get right into our range that we gave in this year -- in this quarter's release. Got it. And maybe a follow-up on the inventory piece. I think you said that versus 2019 you're down what 42% right, 58% of 2019 units? Correct. Yes that excludes all the acquisitions. And dollar-wise we're probably down I don't know it's probably 30% or something like that due to inflation and a larger product and so forth. But units are down and dollars are down. But what's the -- what is -- I'm assuming you're not looking to get back to 100%. It seems like most boat dealers are looking to get a little bit more leaner have more turns over the course of the year. What do you think target is for that number relative to 2019? And when do you think you'll get there? Hey, James, we're talking -- this is Brett. We're talking to our manufacturers kind of every day, I would say, just to kind of try to keep them informed of what we're seeing with retail. And we still don't have a magic number other than we want it to be less than we've historically operated at. But we've got to kind of coordinate that with acquisitions and the growth. And candidly we have a lot of new brands in stores that we didn't carry in 2019. So that has to factor in as well. It's a focus on really inventory turns more than just a dollar level. And I would say, as we've said on past calls all of our manufacturing partners and us and I think most in the industry have the same desire, which is to get to a healthier point. And the discussions that we're having are all very, very positive and very constructive with our manufacturing partners. And so we're all headed in the right place. It's -- obviously, it's a little tougher to get there, but we're all working on it together. I think, it's premature now. I think, we'll keep working on the overall goal with our manufacturing partners and work to obviously improve our inventory turns. Hey, guys. Thanks for the question. I just wanted to sort of maybe put the current industry thoughts or outlook in the context with what you guys talked about last quarter. So I think if I remember you were talking about some softer back half trends in calendar 2022, but you didn't really expect 2023 to change a whole heck of a lot from there. Can you maybe just explain or expand upon what has sort of changed from an industry perspective today versus October? Yes. I can make a comment and then Brett â I think our comments in October, we just let 2022 â the month of October registration data was not out yet. We had commented we were having a very good October, which we did. On that call we said, we expected the industry to be down, I think we said mid-single digit â low- to mid-single digits something like that. Looking at the data for October, November and December, the registration data and you got to recognize that there's inventory out there now for sure of pontoon product and some other product. And you're seeing the registration data, which to us was less than we were expecting. And others in the industry may have different opinions. But to us, it's less than we were expecting and it is difficult to break apart what seasonality and what's economic-related. But now we're one quarter into it. So we're just reflecting back that the industry overall is probably going to be further down than we had originally thought. And I think we're saying high single-digit now. So the big difference is just three months of registration data that we have now Fred. But that was â I mean if I remember â just to be clear, it always gets a little confusing. You're talking about fiscal year comments, or are you talking about calendar year comments here? Yes. It's a very good question and we get that from time to time. When we give industry comments, we're talking overall the industry during our fiscal year. So that'd be between October 1 through 9/30 is our commentary that we make. Okay. Got you. And then just a clarification. I think your guidance was for a modest decline in same-store sales. Can you put some benchmarks around that? Is that low single digits mid-single digits? Okay, thanks. Hey, guys. Good morning. So the gross margin in fiscal 1Q my sense is that was maybe a little bit better than you thought it would come in at. But the guidance for the year is unchanged. Can you talk about what your expectations are over the balance of fiscal 2023 and the puts and takes there? And then I have a follow-up. Yes. I think that a little bit of conservatism in there just based on inventory build and some discounting out there, although we've held really â all the premium product seems to be holding up real well but probably just a little bit of that baked in. Mike? Yes it's really not a change from our guidance. And our guidance in October, we did expect a little bit of margin pressure and boat margins to compress throughout 2023. You add to the business $100 million plus of marina revenue, which helps to offset that. But we still think mid-30s is great. We think we're going to be in the mid-30s but slightly down from where we were last year. Got it. Okay. And then back in October guys, I think you provided some metrics on IGY, the $100 million plus of revenue, $40 million of EBITDA and a $0.10 contribution to EPS. Does that still hold, or are there any changes to that? I think generally that â those numbers still hold for IGY. We obviously are working through all the purchase price accounting and all the implications there. You can actually see that when you work through our numbers, they had a very nice contribution to this quarter. When you look at the manufacturing segment, if you factor that, we had negative 1% same-store sales growth you can see that they had a nice revenue push in the December quarter, which is good to see, especially in the quarter that we merged, which obviously creates some distractions. But I think we'd still stick by what our thinking was around IGY. Thanks. Hey, guys. Good morning. I guess first question on the financing environment. Are you starting to see more cash buyers come into the market? Are you seeing lenders pulling back at all, whether it be to consumers or on the floor plan side? Yes. Joe, god morning. Yes, I'd say that our trends in the stores as far as closing deals, financing deals, all of that is holding up really well. The banks â we have a pretty resilient wealthy client we're lending to. So everything seems to be on track on par, I would say, wouldn't this? Agree Mike? Yes. Actually the retail lenders love the marine retail paper. They always hold it. As I've said before there's never been a securitization of marine retail loans. They like it. The banks want it. I mean obviously rates have gone up. That's -- but in terms of how they underwrite, there's been really no changes. There's no increase in delinquencies or increases in losses. And on the wholesale floor plan side, I think the banks are finally glad. They got a little bit of inventory to get some interest on. So they're probably a little happier today than they were the last couple of years. But no, the relationship and the way they view the industry is very positive. Okay. That's helpful. And maybe in terms of your same-store sales outlook this year, I guess you said down modestly. If you look at Q1, obviously, some weak unit numbers offset by much higher ASPs. Maybe help us understand how you're thinking about ASPs this year and when or if do you expect to see some level of promotional activity back in the market. Yes. I'll comment. We generally see ASPs increasing every year. And I think this year will be no exception. We'll have an increase in ASP given the mix of our business, given cost increasing to a degree, although costs are definitely stabilizing and pretty reasonable on a go-forward basis. What was your second... And I think on discounting I think some of the shows that we've seen, there's been some discounting out there. Again it depends on the products. Smaller, little cheaper product, maybe is under a little more pressure, because there's inventory, all that's well known out there. But so -- yes, I think there'll be some pressure on some models and products to give a little discounting, but the premium stuff is holding up very well. And if I could squeeze one more in and I get this question a lot. Any anecdotal evidence that both usage is coming down? Are you still seeing people -- boat owners still using their boats pretty regularly? Good question. Thanks for asking that. We watch it really close, right? We look at our marinas and we look at fuel sales, our getaways and events and attendance, and they're all sold out. People are boating here and there. You have a given weekend or something that's off compared to the other. But it's overall, I mean I'd tell you that's where we look. We look at website traffic to make sure people are out there looking on our website and it helps us understand seasonality a little, if they're still actively on our website. And then we look at activity in the marinas and boating and all of those are really good. Hey, guys. Good morning. I think you had mentioned that the boat margins really haven't changed to a great degree, maybe a little bit of compression, but maybe if you could drill down into that a little more. Are you seeing any softness in pre-owned margins relative to new? Maybe give us a little more color there. Yes, I'll comment. I commented that if you remove IGY from our business, our margins were basically flat to last year. And so that would tell you that new margins are holding up pretty well in the quarter and used margins. So, I don't think we're seeing a whole lot of change in used margins in our business. No significant shift. I mean a little more inventory in both new and used, but we haven't seen any pattern or significant shift there. And our used, as you know Mike, the trades were taken, right? Whether we took them -- we take trades last year and also this year. And the margin structure and the profile, tends to generally be the same. So... Got you. Okay. And as it pertains to seasonality, I just wanted to touch on just the boat show calendar and maybe your presence. I think you've pulled out and/or downsized some of your activities around boat shows in the past couple of years. But I guess how does that give you more or less visibility in the seasonality, does it change anything? Maybe from a cost perspective, should that benefit certain quarters relative to others? I guess, how do we think about all that together? Yes. Boat shows are -- we've really done a lot of work studying the boat shows all across the country, and there's a handful of shows that really perform well and give you that good index. And then there's other shows, that you go you spend a lot of money and you sell to the people that you've been working on working with for a year anyway. And I don't want to get too deep into that. But of course we get gauges of -- whether we're there or not we know how many people went through the turnstile. We know how many people attended our events at the store. So I would say, when we're kind of through the boat show season here coming out of March, we're in all the right places to understand all of those trends and capture all the sales to be add. And I don't know if that hits what you wanted to know but we have a good pulse on it. Okay. And maybe if I could just slip one more in, I think Mike when you were giving kind of the puts and takes of guidance you said, one of the negatives will be having more, inventory which I presume would largely impact your flooring interest expense. But are there any additional carrying costs to think about as some of that inventory comes back? Good question, Mike. I mean obviously interest expense is one that's very clear in the P&L. You do have -- you've got to maintain the inventory and costs. So you do have some additional costs that run through the financial statements that don't get line item out like interest expense to us. So there is some additional cost which is factored into our guidance already. Thank you. Our next question comes from the line of Eric Wold with B. Riley Securities. Please proceed with your question. Thank you. Good morning. Just a couple of follow-ups on some of the prior comments Brett and Mike, I guess, on inventory I think you made a comment that it's 58% on a same-store sales basis for 2019 and you're kind of talking to the OEMs about where you want to end up. Is the inventory level right now a good level for the guidance you've given for this year? Once again is it a healthy level? Are you concern that it may be too high, or is it more in line with kind of what you would need, or are you comfortable if that number actually goes up from here into your guidance given that you still are somewhat under where you were before? Yeah. Actually that's a really good question. Our guidance assumes inventories do build seasonally, like they historically did from now into March and then, begin to drop in June. The question is to how much do they drop is a little unique this year, because we're still so lean on a lot of different boat and models, right. Yeah, I was going to comment. I wish it was just flat line answer like that, but we have models that we won't even have any inventory of certain models and even of some brands where we won't have much inventory and then others where we have some. So it's still -- I would say in a couple of cases we have enough boats right now. And it'll build maybe a little. In a couple of cases we're way short. Helpful. And then just a follow-up question, maybe the comment earlier that the higher-end customer the premium products kind of providing some insulation. But obviously there's not as many boats and any one [Ph] kind of that price point and the inventory is still a little lean there. Are you seeing anything that's showing some of that softness in demand that's kind of hitting the industry on the lower-end is creeping up at all in terms of the middle to higher-end buyer, or is that just tough to gauge, or one if you are -- if you're not or two is it something age because of the inventory situation? Yeah. Eric that's a great question, it's actually what I'm trying to look at kind of in the last quarter. And it really -- yes, we saw it creep up into that kind of come up from where it was let's say three months ago. But I think it's really seasonally-related. Since we have stores all over the country you can kind of connect those dots. So it appears that I'll call it, softening in this last quarter in that a little higher segment than the low-end I think is seasonally-related, but we'll see, how these show go and how the spring comes together. Mike, you guys have been very active on M&A over the last few years. And I guess I'd like to get your thoughts in terms of how you're thinking about how much capacity you have, from a balance sheet standpoint for continuing to acquire? Good question, David. I'll comment and if Brett wants to chime in he can too. But we're -- our balance sheet has always been a great resource and asset for us and it still is today. Our debt to EBITDA is less than 1 times. The company has flown strong cash. We are in discussions with various different organizations. Where we can find great companies, with great management teams that can help drive future earnings and cash flow and growth for the company, we're certainly still interested in those. And we believe we have the financial wherewithal to grow accordingly. So... We continue to stay focused on -- as opportunities come in front of us obviously, a little more prioritization is going to be in play and some timing and things like that. Just on that M&A topic, I mean the targets of your acquisitions lately have been somewhat diversed in terms of the nature of the businesses. And how do you think about priorities or white space or just where you need to go next in that endeavor? Well, I think I'd say -- I'd speak to what we talked about in kind of our comments, IGY brings a whole new growth platform for us. And some of those include very low capital ways to grow, and some might require a lot more capital. We'll continue to look at our digital approach and the dealership business is still very important to us. And then of course, our growth with new brands and the brands that we've taken on over the last couple of years that candidly we're just getting started with brands like Aviara and whatnot are just really getting started. And with New Wave Innovations, that seems to provide you with a little more scope. Where do you set the guardrails on that in terms of where you're willing to go where you're maybe hitting limits strategically? Yes. I think we've been very strategic about the companies that we have there Boatyard and Boatzon and kind of do they fill a very front-to-back experience for the customer. So that's where we're focused. I wouldn't say, we're going to get wildly out of that scope. I think those two tools have some really good opportunities in the future here for us. I'd say, we'll stay focused there because that's a front-to-back solution for the consumer to -- and that's our goal to create a better experience for the customer. Thank you. Our next question is a follow-up from the line of Fred Wightman with Wolfe Research. Please proceed with your question. Hi, guys. I just have a quick clarification on the EPS guidance. All of the add-backs that you're providing in the non-GAAP EPS number, were those all contemplated in the $7.90 to $8.40 that you gave last quarter? I know that you had given us some hurricane impact reconciliation for fiscal 2022, but I just want to make sure that it's sort of apples-to-apples the updated non-GAAP guidance versus what you guys had given previously. Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. McGill, for any final comments. Well, thank you everybody for joining the call this morning. We're excited kicking off some boat show -- boat show season coming up with the Miami Boat Show here in a few weeks, kind of then falling into Palm Beach and many others around the country. Hope to see you out there and look forward to talking to you on our next call.
EarningCall_1013	Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. Q4 and Full Year 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakersâ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, Audra. Good morning, everyone, and thank you for joining us for our fourth quarter 2022 earnings call. With me today are Michael Miebach, our Chief Executive Officer; and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, weâll open up the call for the Q&A session. You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP currency-neutral basis unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to GAAP reported amounts. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that todayâs call will include forward-looking statements regarding Mastercardâs future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. So, starting with the big picture. Consumer spending has remained resilient, and we are very well positioned to capitalize on the growth opportunities ahead. We closed out the year with strong financial results and several notable wins. Quarter four net revenues were up 17% and adjusted operating income up 19%, both versus a year ago, as always, on a non-GAAP currency-neutral basis, excluding special items. While the macroeconomic and geopolitical environment remains uncertain, we are keeping a close eye on a variety of positive and negative factors. The broadly resilient labor market with low unemployment and rising wages, coupled with elevated consumer savings levels, are key drivers of consumer spending. Weâre also tracking efforts by the central banks to curb inflation, along with moderating energy prices and the reopening of China. So, still lots of moving pieces. From an overall consumer spending standpoint, we expect the consumer to be relatively resilient. Spending patterns have largely normalized relative to the effects of the pandemic with the notable exception of China. In terms of switched volumes, domestic volumes in the fourth quarter remained steady relative to 2019 levels with some slight moderation in the U.S. related to lower gas prices recently. Cross-border travel continued to recover in quarter four with inbound travel either flat or up in every region sequentially relative to 2019 levels. As of the first three weeks of January, inbound cross-border travel to all regions is now above 2019 levels. We will continue to monitor the economic environment closely, and should the outlook change, weâre prepared to move quickly to adjust our spending levels as we have done in the past. In the meantime, we continue to focus on the things we can control. This starts with our three strategic priorities: expanding in payments; extending our services; and embracing new networks. And here are some examples of how weâre progressing against each of these. Starting with payments. We won substantial new business this quarter. Our innovative products, differentiated services and partnership approach enabled us to secure major portfolio flips, extend relationships and launch new programs with banks, co-brand partners and transit systems around the world. I am very excited about our expanded partnership with Citizens to become their exclusive payments provider across all product portfolios in the United States. We will shift their debit portfolio to Mastercard, and we will maintain exclusivity on credit and commercial. Citizens selected Mastercard based on our digital assets, open banking capabilities and safety and security tools. We have also extended and enhanced our long-term partnership with Citi. It solidifies Mastercard as Citiâs exclusive global partner for Citi-branded consumer credit, debit and small business cards. We look forward to continuing to partner to deliver digital initiatives, new technologies and innovative payment solutions together. Weâve extended our longstanding relationship with Bank of America across their consumer and small business debit and credit lines of business. Theyâre great partners. Weâre especially proud to continue as the lead brand for all newly issued small business cards. And our positive momentum with Chase continued this quarter as well. Building up on our recent co-brand, commercial and Pay-by-Bank partnership announcements, we are excited to announce that we have renewed the Chase Freedom Flex portfolio. Turning to the UK, we recently extended our credit deal with NatWest Group for consumer and commercial. Weâre partnering with Belbim, [ph] Istanbul transportation to convert over 17 million closed-loop cards, Mastercards and add 24,000 new acceptance locations across the city. Weâve partnered with QNB Finansbank and Trendyol, a large e-commerce marketplace in Turkey, over 30 million customers to launch a new Mastercard co-brand credit product. Now, an important driver of our success in core payments is our ability to deliver innovation and thought leadership. We are designing and deploying innovation solutions at scale, as a result, are the clear partner of choice for our customers. Three recent examples include our work in Installments, Tokenization and Click to Pay. Starting off with installments. SoFi launched Pay in 4, becoming the first bank in the U.S. to launch within the Mastercard Installments program. SoFi valued the broad acceptance, strong consumer protections and commission-based open banking capabilities that all make Mastercard Installments unique. Weâve got a strong pipeline for Mastercard Installments and plan to add several additional programs across multiple regions throughout the year. Turning to Tokenization. We surpassed 2 billion tokenized transactions per month and for the year, we are up 38%. Weâre currently enabling digital transactions in over 110 countries. Tokenization helps keep the ecosystem safe and secure across a wide range of use cases. One example that I think is particularly cool is the work we are doing with in-car payments. Weâre working with car manufacturers and fintechs to integrate payments using our tokenization platform and biometric authentication capabilities. Think about the simplicity it brings to paying for gas, tolls, charging or entertainment right from your car. This is a great example of Mastercard working with partners to drive the convergence of the Internet of Things, 5G and addressing consumer demand for cool digital experiences. It also highlights how weâre expanding the reach and the value of our acceptance network through new channels to support new use cases. This is just the beginning. Watch for more to come in the space. And on Click to Pay, we partnered with Adyen to launch Click to Pay on their global payment platform, recognizing the value that it brings to guest checkouts and millions of online shoppers. Adyen joins more than 20 other payment service providers around the world, bringing Click to Pay to thousands of merchants globally. Now this focus on innovation and partnership is also a critical part of our strategy to penetrate the prioritized set of new flows that we outlined at our 2021 Investor Day. We continue to make solid progress. Here are some of examples how weâre driving growth in each area. First, disbursements and remittances. Mastercard Send and our cross-border services capabilities are solving for an expanding set of use cases across multiple geographies. For example, we partnered with social marketplace platform, Poshmark, to enable seller payouts. And for cross-border payments, weâve teamed up with Paysend to broaden our global reach and expand the ability to send international payments across card brands. Second, weâre deploying digital capabilities to displace cash and check-based commercial payments at the point of sale, huge opportunity. In France, we signed an agreement with SociÃ©tÃ© GÃ©nÃ©rale to develop their corporate card book. And in South Korea, we partnered with KakaoBank and Samsung Card to launch new debit and credit co-brand offerings for small businesses. The third flow is B2B accounts payable payments. Our virtual card capabilities provide an effective digital solution to address the working capital, process efficiency and data challenges that are prevalent in B2B. We are a global leader in virtual card. Weâre seeing rapid growth in this space. Weâre bolstering our position through new partnerships and capabilities. For example, we announced plans to partner with Sabre and confirm our pay to accelerate the use of virtual cards for B2B travel payments. We also signed an agreement with fintech partner, Extenet, to offer virtual mobile corporate cards in the U.S. and Canada. And finally, on the consumer bill payment front, we are focused on deploying market-specific solutions to meet unique needs of consumers and businesses. For example, in Norway, we are powering the eFaktura service, which is used by the vast majority of citizens to pay their bills. In 2022, we hit a milestone as over 200 million digital invoices were sent using eFaktura. As you can see, weâre making significant progress expanding in payments, and we are excited about the opportunity in front of us. Now turning to the second of our three strategic priorities, services. Services provide differentiation and diversification for Mastercard. Our strategy is to leverage our services to drive growth at the core and to expand into new segments and use cases. Weâre making steady progress on both and have significant opportunity for future growth. Our services continue to drive growth in the core as evidenced by our wins and extensions with Citizens, Citi, NatWest and others, as I mentioned earlier. One example of a service that enhances the value of payments is Consumer Clarity. The service provides cardholders with merchant details in digital receipts to reduce disputes, low charge-back costs and improve the consumer experience. We recently partnered with TSYS who will offer Consumer Clarity to over 25 million cardholders in the U.S. and the UK. In 2022, we signed up over 50 financial institutions and merchant partners for Consumer Clarity, including large issuers like ItaÃº in Brazil. Weâre also expanding our services to new segments and new use cases, including governments, retailers, digital partners and financial institutions. This quarter, we partnered with research and consulting firms, including EFO and SEMA [ph] in Germany, as well as the Barbados Ministry of Tourism and International Transport to provide governments with detailed insights into tourism and retail spending trends. We engage with retailers like Loweâs who are leveraging our Test & Learn capabilities to conduct analytics on their core business. We partner with large fintechs like Monzo in the UK. to advise on product development strategies. And we are deploying our personalization solutions, which we acquired through Dynamic Yield, across a range of retail and financial institutions, including Carrefour, Argentina, Height, [indiscernible] to enhance and scale their personalization efforts. Iâm very encouraged by the continued momentum in our services growth strategy and the differentiation and diversification that these capabilities bring. Iâll now move on to our third strategic priority, which is embracing new networks, namely open banking and digital identity. This quarter, Iâd like to highlight an example of how our open banking capabilities have come together with our other strategic priorities to offer a new solution. As I mentioned earlier, in quarter four, JPMorgan Payments and Mastercard announced an innovative Pay-by-Bank solution. Solution utilizes the MasterCard open banking platform to modernize existing ACH payments and allow customers to pay bills from their bank account in a frictionless manner. Pay-by-Bank offers choice and provides a simple and secure experience of billers and merchants as well as consumers by enhancing existing ACH transactions. This deal is a manifestation of our multi-rail strategy, expands our addressable market by our open banking capabilities, and it deepens our relationship with JPMorgan Chase. Weâre actively working with them to take the solution to market this year. We also continue to make our progress with open banking in Europe. Mastercard is connected to more than 3,000 banks and financial institutions across 18 markets to power their open banking efforts. This quarter, we partnered with Secure Trust Bank in the UK, who will leverage our open banking capabilities to provide safe and convenient ways for their customers to repay retail loans directly from their bank account. In summary, we delivered another strong quarter of revenue and earnings growth, aided by a resilient consumer and the continued recovery in cross-border travel. In payments, we won substantial new business this quarter, including Citizens. Weâre expanding our differentiated services and embracing new networks, including leveraging our open banking capabilities to power solutions, like JPMorganâs Pay-by-Bank. With all that, weâre well positioned for the opportunities ahead. We will manage the business with agility, should the macroeconomic outlook change. Thanks, Michael. Turning now to page 3, which shows our financial performance for the quarter on a currency-neutral basis, excluding special items and the impact of gains and losses on our equity investments. Net revenue was up 17%, supported by a resilient consumer spending and the continued recovery of cross-border travel relative to 2019 levels. Acquisitions contributed 1 ppt to this growth. Operating expenses increased 13%, including a 3 ppt increase from acquisitions. Operating income was up 19%, which includes a 1 ppt decrease related to acquisitions. Net income was up 16%, which includes a 2 ppt decrease related to acquisitions. EPS was up 19% year-over-year to $2.65, which includes a $0.06 contribution from share repurchases. During the quarter, we repurchased $2.4 billion worth of stock and an additional $590 million through January 23, 2023. So, letâs turn to page 4, where you can see the operational metrics for the fourth quarter. Worldwide gross dollar volume, or GDV, increased by 8% year-over-year on a local currency basis. On the same basis, if you exclude Russia from the prior period, GDV [Technical Difficulty] by 14%. In the U.S., GDV increased by 7% with credit growth of 14%, reflecting in part the recovery of spending on travel. Debit increased 1%. Excluding the impact of the roll-off of a previously discussed customer agreement, debit increased approximately 5%. Outside of the U.S., volume increased 8% with credit growth of 9% and debit growth of 7%. Cross-border volume was up 31% globally for the quarter, reflecting continued improvement in travel-related cross-border spending. Turning now to page 5. Switched transactions grew 8% year-over-year in Q4. Excluding Russia from the prior year, switched transactions grew 18% year-over-year in Q4. Card-present and card-not-present growth rates remain strong. Card-present growth was aided in part by increases in contactless penetration in all regions when excluding Russia. Contactless now represents 56% of all in-person switched purchase transactions. In addition, card growth was 5% or 9% if we exclude cards issued by Russian banks from the prior year card count. Globally, there are 3.1 billion Mastercard and Maestro-branded cards issued. Now, letâs turn to page 6 for highlights on the revenue line items, again, described on a currency-neutral basis, unless otherwise noted. The increase in net revenue of 17% was primarily driven by domestic and cross-border transaction and volume growth as well as growth in services, partially offset by growth in rebates and incentives. Acquisitions contributed 1 ppt to this growth. Looking quickly at the individual revenue line items. Domestic assessments were up 6%, while worldwide gross dollar volume grew 8%. The difference is primarily driven by mix. Cross-border volume fees increased 40%, while cross-border volumes increased 31%. The 9 ppt difference is primarily due to favorable mix as higher-yielding ex intra-Europe cross-border volumes grew faster than intra-Europe cross-border volumes this quarter. Transaction processing fees were up 16%, while switched transactions grew 8%. The 8 ppt difference is primarily due to favorable mix, FX-related revenues and pricing. Other revenues were up 16%, including a 1 ppt contribution from acquisitions. The remaining growth was driven primarily by our cyber & intelligence and data & services solutions. Finally, rebates and incentives were up 18%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. Moving on to page 7. You can see that on a non-GAAP currency-neutral basis, excluding special items, total adjusted operating expenses increased 13%, including a 3 ppt impact from acquisitions. Excluding acquisitions, the remaining increase was primarily due to higher personnel costs to support the continued execution of our strategic initiatives, partially offset by lower advertising and marketing costs. Turning to page 8. Letâs discuss the operating metrics for the first three weeks of January compared to Q4 2022. Each of these metrics, with the exception of cross-border card-not-present excluding travel, were favorably impacted by the lapping of the slower growth that occurred in January 2022 related to the Omicron variant. Switched volumes grew 21% year-over-year, up 7 ppt versus Q4. Switched transactions grew 12% year-over-year, up 4 ppt versus Q4. Overall, cross-border volumes grew 42% year-over-year, up 11 ppt versus Q4, driven by cross-border travel growth of 84% year-over-year, up 25 ppt versus Q4. Cross-border card-not-present excluding travel grew 10% year-over-year, up 2 ppt from Q4. A couple of administrative notes, for your reference to help you understand the trends in the business, ex Russia, we have suspended -- where we suspended operations in March 2022, we have included an appendix later in this deck to show all the data points from this schedule, if you excluded activity from Russian-issued cards from prior periods. Additionally, as the impacts of the pandemic recede, going forward, we will no longer provide operating metric levels as a percentage of 2019. Turning now to page 9, I want to share our thoughts on the upcoming year. Let me start by saying that I believe that we are well positioned to address the significant growth opportunities at hand. We have established a clear set of strategic priorities and are making steady progress against each of them. This is evidenced by the many wins across the products and services Michael has discussed on this call and over time. On the macroeconomic front, as Michael laid out, we are monitoring a number of both, positive and negative factors. We do expect consumer spending to hold up relatively well in this environment, driven in part by the strong labor market. It is important to remember that we are coming off a year of strong growth as we lap the effects of the pandemic, and we expect our go-forward growth rates to moderate accordingly. From a cross-border travel standpoint, most regions have recovered and are well above 2019 levels in Q4. The exception is Asia, where there is still room to improve with China reopening. Just a little further context here. China represented about 1% of inbound cross-border travel volumes pre-pandemic in 2019. In Q4, this volume was at approximately 20% of Q4 2019 levels. Similarly, China represented about 2% of outbound cross-border travel volumes pre-pandemic in 2019. In Q4, this volume was at about 50% of Q4 2019 levels. With this in mind, our base case scenario for the full year 2023 is for net revenues to grow at the high end of a low-double-digit rate on a currency-neutral basis, excluding acquisitions and special items. This growth rate would be higher by approximately 1.5 ppt if you exclude Russia-related revenues from 2022. Acquisitions are forecasted to have a minimal impact to this growth rate, while foreign exchange is expected to be a tailwind of approximately 1 ppt for the year, primarily due to the recent strengthening of the euro relative to U.S. dollar. In terms of operating expenses, we will continue to carefully manage our expenses as we invest in our payments, services and new network priorities to drive short and long-term growth. For the year, we expect operating expenses to grow at the high end of a high-single-digit rate on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 0.5 of a ppt to this growth, while foreign exchange is expected to be a 1 ppt headwind for the year. Turning now to the first quarter. Year-over-year net revenue growth is expected to be at the low end of a low-double-digit rate, again, on a currency-neutral basis excluding acquisitions and special items and reflects generally resilient consumer spending. A couple of points to note. Q1 will be the last quarter in which we experience the lapping effect of our decision to suspend operations in Russia in Q1 of 2022. And we expect cross-border volume growth in Q1 2023 to be elevated as a result of the effects of Omicron in Q1 2022. Acquisitions are forecast to add about 0.5 a ppt to this growth, while foreign exchange is expected to be a headwind of 2 ppt for the quarter. From an operating expense standpoint, we expect Q1 operating expense growth to be at the low end of a high-single-digit rate versus a year-ago on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 2 ppt to this growth, while foreign exchange is expected to be a tailwind of approximately 1 ppt for the quarter. Other items to keep in mind. On the other income and expense line, we are at an expense run rate of approximately $100 million per quarter given the prevailing interest rates and debt levels. This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics. And finally, we expect a non-GAAP tax rate of approximately 18% in Q1 and 18% to 18.5% for the year based on the current geographic mix of our business. So Mike or Sachin, I wanted to ask about Pay-by-Bank. Over the years, youâve developed and acquired capabilities for Pay-by-Bank in different countries. You talked about this new partnership with JPMorgan. But a skeptic could also argue that Pay-by-Bank is a risk to cards longer term, and thereâs some precedence in countries. So, can you talk about the push and pull for severe? And also maybe touch upon where is Pay-by-Bank being used versus cards and howâs Mastercard able to participate in those transactions? Thank you. Right. Harshita, let me start off on that. So, the way we think about this is in the end, it is about delivering choice to consumers, choice of merchants, choice to banks, and we are therefore in all relevant ways to pay. But itâs also true that the card ecosystem over the years has driven tremendous value. So, it is a prevalent way to pay for many, many use cases. But on the side, we have alternative payment methods emerging. And we look at those as options to go after new use cases, and thatâs exactly what happened here in the context of our partnership with JPMorgan. This is focused on existing ACH payments, which are not bringing the value to the biller or the consumer that they are looking for. Frankly, though, very specifically, what weâre doing here, the issue with some of these account-to-account payments is you never really know what balance is on the account. And our open banking capabilities are really providing a payment success factor here that tells the biller this is a good time to debit this particular account, so true value brought that somebody is willing to pay for, in this case, the biller/the merchant. So, a good example of where there can be value created an alternative payment tools while this doesnât take away from the power the cards are bringing to consumers and merchants. So, we see this as coexistence. Where this is going over time, we donât quite know, but our multi-rail strategy positions us well to play in either field. Nice job on the quarter and the year. When we look ahead, and weâre looking at the trend youâre showing us for January, even despite easier comps on Omicron, it does look like you have pretty conservative assumptions built into the guide for the year for top line growth of low double digits. Just given the trends weâre seeing even beyond January, but ex Russia, you anniversary that after March, and the numbers go materially higher growth rates. So, can you just tell us if thereâs some building blocks like around what youâre assuming on macro -- from todayâs macro activity going forward and maybe rebates incentives, is that a factor here? Thanks again, guys. Sure, Darrin. Good morning. So, let me provide you a little bit of color here. Look, I mean, what weâve generally assumed in our base assumptions that I mentioned when I was delivering my prepared remarks is resilient consumer spending through 2023. I mean, we see a resilient consumer today, and weâre seeing a generally resilient consumer spending pattern going forward in our base case. The other thing which weâve contemplated, as we mentioned, from a cross-border standpoint, and particularly cross-border travel standpoint, the vast majority of the regions have now reached that state where they are kind of growing and growing at a healthy pace, but theyâre not growing at an accelerating pace. So, theyâve reached that level of stability. So, let me give you a little bit of color here. Youâll remember as we are coming out of COVID, right, intra-Europe came back first cross-border standpoint. After that, we saw several inter markets come back from a cross-border standpoint, U.S., UK, Canada, Latin America, all of those. All of those are growing at a healthy pace, and weâre assuming theyâll continue to grow at a healthy pace but not at an accelerating pace. The one area where we are assuming an increase in terms of growth is around Asia Pacific. I mean, Asia Pacific has been a lagger in terms of recovery of cross-border travel. And weâre expecting that there will be -- with the borders recently opening in several markets in AP that there will be some level of recovery, which will come through there when you index back to 2019. So, thatâs kind of generally been the base case weâve kind of assumed. Look, I mean, to be perfectly honest with you, I think that the reality is weâve got things which are helping us from a share win standpoint. Weâve got strong consumer spending, our services capabilities continuing to grow at a healthy pace, all of that is built into our guide as we go forward. Also remember that in 2022, we did have elevated levels of FX volatility which were there in the market, which actually supported the growth rate which we had in 2022. Itâs hard to predict, but that looks like on a going-forward basis, we do our best assumptions on that from an FX volatility standpoint. But thatâs kind of the building blocks as to how weâve gone about building our business. The last point Iâll make is around rebates and incentives, you asked the question. As you can see, quarter-over-quarter, [ph] we talk about how we are delivering wins. We are winning with new customers. We are expanding our business with existing customers. So, we are building in assumptions from a rebates and incentive standpoint, which will be consistent with what youâre seeing in our track record from a winning standpoint as it relates to us. Michael, I wanted to follow up in your prepared remarks related to new flows. You highlighted that that B2B POS payments as a notable opportunity area and highlighted a few new SMB co-brand wins there. Can you just talk a little bit more holistically about this opportunity? Remind us, a, how big it is; and then b, whatâs different about it? What do you have to do differently as Mastercard to capture this opportunity relative to the consumer side? Thank you. Right, Lisa. So, the opportunity here lies really in taking our existing set of tools, namely from the card ecosystem, very specifically the virtual card capability, which came through an acquisition many, many years ago that weâve now built out -- ourselves into the leader here. So this existing set of tools and a huge opportunity in terms of flows to be addressed and make them more efficient, weâre looking at $14 trillion from an opportunity perspective. If you recall what we laid out across the 4 flows, new flows, this is the -- one of the large ones here that we quoted. And the way to go about this is really to say, all right, who are the different players that we already have in our ecosystem. We bring BCNs in too. Thereâs a lot of deals with financial institutions, but thereâs also a lot of deals with partners out in the travel space, and the travel space is really the one thatâs been most promising for us, and that is coming back right now. So this is a near-term opportunity. Cash and checks dominated existing tools, existing partners. This is right for us to go after it, and weâre leaning in. And Lisa, maybe I can just add a little bit out here, particularly as you think about the virtual card opportunity, which Mike just talked about. The differentiation, which is provided by technology which is what Michael talked about by virtue of the acquisition, which we had with our virtual card capabilities, but thereâs also differentiation in terms of our approach from a go-to-market standpoint. And specifically, when you target flows from a go-to-market standpoint, you go on a vertical-by-vertical basis. So, as you know, weâve been very successful in the travel vertical. Part of the reason weâve been successful in the travel vertical is having a deep understanding of what it takes at the travel integrator level to be able to embed your technology there so that you are the payment choice, which people will exercise when they have to make those payments. Similarly, as we look at that opportunity going forward, there are several other verticals weâre making the similar kinds of advances in. So, thatâs specific as it relates to the BCN piece. But you also asked about small business and the commercial point-of-sale opportunity, which is there. And the reality is weâve been winning significant new deals in that small business opportunity. And we see, candidly, a very sizable market opportunity in commercial point of sale, a large part of that is still in cash and check. And the reality is, just like we did in B2M where we displace cash and check utilizing digital technologies and innovation, thatâs kind of the advances weâre making also in commercial point of sale. So, thatâs how we kind of see and frame the opportunity set across both of these areas. I wanted to ask just big picture, if you would characterize visibility here for us on revenue versus, I guess, you can go back to pandemic or pre-pandemic. Just curious on visibility given you mentioned lots of moving pieces. And then, same thing on expenses, you said in the prepared remarks here that youâre prepared to adjust investments, if necessary. If the base case and the outlook here is to show some operating leverage, can we assume the same operating leverage if revenue weakens relative to expectations? Sorry for the long question. Sure, Tien-Tsin. So, on your question around revenue, itâs like I laid out, right? I mean, at the end of the day, we put our base case together. Weâve kind of laid out what our assumptions are from a base case standpoint. And at the end of the day, we donât have the crystal ball to actually suggest that that is the way things are going to play out. But based on everything weâre seeing in the nature of current trends as well as leading indicators, particularly as it relates to the overall strength of the labor market, we feel pretty good about what weâre seeing from a base case standpoint as it relates to the outlook for revenues. As it relates to one component of revenues, which we oftentimes think about is around -- on an as-reported basis versus what it is on a currency-neutral basis, very hard to predict where foreign exchange markets go. But again, weâve seen recent strengthening of the euro take place, and thatâs what weâve kind of shared with you in terms of our assumptions from an FX standpoint. And then, you asked about operating leverage. Look, I mean, the reality is weâve always operated with the philosophy of delivering positive operating leverage over the long term. We look at the top line. We look at how our expense is up also against that top line. We have, in the past, demonstrated our capability to modulate our expenses to the extent we start to see adverse impacts take place on the top line and vice versa. And the reality is what we donât want to do is impact the long-term growth potential of our business. So, we will continue to invest in our business with our eye on the long term. We will be prudent about not going into spaces from an OpEx standpoint, which are not in demand. Obviously, Iâm kind of stating the obvious here. But the reality is the philosophy remains unchanged. We will look to deliver positive operating leverage as a company. And we have the tools and the ability to actually modulate expenses if top line -- if we feel like the top line growth is going to get impacted over the long term. First off, Iâm glad weâre getting rid of the relative to 2019 metric, for good reason. Just a question on cross-border and sort of the operating assumption this year. I know thereâs a number of different trends that you guys talked about. But thereâs still a decent amount of pent-up demand. I guess, how do you think cross-border travel behaves in a backdrop where macro might get worse from here? Maybe you could use some historical precedent here. Maybe just give us sort of how youâre thinking about it. Thanks. Sure. So Sanjay, let me share a few thoughts on how we think about cross-border, right? So at the end of the day, there are numerous things which impact how people travel and spend in the cross-border environment. But at the outset, what I want to say is that the fundamentals around the cross-border proposition as delivered by Mastercard actually stand to be very sound just like they were in the pre-pandemic days. We said this through the pandemic, and itâs played out in that manner. Now, let me get a little bit more specific as it relates to pent-up demand -- your question around pent-up demand. The reality is we all know from what we hear on the earnings calls of airlines that capacity is constrained from an airline standpoint. And with that constrained capacity and elevated prices, youâre seeing that impact come through when you do P times Q, which is price multiplied by quantity, you get kind of what the resultant impact from a spend standpoint is. Fast forward, as capacity comes back online, one would expect that people will -- there will be some level of adjustment in prices because the demand-supply equation gets a little bit more in equilibrium. And so overall, weâre not assuming that that necessarily results in a tailwind because capacity comes back online, right, because thereâs going to be an adjustment which takes place from a price standpoint. Our view -- again, we hope weâre wrong, and we hope cross-border spending kind of goes with more capacity, prices remain elevated and people continue to spend, but weâve got to take a point of view on that, and thatâs what weâre taking. The other point Iâll make is, as it relates to what the impact of FX rates is on cross-border and cross-border travel. The reality is what weâve seen historically is that when exchange rates move, for example, with the dollar strengthening, with the lag effect, you would tend to see inbound into the U.S. get impacted. Thatâs only natural. It gets more expensive for people coming from different parts of the globe to come into the U.S. But what weâve also seen is individual extend to then redirect that cross-border spend to other parts of the globe where they donât feel the impact of that come through. So, movements in foreign exchange rates, does have an impact on how we think about cross-border going forward. And just to add one point here, Sanjay, that is over the last two years, weâve been winning portfolios in the space. Weâve really focused on the space, expecting to come back. If you recall, let me just remind everybody here, across airlines, across travel, our online travel agencies, across lodging, across other forms of transports like trains, Myriad, Virgin Atlantic, Amtrak, JetBlue, Cathay Pacific, British Airways and so forth, we have won portfolios. And weâve bolstered that in terms of market access through these partners with additional products. So thereâs Mastercard Travel Rewards out there, which is now in 80 countries. So, we believe into the macroeconomic environment that Sachin just laid out, we have the better proposition. So, it remains an exciting space. The pace in which weâll grow, weâll have to see that is characterized by what Sachin just said, but we certainly have a differentiated proposition in that. And one last comment I want to make, Sanjay, Iâm happy youâre excited about metrics and how weâre changing the metrics. From a metrics perspective, I want to complete -- back to Lisaâs question earlier. I mentioned the $14 trillion on commercial POS, but thereâs also $24 trillion on accounts payable, which makes the total opportunity in this combined space, $38 trillion. So, that conversation earlier was an important one on a very big part of our priorities. I really appreciate the China cross-border data you gave there for both inbound and outbound. I think you said that inbound is running at about 20% of 2019 levels in the fourth quarter and outbound at about 50% of 2019 levels in the fourth quarter. Can you give us a sense of how much improvement youâre expecting in those metrics in 2023 as the reopening progresses? And then separately, can you just make any high-level comments on growth for each of your three strategic pillars in â23? Thank you. Sure. So first, Jason, Iâm not going to share specifics as it relates to how we built our model up for the full year. What I will share with you is as it relates to the recovery of both inbound and outbound for China, we have built in some level of recovery as the year progresses. Itâs our best estimate as to what we expect to happen by virtue of the borders opening and the quantity and requirements being lifted. But suffice it to say that the opportunity is pretty sizable. The fact that we were in Q4 at 20% of 2019 levels from an inbound travel standpoint, cross-border travel standpoint is just suggestive of the fact that if you just think about whatâs gone on around the regions and how theyâve recovered and bounced right back and gone well above 2019 levels, thereâs a significant opportunity both on inbound and outbound as it relates to China. And sorry, the second part of your question, Jason? Again, I mean, when you -- the strategic priorities, weâve got payment services in new networks, as Michael has talked about. Look, I mean, Iâll give you a general sense. I mean, you know about -- from a payment standpoint, weâve been doing this, and weâve been doing this for many decades, and that is the substantive part of how we deliver our revenue growth. Over the last decade, weâve shown you how services have grown and still growing at a healthy pace. In my view, the demand for our services capability still remains very strong. Youâve seen that weâve been growing at a faster pace in services relative to the overall growth of our business. And I donât think we should assume anything different on a going-forward basis. And new networks is relatively nascent really. So again, I would put that into the space of itâs growing. Itâs growing off a small base at a very healthy clip. But the reality is on the overall Mastercard, itâs still to have a meaningful impact. So, thatâs kind of the best I can share with you on that. Jason, Iâd say the model really is one not of separate pillars. This is an integrated business proposition where services differentiates payments. And payments is oftentimes a way to build out a further -- a broader set of services and so forth. So, it kind of goes in the circle -- a virtuous circle, I have to say. When you look at it, the -- historically, we gave you a number a couple of years ago that service is a third of our quarter. It has been growing faster. I gave you an example earlier in my prepared remarks on Consumer Clarity, which is something that is transaction-related, and itâs growing faster with 50 new issuers. So, thereâs just a lot of momentum in there. But, there is also the kind of services that are not related to the underlying payments business. For example, what the example I gave you on Test & Learn, where weâre working with a set of customers to work on their base core business as in Loweâs, the example that I gave you. So, different sets of dynamics, but they go hand in hand, and that is the power of the differentiated and diversified business model that we have. Maybe Iâll squeeze one last 2019 -- versus 2019 question before the metrics go away. When we -- some of the kind of moving pieces in December, it seems like across some of the metrics, things seem to take a little bit of a step down on the 2019 stack. So, just any color on what youâre seeing on a regional basis between kind of e-commerce and travel and how those trends have kind of continued into January, maybe excluding some of the impacts of China that youâre seeing? And then just a more numerical piece of that question as I -- appreciate the color you gave on the China metrics on inbound and outbound travel. Just wondering if you have any color on just the overall contribution of China to cross-border volumes? All right, Will. So, Iâll take your questions in order out here. You talked about some color around how weâre seeing things shape up in Q4 relative to 2019 levels. Weâre seeing pretty stable levels as it relates to switched volumes, switched transactions in cross-border, in fact, marginally up on each one of them quarter-over-quarter. So for example, in switched volumes in Q3 as a percentage of 2019, we were running at 154%; in Q4, we were running at 156%. And you can see this in the slide deck, which we shared with you. The one thing to just keep in mind is in the U.S. in Q4, we have seen a little bit of an impact come through from lower gas prices, and thatâs kind of being reflected in the numbers you see right here. You asked a question from a regional color standpoint. Iâd say thereâs remarkably consistent growth that weâre seeing in most regions. For example, in Europe, Europe continues hold up pretty well. Latin America and EMEA are also actually holding up pretty well from a growth standpoint. In Q4, China was in the negative, particularly in its domestic volumes. And again, remember, our -- we donât generate a lot of revenue from the domestic side. But, it was impacted negatively because of the flareup in the COVID situation, which took place there. So thatâs one piece to keep in mind. Another piece to keep in mind is that from an India standpoint, we are -- now that weâre out of the embargo and weâve started new issuance, you still have the tail effect of the embargo coming through. So said differently, the fact that you actually for a year were not issuing new cards in India has a resultant impact of attrition of old cards which are taking place, which need to be more than compensated for by issuance of new cards. And that takes time as issuers get ramped up and ready to go. So, youâve seen that come through in Q4 as well. But beyond that, I would say that we continue to see pretty good and consistent growth relative to 2019 levels across all our metrics here. And a step down compared to last year and the year before is, of course, there because you get the mathematics and the lapping effects and so forth. But to 2019, I think thatâs an instructive view here. And it tells us that, yes, weâre expecting a resilient consumer will continue to spend. And, Will, you had asked the question about China. In my prepared remarks, I shared with you that China inbound cross-border travel pre-pandemic was roughly 1% of our total corresponding volumes, and our outbound -- the similar metric from an outbound standpoint was about 2%. So, I know that was the second part of your question. Europe continues to be a driver of differentiated growth for Mastercard. For the year ahead, could you talk through some of your assumptions on the biggest opportunities in Europe, Germany, Poland, Italy, when you think about both economic outlook and cash digitization? Weâve seen mixed reports 6, 9 months ago, more concerned about Europe given high gas prices. Now, it seems like the outlook has been a little better with lower gas prices and a more mild winter. But, any insights would be greatly appreciated. David, let me start off on that. So, looking at Europe really in three categories, thereâs the UK on one hand and thereâs emerging Europe and then there is Continental Central Europe, and slightly different picture on all of them. First of all, starting off with the continent. Here, the concern has been around for a while on rising gas prices and energy prices and the impact on the consumersâ ability to spend. A combination of fiscal measures to provide cushions to consumers, along with energy-saving measures, along with the gas storage now reaching full capacity has really alleviated some of these concerns. So, we continue to see a fairly resilient European consumer. Thatâs our base assumption as we look forward. UK, somewhat different economic outlook, and that might be a little more shaky there. But fundamentally, in this market, we are seeing a lot of tailwind for us from share gains over the last couple of years. So that works well for us. And emerging Europe continues to be a dramatic digitization opportunity as weâve seen in markets like Russia, which unfortunately is not in our P&L any longer. But we have seen very high digitization rates, and weâre pushing that in these more emerging markets. Somewhere between, thereâs peculiarities like Germany, where there was a significant digitization opportunity, and there still remains. But we caught up a lot in Germany over the last two years, particularly on the contactless side, which is now reaching half of the transactions there. So, healthy mix in Europe and very strong share position with opportunities to come through from portfolio wins that we have shared with you over the last couple of years as they go into effect. And Iâll just add, David, to Michaelâs point around the deals which weâve recently won and announced. Just to give you a little bit of perspective, we had talked about Santander historically. That migration is in progress. And weâre through the bulk of a 9 million card migration there. We expect to be complete by early 2023 on that one. NatWest commenced the issuance of Mastercard debit cards in December of 2021. Thatâs well underway, and we would expect some of that to continue to happen in 2023. And then, the other one we had spoken about historically was Deutsche Bank, and we expect that the migration of one will commence somewhere in the middle of 2023. So, just to give you a little bit of sense as to how weâre kind of thinking about things. I just wanted to drill into a couple of things, now that weâre getting rid of 2019 over the past few years. And looking forward, what has changed in terms of the growth algo? How should we think of that as we think of normalized growth visibility? And then, thereâs a smaller question with regards to - specifically for â23, the spread between [indiscernible] how should one think of that? Iâm going to need a little bit more clarity on the second part of your question, but weâll get to that. Let me take the first question first, which is as it relates to the growth algorithm. Just suffice it to say that the fundamentals of our business actually are very, very sound. The growth algorithm, which has actually enabled the strong growth we have delivered pre-pandemic, very much stands sound even today. So, the reality is, if you think about PCE growth, you think about the opportunity for the secular shift to electronic forms of payment, you think about the fact that weâre growing market share, you think about how weâre delivering on our services capabilities and driving growth from that, and now as weâre doing new and different things around new payment flows as well as new networks, that growth algorithm actually is very sound, very stable, very consistent with what weâve historically had. And thatâs the way we think about the business for, call it, not only the near term but near medium to long term for Mastercard. Yes. I was asking about the cross-border volume spread. How should one think of that as we think of this year? Yes. Look, I mean, our cross-border proposition sound -- is very sound and stable. And I think at the end of the day, like I said, most of the regions are now back to what I would call, the stable growth rates that we would normally have seen in the pre-pandemic phase. The one exception is Asia, and thereâs a little bit of opportunity which we have in Asia, which weâve contemplated in our thoughts for 2023. Hi. Good morning, Michael and Sachin. Thanks for taking the question. I wanted to ask about the cross-border recovery. We see the volumes for cross-border travel are well above 2019 levels. Where are you seeing the transactions versus 2019 levels on that same metric? Sachin, you made some interesting comments on price versus units. And Iâm just trying to get a sense for how much the cross-border travel volumes are benefiting from inflation and spend per transaction, and how much recovery is still left from a number of transaction standpoint. Thank you. Sure, Ken. So my comment is actually going to hold true for not only cross-border for -- largely for the business, if you think about it, right? You know our transactions or the growth in our transactions is impacted by our average ticket size. There are puts and takes on the average ticket size, not only in cross-border but even on domestic, which are influenced by numerous factors, one of which is inflation. The others are the mix between card-present and card-not-present. Because what happens is, typically, with more card-not-present, you tend to see a higher average ticket size, which results in lower transaction growth rate. Now, that being said, also when you do more card-not-present, you have the opportunity to deliver more services. When you deliver more services, it allows you to actually have a compensating effect from a revenue standpoint. So, I think those are two important things to keep in mind. The third, I would say, from an average ticket size standpoint, which impacts both cross-border and domestic, is what is the regional mix? Because different countries have different average ticket sizes, which influences what the growth rates are. Specifically on cross-border average ticket, it has been pretty stable year-over-year. And our assumption, as we kind of think about this is, not knowing perfectly well where inflation is going to go and the variables I kind of talked about, those are those things we factor into our assumptions as it relates to transaction growth on a going-forward basis. Maybe just to go back a little bit to Q1 guidance. You talked a little bit about this, but I know revenue youâve got on a non-GAAP basis decelerating something like 5% or so. But every metric -- every core metric in January accelerated by kind of 4% to 11%. Is there just tougher comps coming on some of those key metrics, or is it rebates? Or maybe talk through a little bit about the gap and kind of whatâs going to happen in the rest of the quarter. Sure, Dave. A couple of thoughts. One, in Q1, acquisitions contribute less to our Q1 growth than they did to our Q4 growth because youâre doing a sequential comparison between Q4 and Q1 in your question there. Number two, the suspension of operations in Russia has a greater impact in Q1 than it does in Q4. Itâs just the way the cadence of the revenues are. And then, two other points Iâd point out is Michael talked about the several wins weâve got -- active deal activity, which has been in play. Weâve got to contemplate all of that in our Q1 kind of thoughts. And then, the last piece Iâd mention is we did have elevated levels of FX volatility in Q4. I donât know where FX volatility is going to play out. Weâve done our best assumptions around that, but those would be the contributing factors. Yes. So, thanks for your questions. Thanks for your trust. Rayna, we will figure out your questions offline. We couldnât get to those, unfortunately. The day will come when thereâs a call where thereâs more questions for me than for Sachin. Iâm still hopeful. We will get there at some point. But the story has been resilient consumer, and we still see some opportunity in cross-border for Asia. Thatâs the base. Weâre winning. That feels good as we look ahead into 2023. And we have 28,000 excited people at Mastercard that are going to deliver on that opportunity. With that, thank you very much and speak to you next quarter.
EarningCall_1014	Good morning, and welcome to Banco de Sabadellâs 2022 Full Year Results Presentation Audio webcast. Our CEO, Cesar Gonzalez-Bueno and our CFO, Leopoldo Alvear will present the main highlights and details of the commercial and financial performance of the bank throughout 2022. The presentation will be followed-up by Q&A session. We have a scheduled around 1 hour for the whole session. Thank you, Gerardo. Good morning, everyone, and welcome to Sabadell's annual results presentation. Let's just start with the key messages in Slide 4. Firstly, commercial activity. Good figures here. In 2022, we delivered a moderate 0.8% growth on our loan book. This is in line with our approach to loan origination, which is focused on managing risk-adjusted return on capital, not on maximizing volumes. Another example of our sound commercial activity are point-of-sale transactions, which increased by 25% in 2022 compared to '21. This is a clear sign of strong economic activity in Spain throughout the year. Secondly, strong core results. A solid commercial momentum. The positive interest rate environment and the efficiency plans executed in the past contributed to deliver a solid growth of our core results, which grew by 26%. Thirdly, improved asset quality. The NPL ratio stood at 341% by year-end, following a 25 basis points reduction in the year. Fourthly, we ended the year posting a net profit of EUR859 million, which means a 62% increase year-on-year. Finally, return on tangible equity stood at 7.8%, and the fully loaded core Tier 1 ratio reached 12.54%, increasing by 36 basis points in the year. I would also like to announce that our Board will submit a proposal at our next AGM to increase the payout ratio to 50%, which will be distributed as a combination of cash dividend and share buyback. Moving on to Slide 5. I would like to share some relevant achievements related to ESG. As you all know, this is a complex topic, and we have made a big leap forward in the last year. We have improved the embedding of ESG in our strategy and in our risk management processes, including risk granting and follow-up. We have established a 2030 decarbonation targets for four CO2 intensive industries in the context of Sabadell joining the Net Zero Banking Alliance. We have also improved our scores with the main rating agencies and indexes such as the Dow Jones Sustainability Index, or the score by Sustainalytics. From a regulatory perspective, we are, of course, fulfilling of our obligations, and we are doing it in a successful way. So providers are giving us positive feedback about our evolution in this field. In summary, we are very comfortable with our progress and satisfied in all fields of ESG during the year. Slide 6 shows the evolution of business volumes at the group level. In 2022, our loan portfolio increased by 0.8% in the year. That is a 2% increase, considering constant FX mainly because of the sterling depreciation, which had negative impact on UK volumes in euros. This growth rate is in line with our target of low-single digit growth for the year. Moving to customer funds. Our balance sheet funds grew both in the quarter and in the year, as our clients continue to build their savings and excess liquidity. Our balance sheet funds trended downwards in 2022 due to the underperformance of financial markets. In these regards, we are enhancing our product offering with value-added products such as guaranteed return mutual funds to limit deposit beta. As we will see later, this strategy has allowed us to significantly increase inflows into mutual funds in the last months of the year. In Slide 7, we start reviewing the commercial activity in Spain. Both new mortgages and new consumer loans performed well in the quarter. Mortgage origination grew by 2% quarter-on-quarter and new consumer loans remained flat. On a year-on-year basis, quarterly mortgage origination grew by 10% and consumer loans by 14%. Our market share of lending stock in mortgages increased by 2 basis points versus December '21 and stands at 6.6%. The quarterly market share of new mortgage lending stood at 7.7%, a higher figure than our stock market share. In consumer loans, stock market share increased by 18 basis points and stands at 3.8%. The quarterly market share of new consumer lending stood at 5.6%, again, a higher figure than our stock market share. Let's move to Slide 8. New protection insurance premiums in the quarter were down by 3% quarter-on-quarter and decreased by 14% year-on-year. As we have explained in previous results presentation, this is mainly due to a shift in our commercial approach to life insurance originated together with mortgages. We are moving from single premium insurance to life insurance with renewable premiums throughout the term of the mortgage. This results in a lower upfront payment by the customer. As a result, our market share of life insurance premiums decreased 68 basis points in the year and stands at 8.8%. Regarding mutual funds, assets under management ended the year 8% below December '21 in a context of market volatility. On a quarter-on-quarter basis, assets under management grew by 3%. Net inflows in mutual funds reached EUR958 million in 2022. Although the figure is lower than '21, net inflows have started to pick up since the last months of the year. Actually, our market share of net inflows reached 8.3% in Q4. In Slide 9, we can see that payment-related services continued to deliver positive dynamics in the quarter. Card turnover increased by 1% quarter-on-quarter and by 11% year-on-year. Our market share remained stable in the year. Regarding payments processed through our point-of-sale devices, quarterly turnover decreased by 10% quarter-on-quarter. This is expected due to seasonality as point-of-sale turnover in Q3 is always higher than in Q4 due to tourism economic activity in Spain during the summer. On a yearly basis, turnover increased by 23%, and the number of transactions increased by 25%, in line with our turnover evolution. Our market share of point-of-sale turnover increased by 88 basis points in the year, while more importantly, point-of-sale fees continued to grow above turnover. Moving to Business Banking in Slide 10. Origination of loans and credit facilities increased by 26% quarter-on-quarter. This is again impacted by seasonality as Business Banking activity in Q3 is always lower than in Q4. And therefore, the quarterly increase in Q4 is always high. On a year-on-year basis, originations decreased by 6% as a result of a greater focus on customer profitability. We are targeting our growth on customers with a better risk profile, therefore, focusing on profitability and not necessarily in volumes. On the other hand, working capital financing continued to perform well, posting an increase of 11% year-on-year. This is another sign of solid economic activity among our Business Banking customers. Regarding our market share of total business lending stock, this has decreased by 4 basis points year-to-date. As I explained recently, this is the result of prioritizing new lending with targeted customers. Let's move to Slide 11 to analyze our commercial performance in Spain for each product. In the graph, we have plotted the percentile (ph) variation of business origination between 2021 and '22 versus the stock share variation for each product in '22. Let me comment on the key elements for each product. In mortgage origination, we focused on managing prices versus volume in a context of high competitive pressure on pricing. We are growing our origination volumes while maintaining stock market share. In consumer loans, we grew origination volumes and increased market share. We achieved these positive results leveraging on a new pricing model. In cards, we delivered a strong growth of turnover in line with the market. So, our market share remained broadly stable. In Business Banking, which includes both working capital and medium-term lending origination, we grew, but there was a slight decrease in our market share. This is the result of our strategy, greater focus on profitability versus volumes. In point of sale, we increased turnover, coupled with the strong increase of our market share. This outcome was delivered while increasing focus on customer profitability, very positive performance here. As you can see, all these products are in the upper right part of the chart, which is the best place to be, growing volumes while maintaining or increasing market share. On the other hand, as I explained, new origination mutual funds decreased due to the high volatility of the market. However, we performed in line with the market. We are well positioned to increase volumes as the market recovers. Finally, new insurance premiums were impacted by a new product mix of life insurance. Both origination volumes and market share are decreasing. This is in line with our strategy for life insurance, as I explained before. We are moving from single premium insurance to life insurance with renewable premiums. Summing up, 2022 was a good year in Spain from a commercial point of view, and we are performing in line with our strategy in our product lines. On Slide 12, we analyze our performing loan book by segments and products. On the left-hand side of the slide, you can see that '22 -- in '22, we managed to grow across all segments in Spain; mortgages, consumer loans, SMEs and corporates and public sector. The total loan book in Spain grew by 1.1% in the year. On the right-hand side, you can see that the performance of our international business was also positive. Mexico and Miami posted positive growth rates in the local currencies and even higher growth rates in euro, supported by stronger exchange rates. Moving on to the UK on Slide 13. TSB's new mortgage lending volumes were impacted by a sluggish UK mortgage market in the second half of 2022. Besides the current high levels of inflation, higher interest rates also reduced individual's appetite for mortgage borrowing. However, on the lower right-hand side of the slide, you can see that TSB's mortgage book kept growing. It grew by 1.3% in the quarter and by 4% in the year. In the lower left-hand side of the slide, you can also see that TSB's market share of mortgage stock increased by 1 basis point in the year, standing at 2.2%. TSB's market share of mortgage origination declined in the first half of the year due to our focus on protecting margins in a context of very aggressive pricing dynamics in the market. Our market share recovered in the second half of the year, when competitive pressure on pricing eased slightly. Our market share of mortgage origination for the year stood at 2.2%, in line with our stock market share. TSB keeps focused on protecting margins of its mortgage book, even if that means slight reductions of its origination market share. As you can see in Slide 14, TSB's business is moving forward at a very good pace. NII and fees grew by 13% and 10% in the year, respectively, while costs decreased by almost 5%. As a result, core results grew by 71.6% in the year. The underlying profitability of TSB keeps improving very, very positively. However, in 2022, there were three elements that weighted on TSB's annual net profit. Firstly, provisions increased in '22 versus '21. This is due to the release of provisions we had in '21, therefore impacting the annual comparison. Secondly, changes in the bank levy impacted the tax line in the year. And thirdly, the fine related with the 2018, â19 IT migration hit TSB's P&L. I'll go into the details in a bit. Overall, the franchise posted a net profit of GBP102 million in 2022. However, without the fine, TSB would have posted a net profit of GBP149 million, which is equivalent to a return on tangible equity of 8%. Let's move to Slide 15. By the end of '22, TSB received the fine related to its 2018 IT migration. The amount of the fine was GBP48.7 million. The net impact in TSB was GBP46.5 million, while the impact for the whole group was EUR25.1 million, since most of the insurance recoveries took place ex-TSB. The resolution of additional insurance claims is still in progress, and we will see some results in the current year. You will find all the financial details on the right-hand side of the slide. Now that this fine has been settled, we can finally leave those issues behind. Today, TSB has a powerful IT platform that gives us a key competitive advantage in the UK, especially for the broker channel. In Slide 16, we review the group's P&L, which performed well across all lines, as Leo will explain later in more detail. Starting with NII, it grew almost 11%, beating the guidance that we set for the year. Fees and commissions grew by 1.5%, in line with our low-single digit target. Costs continued to trend downwards, thanks to the efficiency plans undertaken in Spain and in the UK, and the cost containment discipline put in place. Recurrent costs decreased by 3.5% in the year. As I pointed out at the beginning of the presentation, our core results improved significantly while provisions remained on a downward trend. These positive results drove the net profit for the year to EUR859 million in '22, and took a return on tangible equity to 7.8%. In terms of solvency, our capital ratio has continued to grow steadily and stands at 12.54%. Moving on to Slide 17, shareholder remuneration. Our Board will propose at our next AGM a new shareholder remuneration structure for 2023. The new capital distribution will consider a payout of 50% against 2022 results, which will bring the total amount allocated to shareholders to EUR430 million. This capital distribution will combine a cash dividend and a share repurchase program. First of all, EUR225 million will be allocated to a cash dividend and will include an interim cash dividend of EUR0.02 per share, which was already paid in December '22, and an additional cash dividend of EUR0.02 per share to be paid upon approval by the AGM. Altogether, this represents a total cash dividend yield of 4.5%. Furthermore, shareholders will also be asked to authorize the Board to execute a share buyback program during 2023. This program will be subject to the aforementioned approval by the AGM. We expect to execute it in Q2 or Q3 this year, of course, in the absence of serious macroeconomic surprises, which for sure we don't foresee at the moment. Our intention is to allocate EUR204 million to carry out the share buyback, which will be equivalent to close to 4% of the current market cap. All-in-all, this represents a dividend yield of 8.7%, considering the closing price of January 24. Thank you, Cesar, and good morning, everyone. Now moving on to the financial results. I would like to start by emphasizing that we have had another quarter of positive results. We've recorded a net profit of EUR149 million at group level in Q4, which implies, as Cesar was mentioning, a full year result of EUR859 million or EUR884 million, if we exclude the net impact of TSB's fine and the insurance recoveries. This net profit entails a return on tangible equity of 7.8% or 8%, if we exclude the aforementioned one-off of the fine. Before reviewing the P&L, please let me highlight the seasonal or non-recurring items in it. Our quarterly results were mainly impacted by two elements: the first, the IDEC and deposit guarantee scheme annual payments, which amounted to EUR149 million, which are usually recorded in Q4 every year. And secondly, the fine related to TSB's IT migration that amounted to EUR25 million in net terms, as Cesar just explained. This figure includes EUR57 million related to the fine itself, which is not tax deductible and EUR45 million of insurance claim recoveries, which are taxable, and allowed us to partially offset the impact of the fine. Although, we will review them thoroughly throughout the next slides, please let me highlight the main progress in both the quarter and the annual P&L. Starting with the quarter, I would like to highlight the performance of NII, which grew at 11.6% and reached EUR1,077 million. This positive evolution underpinned core banking revenues. This is NII plus fees, up to 7.1%. When we add these to the costs, which were reduced by 0.4% to EUR720 million, we can see that our current results -- our core results increased by 15.5% in the quarter. As we anticipated, total provisions and impairments grew quarter-on-quarter, as we updated our provisioning models in order to include the new macroeconomic scenario. At bottom line, we printed a net profit of EUR149 million, EUR174 million, if we exclude the net impact from the fine. Now looking at the annual P&L, we can see that NII and fees increased in the year, driving core banking revenues to grow above 8% at group level. With regards to the cost line, recurrent costs, excluding the restructuring charges in Spain and in the U.K. that were booked back in 2021, declined by 3.5%, thanks mainly to the significant cost savings achieved from the efficiency plan undertaken in Spain. All-in-all, and excluding the aforementioned restructuring charges accounted for in 2021, the recurrent costs -- the core results, sorry, increased by more than 26% in the year, underpinned by all the three lines moving in the right direction as we'll review later in more detail. Additionally, it is worth mentioning that total provisions decreased by 15.7% in the year, supported by the improvement in asset quality despite the top up of macro provisions. We will deep digger into this topic later on the presentation. So overall, these results allowed us to post a return on tangible equity of 8% for the year, as mentioned initially, excluding the net impact of TSB's fine. As always, we will now go through the different items of the P&L in more detail. Starting in Slide 20, we can see that NII increased by 11.6% on a quarterly basis, showing an acceleration compared to last quarter. This allowed us to end the year with a double-digit growth of 10.9% and actually to surpass our year-end target. On the top right hand side, you can see the bridge of NII evolution in the quarter. If we move from left to right, first, we see that customer NII was by far the main contributor at EUR89 million in the quarter, underpinned by higher customer margins, loan book repricing at higher Euribor and higher loan volumes, which were partially offset by the impact of FX. Secondly, we see wholesale funding costs and ALCO contribution, which produced almost a flat impact, minus EUR4 million. On the one hand, we had higher wholesale funding costs driven by floating rate instruments repricing at higher yields, plus the cost of two new senior unsecured debt transactions that were printed in September and November. On the other hand, the ALCO portfolio contributed positively by EUR41 million, almost offsetting the increase in wholesale funding costs. The positive evolution of the ALCO portfolio is explained by the low duration of the book, which, therefore, reprices to higher yields very quickly, while we only reinvested EUR0.5 billion in the quarter. The rest of the performance is explained mostly by the TLTRO contribution. We benefited from accruing a positive cost of the funding at the average deposit facility rate from the drawdown of the facility until the 22 of November. And along with this, a higher remuneration of the liquidity deposited at the ECB. Total TLTRO III contribution amounted to EUR58 million in the quarter, which entailed EUR23 million of positive delta Q-on-Q. Allow me to finish by highlighting the remarkable acceleration in customer spread as well as in net interest margin, which increased by 21 basis points and 18 basis points, respectively. This is, on the other hand, a trend that we will continue to see in the coming quarters. Moving on and continuing on the NII topic. In the next slide, we cover our expectations for NII going forward. In this regard, we expect NII to grow by high-teens in 2023. In this slide, we show the different moving parts that will lead our NII to achieve these growth rates, along with the different tailwinds that it will face. We have split NII into three different main repricing buckets. On the one hand, loan book ex-TSB. On the second hand, the ALCO, the wholesale funding and the excess liquidity; and finally, TSB's evolution. First of all, given the decrease in current interest rates, the main tailwind will come from the fact that a meaningful proportion of the loan book equivalent to almost two-third of the loan book ex-TSB. This is around EUR70 billion out of a total of EUR113 billion will reprice in 2023. This includes loans that are either linked to variable rates, mainly 12-month Euribor or loans that will mature and therefore will reprice during 2023 in average at higher rates. As per the pass-through to depositors remuneration, we are forecasting an average deposit beta of 20% to 25% in 2023 over all our current accounts and deposits ex-TSB. To give you a sense of the level of pass-through this implies, let me share with you that we closed 2022 with a beta of 5%. In other words, the increase of the repricing in 2023 that we are budgeting should include, or should be between 15% and 20% of the aforementioned book. Therefore, we are confident that customer spread should improve materially in 2023. The second bucket, the ALCO portfolio, which is in part linked to variable rates, along with the remuneration of the excess liquidity deposited at the ECB, should broadly offset the end of the TLTRO III facility, as well as higher wholesale funding costs. So the net impact of all these elements should be near to zero. And finally, as per TSB, customer spread should also increase, although not in the same proportion as the rest of the book. As the biggest booming part, the structural hedge is not within it. This structural hedge will be the biggest contributor to TSB's NII, as it continues to reprice with a significant gap between its front book, the five-year swap today at 3.5%, 3.6%, and its back book currently around 1%. Let me remind you that this is a five-year structural hedge over EUR26 billion, of which one-fifth reprices every year. In other words, EUR5 billion will reprice in 2023. So all in all, we believe NII should increase in the high-teens in 2023 and gives us confidence to see NII improvement further in 2024, as most of the tailwinds still continue to contribute further repricing, potential ALCO reinvestments or TSB's structural hedge, just to point some out. Turning on to fees in Slide 22. Group fees increased by 1.5% in the year, which was in line with our year-end target of low-single digit growth. On a quarterly basis, we recorded a negative growth of minus 4.1%, mainly driven by lower service fees. These lower service fees income is explained by the fact that TSB recorded a positive EUR5 million non-recurrent fees in Q4, which affects the quarterly comparison and also by lower current account fees, which reached the all-time high figure in Q3. On the other hand, asset management fees advanced in the quarter, although success fees, which are usually recorded in Q4, were lower than other years due to the financial market volatility throughout the year. On a yearly basis, we can see that underperformance of asset management fees offsets partially the good evolution of both credit and service fees, which were up 4.5% and 3.6%, respectively. Going forward, we expect fees to decrease by a low-single digit figure in 2023. This is explained by the fact that in a higher interest rate environment, current accounts balances become more profitable. And therefore, we expect admin fees to be reduced while limiting interest rate pass-through into the depositors. Moving on to costs on the next slide. It is worth noting that our recurrent cost base in 2022 was down by 3.5%, supported by a downward cost base in Q4. In the year, this downward trend of the cost base was mostly driven by the significant cost savings from the efficiency plan in Spain carried out in Q1, which amounted to EUR105 million, out of the EUR110 million expected. Nevertheless, without considering exchange rate movements, these cost savings would have represented EUR128 million, well above our target despite the inflationary environment. To finish with this cost line and looking forward, I would like to point out that we expect 2023 cost base to be around EUR3 billion. This represents a 4% increase, which will be mostly driven by salary increases and inflationary environment. Now on Slide 24, we look at the core results, which include NII, plus fees, minus recurrent costs. As you can see, in 2022, the group core results increased by 26.3%. Additionally, when comparing each quarter with the same period of last year, we can see a remarkable upward trend over the year. On the right, we can observe that the different elements that led to wider draws in the year were both the increase in revenues, 11% NII, 1.5% fees, coupled with a decreasing cost base, minus 3.5%. Going forward, we also expect core results to keep on improving in the coming quarters, obviously, on the back of a higher NII, which will more than offset lower contribution coming from fees or higher costs derived from the current environment. Moving on to the lower part of the P&L on Slide 25. We cover credit cost of risk and other provisions. This is the main remaining elements between pre-provision profit and profit before tax. In this regard, 2022 group's credit cost of risk stood at 44 basis points, while total cost of risk stood within guidance at 60 basis points. In the year, credit provisions include EUR170 million top-up in light of the current macroeconomic uncertainty. Taking a look at the breakdown of total provisions in the quarter on the top right-hand side. If we follow the graph from left to right, we can see that we booked EUR247 million of loan loss provisions in the quarter, EUR13 million of charges on foreclosed assets, EUR30 million of NPA management costs and finally, other provisions, which mainly related to litigations stood at EUR33 million. These provisions levels allowed us to be within the range of our guidance, 60 basis points of total cost of risk and also 44 basis points in terms of credit cost of risk. Moving on to the following slide and continuing with provision expectations for the year. Let me highlight that we believe that total cost of risk will be around 65 basis points in 2023. Let me elaborate a little bit on the outlook for 2023. Looking at the breakdown of total provisions in 2022. So as we can observe, credit cost of risk increase the most, with 44 basis points out of a total of 60 basis points. Going forward, we foresee a small increase, not material, driven by a scenario of lower economic growth and a potential slight increase in NPLs. The rest of provisions, namely foreclosed asset provisions, NPA management costs and other provisions, mainly litigations, accounted for 16 basis points in 2022. And we expect them to remain broadly stable throughout 2023. Moving on, in the next section, I will walk you through asset quality, liquidity and solvency. Let's start on Slide 28 with NPLs. The NPL ratio decreased by 24 basis points in the year to a 3.1% ratio, while the coverage ratio remained broadly stable at 55%. In the quarter, NPLs were pretty stable as well. We carried out an institutional NPL disposal, which had no impact on P&L. However, it was somehow offset by the non-recurrent net new inflows related to a single name. Looking at the coverage ratios by stages on the right-hand side, we can observe that our Stage 3 coverage ratio is 39.4% at group level and 41.2% at ex-TSB level, given that TSB's loan book is 90% mortgages, a product which will obviously entails lower level of provisions. Moving on in the next slide, let me highlight some ideas regarding our NPL portfolio. We have reduced NPLs in the year by EUR400 million or 6%, while keeping the coverage ratio stable. This has been thanks to our ongoing organic recovery capacity and the active management of small NPL disposals. This approach has also allowed us to improve the composition and the profile of our NPLs, as you can see in the table. So for example, NPLs classified as 90 days past due were reduced by 6 percentage points in the year, representing at year-end, 43% of total NPLs. The remaining 57% are unlikely to pay, which, as you may know, are, in fact, still performing, but we have decided to reclassify them as Stage 3 as there are some signs of deterioration with the collector. Within this 90 days past due portfolio, it is worth noting that secured NPLs increased by 6 percentage points, representing now 64% of the portfolio. These NPLs are guaranteed with a collateral, and therefore, the recovery prospects on them are higher. This is demanding lesser provisioning effects. In addition, the vintage of these NPLs that is the number of years that the loan has been past due in our balance sheet has also been reduced by 0.4 years. Allow me also to highlight that all this improvement in the composition has been made while maintaining coverage ratios broadly stable. Now looking forward, despite the improved credit quality of our NPLs and expected shallower economic downturn scenario and the fact that we have not yet seen any sign of credit deterioration, we have been cautious and we have budgeted for NPLs to pick up moderately in 2023. In terms of foreclosed assets and total NPAs on Slide 30, you can see that the stock of foreclosed assets declined by more than EUR200 million or 15% decrease in the year. Today, the portfolio actually represents less than EUR1.2 billion. Let me also highlight that the coverage ratio for this portfolio remained unchanged at 38%, and also that 95% of the foreclosed assets are finished billings. If we consider both NPLs and foreclosed assets, total NPL -- NPAs amount to less than EUR7 billion, having decreased materially in the year, almost EUR600 million or 8% in relative terms, while the total coverage remained stable at 52%. Finally, the gross and net NPA ratios stood at 4.1% and 1.9%, respectively, with a year-on-year improvement. Moving now on to liquidity in the next slide. The group once again ended the quarter and the year with a record liquidity position, even after having prepaid part of the TLTRO facility. This is reflected in the EUR57 billion worth of high-quality liquid assets as well as in the LCR ratio, which stood at 234% for the group. At ex-TSB level, the ratio is even higher. It's 267%. And this is explained by the fact that even though TSB's LCR stood at 196%, its LCR -- it's capped at 100% when computing the ratio at group level following the applicable regulation, given that TSB is a ring-fenced bank. The loan-to-depo ratio ended the quarter at 96%, coming down from 97% in the previous Q, given that deposits have increased more than loans in the fourth Q. In terms of the European Central Bank funding, we have already repaid 50%. This is EUR16 billion out of the total of EUR32 billion with loan from TLTRO III. There are still EUR16 billion to come, EUR11 million of which mature by June 2023, while the remaining EUR5 billion mature in March 2024. In terms of the TFSME, we currently have GBP5 billion outstanding, the bulk of which matures in the second part of 2025. And to end with this slide, let me share with you the different improvements that we have achieved in credit ratings throughout the year. We improved our S&P rating to BBB from BBB- on the back of building a comfortable buffer of eligible subordinated liabilities, ALAC in their terminology. We also achieved a positive outlook from Moody's on the back of improved profitability going forward. And finally, we also got an improvement in the outlook assigned by DBRS, where we went from negative to stable. Turning to the next slide. Here, we can see our current MREL position. We recently received the updated MREL requirements and the subordination requirement applicable to us on a consolidated basis. As you can see, Sabadell is already compliant with all the requirements that need to be met from January 1, 2024 onwards, which are in line with our funding plans. The issuance plan will, therefore, focus on optimizing the costs and sources of funding and on maintaining capital buckets and MREL management buffer. We will also be present in the covered bond market, both at TSB and group level. Finally, as we announced some days ago, an AT1 EUR400 million issuance will be called in February 23. This issuance has been replaced by the EUR500 million that we printed in early January, which leaves the AT1 bucket completed, as well as shows our investor-friendly approach to bondholders given that we call the AT1 by issuing another one in the first window available. Finally, as per our capital position, we have continued to generate capital organically as our profitability improves. Our fully loaded CET1 ratio stands at 12.54%, having increased by 2 basis points in the quarter and more importantly, by 36 basis points year-on-year even after the increase of our payout from 32% to 50%. When we look at the quarter's evolution in more detail, we see an increase derived from organic capital generation despite the contributions to IDEC and deposit guarantee scheme as well as lower RWAs, which offset the small impact from the fair value reserve adjustments and the uplift in the payout from 40% to 50%. From a regulatory perspective, CET1 ratio stood at 12.66% on a phase-in basis, which implies an MDA buffer of more than 400 basis points, which comfortably beats our target of maintaining a buffer above 350 basis points. Finally, in terms of shareholder value creation, tangible book value per share increased by 8% year-on-year, including the distribution of cash dividend of EUR0.05 per share during 2022. This value creation can be partially explained by higher profitability as reflected in an EPS growth north of 60% in 2022. Sorry, my microphone was off. Thank you, Leo. And now to finish our results presentation today. And before opening the Q&A session, I would like to summarize a few key conclusions. In Slide 35, you can see that we have reached all the financial targets that we have announced one year ago. Regarding the P&L, NII surpassed the target, while fees and costs are in line. Credit cost of risk is also in the targeted range. Return on tangible equity stands at 7.8% versus an initial target of about 6% for the year. Our capital ratio stands at 12.54% above the 12% target, while MDA buffer reaches 402 basis points, clearly exceeding the target for the year. Moving on to Slide 36. We are giving our new guidance for '23. We are targeting an NII increase in the high-teens growth rate, as Leo mentioned before. Regarding fees and commissions, we expect a low single-digit decline. In a context of normalized positive interest rates, we expect to reduce fees to customers as current account balances are profitable again. Total costs are expected to stand at around EUR3 billion. Regarding total cost of risk, we expect a limited upward trend in 2023 and are targeting a lower than 65 basis points cost of risk. Finally, we are targeting a return on tangible equity above 9%. Return on tangible equity would be above 10.5%, if we exclude the impact of the temporary banking tax in Spain. However, this is not the end of the road and return on tangible equity will further improve in 2024. Thank you, Cesar. We will now begin the Q&A session. [Operator Instructions] Operator, could you please open the line for the first question? Yes. Hello. Thank you for taking my questions and congratulations for the results. I wanted to ask you about your deposit base. In general, first in Spain, I wonder if you can give us some color on the deposit mix, how much is retail versus institutional? How much would you say are stable deposits? Second, you lost a few deposits in Q4, partly captured off the balance sheet, I wonder how do you see trends in deposits in '23? How much of the deposits you think you can afford losing before having to increase pricing? And you also mentioned a beta of 20%, 25% in '23, but I wonder if you can share with us your views about the terminal beta in this interest rate cycle that you expect in '24? And lastly, you can comment also on the deposit base for TSB and what beta do you expect here? Thank you. Okay. I think you've -- Francisco, you've nailed the question. I mean, if there's something that is relevant for what is going to happen during the results of '23, it's certainly the beta on deposits, both in TSB and in Spain. And it has all our management. It has all the management attention. Let's just start with how the situation is today. And of course, I will ask Leo to give a lot more color into my response because I think this is a key question looking forward. So let's just start with where we stand. The beta in Spain right now is, the pass-through is 2% of the total on balance liabilities, including deposits and including current accounts and including everything and including all the segments. So that's a minimal, minimal starting point. Are we seeing any movement recently during the month of December, during the month of January? No, we are seeing nothing. So for the time being, it's very peaceful. As this is a very difficult projection, we are projecting a 17% pass-through in Spain around and a 20%, 25% for the group as a whole because, of course, our franchises outside Mexico, Miami, although, they are not huge in terms of capital. Nevertheless, the interest rates there are much higher and they follow much more the market. Why are we confident that the pass-through is going to be moderate? Because -- well, and significant at the same time. First, we have different levels. The first one is that we were charging commissions for the maintenance of the accounts, and we were charging negative interest rates on the corporates. And that is being reversed and that's why we are giving a projection of negative evolution of the fees for 2023. And in general terms, this is much more painful for clients. I mean, if you look at customer behavior, the sensitivity to fees for services is significantly higher than the sensitivity of lost income or opportunity cost on the liability side. And we have a lot of management attention because at the same time, we see that the loan to deposits that we ourselves have, which stands at 97% right now, it has room. In the previous circumstances where there was a tremendous fight for deposits, you have to remember that the loan to deposits were almost doubled. So, they were between 150% and 200% in most of Spanish banks with interest rates that were much, much higher and where the sensitivity of customers is significantly higher. And with this, I'll turn it to Leo, which will give much more color, I'm sure, to this very relevant question, Francisco. Hi, Francisco, if I forget something, please remind me because there were a bunch of questions. So the first one is the -- if I understood, basically, the breakdown between retail and wholesale in terms of deposits in Spain. So, we're talking that, basically, we have around, I would say, almost 50-50 split. And today, it's mostly in current accounts, okay, especially on the retail side of things. Basically, we have very little deposit base. Sorry, deposit base as understood of savings, okay? So it's basically on current accounts. The deposits in Q4 actually went up. They didn't go down, but we changed the accounting of the commercial paper, which is now included in a different line, which is basically in, let me tell you line -- it's basically sec in depth and other marketable securities. And there, we have around EUR900 million, which are actually deposits in the form of commercial paper. So if you include that, the deposits went up. So, we're not seeing any usage. In other words, we're not seeing any usage of retail savings, if you wish, which for me would be a first sign or could be a first sign of asset deterioration. And as a matter of fact, the loan-to-depo went down in the quarter from 97% to 96%. Now talking about the beta. As I explained before, the overall beta over all the deposits excluding TSB was in 2022, 5%. Now, this 5% is obviously very much impacted by the deposits that we have, both in Mexico and in Miami, which are included in that bucket, okay? Because rates there are -- have gone up at a much higher speed. In Spain, that beta was 2%, so negligible, almost nothing. What we're guiding for is that we would think that this 5% can become 20% to 25% as an average through the course of 2023 by taking into account that we are starting at 5%, okay? And that we have not seen any significant movements in January. So basically, that 2% that I was mentioning for Spain still remains the same in January. So, I think there's room for that delta to keep on growing. We believe also that this delta will grow in 2024. Yes, that's what we have budgeted. That's what we have included. Where will this end? Obviously, it's very, very soon to know where this can end. I think it's very important to take into account as Cesar was explaining that the context is very different to previous context that we have seen in history. It's not only us who have this 96% loan-to-depot. All banks in Spain are working with a loan-to-depo below 100%. So looking at the future, we don't expect volumes to grow in the assets next year, not materially. We are not seeing any usage of savings yet, and we were expecting to be seeing these from a few months ago. And this is not yet happening. So basically, loan-to-depo should remain without all things being equal, broadly stable. And in this context, I think no banks need deposits or volumes of deposits. I think there will be a lot of competition on probably new customers, new digital customers, but I don't think the focus of banks will be based on gaining volumes, billions of deposits, which is what could increase significantly the prices. But we'll have to see on this regard. And finally, with regards to TSB, basically, we expect that the beta to continue growing next year in line with the evolution of the rates. Right now, the beta at the end of the year was around 12%, and we're expecting that can go up to, again, 25%, 30% average for the year, more or less 30%. Hi. Good morning. Thanks for the presentation and taking my questions. I have two. The first one is a follow-up on NII guidance and you mentioned that you don't expect assets to grow in 2023 in Spain. But I was wondering what are your expectations for your loan book per segment embedded in the guidance? And also, if you could clarify which part of loan book has repriced in 2022, so that we can get an idea what will be left for 2024 after the 60% repricing in '23? And the second question is on the potential disposal of your payments business. I was just wondering if you could provide us an update on the timeline that you expect. Thanks. I'll take the second one, Leo, if you agree. And basically, the timeline, we have no rush and we want to do this properly. As you have seen, it's not solving anything today with growth above 20% on a year-on-year on the payments business and with an increase of the volumes, not only in amounts but also in income. This is not an urgent thing. This is an industrial transaction. And therefore, we will take our time. The good news is that what we are seeing out there is that in terms -- not of commercial, but in terms of technical capabilities, what we are seeing out there is very good and very encouraging. So, we are very inclined to do the transaction. But these transactions are complex. The contracts are complex, and we need to review every step of the way so that we can do it in a proper manner. And that's basically -- I think we anticipate that for sure, it will happen in the course of the year and we are advancing swiftly there. All right. Now with regard to the evolution of the assets next year, what we're expecting is barely growth of around 1% or slightly below 1% in 2023. Now if we focus in Spain, basically, we are expecting a little bit of a growth in mortgages, but fairly flat. Probably some more growth in the consumer finance space because we're coming from behind and because this is a very small book. SMEs and corporates should be slightly positive, but again, very slightly. And basically in TSB, we're also looking forward a flattish environment. So overall, as I said, between flattish and 1%. That could be more or less what we're budgeting on. And I think 2023 is, as Cesar mentioned before, a year to focus on margins and not volumes. Regarding your question of how much it reprices, as I said, as we tried to explain in the presentation, in 2023, we have around two-thirds, a little bit less of two-thirds of the non-DSP book -- loan book, which reprices. That's around EUR70 billion. And a part of this book will certainly be -- keep on repricing in 2024, depending on where the rates in and so on and so forth. And then there are maturities in 2024, which will be repriced. So, there's further tailwind to be gained on that regard in 2024. Thank you. Yeah. Thanks. Just a follow-up on the term deposit mix. Leo, I think you didn't want to give an exact number unless I've missed it, but maybe some color to help us sort of guess what could it be or model it. I don't know if you can give -- I realize banks are not going to compete given the liquidity situation, but I don't know if you can give us amounts of deposits among your wealth customers, the presumably old customers and some of the excess liquidity that corporates might hold in deposits that could make its way to letter or something along those lines that would give a proxy of what could realistically move to term deposits over time even if it's not this year? And the second question is around your cost of risk, the 65 basis points all in. We don't really see -- we're not seeing an asset quality cycle unless you tell me otherwise. When I think about what's the normalized number going forward, where do you think is there a further reduction from that 65 basis points? I'm thinking about your comments about further growth in 2024. Would that be led by lower provisions or further revenue momentum, which, I guess, given the rate curve is going to come to an end in '24. So some color there as well would be appreciated. Thank you. So regarding the term deposits, no, I can tell you no problem. We have, in Spain, basically around 7% of our deposit bases in term deposits, mostly wholesale. So very little retail. We don't have -- we don't -- I mean there's no product. What we have in retail is basically the parts that you would refer to as the private banking space that we were talking about before. We expect this to change, but it hasn't changed yet, not -- I mean as of January as we were speaking. And we're not seeing the momentum yet to be built. Nevertheless, we have budgeted for a significant increase of deposit beta this year because at some point, I think it shall come. I think it's going to be -- but I may be completely wrong, pretty different from other, basically, cycles because of the fact of the starting position of the banks. And we will offer to those clients who are requesting for further profitability, for example, guaranteed funds. We've done that in Q4. It has been very successful. Obviously, that is one of the things that we're going to be pursuing in 2023 to be able to provide with a product for those customers who requested it. Now, this is -- I understand this is the basic assumption for all banks this year. How much is the deposit cost going to increase? We've done a very thorough analysis segment-by-segment, book-by-book of how much we could be paying for deposits. And I think we came to a fair assumption. Now whether this is going to be the final picture or not, I'm afraid we're going to have to keep on waiting to see it quarter-on-quarter. What I can tell you without a doubt is that right now, we have not seen any change from December, okay? And we are at the end of January already. So one month has passed. So when I look at it from 10,000 feet view, we're budgeting for a deposit beta of 20%, 25%, which is basically 15%, 20% more than what we had in 2022. Is that too much? Is that too little? We are still 5%. So the average would have to grow very fast or the beta would have to grow very fast to meet -- to surpass that average for 2023, okay? But as I said, I'm sorry, a lot of parts. And I think we're going to need to have -- to wait. I think the assumption is fair. I think it's been -- there's a lot of intelligence behind it, but we have to see how the market evolves. As per the cost of risk, 65 basis points. Yeah, I think we've been cautious in this regard, as I tried to explain before, because this implies 5 basis points more than in 2022. Is this because we're seen as asset quality deterioration? The very basic answer is no. We have not seen any asset deterioration yet, end of January, I repeat. So the amount of loans 30 days past due is the same as we had last year. As a matter of fact, it started in January '22, worse than it ended in December '22, but it's basically flattish, if you wish or with a small downturn, but we have not seen any pickup. I have not seen any pickup on a slow path of, for example, number of transactions in payments, which for me is a very clear, could be a starting signal of asset quality deterioration if we started to see a number of transactions going down. We have not seen, as I try to explained in the previous question, a reduction on the retail deposits. So, savings are still there. Of course, there will be different situations. But on an average term, we're still there. So no, we're not seeing anything yet, but we thought it was cautious to budget with a conservative view. We are talking about a slight increase in NPLs. So we -- obviously, we're not seeing anything material here. We may get it wrong, and the reality be a little bit more optimistic than that, but we thought it was the right thing to do to budget in this regard. Now going forward, is this a normalized cost of risk? No, I don't think so. I think this is pretty high. If we have, I don't know, cost of risk of 35%, 40% -- basis points, sorry, could be reasonable depending on the mix that you have on SMEs and corporates and mortgages, taking into account that 50%, 5-0 percent of our book are mortgages, including DSB. And that topped up with the rest of the provisions around 15 basis points. So, I don't know, we could be talking about a total cost of risk of 45 basis points, 50 basis points in a normalized over-the-cycle scenario if we are ever to see that again, okay, because the road has been bumpy in the last few years. And as per 2024, yes, I think the revenues will go up. I still think that NII has room for maneuver because a part of our loan book will still reprice. Of course, the deposit beta will increase. That's for sure. But the margins in net figures, it should be positive. And on top of that, we have, for example, just to mention one or a couple of levers, TSB structured hedge. That's EUR5 billion every year, EUR5 billion times the five-year swap versus the back book. That's a lot of money. And then on top of that, we have the ALCO contribution, which will -- if we are to believe that rates will go down in 2023 -- or 2024, sorry, the wholesale funding costs should be reasonably stable, while we have not yet put forth all the profits coming out of the ALCO because, for example, we still have to buy a part of it in 2023. So all in all, put in all together, I'm reasonably confident that NII should keep on growing in '24. In â24, there are many other moving parts, but it's not what we are counting on the guidance of the increase of the ROTE -- of the return on tangible equity. Because, as you know, for example, the contribution to the SRB ends. That's a lot of money. The contribution to the deposit guarantee scheme gets in half. So, that's a lot of money. But that's the current view that we have and what the current regulators are saying. So the SRB has already told us that there's not going to be any contribution in '24, but we will see. But when I was talking about further improving the return on tangible equity, I was mostly talking about the income, yes, most likely, if things go in the way that we're expecting, a lower cost of risk. And then on top of that, you have the other levers that I mentioned. Thank you. Okay. So Carlos Peixoto from CaixaBank here. A couple of questions from my side as well. Touching a bit on the capital side. I was wondering if you could give us some visibility on how you see capital evolving throughout 2023, particularly if you see any specific headwinds that we should take into consideration when modeling our own assumptions. Related with that, on the shareholder remuneration, I was thinking on whether the 50% payout, particularly this blend between -- this particular blend between cash dividend and share buyback should be the benchmark to upcoming shareholder remuneration packages. So basically, the payout policy on 2023. And then finally, taking a bit back on NII, whether you could update us on the current NII sensitivity to interest rates? That would be very helpful. Thank you. So I'll take the shareholder one. The policy that has just been approved by the Board is that in normal circumstances, the payout should be between 40% and 60%. And therefore, we could take the 50% as a middle ground. But of course, the policy also understands that, that number could be higher or lower depending on the circumstances. But in normal circumstances, that should be the -- what the policy stands for. In terms of the structure, of course, the share buyback is much more appealing when the book value -- market to book value of the bank is lower than when it's higher. And therefore, the Board will logically differentiate that split over the course of the years depending on where we stand. As per the capital, yes, we expect capital to keep on improving in 2023. We have no material headwinds coming ahead in '23. We have the implementation of IFRS-17, but that is not material in the group. So with the kind of profits that we are aiming to achieve, the current return on tangible equity that we are aiming for, obviously, we will generate capital, and we will -- I mean, the ratios will grow throughout the year. And I think your last question was regarding NII sensitivity. I think we've -- well, NII sensitivity, you have in the current accounts. In my opinion, I've said it before, that is very theoretical because it implies very strict assumptions, if you wish, and then the world moves and all the different buckets in the balance sheet moves. My honest answer to that would be that my best guess is high-teens growth that we are aiming for in NII for 2023, given the evolution of the macro environment that we are all seeing and the rates that we're all seeing. I would stick to that. That's my best guess right now. Thank you. Thank you. We're starting to run short of time. We're going to try to squeeze one last question. But please make it brief. Operator, could you please give access to the last call? Yeah. Thank you. Just two quick questions from me. One on net interest income. Could you perhaps comment a little bit on the expected trajectory in 2023? So comparing the first half '23 with the second half, are we going to see NII increasing substantially and then leveling off or maybe even decreasing in one of these later quarters? And the second question with regards to the cost of risk. Does the assumption of less than 65 basis points include the release of any remaining overlays? And maybe you can tell us how many are left? And/or otherwise also ask, if there are no asset quality issues on the horizon, when would you have to really increase other provisions? Thank you. All right. So the first one, Britta, itâs the evolution of NII in the quarters, I think we're going to see -- if I, from a 10,000 feet give, NII in Q1 on the one hand, it's going to improve quite a lot because of the customer margin. But on the other hand, we have tailwinds -- sorry, headwinds, basically TLTRO. So that will be -- I mean, over the year, we're going to compensate that with the ALCO and the excessive liquidity, but Q-on-Q, there will be differences, some of that. So obviously, TLTRO will have an impact in the first three quarters and less on the fourth quarter, a negative impact. And in 12 months, that's going to be compensated. But in Q1, that would be a negative. So all in all, I don't know, NIIs for Q1, I think it should be broadly in line with Q4, if you wish. And from there onwards, the NII should -- at least in our numbers should keep growing every single quarter. So yes, the second half of the year, it's going to be higher than the first half of the year despite the fact that in the first half, it's when we will see probably the customer margin growing further. But we have this issue with TLTRO. Hope I more or less have been able to explain it. Regarding the cost of risk and the evolution, we have booked for, as I said, EUR170 million of overlays for the change in the macro this year. We booked in 2020 around -- we have left around EUR550 million or something of overlays for the -- that we booked for the COVID at that stage. But it's important to take into account that these overlays are included within the names. So it's part of the provisions of the single names of our clients, okay? So no, we're not considering any kind of release next year. That is why we are increasing our cost of risk from 60 basis points to 65 basis points. As I tried to explained before to Alvaro, this is our best guess, and I think it's a little bit conservative, if we listen to what we are seeing in the ground in January. Well, let's hope that's the case. And certainly not thinking about doing any release in '23. In my opinion, Britta, and I think I've discussed this before, these overlays, when they are -- you make an overlay and then you put that provision on the names of the clients. So, I really don't expect these overlays to come up unless with the natural movement of clients. If we recover those loans, then we will recover those provisions. So in the near future, it's not something that we're thinking about. Thank you. Thank you. And thank you all for all your questions. And thank you, Cesar and Leo, for your answers. To any of you who might have been left out, apologies, but we do not have any more time. Let me in any case remind you that the full team of Investor Relations is available for any further questions that you might have. And with that, we'll now wrap up the Q&A session. Once again, thank you all for your participation, and thank you for joining us today.
EarningCall_1015	Good morning and thank you for standing by. Welcome to today's International Paper's Fourth Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, today's conference call is being recorded. Thank you, Paul. Good morning and thank you for joining International Paper's Fourth Quarter 2022 Earnings Call. Our speakers this morning are Mark Sutton, Chairman and Chief Executive Officer; and Tim Nicholls, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation on Slide 2, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. And a reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the fourth quarter earnings press release and today's presentation slides. Thank you, Mark and good morning, everyone. We'll begin our discussion on Slide 3, where I will touch on our full year 2022 results. First of all, as I think about 2022, I'm very proud and appreciative of all the hard work our employees have done during the year. And for our strong customer relationships as we've managed through a very dynamic and uncertain market environment. Looking at our performance. International Paper grew revenue and earnings driven by solid commercial and operational execution, while facing significant inflation and lower demand in the second half of the year. We also made solid progress in building a better IP. We delivered $250 million of earnings benefits from our initiatives, focused on lowering our cost structure and accelerating profitable growth. And as a result, we exceeded our full-year target and have strong momentum going forward. We're also confident in the profitable growth opportunities across our Industrial Packaging business and have made strategic investments to support this growth. We will continue to invest to grow earnings and cash generation by building additional capabilities and capacity in our U.S. box system during the next few years. I'm also pleased with the significant progress we made towards achieving value creating returns in our Global Cellulose Fibers business. We delivered $100 million of earnings growth in 2022 and we expect significant earnings improvement this year. This past year, we also returned $1.9 billion of cash to shareowners and our balance sheet is very strong. This allows International Paper to navigate the uncertain macroeconomic environment from a position of strength. And we believe it will give us opportunity to continue to invest through the cycle to grow earnings and cash generation while also returning cash to our shareowners by maintaining our dividend and through opportunistic share repurchases. Turning to our full year key financials on Slide 4. Revenue increased by 9% year-over-year, driven by strong price realization in our 2 business segments. Operating earnings per share improved by 32%. Operating margins were impacted by lower volumes from weaker demand for packaging and elevated supply chain and input costs. Overall, EBIT improved by about $300 million year-over-year. In terms of segment performance, both our Industrial Packaging and Global Cellulose Fibers segment contributed to our earnings growth by about $100 million each as our profit improvement initiatives and price realization offset significant inflationary cost headwinds. Our corporate expenses were also lowered by about $100 million, primarily driven by our building of better IP initiatives and some favorable FX. And for the year, we also generated $1.2 billion of free cash flow which was above our prior outlook, driven by higher earnings and improved working capital in the fourth quarter. Turning to Slide 5. I would like to comment on the press release we issued last week regarding the progress we are making related to our Ilim joint venture. We have entered into an agreement to sell our 50% interest in Ilim SA to our JV partners for $484 million. This transaction reflects a total enterprise value for Ilim of approximately $3.5 billion and approximately 3.1x EBITDA and the EBITDA multiple for 2022 full year results. The JV partners have also expressed interest in purchasing all of IP shares in JSC Ilim Group which represents a 2.39% stake for $24 million. We also intend to divest all other residual and nonmaterial interest associated with Ilim to our JV partners. The deal is subject to regulatory approvals in Russia. We are making good progress and will provide you with additional information when it becomes available. Upon finalizing this deal, IP will no longer have any investments in Russia. Turning now to Slide 6 and our fourth quarter results. Earnings and free cash flow for the quarter were above prior periods and came in better than the outlook we provided last quarter. Demand for our products played out as we expected. In Industrial Packaging, our U.S. box shipments were down about 6% year-over-year on a daily basis, similar to what we experienced in the latter part of the third quarter, after consumer priorities shifted towards nondiscretionary goods and services. In addition, our customers and the broader retail channel continue to work through elevated inventories of their products which constrained packaging demand in the quarter. Underlying demand for absorbent pulp was stable. On a positive note, we did see meaningful relief from lower input costs and our fourth quarter earnings also benefited from our building a better IP initiatives and some favorable onetime items in the quarter which Tim will speak to later in the presentation. And finally, we generated solid free cash flow and returned $355 million to shareholders during the quarter. I will now turn the call over to Tim to cover our business segment performance as well as our outlook. Tim? Great. Thank you, Mark and good morning, everyone. I'm on Slide 7 which shows our year-over-year earnings bridge. Price and mix improved significantly with strong price realization across all channels and benefits from our commercial initiatives. Volume was lower in 2022 as consumers shifted priorities towards nondiscretionary goods and services while dealing with high inflation following a period of demand pull forward during the pandemic. Operating costs were negatively impacted by high inflation on materials and services and significantly higher supply chain cost across all of our businesses as well as lower volumes in our Industrial Packaging business. This was partially offset by improved mill performance and reliability. Maintenance outages increased as planned, impacted by high inflation on equipment, parts and contracted services. Input costs rose sharply across just about every category with more than half of the increase directly related to higher energy and fuel costs. Total corporate expenses and other items decreased by $0.33 per share as follows. Corporate expenses declined by $0.19 per share and benefited from our building a better IP initiatives as well as some FX. Interest expense was lower by $0.14 per share, benefiting from significant debt reduction in the prior year. Tax expense was $0.20 higher per share with a normalized effective tax rate of 24% as compared to 19% in 2021. Lastly, share repurchases impact earnings by $0.20 per share year-over-year. Moving to the fourth quarter sequential earnings bridge on Slide 8. Fourth quarter operating earnings per share were $0.87 as compared to $0.83 in the third quarter. Price and mix improved by $0.06 per share from better mix in our Industrial Packaging business and additional price realization in our Global Cellulose Fibers business. Volume was lower in Industrial Packaging as a result of softer demand across all channels. And Global Cellulose Fibers demand was stable. However, volume was lower sequentially due to higher pull-through of shipments in the third quarter as supply chain velocity began to improve. Operations and costs were impacted by the lower volume resulting in higher economic downtime and unabsorbed fixed costs as well as seasonality. Some of the downtime in our Global Cellulose Fibers business was caused by winter storm Elliott and also some isolated reliability issues. Ops and costs also benefited from favorable onetime items in the quarter related to lower employee benefit costs, workers' compensation expenses and medical claims. These favorable onetime items added about $71 million or $0.15 per share which is not expected to repeat in the first quarter. Maintenance outages were higher in the fourth quarter as planned. As Mark mentioned earlier, we saw a significant relief from input costs which were $144 million or $0.31 per share lower in the fourth quarter, driven by lower energy and OCC costs. Corporate and other items includes benefits from lower interest expense, favorable FX and other corporate items, partially offset by sequentially higher tax expense. Turning to the segments and I'll start with Industrial Packaging on Slide 9. Price and mix improved in the quarter, primarily from commercial mix initiatives focused on margin improvement. The recent publication changes did not have a material impact on the fourth quarter. As Mark mentioned earlier, demand for packaging was in line with our expectations. Fourth quarter volumes remained at lower levels due to constrained consumer demand and ongoing retailer inventory destocking. Sequentially, volume was also impacted by 4 fewer shipping days. However, in this dynamic demand environment, International Paper is well positioned due to our diverse portfolio of products and services and our strategic relationships with a large number of national and local customers across a broad range of attractive end-use segments. Overall, our mill system ran well and we managed through winter storm Elliott very effectively. The lower demand environment impacted operations and costs in the quarter as we adjusted our system to align our production with our customer demand. These actions resulted in approximately 530,000 tons of economic downtime across the system, resulting in higher unabsorbed fixed costs. Ops and costs were also seasonally higher. However, this segment benefited from approximately $57 million of favorable onetime items, I mentioned earlier. Input costs were significantly lower and improved earnings by $139 million sequentially. About half of the benefit was from lower energy costs in North America and Europe and the remainder was primarily from lower OCC costs. Overall, we continue to face elevated supply chain costs as well as the impact from high inflation on materials and services during the past couple of years. In a lower demand environment, when we aren't running at full capacity, we believe there is a large opportunity to further optimize our system and take out high marginal costs. This remains a key lever in 2023. Turning to Cellulose Fibers on Slide 10. Taking a look at the fourth quarter performance. Price and mix improved by $17 million due to the previously announced price increases. Volume was sequentially -- was lower sequentially due to higher pull-through of shipments in the third quarter as supply chain velocity began to improve. Operations and costs were negatively impacted by disruptions from winter storm Elliott and some reliability incidents at 2 of our mills. These were partially offset by approximately $14 million of favorable onetime items I mentioned earlier. Planned maintenance outages were higher by $39 million sequentially, coming off of the third quarter which represented the lowest outage quarter of the year. In addition, input costs were lower by $5 million. As we look forward, feedback from our customers indicate they are seeing in-transit inventory pull through at a faster pace due to improvements in supply chain velocity from last port congestion and improved vessel reliability. Combined with seasonal demand decline related to the Chinese New Year, we expect some customer inventory destocking to impact demand through the first quarter. With that said, fluff pulp inventories remain below historical levels and we believe fluff demand will continue to grow. This is due to the essential role that absorbent personal care products play in meeting consumer needs. Turning to Slide 11. Our Global Cellulose Fibers business continues to make significant progress, growing earnings and executing on our strategy to deliver value-creating returns over the business cycle. The business increased earnings by approximately $100 million in 2022 and was near cost of capital returns in the second half of the year despite significant supply chain cost headwinds. Our team successfully deployed a commercial strategy focused on building strategic relationships with key global and regional customers and aligning with most attractive regions and segments. We are focused on creating value for our customers by delivering products that meet their stringent product safety standards and deliver an innovative value. In addition, we are driving structural margin improvement by ensuring we get paid for the value we provide. In the fourth quarter, we made solid progress in our fluff pulp contract negotiations which will provide additional commercial benefits going forward. We are committed to building on this momentum and expect to deliver significant earnings growth in 2023. On Slide 12, I'd like to update you on building a better IP set of initiatives. We're making solid progress and delivered $75 million of earnings in the fourth quarter for a total of $250 million in 2022 which exceeded our target for the year. About half of the benefits today are from our lean effectiveness initiative by rapidly streamlining our corporate and staff functions to realign with our more simplified portfolio, we have offset 100% of the dissynergies from the printing paper spin-off. Although most of these benefits have been achieved, we will continue to pursue additional opportunities. Another significant driver of full year results was strategy acceleration as we delivered profitable growth through commercial and investment excellence. Going forward, we continue to focus on getting our Global Cellulose Fibers business to deliver value-creating returns, we are also focused on profitably growing our Industrial Packaging business by improving margins and investing for organic growth. Finally, the process optimization initiative has the potential to reduce costs across areas such as maintenance and reliability, distribution and logistics and sourcing as we leverage advanced technology and data analytics. We believe these initiatives will deliver benefits going forward as we finish implementing new capabilities across our business. Turning to Slide 13. I want to take a moment to update you on our capital allocation actions. As Mark mentioned earlier, we have a very strong balance sheet which we will preserve because we believe it is core to our capital allocation framework. Our 2022 year-end leverage was 2.1x on a Moody's basis which is below our target range of 2.5 to 2.8x. Looking ahead, we have limited medium-term debt maturities with about $1.6 billion due during the next 10 years. And finally, even in this environment, our pension plan remains fully funded. Returning cash to shareholders is a meaningful part of our capital allocation framework. In the fourth quarter, we returned $355 million to shareowners, including $191 million through share repurchases which represents 5.4 million shares or about 1.5% of shares outstanding. As a result, we've returned approximately $1.9 million of cash to shareowners in 2022. In October, our Board of Directors authorized an additional $1.5 billion of share repurchases. At year-end, our total authorization was approximately $3.2 billion. Going forward, we are committed to returning cash through maintaining our dividend and through opportunistic share repurchases. Investment excellence is essential to growing earnings and cash. We invested $931 million in our businesses in 2022 which includes funding for cost reduction projects with attractive returns and for strategic projects build out capabilities and capacity in our box system. As an example of this, the successful start-up of our new corrugated box plant in Eastern Pennsylvania which has an expected return on investment of 20%. And going forward, we plan to make additional investments across our box system to support long-term profitable growth. We will continue to be disciplined and selective when assessing M&A opportunities that may supplement our goal of accelerating profitable growth. You can expect M&A to focus primarily on bolt-on opportunities in our packaging businesses in North America and Europe. Any potential opportunity we pursue must create compelling long-term value for our shareholders. So turning to Slide 14, we'll look at our first quarter outlook. I'll start with Industrial Packaging. We expect price and mix to decrease earnings by $65 million as a result of prior index movement in North America and lower average export prices based on declines in the fourth quarter. Volume is expected to increase earnings by $20 million due to 4 more days sequentially in North America, partially offset by the normal seasonal decline in daily shipments in North America. Operations and costs are expected to decrease earnings by $65 million due to the non-repeat of favorable onetime items in the fourth quarter. In addition, we expect seasonally higher energy consumption and some additional inflation on materials and services. Ops and costs will also benefit from lower unabsorbed fixed costs due to higher volumes and more planned maintenance outages. Maintenance outage expense is expected to increase by $91 million. The first quarter will be our highest outage quarter this year representing approximately 40% of planned outage costs in 2023. And lastly, input costs are expected to decrease by $70 million from lower average cost for energy, fuel and fiber. Switching to Global Cellulose Fibers, we expect price and mix to improve by million on the realization of prior increases. Volume is expected to decrease earnings by $15 million based on seasonally lower demand and customer inventory destocking and response to increased supply chain velocity. Operations and costs are expected to decrease by $30 million due to the non-repeat of favorable onetime items in the fourth quarter. In addition, ops and costs will be impacted by higher unabsorbed fixed costs due to lower volumes as well as seasonally higher energy consumption and some additional inflation on materials and services. Maintenance strategy expense is expected to increase by $13 million which is largely associated with the Georgetown mill printing paper out. This cost will be fully recovered as part of the transfer price to Sylvamo over the course of the year. Again, the first quarter will be our highest maintenance outage quarter this year, representing almost 40% of total planned outages in 2023. Lastly, input costs are expected to decrease by $15 million, mostly due to lower energy and fiber. Moving to our full year outlook on Slide 15. We are projecting full year 2023 EBITDA for the company of approximately $2.8 billion. As I mentioned earlier in this presentation, we believe we have significant opportunities to reduce high marginal costs across our system and capture more benefits from our building a better IP set of initiatives. This includes meaningful earnings growth in our Global Cellulose Fibers business as a result of our commercial strategy execution, I would also note that our outlook includes only the impact from previously published price changes. Free cash flow is expected to be between $900 million and $1.1 billion which includes a onetime tax payment of $190 million related to our timber monetization settlement. In addition to free cash flow, we expect to receive approximately $500 million of cash proceeds from the Ilim sale. Regarding this transaction, for reporting purposes, the Ilim JV has been classified as discontinued operations. And in the fourth quarter, we took an impairment charge which was treated as a noncash special item. For 2023, we are targeting capital spending of between $1 billion and $1.2 billion with increased investments in our U.S. box system to build additional capabilities and support profitable growth with our customers. We will also focus on high-cost cost reduction projects across our system. Thanks, Tim. Now I'll turn to Slide 16. I want to reinforce my confidence in the resiliency of International Paper and our ability to navigate through this dynamic environment from a position of strength. As Tim mentioned earlier, we're well positioned due to our diverse portfolio of products and services and our strategic relationships with a large number of national and local customers across a broad range of attractive end-use segments. Also, our teams at IP know what it takes to successfully manage through a business cycle by leveraging options and capabilities across our large system of mills, plants and supply chain to optimize cost while continuing to take care of our customers. In addition, our building a better IP initiative initiatives are focused on continuing to invest in projects to drive structural cost reduction through efficiency improvements and accelerating profitable growth. We exceeded our target in 2022 and we have solid momentum as we enter 2023. And finally, as I mentioned earlier, we have significantly enhanced our financial strength and flexibility. This strong foundation makes IP well positioned for success across a spectrum of economic environment and to deliver profitable growth over the long term. And turning to Slide 17. As we look to 2023 and all of the dynamic conditions at hand, I draw confidence from an incredible milestone that reflects the resiliency of our company. To be precise, today marks our company's 125-year anniversary. On this date, in 1898, 17 pulp and paper mills in the northeastern part of the United States joined to form International Paper Company. I think our founders would be amazed at how our enterprise has evolved through the years, including the incredible products we make and the expansive list of customers we serve. I would also appreciate our long-standing commitment to the pursuit of excellence in safety and environmental stewardship. While the world has changed, our commitment to providing essential products, people depend on every day and the talent and dedication of our team has not changed as we embark on our next 125 years. Our principles and resilience will continue to serve us well. I'm excited about how we are reengaging our company. We haven't performed to our full potential but that's behind us. We are committed to take our performance to a higher level. We recently made talent and leadership adjustments to match the right skills to the right opportunities we have in front of us. It's the right team to execute our strategy. We continue to make a lot of traction on our build to better IP focus areas. The things we're going after will set us apart and will drive our results. In essence, we are proud and well positioned to build on our 125-year legacy in the days, months and years ahead. I'm confident you'll like what you see. I had one specific one on, I guess, energy use. And when I look at kind of the sequential math and what you guys kind of beat by in the quarter, I'd say at least in the corrugated or Industrial Packaging segment, half was from these one-timers and maybe half was from lower natural gas. Has anything changed kind of with your -- so I guess, first question is, can you confirm that? And second, has anything changed with IP's perspective on mediating risk kind of across the organization given geopolitical tensions and potential impact on commodity inputs? I think you sound like you got it about right on the split between the one times which usually get corrected in the last quarter. But through a lot of efforts, especially on things like the medical cost and all of that. On the question about energy and geopolitical, I mean, part of the reason we have lower energy cost is our energy usage can be optimized actually when we're running less than full capacity because a higher percentage of our energy is our own make energy. And so we can actually just stop consuming purchased -- as much purchased energy whether that's raw natural gas to power the auxiliary boilers or whether it's the electricity we buy that we don't make ourselves. Our view on geopolitical is no better or worse than anyone else's. As we look out ahead, part of it is what's happening with weather and what's happening in Europe in terms of demand for some of the fuel, natural gas being the main one. We feel like it's a more stable environment going forward. But what we've been able to do is really manage and optimize our consumption. And as you know, Gabe, in the integrated mills, at the right output level, we are generating from wood biomass fuel most of our own steam to generate most of our own electricity. Not that we don't want better demand but when it is lower, we can optimize our energy profile which is what we're doing. Okay. And then, I mean, if I take Tim's commentary, I think, directionally, maybe implied EBITDA for the first quarter is somewhere in that $540 range which obviously suggests a pretty significant ramp to get to your full year outlook. I wanted to know if you'd be willing to parse out, I think the term used was significant improvement in Global Cellulose Fibers, if you maybe put a finer point on what's implied there. And then I appreciate, again, some of the maintenance costs are somewhat front-end loaded but -- so we've got visibility there. But then it sounds like a lot of this improvement in the back half maybe or as the year progresses is based on your ability to run more efficiently and take these costs out that seemingly kind of crept into the system and to use your words, Mark and you guys were kind of not pleased with the performance necessarily. So just maybe the building blocks of how you think about maybe magnitude of getting to that full year number? Gabe, it's Tim. And I think you actually summarized it quite well. We are front-end loaded in the first quarter on maintenance outages, so we get a step down. If you look at it on average across the quarters 2 through 4. But really, the benefits to GCF come through, the contract negotiations that were closed in the fourth quarter. And so we're going to see a step-up in profitability based on those. And then given build a better IP and what we expect to achieve this year and just flowing back some of these marginal costs. I mean the past 2 years have been -- the costs have been going up almost relentlessly across every category. Supply chain cost has proven to be a little bit stickier. But we think both from a rate and fuel standpoint, there could be an opportunity. But the real opportunity for us is just on the operations side, just getting back to more of a normalized mode mix type of scheduling of transportation and taking out the premium freight and higher marginal supply chain and logistics costs to move product to customers. Congratulations on the quarter. Much better than we were looking for. One thing first point of clarification for Cellulose Fibers, did you say price and mix in the quarter would be a plus 5-0 or plus 1-5? I couldn't quite tell. Okay. So I wanted to piggyback on Gabe's questioning on GCF. Again, to the extent that you can provide a bit more color, what else do you have embedded in the discussion on a significant improvement? I take from your comments that you're assuming current levels of pricing, you're not really making a forecast, at least internally on the direction of pricing? Or are you? Anything that you could provide us there? Anything that you could provide us with the current snapshot, right, in terms of cost and operations, what you might see in terms of a profit delta, '23 versus '22? I'm sorry, I missed the last part of that, George. I mean I think it's no different than what I was just talking about with Gabe. We got big structural changes in the contract negotiations in GCF in the fourth quarter. So that hits now. That starts as we go through first and second quarter. And then just in terms of most of the initiatives their internal self-help, whether they're structural through a build a-better IP or they're just getting back to more normalized levels of operation across a number of categories including supply chain, usage in the mills on inputs and the like. So we're not immune from the macro environment but there's a lot that we think we have in front of us that we can work on, especially as it relates to the marginal cost that were incurred in a more run full type of environment. Would it be fair to say, Tim, if I just very simplistically annualize what you're seeing in industrial packaging on price mix as kind of a headwind you need to manage against that GCF to basically close the gap as maybe a couple of hundred million dollars or better profit-wise in '23 versus '22? Ex any changes in pricing in the market? George, this is Mark. I think that's a good way to think about it, although they're not the same market be the numbers work out. There one way to just verbalize what you should be thinking about with Cellulose Fibers, a lot of commercial changes on all types of accounts and customers and regions of the world occurred through 2022. And those benefits now are largely locked in, in our commercial agreements for the full year 2023, coupled with improving our cost position. So that's where the expansion comes from, commercial is the driver, layered on top of a much more sane higher-velocity supply chain and lower cost structure. And that gets you the significant earnings improvement. Make sense. Two last ones and I'll turn it over. One related to the GCF and then one to the industrial packaging business. So for GCF, Tim and Mark, you mentioned that inventories are low. You believe at your customers' levels, I thought you said but also that there is a potential for destocking in the first quarter. So can you help us reconcile those 2 points? And then in industrial, as you're bringing on the Pennsylvania box plant and as you have been targeting potential other converting investments. What are the implications? And how are you managing against the -- what the implication for the rest of your box business? And how do you keep retention at high levels as you perhaps adjust your converting footprint in any given region, including in Pennsylvania and New Jersey. George. Yes, on the inventory side, it's a combination of 2 things. So we believe inventories are historically low. They've been that way for the past couple of years. But you've got a little bit of a phenomena going on with the accelerated velocity in supply chain through the third quarter that people were able to recover a little bit but still not get back to what would be historical levels of inventory. So they've got a little bit more to work with but they're low on a historical basis and then we believe once you get through Chinese New Year, buying picks up again. So on GCF, the labor issue, yes, that's been a battle through '22 but the business is deploying a lot of strategies there. George, the way to think about the example of the Pennsylvania box plant coming on and then with obviously a softer demand environment. I'll take you back to the last maybe 3 quarterly calls where I commented on our running to meet demand required structural over time in a lot of our plants. And so in that particular part of the country, we are -- we don't have enough capacity even with our employees working a fair amount of overtime. So this plant is going to help us not only gain business, we've had to turn away in some places but stabilize the entire region of plants around it by getting onto a more sustainable operating schedule for our employees. So customer retention because we're stretched on our capacity. And it's not an average statement. It's in different parts of the country. This is one of them. This will actually have benefits from the incremental volume of the plant and secondary benefits by stabilizing the nearby operations into a more sustainable schedule. So I think we feel really good. It's a total net add and an improvement in our operating cost and our operating efficiency and our employee resiliency. So we've got several other examples in different parts of the markets where we're going to be doing the same thing. So 2 quick questions. One was on the cellulose fibers, with the changes that you're making, do you think that pricing beyond 2023 is going to be less impacted by shifts we see in PPW, for instance, is it kind of -- are these more fixed? Or are we still going to be moving quite a bit with where the open market transactions are going? Yes. I mean it's -- so Mark, it's Tim. I don't want to start making forecasts or predictions but we do believe, as we've said, that the business is structurally taking efforts to get paid for the value that they're delivering. And you do have a mix across the different channels and segments that we serve. This last piece that we referenced in terms of the contract negotiations in the fourth quarter were structurally something that needed to be corrected by the business and it took a little bit of time to do it. So not making a prediction but we believe that the actions that we're taking consistent with how we get paid for value. And so you can read into what you think that means as we go through '23 and '24. Okay. So I guess I'd read that hopefully, it leads to reduced volatility. Is that a fair -- that's the intent of the contracts? Well, I think it's the intent of the approach that we've taken with each of our customers and just recognizing that the value equation doesn't change dramatically over time. Mark, I think it's fair to say our commercial objective is to improve profitability, as Tim just described and there's multiple ways to do that depending on the segment and the type of customer. And then secondly, obviously, to reduce volatility in the way that we make When we throw words like strategic customer relationships, that's partly what we mean by the word strategic versus transactional that there is a longer-term view which usually comes with less volatility versus playing a very transactional market by the month or by the quarter. you need probably a mix of all of it but our objective is to improve profitability which we are doing and reduce volatility. Understood. And then just quickly on the Industrial Packaging, when you talked about volume, you talked about the 4 more seasonal days. You talked about the seasonality typically being a negative, of course. Now are you not seeing any signs that maybe the destock which negatively impacted the third quarter and then again in the fourth quarter by your customers. Any signs that we may be getting towards an end? And might that become a positive? Or any indications from customers as to when that might start working less against you? Yes. I think that's right, Mark. A large portion was taken care of in the fourth quarter. It feels like maybe there's some remnants but that it's getting close to the end. And if you look at where we are just in January, year-over-year, it looks like we don't have numbers yet but just following cut out. It looks like we're down 5% year-over-year but stabilizing from fourth to first. Tim and Mark, congrats on a very good quarter. Last quarter, you mentioned you had an internal algorithm you used to figure out how and where to take downtime. And then one of the items that you -- as part of the algorithm is natural gas. So with the domestic natural gas down as much as it has been with the decline in OCC? How have you shifted your downtime plans, if at all? And just trying to get a sense of whether you've been able to more efficiently take down time and whether that was a benefit in the quarter as well. It's a great question, Mike. We shifted it to the algorithm for marginal cost. And so that's one of the important one, also logistics and transportation costs which haven't relaxed as quickly is an important one and then, of course, fiber, wood fiber costs as well as OCC. And I would say, yes, you saw more of our production shift to the lower-cost energy mills but not in a material way. We ran everything. We didn't make any dramatic shifts but you can see the efficiency and cost reduction showed up in our numbers. Because, again, as I said, at certain sweet spots in an integrated mill where you're making at full capacity, 80% of your energy at less than full capacity you can make almost all of your energy and you're not subject to the open market for purchase electricity or gas virtually at all. So that might even trump a lower gas price. When you have a mix of integrated mills and recycled mills like we do. Got it. And then just quickly on China. With the country easing its strict Zero-COVID policies, can you give us a sense of what you're seeing from a demand perspective in GCF? And I know it's early stage and I know that you're also contending with Chinese New Year, so you may not have your line of sight. But any early read on how demand may or may not be impacted from the elimination of those policies? Yes. I think it's probably a bit too early, although we agree that there is an opportunity past Chinese New Year, China reopens, we see that as a positive. First, I just wanted to ask around the sale of your stake in Ilim. Are you able to talk about the time line to close that transaction. It sounds based on your guidance that you're looking for it to close this year. But -- is there any additional color on that? And also any thoughts on key hurdles to clear in terms of receiving regulatory approval. I mean I don't want to speculate such a fluid environment but I think we look to closing sometime this year at the regulatory approval process, will take what it takes. So as we know more, we'll report it. Okay. And then just in Industrial Packaging with linerboard medium prices, we see benchmark prices coming down. Can you just remind us to what degree your typical kind of contract pricing lag on realization would be versus those benchmark prices? Yes. It usually runs a couple of quarters. It's all over the map. But when you look at it in total, on average, usually see it coming through over a 2-quarter period. Just a couple of follow-ups for me. I guess, firstly, Tim, in your prepared remarks, you had a comment about taking out high marginal costs. And obviously, you've been pretty dynamic about that over the last couple of quarters. I'm just wondering if there's an opportunity for some more permanent restructuring in the containerboard system, if that's something you're considering or sort of remains dynamic right now? If you mean -- this is Mark. Thanks for the question. If you mean permanent, like adjustments of capacity, we don't see that on the horizon. Given the types of products we make, the different grades, cost structure of our mills. We're quite capable of running at 105% of nameplate rating and 85% of nameplate rating. And we do believe long term, fiber-based packaging market is growing. So structural cost reduction, where we can now say it's worth making a capital investment to take out this permanently, this marginal cost that ends up only coming out when we are taking economic downtime. Yes, there's opportunities for that. But there's no consideration right now or any major adjustment in our asset base because it's very competitive; it makes the products we need. And I think we've got to figure out also industry in general and I think in particular what's the new normal in supply chain because location of facility near -- converting or near market matters a lot more now than it used to. So we've had a lot to figure out on that but lots of cost reduction opportunities through modest capital investment would be our focus on taking it out for good. Yes, that makes a lot of sense. And I was just wondering if there is any -- if you've made any discoveries through the process of being more dynamic over the last couple of quarters but it sounds like that's a work in progress. Maybe just 2 more quick ones. You've laid out full year guidance. I'm just wondering if there's any economic downtime built into the plan that you've laid out or if it's mostly maintenance in Q1? Yes. We don't comment on any plans we have or don't about economic downtime going forward. But we have a view of the market growth and how we'll need to run the system as we go through the year. Okay, that's fair enough. And then just finally for me, thinking a little bit bigger picture. I'm just curious, I'm just sort of wondering conceptually here, how frequently you evaluate through cycle free cash flow. I think it looks like you need about another $200 million to $300 million of free cash flow to support the dividend within that 40% to 50% payout that we've talked about before. I'm just curious how you plan to get there from here just on a conceptual basis. Yes. I mean we look at free cash flow through the cycle. We do trough testing around sustainability of the dividend. I mean, we feel very good about our ability to meet the dividend requirement. And the 40% to 50% is not a hard and fast rule that it will always be within that. Sometimes it could be a little bit above and sometimes it might be a little bit below. But over time through the cycle, we think averaging 40 to 50 across a number of years is an appropriate range to shoot for. Would you say that CapEx is running like a little bit above average in '23? I mean is that something we should expect to come down. I think it's within $100 million or $200 million, it's probably in the zone. I mean we were trying to spend more on last year but just given supply chain difficulties and long lead times, it was impossible. And so we were just short of $1 billion last year. We're targeting between $1 billion and $1.2 billion this year. But again, it depends on suppliers and vendors' ability to deliver within a time frame. But D&A runs about a little over $1.1 billion. We've looked at average that over time in terms of capital spending. This is John Dunigan on for Phil. Congratulations guys on a great quarter. I wanted to first ask about the containerboard inventories for IP. Where are they now? I mean, one is your base maintenance outage but do you see them in a decent spot with kind of this continuing weak demand environment? Or do you actually see the need to build up a little bit just because of 1Q being your largest maintenance outage? Yes. I mean without getting into the numbers, they came down a little bit in the fourth quarter. We're going into heavy maintenance outage season, first quarter for sure but in the second quarter. So we'll look at inventories and make sure that we are at an appropriate level to support our outages. So -- but I don't expect a lot of movement. Okay. And then just with the new capacity for the industry that's coming online, have you seen any impact from that? Any businesses coming up for bid more frequently or anything along those lines? And just in terms of how IP is maybe responding to all the capacity that's heavily coming on here in the latter half of the quarter. Have you been able to lock in any customers for a longer period of time or kind of shore up some of your contracts to avoid some of the potential instability in the supply demand? John, I think the way we think about it is our containerboard and box system obviously, is an integrated system for the board that we use to make our boxes. And the balance is what we would call our open market position. There's 2 pieces to that: domestic market and export market. And for the domestic market, all of our customers that buy board from us are long-term strategic agreement type customers. We do very little in just kind of what would be considered a spot market. And so we really don't have some of that churn issue that you're talking about. And then we look at demand for virgin kraft linerboard which is all that we export and we oscillate our output on that to match the demand signal. So we've seen capacity come on in the past and it comes on in varying degrees of velocity and varying degrees of success. And we'll just navigate this one like we've done in the past. But we really do run -- for all practical purposes, we run a pretty integrated operation from fiber to box, whether we're making the box or whether a long-term strategic open market box makers making it. Okay, understood. And just one point of clarification. In the deck, it says there's no dividend expected from Ilim in 2023. I mean given the closing, it was just expected sometime this year, is there no cash dividend that could come from just holding on to the Ilim for longer portion of this year depending on the closing? Or that's kind of off the table included in the sale price? Just couple of questions about your -- the assumptions embedded in your full year guidance. One on demand, I think, Tim, you mentioned you're thinking underlying box demand will be flattish sequentially 4Q to 1Q. Could you talk about what your expectations are thereafter? Just given the destocking that you talked about affecting the fourth quarter, one would think that demand would be getting better sequentially at some point over the course of 2023. So just wondering what exactly your expectations are beyond 1Q and for full year shipments '23 versus '22, if you're able to talk about that. I mean we do see a modest recovery. I think we're looking at something in the neighborhood of maybe 1% absolute over the course of the year. So as we get out of the first quarter going into the latter part of the year, a pickup is anticipated but modest. Got it. And on price, Tim, just given the lags you mentioned with respect to when the previously published price changes hit your P&L, is it reasonable to assume that your realized prices in Industrial Packaging will fall sequentially not only from 4Q to 1Q but also from 1Q to 2Q? I would assume so but I just want to confirm that. Okay. And my last question is just if I think about the implied 1Q guidance, I think, around $530 million, maintenance will be higher by about $120 million compared to the latter 3 quarters. So if I take the $530 million, I'd go up to $650 all else equal, if you assume the last 3 quarters of that, you get to about $2.5 billion for the year. So obviously, there's additional improvement embedded in your guidance, I assume from higher realized pulp prices or otherwise. So you're assuming that even though prices in Industrial Packaging will likely be lower from 1Q to 2Q and thereafter. Is that -- I just want to make sure I'm clear on the moving parts from 1Q onward. Got it. And just last one for me is what are you -- what is your sense, Tim or Mark, as to how -- the extent to which the customer destocking has played out in terms of box demand? Do you think you're 90% of the way there? 70%? What are you hearing from your customers as to what their inventory levels are and their expectations are? I think, Adam, we're hearing -- there is a range but we're hearing, as Tim, I think, mentioned in the earlier question, a large portion of the destocking did occur in the fourth quarter. There are a couple of segments that are maybe still going through it. But in some cases, we've had orders pick up in certain segments to kind of replenish inventory. So it feels like based on what we're hearing qualitative and what we're seeing in order book that the destocking story of demand chain played out largely. And now the question mark on everybody's mind is what does the consumer do as we move through the first half of the year with respect to disposable income, what happens with inflation, they're getting some relief on fuel prices and does the consumer move back into the goods economy. And more than likely, everybody who looks at it will get it wrong and it will probably come back faster or it will take longer to come back but we won't get it precisely right but that's what we're hearing. Just a couple of quick ones. Maybe following up on Adam's question on the outlook. I think over the last few years, when you've given a full year outlook, you've given kind of a range of $300 million EBITDA. This year, you're giving $2.8 billion which is maybe a bit more of a specific number. I'm just wondering if there's sort of a different way that you're formulating or presenting the outlook is 2.8 million kind of an internal target? Or how do you think about sort of upside, downside there? Anthony, it's Tim. We said approximately $2.8 billion. It could be a little bit higher or a little bit lower is just a dynamic environment and we think it will be around that $2.8 billion level. Okay. And then you talked about lower fiber costs in the 1Q outlook slide. I was wondering if that's just a function of seasonality or if you're seeing real deflation or maybe price declines there. And then I was just wondering if you're seeing any uptick in OCC? And if you could just kind of comment on Southern virgin fiber costs, understanding those are kind of local markets. No. I think it's OCC and virgin fiber, we're expecting to be down modestly. You've had a lot of transportation cost impact on -- really on both. But on virgin fiber and our inventories are in good shape. And so we think we have an opportunity to bring virgin wood cost down slightly as well. Thank you and thanks, everyone, for joining our call today. Just to kind of wrap up with a couple of key points. We're excited about 2023. We believe in our outlook. We've got opportunities to maximize our performance in this uncertain environment. A lot of opportunity to get our cost structure back to something that we would consider more normal on different cost ratios. And then, looking at the commercial improvements we are making throughout 2022 and into 2023, we expect to see dividends on improving our profitability regardless of the demand environment and then the investments we're making are primarily in our box system, we'll continue to make those and we will be ready with a more sustainable operating model when demand returns to a more normal level with the appropriate level of converting capacity and capability in the right geographic locations. So a lot to do. We're excited about it and we look forward to updating you along the way. Thanks for joining our call today. Once again, we'd like to thank you for your participating in today's International Paper's fourth quarter 2022 earnings call. You may now disconnect.
EarningCall_1016	Good morning and welcome to the HCA Healthcare Fourth Quarter 2022 Earnings Conference Call. Todayâs call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir. Good morning and welcome to everyone on todayâs call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks and then we will take a few questions. Before I turn the call over to Sam, let me remind everyone that should todayâs call contain any forward-looking statements that are based on managementâs current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in todayâs press release and in our various SEC filings. On this morningâs call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in todayâs release. This morningâs call is being recorded and a replay of the call will be available later today. Alright. Good morning and thank you for joining the call. We finished 2022 as expected with pre-pandemic seasonality demand norms driving solid volume growth. Additionally, we continue to see progress with our labor agenda. These factors helped produce solid earnings in the fourth quarter that were consistent with our guidance. We are encouraged by this outcome and believe this operational momentum should position us well for 2023. 2022 was a tale of two halves, with the first half being more about winding down from the previous 2 years of intense COVID activity and responding to the resulting challenges. The second half was more about normalization, which included strong demand and an improving labor market. Once again, I believe our people have demonstrated an impressive capability in the face of these dynamic forces and delivered for our patients, the communities we serve and other stakeholders. Healthcare people in general are unique, but I believe HCA Healthcare people are even more special. Iâll often refer to them as can-do people, and again, this past year, I think they proved it. I want to thank them for their hard work and everything they do each and everyday for our company. Same-facility volumes across the company were strong in the fourth quarter. Admissions grew 3% year-over-year. Non-COVID admissions increased in excess of 5%. Equivalent admissions were up 5.4%, with impressive growth of 11% in the emergency room. Most of our other volume categories had solid growth metrics in the quarter also. The payer mix and acuity levels in the quarter remained at favorable levels. These factors produced revenue growth against a difficult comparison of 3% in the quarter. With respect to our people agenda, we were pleased with the improvements we saw in key metrics. Turnover numbers for registered nurses were down 26% in the fourth quarter as compared to the previous four quartersâ average. Our turnover rate is still higher than we want, but we believe it is better than the industry average. Employee engagement scores recovered to around pre-pandemic levels. Again, our engagement is above the industry average. Our recruiting teams continue to generate results for the company. Hiring increased 6% year-over-year in 2022. And lastly, we opened our seventh Galan College of Nursing School this year. With respect to labor costs during the quarter, we experienced stable labor cost per hour with utilization of contract labor declining. As we have detailed in the past, we have implemented a robust human resources plan. We executed well on it and expect to make further progress as we move into 2023. It remains a top organizational priority. Even with the progress, we continued this quarter to experience capacity constraints, creating situations where we were unable to deliver services in certain situations. Also in the quarter, we saw value from our portfolio optimization plan and closed two joint ventures with strategic partners; one was with our Sarah Cannon Research Institute, which we combined with McKessonâs cancer research entity. We believe the combination of these two entities will produce better cancer research and more clinical trials across the country, providing even more community-based resources for physicians and patients to fight this disease. The second co-venture is with our CoreTrust purchasing organization. We closed on a new partnership with Blackstone. We believe this new relationship can expand our ability to offer commercial purchasing and services solutions to a broader variety of customers. We believe both of these deals achieved our strategic objectives and connected us with better platforms for success in the future. We are excited to partner with both entities. We also implemented our capital plan for the year as expected, including redeploying the proceeds from these two new joint ventures. Bill will provide more details in his comments. And finally, we announced in the last quarter a significant leadership transition that we believe will position the organization better with responding timelier to market dynamics, while also strengthening the alignment of corporate functions to our strategy. The executives who are part of this transition are all proven HCA executives, they understand and appreciate our culture and they know how to execute. As we push ahead into 2023 and beyond, we believe the strong demand for healthcare services presents opportunity for HCA Healthcare in an otherwise challenging macro environment. We believe the company is well-positioned culturally, competitively and financially to capitalize. Our agenda next year will be focused on the following three areas. First, overcoming labor and capacity challenges. Again, we believe we have the appropriate initiatives in place to respond to these. Second, counter inflationary pressures. Again, we have numerous efforts in place to contend with these forces, while ensuring we continue to deliver high-quality outcomes to our patients. And third, accelerating growth with our winning plays. This agenda continues to leverage capital investments in outpatient facilities, clinical equipment for our physicians and service line expansion. On top of our 2023 agenda, we are also making investments in our long-term plan, which includes four primary elements: the first one is advancing our clinical systems and digital capabilities; second is transforming care models with innovative solutions; third is expanding our workforce development programs; and fourth, is investing capital in our networks to expand their offerings. These efforts are pressuring our results some in the current year, but we believe they are necessary in creating a platform for ultimately optimizing our networks so they can deliver even better patient care in the future. Let me close with this. The last 3 years have been an extraordinary experience for everyone at HCA Healthcare. There has been no rest nor retreat for our people and it was truly a challenge like no other. I strongly believe however that our Board, our management teams and our caregivers have shined through it all. We went into the pandemic with two priorities, to protect our people and to protect the organization so we could continue providing high-quality healthcare to the communities we serve. I believe strongly that we showed up, we delivered on these priorities and we did it the right way. I am proud of HCA Healthcare and I am even more proud of our people. The future for our company is even brighter because of the past 3 years and what we learned. Now we will move into 2023 and the years ahead with greater purpose, with a renewed agenda to drive growth and with more confidence in our ability to deliver value for all of our stakeholders. With that, I will turn the call to Bill and he will discuss the quarterâs results in more detail and our 2023 guidance. Okay. Thank you, Sam and good morning everyone. I will provide some additional comments on our performance for the quarter and the year then discuss our â23 guidance. We finished the year with good volume metrics. Our fourth quarter same facility admissions increased 2.9% over the prior year. For the full year, our same-facility admissions were up 0.5%. Excluding COVID admissions, our same-facility admissions grew 5.4% in the quarter and were up 3.4% for the year. For the full year, COVID admissions accounted for 5.2% of our admissions versus 7.8% in the prior year. Same-facility emergency room visits increased 11.4% in the quarter as compared to the prior year and were up 7.6% for the full year. Our same-facility outpatient surgeries were up slightly in the quarter from the prior year, but increased 5.6% sequentially compared to the third quarter. Same-facility inpatient surgeries were basically flat as compared to the prior year. Both were impacted by 1 less business day in the quarter. Our same-facility revenue per equivalent admission was down 2.6% in the quarter from the prior year as this was influenced by the drop in COVID activity. Sequentially, our non-COVID revenue per equivalent admission increased approximately 3.7% as compared to the third quarter. Our case mix increased just under 2% sequentially from the third quarter and our payer mix remained stable as well. We remain pleased with our teamâs management of operating costs even with the backdrop of higher inflation rates. Our consolidated adjusted EBITDA margins were 20.5% in the quarter and right at 20% for the full year. We continue to focus on our labor plans and supporting our teams, while appropriately managing contract labor and premium pay programs. Our total labor cost as a percentage of revenue improved both sequentially and when compared to the prior year. In addition, our supply cost trends have remained very consistent during the year and we are pleased with these results. Other operating expenses have been subject to some inflationary cost pressures when compared to the prior year, but has run fairly consistent as a percent of revenue throughout 2022. Our cash flow and capital allocation are a key part of our long-term growth and value-creation strategies. Our cash flow from operations was $8.5 billion in 2022. Our capital spending was just under $4.4 billion for the year, which was slightly higher than our initial expectations due to some year end real estate and information technology purchases. We paid dividends of about $650 million and we repurchased $7 billion of our outstanding stock during the year. Our debt to adjusted EBITDA leverage ratio was near the low end of our stated leverage range of 3x to 4x. For full year 2022, we realized approximately $1.2 billion in proceeds from sales of facilities and healthcare entities. So, let me speak to our 2023 guidance for a moment. As noted in our release this morning, we are providing full year â23 guidance as follows. We expect revenues to range between $61.5 billion and $63.5 billion. We expect net income attributable to HCA Healthcare to range between $4.525 billion and $4.895 billion. We expect full year adjusted EBITDA to range between $11.8 billion and $12.4 billion. We expect full year diluted earnings per share to range between $16.40 and $17.60. And we expect capital spending to approximate $4.3 billion during the year. So, let me provide some additional commentary on our guidance. Our 2023 adjusted EBITDA guidance is impacted by several governmental and policy changes. In 2022, we recognized approximately $280 million in COVID support mainly from DRG add-ons, removal of sequestration cuts and HRSA reimbursement for uninsured COVID patients. We expect very little revenue from these programs in 2023. Also, as discussed in our first quarter release, we recognized $244 million of revenues and $90 million of expenses related to the Texas directed payment program that was for the last 4 months of 2021. This program that started on September 1, â21 was not improved until the first quarter of 2022. In addition, we estimate the impact of the 340B related payment reductions to be between $50 million and $100 million. Adjusted for these items, the midpoint of our 2023 adjusted EBITDA guidance would be in the middle of our historical 4% to 6% growth expectations that we have had over time. Within our guidance, we expect our same facility equivalent admissions to grow approximately 2% to 3% and our revenue per equivalent admission to grow approximately 2%. Depreciation is estimated to be about $3.1 billion and interest expense is projected to be around $1.975 billion. Interest expense will be impacted by both higher rates and anticipated draws under our revolving credit facilities. Finally, our fully diluted shares are expected to be about $278 million for the full year and cash flow from operations is estimated to range between $8.5 billion and $9 billion. Also noted in our release this morning, our Board of Directors has authorized a new $3 billion share repurchase program. This will be in addition to the approximate $1.5 billion remaining authorization we had under the previous program at the end of the year. In addition, our Board has declared an increase in our quarterly dividend from $0.56 to $0.60 per share. Thanks. Good morning. Just a couple of numbers questions here. I appreciate all the detail you have given. So first, just all thinking about 2023, can you talk us a little bit about what you are expecting for labor expense and maybe delineate the cost on permanent labor versus hopefully the downward trend maybe give us â22 versus â23 million on labor? And then couple of things, exchanges and redetermination, right, exchange growth has been big redeterminations could be a tailwind at least according to our estimates. Curious what you have assumed there on payer mix and kind of impacts from that on 2023 guide as well? Thanks guys. Yes. Justin, this is Bill. Let me start. So as it relates to labor cost, I think as a percentage of revenue, we will keep it on an as-reported basis, flat with where we ran for the full year of this year. We continue to expect improvement in the utilization and cost of contract labor as we go through the balance of the year. And so I think thatâs a good output for us. Relative to payer mix, we think payer mix for now will mostly remain stable. We are encouraged with what we are seeing with the enrollment in the health insurance exchanges and we believe the enrollment in our states, are probably a little bit higher than what we see as a nation. And so we think we have contemplated that within the context of our overall range, but we are encouraged with some of the payer mix trends. Hi, everybody. Thanks for the outlook commentary and so forth. Maybe because you have got about a $600 million range on the EBITDA range you are looking at. Can you maybe talk a little bit about what are some of the swing factors? Do you see those mainly as top line swing factors that would get you to the high or low end or is there expense management, open questions in your mind? And specifically on the labor, you have got quite a bit of a decline in the contract labor from what you spent in â22 versus presumably the run-rate for â23. How much of that are you baking into the guidance versus how much are you saying you have got to redeploy to support permanent labor? A.J., this is Sam. I think on the guidance, I mean, we have got 2.5%, I believe, on either side of the midpoint. The top side of that range I think is achievable if our volume and labor agenda happens maybe a little bit better than what we anticipate. The low side of that range would be greater inflationary pressures and maybe some more challenges in a tenuous labor market. Those are sort of the big variables, if you will, in the equation. I mean, itâs a fairly big number to begin with and again, the 2.5% range on either side of the midpoint we think is not unreasonable. So to consider it to be very wide seems maybe to not fully appreciate some of the variables inside of it. With respect to labor, yes, we have made significant investments in our people. We did that throughout last year mainly in the late summer, early fall, where we adjusted our wages to deal with movement in the market resulting from some visibility that we had with our overall competitive positioning. Some of the contract labor reductions that we expect and have already made even will be absorbed a little bit in those decisions, but we think the net of it is what Bill just alluded to, and that is that we can maintain our labor cost as a percent of revenue roughly around what we finished 2022 at. So thatâs how weâre thinking about it. And again, weâre seeing positive metrics across the key dimensions of our labor agenda that is encouraging to us. And we believe we have more room to gain with our agenda, and weâre hopeful that, that will continue throughout 2023. Hi, good morning. Two quick ones for me. Bill, I know you said contract labor came down again, but I didnât catch if you disclosed the 4Q number. And then my other one was just also on your comment about the other OpEx line. I mean thatâs still a line that on a per adjusted patient day basis is up in the double digits. So any help you can give us on thinking about modeling that for â23? Yes, Gary. On contract labor for the quarter, we were down about 16% from where we ran in the fourth quarter of last year. So good improvement in that area. It represented roughly 7.8% of our total salary wages and benefits. We talked about given that number before. So again, solid trends in the fourth of this year compared to where we ran last year and especially where we ran in the first half of the year. Our other operating expenses, youâre right, are subject to some of the general inflationary increases that weâre seeing across the economy. When we think about utilities and insurance and, in addition, our professional fees areas, weâre seeing some higher single-digit cost growth in other operating expenses. Fortunately, if you look across the quarters for 2022, as a percentage of revenue, youâll see our other operating expenses as a percent of revenue staying relatively and pretty consistent throughout the year. As we look forward to 2023, we do believe thatâs an area that can continue to see some higher single-digit inflationary pressures, and we factored that in to our guidance going forward. Again, we think labor supplies will keep in line and hopefully below where our revenue growth is. But the other operating cost area is around utilities, insurance pro fees are going to continue to see some pressures, and we factor that into our guidance. Hi, good morning. Thank you. With regard to capacity constraints, you mentioned last quarter missing out on 1% to 1.5% of total admissions in 3Q. Can you give us an update on where that stands now? And then maybe some more commentary on progress with your HR and case management initiatives and then the degree to which you expect those to help ease constraints and support your guidance this year? Thank you. This is Sam. Thank you for that. I mean we did, as I mentioned in my prepared comments, had some moments in the quarter where we were unable to receive transfers in or take certain patients into our facilities. And that was actually a little bit elevated over the third quarter. We had roughly, using this as the proxy, approximately 2% of our total admissions we were unable to take through our transfer centers and ahead to find those patients alternative solutions where we could. We were busier in the fourth quarter than we were in the third quarter, so that was part of it. But nonetheless, we still are seeing opportunities for us to improve the throughput through our case management initiatives, as you spoke to, continue to increase the head count in our facilities in order to take care of these patients. And weâre hopeful that those numbers will start to come down a little bit as we push into 2023. Hey, thanks. Good morning. Sam, I wanted to go back to the long-term plan that you mentioned. You talked about advancing the transformation of care delivery models. Can you maybe elaborate more on that, sort of how that may be playing in the physician strategy, maybe a different view into working with MA plans or anything would be helpful? Thanks. Well, let me give you a little bit of a backdrop on our long-term thinking with in â and I think this going to help you understand why we are investing in these categories. First and foremost, we think we have just an incredible portfolio of communities that we serve. They are growing in and of themselves. So we have opportunities to invest in that growth. We think demand is going to grow in our markets. Aging baby boomers population growth chronic conditions, all those things unfortunately produce demand in some respect. And we think our portfolio is a little better than the national averages on that front. So weâve got that as a backdrop. So there is opportunities, Iâll call it, outside the walls of HCA to invest in that natural growth in demand. The second piece that we believe exists is opportunities inside of HCA. We have what we call an economy of opportunities that exist across our 180 hospitals and 2,400 outpatient facilities that we have. And that opportunity is to use big data, use better clinical system capability and better analytics to support better care. And so our technology agenda, coupled with our care transformation agenda, is really about tapping into the economy of opportunity that exist inside our organization. So we think we have two sets of opportunities, outside to continue to grow market share and benefit from the growth in our markets, and then continued improvement in care delivery for better patient outcomes, more efficiency, better operational management in our hospitals by infusing machine learning, advanced analytics with our care transformation agenda. So our care transformation team is led by a physician and a clinical team with industrial engineers and other type of people who are big data analysts who are supporting evaluating great performance that we have inside our company and really studying the processes around those, or looking outside the company for better processes, better technologies, and, again, weaving that into our overall agenda for our long run. And weâre encouraged by that. We have a major initiative that weâre rolling out this year in our obstetrics unit, and weâre excited about the possibilities around that. On our clinical systems, we are actually in our alpha pilot on our clinical system upgrades. We will have a beta pilot later this year. This is a system that we will be able to push more information, standardized information into the cloud and start to turn that into actionable insights that, we believe, can help our patient outcomes. So weâre really excited about our long-run agenda. And again, itâs geared toward better patient care, but capitalizing on the opportunities inside the walls of HCA. Good morning, guys. Thanks for taking my questions. Focusing on the fourth quarter, you talked about 2% lower emissions via the transfers. Were those all surgeries? Iâm just trying to understand why in-patient surgeries are so weak on easy comps, and why I didnât see a bigger increase in outpatient surgeries. Weâve seen some med-tech companies report very strong U.S. surgical growth. So just trying to understand the delta? And also what are you seeing you grow in-patient surgeries and out-patient surgeries in 2023? Thanks so much. So Peter, this is Bill. I think our surgical volume, the most â the thing being pushed out was we had 1 less business day, 1 less surgical day, and so that could account for 1.5 points or 2 of that trend. And I donât think there is any other trends that we observed in our out-patient or in-patient surgery or call out other than just 1 less operating day. Going forward, I would say that we would anticipate our surgical volume to reflect our longer term trends, which has historically been somewhere around that 2 point growth. And again, there is some variables that fluctuate on that, but that was the issue on the flat surgical volume for Q4, was nothing other than 1 less surgical day. Great. Thanks. I appreciate you guys breaking out kind of how you thought about the core pricing in the quarter. Is there a way to do that in the 2023 guidance? Obviously, the COVID is a headwind 340B is a headwind, and then how to think about anything else thatâs a moving piece there? I just want to understand the core trends in pricing, and then maybe talk a little bit about commercial rate growth of what youâre renegotiating today? Thanks. Yes, Kevin, let me start with that. So as I said in my prepared remarks, we are anticipating revenue per equivalent admission around 2%. Thatâs on an as-reported basis. Obviously, I called out some of those non-recurring revenue items weâve had the benefit of in â22, we donât expect to continue next year. If you adjust for those, thatâd probably be pushing us towards closer to 3% number, which would be, historically, we would see 2% to 3% growth. So what really moves us back into our historical pricing trends, what we would see pre-COVID is just that we are having to jump over some of that loss of cohort. So that was a 2% guidance on a revenue per equivalent admission. If you adjust that, itâd be closer to 3%, which is in line with our long-term guidance. Thatâs contemplating both our Medicare rate updates with some improved commercial pricing that I think weâve talked about in the past. Hi, good morning. I know some of your peers have noted that physician outsourcing services especially on the ER is a pressure point for 2023. Are you seeing that? And if so, how much of a headwind is it to EBITDA? And secondly, just on the merchant turnover, I know you said that while you had a big improvement, youâre still not where you want to be. Can you talk about where you were for nursing turnover pre pandemic, where you ended Q4, and maybe where you think you could end 2023? Thanks. Excuse me. So Ann, itâs Sam. We, pre pandemic, were somewhere around 13% or 14% â excuse me, 14% for nursing turnover. Weâre on a run rate now 18%, 18.5%. Thatâs down from mid-20s. We think the industry average is somewhere in the mid to upper 20s right now from what weâve seen external benchmarks and so forth. So weâre really encouraged by the progress our teams have made. And again, over the last 6 months of the year, we were starting to see improving trends. We believe we have the right initiatives in place to carry some momentum in that area into 2023. The market, as I mentioned, is a bit tenuous still, but weâre encouraged by the investments weâve made in our recruiting, the investments weâve made in retention and leadership training and just the â Iâll call it, the hand-to-hand combat that exists in making sure that our employees have the resources on their units that are necessary for them to deliver great care to their patients and for them to be successful in whatever their role is in the company. And we think weâre making progress on pretty much all of those fronts. And Ann, on the emergency room, Iâve brought it to more than emergency from just hospital-based physician we have talked about in the past. We are seeing some increased pressures for subsidies around our interest room and anesthesiologists and the like. We have a number of initiatives to try to counter those. But yes, we are expecting some upward pressure in those areas that we factored into our guidance. If it rolls through, as I mentioned in the previous question, in our other operating expenses, then we could potentially see higher single-digit year-over-year growth in those categories, probably at a little bit of pace above our revenue. But we think weâve made appropriate consideration for those trends inside of our guidance. Hey, good morning, guys. I guess, Sam, follow-up to Annâs question and to Billâs answer of that. I saw that you exercise the call option and the Envision JV last week. So just curious how youâre thinking about operationalizing that and what would change for HCA as you bring those physicians back in-house? And maybe just thoughts on the P&L and balance sheet impact of that as well? Thanks. So weâve had a wonderful relationship with Envision over the years, and it continues to be strong across different facilities in our company. A number of years ago, we had made an investment in a co-venture with them that we felt was an opportunity for us to integrate that physician service, mainly in the ER and hospitalist medicine and a few other subspecialty categories within our hospitals as more clinically aligned and so forth. And what we see is an opportunity to further that. And so we are moving to acquire a larger percentage of that co-venture, and we think it will give us a little better visibility in how to achieve better clinical integration to improve quality. We think we can use that platform to improve efficiency within our emergency rooms primarily and even on our med surge floors where our hospitalists work. It will support graduate medical education in some innovative ways, we believe. And then, finally, we think it offers up an opportunity for us to advance our connections to our strategic outreach partners in ways that maybe we donât necessarily accomplish in the structure we have today. So we are pushing through the final stages of that transaction. I think itâs scheduled to close sometime in the spring. We will take the rest of the year to fully assimilate it, so to speak. And then as we get into 2024, we anticipate being able to execute more effectively on these categories. Hi, good morning. Just wanted to ask a follow-up on the 2023 guidance, I was hoping you could talk a little bit more specifically about your expectations on inpatient admissions. I guess, first, how are you thinking about where the COVID figure goes in 2023 compared to the 5.2% of admissions in 2022? Any implication being Iâd love to hear how youâre thinking about non-COVID admission growth in 2023? Thank you. Yes. So Iâll start with that. So we expect a continued decline of COVID admission as youâve mentioned, and I said in my prepared remarks, they represent about 5.2% of our total admissions. This year, weâre thinking next year, probably somewhere between 3% and 4% of our total admissions. We believe right now, our inpatient admission growth somewhere around that 2% number, and thatâs embedded within the equivalent admission guidance that I gave between 2% to 3%. And again, we will continue to monitor that as we go through the year. We continue to believe that there is strong demand in our markets, and weâre positioned well to serve that demand. So inpatient volume, weâre thinking hovering around 2%, and then outpatient revenue probably continue to grow in that mid-single-digit level. And that helps us get to the 2% to 3% equivalent admissions thatâs â that our guidance entails. Hi, thanks. Good morning. Interested if you can just recap for us what the non-COVID acuity and case mix trends were in 2022. And then what youâre building in for your assumptions for 2023? Thanks. Yes. So I donât know if I have the case mix necessarily. Weâve seen relatively flat, as I recall, on the COVID case mix, right? Our non-COVID mix improved about 2% sequentially from the third quarter to the fourth quarter going forward. Our revenue per equivalent admission was roughly flat for the year-over-year comparisons. Yes, that would be embedded in our revenue per equivalent admission of about 2%. And then when you factor out the loss of the revenue items, I think, as I mentioned earlier, that pushes us closer to 3%. And that would be just a combination of all factors of acuity as well as payer mix and pricing trends underneath the... And Bill if I can add, I think itâs important for everybody to understand it. Strategically, we continue to invest in programs, as I mentioned in my prepared comments. A lot of those programs are farther up the acuity ladder, if you will. They are more significant programs. They are extensions of existing programs and as we get our footing, so to speak, with a mid-level program or an upper-mid level program, then we can move into a more acute level program. And that helps with our overall acuity statistic. So, that part of our strategy, we are doing that on top of the same fixed cost platform. So, our hospitals have the same fixed cost regardless of the acuity in many instances. And so if we can increase the acuity, we get operating leverage from that. So, strategically, thatâs a very important initiative of ours. The transfers and that we havenât been able to take care of tends to be slightly more acute than our average in most instances. And here, again, thatâs why itâs so important for us to get more employees across the organization to take care of these patients who need our services. But all of thatâs embedded inside of a real strategic initiative that we have. Hi. Good morning. It looks like another strong quarter for ER volumes. Can you talk a bit about the trends you have seen there in the last few quarters in terms of payer acuity mix, and what you are expecting for sort of full year? And as you think about the volume trends across the business over the last couple of quarters, are there any service lines or categories that have over or underperformed relative to your expectations? And any color you can give on those going into 2023? Thanks. This is Sam. Let me speak to some of our service lines trends. During the pandemic, we felt the emergency room might be disrupted from what our previous beliefs were. And there was new uses of telemedicine alternatives that were being experienced, we thought. What we have seen is just the opposite. The resiliency of the emergency room for communities is even greater than we thought. And the demand there is very strong because our emergency rooms and other peopleâs emergency rooms are a solution set for people whenever healthcare is needed. So, our trends in the emergency room have been very solid over the course of the year. And when you look at them really without the COVID activity, itâs especially impressive I think. We have seen good volume growth in our orthopedics. Our total joint business for the quarter was up 6%. In many instances, we fully absorbed, we believe, most of the shift over the last 3 years during the pandemic, with the orthopedic business moving from inpatient to outpatient. And in most instances, we believe the large majority of that is behind us. And so we donât have that as a pressure point like we have had over the past 3 years. But nonetheless, we have grown that business in the face of the site of care shift. We have a very robust pipeline for our emergency rooms, especially our freestanding emergency room platform, a very significant development opportunity there for us across our communities, and we are investing in that. Our urgent care center platform continues to grow. We are up to 260 urgent care centers. We will probably push through 300 in 2023. Our ambulatory surgery center platform continues to grow. Here, again, we have more de novo development inside of our ambulatory surgery center platform than we have had in the past, and we are encouraged by how that fits into our networks in a very productive way. So, we are really pretty excited about our investments in our ambulatory network, our investments in our acuity programs and our higher service lines. And we will continue to â we believe, be well positioned to deal with the growing demand that we see in the market. Yes. Could you just talk a little bit about permanent nurses and understand the retention rates are getting better there. Can you talk a little bit about new hirings, what sort of growth you are seeing there? What are maybe some of the drivers of access to nurses there, where are they coming from? And then also, if you could just talk a little bit about, you said the investment spend was pressuring and the long-term plan was pressuring â22 a little bit. Can you talk a little bit about how â23 might look compared to â22 with that? Thanks. Yes. This is Bill. On the investments, when you think about the technology investments, the investments we are making in some of the clinical transformation. And I would also say, with the expansion of our nursing schools going forward, probably is somewhere around an incremental investment of $150 million in â23 compared to what we ran in â22. Lance, we didnât call that out, but itâs part of a long-term investment we think, that will continue to drive performance and value for us. So, our hiring in 2022 was up a little north of 6%, just a huge number of new hires. And so thatâs the total number just as a starting point. Where that is coming from, thatâs coming from new grads. There still is a decent pipeline of new graduate nurses in our communities. We have academic partnerships with different colleges beyond Galen that are important to that pipeline. We are also seeing some travelers decide that, okay, enough, we traveled, we want to come back, and we have been able to recover some of the employees who traveled for a period of time back into our organization. So, we continue to be focused on trying to recover them. And I think again, with our benefits and with our wage adjustments and all the investments we are making in clinical education and other components of our labor agenda, we are starting to see more favorable trends in our recruitment function that we think, if they carry into 2023 and through the year, should be positive for us. Great. Thanks for taking the question. I just wanted to ask a bit more on your capital priorities. You have recently divested ownership in some hospitals. But just wondering how you are viewing the M&A backdrop and if you are seeing opportunities to increase your footprint in your current markets or potentially entering into new markets? And then just on share repurchases, you have increased your authorization by $3 billion, you have $4.5 billion rough remaining. Itâs just in light of the $7 billion this year. Just curious how you are thinking about share repurchases in the context of your larger capital deployment priorities? Thanks. Yes, let me take that. This is Bill. Let me take the latter one first. I think share repurchases, you spend an important part of our overall balanced capital allocation. As you mentioned, we did $7 billion in â22. We will have authorization close to $4.5 billion. I think we would plan on completing the majority of it sometime in this calendar year with a little bit of roll forward afterwards. And again, we will continue to adjust as kind of market conditions present, but a share repurchase program has just been part of our overall balanced allocation of capital going forward. For M&A, we have been fairly active in the market with outpatient acquisitions again when they come available, whether itâs urgent care, some freestanding emergency room, some ASC, some physician clinics and so forth. And those are very complementary, synergistic to our network acquisitions, and we will continue to pursue those as they develop. We have not had too many opportunities on hospital acquisitions. Although, recently there was an announced LOI on a hospital just outside of the Dallas-Fort Worth market that we think is synergistic with respect to clinical services and so forth with our system in Dallas-Fort Worth. So, we will continue to look for those. We do have a pipeline of Greenfield hospitals because the acquisition environment is not as robust end market as maybe we would have hoped. So, we need to consider Greenfield projects, and we do have a number of those that are in the works. We have one under construction currently in San Antonio. And I want to say we have seven or eight parcels of land, maybe 10, that are designed for future hospital development when the time is right for us to make those investments. Thanks. Good morning everybody. So, just on the surgical volumes, you addressed most of the key questions related to the volumes for both the fourth quarter and the full year â23. But just a follow-up on that topic to get, I guess a little bit more. I was just curious whether or not you do see any notable pent-up demand for any surgical cases exiting out of 4Q â22 that might be falling at least into the early part of â23 for various reasons, just curious any visibility on early â23 at this stage? Thanks. Itâs hard for us to really judge the â whether there is demand on the sidelines, and we donât see it. I mean we get some anecdotal information from our physicians who might indicate that, okay, their clinic patient profiles were better in the fourth quarter than they were at any point in time in 2022. I donât know if thatâs a precursor or not for pent-up elective surgical demand. I think we are just going to have to wait and see. But I believe itâs a positive metric and a positive anecdote that their clinic roles, patient roles appear to be at a higher level than they were in previous parts of 2022. Thank you. Good morning. Just a follow-up on the commercial reimbursement dynamics, first, can you remind us what percent of contracts have been recently negotiated that will take us back at the higher rate January 1st? And then secondly, can you give us a little bit of color on what the initial bump in those contracts looks like relative to the rate escalators that are locked in place for the next couple of years? Thank you. We have, I want to say, Bill, maybe 70% of our contracts for 2024 contracted. I will tell you that most of the contracts, if not all of the contracts we closed in the last three quarters of â22 were in line with our expectations, which was around mid-single digit inflators. So, those have to work their way into the â23 portfolio of contracts and on into the 2024. So, we are encouraged by the outcomes of those negotiations. I think there is a general recognition in the payer community that the input costs for providers is up, or up. And so given those inflationary pressures, they recognize that there is a sensitivity to respond to that. And we are trying to be appropriate in our app. And I think thatâs been received well, and we have been able to close these contracts reasonably timely. So, we still have 30% or so of 2023 that will get negotiated over the first part of this year, and will carry us through all of â23 and into â24. We are about 40% contracted on â24. Again, the tail effect of some of the closed contract negotiations that we have just achieved will carry into 2024. Hi. Thanks for taking the questions. I know CapEx guidance for 2023 is only down slightly, and I know itâs still January, but it would be the first time in a long, long time, the CapEx would be down year-over-year, not counting 2020. I was wondering if you could just speak to any changes in budgeting or strategy or if there is anything that could be tempering that investment? Yes. Josh, I donât think there is anything tempering in the investment at all. I think 4.3% is our expectation. As I mentioned in my comments, we initially expected 4.2%. For â22, it came in a little higher because we had some year-end activity that I mentioned around some real estate and some IT. So, I wouldnât read anything from down to the fourth quarter 4.3%. Itâs actually up compared to where our initial expectations are. But as a summary, we still see very good opportunities to deploy capital, we believe, to capture growth opportunities in the marketplace. And we have talked about some of that, whether that would be through our freestanding EDs, whether there is some development of new hospitals, whether it would be expansion of campuses. So, again, I think itâs an important part of our overall capital allocation and I think an important part of our continued long-term focus on growing. Hi. Good morning. I was hoping you could provide a bit more color on the supply cost trends into 2023. What are the assumptions around unit cost increases versus â what steps did you take to manage inflationary pressure for multiyear contracts? Thanks. Well, thank you for the question. Our teams and our supply chain teams have done an incredible job over the past 12 months to 18 months on our supply cost portfolio, and especially with the backdrop of inflationary increases. And we have talked about through the year, we have been really seeing really positive trends in and actually to keep our supply cost growth below our revenue growth. Much of that was because some of our contracts, 60% of our contracts or so was under firm pricing for the most of â22. As we look forward, I think our basic assumption is to continue to keep our supply cost as a percent of revenue flat from where we ran full year â23. That would imply our supply cost per unit is somewhere around that 2% level, plus or minus a little bit. But again, we are expecting continued good results in that. And again, our team is doing a nice job. We can keep that supply cost as a percent of revenue flat with where we ran this year, with the backdrop of inflationary thatâs pretty positive. We have a number of initiatives underway that our teams use. Part of our benchmarking initiatives is to look at utilization and identify best practices across the organization. We also are looking at product selection, partnering with our clinical teams. So, we have a number of initiatives underneath our supply chain operations that are helping us to achieve those results, and we look forward to those continuing as we go into â23. Yes. Hard it is to be clever with the question after all these good questions. I believe three in my question here and have five minutes. So, for me, if we think about, as you reduce your labor turnover, so letâs say it goes hypothetically from 25 to 20, how does that â how would that affect your labor cost per â either for revenue or per unit? How does that factor into the savings algorithm for us to think about? Well. No. I mean salary either salary as a percent of adjusted admits or salary as a percent of revenue, how does reducing turnover? If you reduce turnover about say, 500 bps, how would that affect the labor margin? Well, in theory, will flow through as reduction of our contract labor. And so the margin, if you will, on the contract labor as we replace an individual from a contractor to an employed one is that we will save that margin. And being able to reinvest and what we have been able to do this year is reinvest back into our employee workforce and thatâs part of that turnover level. And I think all of that, John, I would say, is incorporated, if you look at the overall labor spend. So, I mean there is a lot of components into that. And as we said, we think we can maintain our labor cost as a percent of revenue where we are finished this year. Itâs a function of reducing those premium labor and reinvesting back into our employee workforce and keeping that relatively flat year-over-year. And I think thatâs a good result for us and allows us to continue to recognize the important work our employees do for us. Devin, thank you for your help today and thanks to everyone for joining us on this call. We hope you have a great weekend. I am around this afternoon, if I can answer additional questions you might have. Have a great day.
EarningCall_1017	Welcome to Marsh McLennan's Earnings Conference Call. Today's call is being recorded. Fourth quarter 2022 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including in our most recent Form 10-K, all of which are available on the Marsh McLennan website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. [Operator Instructions] Good morning and thank you for joining us to discuss our fourth quarter results reported earlier today. I'm John Doyle, the President and CEO of Marsh McLennan. Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses, Martin South of Marsh; Dean Klisura of Guy Carpenter; Martine Ferland of Mercer; and Nick Studer of Oliver Wyman. Also with us this morning is Sarah Dewitt, Head of Investor Relations. I am excited to be leading this call today for the first time as President and CEO. Marsh McLennan is an outstanding company with unique capabilities in the critical areas of risk, strategy and people. We help clients address their greatest challenges and find new possibilities as they navigate dynamic environments. We have exceptional talent, a wide range of solutions and a track record of execution in financial performance. Our leadership team is focused on delivering the full capabilities of Marsh McLennan to our clients, continuously improving the client and colleague experience, efficiently managing capital and driving growth and value for shareholders. Over the past year, I've been meeting with colleagues and clients to exchange ideas about how we can accelerate impact for clients and enable their success. These conversations reinforce my conviction that we are in the right businesses with strong brands and deep client relationships. I am confident that we have meaningful opportunity at the intersections of our businesses, where together our scale, data, insights and solutions are highly valued by clients. The strength of our unique value proposition has us well positioned for the years ahead. Today, we are focused, aligned, and succeeding together as our results demonstrate. 2022 was an outstanding year for Marsh McLennan. We generated 9% underlying revenue growth, continuing our best period of growth in more than two decades with each of our businesses delivering strong results. Our total revenue surpassed $20 billion and adjusted operating income grew 11% to $4.8 billion. This was on top of 18% growth in 2021. We reported adjusted margin expansion for the 15th consecutive year. Adjusted EPS growth was 11%. I am particularly pleased with this performance as our results included costs related to our strategic investments in talent and the continued normalization of T&E. These results also came on top of 24% growth in 2021, and we delivered significant capital return to shareholders raising our dividend by 10% and completing $1.9 billion of share repurchases the largest annual amount in our history. We also added to our talent and capabilities, both organically and through attractive acquisitions. MMA acquired two top 100 agencies in 2022 and has now surpassed 100 acquisitions since its inception in 2009. Oliver Wyman expanded its capabilities in geographic reach with the acquisitions of specialty consultant Avascent and Booz Allen Hamilton's MENA practice, and Mercer expects to close its transactions from Westpac in Australia in the first half of this year. We overcame significant foreign exchange and capital market headwinds to generate these results through execution, growth and exceptional client engagement. I'm particularly proud of these achievements amid a year of seamless leadership transitions at Marsh and Guy Carpenter. Our purpose and strategy underpin our performance. Marsh McLennan makes a difference in the moments that matter for our clients, colleagues, and our communities. Turning purpose into practice our strategy focuses on several core elements, promoting a culture that attracts and retains top talent in our business, investing to strengthen our capabilities organically and inorganically, positioning ourselves in segments and geographies with attractive fundamentals, leveraging data and insights to help clients become more resilient and find new opportunities, and delivering Marsh McLennan's full value proposition to enable client success. We complement our colleague and client facing strategy with our approach to expense and capital management. We focus on growing revenue faster than expenses, which contributes to annual margin expansion and adjusted EPS growth, and we manage capital allocation to balance performance in the near-term with investing for the long term. We are accelerating collaboration across our business to drive greater growth and efficiency. We are implementing new ways to operate, reduce complexity and organize for impact. In this regard, we took actions in the fourth quarter to align our workforce and skillsets with evolving needs, rationalized technology, and reduced our real estate footprint. Together, these actions resulted in an approximately $230 million of charges. Based on our outlook today, we expect they will drive $125 million to $150 million of savings in 2023. Overall, they reflect an opportunity to accelerate impact for clients, reinvest in our capabilities, and to be more efficient and connected. Now let me provide an update on P&C insurance and reinsurance market conditions. The January 1 reinsurance renewals proved to be the most challenging in nearly two decades. The property cat reinsurance market was stressed with pricing and attachment points increasing significantly, reflecting several years of higher than expected cat losses, macroeconomic factors, and supply and demand imbalances. Global property cat reinsurance rate increases ranged from 25% to 60% with loss impacted clients often seeing higher pricing. In the U.S. property cat reinsurance rate increases were the highest in 17 years, generally in a range of 40% to 60%. It is important to note that ceded premiums were tempered by higher retentions in most cases. Meanwhile, commercial P&C insurance pricing continues to rise on average across many lines and geographies. While the pace of price increases continued to moderate after rising for 21 consecutive quarters, the tight reinsurance market could have knock on effects, particularly for property insurance rates. We are focused on helping our clients navigate these difficult insurance and reinsurance markets and the evolving risk landscape. Now, let me turn to our fourth quarter financial performance. We generated adjusted EPS of $1.47 which is up 8% versus a year ago or 12%, excluding the impact of foreign exchange. On an underlying basis, revenue grew 7%. Underlying revenue grew 8% in RIS and 6% in consulting. Marsh grew 6%. Guy Carpenter grew 5%. Mercer grew 5%, and Oliver Wyman grew 8%. Overall the fourth quarter saw adjusted operating income growth of 13%, and our adjusted operating margin expanded 160 basis points year-over-year. As we look ahead to 2023, we see a mixed economic picture. While there is a risk of recession for major economies, we also believe there are many factors that remain supportive of growth for our business. Softer real GDP growth is offset by elevated inflation, which drives higher insured values and loss costs. P&C insurance rates continue to increase as insurers account for rising frequency and severity of catastrophe losses, the risks of social inflation and higher reinsurance costs. Healthcare costs continue to rise due to higher wages and labor shortages in the healthcare sector. The U.S. labor market continues to remain among the tightest employment environments of the past half century with 3.5% unemployment and over $10 million unfilled jobs and short-term interest rates are at the highest level since the financial crisis increasing our fiduciary income. When the world is volatile and uncertain, demand for our services typically rises. This year's global risks report, which we just published in collaboration with the World Economic Forum highlights that risks confronting our clients extend well beyond economic and insurance cycle concerns. The report identified the cost of living crisis, failure to mitigate and adapt to climate change, extreme weather, natural resource crises, the erosion of social cohesion, cybercrime and geo-economic confrontation among the top risks facing society over the near-term and next decade. In these areas and many others, we are working with clients to meet these challenges, build resilience and capture new opportunities. Our colleagues are inspired by the opportunity to work on these critical issues and to make a difference in the moments that matter. Looking forward, we are well positioned for 2023 and beyond. We expect mid-single-digit or better underlying revenue growth in 2023, another year of margin expansion and strong growth in adjusted EPS. Our outlook assumes current macro conditions persist, but meaningful uncertainty exists and the economic backdrop could be materially different than our assumptions. However, we have a track record of resilience across economic cycles. In summary, 2022 was an outstanding year for Marsh McLennan, one in which all of our businesses delivered strong performance. We generated record revenues and earnings, saw the benefit of recent investments in growth, continued to execute on our acquisition strategy and made record share repurchases. We are proud of the focus and determination of our colleagues and the value they deliver to our clients and shareholders. We closed the year on a high note and look forward to another year of strong performance in 2023. Thank you, John, and good morning. We are pleased with our strong fourth quarter results, which capped another terrific year. We delivered strength on strength from a financial performance perspective and continued to invest organically and inorganically. These investments combined with the actions we took in the fourth quarter, position us well for another good year in 2023. Consolidated revenue decreased 2% in the fourth quarter to $5 billion. As a reminder, the fourth quarter last year included a large gain related to Marsh India. Foreign exchange was also a meaningful headwind to GAAP revenue growth. However, on an underlying basis, revenue increased 7%. Operating income in the fourth quarter was $680 million and adjusted operating income increased 13% to $1 billion. Our adjusted operating margin increased 160 basis points to 22%. GAAP EPS was $0.93 and adjusted EPS was $1.47. Our full year, 2022 results were outstanding. Operating income for the year was $4.3 billion and adjusted operating income was $4.8 billion, an increase of 11% over 2021. Adjusted EPS grew 11% to $6.85 and our adjusted operating margin expanded 80 basis points marking our 15th consecutive year of reported margin expansion. 2022 was also a strong year for capital management. We deployed $3.9 billion of capital, enhanced our short-term liquidity, raised our dividend 10% and saw Moody's lift our rating outlook to positive. Looking at risk and insurance services, fourth quarter revenue decreased 3% to $2.9 billion. Note that RIS in specifically Marsh is where the India gain affected our revenue comparisons. On an underlying basis, revenue in RIS increased 8%, the strong result reflecting the momentum in our business and our resilience in the face of macro headwinds and on economic uncertainty. RIS operating income was $472 million in the fourth quarter. Adjusted operating income increased 23% to $685 million. The adjusted margin expanded 290 basis points to 25.6%. For the year, revenue in RIS was $12.6 billion and increase of 5% with underlying growth of 9%. Adjusted operating income growth for the year was impressive at 15%, our adjusted operating margin in RIS increased 130 basis points to 29.8%. At Marsh revenue in the quarter decreased 6% to $2.7 billion, but was up 6% on an underlying basis. This comes on top of a tough comparison to the fourth quarter of last year, which saw strong M&A and SPAC related activity. For the full year revenue at Marsh was $10.5 billion, an increase of 3% or 8% on an underlying basis. In U.S. and Canada, underlying growth was 5% for the quarter, a solid result given the headwind from lower M&A and capital markets activity. We expect this headwind to persist into the first quarter, but normalize as we enter the second quarter. For the full year underlying growth in U.S. and Canada was excellent at 7%. In international, underlying growth was 8% in the quarter with Asian Pacific up 12%, EMEA up 7%, and Latin America up 4%. For the full year underlying growth in international was strong at 10%. Guy Carpenter's revenue was $171 million, up 5% on an underlying basis. For the year revenue was $2 billion, an increase of 8% or 9% on an underlying basis. Based on our current outlook, we expect Guy Carpenter's growth in 2023 to benefit from a tightening reinsurance market. In the Consulting segment, fourth quarter revenue was $2.1 billion flat versus the prior year. Revenue grew 6% on an underlying basis. Consulting operating income was $336 million, and adjusted operating income was $407 million, down 1% reflecting continued foreign exchange and capital markets headwinds. The adjusted operating margin was 20% in the fourth quarter, a decrease of 20 basis points. For the full year Consulting revenue was $8.1 billion, an increase of 8% on an underlying basis. Adjusted operating income for the year increased 4% to $1.5 billion, while our adjusted operating margin decreased 10 basis points to 19.7%. Mercer's revenue was $1.3 billion in the quarter, up 5% on an underlying basis. This is a good result considering the impact of capital markets on our investments business. Wealth was flat on an underlying basis due to year-over-year declines in both equity and fixed income markets. Solid growth in defined benefits helped mitigate the drop in investments. Our assets under management were $345 billion at the end of the fourth quarter, up 9% sequentially, but down 17% from the fourth quarter of last year due to market declines in foreign exchange, which more than offset strong positive net flows. Health revenue grew 8% on an underlying basis in the fourth quarter, reflecting strength in employer and government segments and momentum across all regions. Career revenue increased 12% on an underlying basis, reflecting continued demand in rewards, talent strategy, and workforce transformation. For the year revenue at Mercer was $5.3 billion, an increase of 6% on an underlying basis, the highest result since 2008. Oliver Wyman's revenue in the fourth quarter was $765 million, an increase of 8% on an underlying basis, a solid result considering a tough comparison to 22% growth in the fourth quarter of 2021. For the full year, Oliver Wyman's revenue was $2.8 billion, an increase of 13% on an underlying basis, building on the 21% growth in 2021. As we look to 2023, we expect growth at Oliver Wyman to slow given rising economic uncertainty. Adjusted corporate expense was $68 million in the quarter. Foreign exchange was a $0.05 headwind in the fourth quarter, and for the full year was a $0.12 headwind. Assuming exchange rates remain at current levels, we expect FX to be a $0.03 headwind in 2023 with $0.05 in the first quarter and $0.02 in the second quarter, reversing to a modest tailwind in the second half. I want to spend a minute on the $344 million of noteworthy items in the quarter, the majority of which related to actions we initiated last year, as well as the final exit of JLT's headquarters in London. The largest category of noteworthy items in the quarter was $233 million relating to restructuring activities which are focused on workforce actions, rationalizing technology, and reducing our overall real estate footprint. The charges included severance associated with headcount reductions, as well as provisions related to real estate actions. Although we expect some reinvestment of the savings from these actions, the majority will flow to earnings. Based on our outlook today, we expect the benefit to earnings in 2023 could be $125 million to $150 million. We anticipate further actions under this program, which will continue through 2023 and possibly into 2024. We are still refining estimates of future opportunities, but at this point, we don't see additional charges in 2023 or 2024 exceeding the amounts taken in 2022. As we typically do on our fourth quarter calls, will give a brief update on our global retirement plans. Our other net benefit credit was $57 million in the quarter and $235 million for the full year. For 2023, based on our current expectations, we anticipate our other net benefit credit will be about $235 million. Cash contributions to our global defined benefit plans were $169 million in 2022. We expect cash contributions will be roughly $107 million in 2023. Investment income was a loss of $6 million in the fourth quarter on a GAAP basis and a loss of $5 million on an adjusted basis, and mainly reflects losses in our private equity portfolio. Given current market conditions, we anticipate negligible investment income in the first quarter of 2023. This compares to $17 [ph] million of investment income in the first quarter of 2022 on an adjusted basis. Interest expense in the fourth quarter was $127 million. Based on our current forecast, we expect interest expense for the full year of 2023 of approximately $565 million. This reflects an increase in long-term debt and higher interest rates on commercial paper, which we use for efficient working capital management. Our adjusted effective tax rate in the fourth quarter was 22.9%. This compares with 20.6% in the fourth quarter last year. Both periods benefited from favorable discrete items. For the full year 2022 our adjusted effective tax rate was 23.5% compared with 23.6% in 2021. Excluding discrete items, our adjusted effective tax rate for the full year was approximately 25%. When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative. Based on the current environment, it is reasonable to assume a tax rate of 25% to 26% for 2023. Turning to capital management in our balance sheet, we ended the year with total debt of $11.5 billion. This includes the $1 billion of senior notes we issued in October. We used a portion of the proceeds from this offering to redeem $350 million of senior notes that were scheduled to mature in March, 2023. Our next scheduled debt maturity is in October, 2023 when $250 million of senior notes mature. Our cash position at the end of the fourth quarter was $1.4 billion. Uses of cash in the quarter totaled $1 billion and included $298 million for dividends, $395 million for acquisitions, and $350 million for share repurchases. For the year uses of cash totaled $3.9 billion and included $1.1 billion for dividends, $806 million for acquisitions, and $1.9 billion for sherry purchases. As a reminder, we have a balanced capital management strategy that supports our consistent focus on delivering solid performance in the near-term while investing for sustained growth over the long-term. We prioritize reinvestment in the business, both for organic investments and acquisitions. We favor attractive acquisitions over share repurchases and believe they are the better value creator for shareholders and the company over the long-term. However, we also recognize that returning capital to shareholders generates meaningful returns for investors over time, and each year we target raising our dividend and reducing our share count. Looking ahead to 2023, based on our outlook today, we expect to deploy approximately $4 billion of capital across dividends, acquisitions, and share purchases. The ultimate level of share purchase will depend on how the M&A pipeline develops. As John noted, there is significant uncertainty in the outlook for the global economy. However, we feel good about our momentum and position, and despite the uncertainty, there are factors that remain supportive of growth in our business. Based on our outlook today for 2023, we expect mid-single digit or better underlying revenue growth, margin expansion, and strong growth in adjusted EPS. Hi, good morning. I had a question first just on the restructuring actions and sort of wanted to just take a step back and just ask, is this a, are you instituting a downturn playbook just based on something you are seeing in the revenue environment that it hasn't shown up in results yet, but is that something that you're seeing and this is a defensive move or should I think of this as more of an offensive move, just from picking up some low hanging fruit that you see just sort of offer improving your efficiency throughout the organization? Good morning, David. There's nothing defensive about the move, right? We took steps to align our workforce and skill sets with the evolving needs of our clients. You know, as I noted, when I outlined some of the highlights of the global risk report, those client challenges and opportunities are constantly evolving in dynamic and we've also identified some opportunities to create some greater efficiencies across our businesses. We're working more closely together. We've rationalized some technology, reduced our real estate footprint. So it's not an indication of what we think the economic outlook is. Got it, thanks. And then maybe just if you could just talk about some of the three drivers that you spoke of, I guess it was real estate, technology and workforce. Any way to size which, how much of that benefit is coming from each of those buckets and how we should think about some of the future actions that you might be taking? Yes, it's a mix. It's fairly balanced between the three different areas. And you know, as Mark noted, we're still doing some work and we see some further opportunities. However, I think it's likely that further charges would be less than what we took in the fourth quarter here. But again we're challenging ourselves looking at where we've got talent, how it comes together, matching that against evolving needs in the marketplace and then pushing ourselves to operate in a different way and a more efficient way. Hey, good morning, Jimmy. Hey, so John, you mentioned a little bit in your comments on just the hard market in reinsurance and also the firm market in commercial lines. Can you talk a little bit more about what you're seeing, if you're seeing any changes in client behavior, whether more sort of self-insurance or higher retention rates at both Marsh and Guy Carpenter? Sure, thanks Jimmy for the question. You know, as I noted in my comments, it was a very challenging January 1st property cat renewal. We expected it to be a challenging renewal season prior to Ian, and then Ian of course exacerbated it. You know, I did mention that some of the higher costs are offset a bit by higher retentions. My comments there were primarily about reinsurance and not insurance. But I'll ask Dean and Martin to comment a bit in a second, but what I would say I commented on the higher cat losses over the last several years. Reinsurers of course now have a higher cost to capital, inflation mark to market losses on the asset side of their balance sheet, just FX as well, a number of the big reinsurers and a lot other cat programs in the United States created some FX challenges as well. So, just a number of different factors led to a really reevaluation of pricing and capacity deployment from some of the bigger capital providers. But Dean, maybe you'll, you can go first and give an overview. Yes, sure. Thanks John. I think in terms of client buying patterns, at January 1 in reinsurance, I mean, you mentioned increased retentions, attachment points. I mean, that was reinsured driven, right? Attachment points were up substantially for many of our clients, not only in the United States, but in all geographies with January 1 cat renewals. So our clients were forced to take more risk, more volatility on their balance sheets. In terms of buying patterns, that inflation driven demand for additional limit, everybody talked about all fall didn't really materialize. Clients mostly bought the same amount of cat limit they bought last year. Maybe up incrementally, maybe our global clients bought a little bit more, but in terms of limit, some of that limit that was eliminated at the bottom end of cat programs was put on top of programs, right? So clients made that up. But in terms of buying more, I think for many clients it was cost-prohibitive given the rate increases that John outlined around property cat, very challenging terms and conditions. You know, really reinsurers had the upper hand in this marketplace around pricing, attachment point and very challenging terms and conditions. Yes, thank you John and thanks Dean. I'll just comment the rate increase, which we've been measuring going back a number of years was still positive for the quarter. We're in the 21st quarter of rate increases about 4%, which is tough for our clients, and of course that is going to impact on their behaviors. Casualties leveling off at 3 and property accelerated slightly to 7% in the last quarter. We anticipate that that's going to continue through Q1 of next year as they absorb the cost of the high cat losses, which and reinsurance costs that Dean described. D&O softened a little bit and we saw that trend going on there. The overall D&O rates were down 6%. As a combination of things, one less SPAC activity which tended to be higher rated. The new entrants into the marketplace globally about 20 new carriers came into the market, deployed capital, which enabled some of our clients to increase their limits actually and take opportunities that they saw in that market. And the cyber rates continued to accelerate at 28%, although that is a deceleration in rate increase in the last quarter we saw 53%. In terms of behavior, our clients are constantly looking at the optimization of their programs. Our captive management business grew nearly double digits in the quarter and for the year as clients retained some more of their risk and we have a wide range of value propositions to help our clients for the risks which they retain and they manage. And so we feel bullish that the changing market is not going to dampen our growth. So Jimmy, it remains a dynamic and challenging market for our clients. Higher cat losses, risks of core inflation, social inflation. So we continue to observe underwriting discipline broadly speaking across the market. Do you have a follow up? Yes, just for Mark on fiduciary investment income, it's obviously gone up a lot and even sequentially up to over 50% from 3Q and 4Q. Do you expect -- should we expect a further increase in that over time? Because what we've seen recently is in some of the regions rates are actually flattish over the past several months. So is there more of sort of a lag effect of what's happened with rates in fiduciary investment income or has the portfolio mostly reset higher? Thanks Jimmy. Good morning. We certainly see continued upside in fiduciary income as we look to this year. Rates really didn't start to move till the back half of the year as you know. And even though it seems like a little bit of slowdown in a lot of places, the expectation is rates have not peaked. And also remember even for the fourth quarter, that's an average rate over the course of the quarter and rates moved even in the quarter. So it is something that we expect to continue to give us benefit into this year. Hi, thanks. Good morning. My first question I guess combines the expense program in some of your fiduciary investment income comments. So the expense program seems like it could be around 70 basis point tailwind to your margins in 2023. And then I would assume you would get incremental uplift from fiduciary investment income rising per Mark's prior comments. So should we think of those two components is, a pretty good tailwind to your margin when we think about 2023 margin improvement? Yes, we're, I'm not going to give margin guidance, on the call, Elyse, and thanks for your question. Again, I think we're well positioned. We're in terrific businesses, just outstanding talent. And while there's some macro uncertainty, of course, that's out there, we expect strong revenue growth this year and we expect to increase our margins over the course of the year. Mark and I both shared a bit, what we expect to flow to the bottom line from the program this year. But we expect to maintain that discipline, that financial discipline that we've had for many years and to expand margin and to have strong adjusted EPS growth this year. Thanks. And then my second question on, you guys talked about some pretty robust reinsurance rate increases at January 1. Have you guys seen any changes on your commission structure just given the strong pricing? Are you making any changes to help your clients in the face of that pricing? And then Mark did say that you guys, that Guy Carpenter would see pretty strong growth over the coming year. I mean, we've never heard, we haven't been in an environment, right, with 40% plus price increases. How does that triangulate into organic growth within Guy Carpenter? We have been in that environment before. We've been around a long time, but it's been close to 20 years since we've operated in that kind of environment. We expect a good year of revenue growth at Guy Carpenter. As I noted in my prepared remarks ceded premiums won't track that rate increase, right? As our insurance company clients retained more risk or have their cap programs attached at a higher level. We work with our clients, of course, to manage our compensation. We're very transparent about that. In some cases, they're cat commission agreements that we have with our, with our clients, but again, we expect it to be a good year for Guy Carpenter. As I said, we work through that with our clients. We have agreements with them and a very transparent dialogue about how we're remunerated. Thank you. Thanks, guys. Good morning. I was wondering if you could give a sense maybe of how much more of a tail end could be left from inflation or exposures that you can see as we sit here today? Thanks Mike for the question. As I noted in my prepared remarks, while we're not immune to the macro economy, of course, there are some real factors that support growth of Marsh & McLennan. In the risk side of our business inflation is one of those areas. So, whether it's wage inflation, core inflation, higher and of course inflation leads to higher losses and more discipline in the pricing environment. All of those issues are supportive of growth. It's a client by client outcome though, right? Some of our clients, there are winners and losers in any economy, of course and some of those distinctions might be more stark in an economy like we're in today. And so some are operating from a position of strength and others of course, will need to be more defensive. So we work through that with them, client by client, but broadly speaking, inflation and nominal GDP, is more indicative of demand for our revenue and our services than real GDP. Yes. Actually may be on Oliver Wyman and Mercer career, I know you mentioned a possible slowdown in Wyman, but can you talk about the pipeline and whether you're seeing that slow down or just kind of anticipating businesses reducing their consulting appetite? Sure, Mike. So let me start by just saying that Oliver Wyman is just a really important part of our value proposition for our clients and a critical part of our company. They advise the C-suite on the critical issues of the day and really help us differentiate our value proposition. We had an outstanding year of growth in 2022 on top of 21% growth in 2021 and over the midterm, medium term, we expect higher growth out of Oliver Wyman than our other businesses. So having said that, we do expect some moderation of growth. So Nick, maybe I'll ask you to share an outlook with Mike. Yes, thanks John and thank you, Mike. As John just started to do, let me put Oliver Wyman into context. We're very happy with a second consecutive year of double digit growth. I think it's 15 years since we've achieved that. We've added over a third to this in that time, and we're confident that we gained market share in what is a pretty fragmented market. And that growth was very well balanced. We grew across all our regions, across all of our capability practices and across most of our industries in 2022. But having said that, this is my seventh call, and it's the first one that I've reported on something below double digit growth in the quarter. That 8% does reflect two things. We're certainly lapping a high growth quarter, but at the same time, we did see a slowing in the pipeline as our major clients, and we pause and digest after several pretty turbulent years. We remain optimistic in the longer-term revenue plans. Yes, there was a pretty heavy surge in the last two years, but we'll likely revert and closer to our medium term expectations of mid-to-high single digit underlying growth through the cycle. Thanks, Nick. Mike, maybe I'll ask Martine as well to comment on Career, Mercer and I would point out Mercer had its best year of growth since 2008, so we feel absolutely terrific about it. Excellent growth in health, excellent growth in career, but Martine maybe you could share a little bit more color? Yes, no, thanks John and Mike as well for the question. Yes, of course and you're right to say that our Career business is the one that has most discretionary projects. So of course we are looking at all indicators in a cautionary way. But what I want to say here is, we've had a tremendous two years in Career. Q4 was a 12% growth. The whole of 2022 was 14% growth. The demand here is really related to change in the world of work. We've added to that in 2022 wage in high inflation. We have the labor shortages issue. So we're looking at reward strategies, workforce analytics, future of work skills, gap, talent engagement, assessment of skills. It's all on top of our client's agenda. So overall at this point, we've entered 2023 with very solid growth momentum, strong sales, strong pipeline. And of course, we are confident in this year, we are monitoring development on sales pipeline and client sentiment given the macroeconomic conditions that are foreseen. But the question remains that as the people agenda stays such an elevated point for our clients that what we're seeing right now is that demand stays strong. Hey, thanks for taking my question. I think previously, maybe not for a while, but you guys had talked about a 3% to 5% organic growth outlook longer-term. Just curious if your view on that has changed at all? Well, you know, as I shared we expect mid-single-digits underlying revenue growth or better for this year, that's the guidance we're sharing. As I noted Robert in my prepared remarks, we're in terrific businesses, we're well positioned in those businesses, just have outstanding talent and a culture that makes us an employer of choice as well. So we feel good about our growth prospects for the near-term. Got it. And maybe just a follow up, yes, how big of a deal are wage pressures in the business today and into 2023, I think the consulting segment perhaps is a little bit more susceptible to that and we saw margins decline year-over-year, so just wondering how big of an impact that is? Yes, you know, it's been manageable for us for sure. As we said we worked really, really hard on our culture and becoming an employer of choice in the markets that we operate in. I think we attract outstanding talent because of that culture, because of the strength of the brands, and it really enables talented individuals who want to devote their career in the areas of risk strategy and people to be their best when they work here. And that's how we think about it. And as I said earlier it's a privilege to do the work that we do, trying to tackle the issues of the day. We're a collaborative environment, so you do it with some really talented people who are very, very focused on client impact. And our client engagement, our colleague engagement, excuse me, remains very, very high. So we saw some elevated voluntary turnover in the early part of the year, but that moderated in the second half of the year, that I think that elevated turnover was really a bounce back from very abnormally low voluntary turnover. But wage pressure has been manageable for us. We're being thoughtful about merit pools and how we allocate those pools, but we feel very, very well positioned from a talent perspective. Thanks. Good morning. A couple of quick questions. First, John, strategically, when you can anticipate higher fiduciary income, does that translate into more latitude for longer-term investments? You know, we're trying to balance, obviously, the near-term and the mid-term. The growth in fiduciary income may or may not be correlated to client demand or opportunities that we see. It's obviously connected to other macro factors. But you know, I think part of the steps that we took in the fourth quarter, the actions that we took in the fourth quarter create capacity for us to make investments and to become a stronger business going forward. Okay, that's helpful. Second question, when we've heard a lot of comments very clearly accurate about the difficult reinsurance renewal season, does that actually impact the expenses that Guy Carpenter incurs? I mean, obviously a stressful period, but I'm wondering about the financial impact. It was a stressful period. Our colleagues were attested and I would say I don't want to mitigate the impact on our insurance company clients. It was a challenging outcome. Again, we expected a difficult market as well. But no, it doesn't impact our cost base in any meaningful way. And, as I said, the overall outlook is supportive of a good growth environment for Guy Carpenter. Hey, good morning. First question is around underlying revenue growth. Marsh is up 6%, Guy Carpenter up 5%. Given the strong exposure growth, the strong rate increases, if you netted that out, would the underlying growth be negative? No. it would not be, it would not be negative Andrew, but, and thank you for your question. It was a very strong year of growth at both Marsh and at Guy Carpenter. I would note Guy Carpenter is a very, very small quarter. And so again, we're quite pleased with the revenue growth. And as I've said a number of times this morning, Guy Carpenter is very well positioned for good strong growth in 2023. At Marsh, it was an outstanding year. You know, 8% for the year, 6% in the quarter. You know, as we noted, I mean, I'll ask Martin to comment on this in a second. Marsh in the U.S. had some headwinds related to the capital markets, right? So, and Martin mentioned earlier the impact of pricing. We had fewer M&A with less M&A activity, less ITO activity. So as Martin pointed out that an impact on pricing there, but it was more of a volume issue. We expected that entering into the fourth quarter. It's also a headwind for us into the first quarter as well. But we expect a good growth year in 2023. Martin, maybe you could provide a little bit more color to share your thoughts on 2023 and our growth at the end of 2022. Yes, of course, delighted to, thank you. Well, as you said, we had growth of 6% in the quarter. It was on top of the 9% in the prior course of 2021. Strong balance of growth across the portfolio. International in the quarter grew 8%, APAC at 12%, EMEA at 7%, Latin America at 4%. You mentioned U.S. and Canada at 5%. I'd say that the U.S. and Canada was actually impacted by headwinds in our business. So we had tough comps in the prior year from elevated M&A and SPAC activity and capital markets activity in the back half of 2021. We think but for that, we would have been posting underlying growth in the region of 8% for the U.S. and Canada, so very strong results there and we feel bullish that as that normalizes in the first quarter of next year, we're going to see an uptick. The full year growth international was 10%, APAC 13%, Latin America 12%, which is a much better representation of what they're likely to. This is the smallest part of international Latin America, so you should look at the full year as a better indicative rather than just a discreet quarter. EMEA was up 8% and the U.S. and Canada up 7%. And then when we look at what's driven the growth and what we think are likely to grow in the future construction growth was double-digit energy and power dealing with the transition up double percent of trade credit business up double digits. Our advisory business, which helps our clients mitigate changes in risk grew double digits throughout the year. So we feel very good about how we're positioned about the geographies that we're in about our position in the value proposition and feeling good about growth. So Andrew, we're working our way through some headwinds in the capital markets, but again feel terrific about the growth in 2022 and we believe we're well positioned in 2023 as well. Do you have a follow up? Yes, one quick follow up, just curious about the JLT integration cost of $91 million in the quarter, just given that it's been, I think the deal was 2019, so I was just curious what that was? And Andrew that pretty much was the final step of integration with the JLT and it related to basically the provisions for shutting down abandoning their headquarters in London as we were able to finally consolidate all of our headcount into our location and into Tower Place. That is an action that was planned at the very early stages of the integration. It just took us that long to refit Tower Place to accommodate all the headcount. Good morning. First question, you had talked about the potential for maybe some compensation structure changes and then [indiscernible] environment. Given that that you've been in this market before, can you maybe give us some ideas or some reflections of how this played out in previous hard markets? How much compensation or commission rate changes in hard markets? You know Yaron our commission levels have been fairly constant for a number of years. As I said, with some of our larger clients at Guy Carpenter, we've had capped commission agreements that have been in place for many years. And so we work with those clients to be fairly remunerated for the work that we do over the course of the year. And so, we have good, healthy relationships with those clients and work our way through them. So I don't think there's really anything more to share than that. Okay. And my other question is with regards to the restructuring, so the workforce action that you identified, does that implicate or impact any of the hires that you had back in 2021? No. we feel terrific about the strategic talent that we brought into the organization over the course of the last couple of years. We invested in talent last year as well. The returns on those investments have been absolutely terrific and driving a meaningful amount of our growth in 2022 and we expect it to drive growth for us in 2023 as well. So as I said, the actions that we took were more about aligning our workforce and skillsets with evolving needs. And it also is connected in some part with how we challenged ourselves to operate more efficiently, more simply and bringing our businesses closer together. Yes and thanks. Two of them for you. First one Mark, I'm just curious, the $4 billion of kind of planned capital deployment this year, how does that necessarily, how does that relate to kind of what your expectations are on free cash flow? Because I think you actually had $4 billion of capital when you expected to deploy last year? Sure. so Brian, we do plan to deploy about $4 billion of capital. The largest source of that capital deployment will be free cash flow that we expect to generate. We also entered, if you saw our balance sheet, we entered the year with a little bit of cash from the debt raise we did late last year. So, that will provide some additional capital as well. Well, free cash flow for us has been a great story as you know, over a long period of time and over time tends to track pretty well with our strong earnings growth. And our outlook is for solid earnings growth. But cash flow can be volatile. So we generally stay away from predicting free cash flow with precision. But as I said, the biggest source of capital underpinning our projected deployment is going to be the free cash flow we generate. Great, that's helpful. And then John, I'm just curious a lot of big corporations out there are tightening belts right now in preparation for what they see as a challenging 2023. And I appreciate you're looking for still a pretty good strong 2023. Maybe you can just remind us what's the lag effect that you see with your revenues vis-Ã -vis kind of a slowdown in business activity out there? I always remember there's like some lag effect. Well, it's hard to talk about lag with any precision. And my comments earlier about the broader environment really carry the day. I mean, yes, it's an uncertain environment. It's maybe modestly more positive when you think about the reopening of China and how Europe has at least so far successfully managed energy related risks and the impact on the economy in Europe. Having said that, there's still meaningful geopolitical risks out there. But for us, again, nominal GDP is more indicative than real GDP and demand remains strong for us in our businesses. So, as I said, we expect a bit of a moderation of demand at Oliver Wyman, but broadly speaking, our businesses overall including strong growth prospects for Guy Carpenter remain quite healthy. And if things get more difficult, we know how to perform in a more challenging environment. We have the playbook and we're ready to execute on that playbook. We're a resilient business and so we'll navigate whatever comes in front of us. Hey, good morning. First question, just looking at the margins in this quarter, fiduciary investment income was a pretty big contributor, it looked like, to the margin expansion, and the comp ratio actually looked relatively flat with 4Q 2021. I guess that just surprised me a bit, given there was so much hiring a year ago with not much revenue attached to it. So yes, how should we be thinking about, I guess the operating leverage or the lack thereof that on that cooperation in the fourth quarter? Yes, thanks Ryan for the question. As I said last year start 15th consecutive year of margin expansion, and we expect 2023 to be our 16th consecutive year. I was pleased with the margin improvement, particularly in light of the investments that we've made in talent. So, it's a modest improvement, slight improvement in the comp and then ratio. But again, margin is an outcome for us. We're focused on growing earnings growing the free cash of the business and we're going to invest where we think it makes sense, where we think it can make us stronger as a business and accelerate client impact. But at the same time, what's not going to change here is our focus on continuous improvement and our commitment to excellent financial performance. Got it. And then I guess just a follow up, John, obviously early days in the new seat, but just curious what you've been focusing on or where you're spending your time? Sure. My voice has been in our strategy for nearly seven years now. As I said in my prepared remarks, we're in the right businesses. We've got market leading brands. We're well positioned, just outstanding talent. It's a real privilege to get to work with the folks that I get to work with every day. And as I said, our focus on continuous improvement and our commitment to excellent financial performance are not going to change here. Having said that, I see some real opportunities at the intersections of our businesses. Client needs are dynamic as we talked about, and those needs don't fit neatly into the boxes on our org chart. We're a big company. We need to be organized in certain ways, but those needs don't necessarily fit again against not all of them anyway, don't fit neatly into how we're organized. And so we're going to be more deliberate about how we collaborate. We've got a unique collection of capabilities. We're going to go to market together where we think it makes sense and where it makes sense is where we can accelerate client impact and enable our client success. And our colleagues are passionate about client success and the work that they do on behalf of clients. So they're excited about the possibilities. I'm excited about the possibilities. We're also going to work more closely together to drive some efficiencies across our business. So I see a lot of opportunity. Again, I think we're in terrific businesses and a terrific team here and I'm excited about the days ahead. I would now like to turn the call back over to John Doyle, President and CEO of Marsh McLennan for any closing remarks. Thanks, Andrew. And thank you all for joining us on the call this morning. In closing, I want to thank our over 85,000 colleagues for their hard work and dedication in a challenging year. And I also want to thank our clients for their continued confidence in Marsh McLennan. Thank you all very much and I look forward to speaking with you next quarter.
EarningCall_1018	Hi, everyone. A very good morning to you in the big picture and to those joining us online. I'm Allison from the CICT Investor Relations team, [indiscernible]. CICT released its full year to it results this morning, and we have the management team here with us to share the highlights of CICT's results. I'll introduce them later. For today's briefing, we'll start out with a presentation by our CEO, Mr. Tony Tan, followed by a question-and-answer session. Please note that this session is live, recorded and will be uploaded later on our website. Good morning. Just commented, there is a big place for a small crowd. So we released the results this morning. I hope you have a little bit of time to digest. I'll just quickly run through some of the key highlights and then of course our management teams are here to take some questions. Okay. So some -- just a few key highlights, which can be elaborated in the following slides. A few things, I think, will work out quite well in 2022. We have seen some nice improvement in the operating metrics. Committed occupancy, for example, has been going up over the year, over the quarter as well. And we have achieved rental reversion positive both for the retail and office as well as a tendency that's now already surpassed 2019 that includes downtown and suburban. So I think we're quite pleased with the overall general trends that we see in 2022, which is quite in line with what we talk about when we met in different occasion on a sequential basis, we think, trying to -- towards the end of the year, which you see nice uplift, given there were a few momentum that has already triggered as a result of more relaxation from the COVID measures. Shopper traffic has been rising as well over the years. And of course, towards the end of the year, we've seen the, in a way, leading to the festive period, we've seen quite nice uplift as well. Throughout the year, I've been very, very careful about how we look at costs, very active managing the costs. Everyone knows the inflation is hitting us in all fronts. Interest rates have been going up. Utility rate has been going up as well. So we have been very proactively trying to manage all these different things and dynamics that have been hitting our expense line. I think we have achieved a reasonable output given the -- given a little bit of guidance on how the utility rate vis-a-vis 2021 has moved up, now almost 90%. And rough estimate on how that would impact on the DPU front, I think we came out better than that. We also secured quite a bit of financing from the market, in total SGD 2.7 billion. They were secured in 2022. And we have hedged our energy rate throughout the course of the year. And 2023 is protected, albeit is a higher rate. 2024 is protected as well. Given that we know that the volatility of the energy price is going to be still notwithstanding all the geopolitical and war issue that we see in the world, I think energy prices will continue to stay elevated for quite a while. Capital management is going to be active this year. Hopefully, we are able to manage our balance sheet more effectively as well. We have done some proactive and very conservative management of balance sheet. I see the gearing came down a little bit, about 40.4% at the end of the year. I'm really looking forward -- we've been quite pleased to hear that China is opening up. At the end of the year, they talked about coming February, they're going to release more or less the flight-gate to the rest of the world. That certainly will be helpful for the retail business and especially in the downtown business. So we hope to see the trajectory coming through in 2023. Also improving on the hospitality side, we have a couple of hospitality-related assets in our portfolio, the hotel in Raffles City, lyf Funan in basically Funan. We have seen very healthy kind of RevPAR or occupancy. Yes. So that's trending out pretty well. So from a number of perspectives, full year, we achieved a -- I mean almost a, let's say, 1.73% improvement on DPU. That's the -- I know it's below market consensus, but I think we have done a little bit of things. Hopefully, going forward, we have seen some improvement from there. Bear in mind that we also have certain, hopefully, potential measure that will help improve the operating number as well going to 2023. On the revenue side -- sorry, distributable income side is up by 4.1% to SGD 702 million. I'll talk a little bit more later on. So overall portfolio of occupancy has creeped up to 98 -- 95.8%. From third quarter, we reported 95.1%. So it's going up as well. WALE has come down slightly from 3.8 years to 3.7 years. From a retail perspective, the -- earlier I mentioned and think that the number trending well quite well. Third quarter, we closed in -- third quarter as in year-to-date September, retail sales was 21.3%. Today, we are looking at full year 22.5% is improvement as well. Suburban Mall -- again Downtown Mall lead to Suburban Mall internally recovery but surely, because Downtown Mall has been getting a wider, a bigger hit during the -- throughout the COVID period. And then you've seen the rebound very robust and all of our various measures like the relaxation of the mask mandate, think it's a critical turning point. A lot of people have started to flow back the office and we've seen very healthy returning rate to the office. So Downtown Mall is seeing a little bit uplift. A little bit of tourists trickling in as well. So we've seen a little bit uplift from the tourist crowd as well. And Suburban, as usual, remains pretty resilient. People are still working from -- either 3 days, 2 days from home or for one, depends on which company you look. But overall, I think suburban has been pretty resilient. Portfolio, overall traffic, has got, like I mentioned earlier and as led by downtown. Overall rental reversion, I did touch on earlier, I think it's all positive now, both the office and retail and is, in fact, I think whether you measure it from an average perspective or incoming/outgoing perspective, I think the retail sale -- retail reversion has gone positive as well. Valuation. Overall -- if you look at overall for the whole 12 months, it's gone up by close to 9%, with a little bit of a portfolio adjustment we did in the year, we divested One George Street towards the end of 2021, and then we had a divestment of JCube. We acquired CapitaSky. We acquired and completed 3 Austrian assets. So a little bit of movement. But overall, I think, the valuation has gone up by about 9%. In terms of geographical split, slight movement only. I think Singapore portfolio share has gone up about just 1%, 93% with 3% in Germany and 4% in Australia. This one I don't touch it too much. I think it's self-explanatory. So second half full year, I think revenue has gone up quite nicely, 14.4% and NPI, 13.1%. Margin-wise, I think, we held steady. We are trying to guide the market a little bit, try to move it, given all the different inflation number that has been coming in. We are hoping that we are able to achieve more than 70% margin. I think we achieved a reasonable margin close to 72-plus percent overall. That's for the full year, okay. I think for the first time, we crossed our NPI by SGD 1 billion, that's a big milestone. Of course, the SGD 1 billion is just a digit, but certainly, it's a major milestone for CICT, yes. We continue to be probably one of the most diversified REITs with -- in terms of different revenue streams, as you can see our layout here. Singapore by far still the largest. And of course, we have some minor contribution from Australia and Germany as well. So we'll continue to build on that. Hopefully, we get even a wider diversification. Singapore will still be very prominent, dominant. And I mentioned before, we hope that over time, we are able to scale up in some of the 2 markets that we're already in. Balance sheet is healthy. NAV closed about SGD 2.12 including the dividend, SGD 2.06 excluding the dividend. Funding-wise, I think, we can assure that it's all covered, SGD 1.166 billion, more that covered. We had all the funding in place, it's about timing drawing down, closing the documentation. And of course, at the right moment, we do the interest rate hedge. And we also done a little bit of sensitivity on the interest rate movement and earlier, I was just discussing with some of you out there. Overall, I think we are quite happy because, I think, we had a pretty high hedge rate. And as a result, I think you see less volatility in terms of the impact from interest rate increase. On the balance sheet-wise, we closed the year with some improvement in the metrics. Gearing has came down to 40.4%, a bit more proactive. Make sure we don't have idle cash sitting around. Total borrowing came down a little bit whichever I meant. Fixed rate has gone up slightly from September, 81%. And then interest cover came down slightly from 3.9% to 3.7%, a reflection of the higher interest cost that we are paying now. So average cost of debt creeped up by about 0.2% to -- from 2.5% to 2.7%. I don't think I want to run through too much detail. All I can say that portfolio remained -- occupancy remained pretty stable and it's creeping up as well. There was slight movement, nothing to shout about. And this again -- the main thesis about diversification. I think the top 20 now contribute less than 20% of our overall contribution income-wise. Okay. I won't touch this. This one I did mention before. And, yes, I think overall, we're still seeing a nice improvement in overall retail occupancy. REIT -- Raffles City, I mean, because we have completed the AEI we took the entire space back into the market and hence we're above 91%, not all the space in AEI has been fully let. It's about 70-ish percent. Later on, I'm not sure whether you'll be participating in the walk at Raffles City post-launch. Yes, so we have -- kind of have a look at what we've done over there. Overall reversion, I mentioned earlier, I think we have achieved a positive reversion even for Downtown Mall and that's positive development. And in the fourth quarter, it's gone positive for both downtown in either incoming or average-average, right? I won't talk about this too much. I think this one I mentioned before. Downtown continued to lead the uplift in terms of the sales improvement. And we surpassed 2019 sales overall, both Downtown and Suburban. I won't say about this too much. Office-wise, occupancy has improved, 94.4%. So in Singapore, is 96.2%, average rent is about the same as what we reported in September. Reversion remained healthy 7.6% compared to third quarter is about 7.9%. Retention rate remained very healthy, 81%. And this is just a breakdown, okay? We've seen some creep up in occupancy at the Australia site as well, and we hope to be on the momentum. And as the return to office, hopefully, will pick up in the -- throughout the course of this year. Okay. I won't break this, right. So all these are a little bit more things for you to digest at your free time. I won't delve too much, okay? In terms of outlook, naturally, I think there's a little bit of a dark cloud out there. Everyone knows about it. There's no surprise. There's been news about various job attrition, tech company, particularly. Some impact to Singapore. We have not seen a very wide spread impact in Singapore yet. But naturally, because the environment is in the mood of rationalization, we tend to see quite -- in line with what the consultants are saying I think going to 2022, we see probably a little bit of slowdown in terms of rental growth. But nevertheless, there are other positive factor underpinning Singapore's office market. Demand beyond the trade sector, I think, has been, I would say, quite decent. FMCG -- legal business support services are still expanding the legal fraternity, I think, are also looking at expansion. Some interesting things like the -- which Singapore is anchored strongly in this part of the world as being a champion on ESG sustainability. And we see a lot of companies starting to move into Singapore as a base. So we have seen some nice traction. Hopefully, that will transmit into some real demand for space, yes. I, think, retail-wise, trajectory-wise, hopefully, first quarter riding into the festive period, we've seen nice improvement and as the flight-gate I mentioned in China. I don't know how many will fly into Singapore. Certainly, there will be more tourists coming in. And hopefully, Downtown Mall will continue to get that push momentum. Suburban Mall I emphasized it before it will remain pretty resilient, yes. So overall, a little bit of dark cloud, some things to match on what we have been actively doing in 2021. Cost management is important. Interest rate cost management is very important. We'll continue to do that. This is what I mentioned. So we are looking also to hopefully complete our AEI in Clarke Quay this year. We are already planning ahead, what next. There are a couple of projects we are studying. And at the timely moment, we will just let you guys know, right? Sorry. I'd like to invite the rest of the management team up on the stage for the Q&A. Before we start, I would like to introduce the management team, to Tony's right, we have Ms. Wong Mei Lian, our Chief Financial Officer. To Tony's left, we have Ms. Jacqueline Lee, Head of Investment. And to her left, who have Mr. Lee Yi Zhuan, Head of Portfolio Management. Some housekeeping rules before we start. (Operator Instructions) We'll be limiting 2 questions per person per round. If you have more questions, we'll come back to you. For those online... Maybe the first question from me is retail rental reversions. I think 1.2% average-average for the full year. Any sense on what was the number in the fourth quarter and the outlook from here? Are you having difficulty pushing through the high electricity cost service charges ? Second question I have is regards to the distributable income adjustments. There's been a negative SGD 36 million of rollover adjustments, I think, related to some tax issues. Maybe you can explain exactly what's happening there. Okay. The fourth quarter overall, we achieved close to 4% reversion that's combining the suburban and downtown thereabout. Whether it's enough or not, like, I think, I was talking to you down there -- I think this year going forward, not just the expense line, I think, of course, we tried to manage the revenue line as well. But we're also very cognizant of the fact that the inflation is hitting the retail -- retailer quite badly though. So they move up the CPI. I mean, basically, the retail sales price, I'm sure you guys feel the heat, right? But not all of them are able to fully absorb the call. So we'll be very cognizant, but more importantly is to be able to drive the sales. So we still think that the sales component of the rent would be very, very important. And that's where I think we put a lot of effort into it. So it would be a little bit more, I would say, accommodating from a fixed rent perspective, but we'll try to drive the turnover rent. And we had the year pretty decent. I think overall, I think GTO rent is about 7-plus percent, which is slightly on the high side. Yes. I think this disclosure was made earlier in the first half results. It's noncash in nature. So this relates to the COVID-19 cash grant that was received in 2019. And it was actually distributed as tax-exempt income. And subsequently, we had the IRS came back to us to sort of confirm the position that it should be -- should not be an exempt income. It should be under the taxable income. So there was a rollover adjustment to adjust for the over distribution of taxable income in 2019. Noncash in nature, has no impact on DPU. Tony, you mentioned that last year, you were very proactive and prudent in the management of your balance sheet. But as a consequence, did it limit your ability to make our opportunity to take acquisitions because you gave a few major deals in this -- in the second half of last year? So can you just remind us what is your stance on potential opportunistic acquisitions last year? And then looking ahead to this year, the fact that you're gearing is still 40%, will that still limit the size of investments you can make? Yes, sure. Thanks. So I think we, of course, we look at holistically, portfolio reconstitution, what we want to do overall portfolio. We look at market condition. We look at opportunity out there. So it's a triangulation of all things with factoring in any kind of your assessment. So it's no different in 2022, 2023. So we'll continue to be able to see whether we can fine-tune our portfolio construct. Market condition is allowable. Obviously, we would like to participate and hopefully can - in some kind of accretive acquisitions. So it's triangulation of everything. So I don't think that 2023 will be any different from the way we look at it in 2022. In 2022, it has been very volatile, especially in the third, fourth quarter, you probably know. Market condition is not exactly there. Hopefully, 2023 market condition is a little bit more favorable. Brandon here from Citi. Just one question. I think your past 2 quarters, you have mentioned that some feasibility studies are in the midst of some of these redevelopment opportunities. Can you share anything on that our progress? What kind of things are you looking at properties? Or is it AEI? Is it going to be a big major redevelopment here? Yes. So cut across different scale AEI ongoing. We just have to prioritize timing-wise. Redevelopment, certainly, we have put a little bit more effort into studying that both downtown and suburban, both retail and office offsets understudy. At this moment, we can't say more because there are different aspects of the redevelopment that we need to consider. Cost is one, obviously. The other one -- the other fact is, of course, the scheme, whether the scheme makes sense in that -- in the location. And ultimately, there's a lot more time that will be required to negotiate, right? There is a negotiation time that you require to go through with the authorities. So it will take some time. I think I've mentioned before, even we -- I think last year, I mentioned a couple of times, that even if we say this is what we going to do, you won't transpire in 2 or 3 years. It takes some time for things to work through especially it's a mall, you don't just do lfy mall, you need to plan ahead. Yes. Okay, it is something that we are working on it. Yes. Okay. And just going back to the AEI part, right? I don't see a lot of outstanding AEI actually. So is there a chance that, I mean any reason why you didn't give back some of the distributions from CICT as well as central... I think it's always been very helpful. We have the cash flow stream coming from these 2 REITs to help supplement the CapEx cost requirement. So I think we still maintain that stand. I don't think we need to dig into that. We have enough, I think we have sufficient things we can work on, yes. So during the quarter, I'm not sure many of us, certainly some people have made up. I think we are still working on potential just came not ready to mention anything yet. So this year, we still have the income. By Jan 2024, officially, the lease will expire. Between now and then, we are looking at different potential kind of configuration if we were to do AEI or a major uplift. So I think we're still working through the detail. Concurrently, I think there are prospects we are speaking to and hopefully, that will transpire into something more concrete, yes. At the moment, nothing more to say there. And my second question is on acquisitions. I think earlier, you mentioned diversification. Does that mean you're looking more at overseas acquisition? And also, what are your thoughts on sponsor assets that you're on? Okay. We -- I need to clarify. One of the major reason why we look at overseas diversification is precisely, we think we have growth in Singapore that we need to ride on. Earlier, as Brandon asked the question, sorry, AEI and redevelopment, all this will have a drag on income. And if you're going to just depend on the one source of opportunity, I think, you're just limiting your options. So for us, in the long run, I think it's good to have the optionality in place in the market that hopefully, over time, we can scale up so that now you'll get the economy of scale's impact. At the moment, the 2 markets we are in there, we're not there yet, yes. So Singapore has opportunity. We have obviously explored some different deals flow. We didn't proceed -- we'll continue that in '23, yes. Congratulations Tony, for the results. Can I just -- Can I ask 2 questions, right? Okay. So the first one is, will you be writing down Galileo any further? That's the first question. And the second one is, you got Raffles City convention and hotels comprised of around 6% of the AUM. Can you remind us what the lease structure is like? Is there some any upside from the revenue if the hotels fill up, et cetera like you mentioned? So we certainly hope this time write-down would have most of the impact that Germany is facing, the inflation is one big one. Of course, the war is a risk, premium risk gone up, right? So overall, the -- hopefully, that reflects the risk has been priced for the valuation. Ultimately, it all depends on how we execute the plan. Today, the valuation taking into consideration the cash flow expected from potential CapEx that may be required. The downtime as a result, no income stream and hence, on a discount basis, and elevated -- sorry, an elevated discount rate pricing in the risk premium. So that all contributing to a -- from a DCF perspective, a low valuation. Hopefully, that has been fully captured, yes. Whether there will be further write-down, I can't tell. It all depends on how we execute the asset value, yes. I know of course the war in the Ukraine is still ongoing, yes. Yes. Even though recent months are beginning to see less pessimism, more -- less pessimistic in numbers coming out from the Eurozone and especially Germany, has been seeing a little bit of a surprise upside in economic activities. So maybe people got used to it. Maybe they got over the deep winter where the fear on the energy rationing will have a major drag on their economy. That's not panned out as best they anticipated. Yes. So RC structure, well, if you recall, in 2020 when in the darkest moment, we had little of the readjustment on the lease structure with the hotel. We essentially in short, we really bring down like no different from what we have done for some of the retail -- the most affected retail tenants, bring down the fixed cost, fixed rent and then bump up the turnover, and we adjusted the duration of the lease because the hotel state, we doesn't need for them to have a longer lease period make up for the time line. So that's been factored in. In the course of the last 2 years, things sort of revert back, the fixed rate gone down a little bit, variable rate came down. Overall on a net basis, I think we have probably done the right thing because we have seen quite a nice uplift in the sales, the room rate and then F&B has been doing very, very well in a hotel. So in fact, 2023, RCS is one of the big boost in our performance. Yes. So I think we are quite pleased with the outcome. I'll come back to Yew Kiang and Derek Michel. Turning to the questions on line we have on tenant sales. From Terrence, UBS, and Joel, DBS, so the question is, 4Q 2022 tenant sales? How does it compare to 2019 levels in terms of overall downtown and suburban? And also, how much of this came in November and December? Is it due to GST fund loading? Do we compute tenant sales net of tax and expectation on tenant sales in this year? 2019 a number, I don't know. But versus overall for the fourth quarter that means the whole 2022 and 2019 downtown improvement by about 4.4%, and then suburban is about 7.5%. Overall, it's a portfolio about 7.2%, yes. I don't have a 4Q number. Maybe our teams will chat later. I hope I had -- I mean, I also hope that we had the crystal ball gazing. Earlier, I alluded the -- there's some positive momentum, positive attributes that we can carry through in 2023. Overall, looks like inflation number has been tapering down. So hopefully, that will transpire into a less-than-expected adverse impact on consumer sentiment, right? Because ultimately is inflation that they are concerned about. Hopefully, economy will ride through well. marked down the economic growth this year. There are seeing some headline job attrition. But overall, the unemployment number is pretty low in Singapore,. still very tight, which certainly is going up, whether it's enough to cover inflation to the extent where it will affect the consumption, anyone's guess. First quarter, we think we have a little bit more visibility, hopefully, Jan to February, things will be okay. People still in a bonus period, right? So there will be a bit of discretionary spending and, of course, the usual necessity spending will be still there. Anecdotally, we -- I do go around the property a lot and speak to tenants. While we see some media report that -- in fact even today, some media reported that chicken people are selling less in the wet market, but I've asked around some of the retailers. And surprisingly, they are saying that this year Chinese, U.S. sales picked faster than last year. And overall, the number has been very robust, stronger than 2019. But we'll see the number how that transpires, yes. But from an F&B perspective, I'm sure you guys are on the ground, you know, right. It's always full. Even leading up the Chinese -- of course, now it's pretty full, but leading up the Chinese New Year, it has been very, very packed. Yes. We have a next question from [indiscernible] from Macquarie. DPU lags behind revenue and NPI growth. Was this due to interest costs being higher than expected? Can you guide us on the borrowing cost trend in this year? I think borrowing cost is definitely one factor that is below NPI line. So that would be affecting DPU growth. The other element is that in late 2021, we also did a small placement. So there is an enlarged number of units. So that also is one of the factor as well. So these are the 2 key factors. Borrowing cost trend, I think we all know that we are in a rising interest rate environment. And going into 2023, I think there's -- all eyes are on the Fed. There seems to be some signs of cooling. But having said that, I think rates have stayed quite high. So we will be watching carefully over the next few months for the indication of where interest rates will be and we will gear accordingly for the debt maturities that we have in the next 6 months on timing of hedging, these fixed rates. I can also add to what Mei Lian said. If you look at 2022, we did some work, right, in terms of portfolio movement, right? So earlier, I mentioned we sold JCube in March. We did some placement in December 2021 in anticipation of the 3 Australian asset which was completed only in April and June. So it's a little bit a timing difference. So we have naturally a couple of months of a DPU impact drag. Then we sold Sky. We acquired -- sorry, we sold JCube and we acquired Sky. So again, it's a bit of a timing difference. So that's one element. The other element, if you do recall that when we acquired the Australian asset, we also had a bit of guarantee income, which we have not touched. So we keep it as an option that we can look at it in the future. Then the other element would be some of the AEI downtime that was not on a pro forma basis you don't build that in, so downtime from AEI as well, yes. So going to 2023, you'll see hopefully, the downtown effect from Raffles City in 2023 will be lesser, where some remaining space in the AEI space to lease out. And Clarke Quay will go through a little bit of a quiet period especially first half, second half, hopefully, will catch up. Some of the rent amortization effect will slowly taper off in 2023. Some of the bigger leases that we signed in 2021, '22 forward commitment when lease commence, you recognize that the revenue, but there's the cash -- underlying cash flow has to amortize over the period of time. So that will taper down in 2023. And you'll see more cash impact coming in. So just to give a little bit of hint where the potential trigger of the number will come. Just one follow-up on the interest rate question. For fourth quarter, what was the all-in interest rat? And some of your peers have mentioned they expect to see 40, 50 bps increase in the all-in across this year? Would that be a fair statement to say as you refinance into higher rates? The 4Q interest rate is at about 3%, yes. So going into the new year, we are looking at higher average costs. 40 to 50 bp may be possible depending on where interest rate levels would be. All depends on your hedging strategy, right. If you take a neutral position 50-50, you say you're not very sure how that will go, it can be a 50-50 of course, then your average hedge rate will come down, right? But we can live with it, assuming we unhedge everything, but those -- the refinance as you acquired in 2023. Our hedge ratio will come down close to 70%, which is okay, right? That's extreme. But of course, you hedge 100% that will remain at 81%. So it all depends on your hedge ratio. But on a neutral level, I think our average is about close to 3 -- high 3s. Yes. Sure. I'm just wondering on acquisition opportunities given the kind of valuation declines for Galileo, do you similarly see opportunities to buy at fairly best levels and which markets do you see that happening in? I think, yes, we have seen yields moving up in some of the markets, but I think we are still watching because they haven't moved up as much as the interest rate increases. But we are watching to see when that will stabilize, but we are going to see some new move up in some markets. Yes. Just a caveat, when we acquired 3 Australian asset, we actually when at our implied yield about 5.0%, so we have sort of based on the negotiated income guarantee that we get -- implied yield is about 5.1%. Can we talk about Australia, like what's the long-term plan? Do we expect -- can we expect to do retail in Australia over the long term? And then secondly is on the next acquisition. I mean, do you think that the pricing is fair? Can you give some maybe some views on that? Is it a structure that you don't like? Would you prefer to have full control of asset when it comes to acquisition, especially if it's a nonrelated party. Okay, 3 questions, right? So Australian retail, I don't think we're around, right? We don't think we will do well. If you look at some -- again, this is all that diversification -- still about diversification, right? We, so far, we have office assets and some small retail in one of the JV. So that's not full retail to me, is a small retail, not so management intensive, even though it's retail, a bit more challenging than we look at suburban retail. But overall, management intensity attention spend on retail is a lot higher. That's a given. So the question is whether we have the capacity to take it. So eventually, I think, we need to have an in-country level, so a bit more diversification eventually. Currently, it's mostly office yes? And not every, market, I think, okay, you talked about Australia. The Australian retail market and the retail-related real estate has gone through the adjustment a lot earlier than what you're seeing now as a result of interest rate impact affecting the expectation on the cap rate line. But retail has been -- since I can recall, 2018 or '17 has been going through the adjustment because e-commerce, people are worried about Amazon going in. So there's already a lot of repricing, and historically, with our asset very chunky owned by a lot and they also want to lighten the load right? So there's been a bit of portfolio reconstitution, I'm not going to make you owner. That's why you see the adjustment multiyear. So it has come to a point where I think the adjustments has come lesser now. And then the new trend as a result, COVID, working from home is not as prevalent, is prevalent in many markets, right, and suburban retail has been pretty resilient. We've seen some of the peers reporting the results, not bad. I mean, retail doing quite okay. So there will be -- it's a recession cycle -- no real estate cycle, that will come and go. But eventually, I will take this, in some -- those countries outside of Singapore, first we must have the scale. Second, we must have the resource to be able to manage, and retail asset is highly, highly management intensive. So we must have that knowledge there. At the moment, we are not there yet. Next move. You want to say anything about where you see or where -- I think there are some reported transaction out there, which in Australia as well, not just in Singapore. So there are some reported transaction out there. I earlier mentioned, we look at it holistically, right, is as a REIT manager, you manage your portfolio design, what the REIT represent, you manage your source of capital. And then you look at how you want to redeploy your capital. So again, it's back to triangulation. And of course, when the market is conducive enough then we'll reset the equity from there. As simple as that. Just a few questions from me. I think firstly is on office -- Singapore office. Do you feel that there's a shadow space creeping up in your portfolio and also in your market? Yes. And secondly, my question is on how do you see, looking at your portfolio, I think, everything seems quite stable. So what's your thoughts? Where do you feel you could -- you would prefer to add like retail downtown or suburban or the office and divestments? Are there still opportunities for you to divest? Is it retail or office in your portfolio? Happy New Year to you, too. So portfolio space, I think, generally, in the market, we were a little bit of creeping up in the coming quarters. I think it's quite known that the tech base, right? We will see some of these things coming up. I think roughly now, some of the statistics is around 600-plus thousand and so certainly will up. But notwithstanding that, I think CBD office generally is still quite tight. So even with this, I think it's not something out of expectations it is something we can manage. Within our portfolio, I don't think it's a big challenge or problem at this point in time. Your question regarding whether downtown or suburban retail, is the ongoing iteration that we're looking it through. And the more we are quite balanced 50-50. Somehow, I don't think it's by design, but it's just panned out that way. We're about 50% downtown, 50% suburban. A few trends we watch out carefully. About the work from home will have some impact on how the consumer travel and behave, right. The reopening of border, certainly, we have a little bit of dynamics. The increased connectivity between Singapore and neighboring country is something you want to watch carefully as well. So there are big implication, right? And your implication on -- our movement of local rather than the other way around. So I think we are watching all these different dynamics quite carefully, yes. So I can only say that at the moment, we are in a nice sweet spot, quite balanced, whether we should swing heavier or the downtown is open. There are a few configurations that we've been through. And also it depends on the opportunity out there. And earlier Brandon asked about where the AEI a potential or redevelopment a potential. I mentioned it could be downtown, suburban, can be office and also can be retail that we are starting now. Can you help us understand for your integrated developments, those with office and retail component. How reliant are they on the office crowd or shopper traffic versus the tourist traffic is my first question. The second question is on your office leasing activity. I think fourth quarter seems to be lowest number of new leases, a number of committed leases about 120,000 square feet. Is this a seasonal thing? Or do you think this is a sign that the market has been cooling off in terms of the leasing demand for office? So your question on the impact downtown integrated. I would say at the moment is still more return to office impact, less so from the inbound travel. It's not very -- of course, yes, it has gone up, right, but not very significant in my view yet. And in fact, you can read all the statistics coming out from the Tourist Promotion Board. The number has crept up, I think but still a long way from pre-COVID. So my view, that's why I mentioned the dynamics on the border restriction lifting, and many countries are lifting all the COVID measures, we should see a more healthy tourist flow and hopefully more inbound catching up with the pre-COVID level. The office leasing, maybe I will pass on to Yi Zhuan. So for the office leasing I think if you look at the fourth quarter, there's a couple of reasons why the number kind of a bit lower than usual, right, for portfolio because on one hand, it's year-end also, of course, the market cooling down maybe a little bit of concern, but at the end of the year, it's also a time when you'll see festive season tend to be a bit slower. But notwithstanding that, I think we do still actually see demand from financial services and legal, real estate also for some of these things. But actually, for our portfolio, there isn't any avenues for the fourth quarter. So actually, we do expect some of this demand to come back a little bit more in the first quarter. If I look at it, I think we also talk to some of the renewals that actively, I think things are shipping out quite okay. Got it. Just to clarify. So is it fair for me to think that with all this hybrid work arrangement right now for integrated developments, say, Plaza Sing, it may not recover -- the shopper traffic may not recover back to where it was even with the tourist recovery. Today, we are about 75% overall pre-COVID. About 75% -- around 75% to 80% levels from pre-COVID traffic-wise. Yes, potentially, but they're buying habit has changed, a bit more intentional. If you go to shopping mall and more intentional. That habit was cultivated during the COVID with all the restrictions, right? Whether that we got off and more leisure, I mean, those I think, it will come back whether it's 2023 or 2024, I think we'll go back to pre-COVID, yes. My firm belief it will be. Okay. I want to turn to the, some questions online. We have a couple on leverage. Are we looking to divest some assets to pay down? And what is the target leverage? So that's part of the portfolio reconstitution I talked about. And when you look at investment, sometimes you look at that currently because it's about how best we look at the portfolio, will it make sense to acquire some assets or partial [indiscernible] whether the market conditions is favorable. So when you look at this type of a triangulation of course, you also assess whether this asset is one of the candidate. Maybe not this year, about [indiscernible] down the road for any type of average uplift. So those are factors that would be important before we look at whether we should swap the asset out into something different, yes. So if market is okay, we can afford to hold the asset and drive through, catch and continue to essentially -- I don't have to use a crew but optimize further make sure asset half further is market condition is okay. There's no real need for us to swap it out, then I think we don't have to do it. It's many, many factors that have to be considered, yes. Of course there will be ideal position, we hope at some point in time, we will be able to. Today, we are okay. I always use the same analogy. We are managing the different stakeholders' interest, equity stakeholder, the debt market stakeholder, the REIT agency looking at us and of course, the consumer, right? So we just want to find a position and make sure that we do not our balance sheet. And of course, it's a factor of where your cost of capital in the different pockets of money is at the right moment whether we should lighten the balance sheet. So there could be different factors that may resolve for us instantly to look at readjustment on the balance sheet. But in the long run, I think ideally, 35%, 40% kind of balance sheet will be pretty safe, pretty -- which is what a lot of investors want, say, predictable, low [indiscernible] income stream with no stress on the balance sheet and give you that firepower even opportunistic opportunity came along where you had to react fast, right? You have a 40 level, of course, you have less flexibility, you have 38%, 35%, 39%, when we are talking to have a lot more flexibility. But it's all again about whether you are able to hold a 35%, 38% and continue to deliver the return you want that investors expect because technically, you may be underworking a balance sheet. If you look at our private equity sales, quite easy to go 50%, 60%. They're looking at balance sheet very hard. But in the public market, we have to weigh the different needs of stakeholders. I have a question on CapitaSpring. Did CapitaSpring contribute any distributions for you last year? And in a steady-state normalized situation, like what type of annual distribution should you receive from CapitaSpring? CapitaSpring don't really contribute to 2022 DPU because there are a lot of rent fee incentive fee there, yes, in 2022. For 2023, we do expect some distribution to come back. Yes. On the question on steady state, I think we have to come back to you. Yes. Essentially, you're asking the amortization effect as one. Of course, at the local entity level, the level where you're bit upstream the remaining cash after settling all the different cost and expense, that's another matter, yes. Okay. Jumping back to the online question. Sorry, Mervin, I'll come back to you. We have asking on the profile of new tenants who have been taking up space in the past 2 years. And what's the guidance on the rental reversions going forward for retail and office? Well, I think just now just to kind of -- okay. So for the fourth quarter, just to recap, most of the deals, the new demand that came to our office is actually the financial services and legal making up most of it. And of course, I don't think it's really that -- it's just a function that in the fourth quarter, we didn't see impact, but I don't think it's anything very specific at this point to anything. We also see some real estate companies coming through. I think the co-working space. We're also seeing some inquiries and demand. And of course, it depends on the kind of models that we are going to actually see going forward. Yes, that's for the fourth quarter. Okay. So for the reversion, I would say the first quarter coming -- going forward, we should still see pretty good reversions. And similarly, for office, I think, if you look at the rental growth, I think the market rents generally is higher than the expiring rents you are seeing for 2023. Hopefully, this works out well for us. But I think the rental growth is probably going to slow down a little bit for this year, especially second half of it is going to be a bit more uncertain. So I think it will should holding up okay. Yes, I got a question in terms of the borrowing cost questions from the investors who's e-mailed me. I think , Mei Lian, you're saying that borrowing costs could go up 40, 50 bps. Then Tony, you mentioned high 3s. Is the high 3s related to when you refi or the weighted average for the full year FY '23? Refi. So it should be in line mid-3s with as per the other REITS that we're seeing or if you're lucky, carried around 3%. Okay. Maybe you can touch on the occupancies for a couple of buildings, Capital Tower and Six Battery Road. We expect improvement in occupancy this year. What are you seeing terms of negotiations? And then turning to Australia. What's the plan there? Are you aggressive with offering that incentives, given the income top-up that you have? So for the occupancy for Capital Tower and Six Battery Road, right? Maybe I think Capital Tower I'll start first, right, I think generally, we previously had and we have actually backfilled a big part of it. There's interest in some of the balance space. So definitely being talked about or we can expect some of the occupancy to go up. I think Six Battery Road similarly, we'll be finishing some of the upgraded floors and then we'll start to actually fill out some of these spaces. So I think it should also be going up. As for Australia, okay -- so, for Australia, the occupancy, right now, we do see actually the return to office is a little bit slower compared to Singapore. So the plan there -- for some of our assets, we are also trying to put in certain differentiating factors, and we are starting some of the plans to find how we can actually best position the asset to capture the return of office and the interest when it covers. Some of the trends we see in Singapore is also beginning to shape up in Australia like the prevalence of certain hybrid model, co-working space model seems to be shaping up. So one of the properties that we are working together with our JV partner is really looking at the utilization of the co-working space. So I think that as a result, we are upgrading some of the aspect of the office. The lobby thing is going to go through a major revamp. So we are bringing up the level higher. The other one that we try to alluded to was I think mall 66 Goulburn Street, which is in the CBD, not North Sydney. And there has been some departure which allow us to fast track some of the planned CapEx when we look at our underwriting. We actually had some CapEx that we set provision to cater for the upgrade because they're building -- it's a little bit a Capital Tower. I mean, it's grade A, but it's not premium grade, right? But we think that there are certain aspects of the building can be further improved, but they have a life of tenancy there, which we can't do anything. So where the lease has expired and then tenant decided to move on, we decided to take back the space and do a major upgrade. This is final question for me. How should we think about the remaining stake in CapitaSpring? Is it just to -- the cover is too low at this point? Well, it's in our radar. We think about it as well, of course in the mix of different opportunity, we will see which makes sense. Yes. Just to add on the point, I think I missed that earlier, maybe talk about incentives, right? I think for the Australian market, the incentives generally have crept in the past year or so, but I think it's currently around the 30% to 40%, which I think is quite normal. Do we expect this to go up? It's really hard to say because it's really on a deal-by-deal basis. Yes. Just one quick follow-up question. For Clarke Quay, I saw you signed on 2 tenants. Just wondering what's the precommitment level and what's the interest like for the remaining space? We have 2 online questions on valuation. The drop of valuation for the Germany asset, how much is it due to the weakening of the euro versus Sing dollar? And how much is due to the assets in euro terms? I think in terms of the FX translation effect, we have about $170 million of the loss due to FX devaluation of euro and Aussie dollar against Sing dollars, but this is largely mitigated by the corresponding fair value gain on the euro and Aussie dollar borrowings that we've taken to fund these overseas assets. So the impact on that asset overall is actually mitigated to a large extent. Maybe Yi Zhuan, you talk about the euro, well, valuation which I earlier in the presentation touched a little bit, maybe you want to give a little bit more color on valuation on our German assets. Yes. So I think for Germany, we -- this time around, it actually because a lot of the -- we actually, the valuation dropped partly also because we took in some of the latest assumptions that what we are going to foresee in this property, so for example, there's some higher CapEx actually taken in. It also reflects the kind of downtime that we're really expecting. So as far as possible, we think that this valuation hopefully already kind of takes the hit that we will see in Germany. And the -- but of course, eventually, it's hard to predict next year how the valuation because a lot of variables are moving. But by and large, let's say, once we have a bit more certainty plans hopefully some of these things will reflect in the valuation at this point in time. So it's a bit -- if you look at purely for a reval gain or loss on the portfolio, it's a mixed bag because you have the corresponding balance sheet effect, right, liability asset, netting off a little bit. And as a result of your natural hedging on your borrowing side so that communicated. Absolute valuation number for individual property, I think range in Germany, it's probably about 15% for Galileo. 15%, right? I think 15% markdown. And then the single-digit. I can't remember the number by single-digit markdown. Yes. Yes. Another question on valuation from Andy Bank of Singapore. Why did this Bugis+ registered a slight cap rate compression while a couple of others had a mild expansion? The one for Bugis+, some of the valuation -- cap rate changes actually more a function of change on valuers. Yes. So you will see probably a few of them actually have a very marginal expansion and the Bugis+ has a slight compression. I would suggest do not read too much into the cap rate. We had a change of value. It's true rotation, right? Every 2 year, we do rotation. So some value, they are different views how they look at assets. They have different growth assumption, right? And then they will look at the risk premium adjustment in the discount. So by and large, different value or a different view in the specific asset in the specific locality. But on a net basis, I think the adjustment on capital is like 5 to 10 bps is very much. So don't read too much into it. More important, look at the trading basically operating yield of the individual assets. Current is all above the current cap rate as a representative. Next online question we have from Gerard. What is the physical occupancy for the offices in Singapore, Germany and Sydney? And what is the current trend? For Singapore, right, we actually see a range across our properties, right? Some are actually as high as 90-plus percent. It's almost like back to pre-COVID levels. Of course, something is trending a little bit lower. I think broadly, 70-plus percent. For Germany and Australia, the physical occupancy return to office rate is actually much lower. I would say that in Australia, if I will put a number to it, it's probably around in the 50%, 60-plus percent range. And in Europe, it's probably going to be a little bit lower. I think it's also the sentiments generally and how the return to office has -- I think in Singapore, there's a little bit more push for people coming back to office. And actually in this aspect, probably this year, we might even see more companies taking a clearer stand on the return to recent office. And hopefully, this will then translate to higher to return to office REITs. Just to give you a sense, in terms of rate, there is different properties to different buildings to different building, it all depends on the companies, their policy. But generally, Monday, Friday is lesser. You can say Monday, Friday is far lesser. Tuesday, Wednesday, Thursday generally quite high, in the 80s and 90%, some building above 90% return rate, which is very healthy. But then, it can taper down to 60%, 50% on Monday and Friday. On a portfolio-wide basis, on an average on a week, we're looking at maybe 60-plus mid-60s kind of return rate, which is decent. We don't really track so intensely the pre-COVID, so I'm not sure. I agree we have got a sense that's not the building, it's already back to pre-COVID days. 80%, 90% simply sounds very high given that it's not the people will be either traveling or maybe they could be working from -- looking at maybe the many clients out there, but it sounds pretty too much to me back to normal on a busy day, right? But that's only on the 3 days I mentioned. Monday and Friday that will be a bit lower, yes. We have an online question from of Singapore. What is the retail occupancy cost? And for Australia properties, how long do we expect for occupancies to ramp up to above 90%? For the retail occupancy cost generally it's around 16-plus percent range. So it's actually quite in line. Generally, within acceptable range of what we're looking at. As for the occupancy in Australia, right, I think I -- to get it above the 90% range, probably it will take a little bit of time long given that's how things are translating a lot of things actually relying on how things pan out in the North Sydney side of things, but I think it will come back. I think we're not that far off. It's just something needs a little bit more time to work on. Yes. Just to add what Yi Zhuan was saying. [indiscernible] in the 80s, 80-plus. mid-80s and above. That's the retail office -- retail space in Australia. And what -- like what Yi Zhuan is alluding, the coming back to office is a little bit lower in Australia, ballpark, we don't track the number, but anecdotally, from our guys on the ground, we say it's probably 50%, 60% back, yes. At the same time, we are together working with our JV partner, [indiscernible] looking at the retail space, and we need to rethink. So we started with the -- good thing is an integrated project. Next, it's connected to the mid-subway line, the metro line. So it's -- on a busy day it can be very busy. But the car retail space configuration, I think needs a little bit of rethink. And at the same time because of the connection to the office building, and we started embarking on the upgrading or the office building, including the entire lobby area, so it makes a lot of sense for us to extend to the retail space, which is connected. So that will be well in progress. Yes. It may involve a little bit potentially, yes. Donald from Bank of America. Two quick questions from me. First is, can we have an update on Twitter? Are they still paying rent? Will they be paying rent? And if we need to backfill the space. Are we expecting positive reversion on that or flat? So for Twitter, right. Are they paying rent? Yes, they are paying rent? Will they pay rent? I hope they continue to pay rent. But I would just say -- I mean, just I said the -- for Twitter, I think right now, they're still a tenant of ours. But broadly across the board, I mean we constantly talk to our tenants about the expansion and rightsizing tenants along the way. And I would -- I wouldn't -- so some of these discussions are happening broadly as a whole, right? I don't think I will comment too much on Twitter itself, whether there's any reversions. So I think it's a little bit ahead of time. As a portfolio, our exposure to tech is actually quite manageable. It's actually below 5%. And actually, if you look at it, right, Twitter is not on the, one of our top 10 tenants in terms of exposure. So I think the exposure is actually quite manageable. One last question is could you remind us on the utility costs for this year, again, the repricing? And what sort of are you expecting? And if there's any mitigation from service charge? So I think -- Yi Zhuan. So for utilities, we are probably looking at a tariff for loan is probably somewhere -- I think the last time you mentioned it's probably about over the current one, right. We have been actually increasing service charge from a few of these properties with effect of 1st January. Generally, across if we look at both retail and office, unfortunately, for retail, right, because of COC, we find immediately an increase in service charge really only take effect kind of in the next renewal cycles. But broadly, I think in terms of whether the service charge can actually cover the increase in tariff, I think coverage ratio is currently around 35%, 40% range. And then progressively, this number will go up as still -- if you look at how the expiry lease profile, we go, we'll start putting back some of these things in the subsequent renewals. Yes, two years rate now. Earlier I mentioned, I think it's higher, potentially around 50% higher than blended 2022, but 2024 will taper down a little bit. Do we have any more last question? Okay. Then I think that we have all the questions addressed. Thank you for the time. We look forward to seeing you again.
EarningCall_1019	Hello, everyone, and welcome to the UMB Financial Fourth Quarter 2022 Financial Results Call. My name is Davey, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand the call over to your host, Kay Gregory with Investor Relations to begin. So, Kay, please go ahead. Good morning, and welcome to our fourth quarter and year-end 2022 call. Mariner Kemper, President and CEO; and Ram Shankar, CFO will share a few comments about our results. Jim Rine, CEO of UMB Bank and Tom Terry, Chief Credit Officer will also be available for the question-and-answer session. Before we begin, let me remind you that todayâs presentation contains forward-looking statements, which are subject to assumptions, risks and uncertainties. These risks are included in our SEC filings and are summarized on slide 42 of our presentation. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them, except to the extent required by securities laws. All earnings per share metrics discussed on this call are on a diluted share basis. Our presentation materials and press release are available online at investorrelations.umb.com. Thank you, Kaye, and Happy New Year, everyone. Thanks for joining us today. I'll make some brief comments about our quarter and 2022 and then turn the call over to Ram for a review of our results in more detail before we take your questions. Our fourth quarter results closed out another record year of earnings driven by strong balance sheet growth, solid credit metrics [Technical Difficulty] from our differentiated fee income sources. Net income for the fourth quarter was $100.2 million or $2.06 per share. For the full-year 2022, net income of $431.7 million or $8.86 per share, an increase of 22.3%, compared to 2021. Operating pre-tax, pre-provision EPS for the year was $11.73 per share, compared to $9.26 per share for the prior year. Net interest income for the fourth quarter increased 5% sequentially. This was driven largely by an over $1 billion increase in average loans, which is a 21% increase on an annualized basis, the impact of rising rates, positive asset mix shift and loan fees. This is partially negated by an increase in deposit costs, largely driven by deposit initiatives to attract new to bank customers, particularly in our commercial business. Additionally, we saw some continued market pressures in our rate sensitive institutional business. As we've noted in the past, our business profile and funding mix is uniquely skewed in favor of commercial and institutional customers. These sources experience different pace and timing than some of our more retail heavy peers in the repricing environment we are in today. Cycle-to-date, we've had a beta of 54% on interest bearing deposits and 33% on total deposits. Our deposit pricing during this cycle is generally in line with our internal expectations and consistent with what we've been talking about publicly. We tend to focus more on total funding costs, which considers the benefit of DDA balances and the impact of borrowing levels. That beta is 36% cycle-to-date. And we benefit on the asset side as well with the cycle-to-date beta of 3% on loan yields, 60% of our loans reprice within the next quarter and 70% in the next 12-months. We expect this repricing combined with our outlook for loan growth will continue to drive good growth in net interest income. Pipelines and sales activity in our fee businesses continue to be strong across the company, driving year-over-year non-interest income growth notwithstanding some market related variances. I'm excited for the opportunities we see in 2023 and beyond. Updates on our various lines of business are included in our slides, and Ram will share a few details shortly. We've long focused on our goal positive operating leverage rather than specific revenue and expense levels. For the full-year of 2022, we generated leverage of 6.7%. This continues to be a focus for us and we expect to generate positive operating leverage again in 2023. Moving to lending. The drivers behind our 21% linked quarter annualized growth and average balances this quarter are on slide 23. Total top line loan production as shown on slide 24 remained strong at $1.3 billion for the quarter bringing full-year 2022 originations to a record $5 billion. Payoffs and paydowns represent 3.4% of loans for the fourth quarter. While we and fewer banks have seen some slowdown in the sale on refi markets, payoffs are hard to predict from quarter-to-quarter. The average for the year was just over 4% in line with our longer-term trends. C&I lending provided nearly half of our $1 billion of average loan growth for the quarter with balances increasing 21% on a linked quarter annualized basis. Commercial demand continues to be strong and we're seeing robust activity within our existing customer base. Line utilization has ticked up from last year and was at 37% for the fourth quarter. Commercial real estate and construction loans posted 25% annualized growth in the fourth quarter, predominantly in multifamily and industrial properties. Construction represented a large portion of new commitments in 2022, so we'll see the additional impact and balances as those loans begin to fund. Average residential mortgage balances have increased 21% over the fourth quarter of last year, despite the impact of rising rate environment. Our down payment assistance program for the first-time homebuyers had more than 1,600 new applications resulting in $2.9 million in assistance in 2022. Looking ahead to the first quarter, we see opportunity in our various verticals across the footprint and we expect continued strong growth to kick off 2023. Credit quality remains excellent. Net charge offs were just 4 basis points of average loans for the fourth quarter and 21 basis points for the full-year. Non-performing assets comprised a modest 5 basis points of total assets. Provision for the quarter of $9 million was driven by our continued strong loan growth. Portfolio metrics and changes in the macroeconomic environment. Our reserve coverage is now at 0.91% of total loans. Back to the balance sheet, average total deposits for the quarter increased 5.3% or 21% on an annualized basis, compared to the third quarter. Our deposit initiatives in commercial banking brought in more than $1 billion during the quarter. DDA balances remained steady from the last quarter and represent 40% of average deposits, compared to 42% in the third quarter and 41% in the fourth quarter of last year. The economic data continues to be a paradox with the labor market signaling a soft landing, but other indicators like the LEI index are signaling a more prolonged recession. We have ongoing dialogue with our clients about their business and outlooks and borrowers are generally seeing good pipeline and many are reporting that supply chain issues have mitigated somewhat. However, caution remains as finding talent to support growth may be ahead then. As I mentioned, we see good growth opportunities in the first quarter and although we continue to closely monitor early warning indicators, we're not seeing any broad concerns. Overall, 2022 was a very strong year, while the unpredictability of the current rate environment is challenging, our time-tested business model and relationship-based culture continues to perform well and we're off and running as we start the 2023 year with a goal to maintain positive operating leverage regardless of the health and direction of the economy. Thanks, Mariner. Let me start with some commentary on balance sheet trends with our liquidity profile shown on slide 40. Our Fed account reverse repo and cash balances rebounded slightly to $1.8 billion and outcome price 5.1% of average earning assets with a blended yield of 3.65%, compared to 2.3% in the third quarter. This was driven by our deposit campaigns, as well as seasonal inflow of public funds deposits. Cash flows from our securities portfolio continued to help fund loan growth opportunities during the quarter. As shown on slide 27, the portfolio roll-off for the fourth quarter was $246 million with a yield of 1.94%, while we purchased $84 million in securities, primarily CLOs with a yield of 5.04%. Additionally, the portfolio is expected to generate over $1 billion of cash flows in the next 12-months. The yield of those securities rolling off is approximately 2.03%. While treasury yields present very attractive reinvestment levels, our priorities to fund the opportunities we continue to see in our lending verticals. Loan yields increased 89 basis points from the third quarter to 5.35% with a linked quarter beta of approximately 61%. The total cost of deposits, including DDAs, was 1.23% up from 65 basis points last quarter. Net interest margin expanded 7 basis points for the third quarter, the largest positive NIM impacts included approximately 52 basis points from loan repricing, loan fees and mix, 34 basis points for the benefit of free funds and 7 basis points from reduced liquidity balances and rate. Offsets included a negative 94 basis point impact related to the cost and mix of interest-bearing liabilities. As we look ahead, there are a lot of variables at play that will impact the trajectory of our net interest margin, including the depth and duration of Fed tightening cycle, outlook for equity markets and that impact on deposits expected disintermediation of DDA balances as ECR rates further increased and our own need to generate additional deposits through targeted campaigns to fund loan growth. Based on our own simulations, we expect our first quarter net interest margin to be flat to slightly up from fourth quarter levels. Additionally, we stand to benefit with the Fed's positive and the pressures on our index deposit bill conveyed an asset yield benefit from the current re-pricing environment and rotation from investment securities. As Mariner noticed, while the focus on deposit beta at NIM is important, we also focus on net interest income growth facilitated primarily by loan growth. Additionally, we typically manage to a loan to deposit ratio limit of 75%. In the fourth quarter, average deposit growth kept [indiscernible] loan growth keeping our ratio steady at just under 65%. Given our strong loan growth outlook, we will continue to focus on deposit and client acquisition across all our lines of businesses. Back to the income statement, total fee income for the quarter was $125.5 million, compared to $128.7 million for the third quarter. We saw some market related declines, including a $2.3 million decrease in company-owned life insurance income, along with a $900,000 decrease in customer related derivative income. COLI income was just $21,000 in the fourth quarter versus $2.3 million in the third quarter had a similar offset in deferred compensation expense. For the full-year 2022, the 18.6% increase in fee income, included investment security gains and losses, driven largely by a gain on our sale of Visa Class B shares in the second quarter. Outside of these gains, we saw positive results from several businesses, including $31 million of additional brokerage fees related to higher 12b-1 and money market revenue share income, despite market related compression of 11% in the underlying money market balances, compared to year end 2021. Trust and securities processing income increased 5.8% year-over-year and included strong contributions from fund services and corporate trust. For the full-year, we had a decrease of $10 million of COLI income with a similar decrease in deferred compensation expense. Slide 22 shows trends in non-interest expense. The 2.8% linked quarter increase was primarily driven by an increase of $2.6 million in processing fees, largely software costs related to the ongoing modernization of core systems $2.1 million in additional marketing and business development expense, driven by increased advertising for various campaigns and projects and $1.8 million of increased charitable giving included in other expense. Additionally, as I mentioned last quarter, our amortization expense increase related to the acquisition of HSA deposits completed in the fourth quarter. A few items to note from the expense levels going forward. [indiscernible] fourth quarter expenses included several timing-related variances along with some non-recurring items. Considering those variances, we have put our quarterly starting point closer to the $225 million to $247 million range. Also keep in mind that first quarter expenses are typically higher, due to seasonal reset of payroll taxes and other benefits expenses. The acquisition of HSA deposits will add approximately 4.5 million of additional amortization expense annually. And as previously mentioned, the increase in FDIC assessment rate takes effect in the first quarter. As a reminder, we estimate this will have an approximate annual impact of $6 million pre-tax. As Mariner noted, our focus remains on generating positive operating leverage, while prudently investing in our businesses. Our effective tax rate was 19.1% for the fourth quarter and 18.9% for the full-year, reflecting a smaller portion of income from tax-exempt municipal securities along with changes in COLI valuations. For the full-year 2023, we anticipate it will be approximately 19% to 20%. That concludes our prepared remarks. And I'll now turn it back over to the operator to begin the Q&A portion of the call. Thank you. [Operator Instructions] Our first question today comes from Jared Shaw from Wells Fargo. Jared, please go ahead. Your line is open. Good. How are you? I guess this big picture, I guess, going into potentially a recessionary environment, we've heard a few banks talk about maybe tightening the credit box a little bit. I guess, could you just talk about if you're thinking about doing anything similar if you're seeing any signs of hesitation or caution from borrowers on the ground? John, thanks for the question. This is Mariner, I would -- for us -- for those of you who followed us for a while, we really don't do anything different in any type of environment. So we stick to our knitting and look for the good quality opportunities and we don't reach during the good times and we don't retract during the tougher times or kind of just stick to what we know and stick to doing it and how we do it. And so that's the backdrop for how we're making decisions. As it relates to kind of what we're hearing and seeing on the ground. Customers and prospects are still talking cautiously optimistically about the environment for the year. Revenue projections and conversations seem to still be pretty steady. I think the challenge that we hear from our customers really is about the hiring environment. But as it relates to selling goods and moving goods, everybody seems to be cautiously optimistic about that. And we -- as we normally do we give you a little look into what we see for the first quarter and pipeline remains strong for the first quarter. Okay, great. Thanks, that's a good color. And I guess just one other area. You closed the HSA acquisition in the fourth quarter. Could you just talk a little about the outlook for that -- for your competitive positioning, I guess, in that market with some pretty large players, kind of, dominating at this point? Hi, this is Jim Rine. We did close the conversion went extremely well. We picked up -- they have a very successful direct-to-employer model and that has been our strategy moving forward. Backdrop looks good. As far as on a national level, the government and those entities has been very quiet. We don't anticipate any changes as far as the need for HSAs or HSAs going away. Our pipeline looks extremely strong. Regarding our competitors, we're obviously more focused on what we're doing. But we feel like we have an extremely competitive platform and this will allow us to deliver a better experience throughout our footprint. With -- what the competitors are doing, we're truly more focused on us. But we've been able to compete in this space for a long time and we're one of the original pioneers in the space. So we feel very good about our position going forward, and we're in the space to say and we're excited about it. Yes, the only thing I'd add is, the technology platform and the backdrop for the business is really using the rails we have already for all of our other businesses. So it's a very leverageable business. And being a big commercial bank, largely thatâs being largely what we do with this direct-to-business model. There's a lot of opportunity within our own customer base to continue to grow. And it's all about the enrollment season and just current customers and new commercial customers adding employees to the enrollment season. Thank you. Thank you. Our next question is from Chris McGratty from KBW. Chris, please go ahead. Your line is open. Great, good morning. Ram, maybe a question for you. Just on the balance sheet, if I'm thinking about your comments on loan to deposit, you have room there and you can be more selective on deposits. But if I look at just the total deposits, the company shrunk about 8% this year. How do I -- I guess how should we think about just the pace of incremental runoff, because it feels like you've got roughly $1 billion of cash flow coming up the bond book to fund loan growth. I'm just trying to get a sense of the moving pieces here? Yes. Chris, this is Mariner. A couple of high-level comments and if there's more detail as you want, Ram can add some color. But I think really what I would focus on, we don't really expect runoff, we expect rotation. And so it's really more about what happens to demand deposits. We have a very, very strong pipeline and ability to grow deposits. So we can bring deposits on at market rates and fund growth, no problem. So really, really the challenge for us which we think we're good at is being disciplined at pricing the assets. So as we bring on loan growth, kind of, as we discussed last quarter, our ability to be disciplined on maintaining and slightly growing margin is more important than what the absolute cost of deposits are coming on. So we're not concerned about that and we feel strongly that we can continue to price appropriately on the asset side to maintain our margin, if not grow it slightly. No, the only thing I would add, Chris, to that is, as we said, our loan to deposit ratio is now 65%, right? If you look at the last couple of quarters of loan production and what's happened there, the same pace continues we could see our loan deposit ratio trickled up to close to 70% which we're comfortable with. As I said in my prepared comments, we managed to stay below 75% on the loan to deposit ratio. Will deposits fund one-to-one of what we see on the loan growth? Probably not, but that's where the $1 billion of securities that you talked about in terms of outflows comes in. So -- and as Mariner said, we're focused on making sure we stay liquid fund the balance sheet with customer acquisitions. That's really great. Thanks, Ram. And on the mix of your deposits, I'm looking back pre-COVID, you were kind of in the mid-30s non-interest bearing, you got as high as 46% you are kind of low 40%. Now I guess how do I -- how are you thinking about just internal migration given competitive alternatives for rates today? Yes. So I think that's the $1 million question, Chris. And when you get the answer, give us a call so we can plan. But I think the conservative way to think about it, right, is we got down to 32% last time. Could it get to 35% or something this time? Probably maybe based on just history, if that's possible. However, there are a lot of other things going on from the growth of our customer base in general. We've added a lot small business customers that have a low loan to deposit ratio over the last few years and we've got a lot of other initiatives and customer bases or our aviation and corporate trust business is relatively new and those demand deposit balances have been growing. So last cycle we got down to 32% is the history repeat itself is the world different. It's our customer remains different. We're not sure exactly what happens. We do believe there will be some rotation from demand this year still to interest bearing. We're just not sure how much. The internal debate we have here, because we already saw a lot of that last year, has it already happened, right? So that's one of the budgets that we debate internally is as that shift taken place, has everybody who wants to move to higher interest-bearing deposits already taken that action. We don't really know the answer to that. But that's -- so that's some of the internal debates. But to be conservative, think about the last cycle I suppose. That's helpful. I really appreciate it. The last one I would have is just to be kind of zooming out, right? If I think about the bullish comment on loan growth, call it, stable comment on margin, it would feel like the net interest income for your company has yet to peak, because I think that's a narrative that's going around among bank investors where a lot of your peers are seeing margins and revenues top out. I guess would you agree or offer any thoughts on that? We expect to see net interest income continue to grow, because we're a growth company. Like I said earlier, two things we focus on would be net interest income growth based on just growth period, as well as the growth of the balance sheet. And then the other thing we think we can do during this environment is produce operating leverage. So we're less worried about the absolute expense levels of the company, because we're investing in our business for growth. And then on the other side, because we have a long track record of building pipeline, we think we'll continue to grow. We've been doing double-digit loan growth since 2015, and it's -- there's nothing about our business model that would suggest that we can't continue to do that. We have new markets, great new markets we've expanded into, Utah, Minneapolis, Texas are our three young markets for us, so we have fabulous track records and great people on the ground. And we're seeing really good traction there. And along with all of our other great markets, we see the same great opportunities and traction. And remember, we don't project or predict our loan growth based on what's happening in GDP anyway. We've -- our loan growth is based on market share gains. So depending on regardless of what's going on, economically, we think we can continue to deliver the same kind of loan growth that we've been delivering. Thank you. [Operator Instructions] Our next question today comes from Nathan Race from Piper Sandler. Nathan, please go ahead. Your line is open. Question on just kind of the longer term or perhaps full-year margin trajectory over the course of this year. As you guys, kind of, think about what you're paying on incremental deposits outside of the index deposits [Technical Difficulty]. Do you see some additional margin expansion potential in the back half of this year just given maybe some lagging repricing within the loan book relative to maybe kind of the incremental cost of deposits that you guys are gathering based on some of the initiatives that you guys outlined earlier in the prepared comments? Assuming the Fed policy, you know, [indiscernible] Yes. Yes, Nathan, this is Ram. Yes, definitely we'd see some opportunity for margin expansion, if the Fed does pause and hold, right? So the pressure on our index deposits and as Mariner said earlier, where we are being disciplined on the loan side and paying market rates on the deposit side, that will still be accretive to our margin. So that's been our focus. So when you think about what happened last night, because the same thing repeated itself where our margin did expand when the Fed paused. And some of the margin expansion benefit also -- sorry, margin benefit expansion also comes from the rotation that we talk about from, you know, look at the next 12-months cash flows from the securities book that have the 2% exit yield and obviously our loan pricing is much better than that and we pick up yield on that. Got you. And within that context, you guys had the spot rate on deposits at the end of the quarter. If you can exclude or isolate the index deposits? Okay, fair enough. And changing gears, Ram, I think in your prepared comments, you mentioned a starting point for expenses in the [$245 million to $240 million] (ph) range for the fourth quarter, did I correctly? Okay. Great. And within that guidance, I mean, as you guys, kind of, think about some additional monetization initiatives that you guys are outlining on the core system side of things or otherwise. How does that, kind of, factor into just kind of overall expense growth for this year in light of the inflationary environment that we're seeing for wages and so forth these days? So I mean high level, I mean, so the run rate that Ram is talking about is inclusive of whatever spending we're doing to modernize and invest in the business. It's all in there. In that step off that he's referring to. Yes. The step off of the $227 million that I talked about, obviously, the inflation on top of that new contracts are coming up. We are making some selective investments in people or in technology. And then as we said in the first quarter, we'll have the reset of payroll taxes and other benefits expense and there's obviously less -- a couple of less salary days. So I would expect the trajectory from the $227 million for the first quarter to go up just, because of the pressure from primarily seasonal increase in expenses. Yes. And as you guys look at, kind of, criticized classified trends across portfolio. Obviously, non-performers are pretty negligible amount as we ended the year. Are you seeing anything across portfolios and you're in discussions with clients that would perhaps cause you guys to come in, kind of, below your historical charge off guidance. I think you guys have spoken to around the $25 million to $35 million -- historically? When you say below, do you mean more losses or do you mean better performance? I might ask that question, which way you're asking the question? I would just think that perhaps charge offs this year can come in below or better than that historical, kind of, talked about Mariner? Well, I guess, I would suggest, you know that -- as has been referenced on the call already, it's a softer environment. I wouldn't suggest us to -- we're going to do a lot better or anything because for any reason. I mean, we expect that we can continue to perform the way we have been performing. Don't see anything that on the rise that makes it anything better based on any information that's out there. I think we can just keep doing what we've been doing. Thank you. This is all the questions we have today. So I will now hand back over to the management team for any closing remarks. All right. Well, thank you everyone for joining us today. The replay will be up on the website shortly, and if you have follow-up questions, you can reach us at 816-860-7106. Thank you and have a great day.
EarningCall_1020	Thank you, operator. Good morning, everyone, and thanks for joining us. I hope you enjoyed watching the video of Tractor Supply's year-end review. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we've made available a supplemental slide presentation on our website to accompany today's earnings release. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although, the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up. Thank you for your time and attention this morning. Thanks, Mary Winn, and good morning, everyone, and thank you for joining our call this morning. I think the opening video was a great recap of the highlights of a record year for Tractor Supply. Year-end is when we reflect on our accomplishments, and I'm pleased to share the results from the team in 2022. We had sales growth of 11.6% and diluted earnings per share growth of almost 13% and this is on top of a record performance in 2021. We had solid market share gains across all our product categories, and these gains continue to contribute materially to our sales growth. At Tractor Supply, it all starts with the team. And my sincere thanks and appreciation goes out to the more than 50,000 team members of Tractor Supply who work diligently every day to live our mission and values. Regardless of the operating challenges throughout the year and really over the last three years since we entered the pandemic, the team has delivered impressive results while also making significant progress on our Life Out Here strategy. I commend and thank the team for stepping up to every challenge that has come at us over this time period. Our team plus our business model are the reasons why we have a record of consistent and stable growth across all economic environments. With this year's results, we've now posted three consecutive years of exceptional sales growth. The highlight of this phenomenal track record continues to be the consistency of our results and the broad-based strength of our performance. Including new stores in the 53rd week, our revenue on a three-year basis has increased about 70%, with a three-year comp stack of 46.5%. Over the same period of time, we've invested nearly $1.7 billion in our stores, distribution centers, technology and other strategic initiatives as part of our Life Out Here strategy. We also have significantly improved our operating capabilities, including relaunching our Neighbor's Club program, creating our field activity support team, expanding our mobile footprint, and delivering on the increased volume of our consumable, usable and edible products. We've remained focused on introducing new capabilities, improving the shopping journey and ensuring we have scalable platforms, all with the underlying goal to be the dependable supplier that our customers count on. As a company, we hit several significant billion dollar milestones in 2022. We grew our sales to a record $14.2 billion, increased net income to over $1 billion, achieved $1 billion in private label credit card sales and returned more than $1 billion in capital to shareholders for the second consecutive year. This culminated with diluted earnings per share of $9.71. Now turning to our fourth quarter and fiscal 2022 performance. Our business continues to be incredibly resilient, and the quarter unfolded much like we anticipated. Albeit, comp sales performance was stronger than forecast as the late December winter storm provided a comp sales lift of approximately two percentage points. Excluding the impact of the winter storm, importantly, our underlying results were in line with the high end of our expectations for the quarter. Now let's go through some of the highlights for the quarter and the fiscal year. For the fourth quarter, our comparable store sales growth was 8.6%, and it was driven by strong ticket growth of 6.3% and transaction count increase of plus 2.3%. And importantly, even without the winter storm benefit, our comp transactions would have been positive for the quarter. All months of the quarter comped positive. October, December were our strongest comp sales months. Both two and three-year comp stacks were relatively consistent across the quarter. On e-commerce, it achieved mid single-digit positive sales growth, and we continue to build out our ONETractor capabilities. As of year-end, the Tractor Supply app has had over 4.4 million downloads since it was launched mid-2020. For the seventh consecutive quarter, we continued to see our consumable, usable and edible products outperform our overall comp sales results. And this is the fourth consecutive quarter for C.U.E. to run at about 3x the rate of overall comp sales growth. This strong performance was driven by dry dog food as well as feed for poultry, equine and wild birds. As we've talked about many times, C.U.E. is one of our structural advantages and the products represent the strength of our core business and they're what drive trips to our stores. Our outperformance in year-round categories offset the declines in big ticket categories. And we continue to gain share across our categories, both online and in-store. Shifting now to Neighbor's Club. Our Neighbor's Club membership exceeded 28 million members and represented nearly 75% of our sales for the year. Neighbor's Club is successfully helping us migrate customers to a higher threshold of spending with us. During the quarter, we reached a new record in the number of high-value customers. Overall, our best customers are shopping with us more frequently and spending more money per transaction. On Petsense, the rebranding of Petsense, the Petsense by Tractor Supply along with our expansion of our Neighbor's Club program to Petsense by Tractor Supply is really resonating with our customers. This expansion is allowing us to deepen relationships with existing customers in our enterprise and help attract new pet customers to both brands. Our customersâ response to these initiatives is very encouraging, with Neighborâs Club membership already representing nearly 50% of sales at Petsense. During the quarter, we launched Tractor Supply, Visa Credit Card. This new co-brand credit card allows our customers to earn more on their everyday purchases, both in-store and anywhere Visa is accepted. This marks exciting progress on our journey to drive sales, build loyalty and reduce tender expense through our credit offerings. And as I mentioned earlier, this past year, we crossed over $1 billion in private label credit card sales. For the fourth consecutive quarter, our overall customer satisfaction score hit a new all-time high as we continue to invest in our team to provide best-in-class customer service. Our team continued to make advancements in our supply chain through the expansion of our mixing centers to a total now of 15 as well as the grand opening of our ninth distribution center just last week. During the quarter, we also broke ground on our tenth distribution center in Maumelle, Arkansas to support for the higher volumes of our existing stores, the continued build-out of our new stores as well as the acquisition of Orscheln. Our supply chain continues to be a competitive advantage for us. In 2022, we moved more than 8 billion pounds of consumable, usable and edible products through our supply chain as we are the worldâs largest seller of bag feed and food for livestock and companion animals. Our scale and reach provide us with the cost to serve that is lower than our competition. We continue to advance on our commitment to be stewards of Life Out Here. Weâre making progress on our absolute carbon reduction goals to further reduce emissions from our operations by 20% by 2025 and by 50% by 2030 from our 2020 baseline. We are committed to achieving net 0 emissions across all operations by 2040. Additionally, in 2022 of April, we announced an ambitious three-year water conservation goal to conserve 25 million gallons of water by 2025. These commitments to the climate and society reinforce our vision that a healthy environment, properly managed resources and vibrant communities are keys to a secure and prosperous future for Life Out Here. As a result, our efforts to enhance our sustainable business practices have been recognized by various third parties. We now have nearly 30% of our store base that are in our Project Fusion layout and our Garden Center build out is now active in over 300 locations. With nearly 1,800 team members, our field activity support team has made powerful contributions to our in-stock performance and execution of our sales-driving initiatives. We continue to be pleased with the strategic benefits and financial returns of these store-level investments. This was a year that we made significant progress on our Life Out Here strategy. And building on our performance for 2022, our outlook for 2023 is right in line with our long-term guidance. And Kurt will share more details on our outlook as well as more details on our performance in 2022 in just a moment. Now shifting a bit to 2023. As we planned for the year, we anticipate continuing to operate in an ever challenging and changing macro environment. Our operating assumption is that the economy in the near to medium-term will remain resilient with flat to modestly positive real growth. Wages are increasing and consumers continue to tap pent-up savings to support spending. We expect consumers will continue to be judicious in their spend, but resilient, while prioritizing needs over discretionary. We believe inflation has peaked, but will remain sticky as we move through the year. It is our view that an orderly loosening of the labor market will be a key determiner of the countryâs ability to return our economy to sustainable conditions in the second half and 2024. The effects of secondary markets on our consumer spending in areas such as housing, agriculture and oil markets are expected to be collectively neutral and individually modest. Whatever economic environment plays out this year or any year for that matter, weâre confident that our business will remain resilient and build on our strong track record of consistent and stable growth across all economic environments. Tractor Supply is a unique, highly differentiated retailer. We are the leader in a large, fragmented market. Weâre a need-based business that is tailored to the Out Here lifestyle. Our customers have a passion for the Out Here lifestyle and over-indexes homeowners, landowners, pet owners and animal owners. We live our mission and values and our culture defines our relationship with our customers. Weâre celebrating our 85th anniversary this year. As we begin the year, we take great pride in our path and are equally excited about our future. Thank you, Hal, and hello to everyone on the call. Let me build on how sentiment for 2022. As we start out the year, we anticipated that our business would continue to exhibit consistent performance as we have a proven business model that has stood the test of time. The team delivered against our goals and exceeded our expectations. The impact of the 53rd week on our performance is detailed in our press release. To recap, the 53rd week added about $225 million to our net sales in the fourth quarter representing 6.8 points of our net sales growth. On a full year basis, it represented 1.8 points of the 11.6% growth year-over-year. Diluted EPS benefited by $0.16 for the quarter and the year. For the fourth quarter, all regions of the country once again delivered positive sales comp. All months were comp positive. As for the cadence of the quarter, our comp store sales were performing at the high end of our outlook as we move into mid-December. Then as Winter Storm Elliott moved across the country, our sales accelerated given the stormâs impact on our customersâ needs for heat, insulated outerwear, livestock feed and forage and some load up of other C.U.E. products. As Hal shared, we estimate the storm provided about 2 percentage point benefit to our comp sales. Much like any emergency response events such as hurricanes, the profitability of these sales from winter storm events of this magnitude is lower due to the mix of products and higher incremental operating costs. Our commitment to being the dependable supplier for Life Out Here was exhibited during this historic storm. Looking back, when excluding the December winter storm comparable store sales have been remarkably consistent across all four quarters of the year. Similar to trends through the year, retail price inflation contributed about 11 points to our comparable store sales in Q4 as the team continues to navigate the ongoing cost pressures across the supply chain. The comparable average ticket growth of 6.3% benefited from inflation, partially offset by a shift in sales mix to needs-based consumables versus the larger ticket items. Demand for C.U.E. categories was nearly 3 times the chain average, while big ticket sales performance was down mid-single digits. We did see strong performance in winter needs-based items such as heaters, snow throwers and log splitters. The performance in these big ticket categories somewhat offset the declines we saw in more discretionary categories like utility and recreational vehicles and trailers. Moving on to gross margin. For the fourth quarter, our gross margin improved by 28 basis points to an even 34% of sales. Our price management actions and other margin-driving initiatives were able to offset the pressures from year-over-year product cost inflation, higher transportation costs and product mix due to the strength of C.U.E. categories. During the quarter, we experienced a significant moderation in the rate of price increases from our vendors, but by no means are we seeing deflation. Our promotional activity was in line with the prior year and we are seeing moderation in transportation costs that we expect to flow through in 2023. Of note, itâs our belief that transportation costs most likely peaked in the fourth quarter. As a percent of net sales, SG&A expenses, including depreciation and amortization, increased 14 basis points year-over-year to 25.1%. As we indicated in Q3, this increase was primarily attributable to three factors: one, the impact of transaction expenses and early integration costs associated with our acquisition of Orscheln Farm and Home; two, our strategic growth initiatives, including depreciation and amortization; and three, our investments in team member compensation and benefits. These items were partially offset by a reduction in COVID-19 response costs and leverage in occupancy and other costs from the increase in comparable store sales. Diluted EPS was $2.43, an increase of 25.9% from the fourth quarter of last year. Our balance sheet remains incredibly strong. At the end of the quarter, merchandise inventories were $2.7 billion, representing an 18% increase year-over-year in average inventory per store. Overall, we continue to believe that our inventory position is in good shape. Today, we believe we are better positioned to drive sustainable long-term growth than we were before the pandemic. Our structural tailwinds such as rural revitalization, home setting, self-reliance and pet ownership continue to benefit us. Our Life Out Here strategic investments have made us stronger. Adjusting for the impact of the 53rd week, our outlook for 2023 is right in line with our long-term targets as we continue to see the power of compounding from our compelling top line growth, operating margin outlook and consistent capital return to shareholders through the dividends and share repurchases. For fiscal 2023, we are forecasting net sales of $15 billion to $15.3 billion, including at least $300 million in sales from Orscheln. Our outlook marks another milestone in our performance as annual sales are forecasted to be above $15 billion. Comparable store sales growth is anticipated to be in the range of 3.5% to 5.5%. We expect gross margin expansion of about 20 to 40 basis points from supply chain benefits and a moderation in both product cost increases and the mix impact of C.U.E. We anticipate SG&A will deleverage modestly due to a few factors. Depreciation amortization is anticipated increase by 17% to 20% relating to our strategic growth initiatives. Also, we opened our ninth distribution center just this month. As a reminder, the operating cost for the new DC are reflected in SG&A, while the supply chain benefits are reflected in gross margin. We expect the incremental cost to pressure SG&A by approximately 15 to 20 basis points. The benefit in gross margin will not completely offset this pressure since it takes time for the new facility to fully ramp to maturity and realize the supply chain benefits. And lastly, the integration of Orscheln Farm and Home is expected to impact SG&A by approximately 5 basis points. These factors are partially offset by the normalization of incentive compensation and leverage occupancy and other operating costs from the increase in comparable store sales. And for the year, we forecast an operating margin of 10.1% to 10.3%. We are forecasting interest expense of approximately $55 million as we have increased borrowings to fund our capital allocation. We plan to maintain a healthy leverage ratio of 2 times or below. We expect our effective tax rate to be in the range of 22.7% to 23%. We continue to expect the Orscheln acquisition to be accretive to diluted earnings per share by at least $0.10 in 2023. All in, diluted EPS is forecast in the range of $10.30 to $10.60. We continue to believe the best way to look at our business is not by the quarter, but by the half of the year. As you model 2023, I want to point out a few things that will impact comparability. And Iâd like to give a little color on the flow across quarters. From a sales perspective, we are planning for all four quarters to have comp sales performance generally within our guidance range. We anticipate retail price inflation to benefit comp sales by 3 to 5 points with the benefit being higher in the first half than the second half as inflation pressures begin to moderate. We are planning for positive comp transactions in 2023. As to earnings, we expect our EPS growth to be fairly balanced between first half and second half. There are a couple of discrete items that will impact operating margins in certain quarters. The first quarter will likely be our toughest comparison from an operating margin rate perspective. Start-up costs for the new distribution center will pressure the first quarter, while the supply chain benefits will not begin to be realized until the second quarter. Additionally, transportation costs are expected to continue to be higher year-over-year in Q1 and then begin to moderate through the remainder of the year with the second half expected to see favorable comparisons. As a reminder, the Orscheln stores will be added to the comp store calculation in October when we cycle the acquisition date. Also keep in mind, the discrete items that impact our earnings comparability in 2023 are the lapping of the 53rd week benefit, partially offset by the accretion from the Orscheln acquisition. And when adjusting for the 2022 benefit from the 53rd week and the 2023 accretion from the Orscheln acquisition, our outlook for 2023 is consistent with our long-term EPS guidance of 8% to 11%. Capital expenditures are forecasted to be $700 million to $775 million, with about 80% for growth initiatives. We expect to open approximately 70 new Tractor Supply stores. We continue to be on track for 10 to 15 Petsense store openings in 2023. Our new store pipeline continues to be solid and we expect to improve the cadence of openings in 2023 with more balance throughout the year. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases. For 2023, we anticipate share purchases in a range of $575 million to $675 million, which is estimated to have a benefit of a net reduction in weighted average shares outstanding of approximately 2%. Our business model has to the test of time and is proven to be resilient. While we are closely monitoring consumer behavior and the impact of economic growth on consumer demand, we believe that we are well positioned for any consumer and economic environment. To wrap up, we are continuing to separate Tractor Supply from the competition. In prior cycles, weâve made investments that strengthened the company. We believe the current environment is an opportunity for us to lean into our strength and further expand our lead for years to come. Thank you, Kurt. As we celebrate our 85th anniversary this year, Tractor Supply is a business that continues to have significant opportunities for growth ahead of us. Our position in our customer spending is for stable, needs based and demand driven product categories. We are in defensive product categories for the lifestyle our customers live. At the same time, we are playing offense to capture organic growth opportunities. We have idiosyncratic growth drivers that are separating us from the competition. As a company, three words that really summarize Tractor Supplyâs performance are: one consistent, two, reliable, and three, sustainable. And Iâd like to walk through these three words and share what I see as structural tailwinds across them to support our future performance. Letâs start first with consistent performance. We have a track record of delivering positive sales growth for over 30 consecutive years. 30 of the last 31 years have had positive comp sales. Weâve had consistent traffic growth across economic cycles and weâre planning for positive traffic growth in 2023. Our marketplace has shown consistent growth for decades and decades. Our total addressable market of $180 billion continues to benefit from numerous trends that we believe are structurally found. Additionally by all accounts, we are gaining substantial share in our market. For instance, our queue product categories are driven by livestock feed for cattle, equine and poultry and companion animal food. In addition to categories like heating fuel, wildlife feed, pest control and lubricants, weâre entering new product categories through our Garden Center transformations then open up new queue categories that provide a halo to the store as new and existing customers shop our expanded lawn and garden categories. Our stores with a Fusion layout and Garden Center transformations are gaining more customers than the balance of the chain. In just over two years since we started our Life Out Here strategy, we have gained significant scale in our Fusion remodels and the transformation of our sidewalks to Garden Centers. We have a substantial runway for growth ahead of us as we still have 70% of the chain to convert to the Fusion layout and the opportunity for another 1,000 plus Garden Center transformations. The comp lift for the Fusion remodels continues to run in the mid-single digits. When we execute a combination Fusion remodel and a Garden Center transformation of our sidelight, we have a comp lift in the high single digits. These projects provide us with the opportunity to continue our track record of consistent growth. The second word I would use to describe Tractor Supply is reliable. We are a need space, demand-driven business, and these product categories differentiate Tractor Supply from the bulk of retail. Our customers count on us for the products they need to deliver Life Out Here. Since relaunching our Neighborâs Club program in April of 2021, we have increased our high value customers by nearly 50%. Additionally, our high value customers are shopping us more frequently and spending more money. Our retention rate for our high value customers is about 80% with our retention rate for our highest tier customers at over 95%. Our Neighborâs Club program is a true competitive advantage for Tractor Supply. Once our customers in the flywheel of Neighborâs Club, their spending becomes much more reliable. Sustainable is the third key word to characterize our company. Weâve had tens of millions of new customers shop us the past three years. We have retained the majority of these customers and a substantial portion have become active Neighborâs Club members. Weâve added over 13 million members since 2019 with more than 5 million in 2022 alone. These strong results position us for sustainable growth ahead. Another important customer cohort that supports the sustainability of our outlook are the millennial customers and they continue to have more significant spending with us and in the years ahead of them. This group will make out nearly a quarter of the U.S. population by 2032, just 10 years from now. Our sales comps for millennials have outpaced non-millennials at Tractor Supply for five consecutive years, millennials over index and sales per customer, units per customer and average ticket. We view this strength that our millennial customer, not as a pull board, but rather as a catch up, as this group delayed family formation and the pandemic really shifted their behaviors to be much like prior generations. This cohort of the population is showing accelerated rates of home ownership and household formation. Today, 50% of millennials own homes versus 30% just a decade ago. So while they may have started a little bit later, we see an inflection point in the pace of home ownership and household formation for millennials. We are focused on retaining these new millennial customers as our data shows that they are roughly double their spending at TSC in their second year of shopping. And if they continue shopping with us for five years, we experience a threefold increase in transactions and sales per customer within five years of their initial purchase. Rural revitalization also continues to be a strong structural benefit for us. Millennials are increasingly choosing to move out here. This is not just a phenomenon of the pandemic, but rather a decade long trend of net migration out of urban areas that skewed disproportionately among this younger generation. The rural lifestyle appeals to millennials and it offers greater affordability, safety, self-sufficiency of slower pace, and the ability to pursue hobbies and passions. Many of the hobbies pursued by the millennials fit with our Out Here lifestyle. Tractor Supply enables passions and hobbies pursued by millennials, whether it is a pursuit as simple as making memories with family and friends or caring for pets and animals, or getting outside to hunt fish or camp, or being more self-sufficient and sustainable. Tractor Supply serves a key resource in our local communities for millennials to come to for trusted advice and expertise. Our passion for the lifestyle connects with our customers and allows us to serve them at scale. These three words, consistent, reliable and sustainable allow us to be an earnings growth compounder on both the top line and bottom line. As I started my remarks this morning, year-end is when we reflect on our accomplishments, but more importantly, this is a key moment to look ahead and to focus on the opportunities ahead of us. With our Life Out Here strategy, we have ignited Tractor Supplyâs next horizon of strong and sustainable growth. 2023 is poised to be another great year for Tractor Supply. Hi. This is Joe Civello on for Scot. Great quarter guys. I was just wondering if we could talk about your â the transaction growth you guys are projecting for 2023. Can you talk about how the expectations are driven by weaker comps, weather driven or other things like that, or potentially incremental visits driven by Garden Centers, Fusion remodels or the things youâre implementing in the store thatâs helping to drive growth? Thank you. Yes. Good morning and thanks for your question. Appreciate you joining the call today. Weâre very pleased with the guidance we provided on our comp sales for 2023 to be between 3.5% and 5.5%, very much in line with our long-term guidance range as well. As Kurt said in his prepared remarks, we expect itâll be a blend of transacts â positive comp transactions and ticket. We do expect inflation will be stronger in the first half, but moderate in the second half. And what Iâd say more broadly is, our market that we participate in continues to run reasonably in line with GDP kind of flat to low single digit growth. And we are taking significant share in the marketplace. As weâve said several times over the last three years, our sales growth, half of that can be attributable to share gain. And we certainly are expecting that to continue in 2023. And the share gain is really a composition of the competitive advantages that we have as well as the investments weâre making in our Life Out Here strategy and the fact that weâre reaching scale on a number of those now, particularly our Fusion and Garden Centers. And they will continue to add material growth to our comps. But again, weâre very positive on our outlook for 2023 and expect the momentum that we exited 2022 to continue into the year. Hi. Thanks for taking my question. Good to talk to you again. So just two questions if I could blend them in. So, just looking at your algorithm, obviously youâre looking for sales growth just on a one year basis to be lower than EBIT growth. And I guess I would argue thatâs probably â sorry, sales growth to be higher than EBIT growth. And I would look at that as a good thing because you are one of the few companies that have invested and not harvested as it relates to the pandemic. So maybe just talk about that algorithm. And then the second question I just wanted to lump in there, when you look at your mix by category, obviously I kind of look at it at about 26% is discretionary. So how do you think about that going into potentially a weaker macro? Yes. Hey, Liz, good morning and thanks for taking the call. Iâm sorry, Karen, I apologize, Karen. Karen, how are you this morning? Good morning. You all are right beside each other your nameâs alphabetically on my list, so my apologies. But Karen good morning and thanks for your question for joining the call. On the sales growth, as you said, we are in an investment cycle in our business and the thing that weâre excited about is that weâre able to grow earnings as we did last year double digits, and weâre able to grow our sales as we did last year double digits even in the context of an earnings cycle. And we anticipate to continue to grow sales at a significant rate next year as well as our earnings at a significant rate next year, even inclusive of all the capital expenditure and kind of underlying DNA that comes along with that, as well as all the other investments weâre making in the business. But weâre very optimistic and confident in the outlook that weâve provided. On the mix by category, weâve roughly talked about discretionary being more like 15% of our business. Big ticket is kind of in the low double digits. Thereâs a few other categories that would be plus or minus in that discretionary area as well. And I think the way we think about that business is that some categories will have - continue to be negative in their comps but thereâs others when itâs seasonally relevant that will be positive. And an example of that is what Kurt articulated in his prepared remarks saying that, our big ticket sales were kind of mid-single digit negative comps. And it was really â there was two sets of categories in there. The kind of discretionary non-seasonal related ones were kind of negative double digits, but then you had ones that were seasonally relevant and there was a demand around those say like log splitters and snow throwers that are also big ticket and could be viewed as discretionary or in our kind of math for discretionary and those blended together to drive a negative single digit â mid single digit comp. And we think itâll play out that way much of this year. As an example, as we get into the end of Q1 and early Q2 when we had the drought last year that disproportionately affected as we commented last year, things like riders. And we expect those to come back as the drought is abetting in many areas of the country even in spite of the consumer shifting more towards needs based needs based spend. Anyway, thanks Karen, for joining the call. I appreciate the question. Thank you. And I donât mind being confused for Karen because she dresses better than I do, so I appreciate it. Thanks for your time. Yes. So the guidance you gave for 2023 and in terms of the operating margin, I guess, it sounds like the investments in new DCs and in store transformations and side lots are probably the factors that would keep that margin towards the lower end at the long-term guidance. But what do you view as the opportunities for operating margin to get to the top end of that guidance over time? Yes, hey Liz. And good morning, and thanks for joining the call. As we've said several times, last year and this year are two biggest peaks in investments. And as we talked about in our enhanced earnings calls a couple of years ago, the first part of this five-year cycle that we're in for our Life Out Here strategy would be towards more the bottom end of our â middle end of our range. And then as we move towards the out years, call it, 2024, 2025, 2026, we see opportunities to increment up on our op margin towards that higher end and kind of get back to a nice leverage across our P&L, let's say, 5 or 10 basis points a year. And really, the biggest determinant of the 10.1% to 10.3% this year would just be the sales range. And if we're up more towards the 5.5, we would expect to leverage more on some of our fixed costs and be more towards that 10.3%. If we're down more towards the 3.5%, we think we'll be more in that 10.1% to 10.2% range as there's a little less leverage on some of our fixed costs. We pull some other levers to kind of manage the business. But certainly, as we look out towards the back half of this five-year investment cycle, we see opportunities for our margin rate to increment up. Got it. And just a follow-up, you may have mentioned this in the outlook for 2023, how many Project Fusion remodels and side lots do you have baked in? Yes. So the mix of our remodels in 2023 will be a little different than last year because of the Orscheln acquisition. This year, as we shared in our opening remarks, it's kind of 70 to 80-ish new stores that will open this year. We'll also be integrating the 81 Orscheln stores. Those will be kind of basically a Fusion remodel. And then we'll do around 150 more Fusion remodels as well. And that's in line with what we did this year, kind of in that 200 to 250 range. It's just the fact that 80 of those will be taken up by the Orscheln integration this year. We continue to be very excited about Fusion and very excited about our side lots. Go ahead, Liz. Hi, good morning. Great quarter, congratulations. So I have two quick questions. I'll merge them into one. First off, with regard to the sort of say, the weather bump in sales late in Q4, should we think about that as incremental demand? Or does that potentially pull forward demand would have happened in Q1? And then the second question I have, Kurt, you mentioned in your script, that you're seeing, I guess, price increases moderate and that's from your suppliers. The first I have is, so then what action â that's occurring, what action is Tractor Supply taking? Are you maintaining your retail prices? Or are you actually adjusting your retail prices to account for those now modeling input costs? Thanks. Yes, hey, Brian, I'll take the first part of it, and then Kurt will take the second part. On the weather bump, we don't see that as pull forward from Q1. And we see it â dominantly, it's just incremental in Q4. I'd go back to some of the comments we made, say, in our Q3 earnings call and our Q2 earnings call, where we said, our business has been very consistent in that 5% to 6% comp range all last year. And as Kurt said in his prepared remarks, and I think I did as well, we were trending towards the high end of our comp guidance for Q4 when the storm hit and then that put us well over. I'd equated a bit to what we said if we had gotten â if the drought hadn't occurred, we think we would have been over our guidance. If we'd had a better spring season, we think we would have been over our guidance for those quarters. I just get back to the point, our business is very consistent, very stable, very reliable right now in that kind of mid single-digits. And then if we get some good weather on top of that, that benefits us, we get that benefit. And that's what we saw in Q4. When the weather is bad, we're there for our customers. And it drives some sales. But otherwise, we continue to run very reliably and consistently in that mid single-digit comps. Yes, Brian, good morning. And I'll just add to that. On that winter storm, we view it very much like a discrete event like the hurricane events have been. You heard my commentary on there. The exciting thing though is, with those types of events, consistent with this storm is it introduces Tractor Supply as a needs-based business to other new customers. And that's what we do as we capitalize on that, we see it as part of our opportunity in 2023 as new footsteps into the business. So great opportunity from that one event as we continue to serve our markets in a significant widespread winter storms such as that. In regards to your question about prices abating and how we manage that, one is, we will â those prices will take time to work through the system. So we do very well at managing whether that be the product cost or the transportation to be able to manage as those flow through and balance between the competitive retail price that we have, gaining market share and how much we actually take to the bottom line. Specifically, the biggest item in the gross margin benefit in 2023 is the easing of the transportation cost. And as you look back even over the last two years, on our gross margin, we've been very specific as we've been able to find offsets or pass through some of those the transportation cost has been the primary one where we've absorbed some of that. And so we will â as those prices abate and ease through, it's a key contributor to how we expect to see gross margin expansion throughout 2023. Good morning, everyone. Nice results. My question, it's a couple of parts, but it's one topic. It's how C.U.E. is comping 3x the company average. If you could speak to â if you can, maybe the price benefit there or what's happening with the basket and the market share seems to be staggering because I don't think some of the items in that category are growing that fast. And then I'll flip it and say then why are you not converting or is it converting to the rest of the store? Are you seeing that conversion? Because it seems like it's a pretty good halo to have on one side of the business. Yes, hey Simeon, and thanks for joining the call. Good to speak to you this morning. On the C.U.E., I would say our AUR is in line with the rest of the market. So kind of high single-digits, generally speaking, across food and speed, but our market share is on a dollar basis, weâre running 2x the market. And on a pound basis, weâre running 3x the market in growth. And so itâs â the majority of our growth there well over half is transactions-based, unit-based and share gain. And dog dry food is the numbers I was just mentioning right there, those were specific to that to dog dry food. But weâre seeing similar type of numbers in poultry feed, in equine feed, in livestock, et cetera. And I would say it is pulling through to the rest of our business, in terms of driving positive footsteps and transactions into our store. And then also, our average ticket continues to remain very solid with very modest reduction in our UPT. In fact, this was the lowest year-over-year in our UPT decline in 2022. And when you look at the customer â underlying customer cohorts in our Neighborâs Club program, what youâre seeing and as was mentioned in the prepared remarks is that the millennials have moved out to kind of rural America and kind of that Sunbelt migration, they start in poultry and pet food with us and then very quickly are migrating into four to five other categories in terms of us being their destination. And so Iâd say weâre seeing strong growth, its market share gains in C.U.E. that weâre taking. Weâre confident we will be able to continue to take those gains. We are the lowest cost to serve in the market, the fastest supply chain, the lowest price is the best customer service. And when they get in there, should they shop the whole lifestyle, and weâre seeing that in our average ticket and also in our on customer data. Hey, thanks. Good morning. Couple of questions on the outlook. First of all, could you walk us through the quarterly comp impact from the calendar shift? And if thereâs anything we need to keep in mind on a flow-through or margin basis for those sales. And then second, on your gross margin outlook. To what extent are you incorporating reinvestment to drive traffic growth versus flowing those lower freight input cost to the bottom line? Zack, hey, this is Kurt. The first question in regards to cadence throughout the quarter, as I mentioned in my prepared remarks, the â all four quarters really would expect to be in line with our overall guidance. We donât expect significant variation between the quarters. I would encourage you, as you reflect back on last year, as we talked about some of the headwinds we saw in the middle parts of the year, with the late start to the spring, the drought that impacted Q2 and Q3. We talked about how in those quarters, there were some headwinds that took some of the top side off of the comps in those quarters. So we see good opportunity to be able to capitalize comping up against those quarters. We obviously had a really strong Q4. We talked about the winter storm. So those are all things that factor into our model as we plan the comps. And on the gross margin question, maybe remind me again your question on the gross margin. Got you. Yes. Well, of course, we always prioritize market share gains competitive in pricing. We are the lowest cost to serve. Weâve invested in our supply chain and distribution to be able to capitalize on this shift in the environment where transportations are coming down. So weâll be able to take advantage of our own efficiencies that we can control. As thereâs opportunities as prices decline, we will take some opportunity modest as we see it in our plan, opportunity to invest in the gross margin. And all of that is considered in our expectation that we could see gross margin growing 20 basis points to 40 basis points in 2023. Exactly. Yes. Thank you. There is not a pronouncement, anything of material. And Iâd just point back to how consistent each of the quarters were in 2023. So thereâs really no meaningful shift in there. Thanks. Good morning, everybody. I wanted to follow-up on the sort of discretionary question that was posed earlier by Karen. As you think about what you saw in the fourth quarter, youâre hearing a lot of retailers talk about a very late Christmas season. And I recognize itâs a small portion of your mix. But in some of those seasonal categories, letâs say, fashion apparel and footwear and toys, did you see any sort of like deterioration? And then similarly, if you look at the data around pet inflation thatâs been very strong, but it does seem like thereâs some unit degradation and some sort of sacrifice same streets and the accessory business. So can you talk about those two buckets in terms of how that behavior has changed, I guess in the back half of the year in the fourth quarter? Yes. Hey Chris, and good morning. Thanks for your question and for joining the call. First, we were very pleased with our Q4 business in general. As I said and Kurt, absent the storm, we were still at the high end of our comp expectations and we would have still had positive comp transactions for the quarter regardless of the storm. And we were also very pleased with our seasonal businesses. They performed in line with our expectations. And then in the last week of right before Christmas, for us, when we have a winter storm like that, it drives more footsteps into our stores, and they end up shopping the entire lifestyle when theyâre in there. So we saw excellent performance that week. And in holiday-related items, whether itâs in apparel, whether it was in decor, candy, toys, tools. It was a solid, very solid close to the year for us on both, as I said, not only just on demand-driven store-related items. And then on pet, we are seeing unit growth and double-digit comps across all categories in pet, whether itâs dog, whether itâs cat, whether itâs hard goods, whether itâs consumables, whether itâs food, whether itâs sundries or accessories. Certainly, the food is outpacing the other categories, but all categories in our pet business are seeing very strong growth. So weâve hit the top of the hour, but weâll let the call go just a few minutes longer because our prepared remarks were longer. Good morning, Hal, Kurt, Mary. I wanted to focus on member cohort trends. So you mentioned, I think, during the prepared remarks, retention rates right among the high-value customers. I was curious if you could expand on retention, repeat behavior sort of in aggregate across the member cohorts as a whole and whether youâre seeing a difference in behaviors right, between those members acquired over the past three years versus those members acquired 2019 earlier. Yes. Hey, Steven, and good morning. This is a great new story for Tractor Supply. What Iâve seen historically in my career in retail is it takes time when you have a new customer for them to ramp up through your high-spending cohorts until they become kind of a mature customer. What weâve seen is the customers, as you mentioned, I said in my prepared remarks, that weâve had tens of millions of new customers shop us in the last three years. The majority of those have continued to be active shoppers with us and a huge portion had become Neighborâs Club members. That cohort is basically shopping us, and weâre seeing purchase frequency, average ticket, number of categories shop total spend in the year, very much in line with our kind of long-time core customers. So theyâve ramped up very fast. And thatâs why when we say things like our Neighborâs Club is outperforming our overall comp, our total company comp, even at 75% penetration. And even with the growth weâve had, thatâs why I think itâs so exceptional because historically, in my past, as you see your membership program becomes such a large portion of your sales is a tendency revert to the mean, right, revert your overall comp. And I think the data set you can see both that weâre providing also an underlying data just shows you how fast those customers have ramped up and become core customers for us. And itâs what gives us confidence as we head into 2023. Hi, thanks. Good morning, everyone. One thing that weâre hearing in the channel right now, and itâs kind of a funny dynamic for Farm and Ranch, but that the chicken category is on fire. And certainly, thereâs been some well-publicized discussion of price increases with eggs. So I guess Iâm wondering, is that a kind of an emerging trend that chickens have perhaps reaccelerated for you. And is that a category that actually could be big enough to move the needle as we look at 2023? Hey, Peter, this is Seth. Thanks for the question. Yes, when we look ahead to this next year, we are incredibly excited about our poultry business. And just to go back to some of Halâs comments earlier, I would just say even in Q4 for us, poultry was a primary driver. We have â unlike some maybe commentary youâve heard elsewhere, we have not seen the entire year over the course of the last three years, any slowdown in our poultry business. And when we look ahead to this year, we think it could be another record year for us. Our stores are setting chick days here over the coming months. When we look out to our center court activity. We look at poultry being a predominant driver for us. And when you couple those things with our pet business, you couple those with our live goods business, all the sustainability things that customers are looking for right now is theyâre looking to find value, to grow those things on their own. Weâre looking at poultry to be just absolutely another banner year and our team is incredibly excited for that. So we definitely agree with the commentary youâre hearing out there, and we think weâre in a position to continue to take market share in this category. Hey guys. Thanks for sneaking me in. I just wanted to ask a question around CapEx, came in above the forecast this past year. Curious if thatâs just projects costing more? Or did you get through more of the projects than you thought? And then as you step back, CapEx is running around 5% of sales in the last couple of years. I think your outlook for 2023 would suggest a similar ratio. How do we think about the path of CapEx beyond 2023? Historically, you guys used to run around 3% of sales. Youâve been investing aggressively for good reason. But just curious how you would think about maybe the CapEx path as we move beyond 2023. Thank you. Hey, Peter, this is Kurt. In regards to CapEx and your two questions, the growth in CapEx in 2022 at the high end of our expectations reflected a couple of things. Certainly, thereâs inflation in the cost of building a distribution center, the new stores, et cetera, that was a piece of it. But also in this environment, the team has done an excellent job of ramping up and ensuring that all of the pieces that go into these fusion remodels that weâve got the fixtures and all of the equipment ready to go. So the pipeline is in good shape for what we plan to use to grow into the 200 to 250 remodeled stores next year. And thereâs some timing of that capital that impacted 2022. And then certainly, for 2023, we expect consistent numbers. Weâve got a construction of a complete new distribution center in Maumelle, Arkansas. So for both years, they absorbed the $150 million-ish cost of some of our largest distribution centers in those years. And that leads to the second question that you had going forward, we really believe that as we said, these would be the two peak years that the biggest investment over the other years is really on the supply chain side. And itâs reverting back more to that over the next few years, $600 million, $650 million in capital going forward. And itâs a very planned, purposeful five-year growth to convert the supply chain and the stores into the new Life Out Here strategy, look and shopping experience for our customers. So I would expect to see that number come down a bit after 2023. Sure thing. For that, weâll wrap up our call. Thanks, everyone, for joining us, and we look forward to speaking to you on our first quarter earnings call in April. Iâm around. If anybody wants to reach out, please let me know and weâll get you on the calendar. Thank you all. Have a great day.
EarningCall_1021	Welcome to the MPC Fourth Quarter 2022 Earnings Call. My name is Sheila, and I will be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin. Welcome to Marathon Petroleum Corporation's fourth quarter 2022 earnings conference call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Mike Hennigan, CEO; Maryann Mannen, CFO; and other members of the executive team. We invite you to read the safe harbor statements on Slide 2. We will be making forward-looking statements today. Actual results may differ, and factors that could cause actual results to differ are included there as well as in our filings with the SEC. References to MPCâs capital spending during the prepared remarks today reflects standalone MPC Capital excluding MPLX. And with that, I'll turn it over to Mike. Thanks Kristina. Good morning. Thank you for joining our call. First off, I want to recognize a new director on the MPC board. Toni Townes-Whitley will be joining our board in March, bringing tremendous experience with her most recent executive position at Microsoft, as well as her board experience on the NASDAQ and PNC boards. Also like to recognize Christine Breves, who was appointed as a new independent director of MPLX in November, and recently served as CFO for US Steel. As we look back at 2022, we've delivered on our strategic commitments. Full year cash provided by operating activities was just over $16 billion on a consolidated basis, and over $13 billion, excluding MPLX, reflecting our improving operating and commercial execution. Our commitment to safe and reliable operations resulted in refining utilization of 96%. And our team's dynamic responses to volatile product markets delivered strong commercial performance, resulting in a 98% full year capture. Our focus on fostering a low-cost culture enable us to sustain our previously achieved $1.5 billion of structural cost reduction throughout the year. We formed a strategic partnership with Neste, which will enhance the economics of our Martinez Renewables fuels project and create a platform for additional collaboration within renewables. In Midstream, our business grew 7% year-over-year, MPLX raise its distribution by 10%. And based on this level, we expect MPC will receive $2 billion of annual distributions. MPLX remains a source of durable earnings in the MPC portfolio. And as MPLX grows its free cash flow, we believe we will continue to have the capacity to increase its capital return to unit holders. In 2022, we return nearly $12 billion through share repurchases, bringing the total repurchases to almost $17 billion since May of 2021. In addition, we increased MPCâs dividend 30% to $0.75 per quarter. Executing on our operating, commercial and financial objectives, combined with a strong macroenvironment led to total shareholder returns of 87% for MPC in 2022. Before Maryann goes through the results for the quarter, we wanted to share our outlook on the macroenvironment and the financial priorities for 2023. Our outlook remains bullish for â23 supported by the nearly 4 million barrels per day of refining capacity that has come offline globally in the last couple of years. Demand for transportation fuels we manufacture remains robust. We've seen recovery in demand across all our products since coming out of the pandemic. And we anticipate further recovery in 2023, particularly as we expect consumers to adjust consumption patterns to lower retail fuel prices. Uncertainties remain around the pace and impact of China's recovery, the magnitude of a potential US or global recession and the impact of Russian product sanctions. But despite these unknowns, we believe that the current supply constraints and growing demand will support strong refining margins in â23. Our financial priorities remain unchanged. These includes first sustaining capital. We remain steadfast in our commitment to safely operating our assets, protect the health and safety of our employees, and support the communities in which we operate. Second, our dividend, we are committed to the dividend which we increased 30% at the end of last year, and intend to evaluate at least annually. And as we repurchase shares, the reduction in the share count increases the ability to support future dividend growth. Third, growth capital. We believe this is a return on and return of capital business. We've been through a progressive change over the last few years and remain focused on ensuring the competitiveness of our assets as we progress through the energy evolution. We will invest capital where we believe there are attractive returns. In traditional refining, we're focused on investments that enhance the competitiveness of our assets. In the low carbon area, investment at this time is primarily associated with the completion of the Martinez Renewables project, as well as a project at our LA refinery that will improve energy efficiency and lower facility emissions. In addition, we're focused on growth opportunities in emerging technologies, as well as opportunities enabled by digital transformation. Beyond these three objectives, we're also returning s excess capital through share repurchases to meaningfully lower our share count. In the period from early November through the end of January, we've completed nearly $2.4 billion of share repurchases. And today, we announced an incremental $5 billion share repurchase authorization, reinforcing our commitment to strong capital returns. Our goal is to be the investment of choice in the refining space, generating the most through cycle cash flow, creating value through strategic deployment of capital and delivering superior returns to our shareholders. We also challenged ourselves to lead in sustainable energy by setting meaningful targets to reduce GHG emissions, methane emissions and freshwater intensity targets which we believe we can demonstrate a tangible path to accomplish. As we innovate for the future, Phase 1 of our Martinez Renewables fuel facilities progressing startup activities, marking a significant milestone in our sustainable energy goals. The facility is on track to reach full Phase 1 production capacity of 260 million gallons per year of renewable fuels by the end of the first quarter 2023. Pretreatment capabilities are expected to come online in the second half of â23, which will enable the facility to ramp up to its full expected capacity of 730 million gallons per year by the end of 2023. At Dickinson, we've optimized operations to be able to bringing in more advantage feedstocks, lowering the carbon intensity of the fuels we produce. We've enhanced our position in the renewables value chain through our pretreatment facilities in Beatrice and Cincinnati. We'll continue to look for opportunities leveraging the strategic partnerships we're cultivating with Neste and ADM. As evidence of our progress on our sustainability goals, this year, MTC was included in the Dow Jones Sustainability Index for North America for the fourth consecutive year. At this point, I'd like to turn the call over to Maryann. Thanks, Mike. Moving the fourth quarter results. Slide 6 provides the summary of our financial results, this morning, we reported adjusted earnings per share of $6.65. This excludes a $176 million LIFO inventory benefit, as well as $60 million gain related to the Speedway transactions. Adjusted EBITDA was $5.8 billion for the quarter, and cash flow from operations, excluding unfavorable working capital changes, was $4.4 billion. During the quarter, we returned $351 million to shareholders through dividend payments, and repurchased over $1.8 billion of our shares. Slide 7 shows the reconciliation between net income and adjusted EBITDA as well as the sequential change in adjusted EBITDA from the third quarter of 2022 to the fourth quarter of 2022. Adjusted EBITDA was lower sequentially by approximately $1 billion. This decrease was primarily driven by refining and marketing, as the blended crack spread was down over $5 per barrel, reflecting a 20% quarterly decline. Corporate expenses were higher in the fourth quarter driven by a retroactive operating tax assessments for prior periods. We intend to pursue recovery of these multiyear tax assessments. In addition, corporate includes special compensation expenses, which also affected our refining and marketing and midstream segments. We do not anticipate that these costs will structurally impact future corporate cost. The tax rate for the fourth quarter was 22%, resulting in a tax provision of nearly $1 billion and the full year tax rate was 22%. Moving to our segment results, slide 8 provides an overview of our Refining and Marketing segments. Like many in the industry, several of our refineries were impacted by winter storm Elliott at the end of December, primarily in our Gulf Coast in Mid-Con regions. Most of our assets were back online after a short period, and we have not seen structural issues. The crude throughput impact was approximately 4 million barrels, which reduced our crude capacity utilization for the fourth quarter by roughly 2%. Looking to January, we anticipate impacts to throughput of 3.5 million barrels which is reflected in our guidance for the first quarter of 2023. Even with a disruption at the end of the quarter, our refining assets ran at 94% utilization, processing 2.7 million barrels of crude per day at our 13 refineries. Sequentially we saw per barrel margins decline most notably in the West Coast region, while US Gulf Coast margins were relatively flat, supported by export demand. Capture was 109% reflecting a strong result from our commercial team. Operating expenses were lower in the fourth quarter primarily due to lower energy cost partially offset by a special compensation expense of approximately $0.15 per barrel, paid in recognition for our employees contributions. Due to lower throughputs in the quarter refining operating costs per barrel were roughly flat in the fourth quarter at $5.62 per barrel as compared to the third quarter. Our full year refining operating costs per barrel is $5.41 when we compare to 2021 refining operating costs per barrel of $5.02, this increase can be entirely attributed to higher energy costs. We believe the actions we have taken to reduce our structural operating costs are sustainable. Slide 9 provides an overview of our refining and marketing capture this quarter, which was 109%. Our commercial teams executed effectively in a volatile market, light product margin tailwinds improved secondary product prices and favorable inventory impacts all benefited capture. We do not expect all of these tailwinds to be repeatable. And in particular, we would expect the inventory impacts to reverse in the first quarter. As our strategic pillar indicates we have been committed to improving our commercial performance and we believe that the capabilities we have built over the last 18 months will provide a sustainable advantage. Historically, we communicated a captured target of 95%. But over the last few years, the baseline has moved through our commercial efforts closer to 100%. We believe we have built capabilities that will provide incremental value beyond what we have realized to date, and will produce results that can be seen in our financials. Slide 10 show the change in our Midstream EBITDA versus the third quarter of 2022. Our Midstream segment delivered resilient fourth quarter results. We did see lower EBITDA, primarily due to impacts associated with lower NGL prices. This quarter MPLX distributions contributed $502 million in cash flow to MPC. Slide 11 presents the elements of change in our consolidated cash position for the fourth quarter. Operating cash flow, excluding changes in working capital was $4.4 billion in the quarter. Working Capital was a $72 million headwind for the quarter, driven mostly by declining crude prices offset by benefits from inventory impacts. Capital expenditures and investments totaled $1.3 billion this quarter. We saw consistent spending in refining in the fourth quarter as work progress on the Martinez Renewables fuel facility conversion and the STAR project at Galveston Bay. While not reflected in the 2022 capital spend, due to the timing of the JV close, the 50% reimbursement from Neste for Martinez capital spend, was received and reflected in overall cash flows in the third quarter. MPC returned nearly $2.2 billion via share repurchase and dividends during the quarter. We began using the incremental $5 billion share repurchase authorization in November. For the full year, we returned $13.2 billion out of $17.7 billion of our 2022 cash from operations, excluding working capital impacts, representing a 75% payout. This was partially enabled by our commitment to complete our $15 billion capital return program. The outstanding purchase authorization of $7.6 billion, which includes the incremental $5 billion approval demonstrates our commitment to returning capital. At the end of the fourth quarter, MPC had approximately $11.8 billion in cash and short-term investments. Slide 12 provides their capital investment plan for 2023, which reflects our continuing focus on strict capital discipline. MPCâs investment plan, excluding MPLX, totals approximately $1.3 billion. The plan includes $1.25 billion for the refining and marketing segment, of which approximately $350 million or roughly 30% is related to maintenance and regulatory compliance. Our growth capital plan is approximately $900 million split between low carbon and traditional projects. Within low carbon $150 million is allocated for completion of the Martinez conversion. We are also executing a project at our Los Angeles refinery, which will improve energy efficiency and lower facility emissions. This is a multiyear project. In 2023, we expect associated capital spending to be $150 million. And we have allocated $50 million to smaller projects focused on emerging opportunities. Within traditional refining, $150 million is associated with the completion of the STAR project. $200 million is focused on smaller projects targeted at enhancing the yields of our refineries, improving energy efficiency, and lowering our cost. In marketing, we plan to spend $150 million for projects that focus on enhancing and expanding the platform for our Marathon and ARCO brands. This morning MPLX also announced their 2023 capital investment plan of $950 million. Their plan includes approximately $800 million of growth capital and $150 million of maintenance capital. The capital spending plan focuses on adding new gas processing plants and smaller investments targeted at expansion and debottlenecking. of existing assets to meet customer demand. Turning to guidance, slide 13, we provide our first quarter outlook. We expect crude throughput volumes of roughly 2.5 million barrels per day, representing 88% utilization. Utilization is forecasted to be lower than fourth quarter levels due to turn around impacts in our US Gulf Coast region, plan turnaround expense is projected to be approximately $350 million in the first quarter, with a significant level of activity in the Gulf Coast region. The remaining scope of the STAR project, specifically 40,000 barrels per day of crude and 17,000 barrels per day of resid processing capacity is expected to be tied in during the turnaround at Galveston Bay in the first quarter, and should begin to ramp starting in the second quarter of 2023. We expect the level of 2023 turnaround spending to be similar to the level of spend in 2022. However, unlike 2022, we expect turnaround activity to be front half weighted this year, with significant planned work in the first and second quarters. Therefore, we will have executed four consecutive quarters of heavy turnaround work. Operating costs per barrel in the first quarter are expected to be flat at $5.60 per barrel for the quarter. In conjunction with our turnarounds, we anticipate higher project related expenses as we utilize our planned downtime to complete other work plans. We are seeing the benefits from lower energy costs in the Gulf Coast and Mid-Con regions. But given the majority of our turnaround activity is heavily weighted to the Gulf Coast. Our expectations of flat operating costs quarter-to- quarter is driven by our West Coast exposure, where we have not seen a decline in energy costs recently. As we look into 2023, we anticipate our operating costs per barrel would decline and trend towards a more normalized level as we complete this turnaround and project activity. Distribution costs are expected to be approximately $1.3 billion for the quarter. Corporate costs are expected to be $175 million representing the sustained reductions that we have made in this area. With that, let me pass it back to Mike. Thanks Maryann. In summary, we believe solid execution of our three strategic pillars remains foundational. Similar to what we've achieved with cost reductions and portfolio. We believe the improvements we've made to our commercial and operational execution have driven structural sustainable benefits, which will enable us to capture opportunities, irrespective of the market environment. Our goal is to position MPC as the refiner investment of choice, generating the most cash through cycle and delivering superior returns to our shareholders with our steadfast commitment to returning capital. Let me turn the call back to Kristina. Yes, good morning team and congrats on strong results here. The first question I had was around the magnitude of capital returns. How should we think about the percentage of cash flow or free cash flow you target to get back to shareholders in a given year through buybacks and dividends? And then you talk about a $1 billion being the target level of cash. We've heard some of your peers talk about that number being higher, why is a $1 billion the right number and how long does it take to get there? Given how strong the environment is? Hey, it's Maryann. Thanks for the question. Let me try to break that into a couple of parts there and then see if I can -- if I've done your question justice. So in first part really the cadence if you will of the share buyback and our return of capital, as you can see from the quarter, Neil, we did $1.8 billion in share repurchase and then we continue to buy back in the month of January. Just wanted to remind you we did complete our $15 billion share repurchase in early October and I indicated on the quarterly call that we would begin using that incremental $5 billion authorization in November. So essentially for the better part of October, our cadence, we worked in the market buying back in October, just to be clear. And then we did seek and have announced an incremental $5 billion authorization. So that leaves us with $7.6 billion of share buyback authorization, hopefully indicating our continued commitment to buyback. And we hope you see that. The second part of your question, just really think around our commitment there. I think that's what you were saying. So when do we get to that $1 billion? How long does it take us and why? We feel a $1 billion is an appropriate level of cash. First, because during the pandemic, we probably stress tested our liquidity and our cash position in one of the most challenging markets. Second, I'd say keep in mind that we receive a $2 billion distribution from MPLX, probably unique when you look at us compared to our peers. So, in reality, that's about $3 billion. And then you combine that with our liquidity, we feel pretty comfortable within a range of outcomes that $1 billion is appropriate. I hope that addresses your questions, Neil. Neil, itâs Mike. Let me just add to what Maryann just said. So we had been at about $1.6 billion from MPLS, moved up to $1.8 billion, we're now at $2 billion pace, we expect that to continue to grow. If people listen to the MPLX call, we're in a real good position there. But that distribution, let's say at the $2 billion pace, that essentially covers the dividend, and half of the refining capital commitment for refining. So that's part of the reason that we are comfortable with $1 billion on the balance sheet. Now, as you pointed out, we still finished the year with close to $12 billion on the balance sheet. So we still have a lot of financial capability to get to a new normal at some point, but hopefully that helps explain why the $1 billion is the right number. And it has to do with our affiliation with MPLX. Yes, good problems, Mike. And then the follow up is around the STAR project, remind us economics, it seems like it's coming on at a good time. But how should we think about what this project could mean for incremental cash flow? And in both a midcycle environment, but also, its current spot economics? Yes, Neil, thanks for that question. It's one we've been getting from a lot of people. So it's relatively easy to model. So up until now, the parts of STAR that are in place are in our results. What's not in our results, is 40,000 barrels a day of crude capacity. And the easiest way to model is take that number times the differential between heavy crude, and ULSD. So if you look at that differential, and you multiply it by 40,000 barrels a day, that's the additional EBITDA that we'll get once STAR is online. But STAR is a pretty unique project for us. So I'm going to ask Tim to make a couple of comments on it. So you have the financial side of it, but let me give you a little bit of the background behind it with Tim some details, please. Okay. Thanks Mike. So Neil, is good question that you have there. So let me give you a little backdrop, keep in mind that we've done this project in phases, a fair amount of the STAR scope has already been completed and put in service, so it's already earning a return, the remaining work that we have is really going to be completed with this planned turnaround that ends late in the first quarter, and then we'll be starting up the units in April. So we do expect STARâs EBITDA contribution to continue to ramp after startup in April and through the second quarter. The remaining scope is really going to be one like Mike just indicated, is going to increase crude capacity by 40,000 a day, and also the resid upgrading capacity by 17,000 a day. So maybe a little background on that decision rather than expanded the Galveston Bay cokers, we elected to upgrade the resilient hydrocracker unit because it offers better conversion and increased liquid volume yield. So it was a better choice than the coker. The fractionation modifications that we made are also going to increase the diesel recovery, which is profitable. And then the refinery will also be able to process a significantly more of the discounted heavy Canadian crude. So those are some of the reasons that drove us to that. So we feel really good about the economic drivers of the project. And with the current heavy crude discounts and the strong diesel margins, the near-term economics are better than when we sanction the project. So hopefully that's helpful. Someone didn't pay the phone bill, guys. I'm so sorry about that. So how is everybody doing? Thanks. I apologize for that. So I, well I was â half of my questions got asked, but let me give it a go. I guess Mike, first of all, when I look at the earnings part of the business, and I look at where your share price is trading. And obviously you gave us a dividend back in November. How are you thinking about you reloaded the buyback program? How are you thinking about the balance between dividends and share buybacks? And you know where I'm going with this? Because obviously, your dividend is fully covered by your distributions from MPLX. So in this kind of environment, should we be buying back a lot of stock at this level? Or should we be thinking that the dividend is a bit more of a bias in 2023? Hey, Doug, itâs Maryann. I'll pass it back to Mike here in a second. But as we talked about the dividend, we committed to looking at that dividend annually. We wanted to be sure that it was secure. We wanted to be competitive with the potential to grow. And we will continue to look at that. As we've shared in the past, and obviously, as you stated, we have increased the outstanding authorization to $7.6 billion of share repurchase, we continue to think that share repurchase over dividend is an appropriate return of capital. You'll see us continuing to use that authorization as we did here in the last quarter. So, yes, we'll evaluate that dividend but we continue to see share repurchase as a bit more preferential over the dividend. I'll pass it to Mike. Yes, Doug, I'll just add to what Maryann said, obviously, we want to have a competitive dividend and a growing dividend over time. So that is foundational to us. It is a little bit tax inefficient relative to share buybacks. That's why Maryann just said that we leaned a little more that way. And the sheer magnitude of the financial capacity we have right now with finishing the year with about $12 billion of cash on the balance sheet and continuing to have a strong refining environment, just the sheer magnitude is much more towards that side of the return of capital. So we're going to look at it, we've committed that we'll look at it each year, and we want to be committed to it. At the end of the day, obviously, a lot of our attention just because of the magnitude of the number is directed towards the repurchase program. Okay, I understand, I guess no one is going to complain about the yield, given that your share price is a big part of that. So but I appreciate the answer. My follow up is an operational question, Mike, I think it's pretty well known that you guys had a fair amount of maintenance in the quarter. But the capture rate was still quite strong, at least on our numbers. And I am looking at the product sales relative to the refinery throughput and wondering if that was part of what was going on there. So I'm wondering if you could help us understand the strength of the operating performance, and maybe give us a steer as to how you see your full year â23 downtime average because we're hearing from a lot of your peers that â23 is going to be a big year for the whole industry. And I'll leave it there. Thanks. Doug. It's a good question. So I'm going to pass it to Maryann in a second. But when we started this out a couple of years ago, we said there's three areas that we're going to concentrate heavily on, one of them was improving our commercial performance. So let Maryann give a little more color on that. Sure. Thanks, Doug. As Mike indicated, our strategic pillars remained foundational, and our commercial performance is clearly one that we remain committed to, you may remember in the last set of guidance, we said that we thought our capture could actually be impacted, given what was a higher turnaround, frankly, they are highest one in 2022. But the commercial team did take quite a bit of initiative in the quarter. I'll give you some highlights and then pass it to Brian and Rick, but one of the things that we saw at 109% capture in this quarter, we had strong light product margins, we had favorable inventory impacts. And then also favorable pricing of secondaries. We we don't think necessarily all of these tailwinds would repeat, and certainly depending on where we sell pricing, some of them could actually be a headwind, particularly when we look at our secondary products. And historically, we've talked about a 95% capture rate over the last few years, given the work that the commercial team has been doing. We're moving more toward 100%. So we're going to continue to challenge ourselves to deliver that. Hey, Doug. It's just a few add-ons to Maryann's comments. So the 98% in 2022, is it sustainable? What I would say to that is, is there will be a lot of volatility, and it'll ebb-and-flow. But this is not a one-time event, we have meaningfully changed the way we go to market from a commercial perspective throughout our entire company. And the focus that we've had since Mike has taken the helm and put in the new leadership team has been night and day and will continue to be. So when you look at 2023 and beyond, I would say you should expect continued momentum, expect volatility, but expect results that will continue to outpace many of our peers. Yes, Doug, this is Brian, I was just going to bolt-on, real quickly to Rick's comments that we really have the team relentlessly pursuing value capture. We've got the team consolidated into really one functional team across the entire value chain, which historically was divided up into multiple silos. And that's been a key differentiation point for us. We're also very adamant about serving our customers. So my team has an example on the clean product side of things. So as we think about turnaround activity and impact to capture, we've got to operate in an environment where whether it's an unplanned outage or planned outage, we've got to serve our customers. So there's a lot of things that we can do from a turnaround planning perspective to build and advance the turnaround to build different feedstocks, depending on the units that are down. And ultimately, we've got the logistics firepower to purchase to cover as well. So I think that's what you're seeing in the numbers as you called out the churn activity relative to sales. We've got the right capabilities to purchase the cover, if we've got refining down either planned or unplanned. Guys, I think it is going to surprise a lot of people. I really appreciate the full answer. Thanks so much. Yes, good morning, everybody. Yes, another, certainly, I'll give you congrats on the capture there. Well done everything. Maybe to change pace though a little bit. I'd like to ask about the process in Martinez, and how we should think about the upcoming timeline and any particular milestones we should be watching for, and maybe how you think about it contributing at a cash flow basis, whether that's happens meaningfully in â23 or we should wait till â24. Hello, Roger, this is Tim, I'll take that one. I guess first on the schedule, we spent really the most the part of January, conducting startup and commissioning activities. And we put fresh feed and actually yesterday in the HDO unit. And we expect finished product the storage here next week. So we are on track to reach full phase production capacity, which is 260 million gallons per year of renewable fuels by the end of this first quarter here. You may know that we're also what we refer to as Phase 2 is constructing some pretreatment capabilities. And those are scheduled to come online in the second half of 2023. And then the facility is expected to be capable of producing the full capacity, which is 730 million gallons per year, by the end of 2023. So we're on track and feeling good. Roger, itâs Mike. The only thing that I would add is we feel really good about the project. And the team's execution has been good. But in light of where the refining macro is today it's not the contributor that it would be saying it when we get back to midcycle at some point, it's going to be a meaningful contributor, but obviously, it's dwarfed by what's happening in refining today. Yes, refining is certainly strong, but that kind of gives me my other follow up question is we've obviously seen some good things in terms of pickup in jet demand, gasoline has continued to look a little soft, I just wonder if he could give us an overview. I guess basically, across your system, how you see things. Roger, this is Brian. So I'll start in just a little bit of reflection on 2022. Because I think we've as an industry really domestically here in the US exited at a point of inflection as relates to COVID recovery. So globally, really strong year in 2022, when you look at a year-on-year 2.3 million barrels a day of overall oil demand increase, as Mike mentioned, in his prepared remarks, we expect to see continued increases into 2023 and beyond. Domestically from what we're seeing, and this is a bit of a triangulation, I know, there's a lot of dialogue around individual marketing books, EIA, data, mobility data. So you have to be a little bit of a statistician and try to piece it all together to formulate an informed view around actual demand. But from an overall perspective, backing through the back end of COVID, diesel has been resilient throughout. It remains resilient domestically here in the US, gasoline if you remember when we went into COVID, early on a lot of conversations around structural impacts. And we do feel like we've seen some structural implications as a result of COVID. But most of that's been on the gasoline front. And we're kind of at a point now where our call of post COVID demand is off about 3% on the gasoline front from 2019 levels. That's probably pretty sticky. The headwind, there is obviously the work from home a little bit of tailwind. We've seen some decreased use in public transportation offsetting that, but 3% is been about the number that we've seen consistently as we look across our books. And then as it relates to jet, steady rate double recovery as what we've seen the last couple of years, we expect to see full recovery domestically here, as we progress through 2023. So back half of 2023 seeing full recovery. As relates to our book, maybe I'll just kind of wrap it up there. What we found in Q4, gasoline year-on-year, 2%. The bright spot of interest was the West Coast. So we actually saw a 5% increase year-on-year in the fourth quarter in the West Coast. Diesel was up 4% and jet was up 3% on year-to-year basis. Hi, guys. Good morning. Few questions, if I could. The first one is really simple. Fourth quarter, I think Maryann mentioned that as some favorable inventory benefits. I assume, Maryann, you were referring outside the LIFO impact which you take it as a special item or that's what you refer. If this is not then can you give us some idea, then how big is that number in the fourth quarter? And secondly, I think you guys talking about a continuing investment, that this year $150 million in the LA refinery system? If I didn't get it wrong. Can you maybe give us some idea that what all investment we're talking about? And what all of benefits we could expect from there, is there any changing in terms of the crews lay or energy usage or that product yield? Anything that you could share on that? Thank you. Hey, Paul, it's Maryann. So you're absolutely correct. The inventory benefits that I was discussing, when talking about the capture rate we achieved in the quarter are outside the LIFO benefits. As you've seen, we've excluded the LIFO benefit from our adjusted results. So I'm talking about commercial performances, obviously, winter storm has impacts on us. And the ability for our teams to address the inventory issues is really what I was referring to when we talk about capturing the quarter not LIFO. Yes, Paul, we've not provided that level of detail on each of those individual contributors, inventory, a piece of that, again, I mentioned strong light product margins in the quarter. We saw the benefit of pricing happen on the secondaries. So there were several contributors to the upsides performance, but we typically don't provide that granular detail on this significance of each one of those. Okay. This is Tim, I'll take your second question. Relative to the LAR project that we were referring to in the opening remarks, that's really a project that addresses the next phase of an upcoming regulation that is going to be mandating further NOx reductions. And that's regulation is going to apply to all of the refineries in the LA basin, not just ours, of course. And so there's going to be some significant investment required by the industry in order to comply with this. And we believe we have a very unique opportunity at our Los Angeles refining complex to really modernize our utility systems at both Carson and Wilmington facilities in order to meet this Phase 1 and Phase 2 of these reduction requirements. So that's what's driving it. And I think the other thing that's worth noting is this novel project really goes beyond NOx reductions for us. And it will also reduce our SO2, our particulate matter, or VOCs, and some greenhouse gases. So besides lowering our facility emissions, it's also going to improve our reliability. And it's going to reduce our energy usage, which will significantly lower our operating cost. These cost reductions will come in the form of energy efficiency and lower maintenance spend. And the thing we like about it is that these favorable economics are independent of the light product margin fluctuations that can occur. So this was kind of all around the backdrop of the LA refinery is certainly a core asset for us on the West Coast. And it's part of the value chain. And it's already one of the most competitive refineries in the state. So this project is going to further cement its competitive position in California, which is consistent with our strategic initiative of being the most cost-effective refiner in every market we serve. So we expect the project to be completed in 2025. And in time to meet the initial compliance dates for the new regulation. So hopefully, that's helpful. Yes, what's the total investment? That $150 million for this year, should we assume $150 million again in 2025. And in terms of the lower energy costs, better efficiency on there? Is there any number you could share to try to quantify what is that benefits? Unfortunately, we generally don't get into those specific numbers on individual projects and returns but it's significant in the sense that it's lowering our emissions and providing a payback. Hey, Paul, it's Mike, we haven't disclosed the multiyear, we will give more color on that as time goes on. What Tim was trying to say is, it is a multiyear project, and we're going to start off with it. It'll be $150 million this year, and we'll give more color as time goes by. Hye, guys. Good morning. Thanks for taking my question. So just to stick with project growth, and looking at your CapEx budget, and your growth program was about $900 million. That number, I assume will be going down close to Martinez and STAR. So looking into the future, where do you think growth capital goes from here? I think we could structurally lower growth CapEx in 2024 plus, or is there maybe another phase of project we'll start hearing about going forward? And I know you've spoken about the LA project, but just wondering beyond that. John, it's Mike, Iâll start off. We've broken it into two buckets, traditional refining and low carbon. And it's our expectation that low carbon bucket will continue to grow over time and at the same time, though, we do have a bunch of projects Tim just mentioned one that will really improve the competitiveness of LA, we have a bunch of those still, that we think we can implement on the traditional refining side as well. So I think you're going to see a nice blend on both sides of the business there over time. I don't think you should expect that number to be going meaningfully down. Yes, I know, people have talked a lot about STAR but we have enough projects that we think are attractive returns, we just want to implement them over time and be disciplined on the way that we allocate capital, but I think you're going to see both buckets and not have an expectation they're going down, because we still think there's a decent amount of return on capital opportunities for us in light of what's been a major return of capital recently from us. Great. That's really helpful. Thanks. And then maybe just talk about how you're thinking about the Russia product sanctions that are going to be hitting here on the certain? And how that maybe -- how that may trickle through the market? And how long do you think it will take for supply chains to adjust? And then relatedly, if you could just remind us the breakdown of Marathonâs export destinations? How much goes to Latin America? How much goes to Europe? And do you expect to increase your exports to Europe after the fifth? Yes, John, this is Brian, I'll take that. So just really quick on your question on timeline, we do not expect it to really unfold until the second quarter. So leading into the sanctions, as you'd expect, we saw a pretty meaningful de-inventorying coming out of Russia getting out of the sanctions, coupled with a re-inventorying in large parts of Northwest Europe. So as a result, we're entering the sanction period of time at really historically high levels of inventory, particularly in Europe. So we view it as 2Q and beyond timeline perspective, but directionally, we see it as bullish for cracks. We see 800 million to 1 million barrels a day of I'll call them structural historical imports into Northwest Europe coming out of Russia, those are going to have to be displaced. And we do expect a high degree of friction on those barrels, for variety of reasons. Product spec mix, is going to be difficult to place them in other markets. So as you'd expect, you have various regional specifications that need to be met local fuel standards that's going to propose some headwinds. The global tanker fleet is really pretty active and overburdened right now with differing trade flows on the crude front. And this is going to create another degree of inefficiency on a tanker, global tanker fleet capacity that we think will provide a degree of friction. And the last thing I'd mentioned, unlike crude on the product side, these are generally going to either countries or end consumers that really rely on receipt of the product. So supply assurance is a new variable that's really important here as well, that is we're hearing from our customers every day, that's a really important thing for them. I think, given the dynamic nature of the situation in Russia, that supply assurance component is really a big unknown, but we feel well, very well positions to take advantage of that, given our position in the Atlantic basin, as you probably know, we opened an office over in London late last year, and are very active in that market. The last point of your question in terms of distribution, without giving too much granular detail, a large portion of them historically have moved into Latin America. We've historically exported 250,000 to 350,000 barrels a day, depending around turnaround and unplanned downtime activity within our system, we do see an incremental pull into Europe, we've seen that we've got some actually really good fit for our Garyville distillate stream because we don't make jet out of our Garyville facility. It fits well into Northwest Europe, especially this time of the year. And we've seen exports into Northwest Europe late last year and the 120,000 barrels a day for the US into Europe. And we've done a meaningful part of that. And we expect to be meaningful part of that going forward. Hey, John, this is Rick, just add on to Brian's comments. So a couple of points to further drive home how we feel about this market going forward. If you look at winter storm, Elliott in December, when it hit the immediate impact, it had on cracks. And it is again taken our life product inventories, especially here in the US down to levels that are five-year type low numbers, when you compound diesel inventories with VGO and the potential impact that the EU ban on Russian exports will have this could just further exasperate cracks to the positive. So more to watch on this. See how it plays out. I think Mike said earlier, it's neutral to positive. We're viewing it as a positive, especially if the cutbacks and sanctions take hold like most people think they will. Good morning, everyone. Thank you. I'm actually, I'm tempted to ask about commercial and turnaround integration again, because I do think that's probably the most important thing from this call. But I think people got the picture there. Instead of asking about low carbon growth, and specifically SAF. And I'm asking because investors ask about it a lot, because airlines talk about it frequently. And both of your partners in the renewable fuels category are also sort of publicly, very pro SAF. And so it'd be great to get your thoughts on that category. And see if you think there's any opportunity there. Thank you. Thanks, Sam. Hey, this was Dave, let me step back a little bit and touch on first that one of our strategic growth pillars for the company is around maximizing the value of our renewable liquid fuels. And so while promptly, a lot of that has been focused on renewable diesel with our Dickinson and Martinez, and the pretreat facilities around those as we look forward that's inclusive of Sustainable Aviation Fuel or SAF. So when you're thinking about growth, it is also inclusive SAF. And so second thing I want to maybe touch on is that we are a very large supplier of fossil fuel, jet fuel today. And our goal is to supply the products that our customers want, and need going forward. So as they, as you stated, there's a lot of chatter around SAF, we're there to help meet that and why you're hearing a lot of the chatter through the airline industries is because SAF is the most viable near term, decarbonization tools for that space. So as we look forward, we are very active in that. The challenge is the premium required, as you look at the SAF whether it be a conversion of a Dickinson or Martinez produce SAF or new investment, these are multiyear very large capital projects. Having confidence in that premium to justify that investment is where that little opportunities exist today. So we are very active just as we were in RD and the evaluation, the studies of where to participate in SAF and I think you see a lot of it within MPC, but also within our subsidiary company Virent. They take sugars into sustainable aviation fuel, you've seen announcements with them on test flights with United, most recently won with the Emirates along with our JV partner Neste. So you can see We're very active in the space of evaluating it, studying it, monitoring it and determining when is the right time to invest. Hi there. I just had a follow up question related to the Russia discussion, and specifically related to VGO and with the Russianâs VGO exports to Europe dissipating from market and lack of clarity where incremental VGO is going to come from and understand that could help definitely in cracks all else equal, but how should we think about how it impacts your capture and what your net VGO position is long or short and how it trickles through your system? Yes, Theresa, this is Rick. So we're short VGO, we're out in the market, especially now more than ever, when itâs turnaround season and I will tell you the way we view this is this short and VGO is going to high grade up all capture specifically on Jet, diesel and light products. So we believe will be a recipient of it and that'll show through via the cracks going forward. Specifically, I will tell you as these Middle Eastern refineries come online midsummer, Theresa, they will domestically consume VGO which, in turn will further short the market, which we believe to be a nice shot in the arm, kind of mid-year end year. So more to come on that. Just something to keep your eye on. Thank you. And I also had a follow up question related to my comments about consumers potentially adjusting consumption patterns to lower retail fuel prices. Just curious what your views on elasticity is or are at this point. How does that reconcile with Brian's comments about gasoline and potentially structurally being off about 3%? Yes, Theresa, itâs a great question. It's one that we look at and try to draw the right corollary too but we do see a degree of flexibility there. Of course, it depends on the market, depends on the extent of the retail prices. We have seen and I commented on the West Coast in my comments earlier, in what I didn't mention, but we got under $5 a gallon on the West Coast in Q4. So that's where we saw my view is we saw nice demand recovery as relates to retail prices. But our forward view is definitely instructed by a moderated view on retail pricing, which we do think will impact demand somewhere in the neighborhood of 2% to 3% depending on the market, but somewhere in the neighborhood of 2% - 3%. Yes, good morning. How's it going? I don't think you guys discussed the outlook maybe I missed it, the outlook for light heavy crude quality dips. Clearly, they've been very supportive in the past couple quarters to earnings. And I think many in the market, expect those to come in as refiners consume. The SPR releases, new capacity comes online. OPAC exports have fallen off a bit. Can you just discuss how you expect those differentials to trend throughout the year? Thanks. Yes. Hi, Jason. It's Rick. Very good question. So it's kind of a tail of two ends. I'll start with the front end here. Because as you look with what happened with the Keystone Pipeline outage, that back then barrels into Canada, Canadian inventories are high. We've had a lot of turnarounds in the US Gulf Coast. We've had winter storm Elliot back in barrels. So when you kind of add all of these together, along with a few of -- a few folks in the in the Mid-Con specifically pad two having issues. We are seeing really robust spreads right now. And we continue to see that to hang on for a bit. As the year plays out, and things get back to normal. I would say you could see some fall off to the spread, but we're still quite optimistic that it's going to be a better spread than midcycle as we look at the year in total. Great, that's helpful and just my follow up. I appreciate the comments on the Martinez project. And operationally, it sounds like everything's going well there. I was wondering from an earnings perspective, how much you expect that project to contribute in 2023, just given the pretreatment unit won't start up until later in the year. And at the numbers we look at, it seems like margins for projects that don't have pretreatments are much more challenged than projects that do. So if you just talk about the earnings in 2023, and the potential step up from the project once that operation units online. Yes, this is Brian, Jason, I just maybe a reminder that we do have pretreatment capacity, not on site but off site. So both at Beatrice and Cincinnati facility, we've got substantial pretreatment capability there. So just kind of a reminder there, and I'll refer it regarding the overall EBITDA or our economic outlook to Mike and Maryann. Yes, Jason, we don't give specific individual facility earnings profiles. I know it's a question and people have been trying to get their arms around. But the best guidance I can give you is if you look at the macroenvironment around the California market, and where each of the subsidies are trading, the key to remember because people ask us about LCFS. But there are other components to subsidy out there that all kind of worked together. And the three of them together have been relatively consistent, even though a lot of them are moving around a little bit. So that should help you a little bit as you model it. And then obviously, look at where feedstocks are trading and diesel's trading. The other incremental comment that I would add to Mike's also is remember when we completed the JV with Neste, one of the things that we were looking for was incremental improvement around our feedstock slate, and we got that with a partner in Neste. So even though we are sharing 50% of the project, we actually improve the economics of the project by the feedstock that Neste is obligated to bring through their partnership with us. So just another data point as you're contemplating how to think about that. Hey, thanks for taking my question. Could I get your thoughts on the wide octane spreads that we've been seeing? What -- do you think that'll persist for the rest of 2023? And are you fully compliant on Tier 3? Or are you short and buying credits in the market? Thanks. Yes, Matt, I can comment on the octane, they obviously you're going to move seasonally and quite a bit. But we've seen steady strength in octane spreads, really as a result of running the systems harder. As we look at not just our system, but the global system working to meet demands, and out running our octane capacity to a certain extent as other facilities have been shut down throughout the network. So you kind of have a bullish long-term outlook as it relates to octane spreads and position well around that, based on our octane capacity in our system. All right. With that, thank you, everyone for your interest in Marathon. If you have any additional questions or if you'd like clarification on the topics discussed this morning, please reach out and our IR team will be available to your call. I look forward to speaking with everyone. Thank you.
EarningCall_1022	Greetings, and welcome to the Transcat Third Quarter Fiscal Year 2023 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Barbato, Chief Financial Officer for Transcat. Thank you. You may begin. With me here on the call today is our President and CEO, Lee Rudow; and our Chief Operating Officer, Mark Doheny. We'll begin the call with some prepared remarks and then we will open up the call for questions. Our earnings release crossed the wire after markets closed yesterday. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website transcat.com in the Investor Relations section. If you would please refer to Slide two, as you are aware, we may make forward-looking statements during the formal presentation and Q&A portion of this teleconference. These statements apply to future events, which are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the news release, as well as in the documents filed by the company with the SEC. You can find those on our website where we regularly post information about the company, as well as on the SEC's website at sec.gov. We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call, whether as a result of new information, future events or otherwise, except as required by law. Please review our forward-looking statements in conjunction with these precautionary factors. Additionally, during today's call we will discuss certain non-GAAP measures which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to compared GAAP measures in the tables accompanying the earnings release. Thank you, Tom. Good morning, everyone. Thank you for joining us on the call today. Yesterday, Transcat announced excellent financial results for our fiscal third quarter. We experienced broad based strength across our portfolio of services that drove 19% service revenue growth, expanded gross margins and provided strong EBITDA growth of more than 20%. We are particularly pleased with our organic service growth of 12%. Organic growth has now been in the high single digits or better for the last eight quarters, despite COVID related impacts, inflationary pressure and economic uncertainty. This consistent performance demonstrates the resiliency of our business model, which inherently performs well through various economic cycles. We continue to execute well in the highly regulated life science space, as well as the aerospace and defense markets where the cost of failure is high and the revenue streams are recurring when we meet the rigorous and ongoing needs of our customers. In the third quarter, consolidated revenue increased 13% to $57.4 million. Consolidated gross margin expanded 180 basis points to 28.6% and was driven by margin expansion in both our distribution and service segments. Adjusted EBITDA, a very important metric for us given our level of acquisitive growth, as I just mentioned, grew 20% from the prior year third quarter to $6.6 million. Our service segment continues to perform at a high level and recorded its 55th straight quarter of year-over-year revenue growth. Expanding our addressable markets has been an instrumental driver of our consistent growth. We continue to make proactive investments to drive differentiation and position Transcat to make meaningful share gains in the regulated markets we serve. A great example of this is the NEXA Enterprise Asset Management. NEXAâs suite of services, which includes asset and data analytics, computerized maintenance management, compliance, quality and validation now positions Transcat in both the U.S. and Ireland to service mission critical global manufacturers. Revenue synergies between NEXA and Transcat continues to be outstanding and reinforces our sustainable longer term competitive advantage. From a margin perspective in the third quarter, we reported service gross margins of 30% which is up 30 basis points from the third quarter of fiscal 2022. Moving on to our distribution segment, demand remained strong as revenue grew 4% to $21.4 million despite extended vendor lead times driven by high end electronic chip shortages that continue to make it challenging to convert some open customer orders. Distribution gross margin expanded 370 basis points year-over-year to 26.2% as we continue to see growth in our high margin rental business and to benefit from the strategic buys that we executed earlier in the year. Acquisitions are an important part of Transcat's long term growth strategy and we acquired two companies at the beginning of the third quarter. E2B calibration located in Cleveland, Ohio specializes in calibration services related to the aviation industry. We believe that we can leverage Transcat's current infrastructure and significant geographic footprint to further accelerate the growth in E2B's capabilities across North America. In addition, we are nicely positioned to capitalize on the life science market in the Greater Cleveland area. In the first quarter, since the acquisition, performance and integration activities have gone very well and we expect this to continue. Complete Calibrations established our first calibration footprint in Ireland. Complete Calibrations is a small but strategic acquisition for Transcat. The acquisition establishes a local presence in Ireland, a country with a robust life science market. Secondly, Complete Calibration offers Transcat foray into calibration robotics, that we believe over the longer term will be another differentiator for Transcat. All in all, our third quarter -- our third quarter results were strong across our portfolio of businesses and channels. Our balance sheet remains strong and supportive of our acquisition strategy with a leverage ratio of 1.66 times. In the third quarter year-to-date, we generated $6.8 million of free cash flow. And with that, I'll turn things over to Tom Barbato for a deeper look into the third quarter financial performance. Tom? Thanks, Lee. I'll start on Slide four of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the third quarter. Consolidated revenue of $57.4 million was up 12% versus the prior year, driven primarily by strength in our services segment. Service segment revenue growth remained very strong at 19% with 12% of the growth coming organically and the other roughly 7% from acquisition. Turning to distribution, revenue of $21.4 million was up 3.7% versus the prior year. We continue to see strong demand for our products, which is reflected in our open order backlog of $9.5 million, which is up 7% versus the third quarter of the prior year. Turning to Slide five. Our consolidated gross profit of $16.4 million was up 20% from the prior year and our gross margin expanded 180 basis points to 28.6%. Service gross margin improved 30 basis points from the prior year. Distribution segment gross margin of 26.2% was up 370 basis points from the prior year and continued strength in our rental business and a favorable sales mix. Turning to Slide six, Q3 net income of $1.6 million was flat to prior year and our diluted earnings per share of $0.21 and adjusted diluted earnings per share of $0.35 were also essentially flat. When comparing diluted earnings per share and adjusted diluted earnings per share to the third quarter of the prior year, it is important to note that increased interest expense negatively impacted both EPS metrics by approximately $0.05 per share. We expect our full year fiscal 2023 tax rate to be in the range of 21% to 23%. Flipping to Slide seven, where we show our adjusted EBITDA and adjusted EBITDA margin, we use adjusted EBITDA, which is a non GAAP measure to gauge the performance of our segments because, we believe it is the best measure of our operating performance and ability to generate cash. Additionally, as we continue to execute in our acquisition strategy, this metric becomes even more important to highlight as it does adjust for onetime deal related transaction costs, as well as the increased level of noncash expenses that will hit our income statement from acquisition purchase accounting. With that in mind, consolidated adjusted EBITDA of $6.6 million was up 20% from the prior year. As always, a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Moving to Slide eight. Cash flow from operations was in line with expectations for the quarter. Year to date capital expenditures through the end of the third quarter were $7.1 million compared to $5.9 million year to date in the prior year. And continued to be centered around service segment capabilities and technology, including automation and future growth projects. Slide nine highlights our strong balance sheet. At quarter end, we had total debt of $49.2 million with a leverage ratio of 1.66 times. We had $37.8 million available from our revolving credit facility. Lastly, we expect to file our 10-Q after the market closes tomorrow. Thank you, Tom. Turning to the fourth quarter and the fiscal 2024 year ahead, we are well positioned for continued revenue and margin growth. We also expect the strength of our value proposition to increase as we further develop our recently expanded addressable markets. In fiscal 2023, we continued to make great progress in that respect as both NEXA and our Pipettes business have performed very well. Serving highly regulated end markets with our unique differentiated value proposition makes our business model inherently durable and we expect demand for our services to remain strong despite the economic uncertainty that lies ahead. In fact differentiation is the key to our strategy. Along with strong execution, differentiation will secure our competitive advantage and foster our ability to gain market share in the industries we serve. Strong organic growth remains at the heart of our strategy and in the year ahead we expect growth to remain in the high single digit range. We continue to identify and pursue strategic acquisition opportunities that will expand our addressable markets and geographic footprint, as well as leverage our current infrastructure with bolt-on opportunities. Ultimately, all these drivers are designed to increase the trajectory of our business. Our balance sheet remains strong and is supportive of our very active M&A pipeline. We'll continue to leverage continuous process improvement, automation, and now robotics with the addition of Complete Calibration in Ireland to generate sustainable margin improvement in the future. We believe Transcat's future looks bright and that we will continue to outperform in the years ahead. Thank you. At this time, we will be conducting a question-and answer session. [Operator Instructions] Our first question comes from the line of Greg Palm with Craig-Hallum Capital Group. Please proceed with your question. I wanted to start with service growth. You saw a nice acceleration, they were up 12% on an organic basis and I'm curious if you can maybe pinpoint, I don't know, areas of outperformance relative to prior quarters, whether that's end market standpoint, maybe its increased synergy contribution from NEXA and other that's lapped a year plus. Just want to get some broader thoughts on that? Hey, Greg. Basically it's a combination of all those things and probably some others as well. We did lap the year with NEXA. So their growth, which has been impressive is kind of towards our organic numbers, but across our channels and our businesses, really the company as we as we said in our stated remarks, performed well across the board. So that was encouraging. We saw strong retention, we saw growth in different businesses, including NEXA. So really kind of broad based strength in the quarter. Okay, good. I didn't hear much in the way of CBLs, and I'm wondering if you can give us an update there on pipeline. What some of the recent activity. And I'm also curious if there's any way you can quantify the gross margin headwind associated with that just for us to compare that on a year-over-year basis? Yes, I would say that, when we look at our growth, CBLs has for many years saved the COVID years, itâs been a contributing factor. We did land some CBLs in the beginning of the year that were new, that were incremental coming out of COVID, which is good to see. And we anticipate it will always be a part, a factor in our growth. But nothing out of as the usual no high percentage of concentration of our growth would attribute to CBLs. As far as the CBLs, the two or three that we has sort of mentioned and guided towards in the beginning of the year, they take a couple of quarters to normalize and during that period of time when you land several in one quarter, there's a bit of a drag and that drag did exist and we're probably -- we'll probably see ourselves coming out of that a little bit more in the fourth quarter and as we enter the first quarter. So that's normal. We're not going to guide towards exactly what the number of associated sort of basis points would be, but it's a typical two to three quarter drag and you should see us starting to come out of the ones at least that we landed in the first quarter as we close out the year. Yes. So I appreciate the question. Okay. It makes sense. And then I guess just last one, distribution margin was strong. It sounded like some or most of that is attributable to rental, maybe mix as well. But can you give us an update on where rental is from a contribution standpoint grow, just be curious to get a little bit more detail on the strength there? Yes. I would just say, Greg, I would characterize it as rentals and the impact of the strategic buys that Lee referenced kind of probably contributed fairly equally to the performance in the quarter. As I mentioned on the last call, those strategic buys are going to kind of dry up on us at some point here in the -- as we approach the end of the year and into early fiscal 2024, but we expect that the growth in rental business will continue to offset those impacts. So I view the margin in the quarter is kind of on a robust side and we would see that normalize a little bit going forward. Hi, good morning guys. Thanks for the time. Piggybacking a little bit on Greg's last question on the rental business. I was curious, are you seeing cannibalization there from sales with the increased rentals? Or are they entirely separate from one another? Generally, Scott, they're separate. We're not seeing cannibalization. I mean, I'm not seeing it doesn't -- it's never occurred, but it's -- I'm not seeing any numbers that would lead me to point in that direction. I think it's -- when we look at our value proposition, distribution has its place. And I think there's a discrete place for rentals. Rentals if anything is strategically a bridge between services and distribution. It's kind of a service in and of itself. But we have not seen cannibalization. So that's a good thing for the business. It's been incremental from our -- in that respect. Thanks. That's helpful Lee. And could you tell us what kind of CapEx expectations are for calendar 2023 in the rental business? And if there's any meaningful change from a year ago? Yes, not a meaningful change. The rental pool is kind of a dynamic population of equipment, but something in the $2 million to $3 million range is what we would expect to be at this year and would see in the near future as well going forward. Okay. That's helpful. And Tom, generally, how should we be thinking about OpEx growth from here? Is there any significant hire you guys need to do on the corporate side or anything like that that would drive a meaningful increase there? No, I think the goal longer term is, obviously, to start seeing some leverage from a -- from an OpEx standpoint. And I think that's a reasonable expectation or a reasonable way to think about it going forward. It's not going to happen overnight, but as we think of our longer-term plan that's certainly what we're shooting for. Great. And then just last one from me. When you look at some of the efficiency gains on the service side, how far are you through those programs? And when should we expect kind of the -- all the fruit of that labor to be into the gross margin? Yes, Scott, this is Lee. We still see ourselves more towards the beginning, I would characterize than the end in that margin enhancement journey. I mean, we started out in the low 24s on the service side, we've got it to the low 30s now. But between automation, some robotics, we're putting a lot of sort of enhanced processes in place that are showing good early signs in terms of improving efficiency and productivity. So I would say, I'm not going to put an exact timetable on it in this call, but like we've talked about in the past, we see this company the next stage for us in the mid-30s. And I think that's achievable in a reasonable amount of time and our initiatives that we have in place should get us there. Beyond that, we'll continue to work on process, we'll continue to see what percentage of the business can be automated. It's not like it's over in the mid-30s, but I think it's premature to get into too much detail. So the next stop is the mid-30s and we think we're going to get there and we've got good plans in place to do just that. Thank you. Our next question comes from the line of Gerry Sweeney with ROTH Capital Partners. Please proceed with your question. 2 questions. I'm going to start with maybe just NEXA. I know you just discussed the part of your -- part of the strong growth we're seeing, but I'm just curious, very complementary business. How much of an opportunity is there for cross selling or how big of an opportunity does NEXA open up for growth? We think it's substantial. So we've been with NEXA for about 16 months, 17 months now, coming up on a year and a half. And so right out of the gate, we were able to sit at the same table, if you will, both Transcat and NEXA with certain strategic customers of ours. And the combined pitch, the value proposition that we were communicating resonated really well. And we even had some early wins, literally a quarter after the acquisition took place. We've seen that continue throughout the subsequent three or four quarters. And when we look at our pipeline now and we look at how we're managing that relationship, how we're managing the synergies, which, obviously, are getting better and better as we get to work with each other. I think there's a lot of upside there. I think our sales team thinks that, the NEXA team thinks that and that goes both ways, which is actually kind of interesting. They have picked up business by virtue of our customers and vice versa. So substantial would be the word I would use over time. It's a great question and we're encouraged by the [reach] (ph) since the acquisition. Got it. Second question, just a little bit more further out on the curve. Obviously, Complete Calibration, I think it's your first lab I will say in Europe. Is this a toehold? Are you looking at other opportunities in Europe? I know Ireland has a lot of life sciences, but maybe mainland or any thoughts on that? Well, it's interesting. When you think about the calibration lab that we bought in Ireland, I would characterize it two ways. There's two things going on in Irelandm one is calibration. Yes, we have a foothold that we're going to build a lab. We will have a lab there. We will go after calibration business in Ireland. When you have the calibration services you have to think of that as almost a local business. So calibration in lab can service Ireland pretty well. Not to say we couldn't service outside of Ireland from Ireland, but generally speaking, we think of that as a local business. But we have 40 or 50 employees in Ireland working on the NEXA side of the business, we can always call it professional services where they're doing the consulting work and some of the things we alluded to in the script. And that's not calibration services. And what's interesting about that particular channel, Gerry, is that, you can expand further out beyond the borders of Ireland fairly easily. So most of that work is done in front of a computer. You do a site visit and then most of your work can be done anywhere. And so I see that platform, in particular, being able to expand at a faster rate and at a greater rate than the calibration lab, which, yes, we're in Ireland and we plan on developing our [Cal] (ph) business there. So I look at it both way. Thank you. [Operator Instructions] Our next question comes from the line of Mitra Ramgopal with Sidoti & Company. Please proceed with your question. Yes. Hi. Good morning. Thanks for taking the questions. First, just a couple on the acquisition front. Lee, obviously, it's a big part of the growth strategy. But as you look in terms of an environment, rising interest rates, how comfortable are you in terms of levering the balance sheet up or being aggressive on the M&A front and while trying to balance accretion from any transaction you might consider doing? Right. Well, it's an interesting question. I mean, typically, our line as it stands today allows us to lever up to about 3 times. We've always been more comfortable in the mid-2s. There have been times in the last five to seven years when we've lingered more around 2 times, 2.7 times, I think at one point, we're at 1.6 times now. So anywhere in that range, Mitra, I think we're comfortable. We have a shelf in place. I mean there are other -- depending on our strategy and how well we execute it and the changes in the market, the availability of these acquisitions, I think there's variety of ways to get them done even using stock as currency. I mean, it's just different methods that we talk about and we'd use them and deploy any of those if it made sense. So I think we're well capitalized in that sense. And as far as the market and acquisitions, yes, we -- it's fairly dynamic for us and we are kind of doing our thing. So no issues. I would just add that assuming we continue to make good decisions on acquisitions and we're adding businesses that are contributing well from a profitability standpoint. That mitigates the impact from a leverage standpoint as well. And I think we've demonstrated the ability to do that consistently over time. Thank you. Thanks for that. And then just trying to get maybe some color on, if you look at acquisitions like Tangent, obviously, it got you into some new geographies or new markets, Indianapolis and Huntsville. Just curious if maybe a year later you have been able to really benefit from that new geography in terms of growing the local business beyond what you might have expected? Yes. The best way to answer that Mitra is to start off by talking about discipline. We are disciplined buyer of companies in our business space. And by the time we make a decision to say whether it's a small company, midsize or a little bit on the larger size for us, they have to fit our strategy. They have to satisfy our drivers. And so, we kind of get a pretty good feel upfront what degree of success we're going to have. We just have to execute well. We've got a great track record here of doing well in that respect. And so I just want to make that general comment. When we look at Alliance in Ohio, when we look at Tangent with the two territories they brought us and E2B in Cleveland. All these deals have done rather well for us. I mean, not all of them are exactly the same, but I would characterize them generally as good to very good to excellent deals. So you can see NEXA at the top excellent and you'd see [indiscernible]. They've satisfied the drivers. We've done well executing. We've done well with the integration. It's always our idea to parallel plan to integrate. And so, we're really satisfied and we're going to keep this going. We got a great track record and a great team working on this. So yes, we're satisfied with the results. And we expect it to continue. Okay, great. And then finally, I don't know if you could provide me with some color also on the Canadian market in terms of what you're seeing there and potential opportunities for the growth? We have three labs in Canada, Ottawa, Toronto and Montreal. Generally speaking, I think Canada has had a really good year. Coming out of COVID, I think we've been pleased. They've hit their numbers that we've set as expectations. They've actually exceeded them in some cases. And I would expect looking at their pipelines and the general environment there, that will continue. There's no reason to believe that it won't at this point. But yes, Canada had a good year for us. And we've mentioned, Lee, this is Mark, Mitra. At the end of last year we invested in a new Toronto lab that clearly expands our capabilities and capacity. So that's going well and probably helping that area up there, which is very attractive. Okay. No, that's helpful. And then maybe finally, as you wind down fiscal 2023 and look out to fiscal 2024, given -- obviously, it's a dynamic environment right now, but what do you see -- if you have any, maybe a potential big or headwind for you that we should be more cognizant of. Well, we're always thinking about the economy when we think about interest rates and inflation. And eventually, you'll see the impact of rising interest rates on the economy in general. As I said before in the past, as we've demonstrated in the past, which is probably more important even than what I say is that, we have a nice business in terms of being recession resistant is probably the best way to characterize it. Our service business is driven by that regulation. These services have to take place regardless, generally speaking, of the economy. So I think the economy will be a headwind, but I think we're well positioned. And I would say this, we're better positioned today than even five years ago or seven years ago, because our value proposition has gotten stronger. The rental business, I think, is a favorable attribute in terms of uncertainty. For distribution segment we didn't use to have that, now we do. And I think even our service business has gotten more into life sciences. Life Sciences tend to hold up well. So for a variety of reasons, I like where we are. Nothing's perfect. Nothing's totally recession proof. But we are in a really good position I think relative to others in our industry. And I think the NEXA value proposition strengthens as the economic uncertainty grows well. So that's something we didn't have even two years ago. Thank you and good morning. Almost all my questions have been asked. So I'm just going to ask perhaps on the Pipettes business, because it's a business I know you all are excited about and see great growth. If you could just provide a little color around it in terms of growth trends you're seeing, kind of where that business is going, just -- basically just kind of fill in some blanks in terms of like how is it -- how much is it contributing to your business? What's the growth profile for it? And how do you see it going forward? Thanks. No problem. So we love the Pipettes business for probably a couple of reasons that stand out. It's a life science oriented business, which is where we tend to focus a lot of our time for all the reasons that we stated, Ted. The business is a recurring revenue stream. And we do a nice job. It's got nice margins and nice growth potential. So today, we run our main operation at the New England area. As we speak, we're opening up a West Coast facility. It's our goal to do that and we're working on it, so that even though the business doesn't necessarily have to be local, it's nice to have something in the general region. The reason why it's in our plan to do that is because we see growth opportunities with this business. Pipettes in general tend to be a nice kind of bridge between normal calibration and life sciences and kind of the base work and additional opportunities are brought via Pipette. So lots of reasons, good attributes, good margins, the business is really well run, we started through an acquisition that would be an example of extending our addressable markets. So that's come to fruition really well. I will continue to develop that business for sure. Is that a business that you'll grow per se organically kind of bringing it along? Or is it a business as you look at your M&A funnel that you're actively pursuing building on to? Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Rudow for any final comments. Okay. Well, thank you. Thank you all for joining us on the call today. We appreciate your continued interest in Transcat. We will be participating in the 35th Annual ROTH Conference. I think that's March 13 and March 14 [indiscernible], we'll be there presenting, so feel free to check-in on us or check-in on us at any time. Otherwise, we look forward to talking to you all again after the fourth quarter results. Come out and thanks for participating on the call today.
EarningCall_1023	Good morning, ladies and gentlemen, and welcome to the Champion Iron Limited, third quarter results of the fiscal year 2023 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Friday, January 27, 2023. Thank you, operator. And good morning, everyone. Thank you everybody in Australia especially for dialing in a long holiday period in the middle of the night. I'd like to thank everybody for joining us, discuss our third quarter results of our fiscal year 2023. Also like to direct people on this call to presentation that management will be referring to, which is already posted at championiron.com under the Events & Presentation section. I'd also like to remind people that some of the matter that will be discussed during the call may contain forward-looking statements, risks and assumptions. So, if you'd like to refer to more regarding those forward-looking statements, please go to our MD&A which is also available on our website. I'd also like to remind people that every reference to dollar amounts in the presentation are in Canadian dollars unless otherwise stated. On the call today joining me are David Cataford who is our CEO; Alexandre Belleau, our COO; and Donald Tremblay, our CFO. I'll turn it over to our CEO now for the formal presentation and then we'll end the presentation with a Q&A session. With that, David? Thanks, Michael. Thanks, everyone, for joining in. Very happy today to be able to discuss the third quarter highlights and the third quarter results. I think we've got some exciting news that we've delivered and one on the phase two and also on our future growth projects. If we look at the quarter, we produced roughly about 3 million tonnes and sold about 2.7 million tonnes at a cash cost of $76 per tonne and generated revenues of CAD 350 million. When we turn towards sustainability, one of the big highlights is the fact that we are hiring quite a lot of people this year. And we want to make sure that we keep everybody safe. So we're putting significant amount of time in training to make sure that all our new employees ramp up quickly to the standards that we have at Champion to make sure that we can keep everybody safe. Also happy to report that there was no occurrence of any major environmental issues. So all the investments that were done in the past allows us to keep the site in pristine condition when we turn to environment. In terms of the relation with our host communities, so we've done quite a lot of work with our First Nations partners in the past quarter. One that I'm extremely proud of is that all of our employees has participated in a cultural and diversity training session with our First Nations partners of Uashat Mak Mani-Utenam. This is something that we've developed in partnership with our First Nations community, and also allows us to have each one of our employees understand the realities of what's happening in the Uashat community to help work with our partners in the future. Also, we had the newly elected officials of the Uashat Mak Mani-Utenam Band Council visit Bloom Lake, again, furthering our partnership and collaboration with the First Nations. If we turn towards the industry and the past quarter, we saw iron ore prices soften slightly. So when you look at the P62 and the P65 index, modest declines of about 4% and 2% in the previous quarter. One of the big highlights during the quarter is also the fact that China has relaxed its COVID-19 measures. So, we have seen some increased demand in China for the iron ore. If you look at the whole year, two of the highlights in 2022, especially if we turn to China, is that for a portion of the year, the Chinese steel mills were not making any money, there was negative margins. And also, they did not have any environmental restrictions in terms of the steel production. We do expect that to shift this year. And as the Chinese steel mills turn back into profitability and also have restrictions in terms of the environment, we do expect the premium for the high grade material to increase over the course of the year. One of the final highlights for the quarter is the fact that the C3 index, so the freight index, has declined a further 14% during the quarter. So you've seen in this quarter where we've reduced our cost of shipping, and that should continue in the coming weeks as we benefit from these lower prices for the vessels that are on the water now and that are coming at Bloom Lake â or in Pointe Noire to pick up the Bloom Lake material during the quarter. If we turn to operations, so very happy to be able to declare that our phase two is not at commercial production. One of the highlights for the quarter, we produced close to 3 million tonnes during the quarter. One of the challenges we did have â well, actually, there was a few during the quarter. One being the fact that it's always very positive when you deliver a plant ahead of schedule, but it makes all the periphery systems very challenged as you ramp up the full operations. What we saw during the quarter is there was some delays in terms of the delivery of our mining equipment, especially on drills and trucks. Drills is pretty much solved now. We're commissioning our last drill that just came in. And this will allow us to remove slowly the contractors that we have at site that are doing drilling, but you have to appreciate the fact that when you have contractors drilling in a large operation like Bloom Lake, it's suboptimal in terms of performance and it's higher cost per tonne because they don't have the same equipment as what we use to be able to do the drilling. So as we ramp down the contractors and use our own equipment, now that it's been delivered and commissioned, this should normalize our costs in terms of drilling and also improve our productivity at the mine. Secondly, we did receive now the trucks that were delayed. So they arrived at site recently. They are being assembled as we speak. As they come into production in the coming weeks, that's also going to allow us to ramp up the actual operations at the mine to make sure that we can deliver the full nameplate capacity of Bloom Lake in the near term. The positives from the quarter, as we now know, both plants are able to operate to full nameplate capacity. Now, we just need to get the periphery systems in the mine to be able to supply at those two plants, so we could get to our full nameplate production. In terms of financial highlights, we had revenues of $350 million for the quarter. We'll be able to run through that, but slight delay in our sales is actually helping us because we will benefit from the higher iron ore prices that we see now for the vessels that are currently on the water. If we do a breakdown of our cash cost during the quarter, so there's some non-recurring elements that happened during the quarter. We did see the price increase to $76 per tonne during the quarter. Part of that due to what we've mentioned, the higher cost at the mine. So even if we have a lower strip ratio, you'd expect that the mining costs would be lower. But because of the amount of contractors and the inefficiencies that we have at the mine, we actually saw those costs increase. There's still some phase two related inefficiencies that we're working through as well. And as we get to the full nameplate capacity for the site, we'll be able to remove those costs from the system. We also had some hiring ramp up costs that are associated in the quarter. That's also going to normalize over the next quarters and be able to be removed as we have our full workforce in place. We did have a larger-than-planned shutdown in Bloom Lake, so that impacted our costs during the quarter. And you've probably seen diesel prices as well ramp up. And to give you an order of magnitude, every $1 per liter increase in fuel costs actually translates into $6 per tonne in our operating costs. So, that's mainly due to the fact that we use diesel, yes, at the mine for our mining trucks, but also in the locomotives to be able to bring the material down to the port. It impacts also our flight costs when you look at the fly in, fly out and even all the way to the food because the food is more expensive to be able to be brought up to the to the site. So, these are costs that will fluctuate depending on the diesel prices, but everything that's in our control. So to ramp up the site to nameplate capacity, manage our shutdowns better and remove the hiring cost, these are all costs that we should be able to remove from the system as we get phase two up and running at the same capacity, that's phase one, and we get the site at nameplate capacity. If we look at our sales, as we mentioned, there was a small provisional price adjustment in the quarter. So, there was a slight difference between what we expected and what we realized. We expected about $112 and realized $109. So that had a negative impact of about $4 million in the quarter, which translates to about $1.4 US per tonne sold in the third quarter. What we do see, though, is that we have about 1.7 million tonnes during the quarter that are associated to a price that we booked at $129 per ton. Those tonnes are on the water right now. And depending where they are and oil price comes to, what the Chinese â we get out of the Chinese New Year, if the price remains where it is today, we could expect a positive provisional price in the next quarter. So we'll follow this closely and be able to report that at the next quarter. If we look at the average realized selling price, so why did we do better than the P65 index during the quarter? It's mainly due to the fact that we did book about â those 1.7 million tonnes at $126 per tonne at the end of the quarter. So that's a big positive compared to the average P65 of the quarter. So since most of our sales were done at the end of the quarter and shipped at the end of the quarter, this allows us to benefit from higher iron ore prices once those tonnes actually land to our clients' facilities. One of the negatives during the quarter is the amount of tonnes that were actually sold. So we sold less tonnes than we did produce. This is not due to inefficiencies in the system. It's mainly due to the fact that Quebec suffered from a major power failure during the Christmas period. Most of Quebec lost power. For some, a few hours; some, a few days. We were mostly impacted at the mine and at the port. The port being the area where we were the most impacted. That translates into two vessels that we were not able to ship at the end of the quarter, which have since sailed in the beginning of January. But those two vessels, we could not load them because there was no power at the port. Same at the mine, that impacted our production as well since this â every time, there's a power failure, well, yes, we lose production during the actual power failure, but it also takes some time to clean up the operations and start it back up following a sudden halt, like a power failure. We don't expect that to be a recurring issue as Quebec has one of the most robust grids in the world. But these were extreme abnormal weather during the Christmas period that translated to major power failures. In terms of cash in the quarter, so the main differences is a change in working capital. Portion of that due to the â we did not receive payments for some of the vessels that were left at the end of the quarter, which we've since received. And a second, we did build up some inventory in terms of either concentrate or also some broken material to be able to feed both plants. We also paid a dividend during the quarter, so CAD 51 million, and also invested in our operations, roughly about CAD 56 million to make sure that we can continue operations and keep the site in the same condition as it was before. So with that being said, our balance sheet is still in very good position and very well positioned for our growth projects, which we'll get into right now. The first growth project being the phase two. So again, very excited to announce that we've already reached our commercial production, and we're now ramping up the site to be able to get to our full nameplate capacity. So we don't see any hurdles now to get the plant to be able to run at full nameplate capacity. And the final step is to get our mining operations ramped up to make sure that we can deliver the full 15 million tonnes per year at Bloom Lake. If we look at the other growth projects that we're working on, one being the feasibility study for the DR pellet feed, which we'll get into in the next slides. Second, we're continuing to advance our Kami feasibility study. So that's ongoing right now. And also, advancing our feasibility study for the pellet plant facility in Pointe Noire. So both of those are advancing, expected to be delivered in the second half of 2023. And we'll dive a little bit deeper into the DR pellet feed. The DR pellet feed is a project that we've been working on for quite some time right now. Very exciting project for the company and for shareholders. As a project where we expect to produce roughly about 7.5 million tonnes of DR quality materials, some of the highest quality material in the world, with a maximum combined silica and alumina of 1.2%, again, making this one of the best products in the world. And why is this important? This allows us to feed into the electric arc furnaces and benefit from much higher premiums than the current P65. In terms of benefits, as we just mentioned, well, this allows us to get into the electric arc furnaces, but also it allows us to go down the BOF, so the basic oxygen furnaces, and blast furnaces, for those that want to start using higher grade material to be able to reduce their CO2 emissions. So not every steelmaker is going to transition quickly towards electric arc furnaces, some are still going to keep their blast furnaces and to be able to achieve their CO2 targets, there's companies in Japan and elsewhere in the world that are working to be able to use DRI material directly in their blast furnaces. So this type of material is going to be destined to producers that want to reduce their CO2 emissions, and that want to benefit from one of the highest quality materials in the world. You can see on this chart here that very few projects can actually deliver this kind of quality, and we will be one of the highest quality materials in the world. So, what we've been seeing even in the DR space is that the quality has gone down in the past year, very difficult for certain ore bodies to maintain the high quality low contaminants to be able to feed the electric arc furnaces, but we really have a pristine material at Bloom Lake once we've passed it through a flotation process. We remove pretty much every single contaminant apart from a little bit of silica. So, it's a very clean material that will be able to help our partners reduce their emissions in their steel making processes. How do we do this? Well, we'll get into this a little bit later. But I think what's important to note as well is the significant demand increase that is coming in the next few years. So as these electric arc furnaces that are currently being built actually get delivered, well, what we see is that there is no project to scale that have been announced to be able to produce DR material to be able to supplement this. There's a fixed amount of high quality scrap in the world. So there will be a very big deficit for this type of material. So we do see that translating into very high premiums for this type of material until eventually there's projects that can potentially balance a little bit more the market. But what we've seen now, very few areas around the world can actually produce this type of material. And again, no projects have been sanctioned to be able to deliver more DR pellet feed. So we do see that as two positives for us to deliver our project in about 30 months to be able to supply a market that's in high demand and that will pay a high premium. In terms of process, it's a fairly simple process, using some milling at the entry of the plant, then going into flotation to be able to remove the â we're actually floating the silica to produce our 69% material at the end. So, again, a very simple process that will be built right next to our phase two plant right now. In terms of economics, the project as we had disclosed following our pre-feasibility study, we have a project that's order of magnitude about $350 million. The contingencies for this are roughly about $57 million, which are included in the $350 million. So when you look at the operating costs of roughly about $7 per tonne and the potential premiums in the market in the order of magnitudes today of roughly $25 to $30 per tonne, we do see that this project can be massively accretive for our shareholders and allow us to generate significant margins over the life of the mine by increasing the quality of our material. In terms of positive impacts, if we factor in those premiums, which we do expect could have some significant upsides depending on where the demand is and how much this material is required to be able to supply the electric arc furnaces, but if we use those sort of numbers that we disclosed just a few minutes ago, the after tax IRR is roughly about 24%. So, a very accretive project for all of our shareholders. And it also allows us to potentially benefit from smaller shipping costs, and this has not been factored into this right now. So we do expect to potentially sell this material closer to home, which could also have a positive effect in terms of our shipping costs. In terms of timeline and funding, so we do expect to potentially generate enough liquidity out of our own operations to be able to fully fund this project. But to be on the conservative side, as we've always been, we want to make sure a little bit like what we did for phase two, to secure all the funding required to be able to do the project, so that way we can go through construction, even if there's some small hiccups in the iron ore price during the construction period. So the board has approved a preliminary budget of CAD 10 million to allow us to be funded till the end of the summer and to maintain our timeline of 30 months to deliver the project. And during this time, we're going to work to find the right non-dilutive funding source. So potentially a similar structure as what we had during the build of the phase two plant to make sure that we can have all the funds required to deliver this project. Again, I think the main highlight for the quarter is us reaching our commercial production at the phase two plant, delivering the findings also of our feasibility study for direct pellet feed and material, starting the project and starting the funding as well, and being able to potentially deliver a project in 30 months that will allow us to have half of our material upgraded to 69%. So, very excited about this quarter. Maybe we could start with operational performance in the quarter. And specifically, I was wondering if we could get more color on costs. We saw the costs move up this quarter to $56 a tonne. I realize there's a lot of moving parts there. You're ramping up capacity, yet you've got some inefficiencies and some inflationary pressures. But can you give us sort of some idea on how much of that increase is structural versus just transitory here and where you see perhaps costs settling down to once you reach that full nameplate? If I look at the this quarter compared to the past quarter, I'd say most of the increased costs is associated to transitionary costs. So, I do feel we'll be able to bring the cost back down to levels in the order of magnitude of CAD 60 to CAD 65, again, depending where fuel prices end. But in these sorts of levels, I think that's an area where we do believe that we can get the operations back. And you have to appreciate that there has been some pretty large inflationary pressures on different parts of the business. But that being said, I do think that there's a lot of room to improve compared to the costs that we had in the previous quarter. That sort of CAD 60 to CAD 65 target, does that assume current, call it, input costs for diesel and other consumables? Or does that assume some deflation? Depending if you use the CAD 60 or the CAD 65, that'll change. But realistically, if you look at the last quarter, if you remove the inefficiencies and you keep that diesel price, we should be able to have operations that run at those prices in the current diesel price environment. But if diesel prices do run back down, then I'm sure we'll be able to get our operations back to lower 60s. Just switching gears in terms of the study that you released for the DRPF. Couple of questions there. First of all, you noted that the project is contingent on securing additional power? How much of an issue is that? Can you give us an idea? When you look at this project here in â the impact that it has to be able to reduce CO2 emissions is massive. So this will allow our steelmaking clients to be able to reduce CO2 emissions more than the whole of the company of Tesla. So when you look at the impact that this project can have, it's high on the list in terms of priorities in Quebec to be able to help the decarbonization strategy. We've also heard the prime minister again â two days ago, the prime minister of Quebec say that, in terms of the most important projects in Quebec, well, there's the battery sector, obviously, there's the green aluminum sector and the green steel sector. So that's in the forefront of what the Quebec government has announced and is continuing to announce. So, I think we're very well positioned to be able to secure that power. And in the event that we will not be able to, I think you've seen our management team, we're extremely creative and we should be able to find the path â even if it takes a little bit more time to secure it with Quebec, we should find a path to be able to find a solution with our existing operation. Yeah, there's a whole lot of available power. It's just that there's been a review in Quebec on where they want to allocate this power. So we know the power is available. It's just a question of getting the actual power secured. So there's no investments required from the government to have to create more power to allocate it to this. It's not in our hands. So we're going to do everything we can to get the allocation this year. But again, as we mentioned, if ever we don't, we do feel that we'll have the capacity to have a project that makes sense with the existing power that we have right now. David, in the feasibility report, can you break down what premiums you're assuming in terms of what you'd get over and above your existing product? And then maybe you touched on a little bit in the presentation about the alternative routes for the feed. Does the feasibility study assume a certain portion goes into the EAF route eventually versus the blast furnace route? Also, maybe just building on from that, can you just talk about the order of the projects? Before you make an investment decision on this one, do you want to see the results of the study on the pelletizer as well as Kami first and tie it all together? If I look at the first one, so we've disclosed an IRR, which probably allows you to back calculate the actual pricing that we've used for these numbers. Again, the last thing we want to do is to lock in a ceiling with our customers and be committed to a maximum premium. So that's why we've been a little bit less vocal about potential premiums because this is not an index-based sale. So if we look at our phase two project, when we do the feasibility study, even if you put a certain iron on price, if the index is higher, you'll be able to sell higher, but this is more on a negotiation base. What we've factored in there, if you back calculate, is a premium in the order of magnitude of between CAD 25 to CAD 30 per tonne depending on the years. So this is what we've factored into the study. But when you look at the potential that we do see, we do see potentials for that to be even higher as the demand increases because we don't necessarily want to commit to either electric arc furnaces or blast furnaces. We will sell to the customers where it makes most sense for us. So if a customer wants to use this in its blast furnace and is willing to pay a significant premium for this material and we can help him decarbonize, for sure, we're going to go down that route for a portion of our tonnes as well. But we don't see any hurdles in being able to sell this material in the future. Now, if you look at the order of projects, realistically, I think this one is a bit of a no brainer. I think this one allows us to produce one of the purest materials on the world. It brings us right in the transition for the green steel. It puts us in a very good spot to be able to sell tonnes closer to homes or to reduce our freight costs. And the CapEx is something that we do feel is manageable out of our own operating cash flow. So when you look at the other projects, let's say the actual pelletizer or the Kami project, I'd say that the pelletizer would only happen anyways if we did this project before. So we want to produce DR pellets out of that pelletizer. So we need to do the upgrading facility first. So that one, we don't need to wait for the study. And second, Kami is going to be potentially very accretive for our shareholders, but it's a larger project than this one here. And by the time that we get the results from the study, we would already be about a third of the way in to our DR pellet feed project. So I don't see Kami or the pelletizing feasibility being required for us to give the final go on the DRPF. I do think that this is where the company wants to go. And this is the most accretive path for our shareholders as well. In your marketing, you'd think the highest value added will be to tailor to specific blast furnace customers' specifications and specific blast furnaces that are the minimum transportation distance in your marketing program. When we look at the way that we've designed our product, I think you're 100% correct. So even when we started Bloom Lake, we tailored the product that we make to make sure that it works with the Japanese market. So they had a maximum 4.5% silica requirement for their blast furnaces and that's how we designed our process. Now, when we turn towards the new product, the DR pellet feed, well, this one, I think has been tailored for everyone, in the sense that it's going to be the probably the purest material on Earth. So this will be required by either blast furnaces or electric arc furnaces. And the advantage that we have in being an exclusive high grade producer and being, I'd say, a bit smaller is that we are able to work with our clients to be able to deliver specific products. And I'll just turn to 2020. When we had one of our clients ask, can we make a little bit higher grade material, you probably saw that we delivered three vessels at a specification of about 67.5% iron ore instead of our typical 66% to make sure that this material was the actual material that was required from our client. So we've got that capacity to tailor a portion of our tonnes to meet our client's specifications and the strategy to sell closer to home is definitely at the top of our list as well. So, we should not jump to an immediate conclusion, for example, that Mittal at â at Dofasco Hamilton or thyssen in Germany is closest, therefore their DR spec in the future would be better than somebody else's because it's closer. The issue with Hamilton, you probably know that ArcelorMittal has their own mine pretty close to ours. Our properties actually touch. And I do think they'll be self-sufficient to be able to have that material. Now when you turn to Germany, that's obviously at the top of our list in terms of potential clients because each one of them is going towards a transition to produce greener steel. I think they've got a very good market to be able to get a green steel premium from their clients as well. And I do think that it's a customer base that's going to be very important for us. We already sell into a Germany, but I think we can definitely sell more into the future. If I can ask another question. After Vale's January 2019 catastrophe, the iron ore market appeared to be in deficit and it was sort of like shooting fish in a bucket. In the September quarter and now in the December quarter, five seaborne majors are combined breaking their 2018 quarterly output records. Of course, last year, world steel output fell. So, as the majors have output growth, there needs to be steel output growth, which there wasn't last year. Do you have any hesitations about expansion in a market that appears to be potentially over supplied? Or is your strategy that your costs and quality are so good, you'll produce full out and somebody else has to be the one to shut down? For sure. We're not going to take an arrogant approach and thinking we can dislodge many tonnes from the majors. I think what we need to focus on is really the quality aspect of it. And when we look at the global output of iron ore, yes, the quantity has been pretty good, but the quality has actually gone down. And what we're seeing is not only in terms of iron ore, but in terms of higher FOS [ph] and the higher alumina. Where we have a different proposition is the fact that we have basically no FOS and almost no alumina as well. So, we really differentiate ourselves in terms of the type of material that we produce. The other positive that we have is we're an exclusive high grade producer. So we don't have X amount of tonnes of low grade, X amount of or Y amount of tonnes of high grade and then have to push the low grade to allow our clients to have the high grades. So we've got a very good proposition which our clients like because they don't have to buy some lower quality material to have access to the high grade stuff. So would we push go on further expansions? We're obviously going to look at the market, how it evolves. For us to produce more â or to get into the DR high grade space, I think that makes a whole lot of sense because it's a market that will have a huge deficit. So even if the global iron ore output increases, even much more than what it is today, I don't see the DR quality material increasing significantly. At least I have not seen anything being announced. So that puts us in sort of a niche market, where I do think that we've got room to grow in the future. For the other potential expansions, we'll follow the market and see where it goes. But if quality continues to decline as what we're seeing now, we do think that there's going to be a good market for material from projects like Kami as well. I could do one more. For sure, Vale, BHP and Rio have a lot of sub 60 stuff and they can't hold their 62 and 65 targets. Last night, Fortescue had their quarterly call. And they produce 189 million, 192 million tonnes of 56% to 59% subgrade. Their 22 million tonnes, 67% magnetite project coming on stream in the next quarter, they say, is a different quality and it's purely incremental. They won't reduce the low grade because they have the high grade. Then they have a project in Gabon, Belinga, that's very high grade hematite, much like Simandou. And that's a third market segment for them. And I don't necessarily agree with their approach. But they're going to produce flat out and they say in all three market segments because they're separate market segments. The reason I'm posing the question to you is because some of the other companies are a little more aggressive, or maybe to use your word arrogant, and trying to go flat out in every quality niche. I think the only niche that they're not hitting is the DR market. And I think what we'll see in the future is today's high grade is going to be tomorrow's low grade. So when you look at those projects, while they will be required for blast furnaces, but they cannot feed electric arc furnaces. They could, but they are â what they've announced at least is they will use this material to be able to blend other lower grade materials. So, depending which strategy they take, well, that'll fluctuate. But what they've announced is that this material will be able to blend up some of their lower grade material there. Congratulations on reaching commercial production at phase two. On the topic of phase two, could you elaborate on when you would expect to nameplate there? Would it be here in the current quarter, next quarter? Appreciate your perspective on timing. As we we've announced, we've now got phase two at commercial production. What we need to do now is ramp up the full site to nameplate capacity. So the major constraint there is the mine. We've got most of the equipment delivered at site and will be ramping up in this quarter. So we've announced also that we do expect that, in the near term, we'll be at full nameplate capacity run rate. So I can't really give you more info on this one as we don't give guidance, but fully expect that, in the near term, we'll be able to be running at full nameplate capacity. Do you have a sense of magnitude for how much production would be up quarter-over-quarter. I think that's a similar question to last one, Lucas. No, realistically, we'll be able to ramp up compared to the past â in the past quarter. To what extent, I can't disclose. But I think the teams are doing everything at site to make sure that we can ramp up those mining operations as quickly as possible, so that we can deliver close to our nameplate capacity in the very near future. Second question on the DR grade feed project, would this impact production during construction? I think construction is â might be 30 months. Would this have an impact? Maybe close to the end of those 30 months in construction, there will be some times between the phase two and this project. But we have designed this to have minimal impact on our operation. So the plan is going to be built beside the phase two project. And apart from those times, we don't expect any reduction in production there. I'll sneak one last one in. The pellet plant project, restarting the facility, I think it's Pointe Noire, would that run on natural gas? And if so, how much? Would appreciate your color on that. I might have Alex to chime in just for the quantity. But we look at starting with liquefied natural gas. As you know, there's no pipeline of natural gas that comes into the region right now. There seems to be about one project missing for the government to potentially evaluate bringing a pipeline to the North Shore. Because as you know, there's a big aluminum smelter, there's ArcelorMittal's pellet plant, there would be this one. There's a few projects that would require natural gas as well. So the beginning would be LNG and then potentially transitioning into natural gas in the future. For the quantity, Alex, do you have that at the top of your head there? If not, Lucas, we'll do a quick follow up after. Thank you. There are no further questions in the phone line at this time. Mr. Cataford, please continue for any closing remarks. sir. Yeah. Thanks for everyone for participating today. I think big highlights, again, is the fact that we've reached our commercial production with the phase two, transitioning to one of the highest grade materials in the world. Very excited about the future that we have at Champion. And we'll continue to work on various projects to make sure that we can generate as much revenue as we can for our shareholders, at the same time as working closely with the various communities, our First Nation partners and all of our employees. So, again, thanks a lot everyone and looking forward to meeting with you in the next quarter. Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.
EarningCall_1024	Good morning. My name is Olivia, and I will be your conference operator today. At this time, I would like to welcome everyone to the GasLog Partners Fourth Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. As a reminder, this conference call is being recorded. On today's call are Paolo Enoizi, Chief Executive Officer; and Achilleas Tasioulas, Chief Financial Officer. And now, Robert Brinberg from Rose & Company will begin your conference. For your convenience, this webcast and presentation are available on the Investor Relations section of our website, www.gaslogmlp.com, where a replay will also be available. If you are participating via webcast, please note that the slide presentation is user controlled and we encourage you to advance through the presentation as you are prompted to. Please now turn to Slide 2 of the presentation. Many of our remarks contain forward-looking statements. For factors that could cause actual results to differ materially from these forward-looking statements, please refer to our third -- our fourth quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these measures is included in the appendix to this presentation. Paolo will now begin today's call with a review of the Partnership's fourth quarter and full year highlights and market update, following which, Achilleas will walk you through the Partnership's financials. Before I get started, I would like to acknowledge that as per yesterday's press release, the Partnership received an unsolicited proposal from GasLog Ltd., which our Board and conflict committee are currently reviewing. This presentation, however, does not touch upon the proposal, as this process is currently underway. We therefore, deem it appropriate that no Q&A session is held today. Please turn to Slide 4 for GasLog Partners' fourth quarter highlights. Thanks to increased LNG flow throughout the year, Europe managed to replace Russian gas, achieving seasonally high inventories and ensuring that Europe will be able to get through this winter. In the process, energy prices and spot shipping rates increased to record highs. Both prices and rates softened during the fourth quarter, as warmer-than-average weather in Europe resulted in decreased consumption. Prices fell nearly 80% from their August peak, and inventories are currently nearly 20% above the seasonal average. Although the LNG shipping spot market has come off significantly, the Partnership managed to fix its remaining open days in the term market at attractive rates. This leaves the Partnership with 87% of days in 2023 fixed, while the remaining ones are heavily weighted towards a seasonally strong fourth quarter. The term market has remained tight, leading to the declaration of charter's options for two of our vessels and a new charter fixture for GasLog Seattle, as I will discuss shortly. Overall, our contracted revenue backlog rose to $729 million, an increase of 18% since our last update and approximately 30% compared to the fourth quarter of 2021. Our capital allocation strategy and disciplined use of cash has allowed us to continue working towards our gross debt to cap target, while our pref buyback have increased our free cash flow per unit by $0.11. Please turn to Slide 5. In this slide, we'll focus on the impact that the Russian-Ukrainian conflict has had on the energy commodity market. You can see that monthly pipeline flow from Russia have fallen nearly 90% since the start of 2022. Despite this, and thanks to the flexibility of the LNG supply chain, Europe managed to fill its inventory to seasonally high levels. Thankfully, competition from major importers was notably absent due to a combination of high LNG prices, moderate weather and continuing COVID restrictions in China. This has created two dynamics that are of interest. Firstly, higher LNG flows into Europe are likely to continue in 2023. Secondly, increased global demand for LNG has both exacerbated an overall scarcity of energy supply and, specifically, an LNG supply deficit, which is likely to remain until new import and export capacity comes online. In response to this, we've seen about 25 million tons of new project being sanctioned and expect this figure to double in 2023, creating additional demand for LNG carriers to match the robust newbuilding order book. Slide 6 focuses on the impact of these dynamics in the shipping market. The spot market saw significant volatility in the last quarter of 2022, driven primarily by the conditions I discussed. The spot market peaked at nearly $450,000 per day, as congestions and floating storage heavily restricted availability of vessels, while charterers were mostly unwilling to sublet their vessels. Since rate peaked, above average temperature have reduced the constant need to fill inventories, resulting in falling LNG prices and easing on floating storage. Additionally, the continuing Freeport outage and persistent low exports from Nigeria have resulted in reduced LNG exports and increased the number of spot vessels available in the Atlantic. Increased volumes are balanced with the shorter trips, reflecting the higher flow from U.S. to Europe rather than Asia to keep ton-mile demand flat in 2022. Regardless, the term market remains strong, thanks to the charter's continuing interest for multiyear coverage, that can only be met with independently-owned vessels, while the number of uncommitted vessels keeps falling. In the next slide, you can see more details on the charters I reference earlier, namely the two extensions and the one new charter, having a combined $167 million of EBITDA. The extensions also have reaffirmed the attitude of charterers to focus on term business. As mentioned in our previous calls, the work with Venice Energy has progressed. And although still under negotiation, we have agreed in principle that the Partnership will convert one of its 145,000 cubic steam LNG carriers to an FSRU, which will be chartered to Venice Energy as effective returns. Further information on the project FID are expected in mid-2023. Such conversion is expected to cost in excess of $100 million and take between eight to 10 months. Finally, in Slide 8, we would like to give an update on environmental-related regulations affecting our business. There are several regulatory bodies that have issued and now developing dedicated regulations aimed at decarbonizing worldwide shipping. Late 2022, the European Union has moved on two fronts under the Fit For 55 umbrella: [notifying] (ph) the entry of shipping into the European Emission Trading Scheme, EU ETS, and launching the FuelEU in order to promote a transition to green fuel in a stepped approach. These regulations will gradually enter into force in the next years, and add to the IMO framework in order to drive the industry net zero targets. As we seek further clarifications on the application of such rules, the Partnership is developing dedicated plans to improve ships' efficiency and reduce emission, as well as cooperating with our customers and investing in digital tools to improve the efficient use of our ships. Further updates in the months to come and in our 2022 ESG report. Before I hand over to Achilleas, I'm delighted to report that the Partnership vessels had another year of particularly good safety score in 2022 with zero LTIs, achieving the ever-needed Goal 0. Turning to Slide 10 and the Partnership's financial results for the fourth quarter of 2022. Revenues for the fourth quarter were $105 million, a 19% increase from the fourth quarter of 2021. This was primarily due to a net increase in revenues from our vessels operating in the spot and short-term markets in the fourth quarter of 2022 in line with the continued strength of the LNG shipping spot and short-term markets. This increase came despite a decrease in available days due to the sale of the Methane Shirley Elisabeth in the third quarter of 2022. Adjusted EBITDA was $81 million, an increase of approximately $17 million or 26% from the fourth quarter of 2021, primarily due to a year-over-year increase in revenues, as mentioned earlier. Operating expenses were decreased by $0.9 million, mostly due to the favorable movement of the EUR/USD exchange rate in the fourth quarter of 2022, as well as the sale of the Methane Shirley Elisabeth in the third quarter of 2022, partially offset by the in-house Overall, we are pleased with our performance in this quarter, as we continued rechartering our fleet at healthy rates with improved visibility on our 2023 cash flows. Turning to Slide 11 and a look at our cost base. Our daily operating expenses per vessel were $13,974 in the fourth quarter, a decrease of $721 per day compared to the fourth quarter of 2021 due to the factors I just described earlier. General and administrative expenses were $4.2 million in the fourth quarter of 2022, an increase of approximately $0.7 million from the fourth quarter of 2021. Daily general and administrative expenses increased to $3,240 per vessel per day in the fourth quarter of 2022 from $2,543 per vessel per day in the fourth quarter of 2021 due to an increase in the administrative service fees for our fleet, which was partially offset by a decrease in the size of our fleet following the sale of the Methane Shirley Elisabeth in the third quarter of 2022. As a reminder, the changes in the vessel management, commercial management and administrative service fees compared to the prior year are in line with our commentary in the previous quarters and are disclosed in detail in our 20-F. Our results were also impacted by a $6.3 million increase in interest expense due to an increase in the base interest rate, LIBOR or SOFR, compared to the fourth quarter of 2021, partially offset by the deleveraging achieved during the last 12 months. For 2023, we expect our unit operating expenses to average approximately $13,850 per vessel per day, with [actual] (ph) operating expenses materially impacted by the foreign exchange movement. General and administrative expenses are expected to average approximately $3,600 per vessel per day in 2023. Also, we have four vessels that will undergo scheduled dry-dockings in 2023, which will result in approximately 30 of higher revenue days per vessel and the total estimated cost of $15.5 million, including cost for ballast water treatment systems. The impact of scheduled [off-hire] (ph) days is factored into Slide 14, to be discussed shortly. Slide 12 illustrates the progress the Partnership has continued to make in its preference unit repurchase program. During the fourth quarter, we repurchased an aggregate of $10.5 million of our preference units in the open market. Since the program was initiated in August 2021, the Partnership has repurchased approximately $68 million in preference units in aggregate at an average price close to $25.00 per unit [at fair value] (ph). These repurchases have reduced preference unit distribution by approximately $5.7 million or $0.11 per common unit on an annualized basis based on the number of preference units outstanding as of today. We expect to continue opportunistically repurchasing preference units in the open market as conditions dictate and there are $87.4 million in Series B preference units outstanding as of today, which are callable and [indiscernible] from mid-March 2023 and onwards at the Partnership's option. Slide 13 shows the progress we have made towards our leverage targets, which we first introduced in the first quarter of 2021. We have made good progress on these goals despite the impairment charges we took in 2022 in connection with the book value of our steam vessels. During the fourth quarter of 2022, we repaid $21.7 million of debt and leases on scheduled amortization and $116 million in the fourth quarter of 2022. In addition, we repaid $32.2 million of debt outstanding in relation to the sale of the Methane Shirley Elisabeth in quarter three 2022 and $32.9 of debt outstanding in relation to the sale and leaseback of the Methane Heather Sally in quarter four 2022. As a result, our gross debt/total capitalization, one of the two leveraged targets we have set, has been reduced from 54% as of the end of the fourth quarter of 2021 to 49% as of the end of this past quarter. Furthermore, our net debt to trailing 12 months EBITDA has been reduced from 4.4x to 2.8x, which is currently below our long-term target. Net debt to EBITDA has, of course, been positively impacted by the Partnership's strong performance in 2022 as well as the increase in the cash and cash equivalents in our balance sheet. It is important to remember that our net debt to EBITDA may fluctuate based on our future operating results and the deployment of cash in the execution of our capital allocation strategy. We expect to continue reducing our gross debt to capitalization in 2023 with a scheduled retirement of approximately $112 million of scheduled debt and lease principal payments in aggregate. Reducing debt balances and making opportunistic repurchases of preference units will further reduce the Partnership's cash flow all-in break-even levels over time and increases our future free cash flow generation potential, enhancing the Partnership's equity value. Slide 14 shows our contracted revenues by quarter in 2023. As you can see from the chart on the left, we have managed our exposure to the spot market over the next 12 months, while still maintaining exposure to the second -- seasonally strong fourth quarter in 2023. This provides significant downside protection in 2023. Every $10,000 per day increase in TCE on our open days above our operating break-even rates will increase our adjusted EBITDA by approximately $6.7 million on full year basis. Turning to Slide 16, and in summary, energy security continues to drive market volatility, demand for LNG supply and supports new FID for additional capacity. The LNG shipping market has benefited from such dynamics and currently maintain strong term business level even in the phase of potentially challenging ton-mile development between Europe and Far East. Partnership has capitalized well on the strong LNG market, securing lucrative fixture throughout 2022 and the exercise of two option charter periods for our vessels. Our disciplined approach and focus on deleveraging has strengthened the Partnership balance sheet, delivering tangible value to our unitholders as well as enable us to identify growth opportunities and effective market returns. Finally, the Partnership continues to benefit from the favorable shipping market in 2023 and we're diligently executing on our strategy to meet our capital structure targets. Thank you to everyone today for listening and for your continued interest in GasLog Partners. Stay safe. And if you have any question, please contact the Investor Relationship team.
EarningCall_1025	Good day and thank you for standing by. And welcome to the Fourth Quarter 2022 Equity Bancshares, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Navratil with Equity Bancshares. Please go ahead. Good morning. And thank you for joining Equity Bancshares conference call, which will include discussion and presentation of our fourth quarter 2022 results. Presentation slides to accompany our call are available via PDF for download at investor.equitybank.com by clicking the presentation deck. You may also click the event icon for today's call posted at investor.equitybank.com to view the webcast player. If you are viewing this call on our webcast player, please note that slides will not automatically advance. Please reference Slide 2, including important information regarding forward-looking statements. From time to time, we may make forward-looking statements within today's call and actual results may vary. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. Thank you, Chris. Good morning. Welcome to our fourth quarter earnings call, and thank you for your interest in Equity Bancshares. With me on the call today are CFO, Eric Newell; COO, Greg Kossover; President, Craig Anderson; and Chief Credit Officer, John Creech. I want to start by celebrating two accomplishments. First, net income for 2022 was a company record totaling $57.7 million. Second, we had a record revenue totaling $197.8 million. Both achievements show the strength of our franchise, our success in serving our customers and showcase our talented group of employees. A year ago, we had expectations of rising interest rates, but no one was forecasting 400 basis points of increases from the Federal Reserve. Our teamâs work to prepare for this inevitable rising rate environment in 2020 and 2021 by keeping our loan pricing short. The results speak for themselves. Loan yields in the fourth quarter of this year were 123 basis points higher than last year, anticipating a challenging environment for raising and maintaining deposits. I mobilized the teams to refine our sales approach to find incremental ways we could do better. We took the opportunity to focus on operational efficiencies to better serve our customers with better products and services that contribute to their success. I am confident that this sets us up for better performance in 2023. Looking forward, there is a lot of economic uncertainty. But rather than dwelling on the uncertainty, our team is focused on what we can control by deeper relationships with our customers, asking prospective customers for their business, being prudent with our capital and not varying from our underwriting philosophy to achieve loan growth. I'm proud of the honor of Newsweek's Best Bank in Kansas in the under $10 billion category for 2023. We were also recognized for the third year in a row by the Wichita Business Journal as one of the best places to work based on employee survey data. Thank you, Brad. And good morning. Last night, we reported net income of $11.6 million or $0.72 per diluted share. Noninterest income, excluding the $422,000 gain on the branch sale in the fourth quarter was $7.9 million, down $1.1 million linked quarter. To reconcile GAAP earnings to core earnings this quarter removed merger expenses of $68,000 and gain on branch sale of $420,000. On Page 6 of the investor deck, we added a new visual to show the impact of our solar tax program. For the total year, we added $811,000 to net income. The timing of the benefit in tax provision and the cost of partnership expense is determined by when we entered into the tax investment versus when the project is placed in this service. Importantly, we expect to adopt accounting for investments and tax credit structures using the proportional amortization method which moves the tax credit expense currently and noninterest expense to the tax line and removes this noise. Late in December, we learned of a tax credit that we had invested in May 2022 would be delayed, not being placed into service in the calendar year of 2022 as we originally forecasted. That had the effect of adversely impacting the tax provision in the fourth quarter, which is a true-up for the full year. We expect this project to be placed into service early in 2023. Our GAAP net income includes a release through provision for credit loss of $151,000. While we expect softening in the broader economy in 2023, we have not seen economic trends in our markets that are of specific concern and more importantly, we have not seen any decline in asset quality trends in our portfolio. While we continue to have qualitative reserves set aside for this uncertainty, the modest release represents improvement in our asset quality and reserves we had previously set aside for specific credits that our special assets team have fully resolved and the credits are no longer on our balance sheet. The December 31 coverage of ACL to loans is 1.38%. Thanks, Eric. Credit performance for the quarter was again strong, seeing improvement across all categories. Special mention loans declined from $35 million at the beginning of the year to $8 million at quarter end. Special mention loans improved $1 million for the quarter. Delinquencies over 30 days past due were $1.3 million lower, ending the quarter at $6 million. I'm most proud of [indiscernible] and Brett Reber, our General Counsel, for working together to reduce OREO to $600,000, excluding branches, our lowest level in a decade. Nonperforming assets declined $11.5 million to $18 million on December 31. The majority of our nonaccrual loans were acquired via bank acquisitions. Rising rates inflation and economic uncertainty continue to be a concern. At the same time, consumer liquidity levels and employment have not yet returned to historically normal levels. The credit card portfolio is relatively new and has not yet produced consumer losses that one would expect in a downturn. We continue to have relatively low rates of overdrafts and overdraft-related charge-offs. Unemployment rates in our largest two markets were less than 3% at year-end. At the end of the quarter, loans to homebuilders were only $28 million. Most of our homebuilders continue to have strong liquidity or good secondary sources of repayment. Declining commodity prices and drier conditions are a concern for farmers. The war in Ukraine is providing a floor for green producers. Cattle prices have pushed upward with a favorable outlook for 2023. Our hotel portfolio has performed well following the pandemic. Travel resurgence is providing a good tailwind for the lodging sector. About 7.5% of our loan portfolio is income-producing office and commercial properties. All newer commercial IPRE loans have been financed with comfortable loan values and debt yields. The Midwest appears to have less issues getting employees into the office than the rest of the country. Equity Bank, for example, never went to a remote or hybrid environment as all employees remained in the office throughout the pandemic. Since fiscal year-end 2019, our Texas ratio has declined from a high of 14% and to 3% at year-end while regulatory capital increased from $348 million to $588 million. During the same period, our ACL has increased from a low of $12 million to $46 million and covers nonaccrual loans by 260%. Our bankers remain vigilant on the credit front, and we have been successful with our loan pricing strategy. While the Midwest economy remains strong, we anticipate and are prepared for more difficult conditions. Thanks, John. Loan growth in the quarter, excluding PPP and branch sales was $56.8 million or 6.9% annualized. Loan growth in the commercial and commercial real estate portfolios was 9.25% annualized. We continue to successfully originate loans at higher interest rates, and we are seeing higher yields as a result of nearly 60% of our loan portfolio having adjustable rates. During the fourth quarter, the yield in the loan portfolio increased 50 basis points to 5.59%. Cost of interest-bearing deposits increased 45 basis points to 105 basis points in the quarter. Our pipeline stands at $600 million today. And as John said, we continue to exercise reasonable caution in terms and conditions on new and renewal loans. Noninterest income of $8.3 million was down $1.1 million quarter-over-quarter when excluding gain on sale of the branch realized in the fourth quarter of $422,000. Service revenue with the exception of mortgage banking held relatively consistent during the quarter, while the benefit of previous acquisitions to noninterest income as well as the declining mortgage production environment drove the quarterly decline. We are seeing positive momentum in our health savings and trust and wealth management divisions and expect further positive contribution to noninterest income in 2023. Eric? Net interest income totaled $42 million in the fourth quarter, increasing from $41.9 million in the linked quarter. We continue to benefit from the rising interest rate environment, with net interest margin increasing five basis points linked quarter to 3.67%. Turning to Page 8 of the slide deck, you can see the composition of the change in net interest income, which benefited from an increase in the yield on earning assets, offset by the increase in the cost of interest-bearing liabilities. We benefited 10 basis points from purchase accounting in the fourth quarter, up one basis point linked quarter but above our expectation going forward. Noninterest expense categories increasing from the third quarter included salaries and benefits, advertising and other expenses. Salaries and benefits increased 3.5% linked quarter attributable to lower job vacancy rates, which will incrementally improve our service and sales to our customers. Advertising expenses increased from the third quarter, mainly attributed to our direct banking platform. As a reminder, our direct bank strategy is designed to meet our deposit needs while helping keep our deposit betas lower in our nondirect channels. Other expenses include our tax credit partnership amortization in the fourth quarter totaling $1.9 million compared to $1.4 million in the third quarter. Our outlook slide includes an updated view for 2023. We do not include future rate hikes. Our forecast still includes the effects of lagging deposit rates. Moderating the impact of higher deposit rates will be an emphasis on relationships to drive noninterest-bearing accounts. Before taxed $1 billion of loan portfolio cash flows in 2023, with a weighted average yield of 6.75%, which is 63 basis points below our current origination yields, as well as a successful deployment of cash flows of the investment portfolio into the loan portfolio, which has about a 500 basis point spread. In the fourth quarter, noninterest-bearing deposits declined due to expected seasonality from our commercial and municipal portfolios and further reduction in customers' excess liquidity. As Brad mentioned, our sales teams have renewed efforts to focus on building and acquiring new relationships, which would have the effect of increasing noninterest-bearing deposits for total funding. Our provision is forecasted to be 20 basis points to average loans. This is a more optimistic view than the current consensus, mainly because of our existing coverage level to loans, the lack of recognized losses and a previous qualitative reserve build for recognizing economic uncertainty. We expect a higher level of advertising expense in 2023 to support our deposit acquisition efforts. Though efforts are underway to introduce products and services that we anticipate will reduce the cost of customer acquisition. Opportunities that potentially result in positive operating leverage includes technology products and services we've been working on through 2022 that will allow for better experience for our customers, improved revenue and incrementally reduce expenses through improved efficiencies. Our exceptional employees are focused on core banking services in 2023. Developing relationships with prospective clients and broadening relationships with current customers. Checking account growth and high-quality credit origination remains top of mind. We met with several banks in the fourth quarter at the beginning of this year as well, discussing their options of whether it's a good time and having low liquidity and in a high rate interest environment, that Equity Bank would be a good upstream merger partner for them. Those discussions will continue. Our performance through 2022 sets us up for success in 2023. We and we are excited for the future. Thanks. Good morning, all. Question on the loan growth side, a bit of a softball, I guess you guys are sort of pointing to kind of mid-single digit in 2023. Just interested in kind of the constraints there; I mean is it â I bet it's a bit of mix of demand you're seeing, appetite for risk on your own side and the ability to fund that growth. But kind of that the pressure points would be interested in just how you characterize loan growth in the coming year and what you're looking for there? Yes. So I think there's a lot of loan opportunities out there, Jeff. And â so we're just trying to make sure that we're balancing the ability to put on things that make sense from an interest rate standpoint. We haven't â we don't need to or haven't stretched our credit underwriting. And so there's lots of opportunities out there. You can grow a lot faster. The question is, can we get that type of loan growth and keep a interest rate that we want for our balance sheet because we have a viewpoint that we think that rates might continue to keep rising. And so we can't be locking in rates now on the asset side that aren't going to reprice in a very near term. And so we're just being moderate on that from the standpoint that we want to make sure we can originate things that fit our interest rate bucket and in the same sense, are prudent for us to do. But there's lots of lending opportunities out there, that's not the issue. Jeff, this is Eric. On the period-to-period, so year-end to year-end loan growth, we're forecasting around 7% to 8%. It might seem a little softer in the forecast slide because that's average balance. That's helpful. Thanks Eric. And maybe while I got you, Eric; on the margin, do you have the average for the month of December? Just trying to figure out what â how that compares to the full quarter average? I don't have the December average in front of me. I would say December probably is a little softer than the quarter just due to the deposit beta that we experienced in the month of December, which you can actually see on Slide 9 of our deck. That's a newer disclosure for us where we broke down the components of yield and cost and added to cumulative betas for loans. And it says deposits, and that's total deposits not just interest-bearing. But you can see for deposits, we had a cumulative beta of 16% in Q4 and then a 20% beta in December. Got you. Yes. I guess looking at the outlook on margin too, it's kind of range-bound in Q1, maybe to the downside a little bit, and then for the full year, a little lower. So I appreciate it. Maybe one last one, Brad, just wanted to circle back to your commentary on having discussions with partnerships of other banks. I guess is that picked up a bit. Trying to get a sense for relative more banks coming out of the weeds to say, let's partner up? Just interested in the a little more color there? Thanks. Yes. I think we're â I think it's been a fairly quiet period. And so the conversations we've had have been â the requests have been more prevalent in the last 60 days than they were in the prior 90 or 120 days. So I would say those conversations are actually picking up. I think this time of the year always picks up steam a little bit because people get their year-end numbers done. And so they get their packets together to come to market. So it will be an interesting spring for us, I think, because I think there's going to be some opportunities there. And so what do we want to do and how do we skin those things, and we've got some creative ways that that we can deal, I think, with AOCI. And so we're ready to start having those conversations. Hey guys. Good morning. I wanted to touch on, I guess, the margin guide not having any rate hikes built into there? It just seems like with some of the repricing of the beta on the deposit side, but there's still an upward bias even with a 25 basis point rate hike. Is that still the case? Or has it gotten to the point where it should be pretty neutral now? I would say with 25 basis points movement we're probably looking between zero and 2 basis points of expansion on NIM. Got it. All right. That's helpful. Then on the mortgage front, obviously, that line item has been under pressure here for a few quarters. If I look at where it's been the last couple of quarters, is that a good place to build off for your 2023 outlook? Or do you think maybe the market you're in a little bit stronger? Yes. We â what we did, Andrew, is we looked at the second half of 2022 actual, and we use â if you annualize that, that's pretty close to our expectation for full year 2023. Got you. Let's see. No, I think that covers all the questions I have. Everything else has been answered. So thanks. Good. So just a quick question on the credit and the outlook. Great commentary and color that was provided in the prepared remarks, the reserve, I think is pretty healthy, around $1.38. And just kind of wondering what your thoughts are on maintaining that level as we go through 2023 and kind of what you would expect for net charge-offs and kind of how we can kind of use that to triangulate into a loan loss provision as we look out over the next few quarters? The environment for us from a credit quality standpoint, it's kind of difficult to characterize because you know what the headwinds look like. But our two largest markets, as we said on the call have 3% unemployment still. If you look at IPR, office and commercial, people in the Midwest are in the office and working, it doesn't have those headwinds to the degree that the rest of the country does. You look at what we're seeing in our portfolio and how we're monitoring it and past dues remain low, overdrafts remain low. They're almost abnormally low. The borrowing base compliance; we look at borrowing bases; the compliance with the borrowing base is good. Our loan covenant compliance and monitoring, we're not providing a lot of waivers. We've got favorable compliance with our borrowing bases. Borrower levels of liquidity remains strong. We're continuing to see borrowers have strong level of liquidity. And what I hear when I look at the economy and listen to our other earnings calls, particularly from the larger banks is that the expectation is kind of muted. So from a credit cost standpoint, it seems odd that we sort of see the continuance of the trend we've had for the last year. So Damon, when you put all that together from a budgeting perspective, we still look at 20 basis points on average loans for provisioning. But when you listen to John and I could see us coming in lower than that based on what we're seeing today in the economic environment and what we're seeing in our portfolio, that certainly could change over the year based on our current coverage and our current credit quality from an ACL point of view, I think that qualitative aspects of the ACL taking into account that uncertainty. But the quantitative are really showing the lack of loss that we have flowing through our model. Got it. Okay, that's helpful. I appreciate that color. And then with regard â just kind of a technical question here, but with regards to the impact on the tax rate this quarter because of the timing which related to the solar credit. So should we anticipate like the low end of your 14% to 16% range in the first quarter because you get a bigger benefit? Or is that just embedded in the overall guidance? I guess we've talked about the deposit betas were below the industry last year, and that was the playbook that you talked about. I guess my question is what deposit betas are you using in your margin outlook? And if we do get a couple of rate hikes, how would that impact the beta assumption? Right now, we're using a terminal beta of 40% in our budgeting for 2023. I don't know if continued rate hikes would alter that assumption at this point, that is something that we talk about in our asset liability committee every month, and we'll continue to monitor that. Thanks. And maybe as a follow-up, maybe could you discuss how you're using the digital bank as an overall funding tool? Yes. So the Digital Bank are also brilliant bank, our direct bank channel is a vehicle for us to raise deposits, and that is a market rate, and it helps us focus our efforts in raising deposits in that channel versus our core markets where we do have conversations with our customers on rate, but it reduces the potential cannibalization of deposits and repricing of deposits there. Okay. Maybe one last one on capital management slide, was it 18; talked about the TCE target at 8.5%, it was 7% at the end of the year. How does that come into play as you think about additional or further buyback activity? We â management and the board talk about the buyback each time we meet and we take into account our current expectation for the upcoming year. What we're seeing in the economic and operating environment. In the most recent quarter we did buy back some shares, but not at a pace that we had in earlier quarters, and I think that was due to us wanting to gain some more certainty on our view of 2023. Now that we have that, I think you'll see us back in the market here in the beginning of the year, and we're â our constrained factor right now is retained earnings. So we want to make sure that we are within a certain percentage, call it, 60% to 70% payout and not higher than that. So said differently, Terry; we look at TCE, but TCE, we look at minus AOCI. So when we're doing our analysis we are very comfortable that the AOCI is going to come back. And we know it's going to come back mostly or almost always going to come back by the end of 2025. So we look at it minus that, and so that's not going to be a restraining factor for us in buying back shares. Thank you. And I'm not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
EarningCall_1026	Good day, and welcome to the CNX Resources Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]After todayâs presentation there will be opportunity to ask questions. And please note that this event is being recorded. Thank you, and good morning, everybody. Welcome to CNX's fourth quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Alan Shepard, our Chief Financial Officer; and Navneet Behl, our Chief Operating Officer. Today, we will be discussing our fourth quarter results. This morning, we posted an updated slide presentation to our website. Also detailed fourth quarter earnings release data, such as quarterly E&P data, financial statements and non-GAAP reconciliations are posted to our website in a document titled 4Q 2022 Earnings Results and Supplemental Information of CNX Resources. As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Alan and then we will open the call up for Q&A where Nav will participate as well. Good morning, everybody. 2022, it marked the best year ever for CNX as a public company with respect to free cash flow generation. The fourth quarter marked 12 consecutive quarters of significant free cash flow generation, which helped produce the annual record of $707 million. We utilized the free cash flow to reinvest into the asset base. We use it to reduce debt, and we used it to acquire our discounted shares Cumulatively, you add all this up, we've retired nearly 25% of the outstanding shares of the company since the inception of the share repurchase program in 2020. And to put this in a perspective in terms of the total impact, the cumulative result of acquiring nearly quarter of our company in this short period of time, it's been matched or vested by only four other companies in the S&P 500 and only by 22 companies in the S&P 1500. So when you consider the steep discounts in price that we enjoyed when acquiring our shares relative to the low-risk, long-term free cash flow yield and the intrinsic per share value, CNX may very well be one of one in the S&P 1500 universe of public companies. We're basically doing two things at the same -- material share count reduction and at the same time, at a substantial discounted price. And by the way, while we typically reference share repurchases since the midstream acquisition, is that's our most recent share count high, we've been consistently repurchasing shares since 2017. And we're potentially just getting started because if we continue to see substantially undervalued shares, we're going to continue to opportunistically acquire ourselves to grow per share value for owners. Stepping back for a moment to assess the results of the past few years. It's clear that at the halfway point of our initial 7-year plan that we provided in 2020, we've exceeded our initial expectations. The long-termism that wraps around our sustainable business model and that's embedded in our decision-making. It's beginning to add up to incredible achievements on our key objective of long-term, low-risk free cash flow per share and more importantly, allocating that free cash flow thoughtfully to produce, in the end, a drastically reduced share count and reduce debt level. This underpins our ability to grow long-term free cash flow per share in multiple different macro environments, and that those macro environments could play out over the next decade plus. And these results, they're symptomatic of our consistent strategic thinking as well as our execution. Now turning back to the shorter-term outlook. Despite the important success of 2022 and the continuing march of our long-term strategy, we find ourselves amid very chaotic times. There are broader macro challenges, I'll call them, that the industry has to contend with moving forward. In particular, we've got increased inflationary pressures in the second half of 2022. You couple that with the rapid deterioration of pricing through this winter, you're seeing the near-term challenges throughout the industry. In CNX, we're not immune to either challenge, albeit I will say we are better positioned than most due to our midstream ownership, our focused activity set and due to our programmatic hedging strategy. So although these two issues are going to impact near-term free cash flow generation, we're still able to execute the core tenets of our sustainable business model, basically, just as we've consistently done year after year across all phases of the macro and commodity cycles. Despite the challenges we see out there today, companies next seven years is going to set up to be vastly improved when compared to the original seven-year look that we laid out again back in 2020. Now while we can consistently generate substantial free cash flow per share goes back to the foundations of our competitive moat, much of that is captured in our Appalachia First vision. I encourage you to review it if you haven't seen it already or to revisit it. If it's been a while and you want to take another look at this. But many of the competitive advantages that CNX brings to bear, they are tied effectively to the strength of the Appalachian region itself. So allow me to summarize the three largest contributors to the CNX competitive moat. On First Advantage, we got unique stack pay position in Appalachia with the Marcellus and Utica, presents an unparalleled opportunity to lead the development of what we think is going to represent one of the world's top two most prolific natural gas basins. Second major strategic advantage that we've got, integrated upstream midstream structure that allows us to make long-term investments to generate high rates of return and basically creating the lowest cost all-in operating costs in the basin. And then the third strategic advantage, it's our opportunity set that we're seeing with our new technologies business segment in arenas of things like methane capture and abatements with respect to transportation fuel market development with respect to just overall general technology deployment. They continue to differentiate us and create a growth outlet for CNX as the world continues right to focus on lower emission and lower risk energy solutions. Now all 3 of these pillars or strategic advantages, they support a sustainable business model that generates that significant free cash flow to simultaneously reinvest into the business to reinvest into reducing debt and to reinvest into acquiring our discounted shares year after year. It's basically a long-term recipe for success when anchored by that Appalachia first vision at the core or at the route. In 2023, each of these themes or these advantages are playing out in different ways when you look at our capital allocation. So some allocation decisions, such as our core D&C program, they're very familiar to all of us. Other capital allocation decisions, such as those in the new technologies segment, they were discussed. We talked about them in 2022, but now they're becoming tangible decisions in 2023. So allow me to touch on each of these broad buckets of capital investment for '23, at least, in some reform, Alan is going to cover these in much more detail shortly. So the first sort of category or bucket, it's that core of our 2023 capital investment and it's the continuation of a 1.5 rig plus 1 frac crew D&C program to continue the development of our core Southwest Pennsylvania assets. This is the bulk of 2023 capital spend is expected, and it's subject to the inflationary pressures that I alluded to earlier. However, today's higher capital costs, I will point out they are more than offset by the increased pricing outlook that we continue to programmatically hedge. So in other words, our project-level returns, they remain robust in this environment. Thanks to our consistent derisking approach. And some out there, they're saying inflation is waning and who knows maybe the right. But we assume in our '23 guidance, current inflationary pressures are going to continue through 2023's entire activity set. If inflationary pressures drop in '23, we can adjust capital guidance accordingly at that time. What's not going to change? It's our desire to use the highest quality crews and products to make the long-term focus decisions for those inputs and that derisk our plan. Now the second sort of component of our capital investment plan for '23, we continue to invest in our fully integrated midstream and water infrastructure. So similar to last year in '22, we invest capital in '23 to enjoy the returns and the benefits over the next, call it, 30 years. And while the core projects that underpin our long-term plan, they very little, the magnitude of these investments, it's going to vary from year-to-year with those inflationary pressures that I discussed, as well as with shifts in planned timing as we're always looking constantly evaluating how to best de-risk and delineate and profitably develop our stacked pay fields. And then additionally, many of these highly accretive life of field investments, they not only solidify us as the region's low-cost operator, but they also raised the level of our ESG performance. I'll give you a great example of that this year. It's a significant one as well, I think. And that's the construction of a centralized aboveground water storage tank facility in our Southwest Pennsylvania field, that not only provides life of field low-cost, low-risk water supply, but that will also start the phase out of in-ground impoundments without adding trucks to the road, and that's a really good outcome from our perspective. And then last, when it comes to the different major components of the capital program in 2023, we've targeted several discretionary capital allocation opportunities whose risk-adjusted returns, they compete for investment and they reinforce our Appalachia first vision. For example, in '23, we will be participating as a major non-op partner in PAD related to the Pittsburgh International Airport project. The continued development of our Pittsburgh airport project, it's critical to CNX and our Appalachia First vision. It's critical to the airport as it continues with the terminal modernization program, and it is critical to the wider region, given the key -- the key role that the airport plays as an economic development engine for the area. Now this project, along with several other emission reduction business opportunities in that new technologies business unit, they're laying the cornerstone to once again support that Appalachia first vision. So now I want to pivot to some comments on our 2023 production outlook. Production, as you know, it's a result for us, not an objective within our strategy and business model. And while our focused activity set results in lower overall operational risk and long-term certainty of execution, any short-term delays or disruptions to that program is going to create noise when look into production on a quarter-to-quarter or year-to-year basis. For example, as we discussed on the Q3 call last year, we experienced delays associated with an abandoned Utica wellbore. And while we initially expected to be able to make schedule adjustments to offset those delays and basically hold production levels flat year-over-year, weather-related and other operational delays in last year's fourth quarter completion schedule, it further impacted production levels in early 2023. And as such, we're now expecting production in '23 to be modestly lower rather than flat compared to 2022. And we expect production levels to be the lowest in the first quarter, build throughout the year as TILs accelerate. Most importantly, we're expecting to return to our 2022 production level run rate around midyear 2023 and plus or minus. And from there, return to more elevated annual levels in 2024 and beyond. So a short-term issue. And if you take all this into account, the planned for 2023, it's pretty simple. Continue the march of our sustainable business model. And before I do hand it over to Alan to discuss the quarter in a little more detail, I do want to introduce our new Chief Operating Officer, that you heard from Tyler with the intros, Nav Bhel. He has no overstatement to say that Nav has seen and done it all. His view of this incredible potential of our asset base that drove this decision to join us. It's just, I can tell you, contributes to our collective excitement about the future. So from overseas North American operations for a Fortune 500 oil and gas producer to his proven track record of building effective teams and successfully developing new shale plays to work in offshore basically across the globe, his diverse set of experiences and Nav's impressive technical expertise, I can tell you they're already valuable as we continue our efforts to pioneer the benefits of the deep Utica here in the Appalachian Basin and of course, site, remain focused on the daily safe and compliant execution of our operational plan. In the end, this is a highly competitive business. We aim to win on behalf of our owners. So whenever we see an opportunity to improve the team, we're not going to hesitate to act. That's what we were lucky enough to be able to do with Nav, and you should expect to see and hear much more from Nav in the future. Thanks, Nick, and good morning to everyone. As Nick mentioned, this quarter represents the 12th consecutive quarter of free cash flow generation through the execution of our sustainable business model that is grounded in clinical capital allocation to optimize long-term free cash flow per share growth. In the fourth quarter, we generated approximately $276 million of free cash flow or $707 million of free cash flow for the year. This brings our 3-year cumulative total free cash flow to close to $1.6 billion or approximately 55% of our current market cap. Let's first turn to the capital allocation side of the business as highlighted on Slide 5. As you can see, we continued our market-leading shareholder return initiatives by purchasing 12.6 million shares in the quarter and another 1.3 million shares after the close of the quarter through January 17. Said differently, we bought back nearly 7% of our total shares outstanding over that time frame. And since we started this program in Q3 of 2020, over the last 9 quarters, we have repurchased approximately 24% of the outstanding shares of the company. We continue to see this as a remarkable low-risk capital allocation opportunity moving forward. And although we have not given an explicit capital allocation framework, if you extrapolate these levels of buybacks moving forward, you can see that we will continue to dramatically reduce our denominator and thereby meaningfully grow our long-term free cash flow per share. On the balance sheet side, this quarter, we also reduced adjusted net debt by $57 million during the quarter, bringing our annual total reduction to $107 million or $360 million since we started the program in Q3 2020. More importantly, our robust liquidity position and long debt maturity runway enable us to take advantage of any deepening valuation disconnects that might occur in either the equity or debt markets. Let's now shift to our updated 2023 outlook on Slide 6. First, from a macro perspective, we expect the recent pricing volatility to continue in 2023 as the U.S. domestic markets continue to fluctuate with shifting weather expectations, uncertain domestic production levels and continuing LNG demand from around the world. How gas prices unfold in 2023 will depend on a difficult to predict combination of those 3 core elements. Despite that uncertainty, CNX's focus will remain on safely and efficiently developing our assets and generating free cash flow to clinically allocate towards reducing our debt and share count. The outcome of the combination of those core elements is easy to predict. High rates of return on our capital investments and sustainable growth and long-term per share value. With that in mind, let's now turn to the specifics of the 2023 guidance. For 2023 production volumes, our initial expectations are between 555 and 575 Bcfe, which is a slight decline based on the midpoint of the guidance range when compared to the 2022 production total of 580 Bcfe. As we discussed on previous earnings calls in 2022, we experienced various operational delays and challenges, including most significantly in abandoned Utica wellbore that resulted in lower overall production in 2022, which are now expected to result in the year-on-year decline. Most recently, further weather and operational delays to the frac line in Q4 2022 are expected to result in Q1 volumes being the lowest quarter during the year with volumes ultimately building quarter-over-quarter as we move forward. Despite the operational delays that were encountered in 2022, we believe that we have made the necessary operational and organizational adjustments that will result in a return to our 2022 production level run rate of approximately 1.6 Bcf per day around the 2023. Based on our 2023 production range and using January 5 strip pricing, we expect the annual EBITDAX range to be between $1.1 billion to $1.25 billion. Given that our 2023 gas production volumes are roughly 80% hedged, this EBITDAX range includes estimated open volumes of around 100 Bcfe. As we've seen throughout 2022 and in recent weeks, while the extreme volatility in the natural gas markets will significantly impact near-term results, prices along the strip are still materially higher than in recent years. And as such, the rates of returns on previous capital investments remain not just high but improved in this environment. And the future business plan not only remains intact, but even stronger. Let's turn now to the 2023 capital outlook. As we discussed on the Q3 call, we are expecting a capital range for the year between $575 million and $675 million. This capital range reflects the continuation of our operational plan that utilizes roughly 1.5 drilling rigs and 1 continuous all electric frac crew. Additionally, this annual capital budget assumes a full year of the increased inflationary cost environment that we experienced during the latter part of 2022 and reflects our desire to use the highest quality crews and products and to make the best long-term focused decisions to help derisk our plan. If we are to break the capital budget down into components, approximately 75% of the total is allocated to D&C capital, which includes pad construction and production equipment. Approximately 20% is allocated to non-D&C capital towards the core business, which includes midstream and water pad hookups and other centralized infrastructure. And then the remaining 5% is allocated to what we are calling discretionary capital, that is per definition, capital that we don't need to spend this year to maintain production, but have determined that the investments outcompete other opportunities for that capital. For instance, we are spending discretionary capital this year on a major non-op pad, which Nick highlighted in his remarks. That opportunity to provide a number of benefits in economic terms, but also helps to unlock our Appalachian First vision. Also, we are spending targeted capital in our new tech business group to further our mine methane abatement operations and other emission reduction technologies. We believe that these discretionary investments will generate significant returns and that they are prudent investments to make today. Lastly, with respect to 2023 free cash flow. Using the midpoint of the guidance ranges, we are setting our initial free cash flow outlook at approximately $375 million. Based on that free cash flow estimate, using our current share count, free cash flow per share is expected to be approximately $2.20. Importantly, that estimate is not based on any potential end of year share count projection but rather based again on our latest share count. We summarize this guidance slide. The current 2023 free cash flow is lower than our expected future run rate due to 3 main factors: First, the lower first half production for the year that we discussed; second, the impact on capital of assuming annualized second half 2022 inflation levels persist throughout the year; and third, incremental investments and high IRR discretionary capital projects. Overall, our goal remains the same. To grow the long-term free cash flow share of the company, and our 2023 business plan is another step in continuing to do that this year and beyond. Now let's shift to Slide 7. This is a new slide that is meant to highlight how our hedging strategy is programmatically locking in higher future gas prices. The dark blue portion of the graph represents the percent of hedges as of Q1 2022. The light blue portion of the graph represents the hedges that we have added over the last 3 quarters. Lastly, the tan dash line portion of the graph represents the open volumes when assuming the midpoint of our production guidance in 2023 of 565 Bcfe and assuming 590 Bcfe for 2024 through 2027, less 7.5% for liquids. As Nick mentioned, today's higher capital costs are more than offset by the increased pricing outlook that we continue to hedge into. In other words, our project level returns remain robust in this environment, and thanks to our consistent derisking approach. That is exactly what this slide highlights. Through the consistent execution of our hedging strategy we have and will continue to add higher priced hedges in what is an elevated natural gas price environment compared to when a lot of the hedges were originally put on. For instance, looking at 2023, as of Q1 2022, we were already 77% hedged at $2.37 per Mcf, which is a realized price net of basis differentials. Over the last 3 quarters, we have added 21 Bcf of hedges for 2023 at an average price of $4.46. Similarly, if you look at 2027, we had very low hedged as of Q1 2022. However, over the last 3 quarters, we have added 113 Bcf of hedges at $3.51 per Mcf, up from $2.10. Locking in these increased pricing levels translates to significant future margin expansion that will add material free cash flow compared to the original 7-year plan that we put out in 2020. In conclusion, we believe that the volatility that we're seeing in the commodity markets is simply noise as it relates to our sustainable business model and long-term plan. Despite the uncertainty in the gas markets we are currently seeing in 2023, along with the uncertainty around the broader economy, we are confident in the sustainable business model that we have created. Our focus in 2023 will remain on safe and compliant execution to develop our extensive asset base and our clinical capital allocation to grow our long-term free cash flow per share. In other words, as always, we will continue to operate with an owner mindset. Nick, I know you mentioned that project level returns are robust at current prices and that -- you've got a significant amount of volumes hedged. But just given the pullback in natural gas prices that we've seen recently, would you consider maybe delaying some completions or slowing activity at all? And I guess if not, is there a price level where you might consider slowing down? Zach, yes. So there's always obviously going to be a price level where we adjust activity set or capital allocation with respect to repurchases, debt, all those different avenues. And the process that remains constant, remains the same. So we're continually running this math that you speak of. And to sort of cut it short with regard to a conclusion, there is a substantial risk-adjusted acceptable rate of return on our 1 frac crew, 1.5 rig activity set sort of under any foreseeable gas price moving forward. We continue to run it. The reason we continue to run the math is to always be thinking about how that might impact the NAV per share of the company with respect to other allocation decisions like share repurchases. But whether it's share repurchases or this activity set that we've laid out with that 1.5 and 1 sort of activity set, we're good to go. . Just one follow-up. I know a lot of things have changed since you initially rolled out the 7-year plan several years ago. But in that plan, you expected operating costs to kind of tick lower over time. Maybe could you just update us or give us a little detail on how you expect those cash costs to trend in 2023 and going forward? Yes. So I think we still have the expectation that the cash cost will trend lower. I think what you saw kind of in the '21, '22 time frame was a higher mix of wet as we brought on some of the additional Shirley-Penn pads, to have those higher process and costs associated with that. And you also saw the impact of kind of higher severance taxes as pricing has moved up. I think moving forward, what you'll see is some of our kind of third-party areas, particularly the legacy Ohio production and the legacy West Virginia production in Shirley-Penn as that leads off and we replace that with our wholly owned kind of gathered infrastructure up in the SWIP CPA, you'll see those prices come down, or average costs come down. I was hoping you could speak a little bit more on some of the operational slippage that you kind of discussed on the fourth quarter. You mentioned there was the issue with the abandoned Utica well. But just wanted to kind of get a sense. I mean, it certainly seems like with the -- as you're seeing lower production in 4Q, something you expect a little bit lower production in the first quarter of '23. Were there any other just like major supply chain issues? Or do you guys have any like labor issues on the frac side or certainly hearing from other operators? And if you a piece of equipment that breaks or something, it's just really hard to kind of get these days in a rapid fashion, just given the tight supply chain market. So I just wanted to get a little bit more kind of color around what's been kind of happening with the ops here of late. Yes. So Leo, basically, the way to think about it is we have a 1 frac crew program, right? So any kind of delay pushes all the future as to the right a little bit. And obviously, the biggest signal contributor last year was abandoned Utica wellbore. And then in the Q4, we had weather and a couple of other issues. So it more -- it's more on our side as opposed to anything you see. I mean, certainly, we experienced the same sort of supply chain issues everyone else does in the basin. But it's more just things slipping to the right on that end. We're constantly evaluating opportunities to potentially get back on that cadence. You run that math, we just thought it made more sense to let kind of the production dip a little bit in Q1 and just focus on getting back to our 1.6 Bcfe run rate. And then just can you speak a little bit to the CapEx range in '23 at $575 million to $675 million. I guess that's just eyeballing the math kind of 15% to 18% range or whatever in terms of the numbers here. You talked about how you kind of assumed inflation continued in that range. So maybe just help us out a little bit with how to get to the lower end versus the higher end? Yes. So I think the way you want to think about it as kind of the 2 big buckets that we split out this time. So on the D&C side, basically that range is reflective of the potential for inflation to kind of soft in the back half of the year. I think you'll probably see elevated prices for the first half. And then as prices have come down pretty rapidly, you should see some softening in the supply chain cost in the second part of the year. Then on the non-D&C side, if you think about those projects, a lot of pipe construction and midstream construction. And most of that stuff is bid kind of currently as it's being done. So you need a wider range there because you're not sure what environment you could be bidding into in the next kind of 5 or 6 months. So just with kind of the uncertainty in the world, we went with wider ranges this time. And as Nick mentioned, as those could tighten up through the year, we'll provide that color to you all. My first question is on OFS inflation and specific. It sounded like you all suggested a bit that your day rates might be a bit higher than potentially some other rigs. I'm just wondering, do you all believe I would call it, your higher-end rigs and fracs are worth these incremental costs. And my second just on that, just quickly. So a brief period year-to-date. I'm just wondering if you could talk about what you're seeing on OFS inflation year-to-date. Yes. So our focus on OFS is always locking in consistent crews that are not recent spot crews that have been called together. We want long-termism in our supply chain that kind of underpins our business model. So to get that, you might have to pay a little extra here there. When a supplier comes, you ask it for a price increase because they could potentially go somewhere else. You're willing to pay that just for all the kind of other externalities that creates to have that consistency. And that's our focus. We're not trying to pennies and chase spot crews to save a buck here or there. We want long-term is in the supply chain [Indiscernible] Like I said, I think you're still seeing levels where we're at the second part of 2022. And right now, the range we're showing here reflects that those kind of persist throughout the year. But again, as prices come down, OFS will soften as it always does in a lower price environment. And then, Nick, if I could ask one more. I'm just curious, looking at your sort of financial operational strategies. I'm just wondering you've laid this out, you've stuck to this. And I'm just wondering. Do you all go back -- would you, I guess, what I'm wondering, would you all consider altering these plans to potentially more growth, dividends or I don't even know, maybe even something strategic with your midstream given the sizable position you have there? Again, why as this is just looking at -- I know 1 year doesn't make history, but for the past year, your stocks up 6% despite the share returns versus your 3 closest peers up somewhere around 30% to 60%. So I'm just wondering when you kind of look back if you would consider any of these alternatives. It's a good question, Neal, because it really speaks to the broader strategy and philosophy that we apply within the company. So first thing I'll say, like any option when it comes to sort of realizing the NAV per share of the company and the share price, we're obviously wide open to considering it and running the math. But just sort of walking through the overall strategy and approach. The first chapter, which wasn't all that long ago was really trying to set us up to execute the strategy, to your point, that we've been employing in the past couple of years. And that was no small task. That was a massive lift. We had a figure out how to reintegrate midstream. We had to figure out how to spin coal. We had to figure out how to refi our balance sheet and build it into what we wanted it to be. We had to delever, right? So all those things were accomplished and it really put us in a position to be that positive free cash flow generator and then be able to allocate the capital. Now when we started on sort of the capital allocation side, once we had all that other stuff accomplished, we didn't hide anything and told Mr. Market exactly what we intended to do. We're very clear about that. Our Chairman of the Board, he wrote a book on it literally the outsiders and if you want to get a read into how we think about our decision making, just give that book a read. It's almost just a perfect road map how we think on behalf of owners. And I'll say it's not rocket science, but it is absolutely different for the space that we're in. And it's also, I think, incredibly effective over the long term. So you look at from 2020 to today, the strategy and the execution from our perspective under that philosophy, it is clearly working. A quarter of the company has been taken in. That's not noise, that's hugely material. And more importantly, this is like the crucial point or piece of it, it was done at very attractive prices compared to the intrinsic value of the company. And amazingly, to me, at the same time, we delevered the balance sheet. So like we said in the commentary, that's rarefied air. And it might be one-on-one in a public company universe when you look at other public companies are out there beyond energy. So is the strategy working, I don't want to go into a rate here, but I'll say -- Mr. Market might have been sleeping on us a bit, and quarter of the company was retired over that time. And if Mr. Market is still asleep, we're still on the move with the strategy execution. And before you know it, these numbers start to get very substantial almost to the point where they get absurd. So we know this is going to work because, frankly, from our perspective, it's working. It's working as we speak. And the last thing I'll say is everything to keep on doing this is entirely within our control. So we don't need to issue debt to win. We don't need to do a major acquisition to win. We don't need high gas prices to win. All we need basically is time to run the play and execute. So we're very pleased with where we're at. And I understand exactly, right, the questions and the points that you're making and what you're looking at, I just want to put that in the context of how we approach it with our philosophy. First question is just more on your ability to how the opportunities that you see to potentially add to your inventory in this sort of pricing environment? Could you discuss the potential bolt-on opportunities that your acquisition opportunities you see in Appalachia at this point in time? Yes. I think the kind of the bolt-on opportunities are fairly reduced at this point. There's not a lot of private equity operators left. We always compare any potential M&A opportunity to the opportunity of doing M&A in ourselves through our buybacks. So it's a pretty high hurdle when you come at it from that perspective. So there's currently nothing kind of on our radar from that perspective, given where our share prices are trading. Appreciate. And also, I understand the -- that you continue to focus more on swaps. What hasn't been the appeal in terms of collars from your perspective -- from a hedging perspective? Yes. I mean when we look at it, we just don't think it's a free lunch to have the caller. I mean we get the SKU and everything, but we like having the certainty of the fixed kind of swap number. And particularly in this environment where you've seen us be able to layer into some pretty attractive hedges, we're going to stick with that strategy. I understand because I'm just -- what I'm trying to understand is, so when you hedge I mean sometimes it's I guess it could be at higher prices, but sometimes it can be a lower prices and you have a buyback program, so if the stock goes higher, you're using hedges that may have been like hedge at alower price. So I'm just sort of trying to understand that value proposition. Why not go with the callers? Yes. Again, we evaluate all sorts of hedging strategies, and we always come back to the swap is the most effective. There's nothing that we can point to with a caller that says that's going to be any more effective than just a straight swap, right? There's just -- there's no implied free launch by going the caller over the swap. And then when we think about buybacks to your question, we think the stock is materially disconnected from its intrinsic value. So we're more than happy to kind of pay the prices we're at today. First one was just on free cash allocation to repurchases in 2023 and going forward. I know you just hit on this in a lot of detail on how aggressive you all been and taking advantage of market conditions. For the buyback, which, I guess, most recently in Q4 was maybe 75% to 80% of free cash flow for the quarter. So the share price where it is today and just given your comments on not really seeing much that competes in terms of M&A on the radar relative to share price. I guess we can pencil in more of the same, but is there anything else you mindful of as we think about that? No. We just remind folks that it's a continuous process. Capital allocation is a constant discussion. If any of the variables change, we would change our strategy so. And then as my follow-up, I just wanted to dig a little deeper on the non-weather-related operational issues you mentioned in Q4, specifically aside from the Just wanted to get a sense like what exactly contributed there and to what magnitude and if those are in the rear-view at this point in time. Yes. So I think certainly, as I mentioned in my comments, we believe those are in the rear-view Outside of the weather, nothing individually material. There's still a lot of smaller delays that added up to the frac line pushing to the right. Please excuse my background noise, I'm the move here. I apologize if you touched on this already, but with the free cash flow calculation, there was a pretty big swing in accounts receivable in the quarter that contributed to the free cash flow. I just -- it just seems larger than I had seen before. Is there any particular on that? Yes. So one of the things we've been working on from a liquidity and risk management perspective is matching up the physical payment timing on the derivatives with the physical cash receipts. So a lot of that started to take hold in Q4. So some of the notes that we saw that were asking about that difference between the realized loss and the cash out the door on the derivatives. That's what caused that. From our perspective, it's a great opportunity to eliminate that kind of 50-day lag between when we have to pay those. And when we get the physical sales ourselves. And so that's kind of a great derisker particularly, it was more important when the gas prices were trading around $10, but it's still important from a liquidity management and risk management perspective. So you see that unwind in the upcoming quarters as we effectively done is slid cash from period to period. And this will conclude our question-and-answer session. I'd like to turn the conference back over to Tyler Lewis for any closing remarks. Thank you. Thank you, everyone, for joining this morning. Please feel free to reach out to us if you might have any additional questions. Otherwise, we will look forward to speaking with everyone again next quarter. Thank you.
EarningCall_1027	Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Old Republic International Fourth Quarter 2022 Earnings Conference Call [Operator Instructions]. Joe Calabrese with the Financial Relations Board, you may begin. Thank you, Chris. Good afternoon, everyone, and thank you for joining us for the Old Republic conference call to discuss the company's fourth quarter 2022 results. This morning, we distributed a copy of the press release and posted a separate financial supplement, which we assume you have seen and/or otherwise have access to during the call. Both of the documents are available at our Republic's Web site, which is [Technical Difficulty] that this call may involve forward-looking statements as discussed in the press release and financial supplement dated January 26, 2023. Risks associated with these statements can be found in the company's latest SEC filings. This afternoon's conference call will be led by Craig Smiddy, President and CEO of Old Republic International Corporation and several other senior executive members as planned for this meeting. At this time, I would like to turn the call over to Craig Smiddy. Please go ahead, sir. Okay. Joe, thank you very much. Good afternoon, everyone, and welcome again to Old Republic's fourth quarter earnings call. With me today are Frank Sodaro, our CFO of ORI and Carolyn Monroe, our President of the Title Insurance business. Well, as some of you may have seen earlier this week, we officially kicked off our recognition of the 100-year anniversary of Old Republic and throughout the year, we plan on engaging with all of our stakeholders, including our shareholders, associates, customers, distribution partners as we look to celebrate this milestone. So ORI had another good quarter, contributing to a strong performance for 2022 with General Insurance producing significantly greater pretax operating income in the quarter and for the year, while Title Insurance pretax operating income was considerably less than the record setting 2021 results, mainly due to the effects of increasing mortgage interest rates. Our reserve position remains healthy in all of our segments, led by General Insurance with very strong favorable prior year reserve development in the quarter and in the year. Our balance sheet is in great shape as we continue to efficiently manage our capital position and as the release indicates, we returned a considerable amount of capital to shareholders during the quarter and the year through both dividends and share repurchases. Consolidated net premium and fees earned for the quarter and the year were lower, reflecting the lower year-over-year Title Insurance revenues. General Insurance net premiums earned increased by 7% for the year, while Title Insurance net premium and fees earned decreased by 29% in the quarter and 13% for the year. Our consolidated pretax operating income was $300 million for the quarter and just over $1 billion for the year, while our consolidated combined ratio came in at a very profitable level of 89.6% for the quarter and 91% for the year. Both General Insurance and Title Insurance produced sound profitable underwriting results as is reflected in their respective combined ratio. Going into 2022, our expectation for Title Insurance was for considerably less revenue and operating income than the 2021 year. And we remain of the view that headwinds will continue for Title Insurance in 2023. ORI's strong consolidated results once again reinforces the soundness of our longstanding diversification strategy between P&C Insurance and Title Insurance, which we believe produces steadier earnings and returns over time. So I'll now turn the discussion over to Frank. Frank will turn things back to me to cover General Insurance, which will be followed by Carolyn, who will discuss Title Insurance and then as usual, we'll open up the conversation for Q&A. Thank you, Craig, and good afternoon, everyone. This morning, we reported net operating income $237 million for the quarter and $845 million for the year. On a per share basis, comparable year-over-year results were $0.80 versus $0.88 for the quarters and $2.79 versus $3.08 for the full year. Although both periods were down when compared to the record set last year, our consolidated earnings were strong by historical standards. Shareholders' equity ended the year at nearly $6.2 billion, resulting in book value per share of $21.05. When adding back dividends, book value increased just under 1% from the prior year end driven by our strong operating earnings, offset by lower investment valuations. The comparable increase for the quarter was 12.5% due to higher investment valuations and our strong operating results. Net investment income increased nearly 18% and 6% in the quarter and year, respectively. The increase for the quarter was driven primarily by higher yields, while the year benefited from both higher yields and an increase in the level of investments. During the quarter, we completed the rebalancing of our investment portfolio. So for the year, we realized $375 million in net investment gains on sales of common stocks while offsetting those gains for tax purposes with sales of bonds, giving us realized investment gains of $62 million. This effort leaves us with a comfortable portfolio mix of 80% in highly rated bonds and short term investments, with the remaining 20% allocated to large cap dividend paying stocks. The average maturity on the bond portfolio is 4.3 years with a book yield of 3.3% compared to a market yield of 3.5%. Even after reducing the stock portfolio by roughly $2 billion, this portfolio still ended the year with unrealized gains of about $1.3 billion. Now turning to reserve development. All three operating segments recognized favorable loss reserve development for all periods presented. In total, the consolidated loss ratio benefited by 7.4 and 3.7 percentage points for the quarter and year, respectively, compared to 4.6 and 2.7 percentage points for the same periods a year ago. Prior year losses have come in lower than expected, driving this level of favorable development. While the mortgage insurance loss costs continue to be favorable, the trends of lower newly reported defaults and higher cure rates on loans already in default are beginning to fall in line with pre-COVID levels as expected. This [Technical Difficulty] paid another $35 million dividend to the parent holding company in the quarter, bringing the total return to $140 million year-to-date. In the quarter, we paid $67 million in dividends and repurchased over $175 million worth of our shares for a total of just over $240 million returned to shareholders. We entered 2023 with $169 million remaining on our existing repurchase authorization, which we will continue to execute on opportunistically. Okay. Frank, thank you for that. So for General Insurance, net premiums written increased by 1% in the quarter and 8% for the year. Of note here, premiums written in the quarter were affected by premium adjustments, including audit premiums and our expectation is for premiums to continue to grow at a pace more consistent with what you see in the overall 2022 annual growth rate. We continue to achieve rate increases on most lines of coverage with the exception of D&O and workers' compensation. Our renewal retention ratios and new business production remains very strong. Pretax operating income rose by 35% in the quarter and by 17% for the year to $690 million. The loss ratio for the quarter was 57%, including 10 points of favorable loss reserve development, while the full year loss ratio was 62%, compared to 65% in 2021. Turning to the expense ratio for the year. It came in at 27.4% compared to 26.5% in 2021 with continued growth in lower loss ratio, higher commission ratio, lines of coverage, adding approximately 1 percentage point of additional commission to the expense ratio for the year. The combined ratio for the year was 89.5% compared with 91.3% in 2021. Turning more specifically to a few of the significant lines of coverage, commercial auto, net premiums written continued to grow at an 11% clip during the quarter, while net premiums earned grew 7%. The loss ratio for the year was 66.6% compared to 71.5% in '21. So while this line of coverage benefited from favorable prior year loss development in both periods, auto liability loss severity continues at the high single digit level and auto physical damage loss severity continues at a low double digit level, while loss frequency still remains below the pre-pandemic levels. Our rate increases on this line of coverage are in the high single digit range, which implies that we continue to cover overall loss frequency and severity trends. So we think our rate levels remain adequate relative to our target combined ratios for commercial auto. Looking at workers' compensation, net premiums written came in lower for the quarter and relatively flat for the year, affected by the premium audits I mentioned earlier and continued rate decreases. Loss ratio improved to 46% for the year from 59% last year. Here too, this line of coverage benefited from favorable prior year loss development in both periods with loss severity slightly up and loss frequency continuing to trend favorably. So here, too, we think our rate levels remain adequate relative to our combined ratio targets. We continue to follow loss frequency and severity trends very closely, especially in this inflationary environment that we're in. And we adjust for these inflationary trends that drive severity as appropriate. We believe our specialty growth strategy and our operational excellence initiative should continue to produce solid growth and profitability for General Insurance as we move forward. Thank you, Craig. The Title group reported premium and fee revenue for the quarter of $836 million, down 29% from fourth quarter 2021. Our pretax operating income of $45 million compared to $137 million in fourth quarter 2021. Agency premiums were down 27% and direct premiums and fees were down 39% compared to fourth quarter of '21. Our combined ratio for fourth quarter of '22 of 96.2% compared to fourth quarter of 2021 of 89.4%. The combined ratio for the fourth quarter would have been 94.1% without the state sales tax assessment as noted in the release, which we expect to recover. While increasing mortgage rates, refinance decline and a softening housing market impacted our residential activity, our commercial activity remained strong in the fourth quarter with commercial premiums up 13% over fourth quarter 2021 and represented 26% of our total premiums compared to 18% in the fourth quarter of '21. Commercial premiums reported for full year 2022 represented an all-time high for the Title group. As we enter 2023, we'll continue with a focus on commercial opportunities. During 2022, we transformed and aligned our commercial operations with an internal structure that allows us to leverage more tools, resources and support to enhance our capacity to deliver in this sector. With technology being an integral part to our business strategy, we will continue delivering on our digital future. While we are committed to delivery on our large technology projects and platforms, as highlighted in prior calls, we are also equally committed to continual enhancements to our current technology portfolio. The ability to electronically record with counties is an essential step in our digital end-to-end process vision. Throughout 2022, our e-recording company, ePN, has had the fastest growing network of county connections of the major platforms. This growth in our network will give our offices and agents additional access to counties throughout the country for closing files electronically. As we continue to work in a market facing headwinds, we'll take advantage of the opportunity to refine, evaluate and enhance our services to our customers with an emphasis on our growing portfolio of technology to deliver measurable benefits and success for the industry, the company and our shareholders. Thank you, Carolyn. Okay. So we think our diversification and specialty strategies produced another year of solid performance and profitable results as reflected in these consolidated figures. And so that concludes our prepared remarks, and we'll now open up the discussion to Q&A, and I will answer your questions or I'll defer to Frank or Carolyn to respond. So with that, can we please open up to Q&A. It does feel like life has returned to normal with the Chicago finest returning from lunch hour during your prepared remarksâ¦ So let's -- the prior year reserve development is clearly a surprise. And maybe you can give us some color on where it's coming from? And I know you did some comments on it, but I was looking at the table on your press release and it's the one where you talk about the loss ratio, excluding prior period loss reserve development. And looking at the annual numbers, I get it cut off in the quarterly numbers, but the annual numbers have been trending down quite nicely. And as you think about General Insurance for '23 and '24, how do you see this loss ratio ex prior period reserve development trending? Is it stabilizing? Is it going to start ticking up? What's sort of your view of how this is going to look going forward? Greg, I'll answer the latter part of your question first, and then I'll turn it to Frank to give a little more color around the reserve development that you mentioned at the beginning of your question. The loss ratio, excluding prior period loss reserve development is, as you say, trending down and that is a result of a few things. One is we've mentioned several quarters in our calls about the effects of the compounding rate increases and we continue down that path. And as those rate increases continue to compound, we have the ability to look at the current year more favorably when we set the loss pick. And then additionally, as we mentioned when I talked about the expense ratio, we are writing more lines that have lower loss ratios but one point is the figure I gave one point of higher expense ratio coming from commission comes along with that. So at the end of the day, we might be seeing a couple of points of improvement in the loss ratio from the line of coverage mix but there is some offset there with that higher expense ratio. So those things together are what is reflected here in this loss ratio, excluding the prior period development. So now I'll let Frank talk more about where this favorable loss development is coming from. So Greg, yes, it's actually a fairly similar story for the quarter and year-to-date. So the quarter had $100 million of favorable development and the year was just under $200 million. And the vast majority of this is coming from workers' comp and commercial auto and it's fairly evenly split. As far as the year as it's coming from in total, mostly all years are favorable going all the way back to 2009. And the only exception that I would mention is for the year-to-date numbers, we had the public company D&O that developed unfavorably and that affected 2018 and 2019. Just as a follow-up to your answer, Frank, you said all years. It's my impression that Old Republic's approach to reserving was sort of a lockbox approach for the first three to five years depending on the coverage. Has that changed? I'll be happy to answer that. It has not changed. Our approach to those loss picks and taking an approach whereby we are cautious about recognizing good news and on the other hand, we're very quick to recognize what looks to be bad news. All of that is exactly as it's always been. And your recollection is spot on when it comes to workers' compensation, five years is generally what we believe is necessary to really understand where those losses are coming in. And on auto liability, we think it takes at least three years on that line of coverage to really have an idea of where it might come in. However, there's only so much constraints we can have if indications are that reserves are very redundant. We do have some requirements to perhaps recognize those and in those cases, there could be an exception. But our reserving approach is identical to what it has always been. So just to clarify on that, Craig. Was there an exception to the fourth quarter release, or was that just the normalized approach that you have? We did see in the fourth quarter where workers' compensation and auto liability were coming out at the very top end of the ranges. So there was some adjustment to those lines. But as Frank said, the majority of it is from years going back all the way to 2009. But when we're in a position where we have to report our earnings, and we're out the top end of the actuarial ranges then sometimes we're forced to perhaps recognize things a bit earlier than we would want to. It makes sense, and thanks for the color and information on that. I guess, so I don't hog time. I'll just ask one other question and Carolyn, I'll pivot to you. Obviously, there's headwinds this year and last year to a degree. Can you just -- it looks like the expense ratio for the fourth quarter was running a little bit higher than probably where you want it to be. Can you just sort of revisit how you plan to manage expenses as the volatility of revenues sort of ebbs and flows with what's going on in the mortgage market? We kind of started as we got to the end of the fourth quarter, realizing what the next year is going to be like, and we've adjusted -- we feel like where we need to within our operations. But one of the things about us is our focus on agency and there's a lot of expenses that just adjust themselves with that business model. But we have people that have managed through these cycles before, they managed through the Great Recession and I just kind of have faith in our management to be watching this. We have a call every week to talk about it. We're just -- we're watching and cutting out everything that we need to do. We're getting back to what 2018 and 2019 looked like and that's how we're starting to manage our operation again. I'll start with a follow-up on Title, and I think you covered a lot of what I wanted to ask there. But maybe the question is, we've seen in the public domain, just everybody has seen mortgage rates pull back a bit from their highs. It seems like mortgage applications in recent weeks have come up a little bit. Are you guys seeing some follow through or some stabilization in kind of Title volumes as we -- in the recent months, at least that we might not see in the recent quarters? No, that really hasn't hit yet. When that changes with the rates and the originations, it takes a little while for it to start hitting the Title companies. So I'm going to say that we don't feel like we're going to see any kind of a change until probably the second quarter, that's when we'll start. We're sort of in that first quarter cycle that we used to always be in where people -- they kind of do a little bit, they sit back, they wait and see what's going to happen. And then they really start getting serious and we start seeing movement again in the second quarter. And then just want to circle back to General Insurance, some of the reserve discussion there. I was just hoping you could maybe even dig a little deeper and specifically kind of -- what are some of the things driving the development? What I mean by that is this medical loss costs have come in better than expected, like with workers' comp or is it more wage related, or just kind of what are the underlying drivers? I know it's across a lot of accident years, but where are some of the underlying drivers that are pushing it? Matt, I'd be happy to talk about that. In this case, it's probably the same answer for both auto liability and for workers' compensation, and that is loss frequency. As I mentioned in my comments, loss frequency ended up being lower than I think we anticipated in several of those years and therefore, there was some benefit. And then as I mentioned in my response to Greg, you have compounded rate increases and when those earn through and you're trying to follow what's happening with losses and you look back, in some cases, we had more rate than would have been necessary from the loss cost trend in severity and frequency. So it's a combination of those things. But clearly, on commercial auto, severity is -- while five, six years ago, the spike was tremendous and it has leveled out in that upper single digit level for the last few years. And our rate increases are keeping up with that at this point. So severity is still an issue on auto liability. On workers' compensation, as I also mentioned in my comments, there's a little bit of severity, but nowhere near to the degree you might see with respect to, say, general inflation or even general medical inflation because with workers' compensation, you have a lot of constraints around managed care and constraints around schedules that are in place in the various states for billing. So the workers' comp medical inflation trend is not, again, as great. There's a little bit of severity there that's emerging. But here too, it's a frequency story that has gone on for what better than a decade now in comp where as technology improves and safety, in particular, benefits from that technology and there's less workplace accidents, frequency comes down. So back to a frequency story on comp as well. I was hoping to ask kind of a big picture question on Title. Could you just kind of refresh and talk about how your business today is the same or different than it was in [Technical Difficulty] in that chart in 2014? And then perhaps an financial questions. Why would -- where we see some of the same revenue changes related to [Technical Difficulty] refi as well as why would we see some [Technical Difficulty] operating leverage, if we use those two periods as a benchmark. Yes, as well as I look at your slide presentation, it looks like we had a little [refi] bump in I think 2013 that also affected revenues as well, right? So maybe comparing and contrasting those two periods. Carolyn, if you don't mind, I'll just give my initial thoughts and then let you fill in. So with respect to refi, that well has dried up considerably and at this point of where we're at with mortgage interest rates. So what you're seeing come through in our numbers and you would see that in our order count, our order count is significantly down, that order count includes refis. And as I say, they have essentially dried up at this point. Comparing back to the financial crisis, if I understood some of your question, when we look at the loss ratios and what we're seeing today, we're in a very different environment with respect to loss ratios because back in the financial crisis period with all of the issues around mortgages and how those mortgages were underwritten or perhaps maybe not underwritten very well, everyone was looking to find any outlet they could to try to have some kind of recovery and there was -- that resulted in some pressure on our Title business. But as I think most of us know, in this current environment and over the last many years, the mortgage underwriting has been tightened substantially. And therefore, some of those knock-on effects we were seeing back in the financial crisis years we don't expect to come through. So Carolyn, please feel free to add to whatever I said or modify what I've said and fill in, if you could? No, I think you've covered it. The only thing I'll add is that one of the things that we really follow are the NBA and the Fannie Mae forecast, and they give us trends of what's happened with refis. And there's nothing showing that we're going to bounce back with refis like we did after those years right now. And the only other thing I would just add, Paul, more specific to our portfolio is we are different than are two larger competitors in this space in that about 80% of our business comes through independent agents. So we essentially have a variable cost model where in downturns, we don't have the level of fixed overhead to absorb given that the independent agents are bearing that. And so that's an important thing to keep in mind. And then the only other thing relative to those earlier time periods you spoke about is what we've done in commercial specifically at Old Republic, and Carolyn touched on where we're at with commercial in her comments. And that has been a focus of ours. We've intentionally tried to expand our footprint in that space over the last several years, five or more years, and that is paying some dividends, as Carolyn pointed out in her comments, where we set a record on the amount of commercial transactions, which helped offset some of the residential headwinds that we're facing. So I thought I'd sneak in with a follow-up. Obviously, it's topical to where other companies are commenting on their reinsurance renewals, and you really haven't commented on that. And one of the other things that's popped up with some of the other carriers is that they're hearing that the reinsurance commission rates have come in a little bit in certain instances. So just curious about your experience with your January renewals and what your view is on that? Greg, I'd be happy to talk about that. So our property reinsurance renewal is a July 1st renewal. So hopefully, things will settle down a bit by then. I think most of our peers in the industry probably have a January 1st renewal. And as we all observed, things look very, very tough. So as we go into that July renewal, our expectation is that rates will be higher on our catastrophic cover and that we need to be prepared for that now and the cognizant of what additional costs we need to absorb in the pricing that we charge for our product on the front end. So we're doing that already. The other thing is we anticipate that we might have to take a bit higher retention on our business -- on our property business, cat business. We, as you know, manage that to a very low retention relative to our peers, and that's why -- one of the reasons we don't write a large amount of property, as you know, relative to our peers. And for the property we do write we buy a significant amount of reinsurance at a relatively lower attachments, so that we don't introduce balance sheet volatility with writing property like some of our peers do. With respect to our casualty renewals, it really depends if you're on our workers' compensation reinsurance renewals everything was very steady. And on the other hand, on our umbrella liability renewals, as you would expect, with severity increasing and the judicial abuses that we're observing with litigation financing and jury verdicts, you can expect that the umbrella business that we write will have to increase commensurately with the reinsurance pricing that we're seeing there, which has increased. And then you also have other lines like D&O, we're in the process of that renewal. And here, too, it's line of coverage specific, whereby you had security class action frequency in 2017 and '18 and '19 was record setting, and that came through in losses for the industry. But then security class action litigation has trended down significantly since '19. So it will depend a lot on how reinsurers look at that. But when you talk about umbrella liability or when you talk about a specific line of coverage like D&O, where there is a seeding commission, it is also accurate to say that in addition to reinsurers looking for rates, they may try to get that rate by reducing seeding commission as well. Okay. Well, thank you, everyone, for your interest and the analysts for their questions. Much appreciated. And as I said at the beginning of our discussion today, we're looking forward to celebrating Old Republic's 100 year anniversary with all of you. And we hope that 2023 will be as successful of a year for us as the last several years have been. So thank you very much, and we will talk with you all again next quarter.
EarningCall_1028	Hello, everyone and welcome to the O-I Glass Full Year and Fourth Quarter 2022 Earnings Conference Call. My name is Davie and I'll be coordinating your call today. [Operator Instructions] I would now like to hand the call over to your has Chris Manuel, Vice President of Investor Relations, to begin. So Chris, please go ahead. Thank you, Dave and welcome, everyone, to the O-I Glass full year and fourth quarter earnings call. Our discussion today will be led by Andres Lopez, our CEO; and John Haudrich, our CFO. Today, we will discuss key business developments and review our financial results. Following prepared remarks, we will host a Q&A session. Presentation materials for this earnings call are available on the company's website. Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials. Good morning, everyone and thanks for your interest in O-I. We are very pleased with O-I's performance in 2022, our results exceeded guidance and we achieved all of our key commitments. Last night, we reported adjusted earnings of $2.30 per share which represented more than 25% increase from the prior year results and exceeded guidance. As you can see on the left, we have very good business momentum, with consistent adjusted earnings growth over the past several years. The strong results reflected solid execution across all key business levers. Earnings benefited from significant net price as well as sales volume growth, good operating performance and our margin expansion initiatives. Importantly, Full year free cash flow and fourth quarter results also exceeded our most recent business outlook. In fact, this represents the 12th consecutive quarter we have met or exceeded the Street consensus. In addition to a strong operating performance, we also achieved all of our key strategic objectives in 2022. Margins were up and we initiated our capacity expansion program to enable profitable growth that includes our first MAGMA greenfield plant. We also significantly improved our structure as Paddock result is legacy as best related liabilities and we completed our portfolio optimization program. As a result, we now have the healthiest balance sheet in the past decade. Reflecting solid business momentum, we expect our performance will continue to improve in 2023 as we further advance our strategy. John will expand on our financial performance and outlook a bit later. Let's move to Page 4 as we review recent sales volume trends. As expected, shipments increased about 1% in 2022 following significant growth in 2021 when volumes rebounded from the onset of the pandemic. While demand remains healthy, our growth has been limited by capacity constraints and record low inventory levels in key markets. Growth was most notable in the spirits, wine and NAB categories, while beer and food were slightly down. Shipments increased nearly 4% in Europe and were up across all end use categories amid a strong underlying demand and glass supply constraints. Volume declined 1% in the Americas, primarily reflecting lower production due to planned and unplanned downtime in North America and Brazil, while we contended with record low inventories across Latin America. Consistent with guidance, fourth quarter shipments were down about 3% given the challenging prior year comparison when volumes were up a robust 5.4%. Looking to the future, we anticipate continued healthy demand as illustrated by Euromonitor projections, indicating average annual growth of 2% to 4% in the key markets we serve through 2025. Overall, we expect our shipment leverage would be flat to up 1% in 2023. The first phase of our expansion program will add much needed new capacity. However, this benefit will be tempered by record low inventory levels and the impact of higher asset project activity as maintenance initiatives normalize and supply chain [ph]. Stronger shipment levels are anticipated in 2024 as more new capacity comes online. Overall, we have not seen significant changes in demand patterns slightly but we'll continue to monitor market conditions given the risk of recession. Let's turn to Page 5. On top of the strong recent performance, we also achieved all 2022 key strategic objectives. Segment operating profit margins were up 110 basis points as we exceeded our targets for both net price realization and margin expansion initiative benefits. As noted, our capacity expansion projects are progressing well as we capitalize on the strongest glass fundamentals in at least 20 years. All MAGMA development efforts are advancing well and we have broken ground on our first MAGMA greenfield in Kentucky. Likewise, the full-scale market trial of our new ultra-light weighted solution is proceeding well. Our ESG and Glass Advocacy efforts continue to advance. As discussed, we significantly improved our structure as Paddock result is legacy asbestos-related liabilities and we wrapped up our portfolio optimization program. I want to thank the O-I team for advancing our strategy and achieving all key objectives in 2022. We have established another set of ambitious and achievable objectives to advance O-I's strategy in 2023, as shown on Page 6. Higher earnings and margins should benefit from a strong net price realization and our ongoing margin expansion initiatives. As you can see, we have increased our annual initiative target to more than $100 million which now includes a set of focused initiatives to advance performance across targeted operations primarily in North America. Efforts include growing in attractive markets in North America, supported by our ongoing expansion program. Likewise, we recently closed one low-margin furnace and are in the process of closing 1 more low-margin forgers in the near future. Currently, we are distributing that volume within the network. We also intend to improve our commercial position as we reset over 40% of our customer agreements with more favorable price and terms and implement current price adjustment formulas which will recover significant prior period cost inflation. We are off to the races and expect to advance our capacity expansion program to enable profitable growth. We aim to complete our Canada and Colombia projects during the first half of the year as we continue the next phase of projects in Brazil, Peru and Scotland as well as our first MAGMA greenfield in Kentucky. Additionally, we will advance our MAGMA development efforts that will enable commercialization of both Gen 2 and Gen 3 in 2024 and 2024, respectively. Likewise, we expect to complete the ULTRA qualification in Colombia that will pave the way for future deployments. We intend to accelerate the use of key technologies to help reduce greenhouse gas emissions on top of a set of initiatives to expand recycling rates. We will advance our Glass Advocacy campaign and increasingly prioritize B2B connections to build the O-I brand with decision makers. Finally, we will continue to improve the capital structure and expect to reduce our net leverage ratio to below 3x by the end of 2023. I'm highly confident these efforts will advance our strategy as we continue to transform O-I. Turning to Page 7. We are very excited about our first Magma greenfield plant in Bowling Green, Kentucky which is on track for initial commercialization of Gen 2 by mid-2024 and yet by mid-2025. We are designing the plant to be a showcase facility that will demonstrate all of our next-generation capabilities. This new state-of-the-art facility will include the MAGMA melter, new melter batch system and pilot forming machine. It will be fully digitized with a high-performance operating structure. This highly scalable plant will eventually include all MAGMA generations, with advanced sustainability features as well as ultra-light weighting system. Located in the Volvo trail, the [indiscernible] plan will demonstrate the value of near locations and will be a key hub for further customer collaboration, investor visits and demonstration of O-I's next-generation capabilities. I invite you to review a recent video that we created that shows MAGMA in action and further discusses these many important attributes. This slide includes the link to the video. Thanks, Andres, and good morning, everyone. O-I reported full year adjusted earnings of $2.30 per share which exceeded guidance and increased 26% from the prior year. In fact, performance improved across several key financial measures, as illustrated on the left. Earnings improved in both the Americas and Europe as segment operating profit increased to $960 million, reflecting strong net price realization as well as modest sales volume growth and solid operating performance despite higher asset project expense. Turning to the fourth quarter, we reported adjusted earnings of $0.38 per share which was up from the prior year and exceeded guidance. Results increased 36% from the prior year when adjusting for FX divestitures and interest in funding the Paddock Trust. Fourth quarter segment profit was $206 million, up more than 25% on an adjusted basis as margins increased 100 basis points. Strong net price boosted earnings and as expected, sales volume was down about 3% given challenging prior year comps. Finally, operating costs were up, primarily reflecting elevated asset project activity. The Americas reported $83 million of segment operating profit which was down from the prior year on an adjusted basis. Earnings benefited from favorable net price, while sales volume was down 6% amid elevated project activity. As expected, higher operating costs were partially offset by our margin expansion initiatives. In Europe, segment operating profit was $123 million, up $52 million from the prior year on an adjusted basis. Very favorable net price boosted earnings while operating costs were up as noted. The chart provides additional details on nonoperating items. Yet again, the company delivered strong earnings and margin improvement despite the highly volatile macro environment. Let's turn to cash flow and the balance sheet, I'm now on Page 4, rather, Page 9. As shown on the left, we reported free cash flow of $236 million which exceeded guidance, yet was down from the prior year due to higher CapEx given expansion project investment. Adjusted free cash flow which excludes the strategic CapEx, totaled $426 million, an increase from the prior year, demonstrating O-I's improved operating performance. In fact, our cash flow conversion was around 36%, well ahead of our 25% to 30% goal. At the same time, we have significantly improved our balance sheet position. As shown on the right, total financial leverage was around 3.4x at the end of the year, down 1x from last year and 2x from 2020. This improvement reflects higher earnings, solid free cash flow generation and proceeds from our portfolio optimization program, while funding the Paddock Trust. In fact, we achieved our 2024 Investor Day goal of 3.5x leverage well ahead of schedule. Recognizing our progress, both Moody's and S&P increased our credit rating this year and we now have one of the better balance sheets in the rigid packaging sector. In summary, core operating cash flows improved and our balance sheet is in the best place in a decade. Let's discuss our 2023 business outlook. I'm now on Page 10. Overall, we have very good momentum heading into the new year. Earnings will benefit from strong net price realization and flat to modest sales volume growth. Operating costs should be up due to elevated asset project activity, partially offset by the benefit of margin expansion initiatives. As a result, we anticipate adjusted EBITDA should exceed $1.37 billion, an increase of 15% from 2022. Full year adjusted earnings should exceed $2.50 per share, reflecting very good EBITDA improvement, partially offset by elevated interest expense. Overall, we expect earnings will be front-loaded in 2023. Net price realization will likely peak in the first half as earnings benefit from annual price adjustment formulas that recapture prior year inflation and new increases effective in January of 2023. Likewise, we will lap the prior year 3 price increases over the course of the year. As such, we anticipate earnings will be up nicely during the first half of the year, while second half results could be more comparable to 2022 levels. You can see that reflected in our first quarter guidance of $0.80 to $0.85 per share which is a significant increase from the prior year, reflecting strong net price and the benefit of inventory revaluation due to elevated inflation. Given macro uncertainty and the risk of recession, we are providing base performance levels for full year 2023 rather than an EPS range at this time. We do intend to introduce an earnings guidance range in a quarter or 2 once there is greater market clarity. Adjusted free cash flow should increase to at least $450 million and free cash flow should be at least $150 million which is down from the prior year due to elevated CapEx approximating $700 million to $725 million. Higher CapEx reflects increased expansion investments as well as normalized maintenance project activities as supply chains improve. As Andres mentioned, our leverage ratio should end the year below 3x as we continue to focus on balance sheet improvement amid a higher interest expense environment. Overall, we are optimistic as we enter 2023 and expect continued positive momentum despite ongoing macro uncertainty. While intentionally cautious on the back half of the year, we are well prepared to manage through elevated volatility as we have done over the past 3 years. Importantly, we have already achieved all of our key 2024 financial targets, as presented at our most recent Investor Day, well ahead of schedule and our 2023 guidance exceeded those goals. Given the foundation we have established and good momentum, we anticipate continued performance improvement in 2024 and beyond and expect to introduce new long-term targets once macro stabilize. Let me wrap up by restating our capital allocation priorities. I'm now on Page 11. Improving our capital structure remains our top capital allocation priority. As noted, we expect leverage will end the year below 3x. We will continue to reduce debt consistent with our glide path to 2.5x leverage and expect to eliminate our net unfunded pension liabilities over the next few years. Our second priority is to fund profitable growth. This includes our current $630 million expansion program. We do anticipate continued modest portfolio optimization as we seek to increase ROIC which could also help with debt reduction or expansion. Returning value to shareholders is our final priority. We will continue our anti-dilutive share repurchase program. Likewise, we may evaluate additional share repurchases or reinstate dividend as we get closer to our capital structure objectives. Thanks, John. In summary, we are very pleased with our performance in 2022. Adjusted earnings per share increased more than 25% from the prior year and exceeded guidance. As noted earlier, we have met or exceeded the Street consensus for 12 consecutive quarters. In addition to strong performance, we also achieved all key strategic objectives in the past year. We increased margins, initiated our capacity expansion program, advanced breakthrough technologies and significantly improved the structure of the company. We have a strong momentum heading into the new year. As such, we expect higher results as we continue to advance our strategy in 2023 and beyond. Finally, I believe O-I represents an attractive investment opportunity as we strengthen our financial profile, execute our transformation program, enable profitable growth, advance breakthrough innovations like MAGMA and ULTRA and further leverage our sustainability position going in the new green economy. We are confident this strategy will create value for all stakeholders. Anders, looking back at 2022 on a segment basis, I mean, Europe was up 320 basis points from a margin standpoint year-over-year, up significantly versus the pre-COVID level. And obviously, there was a lot of chaos last year with European natural gas and so on and so forth. How do you think this evolves from a margin structure standpoint, specific to Europe if, for example, natural gas prices or energy costs more broadly revert towards pre-war levels? Thank you, Ghansham. Well, if we look at the demand fundamentals in Europe, they're very solid. In 2022, all in users, beer and AB food, wine and spirits performed quite well. So this is happening across markets in Europe and across end users. When we look at the wine and beer demand, for example, so Champagne, Prosecco, Italian wine in France and Italy, it is particularly strong. And you know these 2 markets are very large and relevant markets for O-I. Spirits in the U.K. is very strong, too. Now along with that, we mentioned before, there is a large shortage of glass in Europe that is driven by all this growth that I mentioned, plus the capacities locations that are up to 1 million tons, about 4% -- 5% of the total supply. And we believe this is going to take several years to be resolved, right? So from a demand standpoint, we see this continuing. When we look at the gas prices, we're continuously looking at the TTF futures. And when we look at those futures, that -- they suggest to us that this is going to be a multiyear dynamic. And today, we're dealing with a milder winter. This is -- there is still winter to go, that we will be facing replenishing the storages, most likely dynamics are going to change at that time. So I think we've got to see how this unfolds. But you will expect that many users of natural gas bought position in the second half when prices drop a little bit, most likely they're buying positions today and that will take most likely care of 2023. So we're out of this year into the following years. But back to the TTF futures, when we look at them, they suggest this is going to be a multiyear dynamic. And back to Europe performance, the European performance improvement has been a long-term trend. Since 2015, every year, we've been up in earnings and margins and returns. And we're seeing the continuation of that. I think we're very well organized and prepared in Europe to really drive value out of that very important market. That's very helpful. And then for the first quarter, can you quantify the inventory revaluation benefit? And then also related to that, you're pointing towards $100 million plus margin expansion initiatives for the year in terms of benefit. Can you just give us a bit more color as to what that's being driven by? Yes Ghansham, this is John. So on the inventory revaluation, as you know, we have to properly state the inventories on our balance sheet and given the higher level of inflation that we have periodically, we have to do these inventory revaluations. It is adding about $20 million or almost $0.10 in the first quarter of this year relative to if we did not have that adjustment. But keep in mind, that really doesn't affect the full year, it just kind of flushes through over the course of the year. So it doesn't contribute meaningfully to our full year outlook for the business. And as we look at the margin expansion initiatives, $100 million, if you look at that, we had a target in 2022 of $50 million, we came in at $70 million. So we've been doing well in this and we feel confident that we can continue to do well through the combination of our margin -- our revenue optimization activities which test things like value-based pricing, plant profitability which is a lot of the cost-related elements of the plant, as well as what we call cost transformation which is on the OpEx side as we continue to do various different things. But we did add, as Anders noted in the prepared comments, a more focused activity over in North America. And that is certainly contributing to the ability to get to $100 million, in particular, the price resetting activity that Andres mentioned should give us some initial benefits that will bring early benefits to getting to that number. Yes. And I think it's important to highlight that the resetting of conditions commercially in North America is a long-term move. So this has been a market under significant pressure over the last few years and we're working on this structurally. So we're working on a large turnaround effort to get back to the earnings and margins and returns potential of this very important market. So what we're doing in the commercial side, from our perspective, is a long-term move. We're not getting any more you from George, so I'll move on to the next question. Our next question today comes from the line of Anthony Pettinari from Stanton. This is actually Bryan Burgmeier sitting in for Anthony. You've been saying capacity in Europe is reduced by about 5% due to the more and elevated costs. Have you seen any capacity come back online with nat gas moving lower? And do you have a view on industry operating rates in Europe in 2023 kind of based on the projects announced by O-I and competitors? So there is a shortage of capacity of 1 million tons, adding up to about 5% of the supply. We haven't seen the capacity coming back. At some point, it will come back, some of it will come back. But you also got to take into consideration that the Italy and France, as an example and even North Central Europe, are all importers at this point in time. So beyond that 1 million tons, there is a significant volume that is imported every year into those markets. So from our perspective, the backlog in Europe is quite large. Inventories are still to go up. And this situation with capacity in Europe is going to be a long-term issue. The -- I think you can see that when several players including O-I are building capacity to be able to keep up with the growth and those circumstances of dislocation of capacity. This is going to take time to be resolved. Got it. Thanks for that color. Last question for me. Equity earnings were up quite a bit in 4Q. I guess just what do you attribute to that growth? And do you have any thoughts on equity earnings in 2023? Yes, sure. So we have about 4 or 5 strategic JVs that we have spread across the globe. And we have, in particular, 2, 1 in Europe and that caters to the higher-end categories and then 1 over in Mexico. Those have been doing quite well for the business. Again, a lot of the trends that we've been seeing over in Europe have buoyed up that joint venture over in Europe. We expect continued good progress in our joint ventures in 2023 also. First question I had is, you mentioned and John, you made a comment as well in terms of setting the contract in North America. How far along are you in doing that? And do those contracts allow you to recover previous inflation? I think -- you made a comment then allow you to cover some of that inflation. So I'm just wondering if they fully allow you to a recover the inflation that you experienced last year partially? Just some more color around where you are in the process, we're seeing those contracts and if you're able to recur anything historically? Well, so we had a plan to reset contracts impacting starting 2023, that's mostly done. And it is a sizable percentage of the total business. We expect to record inflation through the PAF. So that's going to come into 2023 but we're also resetting the conditions of those contracts in addition to PAF's inflation recovery. So it's a large effort to recover healthy margins, healthy returns in this important market. Yes. One thing I would add on that one, Mike, is that the contracts that we're referring to is North America has long-term contracts, 5, 7-plus years type of windows. So a number of the ones that we're addressing right now were set, call it, 2.15, 2.18 [ph] something like that. which are some of the most challenging environments that we saw in the North America marketplace with what was going on with mega beer at that time as well as the hard seltzer. So they were set in pretty challenging economic conditions. We're seeing a much more constructive environment as the growth in the premium categories and a lot of other new attractive categories that we're seeing in North. And so we're in a much better place as we set those contracts. Yes. The price adjustment formulas that Andres had spoken about will recapture 2022 inflation that obviously was significantly rebounding. And what I would say is the terms of -- the pricing terms of these new agreements are measurably better than the terms that we had prior to that. You can apportion that to recovery of historic inflation or, you can just attribute it to more value creation but it is a step-up in the overall value that we're getting on that business. Got it. And then my second question, just can you provide us with an update on the progress you've made and adding the energy flexibility to our European plants. I think you were targeting either late last year or only this year to have 50% equipped with that energy switching flexibility. And then just as the energy contracts that you've already entered into say, pre-COVID, likely will for the next few years. Given where we are today, given the fact that European natural gas prices are lower, is it fair to assume that you're exploring options to enter into similar type contracts to hedge your energy position in Europe? Yes. So with regards to the progress on adding or enabling the current assets to use alternative fuels, we're making very good progress. The final target is 50 [ph]. The circumstances have been improving. So that give us a little bit more relief in that process. But we started very early last year and we're in a very good place at this point in time to be able to respond if that is necessary. Then on the other question on the energy contracts, just a little background for everybody. We've taken for years a sophisticated structural approach to the energy procurement. As a result, a number of years ago, we established best-in-class long-term energy contracts and that was done prior to the run-up in the cost that we've seen in the last few years. This -- as you alluded to, this long-term position extends well beyond the current year. So we should have an enduring competitive advantage here for that period of time. And keep in mind, we do believe we need this. It's not only just the inflation that we're seeing directly but we have SG&A inflation, higher interest rates, CapEx inflation and things like that. So, at this point in time, we don't feel the need to get into the marketplace. And Anders alluded to it a little earlier is, is even though natural gas has come off in Europe off of its high, it kind of averaged â¬120 per megawatt hour last year. It's still quite elevated at around â¬60 per megawatt hour compared to maybe pre, call it, pandemic numbers of â¬20 per megawatt hour. So, at this point in time, it's still quite elevated. And of course, we're seeing probably a little bit of a lower window given the warm winter but we believe that there's still a structural challenge over in Europe on energy. So again, I think we don't feel any pressure to get into the market. Congrats on the strong quarter and a strong year. I guess just first, I think you mentioned you're looking to introduce an actual guidance range for the full year and the future as you gain more market clarity. What are you waiting on here to get more clarity on? Is it more -- is it consumer demand? Is it inflation? Just any more detail you can provide behind that decision? Yes. I think it has to do with all the macros. I think the first variable that we're looking at more than anything is what is the likelihood of recession in particular in the back half of the year, the implications. We don't really see any tripping any wire between now and midyear in our business. Now we just don't have the visibility into the back half of the year. So we've intentionally tapped down our expectations and what we're showing here in the back half of the year because of that uncertainty. And so obviously, what happens on interest rates and everything like that has a big effect on how people view the economy and potential harder soft landing and things like that. So obviously, that's a big determinant of, I think, whether we drip into recessionary pressures or not. So we're clearly watching that and of course, the volume activity and sentiment from our customers. Appreciate it. And then on volumes, looking at the Americas, do you have a sense if the decline this quarter was the result of any destocking? Or was it just consumer weakness, given inflation? Just what's your best sense of the driver here? And I would appreciate if you're also giving any kind of target range for volumes for 2023 by the segments or by the region? Yes. So the demand fundamentals in the Americas are very good. And in fact, when it comes to Latin America, we remain with very large backlogs and -- in those markets, that's why we're building capacity and we are importing glass as well as other players are importing glass to be able to support those markets. So the Americas North, too, or North America is quite stable. The performance of the MEGA beer has been stabilizing. The decline has been slowing. The premium beer is growing well and premium products are in a very good place. The issue is that we have very tough comps with Q1 2022. That was the time when we were coming back from the pandemic inventories where we will, there was a price increase in the second quarter of 32% that increased in the first quarter of '21. So we're dealing with that. On top of it, our inventories are low. So we can now ship anymore, out of inventories, incremental -- more incremental demand as we did before. So the situation is tight. And then we have a higher level of asset activity at this point in some of these markets which is also limiting our ability to ship. So all those things come together. That's -- we are in forecast. At this point in time, everything is proceeding as we expected. And as capacity comes into operation, we're going to see the positive effect of that on demand. And kind of an other aspects of your question there. If you look at what happened in Americas where the volumes were down 6% in the fourth quarter, that was attributed to our own maintenance activity. We had significant rebuild activity going on both in Brazil and North America. And back to Andres' comments there, the inventories are just a record low levels and given that activity it, was very difficult to meet the demand. And as we look to 2023, overall, we think probably there's probably more volume growth opportunity in the Americas given that all markets are dealing with low inventory levels but we are adding new capacity over in Europe -- I mean in the Americas, primarily in Colombia and Canada. So that will come online and allow to have a little bit more growth in the Americas. I guess I just wanted to understand the earnings in context of your medium-term and long-term targets. So you noted that you reached your '24 number expectations ahead of time in '23 here. So would you characterize the '23 guidance which is about 15% above where many of the Street expectations are and you noted that you beat those 12 quarters in a row. Would you characterize your '23 kind of full year outlook on operating income as kind of a new base level? And the way I would kind of think about it is, since you're growing now in the 2% to 4% range, even though '23 is going to below that for macro concerns, would you just apply kind of a new margin range on some of this heightened growth? And so maybe, in the out years, you'd reach [indiscernible] levels in '25? Is that how we can think about it. Yes. What I would say is, I mean and you included in our prepared comments, we had indicated we expect continued earnings improvement in, not only '23 but also in '24. There's a lot of moving parts. We're managing a lot of levers in the business. Of course, we are raising prices, as we've discussed before. but we are profitably growing our business. Most of that capacity expansion will come more online in 2024 and 2025. And to your point, we're targeting nice categories. So those should be able to inch the margins up in that particular regard. We got more ongoing margin expansion initiatives with in particular, we were profiling North America. There's a couple of years' worth of opportunity there that we're going to be focusing on. We're also focusing on the capital structure, as you know and trying to improve that position that will benefit the organization. And of course, a little bit longer terms while we starting in 2024, we got MAGMA coming online and that starts to change the capital intensity and margin position of the company in a more favorable way. So I think we've got a lot of levers, a lot of arrows in the quiver to be able to continue to drive improvement going forward. At this point in time, we're not providing necessarily long-term guidance and things like that and we'll reintroduce those once our -- once we see a little bit of stabilization in the macro. And then just as a quick follow-up on free cash flow then. So how do you see that evolving, say, from the $2.36 [ph] in '22 Working capital. I would imagine could be a slight positive in '23, just given some of the pullback in some of the raw materials? Or is it the other way that you're still building inventory and that's going to be a drag? Is there a possibility for free cash flow to approach $400 million in '23 maybe? So first of all, I would say that we expect continued progress in our adjusted free cash flow. I mean that takes out [indiscernible] due to the changes in capital allocation expansion investments. So the big drivers there, obviously, is a continued improvement in EBITDA. The CapEx, as we've noted, at least with the planned activities we have right now, 2023 has $300 million of CapEx. Considering what we did in 2024, that leaves about $150 million for expansion in 2024. So that's a drop off, right? And so that should go and benefit the cash flow position of the business. Some other levers, interest expense, obviously, is up quite a bit this year. Hopefully, that stabilizes at its particular level or we'll see what happens with rates and see what goes on in there. And so I think we're pretty optimistic about the ability to generate improved cash flow, in particular. Just to reinforce the adjusted free cash flow this year will be $450 million or higher and that's an improvement over what we saw in 2022. Congrats on the year and the quarter. I just had, I guess, 2 quick questions. One, regional specific to Brazil. And just trying to, I guess, compare contrast what we saw in the last couple of months of the year on beer production down in Brazil and I guess relative to some, call it, political instability down there and then sort of what you're seeing with your customers as they're managing the different pack mix down there. So maybe in tougher economic times folks go back to reusable. And then any insight into where you think the fleet might be on the resalable side. If that's something that needs to be replenished? Appreciating again, that you guys are adding some capacity down there Andean inventories are pretty tight. Yes. So we have data for Brazil through November year-to-date 2022 for beer. And in that data, for the entire year to that point, glass was growing close to 5%. So the performance of glass has been very strong. It's both in returnable and one way. Overall, the Brazilian market, despite of the capacity increases, continues to be very short of supply. Imports are very large and that's driven by beer performance which is quite good but it's also driven by good performance across all end users. So this market and the [indiscernible] markets are in that same boat. They are both performing quite well across end users. They're both short of capacity and we're building in both markets to be able to address that challenge. The returnable containers are doing quite well because of 2 reasons. One is, they generate better affordability for consumers and they're better for sustainability reasons. This is the best container you can have for sustainability reasons. As a consequence of that, there is expansion of the use of those containers even in premium brands which wasn't the case before. If we look at Mexico, for example, the -- our customers are emphasizing returnable containers [indiscernible] and they're doing it for those 2 reasons and that's driving a sizable incremental demand in that market, too. So all in all, the outperformance in Brazil is quite good. There is capacity being built. So we expect that to come online and it's going to help our volumes there and we'll continue from there. All right. And 1 on Europe and just -- I know it's challenging in terms of visibility. But maybe knock-on effects from China reopen and we talked a lot about on-prem, off-prem consumption during the pandemic. But to the extent that we get maybe another active year of travel from folks over in China that have been locked up for a while and a lot of, I guess, spirits being sold through duty-free, is that something where you're hearing from your customers that they want to be prepared for that? Or is that just sort of made up in my head? Well, the on-premise channel is back -- the Horeca [ph] what they call Horeca [ph] channel which is hotels with restaurants and catering is back. So that's driving very good demand. Something that we learn over the last 3 years, different -- when compared to what we used to believe is that the resilience of the glass packaging in both on-premise or resilience to shift in on-premise to a premise is very good. So any direction it moves, I think glass is going to perform well. With regards to China, we've got to see where this goes but there is an expectation for reopening and higher level of activity. That's something that we didn't mention before but got to be factoring in energy prices because that's going to pull from there, too, on top of the water issues and the storage levels which are going to play on the prices in Europe. So altogether -- all in all, the demand in Europe is very healthy on-premise and off-premise. The expectation also is that the at-home consumption will remain. It has remained so it used to be higher than in the pandemic but it's now higher than it used to be pre-pandemic. And in that channel, we performed well. And just as a reminder, about 40% of what we actually make in Europe ultimately gets exported out of Europe into other markets, such as China or the into the Americas or whatever. So any in those particular market activities, more reopening in China could bode well for support of those export activities. I have just 1 question. It's similar to what has been asked before but is now focused on your European business. Can you refresh us on your sales price increase through 2022, both in terms of rough quantum and timeline? And also, if you can share insights on price negotiations entering into 2023 and maybe expectation for later in the year? Yes. So specifically on the price increases, we don't generally comment on the specific price increases that we put into the marketplace for competitive purposes. But you can go, obviously and look at the information that we have in our financial reports. I think if you take a look at the enterprise, we were up 13%, I believe, on an FX-adjusted basis on revenue overall as an enterprise. And I think that number is available. I think it's 16% over in Europe on average for the full year and obviously, the exit rate would be bigger than that. And to your second question, where do we stand in the pricing process is as most people are familiar, we -- 17% [ph] of our business in Europe is open market or at least annual agreements and those tend to get reset at the time of the year. We are largely through that but not complete. And so we continue with that effort but it's -- like I said, it's pretty advanced. Just 1 quick follow-up. I think I know the answer to this but there's been some recent headlines in the news on another case tangential to the litigation that you guys have a deal with in regards to asbestos. And I just want to make sure, I mean, you guys have -- that was a kind of a bilateral agreement amongst all parties and that stuff is in terms of funding the trust and something that can't be reopened. Yes, yes. Just to be clear that the Paddock Chapter 11 case is closed. That included a consensual agreement. We funded the trust. We have the channeling injunction fully in place, so that Chapter 11 is closed. A nice quarter. Real quick on the CapEx outlook. I appreciate, again, we're still just in the beginning of 2023. But should broadly '23 be the high watermark for CapEx so we should see it step back down into '24? Can you just kind of give us a rough sense of trajectory there? Yes. So there's 2 aspects that are driving obviously the CapEx. It's the strategic CapEx investment and then well as the maintenance level. So as we had indicated in the materials, our maintenance activity is getting up to this low 400 range after being below that for the last few years due to supply chain issues and things like that with COVID and all the disruptions. So we do think that that is probably a fair level. It could ebb and flow in different levels from one period to the next but it's probably a reasonable place to be. And then on the expansion side, we have our $630 million announced program We spent $190 million of that in 2022, should be around $300 million this year and then dropping off to the tail end of that $150 million based upon our best estimate of timelines now. So that would suggest that, that crests and goes forward. Of course, then we'll look at any opportunities going forward but that's what we have announced at this particular time. Great. And maybe just 1 quick follow-on to that. As we just think about Slide 11 kind of your capital allocation priorities and a potential return to returning value to shareholders, kind of when should we think about -- I mean, if you hit everything you laid out today, you'll be under 3x by the end of this year. Just when do you think you'd want to start talking more about that or flushing that out more? Yes. So I would say that the second bullet point there that is we're trying to work to this glide path to 2.5x leverage. And so I think the emphasis on return of value to shareholders will probably pick up as we get comfortable about our ability to hit that number. Obviously, the economic situation right now, the uncertainty, everything like that, we're trying to see where things will play out in particular the back half of the year and flow through from that. But I think once we get comfortable about our ability to knock that out in another year or 2, or a couple of years or something along those lines, I think then we'll be able to profile more the return to shareholders. This is all the questions we have time for today. So I'll now hand back over to Chris for any closing remarks. Okay. Thank you, everyone. This concludes our earnings call. Please note our first quarter conference call is scheduled for April 26. And remember, make it a memorable moment by choosing safe, sustainable glass. Thank you.
EarningCall_1029	Good day and welcome to the Evercore Fourth Quarter and Full Year 2022 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Evercore management and the question-and-answer session. [Operator Instructions] I will now turn the call over to Katy Haber, Managing Director of Investor Relations and ESG at Evercore. Ma'am, please, begin. Thank you, [Chelsee] (ph). Good morning, and thank you for joining us today for Evercore's fourth quarter and full year 2022 financial results conference call. I'm Katy Haber, Evercore's Head of Investor Relations and ESG. Joining me on the call today is John Weinberg, our Chairman and CEO; and Celeste Mellet, our CFO. After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore's fourth quarter and full-year 2022 financial results. Our discussion of our results today is complementary to the press release which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website, and an archive of it will be available for 30 days beginning approximately one hour after the conclusion of this call. During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include but are not limited to those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release which is posted on our website. We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings. Thank you, Katy. And good morning, everyone. 2022 was undoubtedly a complex and challenging environment. Yet through all of the volatility and macro-driven headwinds, Evercore was able to serve our clients and strategically invest in our business. We continued to perform well, both in the quarter and for the full year. In fact, 2022 was our second best year on record for the firm with $2.8 billion in revenue, $529 million in net income, and $12.1 in earnings per share. For the full year and fourth quarter, we also made further progress on our goal of narrowing the gap between Evercore and the top three bulge bracket firms in terms of advisory fees. 2022 also marked a year of investment for Evercore as we continued to execute on our long-term growth strategy. We promoted and hired A-plus talent in our important strategic target areas that will drive long-term value for the firm, including seven advisory senior managing directors and one senior advisor in 2022. We also continued to build our important product capabilities and diversify our business to connect with our clients more deeply. As we've discussed previously, our revenues today are meaningfully more diverse than they had been historically. In each of the past four years, including 2022, our non-M&A businesses accounted for at least one-third of our revenue. The diversification of our business stems from the scale we filled across many capabilities, including restructuring, private capital advisory and fundraising, private capital markets, capital markets advice and execution, equity sales and trading, and wealth management. Additionally, we've managed our balance sheet to create the capacity to invest in our franchise through cycles. We will continue to execute on our long-term strategy by investing in targeted areas of growth and in areas where we see opportunities having the highest impact. Before I begin recapping the year, I'd like to quickly touch on our recent CFO announcement. Last quarter, we announced that Celeste will be leaving Evercore. This is Celeste's final quarter with us. And while we are sad to see her go, we feel fortunate to have worked with her and value the contributions she has made to the firm. As you may have seen, we are excited to share that Tim LaLonde will become our CFO effective March 6. Over the last 22 years, Tim has been an integral part of Evercore's leadership, driving the firm's successful growth. He brings a deep knowledge of Evercore in the role and is highly respected as a partner with a superior record of delivering operational excellence. We look forward to his contributions as CFO and are confident that he will position the firm for sustainable long-term value creation. With that, in a similar fashion to a year-ago, I want to provide a more detailed view of the past year and, again, outline our plans for the future. Starting with global advisory, our teams remain very active and constant -- with constant strategic dialog and execution with clients. Looking at our market activity more broadly, global announced M&A activity was down 36% compared to record levels in 2021. However, M&A volumes in 2022 were generally in line with historical averages. For Evercore specifically, the number of announced global transactions was down only 9% in 2022 compared to declines of about 40% for our bulge bracket peers, and 25% for our independent peers. While advising on large M&A transactions globally is very much core to what we do, a meaningful portion of our business stems from deals less than $5 billion in transaction value. Over the last year, we saw an increase in clients seeking advice on highly complex and unique situations, including public-to-private deals which reached record levels in 2022. As for sectors, tech continued to be active, as well as healthcare and industrials. We also saw strength in traditional energy, renewables, and infrastructure. Next, from a geographic perspective, our team in Europe had a very strong year, representative of investments we've been making in the region over the last several years. Our European advisory business had its best year in Evercore's history. We saw strength across the energy, financials, and utilities and infrastructure sectors, as well as debt advisory. We continue to focus on efforts -- on expansion in the region and around the globe. To that end, two of our 2022 SMD hires that I mentioned earlier were international. Within global advisory, we continue to be active in other areas outside of traditional M&A. First, our strategic defense and shareholder advisory team remains very active in 2022 as the number of campaigns, particularly in the U.S., was on par with 2021 levels. The trend of targeting large-cap companies continuous, representing almost 30% of activist campaigns in 2022 from the prior year. Evercore has advised companies representing over $1.5 trillion in market value in this space, and we have the largest team of dedicated activist defense professionals on Wall Street. Turning to restructuring, the business won a significant increase in assignments over the past 12 months and we are entering 2023 with a robust pipeline of opportunities. The growth in the business reflects a mix of company and creditor assignments, ranging from bankruptcies and out-of-court settlements, to liability management and distressed financing. While default rates are still relatively low, rising rates and corporate margin pressure should present significant additional opportunity for our restructuring team. We're well positioned for this upcoming cycle and our restructuring team continues to collaborate with industry bankers to provide our clients with the most comprehensive advice. Next, our market leading businesses focused on private capital, which include fundraising, buying and selling of LP and GP stakes, continuation funds, as well as our real estate capital team. 2022 represented the second best year on record for these businesses in aggregate, collaboration across these teams and the sponsor M&A and industry teams has driven synergies and will continue to be a great platform for growth. We've also continued to build out our private capital markets team which advises and executes on privately placed equity and debt financings as well as complex balance sheet and capital structure issues. The underwriting business had a challenging year with industry issuance down 80%, resulting in the lowest year of issuance since the Great Financial Crisis. While broad industry trends impacted our business, we outperformed on a relative basis and continued to gain share once activity returned in second half of the year. While the IPO market was quiet, Evercore participated in one-third of all U.S. IPOs, greater than $50 million, and in four of five largest U.S. IPOs in 2022. Notably, our role continues to elevate as we were book runner on all of our equity and equity linked underwriting transactions in 2022. Healthcare continued to be a standout sector for us, and we were involved in almost 50% of all healthcare underwriting deals in 2022. Additionally, we've continued to invest in other products such as convertibles, which continued to gain momentum and provide an additional product offering for our clients. We are pleased with the advancements of our underwriting business and expect to see a pick-up in activity when the market stabilizes. Next, our equities franchise continues to focus on providing our clients with the highest-quality research and service as they navigate volatile and uncertain markets. Our research franchise had a noteworthy year. We were ranked number one by institutional investor on an individual weighted basis for the first time ever and had the highest number of top-three analysts of any firm on Wall Street. And finally, in wealth management while the broad market declined, impacted our clients' portfolios, and assets under management for the year, the business continued to have strong long-term performance and client retention. Now, I want to turn to our growth roadmap for the long term. An important pillar of our strategy is tied to the expansion and enhancement of our client base and coverage model. We have a very strong traditional M&A business and we continue to fill areas of sector and geographic white space where there is ample room to expand. We remain focused on investing in the fastest growing segments of the economy, including fintech, cleantech, biotech, and more traditional areas of technology such as software, as well as expanding our global footprint. We continue to invest in and develop our sponsor coverage effort. We've increased focus on expanding our private client capital businesses, and believe there are incremental opportunities to serve this client base, both in this business and our sponsor M&A practice. In addition, as we mentioned last quarter, we added several senior bankers to our U.S. Financial Sponsors Group as we continued to invest in this important space. Overall, we see real opportunities from deepening and broadening many of our product capabilities. We're opportunistically investing selectively across our business and see strong returns from doing so. As we make these investments, we will continue to navigate the market for talent. We'll stay active and selectively recruit A-plus talent while maintaining a high bar for all hires. We begin 2023 with seven newly promoted SMDs in our advisory and underwriting businesses across various sectors and capabilities, as well as one in our equities business. Cultivating the next generation of talent is core to our success, and we are excited about our pipeline of talents. Already this year, we have had an additional SMD committed to joining our private capital advisory business later this quarter. Before I turn the call over to Celeste to review our financials, I want to make a few final comments. 2023 will be another complex year and it will be difficult to repeat the record results that we had in the first half of 2022. That said, we remain focused on our expense base, both comp and non-comp, and maintaining a durable and liquid balance sheet. There's quite a bit of discussion around the probability of recession as we begin 2023. While some believe we will enter one, others do not. Either way, we feel we are well-positioned. We're starting off the new year with a strong backlog although it is down from where it was a year ago, which followed the strongest year for M&A activity on record. Similar to last quarter, there remains greater risk of execution as transaction announcements continue to be slower and the timing of closings is elongated. And while economic stability and market conditions will continue to influence field activity, strategic dialog with clients continues at very high levels. As we look forward, we are confident in the outlook for our business. We believe the firm is well-positioned to capitalize on the current environment and the opportunity that lies ahead as market stabilizes. Thank you, John. Before I review the financials, I want to thank John and the rest of the team as this is my final earnings call with Evercore. It has been a great pleasure to work with this team as well as our sell-side research analysts and shareholders. For the fourth quarter of 2022, net revenues, net income, and EPS on a GAAP basis were $831 million, $140 million, and $3.44, respectively. For the full year, net revenues, net income, and EPS on a GAAP basis were $2.8 billion, $477 million, and $11.61, respectively. My comments from here will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results can be found in our press release, which is on our website. Fourth quarter adjusted net revenues of $837 million, declined 26% versus the fourth quarter of 2021, which was a record fourth quarter. On a full-year basis, adjusted net revenues of $2.8 billion declined 16% compared to 2021's record results. Fourth quarter adjusted operating income and adjusted net income of $218 million and $152 million, decreased 53% to 55%, respectively. Adjusted earnings per share of $3.50 decreased 51% versus the fourth quarter of 2021. For the full year, adjusted operating income and adjusted net income of $723 million and $529 million both decreased 37%, while adjusted earnings per share of $12.1 decreased 31% versus the full year 2021. Our adjusted operating margin was 26.1% for the fourth quarter and 25.9% for the year, in line with pre-2021 historical averages. Turning to the businesses, fourth quarter advisory revenues of $704 million declined 27% year-over-year. Advisory revenues were $2.4 billion for the year, a 13% decline compared to 2021, and our second best year ever for advisory. In accordance with relevant accounting principles, our revenue includes approximately $116 million from transactions that closed in early January and/or had other conditions pending a period at. To compare, we recognized $21 million in the fourth quarter of 2021 and $32 million in the third quarter of 2022 in accordance with the same accounting principles. Fourth quarter underwriting revenues of $44 million were down 32% compared to the fourth quarter of 2021. For the full year, underwriting revenues were $123 million, down 50% versus 2021, reflecting a decline in overall market issuance. Commissions and related revenue of $54 million in the fourth quarter were down 2% year-over-year. For the full year, commissions and related revenue of $206 million were flat compared to 2021. Fourth quarter adjusted asset management and administration fees of $17 million decreased 23% year-over-year, while full year revenues of $71 million, decreased 9% compared to 2021, reflecting a decline in AUM, driven by market depreciation. Fourth quarter adjusted other revenue net was a gain of approximately $18 million, in part reflecting the increase in value or in -- in value of investment funds portfolio, which is used as a hedge for our DCCP commitment, as equity markets rallied in the fourth quarter. For the full year, adjusted other revenue net was a loss of $9 million as equity markets were negative for the year. Other revenue was a gain of $32 million in 2021, driven by positive equity market. Turning to expenses, the adjusted compensation ratio for the fourth quarter was 62.5%. Our full year reported adjusted comp ratio was 60.9% versus 55.7% for 2021. When adjusting the compensation ratio to exclude the hedge in our DCCP, the comp ratio for the full year would have been slightly lower at 60.3% compared to 56.2% in 2021 when making the same adjustments. Fourth quarter non-compensation costs of $96 million were down 5% from a year ago, primarily driven by a decrease in other operating expenses. Last year reflected the initial charitable contribution to the newly created Evercore Foundation. This was partly offset by increases in travel, which began to resume during the fourth quarter of 2021, and increased throughout 2022. For the full year, non-compensation costs of $365 million were up 11%, largely driven by increases in travel related to a return to more normalized levels of travel and professional services, as well as increased cost due to return to office, inflationary pressures on technology, and higher occupancy expenses as we added more space during 2022. As we have previously mentioned, we are focused on our expense management practices across comp and non-comp. Our headcount is down quarter-over-quarter and since June. We continue to manage out lower [Technical Difficulty] incremental and replacement hires. On the non-comp side, we are managing expenses tightly. We expect growth in non-comps in 2023, but at a significantly lower rate than what we saw in 2022. This will be driven by continued normalization in travel practices, inflationary pressures across both travel and tech, as well as continued occupancy related increases driven by the annualization of new space and contractual rent increases. If the market environment improves and activities subsequently picks back up, we could see an increase in deal related expenses. Our adjusted tax rate for the quarter was 28.2% up versus last year. The full year adjusted tax rate was 24.5%, also up versus last year. The increase for the quarter and the full year were primarily driven by [Technical Difficulty] in state and local taxes as well as nondeductible expenses, including meals and entertainment and stock-comp expenses. Turning to our balance sheet. As of December 31, our cash and investment securities totaled about $2.1 billion. Our excess cash as a percentage of our total cash and investment securities is in the low-teens. We review our excess cash position with respect to the current business environment and we continue to hold more cash than what is required to run the firm as market and economic uncertainties persist. We remain committed to returning all excess cash -- all excess capital, not invested in the business to our shareholders over time, while maintaining a durable balance sheet. In 2022, we returned a total of $655 million to shareholders through dividends and repurchases of 4.4 million shares at an average price of $117.27. During 2022, we more than fully offset the dilution from the RSUs that were granted as part of our annual bonus compensation process and we expect to continue to do so in future periods. Our fourth quarter adjusted diluted share count increased slightly to $43.5 million from $43.2 million in the third quarter of 2022, primarily reflecting the increase in the share price, investing of awards, partially offset by share repurchases. Relative to a year ago, our share count is down significantly from $47.3 million in the fourth quarter of 2021. Thank you. We will now conduct the question-and-answer portion of the conference. [Operator Instructions] Our first question will come from Brennan Hawken with UBS. Your line is open. Good morning. Thanks for taking my question. So, the outlook commentary was a bit more limited than we're used to hearing, likely reflecting uncertainty. But one thing I'm curious about from your perspective, what do you think of recovery might look like, because this is something that's often debated, and I know it's a tough question to answer, but recency bias to me results in folks often looking at the most recent recoveries which were aided a lot by a Fed that was quite accommodative. And so, if we end up seeing a less accommodative central bank, how do you think that might play through in a recovery? And when you -- when we look back to prior cycles, which cycles would you think might be most apt as you sit here and playing out what a recovery might look like, obviously, depending on whether or not we'll enter a recession or not, but generally based on what we can see today? Thanks. Thanks for the question. And in terms of how we would chart this cycle versus other cycles. I think it's hard, because this is so -- it's such a unique situation. The way we think about it is that clearly, what is happening now is that, there's a lot of standing back by strategic and by sponsors, looking and saying, we're in a wait and see mode. And I think that is happening. We've seen that the investment grade public market has opened up on the credit side. And I think that -- so, certainly, there is a beginning to see some liquidity in the market for strategic transactions. But I think that a lot of the boards and management teams are still standing back and waiting because there are so many exogenous things that could happen, and I think they're watching to see what happens in the Fed today and the messaging from the Fed. I think people are watching to see how inflation is behaving and I also think people are continuing to monitor the geopolitical situation. I think -- generally, I think that management teams and boards would love to start working on their strategic dialogs and really start working on what they want to have as their growth patterns. On the sponsor side, I think that the investment -- the non-investment grade market, leveraged finance markets, are still somewhat restricted. And I think that people are waiting and seeing. Clearly, private credit is out there and it's available, but it's not big enough to really drive a huge market. And we're also watching to see whether buyers and sellers expectations for values are coming closer together. And I think with the way this will play out is that, you're going to see a few transactions start to go forward. And as those go forward, people are going to be watching carefully to see what the reaction is. I could see it taking some real time to start the momentum of the recovery and then I could see the recovery accelerating. I do think that even though rates will remain relatively high from recent -- with regard to recent history, I do think what you'll see is, you'll see that people are going to want to start really looking at getting going on their plans. And I think that so many management teams and sponsors have been planning for this recovery and wanting to participate. And I think you're going to see -- as things look more positive as some deals get done, I think you'll start to see an accelerating of the pace of transactions. Hey, John and Celeste. Thanks for taking my questions. I just wanted to ask quickly on the debt financing markets, which do seem to have reopened to some extent so far in January, and I guess, in February. Maybe if you could just speak to whether some of the financing pressures holding up M&A deals have subsided and that's what we're seeing, and how this could impact the speed of an M&A recovery. And then conversely, could this have a more negative impact in terms of reducing the restructuring opportunity? Well, first, I'll start with the latter part of your question, which is -- I could easily see -- and this doesn't often happen, I could easily see the merger market really picking up and restructuring continuing at a very high pace just because I think that in terms of restructuring this is really a broad type of application for restructuring. It's not industry specific, it's really company specific. And we're seeing a lot of opportunities, both in terms of distress financings, companies that really need advice with respect to their capital structures. There's a real broad diversity of activity going on in our restructuring group. So, I could see that moving forward even if the merger markets recovering. In terms of the credit markets, there's no question that the opening of the credit markets and the strength of the credit markets has really helped investment grade corporates and big companies really look at the market. But really, the recovery is not really that they don't have access to being able to do deals, it's really that they are really watching the market to see when the market will be receptive to doing big deals. And then I could see that recovering. And so, I think that there's no question that the credit markets make it easier. But I think that it's really going to be management teams and boards getting the confidence to actually move forward with sizable situations to drive their strategy. I think there is a real pent-up demand from corporates and sponsors to do deals. And so, I think the minute they think that there's going to be broad acceptance to deals, you're going to see it start. And as I've said, I think it's going to build. Hi. Good morning. Just wanted to touch on the non-M&A advisory contribution. More recently you've spoken to this coming in closer to kind of a third of the total revenue pie over the past few years. But I'm curious, I guess, as to how this has trended in relation to this number over the past year, kind of considering the push-and-pull dynamics of lower underwriting fees, but what I would imagine is a larger contribution from the private capital advisory and restructuring side. So, wondering that shift within this bucket: one, if the 2022 figure came about the similar proportion to what you've disclosed over that three-year period; and two, how should we be kind of thinking about this outlook on these non-M&A advisory revenues in 2023, particularly with what we're seeing on the M&A -- pure M&A advisory specifically? Sure. Thank you. Well, generally, I think we're still in the one-third area as to where these businesses are actually coming out in terms of our total revenue. I think it's generally in the same place. These are very, very strong businesses that are, I think, well positioned. And I think that the prospects for these businesses is very good and we're actually investing in them. Whether it's in restructuring, we promoted another senior managing director who is going to be very productive. They're very busy right now. They're taking on many new assignments and they've got a lot to do. And so, I think that we feel good about that business. Private capital advisory, we're investing in there too. I mean, we really think we have best-in-class businesses there and we're trying to pour it on. We're giving them opportunities to grow. We're thinking it's a real strategic opportunity for us. And we think that's important. And then the other businesses like equity capital markets and equity trading are actually well-positioned and everybody seems to be gaining some ground in a relative sense. So debt advisory, the same. Wealth management, I think, is doing quite well. I think -- so, I think, the answer to your question is that these are good businesses and they will drive performance. Right now, they continue to be in the one-third area. And I don't think that's going to change because I think that -- I think our merger opportunities will continue to grow. So, I think -- right now, I think it's not changing dramatically other than I feel like we're -- we feel good about the prospects of those businesses and really how we're -- the dialogs that we're having in there. Yeah. I mean, as John said, the merger business will remain the most important business for us as a firm. As you pointed out, ECM will ebb and flow. A strong ECM year for us can help that number and helps a lot of things that provides us with a lot of operating leverage. But I think as John mentioned, we're investing in all of our businesses and -- but the merger business will remain the most important that we're very happy we've invested in delta diversification over the last 10 years. Hey. Good morning. You mentioned Europe is being -- having a record year last year. It did start off strong just from the environment perspective, but I know you've been investing heavily there too. So can you just talk a little bit about your outlook there, both from your own investment standpoint, the momentum you have as well as the environment? Sure. The environment started out very strong at the beginning of last year as you know and I think a lot of our competitors, I think, felt the same thing. The environment started to basically cool off a little bit towards the latter part of the year. Our prospects are that, we actually see that we are feeling good about the beginning part of this year with that business. I think we were kind of midway through or towards -- midway through the third quarter, we were wondering, but we feel like it's actually strengthened. And so, we feel good about that business. In terms of our investment in Europe, we continue to think that we should stay on the course that we have been, which is we are really making strategic investments there. We basically targeted certain areas that we think we can actually really build and do it productively for our shareholders. And so, we're willing to continue to invest there. In fact, we are aggressively looking for opportunities in those areas to really grow. And I think we're in the middle of some very, I think, important dialogs. So our intention is to continue to grow Europe, but do it in a way where we are really being thoughtful and careful about making sure that when we -- what we're doing there and when we're putting shareholder money to work there that it returns. And I think right now it's actually working quite well and we're going to continue to be careful and diligent about how we do it. Great. Good morning. Just a bigger picture question around really the demand for advice. I mean, the one thing we always look at to think about kind of the advisory market is just looking at global M&A volumes. And I think a lot of people track that as kind of a proxy for what's happening. But as the market continues to evolve, which is much more than that and all the other capabilities it brings for clients. And so, wanted to just get a little bit of a sense of how, John, you would just frame the -- how the demand for advice more broadly has evolved or changed? How you go to market with clients, and how that's changed? And just really also the willingness of clients to pay for other types of advice beyond just M&A capabilities. Thank you for the question. Our philosophy is that, we want to become the strategic advisor for our clients. And so, when we enter a go-to-client situation, what we want to do is, we want to build very strong relationships with the senior decision makers, offer what we think are best-in-class capabilities and products, and really try and help them with the things that are important to them. In the very early days of the firm, I think we were doing that, but we were also -- we were limited by having a much more -- much smaller client -- product base, and we didn't have quite as many products to offer the clients. Now, we have a much broader suite of products. And as a result, we can go into CEOs and CFOs and heads of M&A and we can offer them a much broader set. And we're finding that it's really -- it's giving us real opportunity to do more for clients. And whether that's going in and having activist advisory assignments and really beginning the relationship that way or coming in with interesting ideas for growth, or whether it's looking at capital structures, we're able to do all of those things. And as a result, I think we're actually able to create more connectivity and have a much better ongoing set of dialogs that I think really help us bond with clients. So from our standpoint, what we've invested in and what we've done is really starting to have some real impact. And I think we're really trying to broaden our reach with respect to clients. And so, over time, we're investing more in more clients and building that client base. We will be successful if we're able to continue to build the client base and offer them products that they think are best-in-class and very, very importantly to be able to put advisors in front of them who they will value at the highest level. So the answer is, I think the model is feeling good right now. Okay. And John, just one clarification on just their willingness to pay for types of advice beyond just something that's transactional. Understood. We're definitely getting advisory fees. Debt advisory fees, restructuring advisory fees, we're able to really get fees. And so, on the one hand, merger deal fees are really always going to be the big driver of revenue for the firm, I think, just because the transaction driven fees are actually some of the best. I really think that we're having a larger and larger base fees that are being paid for that are non-transactional and very much advisory. So, I guess, the answer to your question is, we're building that and I think that the more expertise and broader our product set is, the more we're able to get that. And if we're successful, we're able to do a merger and then maybe also have debt advisory and be able to have that connectivity from different parts of the transaction where we're able to actually charge fees. And so, that's going well. We're continuing to work on that. And it's -- as much as anything, it's us learning how to really apply what we think our real capabilities to the clients, and therefore, adding value that they think is worthwhile. Good morning. This is Brendan O'Brien filling in for Steven. So, I wanted to ask on the comp ratio. Given all the uncertainties surrounding the outlook and with backlogs entering the year at a weaker level this year than last, it feels like comp ratios are likely to persist into at least the first half. At the same time, it sounds like the impact of your DCCP hedge was a significant driver of the incremental comp ratios seen this year. So I wanted to get a sense as to whether the 61% accrual levels seen this year should be a good place to start for next? And also I was hoping if you could help frame how we should be thinking about incremental comp leverage from here. Your full year comp expense was down about 8% versus a 16% decline in your overall revenues. Would you expect that same dynamic to hold in 2023? Thanks for your question. So, comp -- the comp ratio will continue to be driven by revenue in this environment. And we will set the ratio and share it with you in April. And that will be based at that time not on one quarter, but it's based on our estimate for the year at that time, so our outlook for the full year. As a reminder, our SMDs are paid by performance [Technical Difficulty] largest part of our comp expense. However, base benefits and other things become more meaningful in this environment. But as you can see, we've reduced our headcount quarter-on-quarter and since June we're more aggressively managing our lower performers. We're limiting additional headcount and replacement hiring and we'll continue to do so as long as the environment remains weak. However, we will continue to invest in A-plus talent. And really the comp ratio will be how all of those things come together and we'll be really thoughtful about all of those based on what the revenue environment looks like and what we think the opportunities are for us to invest in the future of the franchise. Just one additional comment which is that, the comp ratio is really going to be impacted most of all by revenues and revenue growth. And with respect to our backlog, our backlog is strong. And the real variable in my mind is that deals -- that backlog and our ability to realize that backlog into revenue at this point is really influenced by what has been an environment where it's taken longer to get deals done and it's all been extended. And so the real question is, what I would say the realization rate of that backlog because backlog is strong, and if we're able to start to see an acceleration of that realization rate, I actually think you'll see the revenue comp go up and I think you'll see us take a lot of the pressure off of the comp ratio. Hey. Good morning. John, you noted that dialog with clients is still pretty active, particularly on the strategic side. So any differentiation you're seeing in terms of deal size? I know that higher antitrust scrutiny is not new, but is that still weighing on large deal activity? And are you seeing more dialog in smaller deals right now? I think we're actually seeing really healthy across the board. Personally, I think there is something to be said that people are watching really carefully on antitrust. And I think -- I'm glad you brought that up, because it is important, and it's something that we're all watching really carefully. That's not stopping management teams from really looking at big things. But I think there is a really careful scrutiny with respect to how antitrust will play in those situations. In the middle which is often when we see recovery, we often say, well, it's going to be led from the middle or the bottom and it will accelerate. In this case, I think that the middle-market and the under $5 billion deals actually are quite healthy. But I also would say anecdotally in what I'm seeing and I'm talking with a lot of our bankers very regularly, I'm seeing that there are some really big -- some big deals that are being seriously considered and I could see them going. So I don't think I would differentiate big from small right now. But I would say it -- a lot of it's going to be the wait-and-see approach that we talked about earlier in this call. It's going to be really interesting to see when some transactions at different size levels start to go forward, how quickly others in those areas or those categories start to pick up. I could easily see it actually being a relatively broad based recovery. But it's just -- it remains to be seen because, as you know, we still have so much uncertainty in this market, which is really what's holding the market back right now. Good morning. Thanks for taking my follow-up. One just sort of clarification quickly. The 130 SMDs that you note in the release that that includes the 1Q recruit, but does that also include the seven advisory promotions? Brennan -- sorry. The promotions will be reflected in the 1Q number because they're effective as of -- we just announced them, but they're effective as of March 1. So they'll be included in the 1Q number. Okay. Excellent. And I don't know if Tim can hear, I know next quarter, it will be your call, but congrats on the new role. And just a quick one to sneak in here. You've been at Evercore for over two decades and held many roles. So from your perspective, what do you think is most misunderstood about Evercore as far as the valuation of the company was reflected? Brennan, I'm so sorry, but Tim actually is out on a medical situation for this morning, and so he's not here for this call. He may be listening in, but I don't think he's going to be able to charge into that one. Let's put that one on hold and in our next call, we'll make sure we remember and answer it for you.
EarningCall_1030	Greetings, and welcome to the Qorvo, Inc. Third Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas DeLieto, Vice President of Investor Relations. Thank you. You may begin. This call will include forward-looking statements that involve risk factors that could cause our actual results to differ materially from managementâs current expectations. We encourage you to review the safe harbor statement contained in the earnings release published today as well as the risk factors associated with our business in our annual report on Form 10-K filed with the SEC, because these risk factors may affect our operations and financial results. In todayâs release and on todayâs call, we provide both GAAP and non-GAAP financial results. We provide this supplemental information to enable investors to perform additional comparisons of operating results and to analyze financial performance without the impact of certain noncash expenses or any -- or other items that may obscure trends in our underlying performance. During our call, our comments and comparisons to income statement items will be based primarily on non-GAAP results. For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our Investor Relations website at ir.qorvo.com under Financial Releases. Joining us today are Bob Bruggeworth, President and CEO; and Grant Brown, Chief Financial Officer; Dave Fullwood, Senior Vice President of Sales and Marketing and other members of Qorvoâs management team. Qorvo delivered fiscal third quarter revenue and EPS above the midpoint of our outlook provided during our November 2nd earnings call. In High-Performance Analog, quarterly revenue reflected year-over-year growth in defense, broadband and power. Our power business posted a strong quarter with robust design activity for our silicon carbide power devices. Offsetting this were power management markets with consumer exposure in infrastructure where customers are working down elevated inventory levels. In our Connectivity & Sensors Group, the quarter reflected lower end market demand and channel inventory consumption for Wi-Fi products partially offset by strength in automotive. Design activity was strong across customers and products, including ultra-wideband, matter and sensors. Use cases continue to proliferate their benefit from precision location, indoor navigation, seamless connectivity and enhanced human machine interfaces. Lastly, in Advanced Cellular, Qorvo participated broadly across customersâ portfolios. The macro environment weighed on overall smartphone volumes across customers, and revenue reflected channel inventory consumption within the Android ecosystem. Design activity continued to be strong across customers and product categories and supports year-over-year content gains at our largest customers. Now, letâs turn to some quarterly highlights. In High-Performance Analog, Qorvo began sampling a radar power solution that combines a high-voltage power conversion PMIC and silicon carbide power switches to control a GaN RF power amplifier. The solution reduces the size by up to 30% in D&A radar systems while expanding Qorvoâs content opportunity. We also expanded our SHIP state-of-the-art RF packaging contract with the U.S. government to develop multichip modules that combine digital optical devices with Qorvoâs mixed-signal RF. In aerospace, we delivered a multichip solution that includes Qorvoâs high-frequency BAW filter as well as a GaN PA for low orbit satellites and other applications. The solution supports cellular satellite links, and we have secured new designs. The opportunity for Qorvo is notable given the trend in defense and aerospace applications of one to many. That means rather than one jet, there will also be many drones; rather than one geo-satellite, there will also be many LEO satellites. At the same time, new capabilities are being added to existing platforms that require increased semiconductor content and higher density and more advanced packaging, all areas where Qorvo is strong and is investing to advance the technology. In cellular infrastructure, we commenced preproduction shipments of our first integrated PA modules, or PAMs, to a Tier 1 European infrastructure OEM for 5G massive-MIMO base stations. We also began sampling our next-generation PAM, which delivers market-leading efficiency for 5G massive-MIMO installations to the leading European infrastructure OEMs. For broadband infrastructure applications, we sampled a CATV power doubler amplifier that maintains linearity and extends bandwidth to enable higher throughput DOCSIS 4.0 capabilities with industry-leading power efficiency. Deployments of DOCSIS 4.0 are scheduled to begin this year and Qorvo is very well positioned as the industry leader. In CSG, we expanded our Wi-Fi content at a Korean-based smartphone OEM to include Wi-Fi 6E and Wi-Fi 7 designs and we ramped Wi-Fi 7 FEMs for access points and routers for our smart home ecosystem customer. We also commenced sampling 5 gigahertz and 6 gigahertz filters. These filters leverage Qorvoâs next-generation BAW process and enable worldwide Wi-Fi 7 frequency coverage. There is increase in customer interest related to multi-link operation, which is a key attribute of Wi-Fi 7 and enables higher throughput and lower latency. Lastly, we began volume shipments of MEMS-based sensors, enabling an enhanced HMI experience and true wireless stereo earbuds. Qorvo sensors were selected to replace legacy capacitive touch sensor technology. Design activity for sensors continues to be strong across markets, including automotive. We are working with leading automotive Tier 1s and have secured automotive smart interior design wins in more than 25 vehicles. In Advanced Cellular, we secured multiple design wins across Android OEMs in support of 2023 devices. During the quarter, we commenced the production ramp of multiple components for the leading Korea-based smartphone OEMâs flagship platform. We have increased our content significantly year-over-year. We are broadly serving this customer across our portfolio and continue to support the migration of their mass market phones to integrated 5G solutions. At a U.S.-based Android OEM, we were selected to supply multiple solutions, including ultra-wideband, antenna tuning and BAW-based antennaplexing in support of their 2023 smartphone launches. Lastly, Qorvo was recognized by multiple customers. We were presented with Honorâs 2022 Golden Supplier Award, and we received quality awards from Vivo for discrete switches and amplifiers and highly integrated solutions. Before handing the call off to Grant, I want to make a few high-level comments to frame our outlook, both in the near term and further out. At our largest two customers, we are very confident in our ability to grow year-over-year content, and that includes this year. In 2023, we expect growth in BAW-based content as well as other content growth. Equally important, we enjoy a range of opportunities across all of our customers in the future years. Qorvo is supporting the highest volume flagship phones while supplying integrated 5G solutions as mass market portfolios migrate to 5G. Fewer than half of the Android devices were 5G in 2022 and the migration of 5G is expected to extend over many years. We are unique in Advanced Cellular in the breadth of our customer exposure and in the depth of our product and technology offerings. Our long-term view of ACG continues to be mid- to high-single-digit growth driven by multiyear content gains. In particular, we see expanding market for our BAW technology. Productivity gains in our Richardson, Texas fab have enabled a doubling of our BAW output. We intend to put that to good use as we continue to capture designs and grow our BAW content in flagship phones. We expect the long-term growth rate of HPA and Connectivity and Sensors to outpace Advanced Cellular. Our view for HPA is double-digit growth. And in CSG, we expect growth in the strong double digits. Key growth areas supported by recent wins with silicon carbide devices in EVs and solar inverters, MEMS sensors and notebook track pads and automotive smart interiors and ultra wideband in automotive and Android devices. These and other investment businesses are securing new designs that extend our opportunity in large growth markets. In the near term, the team is performing exceptionally well while navigating extraordinary events. Factory loadings have been reduced, and we are bringing down channel inventories. We are also actively managing the expense line while sharpening our focus in support of targeted growth. We are working to accelerate revenue related to our Omnia BAW-based biosensors by exploring options for the associated Omnia test hardware, meaning the Omnia desktop test unit and cartridges that contain our BAW biosensors. The technology has been proven commercially, and we are engaged with a diverse set of customers. Qorvo remains at the forefront of connectivity, sustainability and electrification. We enjoy exceptional customer relationships, and we are a key enabler of future architectures. These architectures continue to favor higher levels of performance, integration and functional density to deliver the successive improvements in each marketâs next-generation products. Our customers value Qorvoâs best-in-class products and technologies, and we are securing broad-based design wins in high-growth markets. As volumes recover, we are positioned to deliver long-term growth and robust free cash flow. As a reminder, our references today will be to our three operating segments: High-Performance Analog, or HPA; Connectivity & Sensors Group, or CSG; and Advanced Cellular Group, or ACG. In our upcoming 10-Q, we will provide historical financial information that reflects these operating segments. Additional historical information will be made available in our fiscal 2023 10-K to be filed this May. Iâll now turn to our latest quarterly results. Revenue for the third quarter of fiscal 2023 was $743 million, $18 million above the midpoint of our guidance. We enjoyed relatively strong performance in automotive, broadband, defense and silicon carbide power devices. However, elevated channel inventories and weak end market demand pressured revenue and order activity across all three operating segments. Looking at each operating segment individually. HPA revenue of $155 million in the quarter compares to revenue of $182 million in the same quarter last year. In HPA, growth in areas such as defense and silicon carbide power devices was offset by inventory consumption in the 5G base station market and softness in consumer-facing markets like SSDs and battery-powered tools. CSG revenue of $97 million in the quarter compares to revenue of $158 million in the same quarter last year. This reflects weakness in end market demand for Wi-Fi products and channel inventory consumption. Finally, ACG revenue of $491 million compares to revenue of $775 million in the same quarter last year. This reflects lower smartphone unit volumes and channel inventory digestion within the Android ecosystem. On a non-GAAP basis, gross margin in the quarter was 40.9%. Gross margin fell sequentially due to lower factory utilization and higher inventory-related charges including a quality issue at a supplier. Non-GAAP operating expenses in the quarter were $206 million, $90 million lower than our guidance and down $8 million versus last year due to OpEx discipline, the timing of product development spend and lower employee-related expenses including incentive-based compensation. In total, non-GAAP operating income in the quarter was $99 million or 13% of sales. Breaking out operating margin by each segment. ACG was 20%, HPA was 19% and CSG was negative 32%. Non-GAAP net income was $77 million, representing diluted earnings per share of $0.75, which was at the high end of our guidance range. Free cash flow was $203 million. Capital expenditures were $34 million, and we repurchased approximately $200 million worth of shares during the quarter. The rate and pace of our repurchases is based on our long-term outlook, low leverage, alternative uses of cash and other factors. Turning to the balance sheet. As of quarter end, we had approximately $2 billion of debt outstanding with no near-term maturities and $919 million of cash and equivalents. Our net inventory balance ending the quarter was up slightly at $857 million. Now turning to our current quarter outlook. We expect quarterly revenue between $600 million and $640 million, non-GAAP gross margin of approximately 41% and non-GAAP diluted earnings per share in the range of $0.10 to $0.15. Our current view reflects ongoing demand weakness across end markets as well as our expectations for further consumption of channel inventory. We continue to expect sales to Android smartphone customers will increase sequentially in the March quarter. For historical reference, the March quarter revenue in fiscal â22 for each of ACG, HPA and CSG was $777 million, $211 million and $179 million, respectively. At the volume levels assumed in our guidance, we expect Qorvoâs inventory position will decline in March, but remain elevated. In terms of channel inventory, the picture has begun to improve. For example, total channel inventory for our components in the Android ecosystem was reduced by over 20% in the December quarter. We expect continued improvement this quarter and anticipate the channel to normalize later this calendar year. We are actively working with customers to consume channel inventories. And in doing so, we expect production levels to remain compressed. This will lead to continuing underutilization charges related to inventories which will weigh on gross margin during fiscal Q4 and carry into next fiscal year. We project non-GAAP operating expenses in the March quarter will be up approximately $20 million sequentially due to the timing of product development spend, seasonal payroll effects and other employee-related expenses. Below the operating income line, non-operating expense will be approximately $15 million, reflecting interest paid on our fixed rate debt, offset by interest income earned on our cash balances, FX gains or losses, along with other items. Our non-GAAP tax rate for fiscal Q4 is expected to be consistent with fiscal Q3. The rate remains elevated due to the absolute level and geographic mix of pretax profit including FX-related gains within high tax jurisdictions as well as the impact of the U.S. tax law change related to R&D capitalization among other factors. With regards to operations, I want to highlight the outstanding progress our teams have made in terms of productivity gains. We continue to make improvements in product development, filter design, process engineering, factory planning, manufacturing efficiency and many other areas. Today, these gains have significantly increased our effective BAW capacity. And as Bob indicated, the progress continues. And looking forward, we can double our BAW capacity in the Richardson facility versus our current maximum theoretical thresholds today. Increasing a throughput of an existing asset not only reduces cost, but can reduce complexity within the factory network as production is consolidated. The BAW productivity gains in our Richardson facility allow us to achieve our long-term growth goals across all of our customers, including the most demanding BAW-based placements. As a result, we have decided to sell our Farmers Branch facility. Weâre in the early stages of marketing the site and initial interest has been encouraging. For reference, the site has been incurring approximately $12 million of non-GAAP COGS per year. We are also evaluating strategic alternatives for our biotechnology business to accelerate and maximize its potential value. The Omnia platform, which is based on our BAW sensor technology, has demonstrated significant promise as a diagnostic testing solution. The biotechnology unit currently resides in our CSG segment. While the revenue impact from a transaction would be negligible, it would reduce total expenses by approximately $32 million per year. At this stage, itâs too early to comment on the eventual outcome, timing or potential valuation. These actions will sharpen our focus and resources on the many growth drivers across our three operating segments. Our long-term outlook is positive, and weâre well-positioned to weather current macroeconomic challenges. Product performance requirements continue to increase in our end markets, sustainability initiatives underscore the increasing global reliance on power efficiency, and connectivity and electrification trends are accelerating worldwide. We have diversified our opportunities across markets, customers and product categories while maintaining our commitment to technology leadership, portfolio management, productivity gains and reduced capital intensity. This has supported strong financial performance during a challenging environment and has positioned us for long-term increasingly diversified growth. You gave really good color on channel inventory, but I was hoping to ask a follow-up there. So, channel inventory as it relates to Android, I think you said, was down more than 20% in the December quarter. I guess, how do you see that evolving over the next couple of quarters? And I guess, more importantly, on the non-Android side or the iOS side, whatâs your current assessment of channel inventory and how that plays out over the coming quarters? Yes. This is Dave. Iâll answer that one. So first, weâre not going to comment on the iOS side of the inventories. And Grant already mentioned the Android. I think when we look at the overall channel inventories and when we refer to channel inventories, weâre talking about all of our components that are out, whether theyâre in our distributors or at the end customers. And so, on balance, overall, itâs down about 20% across the entire business, not just within the Android ecosystem. If you look just within our distribution channel, itâs down about a third in the December quarter. But as Grant mentioned, we still have a ways to go in there. So we expect to continue reducing that across this quarter and then into the early part of FY24. Got it. And then, as my follow-up on gross margins, youâre guiding the March quarter to, I guess, 40, 41%, which is essentially flat sequentially. Can you speak to where your utilization rates are today? And as you continue to work down inventory and the overall industry continues to work down inventory, what cadence should we be thinking about for the rest of the calendar year? Do you think you can exit kind of in the high-40s or even close to 50% calendar â23, or is that a little too optimistic at this point? Thank you. Sure. Toshiya, thanks for the question. Iâll touch on margins here, and Iâll try to cover all of it, both in Q3 and then looking beyond that into fiscal â24. For fiscal â23, the primary driver of gross margin continued to be under utilization and inventory-related charges. In Q3, it accounted for about 920 basis points of headwind or in that neighborhood, and itâs expected to remain there in the March quarter, hence the flat gross margin guidance. Inflation across direct costs were approximately 80 basis points in Q3 and again, expected to remain there in Q4. As we stated earlier, in Q3, there was a supplier quality issue representing approximately 30 basis points of headwind in our Q3 period. So kind of walking through that pareto, you can see the dominant factor is clearly underutilization. To your question about getting back to 50%, itâs unlikely in fiscal â24, although it depends on your view of the macro economy and a number of other variables. However, underutilization creates a lingering impact due to timing. And so, as volumes fall, those inventory balances will reflect higher per unit costs. And simply put fewer units moving through a fixed cost factory collect more cost per unit. So, we saw this heading into the December quarter, and it will carry forward into fiscal â24. The rate at which that high-cost inventory flows through the P&L will obviously depend on variables like our future utilization or product mix including a ramp of revenue over the course of fiscal â24, but -- although the precise timing is uncertain, the reduction in channel inventories is very encouraging, and itâs a necessary first step. If I do look out over the course of fiscal â24, I could see potentially that 920 basis points of margin get cut in half, again, subject to your view of the revenue trajectory throughout the year. I was hoping you could discuss a little bit more commentary regarding your outlook. You certainly gave much commentary across the P&L for March. But within that outlook, could you discuss the order of magnitude decline between your segments? Iâm just trying to have a better understanding of whatâs occurring, I guess, in the legacy IDP segment, which appears driven by some maybe some inventory overhang within Wi-Fi, IoT and maybe telecom infrastructure. And then as you address that question, what are your assumptions for your mobile revenue in China in the March quarter, which I believe was guided to 10% in December? Sure. So, let me start with our view of the segments in the March quarter. If we go back to kind of comparing our current March guide to our thoughts last November, thereâs a bit of variance in HPA and CSG. Instead of flattish, there will be rather modest declines there in dollar terms for our guide. Biggest driver, of course, is ACG. If you consider the size of our largest customer relative to ACG revenues in December and that customer, excuse me, is seasonally down in March and June, itâs a sizable headwind, and that really dictates the path of our top line. In terms of our China-based smartphone OEM revenue, it came in largely in line, just a bit above 10%. Understood. I guess, just -- maybe just to follow up on that with regard to the China Android OEMs. It sounds like they came a little bit better. Should that remain at a similar level of revenue on a mixed basis in March? It sounds like itâs going to be improving. And I guess, to the extent you could talk about the recovery process or how you see the recovery process for the balance of the year, I guess the question I would like to understand is, given some of the new -- the opportunity in premium-tier Android flagships youâve announced this -- today, itâs certainly great to hear. But I guess, if you could discuss the level of confidence you have in demand returning for mid-tier handsets, the balance of the year, would be super helpful because I ask because two very large Korean memory OEMs this week indicated the smartphone market could bifurcate between good demand for flagships, you have weaker demand for lower mid-tier models. And so if you could just kind of comment on, I suppose, the production approach and your design approach for those markets, if they do bifurcate, it would be very helpful. Thank you. Sure. Letâs -- if I decompose it, Iâll start and Iâll let Dave tackle the different tiers of handset models. In terms of revenue, as we look forward into the guide, we would expect our China-based smartphone OEMs in dollar terms to be roughly flat but overall, our Android revenue to be up. And then as we look maybe deeper into fiscal â24, without going into too much detail or attempting to guide at this point given the overwhelming impact of macroeconomic factors, I can shape it a bit for you and provide some of the drivers. In terms of revenue beyond the March quarter, we would expect June to be roughly flattish. It could be a bit higher, a bit lower depending on your view of the economy or Chinaâs reopening. We donât have terribly ambitious expectations for the reopening at this point. Weâre playing a bit conservative with our view. From there, I would expect September to see significant sequential growth and then December and the March 2024 quarters to be back to strong annual growth from there. Dave, I donât know if you mind commenting on the tiers. Yes. So, as Bob mentioned in his remarks as well, weâre seeing really nice content growth in the premium tier. So, weâre well represented there. And of course, weâve always been well represented in the mass tier year as well, 5G. And so thereâs still a lot of room to go in terms of conversion to 5G. So the rate and pace of that may not be as quickly as we would have liked, but itâs still a lot in front of us. So we expect to see that mass here still moving to 5G over time. I want to start by asking for some clarification on what Grant just mentioned regarding the sequential revenue comps and year-over-year growth looking into the first half of next calendar year. Was that in reference to CSG or the business overall? Okay. Thank you for that. And any change in view on the purchase commitments from your foundry and suppliers? Are you -- do you anticipate utilizing all those commitments, or might we be looking at some additional write-downs there just given the dynamics? Yes. No change to our view. As youâll remember, we restructured the agreement last quarter to better align our view of demand with supply and are working with that partner on an ongoing basis. Several questions actually. First off, it sounds like the competitive environment, especially in China and maybe in Samsung is getting much more difficult. Weâve gotten lots of feedback of BackSan [ph] being a major competitor in switches, fielding high-band modules, competing in ultra-wideband, which wasnât the case two years ago. And I know theyâve been out there slugging away for some time and now it seems like maybe the political environment in China is favoring them more. First off, are you seeing that? Are they becoming more aggressive? And number two, are the margin expectations for the Chinese anywhere close to what we come to normally expect from your normal western competitors? And if not, wouldnât that affect ASP -- is it affecting ASP or should we expect the ASPs to decline? And then I have follow-up, please. Hi Ed, thanks for the question. As far as the Chinese competitors, theyâve always been there. Weâve always seen them. I think what is overriding everything is the highly integrated modules that require premium filter performance, particularly for those that are being exported as well as for -- within the China consumer market. So, we still feel very good about our position there with our integrated modules, whether itâs ultra high-band. What weâre doing, obviously, with mid-high as well as the work that weâve done, improved significantly the performance and cost in our SAW filters for low pads. So we feel real good about how thatâs positioned. And from a pricing perspective, we havenât seen significant changes there, Ed. I think there are some areas weâre actually raising prices. In some areas, yes, thereâs a little bit of competition, but we always have that. So, we havenât really seen a change in the market. Great. And then on that same note about increasing, it sounds like the MEMS business is -- youâve been working on MEMs forever and now theyâre showing up. And the ASPs, I donât know youâre looking to fuel them as tuners and weâve tracked that business pretty closely from the time, but it sounds like you might be seeing a significant increase in ASPs to the extent that you want the -- industry starts adopting MEMs. And maybe if I could flip that over, it sounds like since Samsung organize the handset division, now that youâre using open market modules, the actual -- content in ASP for those modules seems to have dropped significantly, whether it be the mid-high band or the low band. And Iâm just talking about the flagship, of course, because the master is a big step-up going to modules. So I just try to get at my arms around what the overall, letâs say, year-over-year or year over two years ago, content picture looks like from the Koreans point of view in terms of redesigning that front end? And then what kind of trends in products like MEMs, do you have that are bucking that trend? Thanks. Yes. Thanks, Ed. Iâll take the MEMS and let Dave speak a little bit more about your comments about the standard products that weâve been selling that are highly integrated -- integrating in all the filters. As far as MEMs goes, weâre still very early on in that, Ed. As far as the RF MEMs go, as you know, weâve been working on that through the acquisition of Cavendish Kinetics and really just beginning to roll that out. And yes, they are paying for that. We donât expect that to go broadly and replace all of our antenna tuners. It gets you a DB or so. And people that are willing to pay for it will pay for that. That technology is -- costs a little bit more per function. But you get -- you pick up a significant improvement in the performance. And then second, weâre also -- our pressure sensor MEMs, weâre doing extremely well there. I commented in my opening comments about being in over 25 different vehicles. So people are starting to implement and track pads across -- all of the major OEMs are now looking at it, weâre engaged with them. Weâre just seeing that proliferate in the watches and various other devices. So, itâs very early on also in its life cycle. So, we feel real good about that. And Iâll let Dave speak a little bit about your question about some of the Korean manufacturers and what weâre seeing there. Yes. And while the architectures are similar, especially that particular customer that you mentioned, theyâre still very demanding from a performance standpoint. So they have their requirements and you have to meet their requirements to win that business. So, weâre very focused on that. We work very closely with them on the advanced architectures years in advance to meet their needs. So, I wouldnât think of it necessarily as a standard product. Itâs still very demanding sockets. On the first one, gross margin and then how your balance sheet inventory affects that over time. So, you mentioned gross margin, I think, 41% for March, and June sales are flattish. I imagine gross margins are probably flattish also. And then I heard that you could recover about half of the 900 basis points of underutilization. So, it suggests gross margin somewhere in the mid-40s in the back half. But how do I align that with the inventory that you have on your balance sheet? Where do you see it going over time? And does that impact how the gross margin progression happens in the back half of the year? Hey Vivek. Thanks. This is Grant. Iâll take your question. Yes, youâve got it in terms of gross margin, and the answer on inventory is rather simple, right? As that inventory begins to get sold and flow through cost of goods sold, it will drag with it those higher costs per unit associated with underutilization. So, I would expect the inventories to trend down over time, subject to normal seasonal ramps at large customers where we do have to build inventory in advance of those sales. So over time, it will come down, again, offset by some of those growth-oriented builds that we do at seasonal periods of the year. Grant, the reason I asked the question is because I heard before on the call that you think channel inventory normalizes later in the calendar year. Iâm hoping I got that right. So, if channel inventory doesnât normalize until later, how will your balance sheet inventory start to get back to more normal levels? Yes. Theyâre not necessarily sequential. They can happen simultaneously depending on the level of demand. Although youâre correct, I think the first stage of that would be a reduction in the channel inventories, increase in order activity from our customers pulling through our inventory, along with, as I said, the offset and builds for large customer ramps, but theyâre happening somewhat simultaneously, not perfectly sequentially. Understood. And then for my second question, you mentioned content gains at your top two customers. Are these competitive wins, or is this new term? Like is your gain somebody elseâs loss of content, or is it just new capabilities that customers are planning to add? And kind of related to that, just given the nature of these customers, do you expect to retain this content in the following years? Like, are these multiyear programs or the visibility is only there for the first year? Thank you. Part of the questions we canât answer, but I will tell you that the -- it is both content and share gains at our largest customers -- our largest two customers. Maybe I just want to start, youâve been kind of giving how large your largest customer or 10% customers are. Just trying to get a starting point for some of these moving pieces in December. Sure. So, our largest customer is a significant portion of ACG revenues, usually representing about two-thirds of that business, if not more, in certain periods. And then, our second largest customer, we havenât commented on, but it generally hovers around that 10% mark. And certainly, with some of the growth we expect there could be more. Got you. And then I guess, following up on Vivekâs question, just sort of trying to gauge the magnitude of these content wins youâre speaking to. You talked about being able to double capacity at Richardson, Iâm assuming you have given the pullback in Android, some excess capacity already. So, Iâm just kind of curious the time frame in terms of doubling that capacity if you have that on your horizon. Sure. Let me talk to that. I think just at the highest level, there isnât a BAW placement that we canât fully support at any customer. Our Richardson facility is really the key takeaway there. Weâve driven some significant gains for the reasons I mentioned earlier in the prepared remarks. But the productivity gains, the overall die shrinks, the move from 6 to 8 inches, and then, of course, the successive generations of BAW filters that weâre running through that factory lend themselves to a significant increase in capacity. So, as we look at Farmers Branch, the need for that, I guess, over time has been somewhat of a safety valve in case any of those initiatives didnât come to fruition. But given the success of the team there, weâre able to support all the BAW-based processing we need out of our Richardson facility. I guess, I was going to ask you and Iâll swap the order because they kind of build on Blayneâs last question. But in the BAW filter space, any changes in the competitive landscape there? I think one of your U.S. competitors has made a decent amount of progress on their BAW road map internally in the last couple of years, and it seems like some products might be a little bit closer to impacting sort of the market. So, any -- it sounds like youâre really confident in what comes in content gains to the last couple of answers that youâve given, but any competitive dynamic changes with your primary competitors on BAW. Yes. No changes to our primary competitors. And to the earlier follow-on regarding the capacity at Richardson, that is something that we can do over time, not necessarily this year. But thatâs something that we have the ability to do in subsequent years to add on to the effective capacity there at Richardson. But again, I just want to make sure thatâs clear that we do have to take steps, add equipment, et cetera, in order to make that possible. It will be in the out years, but itâs really a comment around Farmers Branch and supporting the ability for us to do that in the future given our ability to sell the Farmers Branch facility. Got it. Thanks for the clarification there. As my follow-up, obviously, given how big it is in the revenue, most of the focus of the call here has been on the mobile and smartphone markets. But I wanted to ask quickly on the wireless infrastructure side, thereâs some -- I donât know if theyâre correlated, but similar inventory dynamics that are happening. If you guys have any commentary about the inventory build up there? Has it come down? What -- timing of any potential reacceleration? Is it similar, too, on the mobile side or longer or shorter? Just any context there would be helpful. Thank you. Yes. And I think thatâs pretty well known. Weâve seen inventory build up there, and thatâs certainly been impactful to our infrastructure business. And it will take some time, we think, for that to bleed off throughout the year. So, itâs probably similar, but may even take longer than what weâll see in mobile. I just wanted to break down the commentary about September and December and March, if I could. So just the commentary about significant sequential growth in September off the flat June. Whatâs driving that commentary is seasonally September is higher, but can you maybe frame it in terms of relative seasonal patterns? Is this also be aided by more of a significant rebuild by these customers plus share gains? Just any commentary around qualitatively, whatâs specifically driving the September commentary? And then December and March being up year-over-year, obviously, December and March of -- December of 2022 and March of 2023 are relatively easy compares in terms of the revenue. So, just kind of thoughts around December and March would be helpful. Thank you. Yes, sure. So, as we look into September, again, I would just reiterate, weâre not providing any official guidance into fiscal â24, but weâre attempting to shape it just a bit given some of the macroeconomic uncertainty. And obviously, the macroeconomic situation will inevitably dictate the trajectory of revenue. But just looking at some of the drivers that we see seasonally, there is a significant ramp in the September quarter, so. And as Bob stated, we feel as though we are well represented on large platforms across all of our largest customers. So, continued strength at some of those customers as the channel inventories be in clearing will occur as well as a large seasonal ramp gets to a sequential increase in September thatâs pretty substantial off of a rather low base as weâre talking about a roughly flattish June. So, thatâs the primary driver, call it around September. And then into December and March, youâre right, the comps get relatively easy. But with the channel inventory picture clearing up by the end of the calendar year, as we talked about earlier, it should provide for a restocking, if you will, or us selling into potentially demand even at just recurring to normalized levels. Got it. And for my follow-up, regarding your conversations with the Chinese OEMs and the Korean OEMs, what is the kind of expectation as it stands today in terms of their customer forecast for calendar â23 going into calendar â24? Obviously, calendar â22 was kind of a horrific year in terms of units. Are the forecasts relatively conservative off that very challenging 2022, are some OEMs more aggressive in their forecast plans. Thereâs more capacity coming online for a variety of different smartphone components. Does that enable new product ramps? Just any commentary in terms of what the customer feedback is and forecast. Thank you. Yes, sure. So, the customer sentiment and their forecast is very cautious. And I think until -- weâve seen some early signs of life in China and the smartphone sell-through. First few weeks of January were promising, but we need to see a couple of months of that. I think our customers do as well before they really start to gain confidence there. So right now, the purchase order patterns, their forecasts remain very cautious through the rest of the calendar year. Does that answer your question? Question is regarding CapEx and cash flow and both on a shorter-term standpoint on how you plan to manage that as we still burning off inventory here. And then a bit longer term and kind of weâre hearing from you is that it sounds like from a capacity standpoint, you may be set for a little bit, so what can we expect there? Can we expect that as the market normalizes in this inventory start -- had burns off and had some benefits to revenue that we see that flow through for cash flow performance? Sure. So, we donât guide specifically to the balance sheet or cash flow, but Iâll try to give a little bit of color on the drivers. So, having now collected on sales in prior quarters, our cash flow will likely start to follow the path of the P&L, obviously. As we look forward, we still expect to generate free cash flow, and CapEx should be in the 5% to 7% range of sales, representing discipline there and some reduced CapEx intensity as we move forward, having invested in our facilities over the prior years, and looking forward, will be largely capacity driven as we see demand and obviously, improvements in our performance and technology required. But generally speaking, Iâd be looking for the cash flow to follow P&L. Got it. Okay. Just a follow-on. And again, a lot of the discussion has been on the cellular portion. For the non-handset part of the business, I guess what I heard is some of the infrastructure products that thereâs still some inventory to burn off. But what would you say more generally would be the inventory situation for the non-handset part of the business? Is this a situation where this is a little bit slower to come back as compared to the cellular business, or whatâs the view of that -- those businesses as you proceed through the year. Yes, it definitely varies. So, the infrastructure business is probably going to be slower to recover. Weâve got Wi-Fi, a lot of thatâs consumer-facing. That is probably very similar to what we see in the smartphone space, but some of thatâs also more operator and enterprise-driven. And so, we saw that occur a little bit later. So that will probably take a little bit longer to recover. And then our power management business as well, itâs very consumer-facing with power tools and solid-state drives and other types of devices like that that are more consumer-oriented. So, theyâll go probably very similar to the way the smartphone market goes. I wanted to ask about an earlier question that was asked about December growth and March growth. I know you said year-over-year -- the question was asked in reference to year-over-year. But did you mean to say that or is it possible that those businesses -- given the falloff in revenues and units, is it possible that those business could -- your businesses could also work sequentially in this time frame, or will they follow a seasonal pattern? Fiscal â24. Itâs a little early to comment on that. Certainly, from a year-over-year standpoint, the comps are relatively easy and itâs with a high degree of confidence, we believe weâll be able to grow. The degree to which would determine whether it was sequential or not, I think itâs a bit premature to comment on. Overall, we still are encouraged by fiscal â24 and believe that it will be above fiscal â23. Thatâs fair. And then I wanted to ask about your gross margins. Your revenues came down for the guidance for March, but your margins are kind of hanging in there. You mentioned a couple of things, small things, the 80 basis points and 30 basis points issues. But whatâs the reason why your margins are able to hang in here? I think, generally speaking, if I look back over the productivity gains that weâve made over multiple years, weâre still seeing those in our margins today, even though the volumes arenât in the factories. 900-plus basis points of headwind from underutilization is significant. I donât want to understate that. But in terms of productivity and the work that our operational teams have done is really speaking to the strength of those gains and our ability to hold margins at 40%. You talked about changes to your foundry agreements. Can you just speak generally to the cost of foundry wafers? Do you see that continuing to rise? And if so, are you able to pass that through to your customers? And if it reverses, do you anticipate having to pass declines on to your customers? Thank you. Thanks, Joe. And actually, with some of the capacity freeing up, weâre not seeing the increases that I know we saw some of that earlier last year, last calendar year, earlier in the year, so weâre not seeing it. In some cases, to your point, we have been able to pass that on to our customers. And again, as weâve always said, pricing set by the competition, if we all raise prices, we all get an increase; we all donât, we donât get an increase. So weâve been able to pass some of that along. But as Grant pointed out, the inflation is impacting us in our COGS, about 80 bps. So weâre not able to pass it all along, but thereâs other inflation in there, not just foundry parts. I have one clarification and one question. When you guys talk about channel inventories to normalize later this calendar year, are you talking about China Android or total Android or total smartphone? Well, weâre talking about total smartphone inventories, but even some of the other markets that we mentioned earlier in one of the previous questions. We see elevated inventories, not just in smartphones, we see it in a lot of the other markets as well. It all depends on how well the phone sell-through in the end market. Like I said, January -- early indications in January or itâs improving. If that continues through February, March and into calendar Q2, then, of course, our inventory is going to be burned off much more quickly. But weâre not forecasting that. We want to see that sustained before we get too excited about that. Understood. And then, is it possible to break out or comment on how big the silicon carbide power device business is as a percentage of HPA sales? Yes. We havenât given that information. What I can tell you is weâre very pleased with the acquisition. And I think when we -- I know when we file our Q, youâll see why I say that. But itâs been a tremendous acquisition. But Iâm sorry, we havenât sized it. Itâs probably bigger than what most people think. Itâs smaller than what some other people think. But we havenât given any of that revenue out yet, but weâre very pleased with it. Itâs profitable and itâs doing a fine job. I just had one question, Grant. Thanks for providing that down 20% comment. Iâm just struggling with how does it help us? And I ask with reference to what are we talking about? Are we talking days, months, what is normal level? And I know itâs harder in the more diversified areas. But in the handset side, you should be able to kind of quantify and tell us, all right, at the peak, it was x weeks, x months and here we are, and then we think if thereâs some kind of normal pattern, this is what normal level looks like. Yes. I think thatâs a great question, Ambrish. The issue always is when you look at your days of inventory in the channel, you have to understand whatâs the sell-out. And so far, and I think I said this last quarter as well, when we work with our customers and we go through all the math, they reduce their production, we reduce ours. And unfortunately, their sell-out has been lower. So, you have to look at it. Now again, Daveâs mentioned a couple of times on the call, the first three weeks so far in January, at least we can speak to the data that we get, and I think all of you get, the actual sell-out is up, and thatâs a good sign. But weâre not going to get into the game of naming numbers like this because it all depends on the future output of what they sell out. So, weâve got a little ways to go. Thatâs why I think weâre being careful on our comments around June, but we feel very good about September. So, we roughly think itâs in that time frame. So handset inventory cleaned out by September and the rest, as you said, others will take longer. Your best guess at this point is by December that should clean out as well, right? Well, weâve got different parts of the business. In the Wi-Fi area, itâs going to follow because weâre in a lot of the Android phones with our Wi-Fi products, it will follow more of what I said for the handsets. Then Wi-Fi thatâs in some of the retail and some of the industrial applications, things like that, that may take a little bit longer. We donât always get a good read there. Itâs a smaller part of our market, not as much data is published. But I think on the infrastructure side, what Dave talked about, that is going to take a little bit longer. The area of our power management that goes into the SSDs, and thatâs a call on the PC market. So, you guys follow that. Weâll see how that goes. So itâs going to be all different ones. But the major part of our business is the handsets, as you know. And I think weâre giving you as much color as we can as we project forward. There are no further questions at this time. I would like to turn the floor back over to management for closing comments. We want to thank everyone for joining us on todayâs call. We look forward to speaking with you at upcoming investor events this quarter. Thanks again. Hope you have a good night. Thank you.
EarningCall_1031	Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would like to now turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may now begin. Thank you, operator. Good day, and welcome to the MSCI fourth quarter 2022 earnings conference call. Earlier this morning, we issued a press release announcing our results for the fourth quarter of 2022. This press release, along with an earnings presentation, will be referenced on this call as well as a brief quarterly update, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including, but not limited to, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures in the appendix of the earnings presentation. We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months subject to a variety of adjustments and exclusions that we detail in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We, therefore, caution you not to place undue reliance on run rate to estimate or forecast recurring revenues. We will also discuss organic growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode. In the face of significant global headwinds, MSCI delivered strong fourth quarter results to cap off another successful year. Among our fourth quarter highlights, we posted organic revenue growth of 7%, including organic subscription revenue growth of 16% despite a reduction in our AUM-linked revenue. This growth, combined with our intense focus on expense management, drove adjusted EPS growth of 13%. In terms of capital management, we repurchased more than $70 million worth of MSCI shares. You would also note that our Board of Directors has approved increasing the dividend by 10% to $1.38 per share. For 2022 as a whole, we posted organic revenue growth of 9%, including organic subscription revenue growth of 15%. We also achieved adjusted EPS growth of 15%, and our share repurchases totaled nearly $1.3 billion. We delivered these results despite historic levels of market volatility, which makes us cautiously optimistic about the year ahead. MSCI continues to benefit from our diversified all-weather franchise, which allows us to thrive in all environments. In 2022, over 97% of our revenue came from three recurring revenue streams, including recurring subscription revenue, which was about 74% of the total; recurring AUM-linked revenue, which was 21%; and recurrent listed futures and options transaction-based revenue, which was about 3%. While the external environment created headwinds and more variability for AUM, our subscription and transaction-based derivatives businesses performed well through difficult operating conditions. We have once again demonstrated the balance, adaptability and resilience of our franchise, which has enabled us to continue making critical investments in long-term secular growth areas. These investments are helping MSCI expand and enhance our solutions to meet the needs of an increasingly diversified and diverse client base. Baer will talk about our solutions in greater detail. For now, I would like to explore the strategic backdrop for both our 2022 results and our 2023 priorities. MSCI continues to see enormous growth opportunities across product lines, asset classes and client segments. At times like this, investors become even more reliant on high-quality data, models, analytics and research to help them understand fast-moving market changes. MSCI is constantly monitoring for signs of pressure that our clients could face from reduced budgets and longer sales cycles to increased layoffs and fewer new fund raises. That being said, we are cautiously optimistic on the path forward. Our strategy continues to capture major structural shifts in the investment world. For starters, index investing is increasingly popular across regions, asset classes and investor types. The reason is simple. Index investing gives investors an efficient mechanism to express their investment thesis and preferences and to focus on asset allocation. During periods of financial turmoil, the unique strength of MSCI's Index business become even more salient. We can offer one-stop shop for different types of indices across many layers, including asset classes, exposures, styles and investment teams. I have spoken before about the massive potential of direct indexing in particular. I want to emphasize that MSCI dramatically strengthened our direct indexing market position in 2022. For the full year, we increased our total number of direct indexing clients by 200%. The index investing trend reflects a broader shift toward outcome-oriented investment strategies. ESG investing is a big part of that. As you know, ESG has become a hot button political issue, especially in the United States. However, political noise is different from investment reality. And the reality is that ESG risks are financial risks. That is why even as the parties and the bank gets launder, investors continue to make ESG integration a priority. For example, the Index Industry Association recently surveyed investment fund companies across the U.S., U.K., Germany and France. An overwhelming majority of the respondents said that ESG has become more important to their investment strategy between 2021 and 2022. These findings are reinforced by client demand for MSCI's ESG solutions, which has remained strong. No single issue has done more to elevate ESG than climate change. In 2022, climate risk became increasingly visible as countries around the world suffer from record heat waves, record drought conditions and record flooding. What is true of ESG risk in general is true of climate risks, in particular. There can be material financial risks. Investors understand that. For example, in a recent Deutsche Bank investor survey, more than 3/4 of respondents said that climate change either is already having a severely negative impact on the global economy or will have such an impact over the next 10 years if left unchecked. Investors recognize that climate change is also not only at risk but an opportunity. Consider a recent report from the International Energy Agency on renewable technologies. The IEA now projects that the world will have as much renewable power in the next five years as it did in the past 20. MSCI is determined to become the undisputed leader in climate-related investment tools. To support these ambitions, we continue to make key investments across asset classes and geographies. As a result, MSCI is now well positioned to help all types of clients achieve the net zero pledges. In 2022, we saw especially strong growth in climate sales among nontraditional client segments, especially corporates, banks and traders, wealth managers and hedge funds. We have also developed innovative climate tools for private assets, an area where we continue to see tremendous possibilities for growth. One example is the carbon foot printing of private equity and private debt funds tool that we launched with Burgiss towards the end of 2021. The key enablers for all of this remain our data and technology. MSCI's ongoing tech-driven data transformation is helping us improve the client experience in so many different ways. Last month, we expanded our strategic partnership with Microsoft to support our new MSCI One technology platform, which is built on Microsoft Azure. Just last week, MSCI announced another strategic partnership with Google Cloud to build an investment data acquisition and development platform. This new platform will make it easier for ourselves and our clients to translate world data into actionable insights. As I mentioned earlier, the importance of our data, models, analytics and research only increases during periods of market turmoil. Our solutions play an essential role in helping investors navigate today's volatile landscape and build better portfolios. At the same time, MSCI's resilient, all-weather franchise continues to allow us to invest for the future while maintaining strong profitability growth. Just one final note before I turn the call over to Baer. Earlier this morning, we issued a press release announcing that Baer has been appointed to the MSCI Board of Directors effective immediately. I would like to congratulate him on his well-deserved appointment. As many of you know, Baer and I have been close business partners for 23 years, and he has been instrumental in building MSCI into what it is today. Baer's unique skills, experience and strategic thinking will significantly strengthen the Board's effectiveness and ability to continue to create shareholder value. I would also like to be clear that my role is not changing at all. I have no plans or timetable to retire or step down as CEO or Chairman of the Board. I remain extremely engaged and energized by the company's tremendous growth prospects. If anything, I am more excited today but our significant opportunities that I have been at any time in the 27 years that I've been leading this business. I look forward to continuing to partner very closely with Baer for many more years as CEO and President and now as fellow Board members. I'm excited to join the Board and serve our shareholders in this very important role. MSCI is in the midst of many strategic transformations. As President and Chief Operating Officer, I've developed the operational insights and strategic vision that I believe will bring a new dimension to the Board to help MSCI drive shareholder value and deliver on our growth initiatives. Now I will turn to my comments on our quarterly performance. I'll begin by going over some of the highlights for the quarter, the steps that we took to manage in the current environment and some of our priorities for 2023. MSCI's continued ability to deliver strong organic growth and resilient retention during the quarter is directly linked to the investments that we have consistently made over the years, both in good markets and in less supportive ones. As we had indicated to you previously, with the backdrop of unprecedented market headwinds and volatility, we aggressively managed the pace of our discretionary spend and also made select head count realignments to best position MSCI for 2023 and beyond and to preserve our ability to deploy our investments to the greatest opportunities guided by client demand. For our 2023 investment plan, these areas continue to include climate, ESG, client design indexes, fixed income and the ongoing modernization of the client experience. To further illustrate the success of our approach, I will spotlight specific accomplishments during the quarter in Index, Analytics and climate. In Index, we delivered 12% organic recurring subscription revenue growth and 95% retention, which was certainly reflective of the strength of our franchise, our strong client relationships and the investments we've made. In custom indexes, our subscription run rate grew 15% as we continue to invest heavily in the development of our models, software and data to deliver custom indexes at scale. These investments have increased our index building capabilities, reduced turnaround time and strengthened our global support model, positioning us well to capture the enormous opportunities that we see ahead. We are also benefiting from continued investments into our index derivatives franchise. In listed futures and options, we've delivered record full year revenue of $61 million, where we're benefiting from new product launches for Paris-aligned climate action and low carbon target indexes with exchanges driven by ongoing asset owner demand to facilitate the net zero transition. In addition, sales of structured products linked to our indexes were $23 million, growing more than 60% year-on-year for the full year. We remain excited by the opportunities in fixed income indexes, another long-term investment area for MSCI, especially in the current period where investors are focused on credit allocations now that they can earn higher yields with less duration. At the end of December, fixed income ETF AUM linked to MSCI's proprietary and partner indexes was $46 billion, after attracting more than $19 billion of inflows during 2022. We believe our flanking strategy, where we play to MSCI's strength in ESG and climate, as well as our ability to forge partnerships with key players in the fixed income space have all been growth enablers. Let me now turn to Analytics, where we drove 7% subscription run rate growth, excluding FX. New subscription sales were lower versus a strong fourth quarter in 2021 while also experiencing higher cancels which were not so much reflective of higher cancel volumes, but rather from a few concentrated large client events. It's important to remember what MSCI is trying to achieve in Analytics. We already have a large business in enterprise risk and performance, which drove about 60% of our new subscription sales. These tools can serve as large operating systems for investors to help investors in asset allocation decisions and in calculating and understanding their risk and performance attribution. We also offer tools for more targeted use cases such as our equity models and portfolio construction tools that clients can integrate into their investment processes and third-party vendors can integrate into their platforms. These offerings comprise roughly 1/3 of our new recurring sales during the quarter. Throughout 2022, our Analytics growth came from both types of tools, and we believe the same will be true in 2023. The investments MSCI has made in modern, flexible distribution channels are enabling us to chip away at new opportunities. including with front office investment professionals and increasingly for climate use cases where we see a strong pipeline for the upcoming year. These include our investments in platforms such as Climate Lab Enterprise, where we have delivered over 15,000 climate reports throughout the year for our analytics clients since our launch in late 2021. Our unique position of having our clients' portfolios loaded in maps represents a competitive differentiator. It has allowed us to help clients understand all the carbon emissions as well as physical and transition risks associated with their holdings. As Henry indicated, climate remains one of the most attractive and tangible opportunities for MSCI as a firm to help the investment industry. Across all MSCI product lines, we delivered $79 million of run rate, growing around 80% year-over-year, with momentum across all client segments and regions. Back in June, we launched our total portfolio footprinting tool, which helps clients measure portfolio-wide emissions across ad cases, including equities, munis, corporate bonds, sovereigns and private assets. Since then, it's been a key enabler for closing several strategic deals with asset managers banks, insurance companies and others. It's also enabled us to help clients align with emerging PCAP standards. We also continue to drive new wins with large asset manager and asset owner clients to help them with specific use cases, including TCFD reporting, climate stress testing and scenario analysis. Following the recent launch of MSCI One, I wanted to make a few clarifying observations as to what we're trying to accomplish. It is not a new product or a stand-alone new platform to replace other products. It is instead a vehicle for integrating MSCI's world-leading content and analytics using software powered by Azure. We are now up providing clients with a common entry point to access some of our key products and applications that they rely on day-to-day, including climate lab, RiskManager, ESG manager and others, which we believe will also enable self-servicing, self-discovery and upsell opportunities. In summary, the high-returning investments we made in 2022 and our rigorous financial management helped us execute successfully during the year. Our success provides a template for how MSCI will continue to operate and thrive in 2023 and the years ahead. As Henry mentioned, we completed 2022 by delivering organic subscription revenue growth nearly 16% for the quarter and 15% for the full year, outperforming our long-term target of low double-digit growth. In the face of market headwinds, our results reflect the durability of our franchise and the benefits of the consistent investments we've made into attractive high-growth areas. In Index, subscription run rate growth was 12% in the quarter, our 36th consecutive quarter of double-digit growth. We've seen tremendous traction and healthy growth within our market cap-weighted modules as our buy-side clients broaden their usage of our indexes. And we continue to see the utility of our index content expand across a wide range of high-growth segments. Across our Index subscription base, asset managers and asset owners together had subscription run rate growth of 10%, while hedge funds, broker-dealers and wealth managers together grew 17%. We also saw continued momentum in our investment thesis index offerings with nonmarket cap index modules collectively achieving a subscription run rate growth of 14%. From the end of September through year-end, market appreciation contributed approximately $119 billion to AUM balances of equity ETFs linked to MSCI indexes, although for the full year, we saw a net decline of $284 billion in AUM balances. Additionally, we were encouraged by the $23 billion of cash inflows into ETFs linked to our equity indexes during the quarter with roughly $15 billion of inflows into emerging market exposures and over $9 billion into developed market exposures. Equity ETFs linked to MSCI ESG and climate indexes experienced inflows of $6.5 billion, representing approximately 70% market share. Flows into ETFs linked to MSCI factor indexes were more muted but still positive with investor appetite more focused on yield and income where we have less presence than on other factors where indexes are more widely used, such as momentum and minimum volatility. During the fourth quarter, the run rate basis points on AUM paid to us by ETF clients was flat year-over-year supported by a mix shift out of lower fee products. Despite the steady levels over the last year, we continue to believe the average basis points on AUM paid to us by ETF clients will gradually decline over time, although we expect the declines will be more than offset by strong growth in assets. In listed futures and options, we once again saw some of the natural hedges embedded in our asset-based fee revenue line as traded volumes showed healthy growth against the choppy market backdrop. Looking ahead, if market levels continue to rebound and stabilize, we would hope this would be constructive to AUM-linked revenues from ETFs and non-ETF passive. At the same time, futures and options volume and revenues may decline compared to the volatile period a year ago. We continue to believe our opportunity is significant in licensing indexes for both AUM-linked ETF and non-ETF passive products as well as in transaction-based listed derivatives products. In Analytics, subscription run rate growth was nearly 7%, excluding FX. As Bart mentioned, we continue to gain traction in front-office use cases supported by tremendous strength in our factory analytics and our climate tools in recent quarters. Additionally, our growth has been supported by firm-wide enhancements to our interfaces and progress in delivering broader, more flexible access to our content. However, as we have previously noted, we expect some lumpiness in the segment across both sales and cancels given the broad range of clients and use cases that we support. In our ESG and Climate segment, new recurring subscription sales grew 64% from the third quarter as we saw some rebound in large-ticket deals in both ESG research and in Climate and tremendous traction in closing deals in EMEA. Climate remains one of the most attractive growth engines for MSCI. Our firm-wide climate run rate reached $79 million, an increase of 80% from a year ago, reflecting exceptional growth across geographies, product offerings and client segments. Across all of our segments, we continue to see strong secular demand for mission-critical must-have tools, and we continue to see a strong sales pipeline, although we remain cautious given the market backdrop. As we have mentioned previously, in past periods of sustained equity market pullbacks, we can sometimes see slightly elevated levels of cancels and lengthening of sales cycles. In connection with our downturn playbook, we continue to identify efficiencies to aggressively reposition our expense base to drive attractive profitability growth while preserving investments in the most critical growth opportunities. As part of our regular review of our talent and our expense base in the fourth quarter, we took proactive actions to regrade our employee footprint, resulting in a $16 million severance charge, which was roughly $13 million higher than a year ago. These tough actions have allowed us to preserve and even enhance our investment spending in certain key areas. This expense discipline, coupled with our subscription revenue growth, has enabled us to drive strong growth in adjusted EPS even through tough environments. The tremendous growth in our subscription base has been supported by doing more for our clients, continuing to penetrate newer large addressable markets and capturing price increases enabled by the continuous enhancements to our products and client experience. During the fourth quarter, price increases contributed about 35% of our new subscription sales firm-wide across all products and more than 40% within index. We ended the year with a cash balance of $994 million, of which well over $600 million is readily available. Free cash flow came in slightly below the low end of our previous guidance. We saw a small slowdown in client collection cycles as a result of extra approvals within certain clients, which we believe is related to the market backdrop. But we believe overall collections remain healthy, and we see no issues around collectability. Our capital allocation framework, which is focused on maximizing shareholder returns, remained unchanged. We will continue to deploy our investment dollars towards the highest returning organic growth areas, return capital through a steady dividend that increases with adjusted EPS and opportunistically capitalize on share repurchases and pursue value-generative MP&A. As Henry indicated earlier, we have decided to increase our dividend in the first quarter. We are not making any changes to our dividend policy or a broader approach to capital allocation. We have decided to shift our annual dividend increase from the third quarter, where we have historically announced the increase to the first quarter in order to more closely align with our annual planning process. Lastly, I want to underscore that we also continue to actively evaluate and source bolt-on M&A opportunities, particularly in areas of unique content and differentiating capabilities such as private assets, climate and ESG as well as fixed income. Lastly, I would like to turn to our 2023 guidance, which we published earlier this morning. Our guidance ranges reflect the assumption of continued volatility in financial markets with overall equity market levels down slightly from current levels during the first half of the year and gradually recovering in the second half of the year. Our expense guidance range reflects the efficiency actions we have taken in recent months and captures the investments we will continue to make in order to deliver growth. We expect normal seasonality in our expenses with $15 million to $20 million of elevated benefits and compensation-related expenses in the first quarter. I also want to highlight that our CapEx guidance reflects a continued high level of software capitalization as we continue to enhance our platforms and interfaces across product lines. Our tax rate guidance highlights that we expect our effective tax rate to increase slightly year-over-year primarily reflecting that we expect to receive a smaller windfall benefit in the first quarter as a result of where the share price is relative to the price at grant as well as based on the amount of awards vesting. There could be pressure on year-over-year adjusted EPS growth in the first quarter due to the higher tax rate and the significant decline in average ETF AUM levels relative to the average levels during Q1 of last year. Lastly, I want to highlight that our free cash flow guidance reflects the expectation of higher cash tax payments in 2023 as well as a slight degree of caution on client collection cycles based on the environment, consistent with what we saw in the fourth quarter. Overall, we're well positioned for the year ahead, and we're excited to continue to drive growth and differentiation. In periods of volatility and uncertainty, we believe MSCI is uniquely positioned to help our clients capitalize on unique opportunities and drive value creation. These are the times when MSCI thrives. We look forward to keeping you all posted on our progress. Yes, thank you. Good morning everyone. Starting off maybe on the retention side for a second here, that dropped, I guess, from the 3Q to 4Q pretty decently relative to the last couple of years. I think if I look in history, it's probably more seasonal. But I'm just wondering if there's anything that you saw that gives you any sort of pause into this year. You mentioned the things on the analytics side. But outside of that, anything that gives you a little bit more pause as you think about the sustainability of results? Yes, hi Alex, it's Andy. So we - as you know and you alluded to, we typically do have slightly lower retention rates in the fourth quarter, given that it's our largest period of renewals. I would say, outside of analytics, and you can see this, the retention rates were reasonably strong. And if you look at full year retention rates even for analytics, but across all product segments, the retention rates were actually quite healthy. I'd say it continues to highlight that our products really do benefit from the fact that they are mission critical in areas of long-term secular growth, which does create some resiliency. And I think you see that heavily in the retention rates for the full year. However, I would say we do remain cautious. As I've alluded to in the past, when we see a few quarters of sustained market pullback. We tend to see a pickup in client events, things like fund closures, desk closures, restructurings, other, mergers. So despite the overall strong retention rates for the year, we are proceeding with a degree of caution and are pretty sober that we might see some clients pulling back a little bit in certain areas. So we are cautious moving forward here. Okay. And then secondly, and this is somewhat related, but first of all, thanks for clarifying some of the moving pieces on free cash flow. I think some people are trying to read too much into what that means on the revenue side, which is kind of like my question. I know you don't guide revenues, but you highlighted again the long-term targets and history of delivering double-digit, I guess, subscription growth look at the asset side for a minute - as a base side for a minute? Anything that would change your view on that low double-digits as we think about 2023 given some of the starting off points and some of the cautionary comments you've potentially made a little bit just now? So, Alex, Henry not at all I mean, obviously, on a tactical short-term basis in 2023, we've done well in 2022. We have a strong pipeline going into 2023, but - there is the prospect of a global recession - global softness. There is war going on in Europe, right. There is disruption in many markets, including the energy markets. We have to see if there is a real reopening of China or a return to lockdown. So, we remain cautious in the very short-term. Beyond that, we remain extremely positive. The number of opportunities that we see at MSCI is increasing exponentially pretty much every day, whether it's custom indices, which we have high demand for whether it is direct indexing, whether it's climate risk in the context of analytics. Clearly ESG, climate as a whole, the work that we're beginning to do in private asset classes, enormous so, that should bode well for a continuation of our growth trajectory for the company in the years to come. Thanks so much. I wanted to take a step back and look at margins within the analytics business, really stepped up a lot this year. I guess, how are you thinking about investment in that business? Are you investing enough there? Just maybe talk about the drivers of the margin expansion and basically investment needs or growth opportunities? Yes, so similar to recent quarters, there have been several factors that have been contributing to the high analytics margin. I would point out that we have been capitalizing a higher level of expenses related to the development work that we've been doing around things like our Climate Lab Enterprise, Risk Insights, broader enhancements that we're making to the capabilities in analytics. I would also highlight that many of the downturn actions that we've been taking end up hitting analytics. And that's not just directly within the segment. But when we take actions in corporate functions, a meaningful portion of those expenses are allocated to analytics. And then I would highlight that the analytics has benefited from the strong U.S. dollar as well. Given the size of the expense base, a lot of the FX benefits that we've been getting have hit analytics. And so there are a bunch of those more, I'll call it, technical or tactical factors that have impacted the analytics margin and caused it to run up a bit here. But to your question around investments, listen we continue to be very targeted with our investments in analytics. So we are investing there. It is not one of our top investment areas. I think you're familiar with those areas where we are heavily focused on. But within analytics, we are focused on investing on those - in those capabilities that support the broader MSCI franchise as well as continuing to focus on investments in areas like the front office, so front on office content, including our factor models, how we go to the office on the equity and fixed income front office capabilities as well as some of the broader interfaces and applications, that not only benefit the analytics users, but also the broader MSCI franchise. I would like to add, Toni, if you don't mind, the - clearly, there are parts of analytics that we're putting heavy investments on like Climate Lab Enterprise, fixed income, portfolio analytics, equity portfolio analytics and some of the content. But also for the benefit of everyone in this call, we also run a very, disciplined, very rigorous Triple-Crown investment process in the company, in which each one of the product areas. Each one of the client segment areas and some of the support areas, when they come to - in front of this investment process, they have to demonstrate elements of the Triple-Crown. One is high return, high IRR shorter-term paybacks and in areas of high multiple valuations for the company. So in the case of Analytics, they've been able to rationalize investment in some of the areas that I mentioned, but not in other areas. So they haven't gotten capital from us because of that. Other areas like climate and ESG and custom indices and the like have gotten the capital. Perfect. I wanted to ask my follow-up on MSCI ONE. I know you recently launched that. Maybe just clarify - I know you said it's not really supposed to replace an old product or be sort of a new stand-alone platform to replace other products. So I guess maybe help us with who the main users are there, what the opportunity is there, because I think it seems meaningful. And I just want to understand it a little bit better? Thanks. Sure, Toni Baer here. So look, I think the way to think about it is through a few different layers. One is we clearly have a diverse range of calculation engines, which create kind of state-of-the-art analytics of various kind and outputs, which are distributed throughout the firm and different asset classes, et cetera. Then we have some traditional platforms and other distribution methods through files, et cetera, that we've had. And then, we have sort of newer content that we're building. So the way to - the best thing - way to think about MSCI on is a combination of those traditional outputs of our - if you like, our calculation factory and sort of industry standard software that allows those to be presented in a more user-friendly way and brought together in a similar type of platform, which in turn improves both the user experience and users' ability to manipulate that data to do - to have greater flexibility in how they present it, et cetera. So for sure, we think we're on a very important path forward here. It's incremental. As we move forward during the course of 2023, we think that the client impact of that will increase. And we hope - definitely hope and intend to continue to give you positive news and update around all of that. So I think there is maybe a - how should I put it, a risk that we're understanding this somewhat. And that's what I try to wanted to make some comments about it today. At the same time, we want to make sure that we are the delivery department and not the promise department in this area. So as the year progresses, we'll make sure that as we bring out new functionality, new capabilities, new ways of integrating and our clients start using those more, we'll keep you abreast of that. But we're certainly very positive about it. And we think that, over time, this will really be a way that our clients start to think of MSCI in a different way as regards the flexibility and the ease of use of - in their day-to-day working with our content. Thank you. Andy, I just wanted to get back to the retention rate comments you made, the drop, I guess, particularly in analytics. Can you just give us some color around, I guess, where those cancellations or the drop came from? And were they more kind of on time closures in nature? I know you said you're being a little bit more cautious going into '22. But just trying to understand how - what that is and how that might continue into '23. Sure, sure. Yes. Thanks, Manav. So Baer noted this in his prepared remarks, but the cancels weren't so much reflective of a higher frequency of cancels across the board in the segment but rather a concentration of a few large ones. On those few large ones, there were some competitive dynamics and some client event-related dynamics at play. And as we've mentioned in the past, we do expect some continued lumpiness in both sales and cancels within analytics and potentially some impact from the environment. So more broadly, we are really encouraged by the momentum and improving competitive position. We continue to see in the strategic focus areas that we're focused on in analytics like equity and fixed income portfolio management tools or climate tools or enhancements to content and capabilities. And we are committed to the long-term growth targets that we've got for the segment of high single digits, which, actually, we're quite close to in the fourth quarter, the subscription run rate growth on an organic basis, close to 7%. And the revenue was 9.5%, excluding FX. So it was a quarter that demonstrated some of the lumpiness. But overall, we continue to be encouraged by the momentum we see in the segment. Got it. Thank you. And then Henry or Baer, I guess just a broader question. Just trying to - I mean I think as someone - it, but I thought I'd take the opportunity. Just trying to understand the cloud and technology strategy here, the recent Google announcement versus your key partnerships you already have with Microsoft. Just trying to appreciate the differences in each of those agreements and what to look forward to. Thank you, Manav. So the - first of all, I mean, one of the major impetus and investment in our firm is in our data and technology platforms. MSCI, in the past - in the recent past was a very large data processing company. We took third-party data and run it through risk models, factor models, indices and the like, mix methodologies and the like, where MSCI has become, starting with the ESG business, now with climate and private assets and so on and so forth is a large data building in our company in addition to data processing company. So we are now the original source of a lot of data in addition to sourcing data from third parties. And all of that needs to be distributed to our clients in a very effective way. So we have basically three partnerships that we're trying to work and expand and specialize on. The first one clearly has been the Microsoft partnership in Azure, in which they're helping us with the data processing part, processing large amounts of data, especially in our risk systems and all of that, index systems, et cetera. And the partnership there also will help helping us on their software and how do we use their software to build products like in power behind. Obviously, we announced the MSCI One is a partnership with them. So that is Microsoft, and that continues to deepen and strengthen. The second one that we announced is Google and the Google Cloud. That partnership is about Google helping on build data, collect data, organize data, index data in this data building transformation that we're going through and then run all of that data through their cloud as well. So that is definitely - there's always a component of cloud computing, but the push here is data building. As you know, Google is one of the largest data building and data processing companies in the world. Everyone focuses on the search engine, but there's a search engine won't be as good at all without the - data. And the third partnership is South Lake which is in the distribution of our content, our beta in a very effective way with our clients. So we're trying to strengthen and deepen that in our relationship with now. Yes, hi everybody. I'd like to step back and maybe look at the firm-wide ESG and climate run rate growth, which remained pretty resilient despite the U.S. political headlines and then maybe in Europe, some of the SFTR implementation noise. I wanted to know maybe stepping back high level, what do you see sort of as the big opportunities, the big sort of regulatory and market tailwinds and headwinds as well and how we should think about maybe ESG and climate's ability to grow over the next few years? So let me provide some quick comments and then pass it on to Baer. First of all, as I said in my prepared remarks, there is a lot of political football here going on, on ESG. And eventually, we'll get to climate as well. And - but the first point is our ESG business has nothing to do with political ideology of political philosophies. Our ESG business totally grounded on the fact that ESG or nonfinancial risks are material investment risks and material financial risks in a company, things that we're - right now. corporate governance, right? The governance of the company and the auditors and all of that and $60-plus-billion market cap now because nobody tells you that's political and that's not investment risk. Then I don't know what it is investment risk. So that is very clear what we're doing. And therefore, we don't know of any single client in the world that at least we haven't heard of that they're not looking to integrate this nonfinancial risk environment in governance and social issues into their investment processes. And we are the preferred provider of tools to them. Secondly, clearly, there is a lot of regulations around the world, and a lot of our clients are trying to figure out how do they respond to that regulation, especially in Europe by far but also in the U.S. with the SEC proposals. So there is a little bit of a pause by clients and certain purchaser as to - because they're trying to determine what are the right sets of data and tools and risk that they need to do to incorporate into their products. So that's been a little bit of the blip that you see in the sales, much less so the political component. But Baer, anything else on this? I think you've covered it well, Henry. I think the only other element is clearly the - you mentioned the regulatory element on our clients, which has been notably a complex one for funds in Europe and the EU. So that is something that we're very focused on, on working with our clients on. Equally, there will doubtless be an increase of regulation on the providers of data information ratings of ESG clearly which would include us. And I think in that instance, we don't view that as something which is a particular risk to the business. We believe that we run a very high-quality business that we've been structured with a view that, as an index, some form of further regulation could come to us. And as a reminder, our legal entity in the U.S. that issued ESG ratings is already a registered investment adviser, and we're confident about the way that, that is run and I'm actually getting contact with regulators related to that. So I think overall, it's clearly an environment which is very noisy and complex from a number of grounds, but that doesn't, in any way, compromise the scale of the opportunity which remains very real. And in many regards, precisely this regulatory complexity is something which we believe we can benefit from as a provider of high-quality data and adjacent research. And then as a quick follow-up, maybe can you speak a little bit to the opportunity in Paris Aligned benchmarks and climate transition benchmarks with the index franchise. Is that a meaningful opportunity going forward? Absolutely. So we're clearly benefiting from our leadership role, both in ESG and climate and our market share in such indexing and related ETF products is very high, and it's been consistently so. There are some questions related to flows in the short run, but we're - if you look at - I'm very confident that if you look back on this in a number of years' time, that this will be a moment that passes. And the fact of the matter is that, with all categories of investors globally, this is an enormous transition they have to go through. They will clearly do so through active management. But equally, they will need to do so by allocating capital on a timely basis through rule through indexes, through rules-based portfolios that indexes serve as a benchmark and underlying for - so we only see this category as growing. And you mentioned certain specific methodologies, those will continue to grow as will many customized versions of things which serve specific investors' specific need. So we certainly view it as an important and growing category. Thank you for taking my question. I want to go back to your guidance. Could you please talk about your assumption about the market trend to come up with your free cash flow guidance. Do you expect the market to go up, stay flat or to go lower from here? And then on the expense side, could you please talk about the walk of the adjusted EBITDA expense build from 2022 to 2023? And what does it take to go to the low end of the guidance? And also what does it take to get to the high end of the guidance? Thank you. Sure. Sure. So a lot in there. I'll try to unpack it in a logical fashion here. So firstly, on the market assumptions that underlie all of our guidance. So we are assuming that market levels declined slightly from their current levels through the first half of the year and then rebound in the second half of the year. And so that assumption is underlying every piece of our guidance. You alluded to free cash flow. I do want to make a comment around our free cash flow guidance more generally, just to underscore that we are being cautious on it. if you look at the full year of 2022 relative to 2021 and even the fourth quarter of 2022 relative to the fourth quarter of '21, we saw a pretty healthy growth in free cash flow. Although if you remember, after the third quarter, we actually increased our free cash flow guidance. We made that change feeling confident about the strong momentum we had seen in collections. To be frank, we probably got a bit of ahead of ourselves on that one, and we actually saw a bit of a slowdown in collection cycles in the fourth quarter. And so we are making that same assumption of caution around collection cycles for 2023. And as a result, we have a degree of caution on our cash flow guidance for this year. On the expense guidance piece, I don't want to get too specific here, but I want to underscore that - and you saw this in the fourth quarter, actually the last six months or so, we have been taking very tough actions in our expenses and identifying efficiencies to be able to continue to invest. So we are being very measured on our pace of expense growth. We're continuing to find efficiencies. You saw we took some significant actions on the severance front in the fourth quarter. And so that has a meaningful impact on the expense base, although we are continuing to invest in key areas. And so despite those efficiencies and continued actions on the head count front, we are planning to grow our investment spend in 2023 by 13%, and that's more than double the overall expense growth. And so we are, in our guidance, assuming that we continue to be quite disciplined in a number of areas, especially for the first half of the year. But we are continuing to grow head count and invest in those key investment areas, those key growth areas for us as a firm. Got it. That's super helpful. Thank you. And then I want to go back to the Google partnership, the Google Cloud partnership. Henry, could you please talk about maybe the potential incremental revenue and an expense opportunity for this partnership? I mean it would be great if you can even give us some more specific examples so that we can better understand the value creation of this partnership. Thank you. So look, I can't, at this point, give you any numeric analysis of the revenue or profit or any of that. Too early to tell. What is very key is that in us becoming a very large data building company, we need to use the most advanced methods and protocols and technologies and all of that and this partnership with Google will give us that. And for example, one specific area that we're focused on right now is asset locations. So in order for us to be the best, undisputed leader in climate, we need to have understanding of every manufacturing facility every mine, every office of every single company in the world, whether it's private or public company. So being able to work with Google in gathering that information through Google maps and Google's geospatial services and the like will put us at a significant advantage there. That would be clearly one example of that. Another example clearly is the - in the work that we're doing in the private assets, there is a lot of data that we're collecting from GPs and LPs and all of that, and we need to figure out how we index the data, organize it and the like. So the way to think about us, if you want to compare us to - obviously, to the work that Google does is that everyone focuses on the search engine of Google, right? And that's at the top. But on the - search engine is clearly data. So think about our investment tools, whether it's indices methodologies and ratings and risk models and the stress testing models and all that, the equivalent of search engines, like the equivalent of algorithms. And then underneath that, they have to be a base of data that is large, whether it's third-party data or our own data that is large, and that's what we're trying to build with that. Hi, thanks. Good morning. You mentioned it's possible you'll see higher cancels and longer sales cycles during protracted periods of market volatility. Can you elaborate on where in your subscription businesses you're seeing most sensitivity to the macro environment and, conversely, where you're seeing most resilience? Yes. I mean it's very much a general comment that I made. You can see in the retention rates that, with the exception of the lumpiness we saw in Analytics in the fourth quarter, actually, our retention rates have remained quite resilient. I think you've heard us make comments in - particularly last quarter, that we saw some slowdown in sales cycle and in ESG. I'd say that the point that I would underscore is it's going to be dynamic across the board. So I don't think it will be necessarily concentrated in one product area or region or client segment, but these are things that just as the environment remains choppy and volatile and large financial organizations start to implement cost controls, it can cause slowdowns across the Board. And so we're just baking in our color and our commentary here, a degree of caution, although I do want to underscore that our pipeline is - it remains quite healthy and the overall size of the pipeline is quite large, and we are having an active dialogue and engagement and healthy discussion with our clients. It's just we've seen in past cycles that we should be prudent and cautious in our outlook. Got it. That's helpful. You've taken actions to recalibrate head count and expenses as part of your downturn playbook. Can you talk about how much further runway you have for expense reduction, what kind of levers you have remaining? And would you say the majority of your cost rightsizing actions are now behind you? Yes. I would say, and I alluded to this in a prior question, it's important to really underscore that the tough actions we've been taking are really to enable investment. And so as I alluded to, we plan to continue to invest at a pretty healthy rate in those key investment areas, and we're going to continue to have an intense focus on efficiencies throughout the year. Beyond the proactive actions that we took in - on the severance front, and I alluded to this in the past, we've continued to slow down and even stop hiring in certain less critical areas. We've been very selective about the areas where we are adding people we've imposed certain expense controls in areas like T&E and other professional fees. But it is important to underscore, we have numerous levers at our disposal, and we haven't fully flexed the downturn playbook nor does our guidance reflect that we're flexing fully our downturn playbook. We can stop hiring in certain areas, implement hiring freeze is closing backfills. We have degrees of freedom on the non-comp side. As you know, our incentive compensation will move with the performance of the business. So it is a constant calibration and something that we're going to continue to proactively manage. But we are being cautious in implementing cost controls, but we do have many more levers if we need to flex down further, including slowing down investment, which hopefully we don't have to do, but that clearly can help us manage expenses. Very Yes, hi. Thank you. Good morning. And so I wanted to talk a little bit more about ESG. Give us a sense of the new subscription sales that you signed on this quarter. How much of that is just a seasonal acceleration from 3Q to 4Q? Or are you seeing sort of sales cycles? And as you alluded to, the last quarter that those had increased a little bit. Are you seeing further increase in those sales cycles? Or are things sort of normalizing from your perspective? Yes. And I think you could see this in the past, and this is the case across most product areas. But as you alluded to, the fourth quarter does tend to be a strong quarter for us. I would underscore that ESG and Climate had a very strong year overall. And when you drill into it, and we've alluded to this, climate within there continues to grow at an incredible growth rate and is making a more meaningful contribution to the overall segment. And so that is something that is helping to fuel some momentum. Just to put a finer point on that, $45 million of the $79 million of climate run rate is actually within the ESG and Climate segment, and that is growing at close to 80%. So that's helping to drive some of the momentum we've seen. As Henry alluded to earlier, there are many layers and dimensions of growth in ESG and climate across a wide range of solutions serving various objectives and a wide range of use cases. And we're seeing that the thinking around how to integrate ESG continues to evolve. The regulations continue to evolve. And as a result, investors in spots are being more measured in their buying decisions. And so I think there is some element of that. There's some element of the market backdrop that are helping to contribute to the fact that the pace of sales in ESG and climate is likely to fluctuate up and down based on all those dimensions that I alluded to. Overall, we continue to see very healthy growth and strong demand. But for those reasons, we think the growth rate will be a little bit dynamic and the sales could be a little bit dynamic quarter-to-quarter. I would highlight that, because you asked about it, some of those sales that we did see slip from the third quarter that we alluded to on the last call, we were successfully able to close a lot of those, and we had particular strength within EMEA. I think that just speaks to some of those dynamics that will fluctuate up and down over time. But overall, we continue to be very, very encouraged about the overall demand for the products. It's just a very dynamic engagement and discussion with our clients. Understood. Thank you. And then just a follow-up on, I guess, capital allocation. Are you assuming - I think your interest expense guide is a little bit higher than I was anticipating. And I'm curious if you're expecting to maybe incur higher debt to buy back shares. Or sort of what's embedded in your free cash flow guide as it relates to capital allocation? Yes. So the interest expense guidance does not assume any incremental financings for the year. One thing that is driving the interest expense slightly higher is our floating rate term loan A. So we have a $350 million term loan A, which is floating rate. And so we do have some expectation of rate increases and higher rates for the year, which factors into that interest expense guidance. So that's what's embedded in our guidance. But I'd say, more broadly, no change to our approach to capital allocation. We are mindful of the overall financing market and rate market. And so we will, over time, as our leverage starts to come down, look for opportunities to raise capital. But given where rates are right now, we're not in a rush to do that. And we think we're in a strong capital position to continue to be very opportunistic on the MP&A front as well as on the repurchase front if there continues to be volatility in the market. Great, thank you. I wanted to focus first if we could, on the recurring subscription part of your business in indexes. Obviously, the numbers continue to be extremely strong there. But maybe just talk a little further, if you would, about the sales cycles there, your sales pipeline client budgets? I mean, is there anything there that you're feeling a little less positive about stuff, particularly sales cycle? Yes. I would say you've actually seen remarkable strength on the index subscription business that we have with the index subscription revenue line. It's been quite encouraging given the backdrop, to your point, where we've been having very constructive discussions within our more established client segments like asset owners and asset managers. And I mentioned we saw subscription run rate growth within that segment of 10%, which is quite healthy. And we've also seen - continue to see strong dialogue and engagement with hedge funds, wealth managers, broker-dealers, where we saw that elevated growth that I alluded to. Similarly, from a product lens standpoint, we are having strong momentum within our market cap modules. So our market cap modules actually had strong growth of about 11% in subscription run rate. And we saw outsized growth within some of our non-market cap modules relative to that. And so across the board, we've seen a healthy dialogue and momentum. And it's not only with these newer high-growth segments but doing more for existing clients. And so at this point, we haven't seen a lot of impact from the environment, although we are conscious that the index segment tends to have a shorter sales cycle. And so there could be some impact. But right now, it's overall a very, very healthy dialogue. Great. My follow-up question. you talked a lot about the enhancement you guys made in the analytics products. So I'd like to hear further on the fixed income side of things, what you guys are - the investor is spending to do in there, were you really focused on within the fixed income area, please? Sure. So look, this has clearly been a multiyear effort where we have continuously improved everything that we're doing, where we've had some important wins on fixed income in the last few quarters. And clearly, we can't go into individual client names here because it's not what we do. But we're, I think, at a really important inflection point where we have some pretty significant deals in the pipeline, and those deals are ones which we hope if we can get a few of them done they should have really positive knock-on effects for our credibility in this asset class and then hopefully become kind of a virtuous circle. So I would say that, across the teams, people have never felt more positive than today about what we're doing in fixed income. As you know, this has not been a fast thing. This has been more of an oil tanker than a speed boat. But I really hope, and I think I've got good grounds for believing so, that during the course of this coming year, we should be able to really show that we're making a lot of progress in fixed income and starting to win some pretty serious investors over to our fixed income analytics. So in short, I don't think it's one thing. I think it's a compound over various sub asset classes in fixed income, different types of analytics. So it's what we're doing across the board. And I really do think we're in a great place to have a strong year for 2023 in fixed income. Yes, thank you gen. Just wanted to come back to the analytic business to start, can you pin down exactly what's driven the heighten growth in the last couple of quarters? I know you've made a few comments to this already, but is it new products? Is it tech enhancements to existing products? Is it pricing? I'm trying to get a bit of a sense as to, is this structural or cyclical growth. And just kind of linked to that, how does it get decided if climate-related product revenues get booked in ESG and climate or analytics? So I just want to check, there's been no shift in the revenue allocation, which is flattering the growth in the analytics segment? Look, in some, the analytics product line, we have been revamping their strategy. And the hub on the core is continued work on enterprise risk and performance. And we make some good progress there, but the growth rates are not dramatically different than they were before. The growth areas are in three elements that we're pivoting towards. One is the front office so equity portfolio analytics and fixed income portfolio analytics along the lines of what Baer was mentioning. Those are high growth areas for us. Second is climate risk with Climate Lab Enterprise. And the third area, which we just launched a whole bunch of products, is more content. We launched a protocol insights and the like. And so, we're hoping that the 60% of the run rate, which is central risk, continues to grow at a reasonable pace, but the acceleration of the growth will come from those three pivots that I mentioned. And Russell, there's no shifting of run rate from ESG and climate to the analytics segment. There are some climate and ESG focus tools that are analytics tools that are showing up in the segment like our Climate Lab Enterprise and some of our ESG reporting capabilities, but those are not shifting. Those have always been there. Okay, okay thank you. And then just as a short follow-up, the basis point fee charge on the AUM in the Index business that was notably up in Q4 versus Q3 to 2.54. Is that a lagged effect from lower AUM in previous quarters? I'm just wondering, should we expect that to fall again as AUM stays higher in Q1? Yes, I would say it was impacted by flows out of lower fee products. So there was that mix impact. We saw a very small impact from a positive fee adjustment as well. Despite the steadiness that you've seen over the last year, I do want to underscore that we do expect the average basis points to continue to decline gradually over time. As we've seen over the last, call it, eight to 10 years or so, although we do expect the assets to increase at a faster growth rate and continue to be bullish about the growth in the ETF front. But we do expect fees to gradually come down over time. Hi, thank you. I think you mentioned price increases being 35% to 40% of new subscription sales firm-wide in the fourth quarter. Could you provide some color around how this compares versus history? Do you get the impression that you're increasing pricing more or less or similar to some of your competitors in Index and ESG? Sure yes. I don't want to comment on what our competitors are doing. But I would say that, yes, we are generally increasing prices more than we have in the past. The 35% contribution from pricing to new subscription sales across the subscription base and the 40% plus that we are seeing in Index, the contribution within Index from price increases, those are about five-plus percentage points higher than what we've seen in the recent past. And so yes, price is contributing more than it has in the past. I would just underscore that we are - in our price increases, we are heavily focused on delivering value together with the price increases. And so we're continuing to enhance the content that we deliver to our clients, the capabilities, the functionality and the overall client service that they are getting. We do recognize that our growth is heavily going to come from our existing clients and we want to do it in a constructive fashion. But given the overall pricing environment and cost environment, we are increasing prices more than we have in the past. Great, thank you. And then just quickly on the real estate business. New sales were down year-over-year. Is there anything in particular to call out in what is maybe a trickier backdrop for real estate? And more broadly, how is RCA progressing since your acquisition? Yes, I mean its similar message to what we've seen in the past, which is things are progressing well in the segment. I would highlight that our - some of our portfolio services are getting a lot of traction and a lot of interest. Investors, in particular, are focused on understanding what is driving the performance and the risk in their portfolios. And so, we're seeing strong engagement there. On the data side, including the RCA data, we do see some pressure from the backdrop, to your point. There are aspects of the RCA business and the data that we have that are used as part of transactions in the real estate space, and we have seen a slowdown in transaction volumes across the space. But you can see the overall growth rate on an organic basis at 12% is still pretty good, and we think there are some environmental impacts going on given the backdrop in the real estate space, but we continue to be quite encouraged about the long-term opportunity there. Hi, everyone thanks for taking my question. I wanted to just get your perspectives, please on, I guess, the opportunity in the futures and options line, which today they're still relatively small in the context of your overall Index business. I mean how should we think about the structural growth opportunity here for that? Obviously, the larger it is, the more diversified benefits you'll see during times of risk. And I imagine that's quite a desirable thing to have? Thanks. Yes, so there are three legs of any large and successful Index business, the active management; the fees that we charge to active managers, what we call the subscription business; the fees that we charge to passive managers, both in any proper ETF or institutional passive or owning some mutual funds. And the third leg is the licensing of indices into all sorts of derivative products. Some of them are lifted like futures and options, and some of them are unlisted such as swaps and options and structured products that investment banks make. We are very, very intent and focused on building that third leg. What you see and that we comment on is the listed futures and options, and there's still a lot of runway for us to continue to grow in new products. We have a lot of listed futures. We're now focused on our listed options franchise and are pushing new initiatives in that front, more to come on that. And while you don't hear us often, although there were comments earlier today on this, is the structured products and the other forms of OTC derivatives. And that is - those are growing very nicely, and there's still the ground floor where we can achieve it. Okay, that's really useful. And then I guess, just lastly, on the environment for M&A and bolt-on acquisitions, could you just give us a sense of how rapidly that's changing? And thus, I guess, just give us a sense of the opportunities you have ahead of you? Yes, yes. So listen, you know - and you see this on the repurchase front, we are an organization that likes to be contrarian and opportunistic. And so in these environments, there are potentially opportunities to acquire companies that otherwise wouldn't be available. And so, we are seeing some early-stage companies that need growth capital. They're finding that the growth capital is more expensive or tougher to find than it was in the past. And so as a result, they are open to partnerships, investments, even acquisitions in certain instances. And so, we're being very proactive in looking for those opportunities and think they can be instrumental in helping to accelerate those strategic opportunities in our key focus areas that we've talked about in areas like private assets, climate, ESG, fixed income, broader technology and data capabilities. So yes, it's an intense focus for us right now. Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to MSCI's Chairman and CEO, Mr. Henry Fernandez. Please go ahead. Well, thank you, everyone, for joining. As you can hear in our commentary, we continue to see strong demand for our solutions. We continue to invest significantly in large growth opportunities that are ahead of us and preserve and enhance profitability growth in the company. We're very excited about this momentum, especially in such areas like climate, where we are determined to become the undisputed leader. Thank you, everyone, and we look forward to a continued dialogue with all of you.
EarningCall_1032	Good day and thank you for standing by. Welcome to the Hanesbrands Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, TC. Robillard, Vice President of Investor Relations. Please go ahead. Good day, everyone, and welcome to the Hanesbrands quarterly investor conference call and webcast. We're pleased to be here today to provide an update on our progress after the fourth quarter of 2022. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and the replay of this call can be found in the Investors section of our hanes.com website. On the call today, we may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks include those related to current macroeconomic condition, consumer demand dynamics, the inflationary environment, cybersecurity and our previously disclosed ransomware incident and any on-going impact of the COVID-19 pandemic. These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today's references to our consolidated financial results and guidance exclude all restructuring and other action-related charges and speak to continuing operations. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's news release. Any references to 2019 reflects rebase 2019 results consistent with prior disclosures and can be found in our investor relations website. With me on the call today are Steve Bratspies, our Chief Executive Officer; Michael Dastugue, our Chief Financial Officer and Scott Lewis, our Chief Accounting Officer. For today's call, Steve and Michael will provide some brief remarks, and then we'll open it up to your questions. Thank you TC. Good morning everyone, and welcome. For the quarter, Hanesbrands delivered sales that were above the high end of our forecast and adjusted operating profit and earnings per share that were essentially at the midpoint of our range. Iâd like to start by thanking all of our associates around the world. The Global operating environment has been anything but easy over the last three years. However, despite the significant volatility and uncertainty through their dedication and hard work, we've been able to deliver for our consumers, serve our retail partners, and continue to progress on our full potential plan. I'm most grateful and proud of their tremendous efforts. While I'm pleased we delivered on our guidance under difficult operating conditions, we expect the macro economic challenges impacting consumer demand and the lingering pressure from inflation to continue in 2023, particularly in the first half. Consistent with the mind-set we've adopted since my first day, we're not standing still. Weâll continue a proactive approach, remain agile and continue to adapt. Focusing on the things we can control and taking action allows us to manage their short-term challenges, while at the same time continue to implement our long-term transformation strategy. To that end, there are three important topics I'd like to discuss today. First, the near term actions we're taking toward reducing our leverage and strengthening our balance sheet. Second, the path to higher margins and operating cash flows as the year unfolds, including actions to mitigate near term macro related challenges. And third, an update on the implementation and progress of our full potential plan. Let me walk you through each of these beginning with our strategic actions to strengthen the long-term financial foundation of the company. Today, we announced we're shifting our capital allocation strategy, eliminating the dividend and committing to reducing debt. To be clear, investing in the business and our full potential growth plan remains the priority for capital allocation. And we believe we are well positioned to fund these investments through operating cash flow. What's changing is the allocation of our free cash flow, which will now fully direct toward accelerating debt reduction. This decision was not made lightly. And we believe that a meaningful reduction in our debt will drive significantly higher shareholder returns long-term. We also updated our credit facility management to drive greater near term flexibility, given the uncertain macroeconomic environment. Michael will discuss this further in his section. In addition to these actions, we expect to refinance our 2024 maturities in the first quarter of this year, subject to market conditions. Turning to margins and cash flow, we see the path to higher margins and operating cash flow as the year unfolds. The lower cost inventory we're currently producing should begin to hit our P&L in the second half, particularly in the fourth quarter. We'll anniversary last yearsâ time out costs, and we're well positioned to benefit from the actions we're taking to help mitigate the near term macro related challenges. Looking at our mitigation actions, last year we set an aggressive target to reduce our inventory units by the end of 2022, which we accomplished. This created a short term drag on second half gross margins as we took time out in our manufacturing facilities. However, by taking this action, we believe we're well positioned to release working capital and drive operating cash flow this year. We also began and expanded upon a number of cost savings initiatives, including exiting unproductive facilities, consolidating sourcing vendors, and aggressively managing SG&A. Looking to 2023 we're building on these initiatives with additional cost reductions as well as prudent investment management. We reduced corporate headcount in January. We're expanding our savings actions across our procurement operations, including contract renegotiations, and we're strategically managing our investments to align with the current macro environment, just to name a few. We believe the combination of these actions positions us to generate approximately $500 million in operating cash flow in 2023, to exit the year with a meaningfully higher run rate for both gross and operating margins, and to operate more efficiently, which unlocks long term growth. Lastly, I'd like to touch on our full potential plan. Our long-term strategy is fundamentally unchanged. The plan we are executing is right, and our long-term financial targets remain. However, given the realities of the near-term, macroeconomic and consumer demand environment, our timetable has shifted to the end of 2026. Though the timeline has shifted, we're confident in our ability to deliver $8 billion of sales, and he made 14% operating margin. Our confidence is reinforced by the improvements we've made in the way our business operates. We've added new capabilities across the organization and exited non-strategic businesses. We've enhanced our inventory and demand planning processes as well as streamlined our innovation process and innerware, which began to bear fruit with the launch of our Hanes originals product. We've improved the go-forward efficiency and effectiveness of our supply chain. We reduce global skews by 45% since 2019, as well as exited unproductive facilities. We're consolidating distribution centers, and we're generating high single digit savings rates in our sourcing and procurement operations. Plus, we're continuing our technology investments to improve our data analytics, drive global integration, efficiency, and ultimately lower costs. We've also changed leadership and our global activewear business, the new team is moving fast. They're streamlining the operating model, including global coordination of product design and merchandising, increased speed to market and portfolio simplification. This in turn is expected to drive a more focused global product and channel segmentation strategy that provides greater clarity to retailers and consumers as well as improves the long-term health of both the Champion and Hanes activewear brands. It's also expected to build the right foundation to drive revenue and margin growth well beyond the timeline of our full potential plan. We've accomplished a lot. There's no doubt that we're a better, more disciplined operating company today than we were just two years ago. But we're not done. And we'll continue to make progress this year. So in closing, we'll continue our proactive approach, remain agile, and continue to adapt to serve our customers innovate and reduce costs while continuing to execute our long-term transformation strategy. We're making progress, and we see the path to improving cash flow and margins as the year unfolds. Before I turn the call over, I want to take a moment to thank Michael for his contributions to Hanes Brands over the past two years. He's been instrumental in the progress we've made to unlock our full potential. Michael has been a great partner, and I respect his desire to spend more time with his family. To that end, I'm pleased to have Scott Lewis step back into the interim CFO role. As you all know, Scott held this role before Michael joined the Company and performed extremely well. I'm confident in Scott and our entire finance team as we move forward. So thank you both Michael and Scott. Thanks, Steve. I really appreciated the opportunity, and I'm proud of what we've accomplished over the past two years. I'm confident in the full potential plan. And I know you and the company are in great hands with Scott and the entire finance team. For today's call, I break my comments into three sections. First, I'll highlight a couple of key items from our fourth quarter results. Second, I'll address our debt and our actions to strengthen the balance sheet. And third, I'll provide some thoughts on our 2023 outlook. With respect to the fourth quarter, I was encouraged by the team's ability to deliver results that were in line or above our outlook despite the challenging environment. I'll point you to the news release for the details, including our segment performance. However, I would like to provide additional context on inventory, as well as the non-cash adjustment to our deferred tax asset as they drive some of the assumptions in our 2023 outlook. Starting with inventory. As Steve mentioned, we accomplished our goal as we ended the year with inventory units 6% below prior year. As expected, timeout actions we took in our manufacturing operations to deliver on our goal resulted in a drag of approximately 220 basis points to fourth quarter gross margins. However, by quickly aligning inventory units with demand, we believe we're positioned to generate better efficiencies, and more importantly, to release working capital and drive operating cash flow back to more historical levels in 2023. Looking at deferred taxes, we recorded a reserve in the quarter, which was not contemplated in our GAAP guidance. Based on recent results, as well as our 2023 outlook, which reflects meaningfully higher interest expense, we were unlikely to utilize this asset in the short term. Therefore accounting rules required we record a reserve against this asset. Additionally, and related to the deferred tax asset accounting treatment, this will increase accounting tax expense and the effective tax rate in 2023. However, I'll note this reserve is non-cash and therefore does not impact our cash taxes. Next, I'd like to take a moment to address our balance sheet and leverage. We've taken a number of proactive steps to further increase our financial flexibility as well as de risk the balance sheet long-term. We've made a commitment to meaningfully reduce our debt. To accelerate this process, we've shifted our capital allocation strategy. We have eliminated the quarterly cash dividend to focus all of our free cash flow, which we defined as cash flow from operating spends less capital expenditures to pay down debt and bring our leverage back to a range that's no greater than two to three times on a net debt to adjusted EBITDA basis. We also work with our bank group to adjust our credit facility amendment to provide additional near term flexibility given the continued uncertainty in the macroeconomic environment. Specifically, we increase the leverage show by one to one and a half turns for Q1 through Q3 this year, and we extended the relief period by one quarter, which now runs through the end of the first quarter of 2024. Summary details of the amendment can be found on our IR website. We are also working to de risk the balance sheet in the near term. We've already begun the process and we are working with the necessary parties and subject to market conditions we expect to refinance our 2024 maturities in the first quarter of this year. And now turning to 2023 guidance, I'll point you to our news release and FAQ document for additional details. But I'd like to share a few thoughts to frame our outlook. At a high level, given the continued macroeconomic uncertainty, we have taken a muted view of consumer demand in 2023. This is expected most pronounced in the first quarter as we overlap last year strong results. For Q1 at the midpoint, we expect net sales to decline 11% compared to prior year in constant currency, or 13% on a reported basis. Looking at the full year, we expect net sales to decline 1% in constant currency or approximately 2% on a reported basis, as comparisons ease beginning in the second quarter. With respect to gross and operating margins as we communicated last quarter, we expect margin pressure to continue through the first half as we sell through the remainder of our high cost inventory. As we move through the second half, particularly the fourth quarter, we expect year-over-year margin improvement as we begin selling lower cost inventory and we anniversary last year's manufacturing timeout cost. Looking at adjusted gross margin, for the first quarter we expect a decline of approximately 300 basis points as compared to prior year. This reflects a headwind of more than 300 basis points from commodity and freight inflation as we continue to sell through our higher cost inventory. For the full year we expect adjusted gross margin to be flat to slightly down as compared to prior year. In terms of adjusted SG&A, at the midpoint we expect first quarter SG&A to be relatively consistent with prior year on $1 basis. However, given the sales outlook, we expect SG&A which carries a higher fixed cost component to delever approximately 370 basis points as compared to last year. For the full year we expect a slight increase in SG&A dollars. On a percent of sales basis, we expect SG&A leverage to improve over the course of the year as sales comparisons ease. For adjusted operating profit our outlook is for a range of $500 million to $550 million for the full year and a range of $50 million to $70 million for the first quarter. We expect adjusted interest and other expense to be nearly $300 million for the full year, an increase of approximately $130 million over prior year. Our outlook assumes that we refinance approximately $1.4 billion of our 2024 maturities at current market rates in the first quarter, as well as higher average rate on our variable rate debt. For the first quarter, we expect adjusted interest and other expense to be approximately $65 million. With respect to taxes, our outlook reflects an adjusted tax expense of approximately $90 million to $100 million for the full year, and approximately $17 million to $20 million for the first quarter. With respect to earnings per share for the full year, we expect adjusted earnings per share from continuing operations to range from $0.31 to $0.42. For the first quarter, we expect adjusted EPS from continuing operations to range from a loss of $0.09 to a loss of $0.04. And lastly, we are well positioned to release working capital and drive operating cash flow back to more historical levels in 2023. For the full year, we expect to generate approximately $500 million in cash from operations. So in closing, although the macro related challenges are masking the progress we've made, I'm encouraged by the improvements we've made and the actions we're taking to transform the business. We're taking steps to meaningfully reduce our debt. We see the path to improving margins by the end of the year as inflation eases and we benefit from our savings initiatives for driving higher operating cash flow, and we're continuing to progress on implementing our full potential plan. We believe this will drive higher sales, profits and shareholder returns over time. Thanks Michael. That concludes our prepared remarks. Weâll now begin taking your questions and we'll continue with time allows. I'll turn the call back over to the operator to begin the question-and-answer session. Operator? [Operator Instructions] Our first question comes from a line of Omar Saad with Evercore ISI. Omar, your line is now open. Thanks. Good morning. Thanks for all the information and the update today. I guess, I want to ask you about given all the news information today, maybe looking at both the business and the capital structure and the leverage position that you're in, what, what gives you confidence that things are going to improve from here? Are you finding on the leverage side? Are you finding that the debt markets are open to refi? And maybe a little bit of like, going back in time and evaluating some of the decisions that were made along the lines? What could be done differently in the future as you guys think about leverage and the underlying nature of the business? Thanks. Sure. Good morning Omar, and thanks for the question. Let me start with confidence in the business. And then we'll get into capital allocation. I have a lot of confidence in this business. And we continue to improve upon the foundational capabilities in the business. I go back and I look at a little short-term history. We came out of 2021, really strong. First quarter 2022 was really strong. And we felt good about the business. And obviously things pivoted in the macro environment in Q2. And we've had a lot of headwinds since that point. But the foundational capabilities of the company that we've been putting into place through full potential plan continue to improve. I now really believe we're stronger company today than we were process improvements are better. We have a lot new and expanded supply chain capabilities, new leadership team, particularly across active where our innovation pipeline is stronger. And we continue to make the investments that need to be made in the long-term, company, particularly in things like technology. And so as you go into 2023, I think we have foundational capabilities that are going to continue to get stronger. But we're facing continued headwinds, certainly on the top line. We think the consumer challenge is going to stick around for a while. So we have a bit of a muted, look forward in 2023 of the top line. But I'm encouraged to see that our margins are going to improve as we come into the back half of the year as that more expensive cost of goods start to roll through the P&L, and we get the better stuff that we're making right now. And Iâm going to return to cash flow positive. So the foundational fundamental operating in the company, I think it's better today than it was. And I think there's a lot of upside as we go forward as we continue to invest, continue to make good decisions both for the short-term and for the long-term. Now, capital allocation, as I said, we're going to return to positive cash flow this year, and I believe and we're confident in the long-term cash flow generation of the company. But as we look at kind of where we are, when we look at the capital structure of the company, and we look at being able to build as much flexibility into the balance sheet going forward, we thought it was prudent to make a shift in how we're thinking about allocating that capital. Number one priority remains investing in the business. We believe in the plan that we have already teaches that to build the capabilities that we need. But we are making a shift for our free cash flow, to focus on debt reduction, which means the elimination of dividend as we announced. We think between investing in a business and paying down debt is what's going to position us in the long run for the best shareholder returns. We're going to be thoughtful about allocation as we go forward. As things change we'll obviously always continue to look at it both in the short-term and long-term, but we think that's the right position for us to be in today. Hey, good morning. Thanks for taking my question. So I want to ask about, I guess the top line progression for the year. So I think obviously, retailers are still planning inventories pretty conservatively, to start 2023. And I think you've guided to a big decline in Q1 and the guidance applies to get better later on in the year. Do you think that the retailer inventory actions are pretty much done in Q1 and at that point inventories will be rebased to where they need to be? And then that that kind of positions you for a more favorable top line environment or I guess I'm just kind of think like how the shape of the year looks like, would you expect Q2 to be down as well. Just trying to figure out like how we should think about the recovery on the top line? Yes, I think the way you should think about it, first stop [Indiscernible] we're seeing a muted view of the consumer this year in terms of their draw from category, which is going to be a challenge as we go forward. And underneath that, you look at retail inventory; it really can vary by the business that we're in. You look at the innerwear business; certainly we're in a replenishment business. So when retailers take significant inventory action to reduce inventory across the board and apparel, the replenishment businesses can get impacted. First, we saw that happen. And we continue to work through that even though we look at our inventory levels. And we're just below where we were in innerwear versus Q1 of last year. So we see opportunity to continue to build that inventory back. I would expect you would see that in the innerwear business start to rebuild and inventory start to rebuild faster than you would necessarily in activewear. In inactive, there's still pockets that have a lot of inventory out there. It does vary by channel, it does vary by customer. And yes, some of them were promotional driven inventory factors and others, some have managed inventory a little bit there. So it's a bit of a hit and misses. So I think [Indiscernible] will take a little bit of time to continue to work itself through the system. But we're going into the year with a conservative view of the consumer and the top line. Hey, guys, hope you can hear me. Okay. So I guess with that in mind, to kind of jump off of that question. Can you give us an indication of the -- give us the thoughts on the replenishment and working through inventory, but maybe its thoughts on how Champion fall order books look. I want to see what maybe the response to some of the new product is? Obviously, there's a lot of factors at play here. But I guess what factors are you looking for to help you anticipate when restocking can begin in the mass channel in the U.S? And then my final one is I think you said inventory units down 6% with the dollars up 25. I just want to make sure I heard that correct. Because that seems to imply something like price per unit up in the 30% range. Maybe just walk me through that if I'm missing anything obvious. Yes. So in terms of restocking in the mass channel, we talk to our customers and our partners closely all the time, and kind of understand where they are. We're also working very closely to find specific opportunities. There's always different pockets by different customer, by different products, to be able to use the data and analytics that we're building to find those opportunities. So I would expect those channels to probably come back faster than others. But again, it ties back with the consumer. And obviously, we all want to match shipments. They want to match up with the POS. We want to match up with the POS, so we don't end up with big pockets of inventory to the positive or to the negative. So as we see relatively conservative view of consumer demand, we're trying to match inventory to that point. So that should come back, late first quarter, early second quarter, we get back to a more normalized matching of POS to shipments as we go forward. In terms of inventory, yes dollars are up about 25%. When you think about that difference versus unit, it's about half inflation, and the other half would be roughly mix. So when you think about unit costs, you're probably up in the in the low to mid-teens, when you average all that out. And good morning, Michael, this is Scott. Just to add a couple of things to the inventory. I feel like we were in a really good shape and that the health of the inventory. Think we're in good shape there. The vast majority of the inventory is replenishment in nature. So the quality inventory is really good. And if you think about inventory itself, and we've been very proactive in managing our inventory levels, like we talked about earlier in the prepared remarks. We took time out at our manufacturing facilities. We offered [ph] to exit a couple of manufacturing facilities as we are optimizing our manufacturing network so that really positions us really well going into 2023. And it should drive working capital benefits as we move over the course of 2023. So feel good about it. We again, units for now we met our goal of our units being down 6% compared to last year, and we're not stopping there and weâre looking to reducing it again, really drive away capital benefit as we move forward. Hey, hey, good morning, guys. A couple of quick housekeeping questions. Excuse me on the model on the elevated interest, the 130. Is there any way you could break out how much of that is from the variable debt versus how much is the expectation on the refi on the tax rate? That's I think, if my math is right, if they can imply 40% rate, I understand the dynamic this year. I'm just kind of curious, like when we go past this year into deferred tax dynamic, does that tax rate revert back to I believe your high teens run rate once we get through there? And the last one, just on the inventory? Is there a way, I think you're saying that the inventory is going to be a cash benefit this year? Is there like an inventory dollar amount you can kind of let us know or something you let us know, by year-end on your expectation on the balance sheet? Thank you. Hey Ike, this is Michael. With regard to the interest because it factors in financing, there's a number of different scenarios that could play out between the mix between fixed and floating. So I think we'll just stick with the 300 million at this point. As we work through the financing, then would probably be a lot more granularity or certainty you could -- we could provide you about what's the ultimate fixed floating mix there. With regard to the -- your question on the tax rate? Yes, the effective tax rate, as you look at 2023 is in the area of 40% to 45%. And what will happen? I'm not sure I caught the tail end of the comments you were making. But as you think about this deferred tax accounting, what will happen over time is that it will return to normalized levels, but it could take several numbers of years. And once again, it does not have an impact on the cash tax payments. So for perspective, the cash tax payments in 2023 are expected to be in the neighborhood of 90 million to 100 million, which is essentially where they were in 2022 and 2021. So the last question was on inventory. Yes, and Iâll take that one Michael. So on inventory we don't got to a specific target about the inventory by the end of the year. But again, they kind of talking about expectations and working capital is going to drive a lot of the benefits in the cash flow perspective. And I know you've been with us a while so you know the cadence of our inventory. As we look in the first half, we typically use cash. And the first half as we are supporting the back of school season and looking to drive the inventory down over the course of the rest of the year. And as you think about our cash flow, again, we're your guiding to $500 million. That's a good mix of again, heavy working capital benefit, and the net income that drops from a profitability standpoint. But we can still really good about the cadence and being able to drop that working capital benefit or really revert back into a good position to cash standpoint. Hey, good morning. Thanks for taking my question. Can you talk a little bit more about what's embedded behind maybe your segments in the full year guidance for sales for innerwear versus activewear? And then where are you seeing pricing and promotion shaking out through the year to offset any of the costs during the first half? And lastly, when do you expect to achieve the target leverage range? Thanks. Sure. So in terms of kind of a mix of the guide, if you will, by segment, the way I think you should think about it is will be roughly consistent across the segments for the total company guide. So no meaningful outliers across the three segments. In terms of pricing and promotion in the market I think you're two different businesses. We're looking at the start of Q1 for innerwear in particular or kind of less promo than when we've seen a lot of promotional environment. Retailers I think are working to recover some of their gross margin. And in the, in the interest base, if there was any distressed inventory, I think most of that's been worked through. So they could start to see a normal cadence of promo where, Q1 is always less than Q4 kind of on the natural basis. On the activewear side, it really varies by channel, and by customer. There's I'm seeing there's low in some areas high and others. So it just depends on where that individual customer is. There is still lots of -- out there in the market and some of that is age. So I think you're going to continue to see some promotion around that space. But we would expect that the promotional environment would begin to drop as the as the quarter progresses. And then, yes, I think with regard to below, we would be below three by 2025. Essentially, a couple years from now. Great, thank you so much. My question is on SG&A and the full potential plan. Maybe Steve, can you just walk us through how much of the expected SG&A savings has already been realized in 2022, maybe how much more you expect in 2023 and 2024? If you just give us an update there, that'd be super helpful. Thank you. Yes, there's a lot, a lot of activity going on in the SG&A space. And it's a balance of savings and investment. And I will be clear that, part of the full potential plan is we're leaning into the areas of the business that we need to continue to grow. Technology spend is going to continue to build some of that expense, some of that's capital, but we're going to continue to invest in that space. But we are taking near term action, we did do a headcount reduction in January. We are looking at other opportunities for us to continue to take costs out of our networks, and be as efficient as we possibly can. We're looking carefully at spending this year. We've been investing in our brands, but we're going to be thoughtful and kind of spend at the rate of consumer demand out there as we go forward. But we look at our model, and you look at the P&L of this company, the big savings that we need to continue to generate or revert back to where we were as in cost of goods. We need to regain the margins that we had before COVID, before all the inflation hit. And that's our focus. And we're doing that through optimizing our network, we are looking at sourcing in our contracts and how we source, we're consolidating vendors. We're looking at all the different parts of our network to continue to improve. And we think we can do that. As I said, we kind of reconfirmed the commitment of a mid-14% Op margin and the full potential plan. And we're going to continue to work costs across the board. Got it. Okay. And if I can follow up with one more. Tim [ph] has been touched on the call. But if you could elaborate a little bit more about where the headwinds are in 2023, maybe in terms of channel or geography, and then maybe talk about where some of the opportunities are for growth, perhaps beyond that'd be, that'd be helpful as well. Yes, and as I said, we expect it to be relatively consistent across all the segments. As I look at the market right now, and look at how the consumer is responding on a global basis. Obviously, the U.S. market inflation while softening, we still see it as well above historical levels. And it's going to continue to impact the U.S. consumer and their spending decisions, particularly in the lower income consumers. As you look back, we would expect the mass channel trend to start to improve. We are seeing decent POS early in January, which we're seeing is encouraging, running positive and most accounts, but as we talked earlier, shipments are still lagging. So there's some optimism there. When I look at our European market, it's similar to the U.S. still challenging. Their consumer sentiment is still low, so kind of cautious in the retail environment there. Asia's mixed, obviously, there's a degree of opening up. So we're seeing signs of improving traffic in large stores in Japan, which are heavy, travel dependent. China opening up with its COVID policies, so that'll help us get traffic back into our stores there, although, because the stores have been closed for so long as sitting on inventory for the past. So we have to work through that. And Australia, I would say lagging the U.S. a little bit in terms of itâs evolution going through the inflation. But we've got a really strong DTC network there and a really strong brand portfolios, and they're working hard on innovation. So you have similar consumer headwinds, but the DTC network there is relatively well positioned. Hey, thanks guys. Just a couple. You had some big changes in your working capital this year. Curious which of those line items came in better or worse than you had initially expected or I shouldn't say initially even as of the last quarter. And maybe you could talk a little bit more about what your assumptions are, for this year on some of those major items, inventory, accounts payable, just the ones that you think can move the dial most in terms of generating that 500 million of cash from operations. And then also separate, just what percent of your items this year were manufactured internally. How does that look for 2023? Any change in your thinking about the right structure in terms of how much you do internally versus externally? Thanks. Sure. Why don't we take it in reverse order, let me start with manufacturing. We manufacture internally 60% to 70% of our units, which has been relatively consistent over the years fluctuates a little bit. As Scott mentioned earlier, we did take two facilities offline over the last couple of months, that was primarily driven by efficiency, not volume. So we're working hard to make all of our facilities more efficient over time. And as we build these efficiencies, an increase capacity allows us to streamline the network as we go forward. We're always looking to balance our internal versus external, and with the supply chain innovation that we've been doing as part of the full potential plan. We have new capabilities inside our supply chain to separate replenishment product versus Made to Order product versus fast Chase product. So the capabilities that we have there allow us to make certain things better and faster. But as we continue to innovate, and as we continue to move into new materials, and as we seem to be a faster moving company in certain parts of our business, we will look to continue to use strategic partners to use those products, and we may internalize them over time. But we're going to find that right balance as we go forward. And if it's a product that we think we can make cheaper and more effectively, internally, and we've done a lot of benchmarking on that we will continue to do that. And if it's smaller runs, maybe new materials, maybe a more difficult design, we'll look to outsource that over time, but the mix is staying relatively same for now. Yes Paul, good morning. Thanks for your question. So as far as the cash flow for 2022 and working capital, everything was pretty much in line with what we expected. As far as the contributions and working capital, like we talked about earlier with the inventory we came in, achieved our goal of lower units at the end of the year. So we came in pretty much in line with our expectations are going to be. As you move to 2023 and like I mentioned earlier, really looking to drive working capital benefit across the board. I would say in particular inventory is going to drive that benefit and just accounts payable, accounts payable and the relationship as that as the timing of procurement and production is throughout the year. We're expecting some benefits over the course of the year from the payable standpoint. Yes, the one thing I would say about you have to remember with payables to inventory is that when the business is accelerating, like it was late last year, you get incredible payable leverage in terms of when you're sourcing and manufacturing. And if you looked at the balance sheet at the end of 2021, I think we were like 76% payables inventory. When you think about what we did in the back half of 2022. We significantly put decelerated, right? We took production out, we took time out. And then you look at the balance sheet where I think we're about 46%, payables to inventory, and it's really, because we were pulling back but you're still paying your vendors. When you get to a more normalized environment in terms of 2023, instead of those two extremes, I think you're going to be more in that 50%, 60% area in terms of payables to inventory. And so, when you're trying to do the math, I think that's something to keep in mind. As the as you get into a more normalized situation the payables goes back to a normal relationship with inventory. Our next question comes from the line of David Swartz with Morningstar. David, your line is now open. David, your line is now open Steve, can you give us more information on Champion? What gives you some confidence that it's going to recover, and what categories for Champion seem to be stronger and weaker right now? And also, secondly on the dividend, can you give us some indication on when you might revisit a decision to suspend a dividend? It seems to be that the dividend was eliminated due to the lower EBITDA. And so maybe when EBITDA returns to more normal levels, perhaps you'll revisit the decision to suspend it. Thanks. Sure David. Let me talk about Champion first. I'm really confident in Champion and see a big opportunity in the brand. Obviously, there's some work to do right now. But there's a new team in place. They're building the foundation for both revenue and margin growth. And I think that's growth beyond the timeline of our full potential plan. They're moving fast, really focused on brand purpose, brand desire, operational effectiveness, and to drive sustainable profitable growth, around Product Design and Merchandising, increase speed and market. They've already taken three months out of our global design calendar, really working on global product and channel segmentation to really provide clarity for consumers and retailers, what the portfolio is, and what the brand stands for. B2C is a early opportunity. We've made progress. I think if you look at our site, it's much better than it was a year ago. But it's not where it needs to be. Footwear still a big opportunity and an opportunity just across the portfolio in general. So near term, there's some challenges in the brand as we continue to work through inventory. But the team is being very aggressive. We're going to see good growth in Asia, led by Japan, the collegiate [ph] channel has rebounded. We've talked about that over a number of calls in the past two years. And we expect it to continue to grow as we go forward. And we're reaching new campuses. We're in a much deeper relationships with those campuses. We've got good merchandising capabilities in that space. We are seeing good student response. We're seeing positive price mix in that area. So lots of good things there. And we're going to continue to focus on channel strategy and being really specific about where we need to go. And early on, we're getting good response from retailers. They like where we're going. They want this brand to win, that plays a really important role for them. And they liked the work that we're doing going forward. So work to be done on the brand, but confident in where it can go and what it stands for, and the work that the team is doing. And we're starting to see some interesting innovation in reverse weave and some new product for our pinnacle accounts. Our TSP product from innerwear is going to cross over and now go into Champion business this year, working on the absorbency category for Champion as well as our innerwear business. So innovation is coming. We're going to continue to lean into innovation, continue to build the brand, continue to be a more disciplined operating company around the brand and how we go to market. And I'm confident that it's going to -- it's going to continue to improve, but we have work to do this year for sure. And then on the dividend, I think what's clear to know is our focus right now is around paying down debt. And that's what we announced today, and that's where we're going to put our free cash flow book. The board is always evaluating capital allocation, both the short-term and the long-term. But right now, our focus is on reducing debt. And we think if we reduce debt and we continue to deliver against the full potential plan, that's what will drive the higher shareholder returns in the long run. No the amendment, the basket does allow us to pay a dividend of upto $75 million annually. So to Steveâs point we thought it was prudent to utilize all of the cash after we've made the investments in the business to retire debt. Good morning. I have two. The first is there was good commentary when you broke out the difference between inventory units and what amount of that was due to higher average unit costs. When you look at this year, what you're seeing in terms of lower cotton costs, as well as lower freight? How should we think about where your average unit cost might be I don't know six months from now or towards the end of the year? Yes, yes, I would, I don't know that we're going to give you a specific guidance. But I think I would tell you that the cost that we are seeing today in terms of either what we manufacture the input costs for cotton for free, those costs are coming down. And so you will see the margins in Q3, and especially in Q4 start to improve because our costs are coming down, currently, relative to where we were 6 to 12 months ago. And we're seeing lower commodity costs, lower freight costs, all that, again, the units that we were producing today, that well, again, as we talked about, in the earlier remarks, from a margin standpoint, as you look over the course of the year, I'm very encouraged with the trends, you're going to see a sequential improvement in margins throughout the year as we are again, selling off the higher cost inventory in the first half. And as you get into the second half, especially in the fourth quarter, you're going to see some really more of a positive margin trends as we go into late in the year as we move into next year. Also we have foreign currency, from a transactional standpoint, some headwinds into the in the first half, that will subside in the back half. So again, a lot of positive trends that we're going to see in March and as you move into the latter part of the year. And the one thing I would just add to that Scott also is a couple 100 basis points headwind from the timeout that we took in Q3 and Q4 of last year. So you don't have that headwind as well. So when you take that headwind going away, when you take the change that we're seeing right now, we expect to see, as you said, the sequential margin improvement going forward. And the cost savings initiatives, all these things are adding up to really a positive trend as you look late in the year and as you move forward. Okay. And I guess related to that, the timing lag between when cash costs are incurred versus when those hit the P&L? What's that lag typically like? Okay. And then just lastly, for me you mentioned addressing the 24 in the first quarter, is there a situation or set of circumstances where you would consider addressing the 26 is at the same time? Great. Follow on to Bill's question around that refinancing. Your thoughts and whether you're looking in the bank market versus the -- you have capacity to do unit banker bonds or secured bond. Yes Carla, this is Michael. As you can appreciate, we can't really discuss that at this point. But we do think that we have flexibility to access a number of the markets. Okay, great. And then a couple of cost questions. The facility timeout, is that all behind you now? Or could that also affect 1Q? That's all behind this. We recorded all the charges costs associated with that in 2022. Thereâs nothing going forward. No impact 2023. Okay. And then on SG&A, I think I heard it correctly that you expect the dollar amount of SG&A to be up year-over-year. And I'm just I was a little surprised given all the work you're doing around full potential. So could you just give us a more clarity there? Good morning Carla. Thanks for the question there on the SG&A. I think you are exactly right. The dollars are up and there's some puts and takes for SG&A. And a couple things to consider from a higher cost standpoint. We will have higher incentive, variable compensation cost in 22. We didn't have a payout in line with a performance as we move into 23 weeks back to the how to pay out there, so you have a higher cost associated with that, and also have a higher technology investments. So we're going to continue to invest moving forward with our technology transformation initiatives that will have those offsetting that is what Steve mentioned earlier, we are in laser focused on controlling cost to action in January. The corporate headcount actions, they are to reduce costs they are. So we are against laser focus on cost control discretionary spending from a leverage standpoint, and then over the course of the year, that should improve as the sales comparison. Okay. And then just one on the amendment. Just because I don't I can't find the document yet. But you say you've increased the flexibility by one to one and a half, or one to one and a half turn over the next three quarters. So we assume that goes up by one in the first quarter and then by one and a half, and then and a two kind of peak quarters. Is that the way to think about it? Yes. So, as an example, Q1 of 23 goes to 6.75. Q2 goes to 7.25. Q3 goes to 6.75. Q4 goes to 5.25. Q1 of 2024 goes to 5. And then the amendment period is over. We like to thank you everyone for attending the call today. We look forward to speaking with you soon. Have a great day.
EarningCall_1033	Good afternoon, ladies and gentlemen. Welcome to the Sartorius and Sartorius Stedim Biotech Conference Call on the Preliminary Full Year 2022 Results. Today's conference is being recorded. Thank you very much. Happy New Year, everyone, and welcome to our today's conference call on the preliminary results of the year 2022 for both Sartorius AG as well as the Sartorius Stedim Biotech. Thank you for your interest. Together with Rainer, our CFO, I will kick it off. We will first talk about the results of the Sartorius Group and then later on, on those of Sartorius Stedim Biotech. Let me start with a brief overview on the most important results for 2022. It has been another successful year after two years of very dynamic growth. We have been able to grow both divisions double digit. Overall, we met the targets that we tried to achieve, even though the corona business came in substantially lower than we thought at the beginning of the year, as I think everybody has recorded for 2022. Also, our underlying EBITDA is up substantially. Our margin is pretty close to the high pre-year level. For 2023, this is a bit special now, and I think some of you will have seen that already when looking at the respective guidance's by other companies from the industry. We expect a low single-digit sales growth overall mainly because of we are now seeing the tail of the corona effects, excluding the COVID business, we are expecting high single-digit top line growth. For the underlying EBITDA, we expect the margin to be around the same level as in 2022. For 2025, and we said that since mid of last year, we have looked into our ambition. We fundamentally confirm those numbers in regards to all essentials because we see all the underlying market fundamentals to be completely intact. However, because of the higher price levels that we are seeing following the higher inflation rates for 2022 and the one that we would expect for 2023 and beyond, we have shifted up our total sales revenue target to â¬5.5 billion. We leave the margin target unchanged at 34% for the group. I think it goes without saying that the uncertainties overall remain very high, both from a political as well as economic standpoint, I believe. Thanks, Joachim. Also welcome from my side to today's call as well as Happy New Year. As always, let's have a look at the figures, as Joachim already mentioned, really another very successful year. Revenues increased by 21% and reached â¬4.175 billion. So that actually fracked another milestone here by breaking the â¬4 billion mark. In constant currencies, this was a growth of 15%. Out of that, 2 percentage points were contributed by acquisitions. And also this number includes a bit less than what we anticipated in COVID revenue. This one amounted at the end of the day to â¬220 million in 2022. Order intake decreased as expected by 10% and - so the normalization continued in the fourth quarter as we anticipated due to mainly, of course, the lower COVID business. If we would exclude the COVID-related business, we would have actually had a slightly positive growth on the order intake, which at the end amounted to â¬4 billion. The underlying EBITDA grew by 20% to â¬1.4 billion. So that's pretty much the margin as on the previous year level, reached 33.8%, so 0.3 percentage points lower than last year. Here, mainly attributed to the, yes, anticipated catch-up in our cost base that we talked about during the last quarter, as well as some slight FX-related headwinds. If we look at the geographical distribution of the revenue. Let's start from the left-hand side, we see the Americas fantastic growth, 21.5%, almost to â¬1.54 billion. The Americas contributed here both on - with both divisions to that success. In the EMEA region, in the middle, we achieved a revenue increase of 9% to also â¬1.5 billion. Let's keep here in mind that we really had tough comparables. You know the growth as here in 2020 as well as 2021 were fueled by the COVID-related business. Let's also keep in mind actually that the business in Russia decreased significantly in 2022. Asia Pacific, also nice development here, double-digit 16.2% growth to a little bit over â¬1 billion. Also both businesses performed well also against to minus [ph] actually quite high comps. If we have a look at the donut on the right-hand side donut chart, we see actually a little shift between the regions. If we look at - if we compare to 2021, EMEA has now 37% of the revenue share that is down 4 percentage points. And those 4 percentage points were actually gained by the Americas that are also now on 37%. Of course, let's keep in mind that also the strong dollar had an impact here. But nevertheless, it also reflects the better growth rates that we could achieve in the Americas. Asia Pacific contributed as previous year was 26%. I also want to point out here that in that region, the partial lockdowns that we â that incurred over the last quarter in China really had no significant impact on our business and the growth in Asia Pacific. So let's have a deeper look into the divisions. On the next slide, we see Bioprocess Solutions. Revenue increased 22% to â¬3.3 billion. That's an increase of almost 16% in constant currencies. Here as well, acquisitions contributed 2 percentage points. The COVID-related business significantly down compared to previous year amounted now to around â¬200 million. And the order intake on the left-hand side, we see, as expected, down 10.4% to â¬3.1 billion in constant currencies here, a reduction of 14%. Again, let's keep in mind, if we would exclude here the corona-related business, this would have been slightly positive. The underlying EBITDA margin was pretty much on previous year level, maybe a little bit, of course, impacted by the anticipated increase in the cost base that we talked about us - throughout the last quarter that now is pretty much in effect. And therefore, is around - is 35.7% in absolute numbers, almost â¬1.2 billion, an increase of 20.5%. If we look at Laboratory products and Services. Here, we also have a really very successful year. Sales revenue increased in constant currencies by 11.5% to â¬848 million. Here only acquisitions contributed 1 percentage point. And we also pointed or - I'm naming here, the COVID-related business is around â¬20 million, of course, significantly lower the impact of that than on the Bioprocess Solutions division. Order intake, up 7.5% by in constant currencies to â¬885 million, really a very dynamic development also mainly driven by our Bioanalytic business, which is performing very well over the last years and also was the driver of the 2022 increase - our growth for order intake as well as sales revenue. The margin, we could slightly increase to â¬222 million basically an EBITDA margin of 26.2%. And that was actually despite also here the anticipated increase of the cost base, but also some FX-related headwinds that we have here. We then have a look at the - some key performance indicators. On the next slide, we actually could not fully, let's say, translate the underlying EBITDA of â¬1.4 billion to the same growth or growing by 20% to the operating cash flow. That is mainly due to higher inventories to support our supply chains. So here, the cash flow related from the increase of working capital is around roughly â¬300 million. Just to put some color to this. The financial result, as in the previous quarter, as we mentioned, is mainly driven and influenced by the valuation of the BIA separations earn-out liability. The underlying net profit increased, therefore, by 18.4% to â¬655 million. The reported net profit increased. And let's keep in mind here that, of course, the valuation has a big impact on here by - increased by 112% to â¬678 million. Investing cash flow, around â¬1.1 billion. That actually is roughly â¬536 million is attributed to acquisitions. Keep in mind, the acquisition of ALS at the beginning of 2022, but also Novasep, as well as then the biggest acquisition in 2022 Albumedix in the third quarter and the remainder of the â¬1.1 billion, so the â¬593 million is related to CapEx, mainly to - in our production facilities around the world. So that ultimately, our CapEx ratio stayed a little bit below our guidance with 12.5%. As you know, we guided 14%. So we had that adjusted. Yes, at the end came in with 12.5%. On the next slide, we see our usual development of our equity ratio, a nice increase of to 32 -- 38%. So very healthy financials. Net debt increased, of course, driven not only by working capital, but mainly also by the acquisitions to almost â¬2.4 billion, but a more relevant figure and net debt divided by underlying EBITDA at a healthy 1.7%. And on the right-hand side, you can see, of course, after each acquisition, which we always try to deleverage in the following quarters, and we plan to do so as well going forward. Thanks, Rainer. So you already heard a bit about acquisitions and CapEx when Rainer talked about the cash flow key figures. I would like to highlight just briefly the CapEx side of things. But maybe before I do so, I just want to remind everyone, as we mentioned before, we made three acquisitions also during 2022. When we take a little bit of broader perspective on the years 2020 through to '22, it has been 10 businesses that we have been acquiring and integrating. I'm just saying that because we were doubling our sales revenue in that time period or more than doubling our sales revenue actually in that during the time period and made quite a number of acquisitions. So we have been quite busy also on the front of adding capacities globally. And you see this on this chart. We invested a bit more than â¬0.5 billion during 2020. The CapEx ratio was 12.5%. You have heard that before. And you can already see here that we are planning the same level for the year 2023. This is very much a global exercise or international exercise, we are expanding our capacities in all regions and also for all product segments as we have a broad distributed growth. We are growing in both divisions and also within the divisions across our product portfolio. Just a few pictures also on those sites where we are running larger capacity expansion projects, Ann Arbor, Michigan, is one example that is quite advanced. The same is for GÃ¶ttingen, where we are â we'll start casting membranes in these new buildings quite soon. In Yauco, we have expanded our manufacturing footprint substantially, added cell-culture media to it. Aubagne, France, where is the main location for our bag manufacturing. We are expanding our footprint substantially. The same on a smaller scale is in Beijing, China, where we are expanding our local manufacturing of bags, so bags made in China for China. And then in Songdo, South Korea, we are just about to start building a significant facility to serve the quite relevant South Korean market and also the market outside Korea in the Asian region. So - and now I would like to shift the perspective on 2023. I already mentioned at the beginning that we have to really take a look on two or take two perspectives on those numbers. One is what I would call the, let's say, the all-in growth rate that we are expecting, which is low single digit for Bioprocess and mid-single digit for the Lab division and, therefore, also overall for the group, low single digit. But that includes a further significant decline that we expect for our COVID-related business. If we exclude that, then we are expecting both divisions and therefore, also the group to grow high single digit for BPS. And accordingly, also for the group, this includes 1 percentage points from acquisitions. So particularly, it's the Albumedix acquisition as this took place rather late last year. We expect the underlying EBITDA margins for both divisions and the group to come in around the level of 2022. What I would like to underline is we believe that we should again perform at least on market level. We have been growing substantially stronger than the market throughout a long period now and particularly also during the period 2020 through to '22. And again, therefore, explicitly also during '22. I don't think that I have to read out all the comments made here. CapEx ratio, I mentioned already, net debt underlying EBITDA, I think, has been touched upon by Rainer before. So therefore, what I would like to do before then shifting to Sartorius Stedim Biotech is briefly talk about the midterm ambition for 2025. Just as a reminder, we first published our prospectus for '25 at the beginning of 2019, I believe. At that time, we were shooting for â¬4 billion of sales revenue. In the meantime, we have shifted this to â¬5 billion, and we also shifted our margin expectation quite a bit to 34%. And while we leave the margin expectation unchanged, we think that we have to adjust the top line guidance a bit upwards by approx 10%. And this is because of inflationary effects. But before I come to that, I would like to draw your attention to the fact that we are currently running ahead of our midterm plan by roughly 1 year, even a little bit more than 1 year. And what you can see on this chart is the yellow line that represents the growth curve from '19 through to '25%, even including now this upward shift a bit, which would lead to a compound annual growth rate of 20%. Excluding this shift, it would be 18%. And this rate is already quite significantly higher than the historical compound annual growth rate of 13% from '15 through to '19, which again, was higher than the market back then. But as you can see for the period from '19 to '22, the compound annual growth rate has been 32%. And as we already were talking about since mid of 2020, this growth rate is not back - hasn't been backed by a respective fundamental increase of demand, but it was driven by this additional corona demand but also substantially by temporary effects of different ordering behavior of customers. And what we are seeing now is like the correction of this and customers are now shifting back to normal - more normal stock levels. And that, of course, leads to also us now moving back towards the underlying growth path. And this we wanted to share with you in this graphical representation on this chart. But again, nevertheless, we have shifted our ambition for 2025 by 10%. You see that this is the case also for both divisions. It's just rounding that we came up with 4.2% and 1.3% for the two divisions, which looks slightly different than 10%, but essentially, it's 10% for both divisions. And therefore, for the group, â¬5.5 billion now is our top line target for 25%. And as said before, we leave the EBITDA margin target unchanged at 36% and 28%, respectively, and 34% for the group. I now would like to talk briefly about the results of the Sartorius Stedim Biotech Group. As always, they are very much in sync with the development of the Bioprocess Solutions division. So what you see here is that our sales revenue was up by 15%, including one in constant currencies, including 2 percentage points from inorganic growth. Order intake was down by a little bit less than 10% because of the effects that Rainer was explaining before. EBITDA was up by a good 18%, then margin slightly below the previous year's level for yes, partially, of course, non-currency effects, but mostly because of the expected catch up of the costs. From a geographical standpoint, also here, most comments have been made before. We should keep in mind, of course, that EMEA, which is posting the lowest growth rate for 2022 is - has been showing extremely high growth rates before because of the strong portion of European players in manufacturing COVID corona vaccines. So overall, a healthy distribution of our geographical growth and also a healthy distribution of our sales by region, as you can see there. Regarding cash flow, again, this is very much our high level of investments, as well as the effects coming from working capital and then also those from the earn-out - BIA separations and other effects that Rainer was talking about before already. CapEx ratio, you see here has been 12.3% for Sartorius Stedim Biotech. Therefore, also the balance sheet and other financial KPIs look very healthy, I would say. Equity ratio, almost 50%. Net debt to underlying EBITDA is still below 1.0 even though we are investing significantly both in organic and inorganic growth. And then I don't want to walk you again through this conceptual chart on why we are on and how we are running around one year ahead of our midterm plan. But you can see that this particularly holds true for our Bioprocess Solutions division and, therefore, also for Sartorius Stedim Biotech. And of course, we also have shifted, therefore, our midterm ambition, but before we show that one. I briefly talk about the outlook for 2023 which is at low single digit all in, as I described that before, but then excluding the COVID-related business and the respective effects that we expect for '23, we expect mid to high single-digit growth for Sartorius Stedim Biotech. FX also around 12.5%. And the further decline of our embedded ratio provided that we would not make any further acquisitions. As always, we never try to factor those into the numbers. We update rather such forecast if we make any acquisitions. And underlying EBITDA margin, we expect at the same level as for '22. So - and then finally, coming back to our '25 ambition. Also here, we increased the top line ambition and target to â¬4.4 billion after â¬4 billion before reflecting the higher price levels because of the inflation that we have seen in 2020 and that we anticipate going forward, we leave the profitability target unchanged at above 35% for Sartorius Stedim Biotech. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] We have the first question from Odysseas Manesiotis from Berenberg. Your question, please. Hi, Joachim. Hi, Rainer. Thanks for taking my questions. So firstly, taking from your peer's recent statements or your backlog and customer discussions, would it be fair to assume a stronger H2 '23 compared to H1? And would you expect book-to-bill ratio to improve the historical levels by the second half? And secondly, also given that you had some FX headwind in your full year 2020 EBITDA margin, what negative profitability factors would essentially replace this negative FX impact for you to guide 2023 margins in line with 2022? Is it simply a factor of increasing your core to emission reduction expense from 50 to 100 basis points? Or are there other factors involved as well? Thank you. Thank you very much for your questions, particularly the first one, I believe, is an important one and one that is discussed widely in the industry at the moment. So absolutely, as you assumed, we also expect as other players as well, different halves of the year 2023, we would expect H2 to be quite a bit stronger than H1 indeed. We expect and we - I think we were talking about that during our last two or three calls already that we would expect the beginning of the year to still show - quite some effect of normalization as we talked about, whereas around mid of this year, we expect then to rather see orders and sales revenues to be more in sync again and that this reduction of order of stock levels that some customers to also have come to an end. It's very difficult to be very precise at this moment. I think it's too early to be more precise than that. But from our today's perspective, we definitely would expect H2 to be stronger than H1 indeed. And for the FX effects, I hand over to Rainer. Yes. So regarding the nature of our FX effects are, of course, the positive one is the strength in the dollar that we've seen in 2022. But of course, that unfortunately is being compensated by the hedging - hedging hedges that we do. And here, again, the dollar is the most relevant one for us where, of course, we hedge 12 to 18 months ahead. So this is actually a rolling forward, therefore, in 2022. The positive impact of the general P&L effect has been diluted or actually even completely compensated by those negative realization of hedges. Going forward, and this really depends, we were down pretty much to parity in around Q3, also beginning of Q4. Now we're back a little bit to - that the euro gained a little bit of strength. So we still will see a little bit of FX happen most likely at the beginning, but that should then bleed out hopefully over the end of the year. Thank you. That's very clear. And sorry, just to squeeze one more in there. So that 100 basis points costs that you're assuming for your CO2 emission reduction program. Is that going to be relevant after 2025? Or should we not consider it as such? Yes, we expect that to continue playing a role. We, at this point, believe that the - that costs for - for example, energy with a lower CO2 footprint or transportation services with the lower CO2 footprint, et cetera, to rather be more expensive than whatever, more traditional sources and suppliers, that probably will change at some time, but I don't think that this will be already the case after 2025. So they will, we believe, continue playing a role. Thank you. Two for me, please. The first just a follow-up. And Joachim, do you think that the BPS book-to-bill ratio has troughed in 4Q of '22? Or do you think it's potentially got further to fall as we get customer order normalization in the first half of this year? And then secondly, a question about price trends. On the 3Q call, you alluded to the fact that you anticipated taking another substantial chunk of price at the beginning of '23. Could you let us know what's happened in terms of pricing for LPS and BPS going into this year? And what that means to the underlying run rate is likely to be for the full year? Yes, sure. So to be more precise than we have been so far for B2B as a book-to-bill ratio is honestly also quite difficult on a quarterly basis as this is quite - I mean, to our standards a rather short period of time. So what we believe and we said that already, I think, mid of last year is that we would expect the beginning of 2023 to also rather show book-to-bill ratios below one. Again, quite difficult to be more precise. I think the - in our perspective, most important message is that all the market fundamentals, we really consider to be fully intact, be it the, let's say, the fundamental demand for drugs, but then - and therapeutics, vaccines, et cetera, and then also for the respective technologies to develop and produce those products, but also in regards to the pipeline of innovations, both of the developers and manufacturers of medical products and pharmaceuticals, in particular, but also in regards to their need for innovative technologies for such new modalities partially. So that's the key thing, we believe, and we believe that even though, of course, we fully understand the interest in as precise as possible predictions on some more detailed trends, we believe that those are not really important for any fundamentals here. So long story short, book-to-bill, we expect to be below one, maybe for the first two quarters this year, but it's difficult to be more precise. Price trends, we indeed shared with you before that at the beginning of 2023, we would introduce another adjustment of the price levels in sync with the inflation. I think what one can say is that the inflation rates have been going down already a little bit, and the perspectives seem to be also a bit more optimistic in that regard going forward. The level of price adjustments that we are introducing now is reflecting that. So we are rather introducing mid single-digit price increases, but the guardrail for us anyhow is to balance the effects that we see on our cost side coming from price effects there on the - on our sales prices. So - and there, we are quite optimistic that this should be the case, and we factored that into our guidance for 2023 accordingly. Yes. It's actually Elmy Miranda [ph] from Kepler Cheuvreux. Thanks for taking my question. And the first one is on market share. There's obviously different dynamics you were able to deliver when others didn't have any kind of capacity. So can you just talk about to what extent that is currently a headwind from certain accounts, excluding COVID? And on the other side of the equation, obviously, you were able to get a foot into the door with some kind of new clients where you probably may gain going forward. So can you just talk about the dynamic of these two factors? And second question then on LPS. If I look at your guide for 2023, it points to mid single-digit growth. And I guess when we consider the dynamic in Bioanalytics, this should probably loan drive more than 7.5% growth in that division. So it's the right way to think about it, you're expecting negative growth outside bio way [ph] And the third question also on LPS, obviously mid single-digit growth for 2023. But in order to get to the â¬1.3 billion guided implies more than 20% sales growth in '24 and '25. So can you just share with us your thoughts in terms of the split of this growth between organic and M&A? Thanks very much. Yes. Let me answer question three and four. And maybe then you can repeat your first two questions, please, because on market share because it was hard to understand them here. The line isn't that good, unfortunately. So on LPS, 2023 and our guidance there for top line development. So we are not planning for a negative growth for our - what we call Lab essentials business. The fact that we are not more aggressive in regards to our growth targets reflect the fact that we have been seeing quite a high level of demand and therefore, also growth in that division. Again, also, we were growing above the market. But overall, the market was rather healthy during the last two years. And I guess you are partially also discussing these - the question of in how far the more difficult funding environment for early-stage biotech firms, for example, would have an impact on growth. So we are not that exposed to customers that are depending on funding. However, we would say that the overall investment mood in the - also in the lab domain is a little bit more muted than it has been probably before. So therefore, we believe that 2023 will be showing a lower market growth than the years before and our growth expectation here is mirroring that. So it's not that we are particularly having a negative view on our Lab essentials business. And on '25, you are right. We are including some assumptions on inorganic growth. This portion of inorganic growth will maybe a little bit larger, the portion, not necessarily the absolute numbers. The portion will be possibly a little bit larger for LPS and represented a more significant double-digit percentage of the overall top line growth. That's absolutely correct. By the way, also in line with what we have said even back in 2019 when we were defining the target the first time for '25. At that time, it was â¬1 billion for LPS. But even then, we said, well, inorganic growth contribution for LPS might be relatively higher than for BPS. But then, of course, let's see, it all depends then also on the size of targets, the timing, et cetera, whether that then materializes exactly in that way. But yes, our model is built like that. And then again, please, could you repeat your question around market share? Yeah. Of course, sorry for the bad line, quality. I hope you can hear now. So it's just about the dynamics and BPS. So obviously, during the last two years, we have been able to deliver capacities to clients where competitors didn't have any kind of leeway. So now the entire industry is obviously ramping up capacity. So in these accounts, what do you expect any kind of headwinds in terms of market share? And I guess, in other clients where you did not have a foot in the door, you now enter these accounts and may probably grow. So I'm just wondering if you can talk about these kind of dynamics and which one of this is relevant or another way of asking this is, obviously, do you believe from here onwards, do you believe you can continue to gain market share? Yes. Okay. Thank you very much. Now it was clear. So yes, absolutely correct. What you are saying during the earlier phases of the pandemic, I think we - our delivery ability was above average, and that - then resulted in exactly the effect that you were summarizing. We were gaining business proportionately, also from customers that were looking for a second or third source in some areas. There is not one answer that fits all cases. There are different behaviors by customers. By and large, we would say we would consider quite a significant chunk of these market share gains that come from that very effect. And it's not the only effect why we are gaining market share to be sustainable. We don't think that everything will just bounce back. That's not what we are seeing. And as it is not the only effect for our market share gains, we also believe that we should be able to continue gaining market shares. The - there are a couple of main drivers for this and also the drivers that have been playing a role before the pandemic. And those have been won clearly that our presence and relevance also in the U.S. is a completely different one than 10 years or 20 years ago. And that means that the portion of new business that we are winning is much larger than it has been back then. But of course, the overall business always reflects to a good portion as so much of the sales revenue is recurring that the overall business always reflects a good portion of the past. So that's one driver. And the other driver is, of course, the, let's say, the bandwidth and again, relevance of our product portfolio in quite a number of areas. Our product portfolio has been strengthened substantially when focusing on BPS. And the effect that you were mentioning before is a - has been a BPS effect. I would just mention that we have strengthened our portfolio in downstream processing substantially, in regards to classical chromatography but also intensified chromatography for instance. And then we have built quite a comprehensive portfolio of what we call critical raw material, less reagents, media for particularly new therapies, and that pays off. We are winning a substantial chunk of business in that market segment or in those applications, and we expect that to continue. Thank you very much. Two questions, please. One, just a follow-up on the market shares. Customers have gone to deal specking some processes. Do you expect that to reverse and those process going back to single specking? Or do you think that your specking is now there to stay, and we shouldn't worry about who gets kicked off projects over time? And the second question, just on the inventories in the channels. Is there a degree of expiries for those that matter? Is that a variable that could help reducing inventories as 2023 progresses and inventories just expires because the channel flight [ph] is over? Thank you. Yes. Thank you very much. Really relevant and interesting questions, addressing quite some detailed mechanics of the market indeed. So we don't see that customers who have gone through the effort of establishing a dual or a second source would go back to a single source typically, so that we wouldn't see. That doesn't mean that both sources are used to the same level. Again, there is not one answer probably to the question in that regard or in a quantitative manner but qualitatively, one can say that nobody would really go back to a single source effectively. On inventories and limited shelf life, yes, you're absolutely right. Products, the products that we are talking about here and when we are talking about inventories, indeed, we are talking about consumables, single-use products. Those are sterilized before used, and they are ready to use their customers, so they have been sterilized. That is one reason, not the only one, but one reason for limited shelf life. But we wouldn't expect the limited shelf life to play a major role for at which point in time the inventory levels at customers are back to their desired levels. We - again, it's a relevant aspect per se, but we don't think that this should play a major quantitative role. Hi. Thanks for taking my questions. Joachim, when back at the end of '21, you highlighted, I think, that you thought 5 percentage points of growth in '21. And I think an additional 5 percentage points of growth in '20 had come from maybe stocking up at customers, which could equate to a couple of hundred million of destocking. Is that what you're thinking about in terms of the total level of destocking through 2023? And also just a clarification, a lot of your peers are sort of suggesting that the destocking would only be coming from customers involved in COVID and other areas. Is it that COVID type customer that you're seeing the destocking? Is that where you're seeing it? And then second question, just I mean, sort of related, and I think you might have touched on it. But the order backlog that you have based on the delivery dates you see, is that coming out in Q1 and Q2? Or is some of that backlog deliveries in the second half as well? And then final question, please. Just thinking about the M&A priorities in '23. Obviously, you mentioned 10 deals. They've been - I say some of them - a big, some of them small, where are you sitting in terms of deal size at the moment and areas like mRNA, et cetera? Thanks very much. Yes. Thanks for the questions. So we think that maybe the best number to use - to estimate the exceeding stock levels at customers is to take a look on the book-to-bill ratios that we have seen during '20 and '21. And I'm saying that absolutely being aware of the fact and also with you know, wanting to ask everybody to take this always with a grain of salt, that the more you take a, let's say, a more narrow view on book-to-bill ratios like on a quarterly basis or so, I would not recommend to take those numbers for being too relevant. But on a longer time horizon, they make quite some sense. And for '20 and '21, the book-to-bill ratios have been approx 1.25, 1.28, whereas our usual level has been around 1.08, somewhere around that figure. So we had two years where the - where we had 15 to 20 percentage points higher order levels than we usually would have had. Now if we take that and then deduct approximately the â¬500 million, for example, of COVID business in '21 and then the 220 in '22, a bit already before in 2020, then you get a feeling for the exceeding orders that have been not directly related to COVID business. So - and therefore, I would say if you do the math, you come up with a higher three-digit million euroâs number of orders that are rather representing exceeding stock levels. Have that been just companies that have been involved in manufacturing, corona vaccines? No. But clearly, they have played a role here, clearly. So some of those have been particularly been exposed to the need for ensuring their supply chains, and they have been particularly keen to do everything that was necessary to maintain that. So therefore, I would say we wouldn't define the group of customers that have acted like that as narrowly as maybe some others have experienced that. But clearly, those customers have played a particular role. And on M&A in '23, I mean, I guess you understand that this is a question that I can almost not answer. What I can say is that we continue to be interested in adjacent additions to our portfolio complementary additions. We believe that there are a number of highly interesting companies out there. Maybe some won't be for sale. Maybe some others might be open. What one can say is it's also a very competitive landscape out there. So one thing is what we find interesting. The other thing is what might be then achievable and executable. So let's see. But clearly, we, I think, have a clear focus. We have a decent track record. We have reasonable financing power. So let's see what we will be able to achieve. Hello. Thank you for taking for taking my questions. Just circling back on the pricing impact. You mentioned in the middle of last '22, you had a high single-digit price increase and then you had â even you highlighted a mid single-digit price increase for start of this year. So can you just let us know what the pricing impact is on average throughout 2023 across BPS and LPS, respectively? And then as we think about modeling in the BPS division, with the 13% CAGR that you highlighted before as being sort of the historical CAGR again above market growth. But would that be the best place to start? And then making our adjustments for price and COVID and destocking? Then on investment intensity. You mentioned again CapEx is around about 12.5% of sales there thereabouts. Can you remind us how this should trend for the coming years and where a normalized level would be? And then as we think about the projects you're investing in, you highlighted some on the slide, but where are the key areas that you are investing in across the sort of five portfolio areas that you mentioned in BPS and similarly in Bioanalytics as well. So which areas are benefiting most from your investments/ And finally, on the order book, again, similar question as other quarters. Have you seen any cancellations outside of normal course of business or outside of COVID orders? Thank you. Yes. Thank you very much. So on price increases, I think you're very well aware of the fact that we have to consider here before I mention the number that we had a price increase that was reflecting the substantially higher inflation rates around mid of last year only. And then, of course, until this hits the sales revenue, it still takes some time because you always have quite some order book that you are executing first where orders have been pulled in at the previous price levels. So therefore, we would consider and there's not much difference between the two divisions. The effective price effect above the usual level of being low single digit, because you have timing and so on and so forth. So therefore, that was definitely, yes, as I said, a low single-digit number. And for the year 2023, and I guess I said that before, we are introducing a pricing round and the price adjustment around that is a bit lower than the one that we are adjusting - that we have introduced been introducing last year. But of course, in turn, it will become effective for most of this year. So maybe the effect then including this time shift, again, will lead to a lower single-digit effect above the 2022 price level at the end of the year, and that will mean that overall, the pricing effect above the usual inflation rates will be in total when they have been fully - become fully effective will be around 10%. And that's exactly mirrored in our '25 ambition. These 10% and they have become fully effective are mirrored in our '25 ambition. And therefore, I'm not 1% [ph] sure whether we can help you to detail out your model here in this call. Maybe this should be a separate call with our IR team later. But because by '25 and also towards the end of this year, we expect that all those temporary effects have become - to have fully phased out by them, be it stock levels and so on and so forth. So - but again, maybe that's a separate call. On CapEx, the 12.5%, as we mentioned in the presentation, and you are asking for specific areas that we are focusing on, well, I think as said, we are very satisfied with the fact that we are growing pretty much across our product portfolio. And therefore, we are very much taking care of making sure that we remain having a high delivery ability across our portfolio to the benefit of our customers. And that means that we are indeed expanding our capacities in. And let me start with bioprocessing in separation technologies. Now I could go into more detail and say, filtration in both and purification. And indeed, we are investing in both areas. We are investing into our fluid management technology capacities. We are investing into our cell culture media capacities, including reagents to cell culture media. And in the LPS division, we are particularly, of course, investing into the fast-growing area of bioanalytical instruments, respectively, the capacities that we have here. So the latter would be particularly the facility in Ann Arbor whereas before cell culture media, one to highlight would be Yauco, but there is also one in Germany that we are expanding. Then when it comes to the fluid management domain, the first one to mention would be Aubagne, France, as I said, for China â for China also Beijing. And then our separation technology, I would particularly mention the one in GÃ¶ttingen, but also the one in Yauco again. So it's really across the board. And then on your last question, order cancellations. Yes, I think as everyone else in the industry, we have also seen some at the lower double-digit million euro range. And that particularly in the fourth quarter, which as explained before, came in even a little bit lower than we thought as the vaccine manufacturing has been further been in decline across the board. Thanks for your time. Congratulations on the quarter, Joachim. The question I have is, are you seeing a heightened activity in mRNA in cell therapy and antibody-drug conjugate work? And if so, are you better positioned to capitalize off of those trends? Yes. So I think maybe the answers would be a bit different when discussing the different modalities in more detail. But in general, I think - and I guess that wouldn't surprise you. We are always taking a little bit longer or yes, a perspective of longer time period, and one can clearly say that we are living in a different - completely different phase in the biopharmaceutical industry than 10 years ago is maybe too simple, but even five years ago. Back then, it was just monoclonal antibodies, you could say. And of course, they are still dominating the market. They are playing the most significant role, and they are still growing. So it's very important to still have a very relevant and also constantly - or a portfolio where innovation plays a role. Let's think of intensified manufacturing, for instance, which is, I think, an interesting direction in manufacturing monoclonal antibodies. So - but you were asking for the new modalities. And here, we are seeing a lot of activities, of course, a lot of investments into new mRNA therapeutics also that have been kicked off since 2020. And we have seen also a lot of activities and do see [ph] that's still in cell and gene therapies. Of course, at the beginning, when such markets are young, when only a few products have made it to the market, volatilities are extremely high. And therefore, and even in the Maps [ph] market, we have seen quite significant volatilities overall in demand when you think of the effect that has come from biosimilars, for instance. So we are talking about a market where I would say, again, it's probably not recommendable to take it to short-term oriented look on things. And therefore, we wouldn't say, well, maybe it has been a little bit less demand for technologies in the cell and gene therapy domain during the last, whatever, 12 months or so because that can have and very often, just is driven by one or two drugs that have made it to the market only. So it's early stage still in this market. But we believe it's a highly attractive, increasingly relevant market. It's a market for which we are offering relevant technologies and where we have a very close look on and where our sales revenues have been growing quite a bit over the last couple of years. Thank you And then last, so COVID-related business really be more in the latter half of 2023, pretty slow in the beginning? Yes. That is - I mean, I tend to say it's my first pandemic. So therefore, it's - let's see what exactly will happen. But we tend to say, well, there have been a large part of the population that has been getting vaccinated three times in - during 2021, whereas a smaller part of the population has been vaccinated just once during '22. And a very significant part of the population now already has been going through an infection on top of their vaccination status. So therefore, I would say the overall level of immunity in the population is completely different than it has been two years ago. And therefore, I wouldn't expect the - yes, let's say, willingness or the demand for such vaccinations to pick up again. I don't expect that. Of course, all this is very much depending on, okay, will there be another variant that is more dangerous, so to say. But if that doesn't happen, we would rather speak to all of you that we already applied more than a year ago when we said we expect sooner or later the corona vaccine business to rather become a very - a rather small one, and part of that might become even part of the what we call flu vaccine business today. So that the net effect will be really rather small and not really too relevant to talk about. Thanks very much. And thank you for sharing that the order intake would have been slightly positive if you exclude COVID in '22. Could you by any chance also tell us what the order intake would have been if you exclude COVID and exclude this destocking that you witnessed in 2022? Just trying to get a feel for the very true underlying trend here in '22? And then my second question is whether there's anything that stands out when thinking about growth in China in 2023? Thank you. So on the - so the first question, I'm sorry, that really would become a little bit too granular for the - for public communication here. But what I can say is because as you are asking for order intake, the - there hasn't been - as you would expect, as you know, the demand or the manufacturing of vaccine has been slowing down substantially during this year, and there have been a lot of orders being placed before 2022. So you can imagine there hasn't been much order intake for that during '22. And for stocking, maybe as a reminder, we have seen the stocking playing a role in our order intake, particularly in the five quarters, Q3 2020 through to Q3 '21. So '22 again, hasn't been seeing much of that, if at all, I would say, pretty much nothing on the order level, and you were asking for orders. So I hope that helps, even though we wouldn't make an explicit calculation for that. So - and on China, and I guess you asked for China '23. So as maybe for the entire business for different reasons, we expect growth in China to be maybe a bit slower at the beginning of the year. I think it's very obvious that maybe first, the wave of corona infections has to come down again in China. I think as it has been a quite intense one, obviously or still is an intense one there on the positive side hopes that we will see the tail of that wave already during Q1, but there should be and will be an impact in Q1. Overall, we are absolutely not pessimistic for China for '23. We expect '23 to be a decent year again, and we usually are seeing healthy double-digit growth rates in China, and that is what we are expecting for '23 as well. But again, not in a linear manner. Yes. Hello, hi. Good afternoon, everyone. Follow-up on many points. And so you talk about China, but I think it's very much of an interest [ph] for everybody to know what sort of size in terms of business we can achieve in China with the ramp-up in terms of manufacturing? So if you can give us any idea or any comparison in terms of business for any country would be very much interesting. Other question regarding the business development at BPS. When we consider your guidance for this year for '23, ex mid to high single digit, I was very much interested in knowing what are your underlying assumption, let's say, on the client category, meaning that what does that mean for your, let's say, traditional long-term contract versus the one-off or the short term you may have due to the research due to the biotech due to any specificity on the cell and gene. So can we have just a flavor of your assumption? Are you still having a number for the small category one-off time? Or you've already plugged everything into this, I'd say, continuum of long-term contracts? Many, thanks. Yes, sure. So on China, we are running currently around 11% of our global business that we make in China overall for the Sartorius Group. And we expect that ratio to slowly but steadily increase. I mean, slowly simply because such a ratio doesn't move that quickly. But we usually are growing a bit stronger in China than globally, mostly because simply, the market is growing very strongly. Now of course, one could say, well, in how far will that probably change in the course of global economic tensions, I think that's pretty much impossible to factor in, in a decent way. So far, we do not see any significant limitations to doing business in China. We also don't see U.S.-based companies to changing their ambitious approach towards making business in China. So therefore, consider that maybe to be a disclaimer. So around 11% at the moment, and then that should further grow a bit. Maybe to again confirm, we are not manufacturing products in China for the rest of the world with one smaller exception where we are also making sure that we are mirroring that at other places. We never shifted manufacturing towards China. So - and therefore, whenever we have built up manufacturing in China and that holds true for more than two decades now already, this was China for China, and that is what we are still doing. But of course, we are still importing quite a lot into China. And even before the more apparent economic tensions that we are seeing now, we were working based on the assumption that sooner or later, also in our industry, policymakers would ask for a higher local content. So we believe that over time, we have to make sure that we are maybe producing even more in China for China than we are doing today because our scope of what we are manufacturing there is a bit limited. But again, no limitation for us to making business there currently. I guess you were asking for quite a high level of granularity regarding our BPS growth assumption. And I'm really sorry, but that level of detail, we, for sure, cannot share publicly. In principle, and I think I said that before, the - when you accept now for single quarters and other short periods of time and take a little bit of broader look, then we expect the market segment of new modalities to rather grow faster than the one for monoclonal antibodies and therefore, also our business that serves those different market segments should grow a bit faster. But - and maybe then conceptually, what I can say, when we are building such or when we are building our budget, which is the basis for our guidance, then of course, we are taking quite a detailed look into those different market segments. But yes, again, it's - I think you understand that we cannot share that publicly. Hi. Thanks for the presentation and on the results. I have two, please. First of all, in CapEx, last year, earlier in the year, you had a [Technical Difficulty] CapEx. You ended the year with 12.5%, and that also the outlook. So I was wondering if one of the three acquisitions you did throughout â'22 [Technical Difficulty] for CapEx? And are these conditions that you made over is well positioned posterior [ph] as coming to an end of the back end demand? And secondly, in biosimilars, how do you see your competitive position there? Do you think that big market share is gained throughout the company cannot be utilized in gaining more market share in biosimilars business. How you've seen your positioning there? And thirdly, and lastly this business in Stedim, I think that in combination with the strength of [Technical Difficulty] has to do with the difference in your outlook for 2023 and the too high is quarter growth for them versus high single-digit [Technical Difficulty] So maybe if you could elaborate on the business and how we should see the impact on [Technical Difficulty] Yeah. So I have to say the line was incredibly bad. I don't know whether anybody else in the call got more than 10% of your question, but we didn't. I have to say it's extremely difficult to answer that we think we heard something like why our guidance excluded COVID business is a bit different between BPS and SSB. I thought I heard the word bioanalytics, but don't get whether there was a question around that. I really have to admit it. The only one that I can answer is that the reason why we say mid- to high single digit for SSB in comparison to high single digits, both excluding COVID for BPS is it's basically - it's a very minor difference, of course, as you can imagine, but yet it's a slight difference. And the reason is that the SSB Group is supplying some products to the LPS division of Sartorius AG and mainly we are talking about OEM membranes, membranes that have been - are used in diagnostic test kits in various applications. And one of those has been and still is, of course, for example, food test, but also corona test, and that has been the reason, as this played a role will less play a role in 2023. This dilutes a bit the growth. But maybe you can repeat and I can only hope that the line is a little bit better. Maybe you can repeat - may I ask speaking slowly repeat one or the other of your further questions. Okay. I hope you can hear me better now. The first question you answered with perfectly the frac question. So I just wanted to ask about tax. Earlier in 2022, you had guided for 14% CapEx. Now it's 12.5% actual '22 and '23 guidance. So I was wondering if one of the three acquisitions you made removed or reduced the need on CapEx on that side? And the last one was on your positioning in biosimilars now that COVID vaccine demand is going to be - it looks like it's going to be less and biosimilars demand probably more. So how do you see your positioning there? Yes. Thank you very much for repeating the questions. I think now it was much better. So CapEx is a bit higher partially because we are expanding capacities also at sites that we have acquired, like we are expanding our capacities at Solugenix [ph] for instance. We will expand our capacities or our -- have started basically to expand our capacities at Cell [ph] And then going forward, it's not yet part of that are expanding our capacities in Albumedix. So those acquisitions would not dilute our CapEx overall. The reason why it has been a little bit lower than we initially thought in 2022 has basically our timing effects. It's - we didn't stop or whatever any of our activities there. We were rather taking a mindful look on when exactly we would need certain capacities because we need them, midterm guidance and midterm demand unchanged. But now as we really - as soon as we saw that the expected normalization really kicks in, we look where we could relax our time lines a little bit. So that was basically the background there. And on biosimilars, absolutely right, biosimilars are a driver of or a component of our growth. Overall, we would say also an area where we rather have been gaining market share or through which we have been gaining market share as we typically have a larger share in the manufacturing of biosimilars than in some of the original products. I think it's maybe less of a dynamic driver than it has been. That always depends a little bit on the number of products or patent expirations. But yes, overall, it's a relevant part of the market and one where I think we play a decent flow. Hi, there. Thanks for taking my questions. In the past, you've spoken about some of your customers or being able to get insight into the inventory levels at some of your customers. Where you have that insight? Can you see how much inventory they have left until they get back to the current normalized levels? And secondly, on - I'm sorry, that's on BPS. And again, in terms of supply coming on stream in BPS, there's obviously lots coming on in the next 12 to 24 months. I'm just trying to understand if you - where you see utilization at these plants and whether it can stay as high as it was in 2022 this year and in next year and what that impact that might have on kind of margin - so just trying to understand the utilization levels as these new expansion projects come on stream? Thank you. Yes. Thank you very much for these two questions. So indeed, exactly, as you said, insights into inventory levels is in general limited, but of course, it's different from customer to customers and at some, we have some more information and some more detailed insights and those - and these insights that we have very much back the view that we have been expressing before here in this call when we said that we probably would expect the first two quarters to be quite impacted by the rundown of the high inventory levels of customers, whereas maybe in the second half of the year, we should be seeing then more the typical pattern there. So yes, again, that's where we have more insight, we would project, yes, this time lines roughly. On the capacities that have become or will become online in this space? I think - I guess what you are indicating here is that maybe the capacity utilization will be not that high at the beginning. That's right. For us as a supplier into such processes, that's not necessarily a big topic. What we probably will see indeed that other than we have been seeing during the last few quarters that, as you would expect, that the demand for systems and instruments, et cetera, has been rather high because those are not subject to inventory or stocking that we might see maybe a little bit more a, let's say, kind of uniform demand for both systems and consumables. I'm talking order intake here or orders, right, for sales revenue, then everything is a little bit more flattened out anyway. So maybe that is what I would expect. But in general, I wouldn't say that we see a particular unusual situation in the industry. You always have certain fluctuations of capacity utilizations and then very often capacity utilizations are high. A lot of investments are started. And then, of course, logically, this reduces the average capacity utilization significantly. And then you will see less new capacities being triggered. So I would see us quite in a normal cycle here and we don't have like any additional caveats to our expectations here. Thank you very much. And Joachim, thanks for your patience with a follow-on. It's just a quick question about client inventory at COVID manufacturers. And I'm just curious, if I ordered a great deal of Sartorius inventory for mRNA manufacturer and subsequently, I realized I didn't need it, but I was a bio-manufacturer, who did make many other things that use Sartorius products. Would you entertain it if I came to you and said, would you have it back, and I will swap it for stuff that I need for everything else or that inventory sits with the customer, and there is nothing that you will do about it? Yes. Thanks for that question. I think it's a question that quite logically comes to one's mind. And I know that there have been some comments made by other players in the industry, the quarters before that somehow, I think, left the impression that this was quite an usual whatever behavior and kind of negotiation also. But I wouldn't see that very much. And the reason is the following, a very significant portion of vaccine manufacturing have been made by CD or CMOs. And there are for those products that are standard products they can typically use them also indeed in other processes. I think that was a comment that was made before as I just said by other players, that we would also see. Where the products are custom made for that very process, there is no point that we could take them back. So both ways, it's rather not a scenario where we are taking back products. Yes. Once again, thanks, everyone, for participating in this call and your continuous interest in Sartorius and Sartorius Stedim Biotech. We appreciate that a lot. I think I just close the call by saying that we are looking forward to be in touch when we will publish our Q1 figures in roughly 12 or 13 weeks from now. Take care all the very best for everyone. Bye-bye. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you very much for joining, and have a pleasant evening. Goodbye.
EarningCall_1034	Good morning, everyone, and thank you for participating in today's conference call to discuss MiX Telematics' Financial Results for the Fiscal Third Quarter 2023 ended December 31, 2022. Joining us today are MiX Telematics President and CEO, Stefan Joselowitz; and the company's CFO, Paul Dell. Following their remarks weâll open the call up for any questions you may have. I'd now like to turn the conference over to Chief Financial Officer, Paul Dell, as he reads the company's safe harbor statement regarding forward-looking statements. Thank you, and good morning, everyone. Before we continue, I'd like to remind all participants that during today's call, we will make forward-looking statements related to our business, which are subject to material risks and uncertainties that could cause our actual results to differ materially. For discussion of material risks and other important factors that could affect our results, please refer to those contained in our Form 10-K and other SEC filings, all of which are available on the Investor Relations section of our website. We will also be referring to certain non-GAAP financial measures. There is a reconciliation schedule detailing these results currently available in our press release, which is located on our website and filed with the SEC. Thank you, Paul, and good morning, everyone. Thank you all for joining us. For our third quarter of fiscal 2023, we delivered another strong quarter of financial and operational results. Our results were highlighted by record organic subscriber growth, a 520 basis point sequential improvement in our adjusted EBITDA margin and a strong return to positive free cash flow generation. We achieved another record quarter of organic subscriber growth with an increase of over 44,000 net new subscribers, primarily driven by growth in Africa. At the end of the quarter, we had more than 959,000 subscribers, which was up 21% year-over-year. Financially, we generated $37.8 million of total revenue and delivered 17% year-over-year growth in ARR on a constant currency basis, ending the quarter with $131.8 million of annual recurring revenue. We are making steady progress on integrating the Field Services Management business, which we refer to as FSM, which we acquired from Trimble in the second quarter and are now implementing our customer retention strategy. While it is still early in the transition process, we continue to believe that we can achieve our previously set goal of a 75% conversion rate within the next 3 to 5 quarters. We also closed the deal for 500 MiX Vision AI cameras with an FSM customer with additional potential future upside. This is an early sign of success of the cross-sell potential inherent in this acquisition. In terms of our adjusted EBITDA performance, we generated $8.4 million at a margin of 22.2%, a significant increase from last quarter. We saw sequential expansion in our normalized adjusted EBITDA margins in each month of the quarter and believe that we will exit fiscal 2023 with margins moving towards the mid-20s in the fourth quarter with further margin expansion expected in fiscal 2024. As we continue to grow and evolve as a company, strategic M&A remains an important component of our business strategy. We are committed to finding attractive means of adding value to our subscriber base and technology portfolio. Through that end, we have a dedicated team in place that is focused on identifying and evaluating potential acquisition opportunities. Our team is continuously monitoring the market for companies and assets that align with our strategic goals and that can help us to scale our presence in the U.S. and abroad. Shifting our focus to product development. We recently unveiled a significant upgrade to our MiX Vision AI solution in early December. This update to our existing integrated video and feed telematics package includes support for smaller dash cams that are quicker and easier to install as well as new software features to enhance the user experience and provide even more flexibility to customers. Our portfolio of AI-powered products now includes the option of an advanced multi-camera mobile digital video recorder that integrates seamlessly with MiX Telematics' premium fleet solutions. We believe this will enhance the value proposition of our broader portfolio by addressing the growing trend of business, leveraging video technology to improve driver safety and reduce risk. With regards to our MiX OEM Connect strategy, last quarter, we completed our integration with the telematics services of Ford Europe as well as another major vehicle corporation that represents multiple automotive brands. The commercialization of our OEM Connect solutions is ongoing in North America and Europe. While this currently represents a small portion of our overall business, we continue to view our OEM strategy as a gateway to high-margin recurring revenue in the future. The nature of our industry demands ongoing innovation. So it is essential that we maintain a forward-thinking approach by constantly enhancing our offerings. This enables us to preserve and strengthen our competitive edge across our varied solutions. Investing in these endeavours is vital for our ability to organically grow our market share and retain our dedicated customers in the long term. Now turning to our regional performance and key customer wins during the quarter. Our global sales team has been working diligently to identify new opportunities and strengthen existing relationships. This has led to a steady flow of new subscribers as well as upsell opportunities with current customers. In North America, subsequent to quarter end, we signed a contract with a large fast food corporation with thousands of locations across the United States, which will further enhance the expansion of our footprint and continue to diversify our presence outside of oil and gas. This contract signing is just the start of our relationship with this customer, and we will have work to do to build it out, but we are hopeful that this customer can become an important vertical reference for us. We implemented over 2,900 new additions in Latin America, including supplying our premium fleet solution to a mining company in Brazil with a potential upsell of 9,000 connections. This customer has a fleet of over 20,000 vehicles and seeks to improve safety and maintenance costs by implementing our telematics solutions. We also provided over 1,200 new premium fleet connections to a Brazilian bus and coach company, adding to our existing 2,000 subscribers with this customer. In Europe, we are expanding our connections with Linde Gas with orders for over 750 new connections across six countries as a result of the compelling safety value proposition of MiX Vision AI. The solution is gaining further traction rapidly in Europe, including with our customers, Swans Travel in the U.K., who specializes in transporting fans to and from premier league soccer games. In the Middle East, we received a first phase order from a major FMCG player and extended our base with a large existing customer in seven additional countries. And lastly, we added over 100 new subscribers in Australia for MiX Vision AI to combat fatigue for an agricultural customer and renewed two key customer contracts for multiyear agreements. Overall, I'm pleased with the progress our sales and marketing teams continue to make and believe that we are on the right path towards sustained improvement coming out of the pandemic. Looking at the expectation we set for organic annual recurring revenue percentage growth for fiscal 2023, we are likely to end the year closer to the low end of our previous guidance range, which would put us in the high single digits. Looking towards fiscal year 2024. While our pipeline remains robust, we, like everyone, expect to face uncertainties in the broader macroeconomic environment across the globe, which somewhat complicates our line of sight into our growth objectives. However, our broad product portfolio and truly diverse global customer base positions us well to take advantage of the positive trends in the telematics industry and to drive growth. Given the uncertainties within the macro environment, our goal for fiscal 2024 is to prioritize initiatives within our control and ultimately reaching Rule of 40 performance. We remain highly confident in our ability to continue restoring our operating margins, improving our bottom line and driving free cash flow. I would like to announce that we plan to hold an Investor and Analyst Day in April to discuss our ongoing strategic initiatives in more depth. Further details regarding the upcoming event will be provided in the coming months. Starting with the top line. Total revenue increased to $37.8 million compared to $36.2 million in the same year-ago period. Subscription revenue for the third quarter of fiscal 2023 increased to $32.5 million or 86% of total revenue compared to $30.3 million or 84% of total revenue in the same year-ago period. The FSM business, which we acquired in the second quarter of this fiscal year, contributed $2.3 million to the third quarter subscription revenue. Subscription revenue increased by 17% on a constant currency basis year-over-year, of which 8.5% is attributable to the FSM acquisition. The bulk of our revenue is derived in currencies other than the U.S. dollar. And as a consequence, the strengthening of the U.S. dollar over the last year has provided a headwind to our top line results. The impact of foreign currency translations led to a 9.6% decrease in our reported subscription revenues. We ended the quarter with over 959,000 subscribers as a result of the record 44,600 net organic subscribers added. Our subscriber base has increased 21% year-over-year. The strong organic subscriber growth was driven by positive contributions from all service lines, with record growth in our asset tracking and large fleet solutions in our Africa business. Annual recurring revenue or ARR was $131.8 million. On a constant currency basis, organic ARR increased 2% in the third quarter sequentially and has grown 7% since the start of our fiscal year. Year-over-year, constant currency ARR is up 17%, of which 8.5% is attributable to FSM. In addition to our record organic subscriber growth in Q3, our hardware sales, which are a leading indicator of further subscriber growth came in above our internal projections and showed strength across all geographies. Our gross margin for Q3 of fiscal 2023 increased to 64.4% compared to 62% in the same year-ago period and 62.7% in the second quarter of fiscal 2023. Importantly, our subscription revenue margin improved by 170 basis points sequentially to 69.6% in the quarter as we extracted efficiencies in a number of areas across our business. We expect gross subscription margins to stabilize at around 70% due to easing supply chain pressures and our continued focus on cost management. While we may see some volatility depending on the level of hardware revenues, in a normal operating cycle, we expect that we'll maintain an overall gross margin in the range of 64% to 66%. Adjusted EBITDA in the third quarter increased to $8.4 million compared to $7.1 million in the year-ago period and the $6 million reported in the second quarter of the current fiscal year. As a percentage of total revenue, adjusted EBITDA increased to 22.2% compared to 19.6% in the third quarter of fiscal 2022 and 17% in the second quarter of fiscal 2023. The 520 basis point sequential increase in our adjusted EBITDA margin was driven by continued growth in our subscription revenues, including the aforementioned subscription margin expansion together with ongoing operating cost leverage. We are also pleased to report that as expected, the FSM acquisition has been accretive to our EBITDA performance. Turning to the balance sheet. We ended the quarter with $25 million of cash and cash equivalents compared to $33.7 million at the end of March 2022. During the third quarter, we gained $11.2 million in net cash from operating activities and invested $5.3 million in capital expenditures, resulting in a positive free cash flow of $5.9 million. With expanding adjusted EBITDA margins and the easing of the global supply chain pressures, we are well positioned to generate significant free cash flow, both in the fourth quarter of fiscal 2023 and for the full fiscal 2024 year. Regarding our expectations for the current fiscal year and considering the acquisition of the FSM business last quarter, we continue to anticipate that we'll report double-digit constant currency subscription revenue growth for the fiscal 2023 year. We expect our organic subscription revenue growth to stay in the mid-to-high single digits. As Joss mentioned, in terms of annual recurring revenue, we anticipate achieving high single-digit organic constant currency growth in fiscal 2023. We're also focused on reaching an annual adjusted EBITDA margin of 20%, while exiting the year with a fourth quarter margin approaching the mid-20s. On our next earnings call, we will provide more detailed fiscal 2024 guidance based on the actual Q4 performance and our finalized operating plan. Heading into the fourth quarter, we are pleased with the trajectory of the company, particularly the margin expansion and free cash performance. Joss or Paul, when you alluded to kind of the rule of 40 outlook, I just want to clarify, was that specifically an FY '24 kind of comment or just affirmation that you continue to march towards that target longer term? Certainly, at this stage, we'll obviously give more -- we'll flesh out the -- our view around fiscal '24. But at this stage, that's the way we're thinking about the year, yes. As we see sales cycles strong -- elongate a little bit, we are definitely operating in a murkier environment than we have been and we are focusing on the things, I guess, that we can control. And certainly, in terms of the objectives we're setting ourselves out for fiscal '24, something approximating a rule of 40 is what we're currently targeting. And then, Paul, I just wanted to dig into the gross margin line, in particular. It just looks really impressive given the mix of hardware actually increased versus the first half of the year. So could you just talk about some of the efficiencies you gained there? It sounds like it will be recurring? Is that just some of the carrier renegotiations you've talked about? Curious what else is in that line. So we saw a 170 basis point expansion in the current quarter. I think in terms of Q4, I don't think that -- we'll see a little bit of expansion, but definitely not at that level, and we expect it to end the quarter, probably around 70%. And I think -- just in terms of what we did, we have looked at every line item and our costs. As we mentioned on the last call, we executed on what we said. We have renegotiated certain of the carrier costs and we have continued to make improvements in our operating processes, including additional automation and a big business in Africa where we're doing major volumes. I think that if you make small changes, you get a lot of leverage given the volumes, and that drops to the bottom line. So yes, we are pleased with the margin improvement. But I would caution that it won't be as big next quarter. It would -- it's going to end around the 70% level. And maybe I'll just squeeze one more in. You've historically talked about the backlog you have of kind of booked deals that you haven't implemented. Has there been any kind of change in terms of the size of that backlog? Or it's still kind of pretty similar to prior quarters? We are certainly seeing it start to trend towards normalization. So we've been steadily eating into that. It's still at elevated levels, but I think as we've seen global supply chain issues start to ease, that certainly been having an impact on our ability to roll out booked transactions. On the result that you saw in Africa, just wondering what drove the standout performance in that geo relative to some of your other geographies? Certainly overweight on our asset tracking portfolio, so lower ARPU customers. I've mentioned before that we do have a kind of a contracyclical impact in some of our geographies; Southern Africa being one of them where a stressed economy drives security needs, and we're certainly seeing some uplift from that kind of trend. Having said that, we continue to see great pipeline growth in that geography on premium fleet opportunities as well. So our team there overall is doing a fantastic job considering the environment that they're operating in. And then your comment, Joss, on seeing some sales cycles elongate. Is that something new? And have you seen -- or have there been any changes in terms of customer conversations and how those have gone? There's no doubt that we're seeing really across the spectrum of customer verticals, increased caution around the concerns, I guess, pertaining to potential recession, et cetera, et cetera. So it is kind of a newish development certainly as far as this cycle is concerned, where we are seeing -- we're starting to see a more cautious approach in terms of buying decisions from large enterprise customers. Yes. I think it's certainly a combination of a big focus on cost control, specifically what we would deem nonstrategic costs. So we certainly have been tightening our belt and we'll continue to do so. Combined, of course, with increased revenue, which I guess, that's where the magic happens. If you can grow your top line faster than the costs are being added on in the business, you unlock efficiency and drive margin expansion. And we're certainly seeing that impact in our business as we've reported over the last couple of quarters, and we're certainly expecting that expansion to continue. Last one for me. You called out the M&A team, Joss. What are you seeing there in terms of pipeline and willingness of assets to potentially sell themselves? So certainly, we are -- I'd call it improvement. I guess we're -- in terms of the conversations we're having, I think the valuation expectations have moderated somewhat in terms of setting the size of the assets that we're looking at. So I think these kind of times do play favorably into the hands of organizations such as ourselves that have strong unleveraged balance sheets that are cash flow positive as thankfully, we are starting to enter a phase of good cash generation again. And I think it does put us in a relatively strong position to potentially take advantage of opportunities that might come along. So certainly, the team is building a nice pipeline. We're having some interesting conversations, nothing that's clear and present as we speak, but certainly interesting stuff. Thank you, Melissa. Great job. We'd like to thank everyone for listening to today's call and we look forward to speaking with you again when we report our fourth quarter and, of course, full year fiscal 2023 results shortly. Also, please stay tuned for details regarding our upcoming Investor and Analyst Day as we hope to see many of you there. Last, I would like to acknowledge the contributions of our worldwide team. Their tireless efforts and commitment to MiX were instrumental in our successful quarter. Thank you, guys, for your role in advancing our goal of being a top provider of fleet and mobile asset management solutions. Thank you, everyone, and have a wonderful day.
EarningCall_1035	Greetings, and welcome to the Weyerhaeuser Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakersâ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Andy Taylor, Vice President of Investor Relations. Thank you. Mr. Taylor, you may begin. Thank you, Melissa. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuserâs fourth quarter 2022 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer; and Davie Wold, Chief Financial Officer. Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported full year GAAP earnings of $1.9 billion or $2.53 per diluted share on net sales of $10.2 billion. Excluding special items, our full-year 2022 earnings totaled $2.2 billion or $3.02 per diluted share. Adjusted EBITDA totaled $3.7 billion for the year. For the fourth quarter, we reported GAAP earnings of $11 million or $0.02 per diluted share on net sales of $1.8 billion. Excluding an after-tax charge of $160 million for the special items, we earned $171 million or $0.24 per diluted share for the quarter. Adjusted EBITDA was $369 million. This is a 37% decrease from the third quarter and was largely driven by further softening in Wood Products markets as cautious sentiment continued to weigh on the near-term housing and macroeconomic outlook. Iâll begin this morning by expressing my appreciation to our employees for their strong execution and performance in 2022. Notwithstanding a number of supply chain disruptions and dynamic market conditions over the course of the year, our teams operated safely, continued to serve our customers and drove meaningful improvements across our businesses. Through their efforts, we delivered our second highest annual adjusted EBITDA on record and are well positioned to navigate a more challenged market environment entering 2023. Additionally, as highlighted on page 20 of our earning slides, we generated more than $2.3 billion of adjusted funds available for distribution in 2022, again demonstrating the strong cash generation capability in combining our unmatched portfolio of assets with industry-leading operating performance. We announced yesterday that our Board of Directors declared a supplemental cash dividend of $0.90 per share, payable on February 27th to holders of record on February 15th. When combined with our quarterly base dividends of $0.72 per share, weâre returning total dividends to shareholders of $1.62 per share. Including $550 million of shares repurchase during the year, Weyerhaeuser is returning $1.75 billion of total cash to shareholders based on 2022 results, or 75% of 2022 adjusted FAD, which is in line with our annual targeted payout range of 75% to 80%. As summarized on page 21, weâve now completed the second full year of our new cash return framework. Upon payment of the supplemental dividend, we will have returned more than $3.8 billion in total cash to shareholders based on 2021 and 2022 results, through a combination of cash dividends and share repurchase. We continue to believe this framework will enhance our ability to drive long-term shareholder value by returning meaningful and appropriate amounts of cash back to shareholders across a range of market conditions and deliver an attractive total dividend yield to our shareholders. Moving forward into 2023, our cash return commitment will continue to be supported by our sustainable quarterly base dividend, which we intend to grow by 5% annually through 2025. As outlined in our cash return framework on page 19, we plan to supplement our base dividend with an additional return of cash, as appropriate, to achieve our targeted annual payout of 75% to 80% of adjusted FAD. And as demonstrated in 2021 and 2022, we have the flexibility in our framework to return this additional cash in the form of a supplemental cash dividend, or opportunistic share repurchase. With that, Iâll now turn to our fourth quarter business results. Iâll begin with Timberlands on pages 7 through 10 of our earnings slides. Timberlands contributed $86 million to fourth quarter earnings. Adjusted EBITDA was $150 million, an $18 million decrease compared to the third quarter. This was largely driven by lower sales realizations in the West. For the full year, Timberlands adjusted EBITDA increased by 13% compared to 2021. These were strong results, and I am extremely proud of the focus and resiliency demonstrated by our teams in 2022. Turning to our western Timberlands operations. Domestic log market softened at the outset of the fourth quarter, driven primarily by lower lumber pricing and ample log supply in the system. This drove domestic log pricing to lower levels early in the quarter. As the quarter progressed, log supply into the market became more constrained, resulting from a seasonal reduction in log availability. This dynamic resulted in a temporary period of log price stability into December. For the quarter, our average domestic realizations were moderately lower than the third quarter. Our fee harvest and domestic sales volumes were higher, as the business quickly returned to full run rate operations following the resolution of our work stoppage. We plan to capture the majority of the deferred harvest volume from the work stoppage in 2023. Forestry and road costs were seasonally lower compared to the third quarter and per unit log and haul costs were comparable. Turning to our export markets. In Japan, demand for our logs was strong in the fourth quarter as our key customers sought to replenish lean inventories resulting from our work stoppage. That said, our export sales volumes to Japan were slightly lower as work stoppage related impacts to our export program were disproportionately higher in the fourth quarter, compared to the third quarter. Our average sales realizations were significantly lower as broader log market softened in Japan, due primarily to an oversupply of European lumber imports, as well as lower consumption driven by reduced housing activity. Log demand from our China customers was solid in the fourth quarter, and our export sales volumes increased significantly compared to the lower levels in the third quarter, when we intentionally kept more volume in the domestic market to capture higher margin opportunities. Our average sales realizations were significantly lower in the fourth quarter, as broader Chinese log markets softened due to lower consumption resulting from COVID disruptions and challenges in the Chinese real estate market. Moving to the south. Southern Timberlands adjusted EBITDA increased slightly compared to the third quarter. Similar to the last several quarters, notwithstanding adequate log supply and softening finished product pricing, southern sawlog and fiber markets remained fairly stable during the fourth quarter. Log demand was steady as mills continued to carry higher inventory levels to mitigate potential risks from supply chain and weather challenges. As a result, our sales realizations were comparable to the third quarter. Fee harvest volumes were slightly higher as weather conditions remained generally favorable for most of the quarter. Forestry and road costs decreased slightly, and per unit log and haul costs were comparable to the third quarter. On the export side, our southern program to China remains paused due to ongoing phytosanitary rules imposed by Chinese regulators. While itâs unclear when this issue will be resolved, we continue to have a positive longer term outlook for our southern export business to China. And in the interim, we will continue to grow our export business into India and other Asian markets. In the north, adjusted EBITDA increased slightly compared to the third quarter, due to significantly higher sales volumes as weather conditions were favorable. Our sales realizations decreased moderately. Turning to Real Estate, Energy and Natural Resources on pages 11 and 12. For the full year, Real Estate and ENR generated $329 million of adjusted EBITDA, slightly higher than our revised full year guidance, and 11% higher than 2021. This was driven primarily by exceptionally strong demand for HBU properties in 2022 as well as robust energy and natural resources activity for much of the year. In the fourth quarter, the segment contributed $24 million to earnings. Excluding a $10 million noncash impairment charge, resulting from the planned divestiture of legacy coal assets, the segment earned $34 million in the quarter. Adjusted EBITDA was $46 million, a decrease of $14 million from the prior quarter, primarily due to a reduction in real estate acres sold. Although HBU demand has moderated somewhat in response to broader macroeconomic concerns, we continue to see steady interest from buyers seeking the safety of hard assets in an inflationary environment. Notably, we delivered our highest average price per acre for all of 2022 on our land sales in the fourth quarter. These are high value transactions with significant premiums to timber value. Iâll now make a few comments on our Natural Climate Solutions business. As shown on page 13, full year adjusted EBITDA from this business was $43 million, a 13% increase compared to 2021. Growth during the year was primarily driven by conservation activity, with ongoing contributions from our mitigation banking and renewable energy businesses. In addition, we achieved notable milestones in our emerging carbon businesses in 2022, including the announcement of our first two carbon capture and storage agreements, one of which was announced in the fourth quarter in partnership with Denbury. Similar to our agreement with Oxy Low Carbon Ventures announced earlier in 2022, the Denbury project will take several years to begin production, and we expect both projects will come on line in 2025 or 2026. Moving forward, we continue to advance discussions with high-quality developers of carbon capture and storage on portions of our Southern U.S. acreage and expect to announce additional agreements in the future. Turning briefly to forest carbon offsets, weâre nearing completion of our pilot project in Maine and expect third-party approval soon. This project serves as a proof of concept for Weyerhaeuser and positions us well to advance additional forest carbon projects in 2023. With these exciting developments, we continue to see multiyear growth potential from our Natural Climate Solutions business and maintain our target of reaching $100 million per year of EBITDA by the end of 2025. Moving to Wood Products on pages 14 through 16. Wood Products contributed $147 million to fourth quarter earnings and $197 million to adjusted EBITDA. Fourth quarter adjusted EBITDA was a 50% reduction from the third quarter, largely driven by continued softening in Wood Products markets and lower product pricing. For the full year, our Wood Products business generated over $2.7 billion of adjusted EBITDA, and our engineering Wood Products business established a new annual EBITDA record. Additionally, our distribution business generated the highest annual EBITDA in over 15 years. These are outstanding results, and Iâm proud of our teamâs ability to deliver this level of performance, notwithstanding numerous challenges in 2022. Turning to some commentary on the Lumber and OSB markets. Benchmark prices for Lumber and OSB entered the fourth quarter showing signs of stabilization after falling for much of the third quarter. As the quarter progressed, both markets exhibited cautious buyer sentiment, resulting from a softening housing market in addition to broader concerns about the economy and inflation. Buyers maintained lean inventories and limited orders to necessity purchases through year-end. This drove benchmark prices lower for both, Lumber and OSB in the fourth quarter. As a result, the framing lumber composite pricing decreased by 24% compared to the third quarter and the OSB composite pricing decreased by 20%. That said, benchmark pricing for both projects -- products stabilized in January as buyers reentered the market to replenish lean inventories. Adjusted EBITDA for our lumber business decreased by $80 million compared to the third quarter. Our average sales realizations decreased by 11% in the fourth quarter with relative outperformance compared to the benchmark, resulting primarily from our regional and product mix. Our sales and production volumes decreased significantly compared to the third quarter. These decreases resulted from a combination of the work stoppage-related impacts in the Northwest, adverse weather conditions in December and challenged reliability at several mills during the quarter. As a result, unit manufacturing costs increased significantly during the quarter. Log costs were modestly lower, primarily for western logs. Specific to our Northwest mills, which resumed operations in November following the work stoppage, much of the lumber we sold in the fourth quarter was manufactured using logs purchased in the third quarter when log prices were higher. As a result, margins compressed and are expected to remain lower until we work through the higher-cost log inventories and log prices in the Northwest adjust to reflect current lumber pricing levels. Adjusted EBITDA for our OSB business decreased by $47 million compared to the third quarter, primarily due to the decrease in commodity pricing. Our average sales realizations decreased by 16% in the fourth quarter. Production volumes were comparable. However, sales volumes decreased slightly, resulting from weather-related disruption challenge -- weather-related transportation challenges in Canada late in the quarter. Unit manufacturing costs decreased moderately and fiber costs were slightly lower in the quarter. Engineered Wood Products adjusted EBITDA decreased by $56 million compared to the third quarter. This result is directly tied to recent softening in demand for EWP products which are primarily used in single-family home building applications. Although we often see demand for Engineered Wood Products slow somewhat during the winter months, the broader slowdown in the housing market in Q4 caused more of a pullback than ordinarily would be the case. As a result of this dynamic, our sales volumes decreased for all products compared to the third quarter. Production volumes were also lower as we elected to take temporary holiday downtime at several EWP facilities during the quarter. Our sales realizations decreased for all products, except for I-joist, which were comparable to the third quarter. Unit manufacturing costs were comparable in the fourth quarter, and raw material costs were moderately lower, primarily for OSB web stock. In Distribution, adjusted EBITDA decreased by $18 million compared to the third quarter, largely driven by lower sales volumes, primarily for EWP products. With that, Iâll turn the call over to Davie to discuss some financial items and our first quarter and 2023 outlook. Thank you, Devin, and good morning, everyone. I will be covering key financial items and fourth quarter financial performance before moving into our first quarter and full year 2023 outlook. Iâll begin with key financial items, which are summarized on page 18. We generated $167 million of cash from operations in the fourth quarter, bringing our total for the year to more than $2.8 billion, our second highest full year operating cash flow on record. As Devin mentioned, we are returning $1.75 billion to shareholders based on 2022 results, which includes $550 million of share repurchases. Fourth quarter share repurchase activity totaled $146 million and we have approximately $375 million of remaining capacity under the $1 billion share repurchase program we announced in the third quarter of 2021. We will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value. Turning to the balance sheet. We ended the year with approximately $1.6 billion of cash and cash equivalents, of which $662 million is earmarked for the supplemental dividend we announced yesterday that will be paid in February. Our balance sheet remains strong with ample liquidity, and we ended the year with approximately $5 billion of gross debt. Fourth quarter results for our unallocated items are summarized on page 17. Unallocated adjusted EBITDA increased by $16 million compared to the third quarter. This increase was primarily attributable to changes in intersegment profit elimination and LIFO as well as benefits resulting from lower-than-expected health care expenses and increased discount rates on workersâ compensation obligations. In the fourth quarter, we completed the purchase of a group annuity contract, which was approximately $420 million of our Canadian pension liabilities to an insurance carrier. The contract purchase was funded from our Canadian pension plan assets with no company cash contribution required. As a result of the transaction, fourth quarter special items included a $205 million noncash pretax settlement charge. This transaction is the latest in the series we have executed to reduce our pension plan obligations. Since we began these efforts in 2018, our pension obligations have decreased from $6.8 billion to $2.3 billion as of year-end 2022. Key outlook items for the first quarter and full year 2023 are presented on pages 23 and 24. In our Timberlands business, we expect first quarter earnings and adjusted EBITDA will be slightly higher than the fourth quarter. Beginning with our Western Timberland operations, domestic log markets entered the first quarter showing continued signs of softening as a result of lower pricing and takeaway of finished products, along with elevated log inventories at mills. Regional log supply has improved compared to the fourth quarter and is expected to remain ample for the majority of the first quarter, notwithstanding winter weather disruptions. As a result, we expect our domestic log sales realizations to be significantly lower compared to the fourth quarter. Our fee harvest and domestic sales volumes are expected to be significantly higher in the first quarter as we have returned to full run rate operations following the work stoppage, which affected one month of operations in the fourth quarter. Per unit log and haul costs are expected to be moderately lower as we make the seasonal transition to lower elevation and lower-cost harvest operations. Forestry and road costs are expected to be significantly lower due to the seasonal nature of these activities. Moving to the export markets. Demand for our logs remained steady as customers in Japan and China work to build finished product inventories in preparation for seasonally stronger construction activity in the second quarter. We expect to significantly increase our export sales volumes to both markets compared to the fourth quarter, which was affected by one month of reduced export activity resulting from our work stoppage, but we also expect to shift additional volume to China to take advantage of higher-margin opportunities. That said, our export sales realizations are expected to be slightly lower in the first quarter as broader log markets continue to soften, resulting from the headwinds Devin previously mentioned. In the South, we expect log demand to remain fairly steady in the first quarter, although grade and fiber markets are showing signs of slight softening as we enter 2023, particularly fiber markets in the East. As a result, we expect our sales realizations to be slightly lower compared to the fourth quarter. Fee harvest volumes are expected to be slightly lower due to seasonally wet weather in the first quarter. Per unit log and haul costs and forestry and road costs are expected to be comparable to the fourth quarter. Turning to our full year harvest plan. For 2023, we expect total company fee harvest volumes to increase to approximately 35 million tons. In the West, we anticipate our harvest volumes will be moderately higher than 2022 as we plan to capture the majority of the deferred harvest volumes resulting from our work stoppage. We expect our Southern harvest volumes to increase moderately compared to 2022 as we resume a more normalized level of activity following reduced harvest levels resulting from adverse weather conditions, primarily in the third quarter of 2022. We expect our Northern harvest volumes will be slightly higher year-over-year. Turning to our Real Estate, Energy and Natural Resources segment. As Devin mentioned, HBU demand has moderated somewhat in response to broader macroeconomic concerns. That said, we are still seeing steady demand for our real estate properties, and we continue to expect a consistent flow of transactions with significant premiums to timber value. We expect full year 2023 adjusted EBITDA of approximately $300 million for this segment. Consistent with previous years, we anticipate our real estate activity will be heavily weighted towards the first half of the year. Basis as a percentage of real estate sales is expected to be approximately 35% to 45% for the year. First quarter earnings before special items are expected to be approximately $10 million higher than the fourth quarter, while adjusted EBITDA is expected to be approximately $35 million higher, primarily due to the timing and mix of real estate sales. Turning to our Wood Products segment. As Devin mentioned, buyer sentiment remains cautious. That said, benchmark prices for Lumber and OSB have stabilized in January as buyers reentered the market to replenish lean inventories. Excluding the effect of changes in average sales realizations for Lumber and OSB, we expect first quarter earnings and adjusted EBITDA will be moderately higher compared to the fourth quarter. For lumber, we expect higher production and sales volumes in the first quarter and significantly lower unit manufacturing costs as we resumed operations in our Northwest mills following the work stoppage in the fourth quarter. We also anticipate improved reliability across the system. Log costs are expected to be moderately lower, primarily for Western logs. For OSB, we expect sales and production volumes to be moderately higher in the first quarter due to less planned downtime for annual maintenance and improved transportation networks following extreme winter weather in December. We expect fiber costs and unit manufacturing costs to be lower compared to the fourth quarter. As shown on page 25, our current and quarter-to-date average sales realizations for Lumber and OSB are both moderately lower than the fourth quarter averages. For Engineered Wood Products, we expect significantly lower sales realizations in the first quarter, resulting from softening demand for EWP products. Sales volumes are expected to be slightly lower for solid section products while I-joist sales volumes are expected to be moderately higher. We anticipate significantly lower raw material costs, primarily for OSB web stock. For our distribution business, we are expecting lower adjusted EBITDA in the first quarter due to lower margins for all products. Iâll wrap up with some additional full year outlook items highlighted on page 24. Our full year 2022 interest expense was $270 million. This represents a $43 million reduction from the prior year, largely due to the strategic refinancing transaction we completed in the first quarter of 2022. For full year 2023, we expect interest expense will be unchanged at approximately $270 million. Turning to taxes. Our full year 2022 effective tax rate was approximately 20%, excluding special items. For first quarter and full year 2023, we expect our effective tax rate will be between 12% and 14% before special items based on the forecasted mix of earnings between our REIT and taxable REIT subsidiary. For cash taxes, we paid $566 million for full year 2022, which was slightly higher than our tax expense, excluding special items, due to the timing of Canadian tax payments. We expect our 2023 cash taxes will be comparable to our overall tax expense. For pension and post-employment plans, the year-end 2022 funded status improved by approximately $100 million, primarily due to higher discount rates compared to year-end 2021. Excluding our fourth quarter settlement charge, our noncash, non-operating pension and post-employment expense was approximately $50 million in 2022. We expect to record a similar total at approximately $50 million of expense in 2023. Cash paid for pension and post-employment plans in 2022 was $24 million. In 2023, we do not anticipate any cash contributions to our U.S. qualified pension plan, and our required cash payments for all other plans will be approximately $25 million. Turning now to capital expenditures. Our full year 2022 capital spend totaled $462 million plus $6 million of capitalized interest. We expect total capital spend for 2023 will be approximately $440 million, which includes $110 million for Timberlands, inclusive of reforestation costs, $315 million for Wood Products and $15 million for planned corporate IT system investments. Thanks, Davie. As we begin to wrap up this morning, Iâll make a few brief comments on the housing and repair and remodel markets. Residential construction activity has clearly softened from the peak levels of 2022, particularly in the single-family segment. As we enter 2023, buyer sentiment remains cautious for new and existing homes and is being driven by numerous ongoing headwinds. Most notable is the affordability challenge brought about by increased mortgage rates, combined with significant increases in home prices over the last two years. In addition, we believe buyer psychology is being influenced by uncertainty related to the trajectory of mortgage rates, general concerns about the economy and falling home prices in many markets. As a result, we anticipate a more challenged housing market compared to the last couple of years, particularly in the first half of 2023. That being said, there are some signs recently that the environment may be improving. Mortgage rates have ticked down from recent highs. Homebuilder sentiment improved in January and mortgage application activity has picked up over the last several weeks. Additionally, the labor market remains fairly strong overall and household balance sheets are generally in good shape. There are still plenty of people who want a home and can still get a mortgage, but many buyers are likely to remain on the sidelines until we see some improvements, but at the very least some stabilization in certain macroeconomic and housing-related trends. I will note, however, that despite what may be a period of choppiness in the near term, our longer-term view on the housing fundamentals continue to be very favorable, supported by strong demographic trends and a vastly underbuilt housing stock. Turning to repair and remodel. Activity in the repair and remodel market remained fairly stable in the fourth quarter and continue to be supported by steady demand from the professional segment. Demand from the do-it-yourself segment continued to soften from the elevated levels of the last couple of years and has returned to a more normalized pre-pandemic level. In the near term, we expect stable demand from the repair and remodel segment, albeit perhaps at a slightly lower level than what weâve seen over the last couple of years. Looking out beyond 2023, most of the key drivers supporting healthy repair and remodel demand remain intact and support our more bullish long-term outlook, including favorable home equity levels and an aging housing stock. Now, before we move into questions, Iâd like to provide an update on the progress we made in 2022 against the multiyear targets we set out during our Investor Day in September of 2021. As highlighted on slide 22, weâre progressing well on all fronts. Last year, we deployed approximately $300 million on Timberland acquisitions, including our Carolinas transaction. We grew our Natural Climate Solutions EBITDA by 13% compared to 2021 and announced our first two carbon capture and storage deals, and we remain on track to grow this business to $100 million of EBITDA by year-end 2025. Last year, our teams captured approximately $40 million of margin improvements across our businesses and also made meaningful progress against our other OpEx priorities. Iâm extremely pleased with this result, considering the inflationary pressures we experienced in 2022. We made progress against our 2030 greenhouse gas emissions reduction target. And finally, we demonstrated our ongoing commitment to disciplined capital allocation by increasing our quarterly dividend by 5.9% and returning $1.75 billion to shareholders, based on 2022 results. So, in closing, our performance in 2022 reflected solid execution across all of our businesses. Entering 2023, our balance sheet is exceptionally strong, we have a competitive cost structure, and we are well positioned to navigate through a range of market conditions. Weâll remain focused on servicing our customers and driving long-term value for shareholders through our unrivaled portfolio, industry-leading performance, strong ESG foundation and disciplined capital allocation. Thank you. Good morning, everyone. My first question is, can you perhaps give us some more details on the Wood Products business based on the comments of a pickup as we came into the first couple of weeks of this year? Can you talk a bit about the supply and demand conditions on the ground as we go into the spring and the builders are obviously ramping up a bit, trying to get things closed and trying to have inventory on the ground for the selling season, and then, the opportunities for Weyerhaeuser within that, given your cost structure relative to some of your peers? Yes. Good questions, Sue. I mean, look, we have seen a little bit of a pickup here really over the last few weeks on the Wood Products side. I think thatâs a reflection of a few things. Number one, going into the end of the year, most buyers really had very low inventories. And I think that was just a reflection of a lot of concern over what was going to be happening in the housing market. So, inventory levels were really low going into the end of the year. Weâve seen a few, I think, green shoots on the housing side, whether itâs the new home sales numbers, albeit down quite a bit from last year, up month-over-month. Youâve seen homebuilder sentiment pick up a little bit. So, I think thereâs maybe a little bit more optimism than there was perhaps a month ago. And so, thatâs driving a little bit of sentiment. I think the other piece of it, which is probably even more impactful, is just on the supply side. Weâve seen a fair bit of curtailment activity over the last few months up to another action this week from one of our competitors. And so, I think thatâs driving things to be a little bit more in balance. I do think weâre probably still several weeks, if not a month, from really seeing a meaningful pickup from spring building activity. I think weâll have a better sense as we get deeper into February as how thatâs shaping up. But overall, itâs certainly been a tougher period over the last several months. But, as we head into the spring building season, we start to see mortgage rates tick down. I think weâre optimistic that it will be a little bit better than it was expected, even just a few months ago. In terms of our cost structure, thatâs really been, I think, one of the true success stories at this company over the last several years. The work that weâve done around OpEx just year after year after year driving improvements has put us in, I think, a very good competitive position from a cost standpoint, which is always important, and weâre always focused on it, but particularly when you have these market dips, it becomes very important. So I think weâre really well positioned with the scale, the cost structure that we have in place to navigate through market conditions, regardless of what they end up being for the first half of the year. Congratulations on the good end to the year. My two questions are around timber. There was a lot of discussion as we go into the year on I think you mentioned high-margin opportunities in China, some opportunities in Japan as well, yet there also seem to be some headwinds in terms of the market activity and ultimately, what will be realizations. Could you give us a bit more color, Devin and Davie, in terms of what we should take away in terms of the realization outlook, and why in timber in the export markets on the west? And I ask, particularly given that, at least from the day that we see and certainly thereâs a lag on it, exports to China on softwood are down quite a bit? My second question is can you talk a bit about the prospects for Climate Solutions to tension the timber markets, where would you expect to see the most impact and when and from which of your Climate Solutions business is in terms of ultimately helping support timber pricing in the future? Thank you, guys. And good luck in the quarter. Sure. Thanks, George. Well, with respect to your first question and thatâs primarily, I think, a question about the Pacific Northwest. The dynamic is really being driven right now by lumber prices. So, as you say, I do think weâre going to see a pickup in export activity out of the Pacific Northwest, both to Japan and China, particularly coming out of the Lunar New Year period, weâre expecting our exports to China to really ramp back up. And so, thatâs going to be a nice healthy offtake and weâre going to see more volume going to the export market out of the Northwest. And so, ordinarily, you would see that tension things up and support pricing. But the reality is in the domestic market, log prices are going to have to be within a range where the manufacturers can still generate a profit. And frankly, until you see those log prices come down a little bit given where lumber prices have been, thatâs been a real challenge. And so, I think ultimately, whatâs going to be the governor on pricing in the Northwest is really what happens with lumber prices. Now, if you were to see lumber prices start coming back up as we enter the spring building season and some of the weather issues in California resolve, so you see more takeaway out of that important market, to the extent lumber prices come up, then I think youâll see log prices follow. It continues to be a very tension wood basket. Regardless of lumber prices, thereâs just a shortage of log supply in the Pacific Northwest, and that will ultimately be reflected in log prices, particularly as we see exports pick up. But again, youâre just not going to see that to the extent that lumber prices stay at a lower level. So, thatâs the answer on the log side. Just in terms of the Natural Climate Solutions business and tensioning log markets, I think, candidly, weâre still a ways away from that. The primary tool for doing that is going to be on the forest carbon side. I do think over time that is going to be a big opportunity, not just for us but for other landowners. But weâre still in the early innings, I think, of that market developing. You can read the commentary on it. I think as a whole, the market is still figuring out exactly how these carbon markets are going to work. So, thatâs still probably got a little bit of time before that has any real material impact. And frankly, I do think just remember, thereâs lots of forest land in the United States. So I think thatâs probably still a ways out before that becomes a real issue. Devin, in lumber, you talked about, I think, the very large number of curtailments that weâve seen in BC. And I was wondering, in aggregate, do you have a sense if there are still kind of meaningful curtailments to go, or has that maybe sort of run its course and was more sort of a seasonal -- the seasonal actions with lumber, maybe back above 400, could we see some of that capacity coming back? I was just wondering if you could kind of talk about how the dynamic in BC could play out this year, assuming weâre somewhere close to current lumber prices. Yes. Well, look, Iâll just say at the outset, itâs hard for me to comment specifically on the cost structure of my competitors. So, Iâll just offer some broad commentary because we obviously do have some operations in BC. And I think certainly, weâve seen a fair amount of capacity curtailment. I donât think that was unexpected, just given the higher cost structure that you see in British Columbia now. A variety of reasons for that, and weâve discussed that in the past. I think the curtailment activity is just going to be dependent on where lumber prices go. I think for where we were for much of the fourth quarter, particularly at the end of the year, it would be very challenging for the economics to make sense in British Columbia. Now, weâve seen prices come up just a little bit. As you know, the log price adjustment mechanism does happen quarterly, so that will adjust down a little bit. But, it remains a very high-cost region to manufacture lumber. And so, lumber prices are going to have to stay well north of probably the historical averages for the economics to work in that geography. And Iâd say too in the Pacific Northwest for that matter. The log cost to lumber ratio that weâve seen recently has been pretty challenging for the Pacific Northwest. And so, I suspect there are a number of producers that have been challenged in this environment as well. So, until you see lumber prices go up or log prices go down, the economics are challenging, and you could see continued curtailment activity. Okay. Thatâs very helpful. And then just following up on Georgeâs question on Natural Climate Solutions. If you look at the kind of the work streams and the different activities there, whether itâs wind or solar or forest carbon or CCS, is there a sense that sort of partner interest and adoption is maybe progressing faster than expected or maybe slower than expected if you look at those different categories compared to when you kind of first unveiled those targets at your Analyst Day? And are there any sort of obstacles or pain points as you pursue some of these projects? Just curious if thereâs any additional color there. Yes. I would say, on balance, the interest level has gone up since we first announced this target. And thatâs really true across the board, whether youâre talking about conservation, mitigation with all the infrastructure activity thatâs going to happen over the next several years, thereâs going to be a lot of need for mitigation banking, carbon capture and storage, particularly with the 45Q tax credit going up to $85, solar wind, forest carbon. Thereâs really a very significant amount of interest across all of those categories. The challenge is the time line to get these things to come to fruition. And thatâs true, particularly when you talk about the renewables, you think about solar. The demand for solar is off the chart. The challenge is every one of these projects has to go through a local permitting process and to get tied into the grid. And thereâs just way more activity than there is administrative support to make that happen. So, the time line for these things, carbon capture and storage, et cetera, itâs just going to take time for these things to come to fruition. But I would say our confidence in the opportunity set in Natural Climate Solutions is higher today than it was when we announced these targets in 2021. Itâs just the time line. Thatâs the big question. Thank you, and good morning. Within your sort of the Wood Products CapEx outlook that you talked about for 2023, can you talk about sort of two or three key projects that you have for this year? Yes. So, a couple of things I would highlight. Part of our program, and this has been the case with the exception of our Dierks project, our Millport project and the Holden project thatâs ongoing currently. The vast majority of our projects are not really big enormous capital projects, theyâre replication projects that are -- whether itâs a merchandiser, a new gangsaw, a new CDK, I mean, those are the kinds of projects that weâre really doing across the system. And so itâs all about going in mill by mill according to a multiyear road map, finding the roadblocks and bottlenecks and taking those out so that we can drive down costs, improve reliability, drive efficiencies and then obviously, thereâs some come along volume that is a part of that as well. So, itâs not any particular big project other than Holden, which we did start up the sawmill at the end of last year, weâll be starting up the planer mill later this year. So, that project is going well. But other than Holden, thereâs not any particular project that I would really highlight. Itâs just a number of projects, all of which are largely replications of things that weâve already done in other facilities. Got it. Thatâs helpful, Devin. And then, just very quickly, we are starting to see kind of more European lumber make its way into the U.S. Do you think that there is more room for that to grow in 2023? I think thatâs potentially the case around the margins. Weâve certainly seen more European lumber coming into the market. So, on a percentage basis, year-over-year, it might look like a lot. But relative to the overall North American consumption, itâs still a pretty small percentage. And so, even if we do see a little bit of a pickup in the near term, I donât think itâs going to fundamentally impact the overall supply-demand dynamic. The one thing I would say is, over time, I would expect that European lumber supply to go down somewhat for a couple of reasons. Number one, with the beetle kill and the fires, et cetera, that weâve seen across Central Europe, there are a number of years that youâre going to see elevated harvest levels to work through that salvage. But ultimately, that fiber supply is going to go away. And then the second piece being just with the bans on the Russian and Belarus lumber coming into Europe, if Europe is in a normal state, you would expect more of that European lumber to have to stay domestic. Now obviously, thatâs not the case because of the general economic conditions in Europe right now. So you still have, I think, a fair bit of that lumber coming into the U.S. But in any event, over the longer term, I would expect that to moderate, if not go down. Thank you. One question, and Iâm certainly not projecting that this would be the case. But if markets were very weak in a given year and it ended up that your FAD wasnât at a level where even at 75%, you would meet the base dividend, would you still meet that? Or again, just itâs not even in the contemplation universe right now, so you havenât really assessed that question. Yes. I mean, look, Mark, weâve -- when we established the dividend framework, we looked at a number of different scenarios in establishing the level where we were going to put that base dividend and we feel confident in our ability to meet that. And I think coming back to some of the things weâve been doing with that base dividend being tied primarily to the Timberlands and Real Estate, Energy and Natural Resources businesses, the Carolinas acquisition, for example, that helps us have confidence in our ability to increase that base over time and meet that and additionally, the work weâve been doing in the Natural Climate Solutions business to increase that target over time, along with our day-to-day commitment to OpEx and innovation. So I would say that gives us a lot of confidence in our ability to meet that over time. Sure. And then just philosophically, is it fair to say then that if there were for whatever reasons, there was this short-term issue that led to a shortfall that you would cover it with the high degree of confidence you have that over time, itâs a very, very manageable number, is that fair? Two other quick ones. One, Devin, you talked about price realizations, Pacific Northwest and kind of the drivers there for the Timber business. In the South, weâve seen obviously, packaging demand has also been quite weak recently. And you laid out kind of some of the challenges in housing. Is that just a much stickier in pricing framework? So, what do you expect to see in the U.S. South for realizations as the year proceeds? Yes, Mark. I mean, first of all, youâre absolutely right. With the South, itâs just a much less volatile pricing dynamic than you see in the West. So youâre not going to see those big quarter-over-quarter, year-over-year swings in pricing in the South. I think when we look out to 2023, particularly the first half, I do think weâre going to see some moderation in terms of the pricing dynamic, probably be down just a little bit. And thatâs a reflection of a couple of things. One, we do see end market pricing softening, and thatâs true both on the Wood Product side but also the pulp and paper side in general. But I think the bigger issue is one of the drivers in the South thatâs been keeping prices high the last couple of years has been a general -- I would call it, urgency on the behalf of mills to keep high inventory levels of logs. And that was really just to mitigate downside risk because of the supply chain challenges, trucking, logging capacity, et cetera. So, I think that was a little bit of a support mechanism for pricing over the last couple of years. I still donât think weâre in a place where you have an overcapacity of logging or hauling capacity in the South, but itâs eased around the margin. So, I expect pricing to soften just a little bit, broadly speaking, across the South in the first half. But the trajectory of pricing in the South, we still believe will be up over time with capacity additions and all the same drivers that have been really kind of pushing that up over the last couple of years. And lastly, just real quick. So, we have seen more of a bounce in lumber than OSB. Is that just because it overshot more and youâre getting some more of the supply response in BC, or -- any other thoughts as to why thatâs happened to date and any perspective you have kind of going forward? Yes. I mean, I think thatâs exactly right, Mark. I think itâs largely a function of the supply response. OSB is a little different. Unlike Lumber where you can take a few shifts here, a few ships there, OSB is pretty lumpy in terms of capacity coming on and off, and you just havenât really seen that. So, I think thatâs really the primary difference. Thank you, Devin, Davie and Andy for taking my questions. First one, just wanted to get a sense from you on -- your thoughts around China and potential for exports, particularly given how China has eliminated its COVID restriction. So, is there the potential -- are you seeing the potential for even greater demand to the country now that theyâve -- reducing those restrictions around COVID? Yes. Well, I mean, the short answer is yes. I think as they come out of the COVID restrictions, that will create more opportunity. But just for a little more context, China has been an interesting market of late. There have been a lot of puts and takes. Demand clearly has been down primarily as a result of the COVID lockdowns, but also just a broader shakeup in the real estate industry in China. So, Iâd say on balance, log demand, lumber demand in China has been down of late. But there have also been a lot of supply impacts as well. So with the Russian log ban, the Australian log ban, I think youâre seeing some of the European log flow from the salvage activity start to wane a little bit. So, there have been, I think, impacts on both sides of the ledger. For us specifically, weâve got long-term customers. The demand for us was actually higher than the volume that we sent there last year. And as weâve said, that was really just a function of capturing the better margin opportunities domestically. As those two have come a little bit more into balance, freight costs have come down, we are anticipating ramping up our China volume into Q1. And thatâs -- I think that would be the case regardless of whatâs going on in China, just because our customers need that wood. But I do think coming out of the Lunar New Year in China, youâre going to see log and lumber demand pick up. Theyâve been in a relative soft spot for a while. So, I think thereâs going to be plenty of opportunity for us to ramp up our export volumes to China. Got you. I appreciate the color. And then just on the repair and remodel markets, obviously, you reiterated this quarter that itâs held up pretty well thus far in the professional segment. If you look back historically, there is a correlation between single-family housing starts -- or housing starts in general and repair and remodel -- typically repair and remodel follows housing starts by a couple of quarters. Wondering if you have any insights into the cadence of repair and remodel during 4Q? And whether that -- with activity is really steady or maybe it sort of started to decline as the quarter progressed? And then just quickly, with all the repair and remodel that has occurred over the last several years of people working from home, what gives you the confidence that R&R should continue to persist going forward at an elevated rate? Yes. Well, in repair and remodel, I think there are a number of variables at play. And to some extent, it makes it a little bit harder to forecast than normal. I do think most of the drivers behind strong repair and remodel that weâve seen over the last several years are still in place. Youâve got homeowners with a lot of equity. Youâve got an aging housing stock. A lot of these older houses are smaller and have different layouts than some of the newer homes. So, I think that provides an incentive for homeowners to upgrade and add on to existing older homes. I think the other dynamic thatâs somewhat new with so many people having refinanced mortgages at lower rates to the extent that keeps them in existing house rather than going out and purchasing a new home at a higher mortgage, I think that could be also a catalyst for more repair and remodel activity. Now, of course, as you mentioned, historically, buying and selling a home is one of the times people often do repair and remodel projects. And so, that could be a little bit of a headwind to the extent that activity dies down a little bit. So, lots of puts and takes. But I think weâre still expecting solid repair and remodel activity this year, albeit probably a little bit lower than weâve seen over the last couple of years. But weâre still seeing good activity. Now, to your question about how did that trend in the fourth quarter, I mean thereâs always a little bit of seasonality when you get into the cold months. Youâre not going to be having people build decks in December like they would be in the spring. So, thereâs a seasonality impact. But on balance, weâre still seeing solid demand and would expect that to continue in 2023. Just one question, just to sneak it under the hour on lumber. Youâve got the goal of growing it by 5% a year, and I appreciate the strike impacted and sales volumes were down a little bit over 5% in â22. But in the U.S. South, was your production up 5% in â22? Yes, it wasnât. And when we talk about that multiyear goal and so just to reiterate, thatâs getting to 5.7 billion board feet by the end of 2025. We are doing the work year-to-year through our capital programs to get to that level. Now year-to-year, the production will vary depending on whatâs going on. And you look at what happened last year between COVID, the strike, a number of other issues that we dealt with last year with supply chain, labor, et cetera, we did see our production volume reduce year-over-year. But, the underlying projects that build the capacity within the system to accommodate 5.7 billion, weâre still on track for that and expect to get there. But again, year-to-year, it will just depend on what the market dynamics are in terms of actual production. Great. Thanks, and good morning, everyone. Just starting on the share repurchase side. I mean, do you expect to take your foot off the gas at all given whatâs likely to be a much leaner at least near term on the cash generation front to kind of ensure you can accrue some cash for a supplemental dividend next year, or how do you think about matching buyback activity with underlying cash flow as the year progresses? Yes. You bet, Kurt. So, weâre constantly evaluating how we think about share repurchase, the dynamic process, looking at all the factors, really, it comes back to weighing all the options available to us and allocating the capital in a way that creates the most long-term value for shareholders. So, as you know, we were active in 2022. We did $550 million of share repurchase, progressing well against our overall authorization. And as weâve demonstrated, weâve got the ability with our cash return framework to allow us to supplement the base with either the cash dividend or share repurchase. So, looking ahead to 2023, our process for evaluating it remains the same. I will note, of course, that with our cash return framework, to your point, the amount of cash committed to return to shareholders is going to flex up or down year-to-year based on the amount of FAD generated. But really, as we think about it from a framework perspective, from how we evaluate it, all that remains consistent, and weâll continue to assess repurchases along with all the other priorities available to us and report back to you quarterly on our activity. Okay. Makes sense. And then, just on EWP, could you maybe put some numbers or a range around kind of what youâre thinking on sequential pricing in Q1? Obviously, thereâs a lot of quarter left, but it is a product where you should have greater relative visibility than the commodity. So, any thoughts there would be helpful. Yes. Well, as you know, the EWP market is most closely tied to single-family housing. And so, as weâve seen that market slow, it has had an impact on EWP demand and you could see in our quarterly numbers in terms of production, we did take some extra holiday downtime to try to better match that. So, I think as we think about pricing generally, itâs always trying to balance market share, margins, operating posture, et cetera. We did take -- we did implement a targeted price reduction in EWP. Weâll kind of see how the rest of the quarter plays out to determine what that pricing trajectory looks like. Probably not going to give specifics on the pricing just for competitive reasons, but I would note, weâre still obviously above pre-pandemic levels. And to the extent that we see housing start to pick up again, we feel like weâre in a really good competitive position with our Engineered Wood Products. Thank you. Devin, I wanted to talk a little bit about Timberlands, the overall kind of sentiment there. As we think about the cyclical versus the secular trends coming into this year, what is the overall appetite and sentiment there for those assets? And are you seeing any differences by region? Yes. Well, I think the reality, and weâve seen this really over the last couple of years, and my expectation is this is going to continue. There has been a lot of interest in the Timberlands asset class. And thatâs from the traditional players, the REITs, the TMOs, the private integrators, just a lot of interest there. But weâre also seeing interest come in from some new types of investors. And I think thatâs really driven a lot of activity. Last year, we were over $5 billion of Timberlands transaction activity. Our expectation is weâll still be north of $3 billion for this year. So, just a lot of interest there. And I think thereâs a few things. Number one, we have seen log prices trending up a little bit, so that could be driving some of it. But I think the bigger piece is just a lot more interest in the ESG properties of owning timberlands in an environment where thereâs so much focus on climate. I think, theyâre starting to be a better realization and recognition of some of the alternative values that are inherent in owning Timberlands, and thatâs renewables, carbon, real estate, et cetera. So, just a lot of interest there. My expectation is thatâs going to continue into 2023. Our view is that the trajectory for Timberlands is very positive in the years to come. All right. Well, I think that was our last question. So, Iâll just say thanks to everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser. Have a great day.
EarningCall_1036	Good morning, everybody and welcome to this results briefing for WÃ¤rtsilÃ¤ Financial Statements Bulletin 2022. My name is Hanna-Maria Heikkinen, I am in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will start with the group highlights, continue with the business area performance. And after that, our CFO, Arjen Berends, will continue with the key financials. After the presentation, there is a possibility to ask questions. Time to start, please, Hakan. Thank you, Hanna-Maria and welcome everybody. Letâs dive into it straight away. So if we sum up the full year of 2022, itâs been a challenging year, but on the positive side, with strong annual growth. Order intake increased by 6%. Net sales has increased by 22% and we do see continued good progress on the services side. The service order intake increased by 17% and actually exceeded the equipment order intake in absolute terms and the service net sales also increased by 12%. And on the negative side, the comparable operating result declined by 9%. The result was supported by the higher sales volumes, but it was burdened by cost inflation, less favorable sales mix between equipment and services and the cost provision that we released in Q4 for â¬40 million related to Olkiluoto nuclear project. 2022 has also been a year of quite a few structural changes. I mean, first, we did orderly exit from the Russian market and we have completed that. Then we announced our plan to centralize our 4-stroke manufacturing to Vaasa, Finland and to scale down manufacturing in Trieste, in Italy. And we have also decided to integrate the Voyage business into Marine Power to strengthen the end-to-end offering and accelerate the Voyage turnaround. Now if we look at the numbers, and I will focus a little bit on the Q4 side. If we see the order intake, it went down quarter-on-quarter from â¬2.1 billion to â¬1.6 billion. Itâs a 24% decrease. But we should remember Q4 2021 was an all-time high quarter for WÃ¤rtsilÃ¤ history. And if you look really at the order intake, on the full year, actually 2022 has the second highest order intake in WÃ¤rtsilÃ¤ history. The highest year is still 2018. So from order intake side, I would say a pretty strong year. Services, jumping back to the quarter, is continuing to grow from â¬747 million to â¬791 million, 6% growth. Net sales also growing from â¬1.6 billion to â¬1.8 billion, 11% growth. Book-to-bill, we have been living now with a number of quarters above 1. Now itâs coming down slightly below 1. The rolling â 12-month rolling is still above 1, but itâs coming down a little bit in this quarter. Operating results clearly coming down 75% from â¬144 million to â¬37 million and by that from 9% to 2.1% and similar development on the comparable operating result, down 41% from â¬158 million to â¬93 million. So looking at the fourth quarter highlights. So, net sales close to â¬1.8 billion and a 4% increase in service sales. The comparable operating results landed at â¬93 million, which is a 41% decline. If we look at the marine market, I would say that the market sentiment continued to improve despite the growing macroeconomic concerns. Newbuild investments were moderated due to close to full order books at many yards and also higher newbuild prices. If we look at the number of vessels in Q4, they decreased to 1,538, down from 1,855 year-on-year comparison. Order activity was supported by record high orders for LNG carriers, especially in terms of order value. Fleet utilization on the passenger travel segment has improved and the offshore assets reactivation also continued. 466 orders were placed globally for alternative fuel capable vessels, and that represents about 30% of all contracted ships and 60% of the vessel capacity in the review period. The cruise sector focus shifted towards managing the capacity growth and occupancy levels in a profitable way and mitigating the impact of rising operating costs. Looking at the energy side, I would say â we would say that the energy transition outlook is very strong. The energy crisis has brought out a clear need and an ambition for a structural change in the energy sector. And the uncertainty caused by the geopolitical situations continues to affect the investment environment for liquid and gas fueled power plants and energy storage. I would say that U.S. is moving very strong. Europe is holding back for the moment a bit. Beyond some of the short-term setbacks, the energy transition outlook is very strong and advancing the renewable energy buildup strengthens the security of supply by reducing dependency on fossil fuels. Growth in the demand for the energy storage solutions continued. And a really interesting figure, 42% of our full year thermal order intake was related to balancing power. So balancing is really growing as we speak. Service growth continued and customers are showing increasing interest in long-term agreements. And our market share for the gas and liquid fuel power plants increased the notch from 7% to 8%. Looking at order increase overall, the order intake decreased by 24%. The equipment order intake decreased by 40%, but itâs from the all-time high quarter last year. Services, on the other side the order intake increased by 6%. We have a strong order book and the rolling book-to-bill is still above 1. And also, if you see where we went out from the last day of 2022, you can see that we are building for deliveries in 2023. Net sales increased by 11% and the equipment net sales increased by 17% and services net sales increased by 4%. Technology and partnerships, so what are we doing there? What have we done in the last quarter? The decarbonization journey continues and the decarbonization theme continues, I would say, to accelerate. We clearly continue to have a lot of interest from our customers, both on the energy and on the marine side. We really feel the strength in the trend. So a couple of exciting things that we have done in the last quarter, we launched our next generation of grid balancing technology. So this is a solution that is based on three fully integrated key components. Itâs first the WÃ¤rtsilÃ¤ 31SG balancing engine, then itâs a concept with prefabricated modules to drive really cost efficiency for plant construction. And the third element is the WÃ¤rtsilÃ¤ Lifecycle services. So that combined, itâs a very interesting customer proposition. The engines can start and ramp up rapidly, do a lot of ramp up and ramp down â ramp ups and ramp downs and adverse weather condition. Itâs a very robust solution to support intermittent renewable generation. Then we have concluded exciting test successfully. Itâs a hydrogen blended fuel on an unmodified engine. So we are taking an existing engine. We blend in the hydrogen and we run it in full operation. And this is a testing that we did in Michigan, in the U.S. in collaboration with WEC Energy Group with EPRI and Burns & McDonnell. And throughout the testing period, this 18-megawatt WÃ¤rtsilÃ¤ 50SG engine continued to supply power to the grid. And this is really the largest internal combustion engine ever to operate continuously on hydrogen fuel blend. So this is worldâs first achievement. Then of course, itâs a step to other steps, but we are moving the needle. Marine Power, fantastic picture. Marine Power had very good progress in services. And I think the picture â actually, this fantastic picture also reflects the fantastic performance of Marine Power. Service order intake increased by 23% and service net sales increased by 17%. You can see the order intake is up 2%. Net sales was down a little bit with 5%. And if you look at the comparable operating result, it was up from â¬75 million to â¬80 million. And on the positive side, we do see the good service performance and also favorable mix between equipment and services. On the challenging side, we have the cost inflation affecting materials, especially components, transport and test fuel costs â test fuel cost. Component unavailability has also been a bit of a challenge, and the high energy prices in general is also having an effect, but in net, a positive development. If we look at our service agreement business in the Marine Power, itâs really developing in a positive way and net sales from installation â from installations under agreement is strongly increasing. And as you can see, we are well above now the pre-COVID levels, so really good development on services. Another example that we want to bring is how we are evolving our hybrid propulsion systems, combining batteries, combustion engines. And now we combine the batteries with our methanol engines. And we just got an order for that, which is really exciting. Itâs a hybrid propulsion system to be supplied for 4 new heavy lift vessels. Itâs â theyâre going to be built at the Wuhu Shipyard in China for SAL Heavy Lift. And our innovative hybrid system will minimize the ship CO2 emission, thus supporting the Marine sectorâs decarbonization. And the system will feature a variable speed, WÃ¤rtsilÃ¤ 32 main engine capable of operating on methanol fuel. And on the hybrid side, we are really in a strong position. We are the market leader with about 25% market share based on installed megawatt hours. Itâs a very strong and interesting business going forward. Marine Systems. Marine Systems net sales were stable and so a comparable operating result. Service order intake increased by 11%, you can see the order intake came down mostly driven by the scrubber business, the net sale, up 6%. And if you look at the comparable operating result, itâs a little bit down, but I would say itâs rather flat. We have a steady development on the services side, but we have also had lower scrubber volumes in the quarter. Voyage. Voyage had a positive and improving comparable operating results. Service orders were stable. Order intake was down. You can see down 21%. Net sales up a notch, 1%. And if you see the positive development on comparing our operating results from â¬1 million to â¬5 million. The key driver was the higher profitability in services, then being able to fully balance the closure of the profitable Russian turnkey business, which is not contributing to Voyage anymore and also the cost inflation. Our cloud solutions in Voyage continue to grow. So 19% increase in connected vessels. And here, we have, I think, a really interesting example what we can achieve. This is from Carisbrooke Shipping that had really proven that they can improve the environmental footprint using our fleet optimization solution. So Carisbrooke Shipping has in 2022 using FOS reported a fuel reduction of 5% to 7%. This is significant. I said over 600 tons of CO2 emissions. And Carisbrooke they are responsible for monitoring vessel position, passage plans and roads, advising on maximizing cargo intake and monitoring vessel safety and performance. And they use real-time data that enable continuous optimization of the fuel consumption across the fleet. And I should also say this was the last time that we reported Voyage in this context. Voyage is now being integrated, as you know, into Marine Power and will be part of the end-to-end offering, combining propulsion, the fleet optimization and Performance Services. And we have also earlier informed that we will present an updated strategy for Voyage in Q1. So that is coming. Now energy. So energy had a challenging quarter. I mean the Olkiluoto cost provisions really burdened the result and also the challenges with cost inflation remained. So the order intake came down from record levels, down 37%, whereas the net sales went up with 28%. And you can really see the significant downturn in comparable operating results from â¬64 million to actually negative â¬8 million in the quarter. On the positive side, we have an improved cost leverage on the storage on the battery side due to the high delivery volumes. But the real challenges were the cost provisions of â¬40 million related to Olkiluoto, the cost inflation in equipment projects and also a less favorable sales mix between equipment and services. Energy storage net sales continued to grow and profitability has been improving and the full year comparable operating result was approximately 4% in 2022. So this is the figure that I know many have been asking about. And now we are making this public. This is a full year, minus 4% in energy storage. Some really good examples on the balancing side. Here, we have three different projects â well, three different deliveries. We have first our internal combustion engine technology for two new balancing power plants in the Upper Midwest. And the WÃ¤rtsilÃ¤ engines, they were selected primarily for the grid balancing capabilities as the utility expands its integration of renewable energy in wind and solar basically. And the two plants will operate with WÃ¤rtsilÃ¤ 34DF, the dual fuel engines. First plant will generate 28 megawatts based on 3 engines; second, 47 megawatts of power on 5 engines. And then we have another balancing example this time from Basin Electric in the U.S., 130 megawatt, also balancing, also integrating renewables, enabling the integration of renewables into the power system. And it is really this fast starting and stopping in a very short time that can support the intermittent renewables. That is the key trigger. And itâs also a rugged solution that can really cope with weather of all types and conditions. If we look at the energy service agreement side, we also continued the good development on the coverage, so to say. And you can see that the trend is continuous and itâs going in the right direction. Another key part of our business development is the power system studies that we do, the power system modeling and we have done quite a few during the recent years. The latest one here is a system modeling that we did for Nigeria, South Africa and Mozambique. And the modeling found that renewable energy and combined with flexible power can generate enough energy to provide power for close to 100 million people who currently do not have energy access and if it is matched with the required grid infrastructure. The report also demonstrates that replacing coal with renewable energy, combined with flexibility from engines and energy storage is the most effective way to reduce energy cost, increase energy access and improve reliability. And I think we are doing these studies in many parts of the world, and this is a common conclusion that we reach, so to say. Yes, I have â one clicker. Thank you, Hakan. If we look at the other key financials, a few points to highlight on this slide. We had a positive cash flow in Q4, â¬51 million. But unfortunately, letâs say, not enough to take the full year to a profitable â sorry, not to a profitable, but to a positive number. Cash flow has been a bit of a challenge during the year. It started already in the beginning of the year with a negative working capital at the start, which was really driven by big customer payments that came in, in December 2021. And in addition, we also had during the year to raise our inventory levels to facilitate increased spare part business. There is an echo on my mic. Okay. Now, itâs better. To facilitate increased spare part business and also to, letâs say, smoothen or have a smooth footprint changes on the 4-stroke side, for example, the ramp-up of the sustainable technology in Vaasa. Net debt increased. We paid back â¬93 million of long-term debt during the year. But due to a low cash flow as well as, letâs say, increased leases, â¬69 million also related mainly to the sustainable technology hub in Vaasa. The net debt position went from â¬4 million to â¬481 million. And that, of course, also has an impact on the gearing ratio even though the gearing ratio is still at a good level, as you know, we want to be below 0.5. Solvency improved a bit during the quarter four but has been throughout the year 2022 around 35%. Of course, Iâd say the negative profitability having a clear impact on the equity in the equation of solvency calculation. Looking at cash flow. On the left side graph, you can clearly see the challenging start. So we had two quarters with negative operating cash flow. And then in the second half of the year, we had two quarters with positive operating cash flow, as I said, not enough to take the full year to a positive number. And again, letâs say, the big Q4 give us somewhat of a bad start in the beginning of the year. If we open up a little bit on the fourth quarter stand-alone, you could say that the operating cash flow generated in Q4 came about 50-50 from one part being the result and the second part being the change in working capital. And in particular, trade payables is a big bar here, and that is mainly related to purchases for near-term deliveries. Looking at the dividend. As you know, letâs say, our target is to pay at least 50% of EPS as dividend. And if you look at historical years that clearly the case. Now we have a loss-making situation, but the Board still proposes â¬0.26 as dividend for 2022. Giving back to you, Hakan, on the prospects. Thank you, Arjen. So if we look at the prospects, so we go back to giving the prospects for the next 12 months, so we now expect the demand environment for the next 12 months in the Marine business, which includes Marine Power and Marine Systems to be similar to that of last year. And for the energy business, we expect the demand environment to be better than last year. Okay. So those were the prospects. So letâs move over to the Q&A. And I suggest we do like we normally do, that please raise your hand digitally and state your name, etcetera. And letâs start with one question per person. And then, of course, you can come back. So letâs open the floor. Okay. First question on the line is from Daniela Costa from Goldman Sachs. Please open up your microphone. And ask your question. Perfect. So my question is regarding like the statement on your outlook where you talked about â I think you used the words turning around in Voyage and in storage. And I wanted to clarify, is that a comment for 2023? Do you expect those businesses to breakeven already in â23? Or is that more of a medium-term comment? And then just related to this, but there is a comment also that you have more EPC within storage now. What does that mean for that comment and for the medium-term margin? Thank you. So I would say that our earlier message over a few years, it still holds. And I think we are moving in the right direction. You could see now on the storage, the minus 4%, and we say that we have a positive trend but I still think you should look at this over a few years. And similar on the Voyage side, I think weâve seen strong Q4, but there is still a turnaround to be made, so to say, and that will take a few years. And as I said, we will come back during Q1 with updated strategy. That I can clearly say. Yes. Hi. So I just wanted to ask about how to think about energy margins into next year. Because I think youâve been quite open in saying that you had some backlog that was impacted by higher component costs, I think youâve talked about â¬2.2 billion of lower-margin revenue falling to â¬1.2 billion this year. So I guess when we look at the energy margin and kind of where you were in 2021, is there any reason that we shouldnât get a sort of significant natural uplift just by price cost on orders that youâve taken in the second half being a lot more favorable and potentially going back to those 2020, 2021 levels. So I guess can you confirm that sort of price cost on orders going into the backlog in energy are, I guess, more like 2021 in the thermal business? And how should we think about maybe the business in â22 compared to â sorry, in â23 compared to what we were doing in â21? No, thank you, Max. And we donât give guidance, of course, on profit margins, etcetera. But I mean, to your point, itâs clearly, your observation is right that we are working through an order backlog and â¬2.2 billion for this year, we have still â¬1.2 billion approximately to deliver in 2023. But as that transfers through the system, I think we should see more normal levels, so to say. So then I will also say where we have a positive outlook is on the services side. Okay. And maybe just â sorry, one housekeeping question, just in terms of your energy storage margin, just to help us understand the overall development of the margin through the year. Would you say, without giving the specific numbers, would you say there is significant variability between the storage margin per quarter or is it more stable? Is it as seasonal as this kind of overall energy business or is it â does it tend to be more stable across the quarters? No, I would say that it is a fluctuating business. I mean it is a project business. So you can have movements from one quarter to the other. And this is also why we talk about the minus 4% over the full year, but we also see an improving trend. Yes. Hello, itâs Antti from SEB. My question is on the services and if you â if we look at the order growth that you had in â22. And if we exclude kind of FX and pricing impacts, I guess we are looking maybe a mid-single-digit volume growth. Am I on the right ballpark here? And then could you kind of summarize the headwinds and, letâs say, opportunities and challenges going into â23, especially at the marine power and energy side in terms of volume growth in services. So I think the major driver here is, as you know, weâre talking about the service value ladder. And where we have different steps, I mean, the first step is the more transactional business. We have different type of agreements. We have retrofits and we have performance based. And what is happening right now is that we are growing each step. And then at the same time, we are transferring customers up through the service. I mean moving â trying to move customers and we do have some progress in that, moving customers to agreements and to more advanced agreements. So yes, there is, of course, a price and inflationary component. But I do think that the fundamentals are there, and we also see a continued, you could say, organic growth avenue. No, we are not giving that number out. Letâs say, what we do in price increases I think, is competitor sensitive. So we donât provide that. No. Hi, everyone. Thank you very much. Good morning. I wanted to ask a follow-up on the order intake in energy. Would you mind giving us a sense of how you expect the energy storage order intake to develop? And what sort of impact the Inflation Reduction Act might have in this year as opposed to say uplift next year thereafter. Thank you. So if we zoom in on storage, I think we see a continued positive development. I mean the market is really growing. I would say itâs even growing, excluding IRA. I would say that it would â in our view, at least that it IRA creates a positive sentiment clearly a drive for localizing in the U.S. because of the â by Americas side. But I think we have yet to see the very concrete effects of it, so to say, but the market is still growing. And not only in the U.S., itâs growing, I would say, in many places in the world. Yes. Good morning. And just to follow-up on the margins. I know you donât give a quantitative outlook here. But just when I look at your qualitative statements in the report, right, you say we aim to improve profitability. So to me, that means margins. Is that also excluding the â¬40 million provision you had in Q4? Thanks. I have a question regarding the capacity utilization in Vaasa and Trieste at the moment. And then what was the risk that the Trieste facilities will have to stay open beyond September 2023. Whatâs the current update there with the Italian government? So basically, we have reached an agreement with all stakeholders, the unions, the regions, the government, on the process and a way forward. And we are working according to that. So right now, during the first quarter, we are making deliveries and â from Trieste and we are also ramping up in Vaasa. Then according to the scheme, which is public, there will be furlough arrangements going forward according to the process. And then we will basically see in September, I think the very important thing here is that there are furlough mechanisms in place. So I think there is â we feel a strong support from the Italian, you could say, ecosystem in making this transition. In parallel with this, and this is also public, we are very active in what is called a reindustrialization process. And that is basically a process where we try to find other stakeholders to take over the manufacturing, so to say, but that is a parallel process. Is there a risk that you will incur further costs there? Or do you think that is now all through the books? Correct. We announced â¬130 million, and we booked â¬90 million last year. So this year, there will be the remaining part. Thank you for correcting me. So we announced provisions for â¬132 million and we still think that we will be able to manage within those boundaries. Okay. And then a follow-up on energy, I mean, we all know that you had this 50% price hike in Q1 last year. And in summer, the input costs were nicely coming down. But now we see copper going up 20% since summer. We have lithium going up 50% since summer. How do you assess the risk of that further price increases are now needed to cover your cost on the energy storage? So on the storage side, what has happened also as a consequence of this significant price increases we had in Q2. I mean, the model has now changed. So you have material price indices in the contracts. So that has been made in a major way. So you could say that we are a little bit more covered from that going forward. Hi, this is Tomi from DNB. A question on the demand outlook, you now give it the full year, as you mentioned, can you comment the first quarter demand outlook and maybe also your view on the services demand for the full year? So since we now go to annual according to our policy, we will stick with annual, Tomi. So you will have to live with that now. I understand your question. But now we stick with the full year. But then if you look full year services, which I also understand your question, I think we have a positive outlook. And itâs fueled both by high utilization of our equipment, both on the energy and the storage side and also by our strategy to move up the service value level. Okay. And if I may continue on the voyage strategy update, you have earlier said that it will be moved to Marine Power. Does the strategy update possibly mean something else that it could not necessarily be put on Marine Power, but possibly something else? So by â from the 1st of Jan, it has already been moved. Voyage has been moved to Marine Power. So itâs already there. But that is just a starting point of shaping a business that is focused on this end-to-end offering for optimization. And this is something we will come back to how we structure that and how we set this up. This will come back in Q1. Thank you. And the third if I may. Energy orders last year didnât include any, letâs say, mega orders as the year before. Do you have that kind of large, very large orders in the pipeline? Well, there is a lot of things in the pipeline, but I think we have all been following that. So these things can slide in time, etcetera, etcetera. So Iâm very careful there. like I would say, there is always prioritization phenomena. You also know the practice for us to recognize order intake. We need down payment, etcetera, etcetera. So you need â you cannot only look on one quarter when you try to assess where we are. I think that on the â if we look on the thermal side, I would say itâs rather stable. Thank you. I have two questions related to marine. Firstly, on the demand outlook, you expect it to be at the same level as last year. Just kind of what are your thoughts behind that assumption given the lower ship orders? Is it so that you see kind of your relevant ship types growing, or what is the thinking behind that? And then secondly, how do you see the margins developing in â23, I mean should we assume kind of support from kind of mix being a tailwind? And then also, can you comment on kind of the backlog of problem projects? Was it only in energy, or do you still have this in marine? So, quite a few questions. We will take them one by one. So, if we talk about the order backlog, as you know, Russia, we made a major exercise during 2022 in correcting and reshaping the order backlog for marine, it has been done. So, I would say we have a robust order backlog on the marine side. And how do we assess the market. I think as you know, we are active in many segments. And we see activities in special vessels, in offshore, in ferries. Cruise is a little bit muted still. Itâs â we see a little bit of activities also on auxiliaries for merchant. So, we â yes, the overall figures for the whole markets are coming down, but we see activities and interest also partially driven â you could see this methanol example earlier today with heavy lift. I mean there are many of these applications and our green offering is feeding in very well to many of these type of customer needs. So, itâs â I cannot point at one segment. Itâs a little bit everywhere. And itâs good to remember that, letâs say, in the marine industry have also, letâs say, quite stable segments like tug boats and fishing in these. So, there is a quite good stable base of orders basically every year. And then if you take a ship segment like cruise, if you look at the Clarkson forecast, clearly letâs say, 2023, I think it was 20 vessels is clearly higher than what we have seen in 2022, I think it was six or seven. So, things are happening. And I would say the segments that we are typically strong in, we have a pretty okay outlook actually. Thanks. Thatâs clear. Can I just kind of clarify on the backlog? I think you gave a number of â¬1.2 billion continuing into â23, which is these projects taken before the inflation accelerate. So, is this like fully in energy this number? Hi. Great. Thank you very much. I just wanted to touch on your cash flow. And I was just wondering, do you see a quick reversal of your kind of current cash levels given the working capital impacts and sort of what more can be done there? Yes. Just wondering on your cash and cash flow, do you see a quick reversal and given itâs been hit by sort of working capital and what else can be done there? Yes. No, letâs say, clearly, we do anticipate, letâs say, better cash flow in 2023, letâs say, a negative cash flow is of course, not something that we would celebrate on. And okay, I explained, letâs say, what are the main drivers behind that. And clearly letâs say, we expect that to reverse in 2023. Exact timing is difficult to say. There are a lot of moving parts in the working capital. But clearly, we anticipate an improvement in this year. Hi. Thanks for the opportunity everyone. I wanted to go back to storage if we could. Can you give us some color on the match or mismatch between the actual lithium price moves and the indexation? And is there a difference between the quarters, or is that the trend or the relationship early study? Thanks. So sorry, I hear you a little bit badly. I donât know if itâs a bad connection, but can I please ask you to reiterate your question? Sure. I was wondering if we could go back to storage. Could you give us some color or context between how the new indexation, the new contracts are matching, not matching the actual price moves in the lithium or the underlying battery costs. And is that relationship noticeably different in the quarters. One follow-up question, please. Yes. So, I mean basically, you have a material price clause when you sell something where you have a kind of pass-through mechanism based on lithium prices and some other raw material prices. So, itâs a fairly straightforward pass-through. And this type of pricing mechanism they became more and more used after the hike of pricing in Q2 last year. Okay. Great. And is the lead time or fulfillment time on the storage unit similar to last year, or is it getting materially better? Thank you. No, I would say itâs about the same. I think we have been asked questions about our delivery position and also our capability to deliver. And I would say that this has been one of our focuses. And I think some of our customers would even say itâs one of our strengths that we deliver on our commitments on time, so to say. So â and of course, we have valuable supply partners that we are working with. So, for us, we are keeping the lead time. Super. Thank you. Firstly, just â you mentioned earlier about different demand dynamics between the U.S. and Europe. If you could just I think, add a little bit of color here, particularly in Europe, I mean are you seeing effectively capital moving, particularly around decarbonization out of Europe towards the U.S.? And my second question, you also made a comment on the shipyard being full. I therefore wonder, is your guidance around similar year-on-year demand around constrained capacity rather than actual underlying demand, particularly for services? Thank you. So, if we talk on â we will start on the energy side, and we talk the demand environment, I would say, for balancing both thermal and storage in the U.S. and a little bit contrast with Europe. I mean we can really see balancing demand moving very fast now in the U.S. And you saw the examples that I mentioned earlier of order intake. They were all in the U.S. And we see a very strong market development there, both on the thermal but also on the storage side. And IRA will further support this transition. What is happening now, there is â our view there is â will be a significant growth of renewables. And then you need the balancing power to enable it. So, itâs very strong and happening as we speak. In Europe, I think that we all know the energy crisis. And I think the most current focus is to secure gas deliveries and to set LNG infrastructure, etcetera. Unfortunately, also many are retracting to coal. But we see this as a relatively short-term phenomenon. In parallel, what we do see happening is this strengthening of the focus on moving renewables forward. But I think the major constraint for really accelerating renewables in Europe is permitting. Everybody wants green power, but not in my backyard. And the whole permitting, as you know, EU is working on a context on â framework on this, but this is a political issue. And this is what we see holding back renewables right now and therefore balancing, but it will come. But even in our view, it will take a little bit longer time. Then of course, also with the high gas prices, it creates some commotions and people might wait a little bit. But I also sometimes get the question, the current interest rate, how do they affect you, I would say that our customers, when they do make their investment cases, they have much longer time horizons than just considering the current interest rate. So, we think that Europe will get there, but it will take some time. Yes. Regarding these low margin or even loss-making projects, this â¬1.2 billion are â you previously indicated that this pipeline will be fully exhausted or delivered by Q4. Can you still confirm this? And is there any pattern between quarters? I mean is it front loaded, back loaded in Q1, Q3, etcetera? I would say the majority is probably in the first three quarters, might be a few bits, letâs say, into Q4. But by the end of this year, we should be done with it. And just to clarify, we havenât seen that they are loss-making. We have said that there are projects that have been heavily impacted by inflation. Yes, just to make sure. Next up is a written question from Vlad Sergievsky from BofA. Could you explain the drivers for a very big â¬250 million increase in trade payables in Q4 in â22? Does it have anything to do with higher utilization of supply chain financing facilities? Trade payables to sales now stand at 20%, while historically were around 10%. Do you expect any normalization here given that cost of supply chain financing are rising with higher interest rates? Good question. Yes, the supply chain finance is definitely, letâs say, part of it. Letâs say, we have at the end of, what is it now, at the end of 2022, I think we have about 49% of our trade payables is supply chain finance, which was earlier, I think 1 year. Before that, it was 42%, if I remember right. So, yes, supply chain finance is clearly part of it. But itâs related of course, to what you buy and what you need to deliver in the near-term future. Supply chain finance is just giving you extra payment time. Yes. And there is another question from Vlad. On Slide 26, you provided a helpful cash flow bridge. Could you comment on â¬176 million cash outflow related to other working capital. Does this item include contract assets, unbilled receivables? Thank you. The whole percentage of completion is part of it, which is, of course, a lot of moving elements. Yes â answer is yes. Yes. Thanks for taking my follow-up questions. The first one is on cruise. I think you mentioned 90% of the fleet is back in service. I was just wondering what your expectations are on China reopening? I mean I guess the China cruise travelers have been absent in the market for a few years now and probably coming back. Do you expect this to give you a further uplift to cruise? I would say where we see really the stabilization growth coming back is in the U.S. I think Europe has been a little bit slower, but itâs coming. And Asia will probably come the last. Itâs very hard to predict how China and Asia will evolve because itâs like trying to predict COVID. And the interaction there between COVID and cruise in Asia, itâs a very complex environment. So, itâs very hard to make any predictions. And I think that when we look at the future on our outlook, itâs mostly based on North America and Europe. And just to add, so letâs say, of course, our service business, if thatâs what you referred to, is correlating with running hours and whether the vessel is, letâs say, fully utilized by passengers, by cruise passengers or not, letâs say, the ship sales and the running hours that what counts for us. So, I am pretty sure that many cruise operators would love to see more occupancy rates on their vessels. So, I think the Chinese are more than welcome. Okay. And the other question I had was just on the storage margins. Thanks again for providing the margin for last year. I mean whatâs your intention from here? Do you intend to report this on an annual basis now, or quarterly basis, or was there is an exception now for 2022? Yes. Appreciate it. Thank you. The last question I had, if I may, was just on the storage order intake, which in Q4 was down quite a bit sequentially. Is that just the lumpiness? And as you said, the pipeline is generally good. And so there is nothing to read into that. No, this is â as you put a lumpy business, you can have swings quarter-on-quarter. You need to take the rolling 12 as a â look at the longer terms. So, the renewed uptick in the prices that we already talked about that didnât have people now taking a step back like they did a year ago and reevaluate. Thatâs not whatâs happening. Hi. I just wanted to ask a little bit around kind of what we are seeing in the service business in energy. And I guess what I was wondering, I mean, now that the storage business is kind of a fairly considerable part of revenues at â¬774 million for the full year. Are you able to give us a feel for how much service thatâs generating? And I guess could you also talk a little bit about â you have talked about thermal balancing orders becoming a much bigger part of the equipment orders. I also wonder kind of how the service business on those thermal â on that thermal business, as you deliver those is comparing to, say, your traditional business. So, kind of two questions. One is the thermal service business? Sort of are you seeing lower revenues when itâs for balancing. And then the second one is just around service, some help around how the service business for storage has evolved within that â¬775 million? Thanks. So, service for thermal balancing, itâs a little bit early to say because we are â the really off-take on the balancing side, it is only a couple of years back. What we have seen, if you look at a little bit older, transitional base load, etcetera, etcetera, the machines are running much more than maybe the customers originally had envisioned. So, we donât see on those old installations a downturn on the service business so to say. Theoretically, you could â which is perfectly viable if the customers will run their engines 3,000 hours or less, then of course, there will be less maintenance. But â and this is part of our strategy is to move up the service value ladder going for more performance-based arrangement and sharing up and downsize. And as you know, we launched our decarbonization services business last year, and we are evolving that. Itâs still relatively small. But we have a fairly optimistic view on the service business in thermal base load balancing going forward. If we talk storage, itâs clearly so that itâs a smaller portion, much smaller portion because there are no moving parts. And there is a power system optimization, digital service, but still I would say, itâs a rather small share of storage. Itâs â still today, itâs a significant in equipment business. Yes. Many thanks for that. Regarding the storage profitability in â21, have you calculated this what I am of course, after is the delta between â21 and â22 in terms of storage profitability? Itâs a good question, but we donât go into those details. I think we start with a minus 4% now itâs one step forward. I mean this is of course, a business â sorry, just to â this is a business that is growing very, very fast. So, yes, letâs focus on the future and the future profitability. Thank you, Erkki and thank you for â all of you for great questions. Thank you, Hakan and thank you, Arjen, for presentation. WÃ¤rtsilÃ¤ Q1 report will be published on April 25. In the meanwhile, I hope that you can also enjoy the warm winter this year. Thank you.
EarningCall_1037	Good day and thank you for standing by. Welcome to the Q3, 2023 Prestige Consumer Healthcare Inc, Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that todayâs conference is being recorded. Thanks operator, and thank you to everyone who has joined today. On the call with me are Ron Lombardi, our Chairman, President and CEO; and Christine Sacco, our CFO. On todayâs call, we will review the third quarter fiscal 2023 results, discuss our full-year outlook and then take questions from analysts. The slide presentation accompanying todayâs call can be accessed by visiting prestigeconsumerhealthcare.com, clicking on the Investors link and then on todayâs webcast and presentation. Remember, some of the information contained in the presentation today includes non-GAAP financial measures. Reconciliations to the nearest GAAP financial measures are included in the earnings release and our slide presentation. On todayâs call, management will make forward-looking statements around risks and uncertainties, which are detailed in a complete Safe Harbor disclosure on page two of the slide presentation, which accompanies the call. These are important to review and contemplate. Business environment uncertainty remains high due to supply chain constraints, high inflation and various geopolitical factors, which have numerous potential impacts. This means results could change at any time from the forecasted impact of reconsiderations of the best estimates based on the information available as of todayâs date. Further information concerning risk factors and cautionary statements are available on our most recent SEC filings and the most recent Company 10-K. Thanks Phil. Letâs begin on Slide 5. We are pleased with our third quarter results, which built on our first half momentum and what continues to be a dynamic supply chain and retail environment. Revenues of 276 million in Q3 grew about 2% organically versus the prior year. Thanks to our diverse portfolio of trusted brands. Q3 revenues were driven by a continued rebounding cough cold, which I will discuss in greater detail on the next page, the GI segments Dramamine brand, as well as a strong international segment performance. Solid revenue continues to translate into strong profitability, generating $1.4 in diluted EPS, and over $50 million in free cash flow in Q3. Even with almost $20 million in inventory investment in the quarter to support service levels and future growth. Our consistent cash flow profile continues to enable our disciplined capital deployment strategy. These efforts resulted in a Q3 leverage ratio of three and a half times our lowest level of leverage in over a decade. We continue to anticipate gradually lower levels of leverage over time, which further enables future capital allocation optionality. Now letâs turn to Page 6 and discuss the Cough & Cold category which is experiencing extraordinary demand this fiscal year. Our Cough & Cold portfolio is comprised largely of two iconic brands, Chloraseptic and Ludenâs, each with their own distinct heritage for sore throat treatment. Chloraseptic has a heritage in efficacious sore throat sprays and lozenges that began in the 50s. Ludenâs goes back even further with a brand created in the late 1800s. Today, consumers continue to associate the product with its iconic, great tasting, cherry flavored throat drop. This long standing history with consumers has allowed us to benefit from the extraordinary demand that has driven the category this fiscal year. Year-to-date, the category has grown well beyond our start of your expectations due to illnesses throughout the year, consumers being more proactive around health treatments, and a low-level of inventory of stores due to the supply chain environment. The combination of these factors has enabled strong growth for both Ludenâs and Chloraseptic beyond what we typically expect. As shown on the right of the page. Each brand has grown over 20% year-to-date, with the potential for additional growth hindered by supply chain limitations that have kept upside for us and others in the category. We have a clear opportunity to sell additional volume, and we have taken strategic actions like adding new suppliers to keep up with this demand and refill retailers depleted stocks. Looking forward, although the category is small as a percent of total company sales, we anticipate a strong demand to continue to the balance of the year and these strategic actions, helping to position these brands for long-term growth. Thanks, Ron. Good morning, everyone. Letâs turn to Slide 8 and review our third quarter fiscal 2023 financial results. As a reminder, the information in todayâs presentation includes certain non-GAAP information that is reconciled to the closest GAAP measure in our earnings release. Q3 revenue of $275.5 million increased 40 basis points versus the prior year and increased 1.8% excluding the effects of foreign currency. North America revenues were down approximately 1% versus prior year excluding currency, with sharp increases in the Cough & Cold and gastrointestinal category, offset by declines in the Womenâs Health and Eye & Ear Care category. Our international segment revenues of $38.6 million were up over 25% in Q3 excluding FX. The performance included broad based strength across regions and product categories. EBITDA and EPS were up 4% and 5% in Q3 respectively from the prior year, with inflationary pressures and higher interest costs more than offset by higher revenues and lower marketing spent. Letâs turn to Slide 9 for more detail around year-to-date consolidated results. For the first nine-months fiscal 2023 revenues increased 2% versus the prior year on an organic basis. The performance drivers were largely similar to what we experienced in Q3, with the largest benefits coming from our international segment performance strength of Dramamine and robust Cough & Cold category growth. We also continue to experience solid year-over-year growth in the e-commerce channel, continuing the long term trend of higher online purchasing. Total company gross margin of 56% in the first nine-months declined 170 basis points versus last yearâs adjusted gross margin of 57.7%. The gross margin change was anticipated and attributable to cost increases partially offset by pricing actions across our portfolio which offset the dollar amount of inflationary cost headwinds. For Q4, we anticipated gross margin of approximately 54.5%. Advertising and Marketing came in at 13.6% for the first nine-months, down versus 14.7% in the prior year as a percentage of revenue. As a reminder, we anticipate spend for the year of about 13% of revenue, owing primarily to the timing of initiatives and reduced spending around certain categories due to strong consumer demand. G&A expenses were 9.5% of revenue for the first nine-months, we still anticipate full-year G&A dollars to approximate prior year at around 9% of revenue. Finally, diluted EPS of $3.14 compared to $3.15 in the prior year, as higher revenues were more than offset by the gross margin compression just discussed. Our year-to-date tax rate of 23% was slightly favorable to prior periods, due to the timing of certain discrete tax items. We still anticipate a Q4 and long-term normalized tax rate of approximately 24%. Now letâs turn to Slide 10, and discuss cash flow. In the first nine-months, we generated $165.5 million in free cash flow down versus the prior year. Although quarterly variations can be affected by the timing of working capital, beyond this, we have strategically invested behind inventory in light of the current supply chain environment, finding opportunities where we can increase inventory to better support targeted service levels. This is the primary driver to our updated free cash flow guidance for the year of $220 million. Our stable EBITDA margins enabled consistent and strong free cash flow generation and as a result, we have the ability to invest behind our brands to support increased levels of customer service through working capital investments without derailing de leveraging efforts and targets. We anticipate Q4 free cash flow of about $55 million and year-end leverage below 3.5 times reflecting our disciplined capital deployment strategy that includes debt pay down. Looking beyond this inventory step up and related cash flow timing, we anticipate a more normalized free cash flow profile in fiscal 2024 and will provide a full outlook in May. At December 31st, our net debt was approximately $1.4 billion and we maintain the covenant to find leverage ratio of 3.5 times. We now anticipate interest expense of $69 million for the year owing to the timing of debt paid down. Thanks, Chris. Letâs turn to Slide 12 to wrap up. With just one quarter to go in the year, we are refining our outlook. Our proven business strategy and leading consumer healthcare portfolio are enabling us to grow within our original outlook range for the year, even in the current supply chain and inflationary environment we and others are facing. For fiscal 2023, we anticipate revenue growth of approximately 3% on both a reported and organic basis, consistent with our long-term target. Q4 revenues are anticipated to be approximately 278 million to 280 million translating into growth of mid single-digits versus the prior year. We anticipate EPS of $4.18 for fiscal 2023 which implies Q4 EPS of $1.4. A disciplined pricing actions and cost management are helping to offset inflationary headwinds, while the benefits of our strong free cash flow continues to help offset the impact of higher interest rates. Lastly, we now anticipate free cash flow of 220 million or more reflecting the strategic increases in inventory investments that Chris just discussed. So in summary, our business strategy is working with one quarter to go, we anticipate solid typical 2023 growth with record revenue and earnings that builds on our strong fiscal 2022 despite a dynamic market backdrop. We also expect this momentum to result in continued growth in fiscal 2024, which we will provide a full outlook on in May. We remain confident in our business attributes. And then our strategy is set up to reward our stakeholders over the long-term. Hi, nice job on the quarter, thanks for taking my question. I was wondering if you could follow-up on the supply chain. Obviously, there were some really strong sell-throughs and Cough & Cold. Iâm curious, are you guys seeing still, supply demand imbalances in the store? Do you guys feel like - I guess maybe if you could talk about by category to, that the in stocks are getting better, and the out of stocks fewer as we kind of look forward through the rest of the year? Sure. Thanks Susan, good morning. So the supply chain, we have been talking about that topic, I think just about every one of these calls for a good year now. I think the positive thing is we have been able to keep up with record demand for our business through last year and through this year so far. But we are seeing certain categories that are challenged to keep up with demand and Cough & Cold is a clear example of that situation for us and quite frankly, for many other players in the Cough & Cold category and you can see that shelf when you go to retail. I think we mentioned in the prepared remarks that we brought on some additional liquid, a liquid supplier to help with capacity there going forward. But it is clearly a category where we see limitations. The other thing I will call out during the third quarter was our Eye Care category was another example where despite good continuity of supply so far through the year, the third quarter actually saw a slowdown an impact impacted our shipments there and something we are expecting to into the fourth quarter. So make the important note here on the supply chain is that we continue to operate in a challenged environment, we have been trying to add to inventory for a good year now we made some progress in Q4, really as a way to add buffer to the categories that are doing well and get ourselves in a good position to support continued growth next year and improve our service levels. Great, that is really helpful, and then maybe if I could just add one more on the international business, so another strong quarter there. Maybe if you could just talk about kind of the trend you are seeing there and particularly Hydralyte and how you are expecting that to play out the rest of the year? Yes, good morning Susan, this is Chris. So you are right international had another really strong performance coming off of a record year last year and so helped a little bit with illnesses, but we saw strong performance across all regions, not just Australia in the third quarter. So we feel good about Hydralyte, and we are up to about 10% household penetration on Hydralyte which is a few points over the last couple of years which is quite good. But obviously at 10% household penetration still plenty of room to go. So we have continued to feel good about the growth prospects internationally and we target remember a long-term growth rate of about 5% internationally and we feel pretty confident about that going forward. Great that sounds good. Thanks so much, I will let someone else jump in. good luck for the rest of the year. Good morning and thanks for taking my question. So I just want to go back to the prior year guidance, if you can just give more color in terms of the sales reduction to the lower end of the range, in terms of what drove that and it also for EPS, it looks like higher interest expense may have had an impact on EPS range? Thank you. Hi Rupesh. So the guide - reported guide going from 4% growth to 3% growth is really FX driven. We have seen some currency headwinds, as a reminder for us that - in particular, the Australian and Canadian dollars, there has been a lot of movements, particularly in the third quarter in the Australian dollar, in particular. So from an EPS perspective, as we just talked about, right, we narrowed our original sales guy to the lower end of the range. There is some currency headwinds sitting in the P&L. It is just another expense related to the currency headwinds I just discussed. And then interest got called up just about $1 million for Q4, just given the timing of some of the rate hikes and the pay down. So those are the main drivers of EPS calling down to the lower end of the range, but still within the target range. Okay great and then just in terms of the categories that you guys called out this week, Womenâs Health and Eye & Ear Care, when do you expect those categories to improve? Is that something Q4 or next year, maybe it is just some thoughts there? So letâs talk about those both individually starting with eye care, Eye & Ear. We actually continue to have great momentum in that category. Consumption is good. Sales are good, as I mentioned in response to Susanâs question, the issue in the third quarter for us is really all about supply chain impact and we expect a bit of that into the fourth quarter as well. And then on Womenâs Health, we have actually seen a decline in the total category. Again, we continue to see consumer changes as a result of COVID and everything else that has been going on, and in particular, women going back to the doctorâs office impacting the yeast infection category, and continued impact on the go portion of the Summerâs Eve business. So, again, it is easy to forget, but we are really in year three of three years of disrupted factors on the business and in some cases, it is comps versus a funny number last year, in some cases, it is the continuation of a change in consumer habits or continuing to chase supply to keep up with demand. And maybe one last question. So I know you are not ready to provide FY 2024 guidance. But just curious, is there any puts and takes you can share at this point. And I am curious just on A&M, I know this year went down to 13% of sales, do you expect that to be a larger percent of sales next year? Thank you. Yes. So let me start I guess with a comment on overall momentum of the business like I said on the prepared remarks today, we continue to feel good about the positioning of the business, the consumption trends behind many of our brands, and we feel that we are positioned for continued growth in fiscal 2024 after two record years top and bottom line in a row. And I will let Chris comment on A&M for next year. Sure. So obviously more details to come in May Rupesh, but we always talk about our A&M plans being built up from the bottom with our marketing teams. We talked about additional A&M support being pulled a little bit this year, really related to categories where we have strong demand, regardless of our investment. And I would couple that with our ability to provide supply in this environment that we are talking about. So more to come next year, A&M spend is always driven by the timing of initiatives and new product launches and a whole bunch of variables. But we will give you more details in a few months here. Thank you, good morning everybody. I guess, on the inventory step up, strategic investment in inventory. Is that really kind of a short-term remedy for some of the supply chain disruptions or constraints I should say that you are experiencing juxtaposed against the strong demand for things like cough/cold or is there also a longer term element to it in terms of retailers looking for higher order fill rates or tighter delivery windows? Iâm just trying to understand kind of the reasoning behind it. The first driver is to better align ourselves to meet our retail customers, service requirements. So part of its that it is really short-term in nature, Jon. As I said, earlier, we have been looking to try to build inventory to give us a better buffer for the next hiccup in the supply chain, and supply chains out there, in general continue to be impacted by COVID impacting workforces. Not only at their own facilities, but at their, at our suppliers, suppliers, whether it is cardboard or an API, or whatever it is. All it takes is one missing thing in the supply chain to disrupt finished goods, whether it is a label a pallet or an API. So we have been focused on trying to give ourselves a better buffer for the next two to drop that we donât know about. As we get into fiscal 2024 and we begin to learn more about how things are stabilizing, we will adjust inventory back down over time. But right now, it is all about getting that buffer in and being better positioned, not only to meet service requirements, but to take advantage of those growth opportunities. And as I mentioned with cough/cold we brought on a second Chloraseptic, Ludenâs supplier actually got the first shipments I think the last week or two of December, so we are chasing things out there, Jon. Okay that is helpful. Gross margin stepped down a little bit sequentially again in the quarter and I think Chris, you mentioned, the gross margin you expect for the fourth quarter is kind of similar to what you just experienced in the third quarter. And I understand the math driving this, I think is the cost increases juxtaposed again against the price increases. But do you think we have kind of leveled off at this point or in terms of the gross margin performance and is there potential for some recovery as you look to 2024 and 2025, Iâm not sure what would drive that recovery, per se. But any thoughts around that would be helpful. Yes, Jon, I would just say, you know, gross margin is largely coming in, in-line with our expectations, right. And you are right, Q4 being consistent with what we saw here in Q3. I think of, so if I start with about a 56% gross margin as the base, we will continue - excuse me, we will continue to look for opportunities to take pricing actions, that can also come in the form of new product development, as it has historically and which is a big focus for our company, as you know, in addition to continued multiyear cost saving projects that we have going on. So we have talked about, in this environment, going forward, looking at things a little bit differently than we have been operating for the last few years, in that cost savings will come in many different forms going forward. And it is certainly you know, we have talked about not having a structural issue with our gross margin. So we will be looking to increase our gross margin overtime, and reinvest those dollars into A&M to maintain our EBITDA margin, as we always say. Great, thanks. One follow-up. I think Ron, Ron is at the start of this year, you think he talked about the possibility of perhaps shipping a bit ahead of consumption in fiscal 2023, as there was still a need to establish a better in stock levels, maybe across certain categories coming out of the pandemic, it kind of feels like, you might be in that same situation right now, as you kind of looked at 2024. Is 2024 year where, net- net, you think it is possible that you might, there might be a little bit of a benefit from restocking given where you sit today? Thanks. Yes, as we started 2023, we were focused on trying to recover and improve some of the our stocks and service levels. And we didnât make the progress that we would have liked to, hence, the focus on continuing to build that inventory buffer. As we head into 2024, we think that will likely be the case, again, where there is more opportunities or inventory recoveries or builds at retail than it going the other way. Thank you. And it looks like our next question will come from Mitchell Pinheiro of Sturdivant and Company. Your line is open. Yes, right. Cough/cold and certain SKUs in the Ear & Eye category are the big cause for us, as well as Gaviscon up in Canada as well. Okay and then was it - I mean in terms of having an impact on your revenue, was it significant, was it just a couple percent or any way to put a number on that? Yes, Mitch, this is Chris. I wouldnât say it was material to the quarter in terms of sales. And what we are seeing largely is, you know, a SKU or brand goes out of stock. We refill it. It goes out of stock again, we refill it now it is another brand. So this concept that Ron mentioned about you know, us wanting to make sure we have enough inventory on hand to provide a more consistent level of supply for unanticipated disruptions in the supply chain speaks to exactly what we are experiencing, which is a bit of a game of Whack a Mole, if you will. But despite that, I guess I would still just highlight that we had strong sales for the quarter. So having the diversified portfolio has really enabled that and helped us this year. So we are still, we had originally guided pricing to be about two-thirds of our growth for the year, and we are still on target might be slightly above that in terms of pricing for the year. So but that is the way to think about pricing for the period. Okay and then, Ron, you had mentioned that that you anticipate lower levels of leverage overtime. And I donât understand. Does that mean that acquisition growth slows a little bit or is there anything implied there with that? No and I think a great example is what we did last year with the Akorn acquisition. So we were able to do a $225 million acquisition in the year added to our Eye Care platform, and still reduced leverage by about a half a point last year. So I think really, the message is that one as we get bigger, and generate increased levels of cash flow and lower our debt overtime, it gives us the ability to do transactions and not go back to the peak levels of leverage we saw historically, as we were building the business. In terms of M&A, if there is a compelling opportunity out there, it is really our job to figure out how to get it done within the right leverage profile for the company. So that is how we think about it. It is not really describing any limiter for us Mitch. Hi good morning. This is [indiscernible] in for Anthony. My first question is, can you comment on the level of pricing actions that you took in the quarter? Sure. So we had announced pricing back at the beginning of the year really, for some of our brands have gone through a second round of pricing. We talked about two-thirds of our growth this year expected to come from pricing, which is essentially the cost savings, offsetting our inflationary pressures on the dollar-for-dollar basis for the year. So we talked about that being in the $15 million to $20 million range for the year. So the pricing that rolled through earlier in the year, certainly helped in the quarter. Thank you and second question is given the slower economy are you guys seeing any meaningful changes to consumer behavior? If yes, like which categories? In our categories, what we have seen overtime is that it tends to be the one of the last areas that might be impacted by a slowing economy or pinched wallets by the average consumer right. You wake up and somebody is shifting your household and you donât feel well. It is something that you generally look to postpone or forget about - it continues to be an opportunity where you look for that trusted brand to take care of your health. So it is something we continue to monitor and take a look at but at this point, we donât see it impacting our business. Alright. Thank you and how much is e-commerce now as a percentage of revenue and what was the growth rate in the quarter? Yes, e-commerce is now about 15% of our sales and the growth has been continued to be strong in the high single-digits. Thank you. And lastly, Iâm not sure if you guys answered that but it looks like you guys are just a guidance and I was just wondering why you guys - why the company is adjusting to guidance with 2023? I donât know if I missed that. I apologize. Sure. So what we did today is we narrowed the original guide that we had to the lower end of the range on the top-line. We talked about FX impacting the top line results a little worse - and it worsened a bit this quarter, from our previous expectations and the EPS guide at the lower end of the range really reflecting the top-line we just talked about. Hi, good morning. So on the question of innovation I was just curious what you consider to be to a venue most significant innovation in FY 2023. And then for FY 2024 in general, do you expect a similar level of innovation to drive revenue or higher or lower? Thanks. Good morning Linda. If you look across our portfolio, it is kind of hard to pick one. If you look at our Dramamine business, we have had a string of great success expanding into nausea. And in 2023, we saw a number of the nausea products continue to do really well is one example. Compound W is another example where the recent launches of technology have done well there as a couple of examples. We look to have a consistent pipeline of new products and innovation to come out every year so 2024 will be no different than we have seen over the last few years with a steady pipeline. And we generally donât talk about the things until they get out in the market for obvious reasons. So we continue to feel good about the efforts and the results in our NPD pipeline. Okay and then years ago, in your business, we would rarely hear about these sort of supply chain glitches and hiccups and everything, but of course, now it is becoming a little bit more of a frequent thing. Does that change your view on having more internal manufacturing and maybe you could update us do you still have that Lynchburg Virginia facility and what is going on there, what is manufactured there and what is the capacity like in that facility? No, we still think that our business model of working and partnering with third-party suppliers and having the Lynchburg facility is the right mix. Lynchburg makes about 15% or so of our total revenue, it is a liquid mix and fill focused facility and does a great job for us. One thing that we have learned during COVID is that as the supply chain environment has evolved and changed, we have had to change the way that we partner with our suppliers. So over the last couple of years, we have done things like make investments at the suppliers for additional tooling or additional lines to get dedicated capacity. And we have also looked to add additional suppliers and I use that Chloraseptic liquid supplier as an example where in the past, we were comfortable with one main supplier on that Chloraseptic product offering now we want to have to. So we are going to continue to think about different ways to partner to add robustness in the supply chain as a result of the new world that we are operating in. This is [indiscernible] on for Carla. Just to piggyback off of the prior question on the gross profit margins that kind of sequential decline. Is there a component of that was related to a tick up and promotions in any category and are you experiencing any retailer pushback on pricing? No. So in our categories, not a lot of promotion to drive consumers because there is a linked to incidences. So the answer is, no the gross margin was not impacted by the timing or increased promotional activity. I apologize. Just missed the second part of that question. Gross margin really relates to the cost inflation that we have been talking about for the whole year. So that is partially offset, really dollar-for-dollar by pricing. But from a margin perspective, that still lowers the overall percentage and that is really where we are in Q3 and Q4. Yes. We havenât seen pushback from retailers on pricing. I guess the environment is such that everyone is facing inflationary pressures and everyone is going to retailers with the pricing and quite frankly, they have got cost inflation on the labor side and such for themselves. So, so far, we have not seen significant pushback from the retailers. No. And just one more question, do you have any thoughts or initial thoughts on timing potentially on refinancing your 2024 term loan? So the term loan goes through, I believe, 2027. So we will continue to kind of actively look at that, if you are referring to our revolver ABL that is maturing at the end of 2024 and we will continue to kind of look at that, but obviously a much different structure than the term loan, but we will be opportunistic on both. Thank you and Iâm seeing no further questions in the queue. I would now like to turn the conference back to Ron Lombardi for closing remarks. Thank you, operator and thanks to everyone for joining us today and we look forward to providing an update in May on our first of fiscal 2023 and our outlook for fiscal 2024. Thanks again and have a good day.
EarningCall_1038	Hello everyone and welcome to the Ameris Bancorp fourth quarter 2022 conference call, and thank you for standing by. My name is Daisy and I will be coordinating your call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our website at amerisbank.com. Iâm joined today by Palmer Proctor, our CEO, and Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening comments and then I will discuss the details of our financial results before we open up for Q&A. Before we begin, Iâll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list some of these factors that might cause results to differ in our press release and our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the companyâs performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. We were very pleased with the financial results we reported yesterday, and Iâm also excited to be able to share some of the financial highlights in addition to our overall strategic view, before Nicole gets into some of the details. For the fourth quarter, we reported net income of $82.2 million or $1.18 per diluted share, and for the year we earned net income of $346.5 million or $4.99 per diluted share. We had another quarter of margin expansion where our margin improved by six basis points to just over 4%, and then our net interest income increased over 5%. One of the metrics weâre really proud of is for the full year of 2022, our growth in net interest income was over $145 million and more than replaced the decline in revenue that we experienced from the mortgage industry refi boom and the PPP income from 2020 and 2021. As a company, our pre-tax, pre-provision increased 13.9% in 2022 to $524.8 million from $460.7 million in 2021. This resulted in a PPNR ROA of 2.22% for 2022 compared with 2.11% in 2021. This revenue growth and our disciplined expense control improved our overall operating efficiency to 49.9% this quarter and 52.5% for the year. As for capital, our capital position remains strong. Our PPE ratio was 8.67 at the end of the year, and weâve consistently said weâre focused on tangible book value growth which we believe is a main driver for building shareholder value, and we grew tangible book value this year by 13.9% to end at $29.92 per share. On the balance sheet side of things, weâre pleased with our loan growth as well as our deposit balances. Loans grew over a billion dollars during the quarter, which includes an asset purchase of approximately $472 million of cash value life insurance-secured loans. Excluding this purchase, organic loan growth was $576 million or 12% annualized for the fourth quarter. Our full year 2022 organic loan growth was $3.5 billion or 22%. We continue to anticipate 2023 loan growth to moderate but are still guiding, though, in the mid single digit loan growth for 2023. The total deposits were relatively flat for the quarter and ended at $19.5 billion compared to $19.7 billion last year, and our total non-interest bearing deposits still represent about 41% of our total deposits. Weâre going to continue to work diligently to protect these relationships, and we still have less than 1% in broker deposits or brokered CDs. On the credit side, overall quality remains strong. We recorded a $33 million provision expense this quarter due to loan growth and our updated economic forecast, and none of this provisioning expense was due to credit deterioration. Our annualized net charge-off ratio improved to only 8 basis points of total loans for the quarter and the year, and our non-performing assets excluding the Ginnie Mae guaranteed loans as a percent of total assets was 34 basis points. Our allowance coverage ratio excluding unfunded commitments improved to 1.04% at the end of the year. To summarize, while the economic outlook seems to change daily, weâve got strong fundamentals and weâre prepared for 2023, and I say this for several reasons. First, when you look, we have a slightly asset sensitive balance sheet thatâs going to help protect us and protect the margin throughout the next few Fed hikes. We also have a strong core deposit base. As you know, with deposit betas are better than modeled, weâre going to continue to target a pre-tax, pre-provision ROA greater than 2%, as it was 2.2% this year, as I mentioned earlier, and weâre also projecting an ROA in the 1.30 to 1.40 range and an ROTCE above 15%. What drives a lot of this is our culture. Weâve got a strong culture of expense control and expect to maintain a sub-55 efficiency ratio. Weâve got a diverse revenue stream among other lines of business and geography with over 73% of our net income coming from the core bank segment, and weâre going to continue to accrete capital and we expect to have double-digit tangible book value growth. Last but not least, when you look at how weâre positioned in terms of our markets and our experienced bankers, thereâs no reason why we canât achieve what I just mentioned. As you mentioned, for the fourth quarter weâre reporting net income of $82.2 million or $1.18 per diluted share. On an adjusted basis when you exclude the MSR gain, we earned $81.1 million or $1.17 per diluted share. Our adjusted return on assets in the fourth quarter was 1.32 and our adjusted return on tangible common equity was 15.78. For the full year â22, weâre reporting net income of $346.5 million or $4.99 per diluted share. On an adjusted basis, we earned $329.4 million or $4.75 per diluted share, and that brings our full year ROA to 1.39 and our ROTCE to 16.92 for the year. We ended the quarter with tangible book value of $29.92 per share - thatâs an increase of $1.30 this quarter, and for the year-to-date period we grew tangible book value by $3.66 or almost 14%, as Palmer mentioned. We started at $26.26 at the beginning of the year and we ended at $29.92 at the end of the year. Moving onto net interest income and margin, our interest income for the quarter increased $39 million compared to third quarter and increased $95 million when you compare the fourth quarter of last year. In comparison, our interest expense only increased $28 million this quarter compared to last quarter, and just $38 million when compared to fourth quarter of last year. For the full year â22, our interest income increased $191 million while our interest expense only increased $45 million, so we had a net increase in net interest income of about $146 million or just over 22% year-over-year. Whatâs really important there is we have to remember that that included the headwind of the PPP run-off, so when you look at the core bank segment, net interest income in the core bank increased $188.7 million or 41.2% this year. That was attributable to both asset growth and to our margin expansion. On the margin expansion, we increased 6 basis points this quarter from 3.97% last quarter to 4.03% this quarter. Our yield on earning assets increased by 54 basis points while our total cost of deposits only increased 39 basis points. Due to competitive pressure, we have been more aggressive with raising deposit rates this quarter but weâre still below our modeled betas. Our cumulative deposit beta this year has been about 15% compared to an original model beta of 23%. We continue to be asset sensitive with NII increasing about 2% in an up 100 environment, and weâve updated the interest rate sensitivity information on Slide 10. Non-interest income for the quarter decreased about $17 million, and $14.6 million of that was in the mortgage division. Once again, our mortgage group did a great job reducing their expenses as production pulled back. Expenses in the mortgage division declined by $7.3 million and represent 50% of the revenue decline due to the variable expenses there. Purchase business stabilized this year closer to historic levels at 82% of total activity, and we really are prepared for the continued success [indiscernible] pre-pandemic, pre-refi boom levels. Total non-interest expense decreased $4.5 million in the fourth quarter. We really do remain focused on our operating efficiency. Our adjusted efficiency ratio improved to 49.92% this quarter from 50.06% last quarter, and for the full year our efficiency ratio was 52.54% compared to 55% last year. We continue to look for expense reduction opportunities, and although there is always a cyclical first quarter bump, we still believe we can maintain an efficiency ratio in the low 50s next year, even with these slight non-interest expense increases. On the balance sheet side, we ended the year with total assets of $25.1 billion compared to $23.8 billion last quarter and $23.9 billion last year. We were pleased with [indiscernible] unit growth of $576.1 million or 12.25% annualized for the quarter, and for the year that was $3.5 billion or 22% for the full year. We do anticipate 2023 loan growth to flow and be in the mid single digits for next year--thatâs this year, 2023. Total deposits were relatively flat at $19.5 billion for the quarter, and our non-interest bearing deposits still represent over 40% of our deposits, 40.74% to be exact. Then our total non-rate sensitive deposits, we include non-interest bearing now in savings, they represent over 65% of our total deposits, and as Palmer mentioned earlier, weâve got minimal--less than 1% of our deposits are brokered. With that, I will wrap it up and turn the call back over to Daisy for any questions from the group. Maybe first starting, Nicole, you mentioned, I think a 15% cumulative deposit beta versus your 23% model. Is it your expectation over the next few quarters that the beta will kind of grow towards that 23%, or has, I guess, your longer term beta outlook come in a bit? Maybe just touch on where deposits costs were at the end of the quarter versus where they were over the quarter, if thatâs gone up meaningfully or not. Sure, so yes, our original model beta was about a 23 and our current model beta is about a 21, and so we were below that. When you look at--and again, that is modeled all in, so thatâs including interest bearing and non-interest bearing, and so for the cycle, weâre at about 15% compared to that original 23 and our current model beta is about 21%. We are asset sensitive, still slightly asset sensitive, about 2%; but what I would say is with every rate hike, we have seen--definitely seen competitive pressure in the market, and so we would guide the margins to be peaking or near peak at this point and that, even though we are asset sensitive, if the Fed moves next week and they have one or two more moves, that we really have that extra beta, that catch-up beta to be able to protect our deposits. We would guide that the margin is stabilizing or peaking now. Then for spot deposit costs at the end of the quarter, I might need to get back with you on that one, Casey. I will say that with the latest move there, itâs going to be in CDs, and that our overall CD costs--I mean, I think our money markets and all of those are fairly consistent with what we reported for the quarter, but our CD costs for the spot costs--so our money market spot costs at the end of the year were about 2%, now theyâre about [indiscernible] for a total of about 1.53%. Okay, I appreciate that. Maybe walk us through the strategy just with FHLB borrowings and, I guess, talk more broadly about total funding costs versus just deposit costs, and also your appetite for FHLB versus broker deposits and how it kind of applies to the loan growth guide and also the loan purchase this quarter. Sure, so we--going into this, when we purchased the loan portfolio, which we like that credit and we like that cash surrender value and we like the rate, and so when we model that, we modeled that with some wholesale funding, at least temporarily. The fact that we--when you look at our FHLB borrowings at 1.5 at the end of the year, a third of that was really to fund that portfolio purchase, which is accretive to ROA. So really, the remaining borrowings, about a $1 billion is FHLB borrowing, and we really look at that from a profitability, margin and an ROA perspective. But had we instead of doing brokered deposits--Iâm sorry, instead of doing FHLB advances, if we had done broker, which we had room to do that because our brokers were less than 1%, so if we had booked those as brokered deposits instead of FHLB advances, our loan to deposit ratio would have been less than 95% because we would have grown that denominator. We really were looking at that from a profitability and our timing of that and the longevity that we wanted to lock in and the rate [indiscernible], we made that decision from a profitability standpoint. Mm-hmm, okay. Just with the loan purchase, obviously you [indiscernible] with the credit. Just what kind of yields are in that book, and is the plan to add more to that or is this sort of more one-time transactions? This is the acquired piece of the one-time transaction, but we already have--thatâs already a product that we offer, is cash surrender value secured. We like the credit, itâs a variable rate product. Right now itâs yielding over 6% with very low credit risk, so we like all of that, and it complements the existing portfolio that we already had. We purchased it and converted it to our core system, so thereâs little to no--very minimal overhead to really continue that product, so it really was accretive to ROA. Thank you very much. Our next question today comes from Brady Gailey from KBW. Brady, please go ahead, your line is open. I wanted to start with mortgage - you know, another step down here in mortgage revenue in 4Q. I know itâs incredibly hard to forecast, and a gain on sale of 126 basis points is not helping you. But any way to think about what mortgage could look like in 2023 from a volume and a gain on sale perspective? Yes, Iâll tell you what, Brady - Iâll kick off in terms of the outlook, and then Iâll let Nicole talk kind of on the gain on sale portion of it. I think what weâre all experiencing as an industry is really the mortgage space has obviously moved because of higher rates back more into a pattern of seasonality year-over-year, which is where we were pre-boon, pre-pandemic, so itâs kind of a nice shift, quite frankly, to level set and reset everything in the industry, but I think what youâre going to find across the board is that thereâs going to be more seasonality that we were accustomed to. First quarter of each year is always typically the weaker quarter, and then second quarter generally picks up because of spring selling season, and then third quarter is typically your highest quarter, and then fourth quarter, assuming that rates kind of moderate, weâll continue to see some improvement there. We think the Fed will have long term rates moderating probably around 2.6, 2.85 in the 10-year, bringing kind of long term rates to a steady 5% for Fannie and Freddie-type products into 2024. I think the outlook right now in 2024 is actually pretty positive for the housing market, so thatâs kind of what I think weâre going to all experience, which weâre glad to see, itâs just some more moderation and getting back into that pattern of seasonality. Sure, so our gain on sale this quarter was a 1.26, and we certainly donât feel like thatâs--we feel like thatâs definitely going up and that that should stabilize. Weâve said--we originally said about 2.75 to 3 - donât know when weâll get there, but I do have some interesting little details I wanted to mention on mortgage. Thereâs been so much noise between 2019, â20 and â21, and so when you kind of go back and look at fourth quarter â19, which is post Fidelity but itâs also a fourth quarter, itâs a really good comparison quarter in that itâs post Fidelity, itâs pre-COVID, pre-boon, and itâs a fourth quarter, so youâve got the cyclicality of that fourth quarter. When you look at that, our production is down about 40% this quarter over--Iâm sorry, 30% this quarter over fourth quarter â19, but our profitability is greatly improved, and a lot of that has to do with all of the things that the mortgage group learned and did because they had to during that refi boon, so theyâve definitely become more efficient. Then when you look at their contribution to the company in â19, they were about 19% of our net income, and this quarter theyâre about 13% of our net income, so they continue to be efficient and they continue to monitor all of that, and so if they can stay on that projection and be able to kind of make up for that loss of gain on sale, when gain on sale comes back, itâs just going to be gravy for us. When we think about production for next year, I would model about mid-$4.5 billion to $5 billion of production, thatâs probably $1 billion in the first quarter and fourth quarter and then about $1.5 billion in the second and third, so that gets you to about--between $4.5 billion and $5 billion in production. I would hate to tell you to model a 1.26 gain. I would hope that it would come back a little bit and that we would see that come back this year, but I really donât see it coming back into that 2.75, 3 range until the market really stabilizes. But I think it would be safe to project kind of in that 2% for next year. Then thereâs a lot of focus on commercial real estate, and specifically in office. I know you guys give some good stats about your office investor-free portfolio, which is a little over $1.2 billion. Any other things you can talk about that - is that Class A, Class B, are you seeing any weakness there? Any updates you can give us on office CRE? Yes, I can give you a little bit. Our office portfolio is primarily--we kind of mentioned it on the slide, but really three categories, I guess youâd call them: essential use, meaning that a company needs that facility for a call center or a headquarter building or something along those lines, medical office, and/or credit tenant. We really donât have kind of CBD offices and really not a lot of just sort of the generic, two or three storey kind of stuff. We really try to focus on those three categories for that portfolio. As you can see on that slide, there is a level of NPAs of 70 basis points, but I would tell you that that is really in one loan that we are continuing. It kind of broke in the second quarter of 2022 and weâre continuing to work out strategy on that, but thereâs not been anything sort of widespread as far as any cracks that have developed thus far in that portfolio. Okay, all right. Thatâs helpful. Then finally for me, cash levels continue to come back down. If I look at cash to average earning assets, I think itâs about 5% today, that was 18% last year at this time. Just talk about where do you want to keep cash longer term, like whatâs the floor, and then what implications does that have for the bond book? Should we think about--you know, with you guys still growing loans and deposits potentially being flat here, should we think about the bond book starting to shrink in 2023? Great question, Brady. Our investment portfolio as a percentage of assets, earning assets, itâs about 7%, 6.5% to 7%. It would normally run in that 9% to 10% range, and so we have been programmatically buying bonds. In the fourth quarter, we bought about $100 million a month, and so weâve been growing that bond portfolio. That ties into your cash question, that we really kind of--we take our bond portfolio and our cash, because remember we donât have all the unrealized loss in the bond portfolio that some of our peers have, and so our bond portfolio is sellable with very little impact to regulatory capital because of our AOCI position, and so we are able to consider our securities and our cash in our liquidity ratio, so we keep that liquidity ratio in that 10% to 12%. If you ask where is our kind of minimum there, itâs that 10% to 12%, between those two, so thatâs where we are. I would expect to see cash kind of staying at that 5% and then, depending on what the market does with the bond portfolio, I think it would stay kind of in that 7%, possibly growing to 9%, but thereâs so much uncertainty in the market today. One thing I wanted to add there, as I think about [indiscernible] here, is just kind of our loan to deposit ratio at 102 and that people see that maybe elevated. But I wanted to point out that if you take loans plus investments, because our investment portfolio, we donât have the AOCI dilution, and it is a liquid asset for us. If you take loans plus investments to deposits, we are right in line with peer. Where some of our peers have bond portfolios that are very low yielding, they canât sell them because the AOCI impact becomes realized and affects their regulatory capital, so we have used some of our loans and some of our loan purchases to offset the bond portfolio, so we really view that together. Then on the liquidity funding side, our brokered CDs, I think weâve already said it probably twice, but we really have minimal brokered money - itâs less than 1%, and our FHLB borrowings are less than 6%, so we have room on the liquidity side, and like I said earlier, if we had not done the FHLB advances and we had gone the brokered deposit route instead, that loan to deposit ratio would be less than 95% and it wouldnât be quite the outlier. But again, we manage that funding source from a profitability and ROA perspective and margin perspective. Thank you. Before we take our next question, I would just like to remind everyone, to register a question, please press star followed by one on your telephone keypad. Thanks, good morning. Nicole, just to kind of continue on the same points you were making, what is the cash flow from the securities portfolio, and how much of your funding can you do internally just from that alone? Give me one second. Sorry for the dead silence for a second. I want to make sure Iâm giving you--. Chris, I apologize. I thought I had it right here at my fingertips, and I donât want to give you the wrong number, so Iâll get back with you on that. But I would say at this point that anything thatâs cash flows off the bond portfolio, I would consider reinvesting that into the bond portfolio to kind of still keep it at that 7%. Yes, and because we had moved our bond portfolio down to less than 3% of assets and weâve really added that bond portfolio back in over the last six to eight months, the cash flow on that is not as aggressive as you might expect. Then outside of the purchase portfolio on loans, is the pace of commercial loan expansion this year going to be similar to what we saw in the fourth quarter, or would that be different? You had a very successful last year from Balboa and all the other organic sources, so just want to kind of understand if that pace is similar or if it may slow down. Sure, so we would consider growth kind of among the category split. We still see growth opportunities in CRE as well as our C&I, and as well as our premium finance, FDA. I mean, we really have it diversified across all of the verticals there. And Chris, you know, one benefit from this cycle, if you want to look at it glass half full, is that itâs allowed banks to kind of step back, obviously be more selective, and we have all intentionally pulled back on CRE. But when you look and youâve got--youâre limiting how much powder you want to put to use in certain asset classes, what it allows us and all banks to do is kind of have a focus on what theyâre going after. Our continued focus on obviously deposits, but more importantly on C&I kind of growth too, is that weâre getting a lot of really good opportunities on the C&I front, so I think youâll continue to see strong growth there on core organic kind of C&I, in addition to the equivalent finance type of activities. Weâre really encouraged by that. The other reason and benefit in doing that, as you well know, is from the deposit front, so the deposit side of it, weâre really excited about it because a lot of these operating companies are bringing material deposits over to the bank, which includes all of our treasury management services, so thatâs really been a bright spot. Thatâs the focus. Weâve kind of got three pillars for 2023 that weâre focused on, with the first one being deposits-deposits-deposits, and fortunately for our company thatâs nothing new, but all our incentive plans have been adjusted to reflect that across the board at a more intense level. Theyâve always had a deposit component, which is really the result of that 41% core funding that we have on DDA. Then the second thing is the C&I small business growth, and then third is focused on more of the customer experience. Those are really our three main focuses for next year, and I think thatâs going to serve us well as we navigate through the remainder of 2023. Great, I think you mostly answered my follow-up question. It was just to confirm that deposits can grow organically this year, which it sounds like they will. Yes, thatâs probably going to be one of the bright spots. Itâs going to be challenging, obviously, because weâve got to protect what we have, but at the same time weâre supplementing what we have through a lot of the organic growth efforts, and predominantly through the C&I and business banking aspect. Thank you. This is all the questions we have today, so I would now like to hand back to Palmer Proctor for any closing remarks. Thank you Daisy. Once again, I want to thank everybody for listening into our fourth quarter and full year 2022 earnings call. The momentum and the discipline that weâve positioned ourselves, I think this year and last year, is going to bode well for us as we move forward, and Iâm reminded every day of the importance of teamwork and want to give a big shout-out to the entire Ameris team for all of their hard work and allowing us to deliver this type of performance. I can assure you that that discipline and our ability to stay focused will continue as we move into 2023 and the remainder of the year, so we remain committed to top of class results and I want to thank everybody again for their time and interest in Ameris.
EarningCall_1039	Thank you, Crystal, and good morning, everybody. Welcome to Corning's fourth quarter 2022 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Ed Schlesinger, Executive Vice President and Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures, unless we specifically indicate our comments are related to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the fourth quarter, the difference between GAAP and core EPS stemmed primarily from restructuring charges as well as noncash mark-to-market adjustments associated with the company's currency hedging contracts and foreign debt. In total, these increased core earnings in the fourth quarter by $256 million. As a reminder, the mark-to-market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast, and we encourage you to follow along. They're also available on our website for downloading. Thank you, Ann, and good morning, everyone. Today, we reported fourth quarter and full year 2022 financial results. Throughout the year, a series of pandemic-driven effects continued to ripple across the global economy. Nevertheless, we executed well to grow sales and advanced strategic initiatives, while addressing the implications that the current environment poses for margins and cash generation. For the fourth quarter, sales of $3.6 billion and EPS of $0.47 were both at the high end of our guided range. And for the full year, building on our strong 2021, we grew sales by 5% to $14.8 billion and EPS by 1% to $2.09. Gross margin was 36%. Free cash flow was $1.24 billion. I'm pleased with the sales growth we continue to deliver, despite confronting what is essentially recession level demand in markets that constitute about half of our sales. Cars, televisions, smartphones, laptops and tablets are all well below what we estimate as the normal range. Now we've offset this weak consumer demand with the strength of our positions in the growing optical communications and solar markets as well as ongoing outperformance by our businesses versus our end markets. That said, profitability and free cash flow are not where we need them to be. So I'd like to deviate from our usual format for these calls, in which I focus on our progress across our market access platforms. Today, I want to give you some insight and perspective on the external dynamics driving our financial results, and I'll discuss what we're doing to address those dynamics. Since 2020, the external environment has been characterized by the sweeping impact of the pandemic, including supply chain disruptions, depressed productivity, large swings in consumer spending and inflation. When the pandemic hit, our core priorities were protecting our people and delivering for our customers. So throughout 2022, we operated with elevated staffing and higher-than-normal inventory levels. In addition, persistent and sometimes quite unpredictable, inflation added to the cost of raw materials we purchased, the cost to produce and ship our products and the inventory we maintained. As a result, our growth in profitability and cash flow have lagged our sales growth. While we took action to improve profitability and cash generation throughout 2022 and made good progress during the first half of the year, it became clear that more was needed. So we took additional and significant actions in the fourth quarter, including raising prices, again, in optical communications and life sciences to more appropriately share the inflationary cost with our customers. Adjusting our productivity ratios to get closer to historical metrics without impacting our ability to supply and capture future growth and normalizing inventory. Because our productivity and supply chains have improved, in the near term, we expect to maintain reliable supply for our customers at current inventory levels or below. Now all of these actions will improve our margins and cash flow throughout 2023. Now as you may have already inferred from our press release this morning, we expect both first quarter sales and profitability to be anomalous from a historical perspective. Typically, our first quarter sales declined about 5% sequentially and margins declined about 1 to 2 points. This year, we expect first quarter sales to decline by more than normal seasonality. In contrast, we expect our margins to increase sequentially due to the benefits of our recent actions. What's driving our below seasonal outlook for the first quarter sales is the situation unfolding in China, where consumer sentiment was already low. In December, China shifted its approach to the pandemic and a significant wave of COVID outbreaks ensued. This resulted in lower consumer spending and workforce shortages, which have, in turn, impact the demand for our products as well, particularly in Display, Environmental and Specialty Materials. We expect China to overcome these issues and demand to improve, but it's too early to call the specific timing of improvements in consumer sentiments and demand. We'll keep you posted as we learn more. In the interim, we continue to be well positioned to capture growth and drive innovation. And as our sales grow, we expect to benefit from operating leverage and our profitability to improve further. Given -- I think it's too early to call the rebound in China, it's difficult to be definitive on our full year results. Here's what I can say. First, our quarter 1 sales are not an indication of our 2023 run rate. Second, I'd be disappointed if sales didn't grow sequentially in the second quarter, and we didn't see year-over-year growth in the second half. Finally, the benefits of our fourth quarter profit and cash flow actions will be significant throughout 2023. As we see consumer demand return and our revenues increase, we expect to see our profitability increase. Now having shared our near-term perspective, I want to underscore how great we feel about our focused portfolio and long-term prospects. As we evaluate our trajectory, given the uncertainties, and there are a lot of them, one thing that is certain is the relevance of our leadership capabilities to secular trends. Across each of our markets, we are capturing a compelling set of long-term growth opportunities with more to come. In Optical Communications, we're building on a record $5 billion 2022. And we believe we are still in the early phases of a multiyear build cycle driven by broadband, 5G densification and cloud computing. Cable and fiber demand remains especially robust. If we could make more, we could sell more. In solar, we continue to capture significant upside tied to growth in the renewable energy industry, and we see excellent growth potential as we contribute to a sustainable U.S.-based solar supply chain and benefit from the Inflation Reduction Act. In display, we maintained stable price and a very strong market position throughout the ongoing industry correction. We expect to emerge from the correction with strengthened customer relationships of refreshed manufacturing fleet and increasing sales and profit. In mobile consumer electronics, we anticipate ongoing strong adoption of our innovations, and we expect to continue outperforming the markets we serve through our product leadership, our more Corning approach and our ongoing collaboration with industry leaders. Moving to automotive. We've been outperforming the market throughout a period of industry constraint. We remain focused on building our $100 per car content opportunity, and we're pleased by our progress as evidenced by our strong growth in Automotive Glass Solutions in 2022. And we'll be ready to capture even more growth as adoption of our technology continues and car sales return. Finally, in Life Sciences, we're focused on delivering differentiated tools to support the discovery and delivery of cell-based medicines and modern drugs. Our operations are improving as the industry completes its correction from the unprecedented demand shifts caused by COVID. So now I've gone through the macro uncertainty that characterizes the near term, and I've told you what we're doing to deal with those uncertainties. I also outlined the rich set of growth opportunities we're capturing over the long term. And I believe our progress so far is a testament to what we can achieve going forward. Let's take a look back at the 2020 to 2023 strategy and growth framework that we introduced in 2019, shortly before the onset of the pandemic. Our goals included sales growth at a compound annual growth rate of 6% to 8%. From 2019 through 2022, we grew at greater than 8% CAGR, even in the face of the ongoing and universally experienced external challenges. Over the past 4 years, we've advanced significant strategic initiatives. We delivered key fiber-to-the-home and data center solutions to meet surging demand and facilitate a period of strong growth in optical communications. We delivered on our gasoline particulate filter content opportunity in automotive, and we introduced ceramic shield with Apple, both of which have driven strong outperformance versus depressed end markets. We ran our Gen 10.5 plants to extend our leadership in the glass for large televisions, and we made major progress on our emerging innovations. We gained significant traction in our Automotive Glass Solutions business, and our pharmaceutical packaging portfolio leaped forward to play a central role in the global health fight over the past 3 years. Our vials and tubing have supported the delivery now of more than 8 billion COVID-19 doses in more than 50 countries. In sum, we've delivered multiyear sales growth in a challenging environment. We've extended our leadership position across our markets, and we have paved the way for future growth. I think these are outstanding achievements. Now as I wrap up my remarks, here's what I'd like to leave you with today. Since the start of the pandemic, we protected our people and, as evidenced in our sales growth, delivered for our customers. We've now completed significant additional actions to improve our profitability and cash generation. The unfolding situation in China certainly impacts our sales in the short term. But despite this, we expect to see the benefits of these recent pricing and productivity actions take hold in the first quarter. Overall, we will continue to focus on operating each of our business as well and adjusting to meet the needs of the moment, while simultaneously advancing growth initiatives and capabilities that will drive success as the global economy stabilizes. Our focused and cohesive portfolio provides strategic resilience that is evident in our results even in the current environment. And we remain confident in our ability to deliver durable, multiyear growth with improved margins and cash generation. Now I'll turn the call over to Ed so he can get into the details of our financial priorities, along with our results and outlook. Thank you, Wendell. Good morning, everyone. Building on last year's strong performance, we grew full year sales 5% to $14.8 billion and EPS 1% to $2.09. We outperformed our consumer-facing end markets, we continue to capture growth in solar and we delivered record sales of $5 billion in optical communications. In total, we had a solid year, and our results reflect our resilience in the face of ongoing external challenges. As you heard from Wendell, our profitability and cash flow have lagged our strong sales growth. To address this, we took further actions, including raising prices again in Optical Communications and Life Sciences to more appropriately share the inflationary costs with our customers, adjusting our productivity ratios closer to historical metrics without impacting our ability to supply and capture future growth and reducing inventory by $115 million in the fourth quarter. We will start to see the benefits of these actions in the first quarter despite suppressed sales from the disruption and low consumer sentiment in China that Wendell described. With that, I will turn to our fourth quarter performance. Sales in the fourth quarter were $3.6 billion and EPS was $0.47, both coming in at the high end of our guidance. Fourth quarter gross margin was 34%, down 250 basis points sequentially. And operating margin was 14%, down 290 basis points sequentially, both including the impact of reducing inventory. EPS was favorably impacted by $0.03 due to a tax adjustment. Through the third quarter, our estimated tax rate was 20.5%. Our actual 2022 tax rate was 19.3%. The required adjustment resulted in an unusually low 15% core tax rate in the fourth quarter. Now let's take a closer look at our segment results for the fourth quarter and full year, beginning with Optical Communications. Fourth quarter sales were $1.2 billion, down $122 million sequentially, reflecting the slower pacing of customer projects that we discussed on our last call. Net income was $130 million, down $53 million sequentially on lower volume and the impact of reducing inventory. The strength of the first 3 quarters of 2022 drove annual sales to an all-time high of $5 billion, reflecting a 15% increase, while net income grew 20% year-over-year to $661 million. Moving to Display. On our last call, we said we believed panel maker utilization had reached bottom in September, but it was too early to call the timing or the shape of the recovery. We were then very encouraged to see panel maker utilization levels climbed in October and then again in November, indicating a recovery had begun. However, in December, China reopened and a significant wave of COVID outbreaks ensued, panel maker utilization leveled off in December and has since decreased in January. We believe that panel maker utilization will resume its recovery. In January, panel makers are operating below the current reduced rate of demand. I'll cover more on our Display outlook in a moment. Display sales in the fourth quarter grew 14% sequentially to $783 million. Net income was $171 million, up 28% sequentially on strong execution and the additional volume. Fourth quarter glass price was consistent with the third quarter as expected. For the full year, sales were $3.3 billion and net income was $769 million, both down year-over-year, reflecting the impact of the industry correction in the second half. Glass price for the full year was consistent with 2021. We anticipate glass price in the first quarter of '23 to be consistent with the fourth quarter, and we expect the favorable glass pricing environment we experienced over the last few years to continue, driven by 2 factors: first, glass makers continue to align supply to demand. Corning and other glass makers have been taking additional tanks offline for maintenance and repairs after an extended period of glass tightness. As we've told you before, we are taking this opportunity to upgrade our fleet with the latest technology, and we are actively managing the timing of tank restarts to align our supply to demand. Another factor is glassmakers profitability. It is challenging for glass makers who have high fixed costs to maintain profitability during this period of low volume and high inflation. We have maintained stable price and market position through this industry correction and as demonstrated in the fourth quarter when the market recovers, incrementals from our increased volume will be meaningful. In Specialty Materials, fourth quarter sales of $505 million were down 3%, but we outperformed our markets driven by customer product launches and continued strong demand for premium glasses and advanced optics products. Full year sales were $2 billion, flat year-over-year. Gorilla Glass sales were down 5%, outperforming the smartphone market, which was down 11% and IT market, which was down 15%. Advanced Optics grew sales 12% driven by the strength of our next-generation semiconductor equipment materials. Full year net income was $340 million, down 8% year-over-year due to continued investment in next-generation materials for consumer electronics and semiconductor equipment as well as new markets, such as bendable devices and augmented reality. In Environmental Technologies, fourth quarter sales were $394 million, up 12% year-over-year. And net income was $69 million, up 28% year-over-year. Sequentially, fourth quarter sales were down 7%, impacted by a decline in China OEM production levels in December, driven by similar COVID dynamics I mentioned in Display. Full year sales of $1.6 billion were flat versus 2021 as light and heavy-duty markets in China remain weak and global auto market growth was restricted. Net income for the full year increased 9% to $292 million as we improved our productivity and raised prices. Turning to Life Sciences. Fourth quarter sales were $294 million, down sequentially and year-over-year, impacted by lower demand for COVID-related products. Fourth quarter net income was down, driven by lower sales and the impact of reducing inventory. Full year sales of $1.2 billion were consistent with a strong 2021, while net income was $153 million, down 21% as the unexpected shift in demand away from COVID-related products led to a significantly lower productivity in our manufacturing operations. And finally, in Hemlock and emerging growth businesses, sales in the fourth quarter were $462 million, up 22% year-over-year and 14% sequentially. And full year sales were $1.7 billion, up 34% year-over-year, reflecting strong demand for polysilicon as we continue to see robust demand for both semiconductor and solar grade polysilicon. We also saw strong growth in Automotive Glass Solutions and Pharmaceutical Technologies. To close out my segment recap, we're pleased that our more Corning approach and secular trends in optical and solar enabled us to grow sales and outperform our markets. Turning to our outlook. We maintain an attractive long-term trajectory and are well positioned to capture growth. Looking at the near term, typically, in the first quarter, our sales declined about 5% sequentially and margins declined about 1 to 2 points. This quarter, we expect a sequential sales decline of 6% to 11%. In contrast, with the recent price and productivity actions we've taken, we expect about a 1- to 2-point margin improvement in the first quarter. In total, for the quarter, we anticipate core sales in the range of $3.2 billion to $3.4 billion and EPS in the range of $0.35 to $0.42. Our first quarter sales outlook reflects the current dynamics in China since COVID restrictions were lifted in December. The situation has impacted consumer sentiment and labor availability, which is playing out across some of the industries we serve. For example, in Display, as I mentioned, we saw panel maker utilization decline in January back to October levels. With that, we now believe the display industry recovery has been delayed by at least a quarter. And in environmental, we expect the lower OEM production levels we saw in December to remain in the first quarter. We will have a better feel for the situation in China after the Lunar New Year, and we'll share more with you as we go through the quarter. As a reminder, the first quarter is usually our lowest volume quarter of the year. So we expect sales to grow sequentially in the second quarter. And I'll also note that we expect 2023 full year capital expenditures to be consistent with 2022. Before I close, I want to cover 2 other topics. First, I want to take a minute to address currency exchange rates. As a reminder, we have actively hedged our foreign currency exposure over the past decade. This serves as an effective tool to reduce earnings volatility, protect our cash flow, enhance our ability to invest and protect shareholder returns. Our largest exposure is the Japanese yen. As we've previously shared with investors, we have most of 2023 hedged. We now also have most of 2024 hedged. We expect to keep our core rate at 1-0-7, at least through the end of 2024. We're very pleased with our hedging program and the economic certainty it provides. We've received more than $2 billion in cash under our hedge contracts since their inception. Second, as CFO, in addition to investing for organic growth, my top priorities include maintaining a strong and efficient balance sheet and returning excess cash to shareholders. Examples include creating one of the longest debt tenors in the S&P 500. Our current average debt maturity is 25 years, with only $1 billion in debt coming due in the next 5 years and no significant debt coming due in any given year. And our interest rate exposure is very low because essentially all our debt instruments are fixed rate. Additionally, over the last 4 years, we have consistently returned excess cash to shareholders even throughout the pandemic, and one of the ways we do that is through dividends. We have grown our dividend 35% since 2019, and we have increased our dividend for 12 consecutive years. Our dividend yield is top quartile in the S&P 500 at 3%. As we enter 2023, we will recommend that our Board approve an increase in the quarterly dividend, raising the annual rate from $1.08 to $1.12 per share. Stepping back, our long-term growth drivers all remain intact. As markets recover, sales growth will resume and we're well positioned to continue capturing growth tied to key secular trends, such as optical and solar. In the face of ongoing macroeconomic challenges, we grew our sales 5% in 2022 and delivered a CAGR of greater than 8% since 2019. We have adapted to meet near-term needs, taking actions throughout this period. And while our profitability and cash flow have been impacted, we expect to see the benefits of additional actions we took in Q4, in our Q1 results and throughout the year. I have one for Ed, one for Wendell. Ed, you said your core rate will be 107 through 2024, but I would imagine your transactions are increasingly happening away from this core rate. How should we think about the impact of the yen as we think about 2023 and 2024 if the hedge rate is significantly away from the core rate? And for Wendell, can you talk about Corning's role in both bendable and augmented reality since Ed mentioned it in the script? I'm kind of curious on the technology that you're bringing. And b, any thoughts on commercial availability for these products, particularly by flagship customers? Yes. Wamsi, this is Ed. I'll take your yen question first. So just for clarity, our hedges are actually close to our core rate in '23 and 2024. And we have most of our exposure hedged, and that's why we expect to keep our core rate at 107. With the recent strengthening in the yen in December and January, we were able to put more hedges in place for 2024. It is -- sorry, Ed, if I could just follow up on that. Is the cost to hedge significantly different in '23 and '24? Thanks for your question on bendable and augmented reality. For bendable, we have 2 significant opportunities, one of which is we're relatively matured in, which is we make the mother glass upon which the displays are manufactured to be able to do a bendable display. Actually to make one of those displays consumes more glass than sort of a typical LCD does. Second, where the bulk of our innovation investment -- new innovation investment has been is in the cover material for bendables. This effort has led to many of the bendable devices that you see today. It still is not a product that we believe is meeting the true needs of the customer. So we have a whole series of new innovations that we're doing to try to take that technology and make it be able to be mainstream rather than just a novelty. This effort is going to continue for the next number of years, and you can expect to see us introduce new products in that space. In augmented reality, 2 major efforts. One has, once again, be COVID-related, and I don't want to talk about that in too much detail. And then two, is we make the material and sometimes the wave guys that create that digital light field in front of your eyes. And so we have significant efforts in both these areas, augmented reality, embryonic industry, but quite exciting for the long term. My first question is about the guidance. Can you talk about the sequential growth in EPS? I think implied from the guidance adjusting for the tax benefit, EPS decline more sequentially comparing to core revenue. Is there anything else we should be looking for, for OpEx knowing that the margin -- gross margin is likely to improve sequentially? Martin, I'll take that one. No, I think actually, our margins, both gross and operating margin, should improve sequentially in the guidance we've given you. Obviously, we've given a range for both sales and earnings per share. And you're right, if you adjust for the tax rate, it's actually a reasonable level of incrementals on the lower sales. Remember, sales are going down 6% to 11% sequentially. So Martin, yes, I think you're doing your math correctly. You're seeing a pretty significant increase for us in our profitability at both the gross and operating margin lines and somewhat muted by the delta in tax rate from quarter 4 to quarter 1. I think you've got it. Got it. And then a question on automotive glass, you highlighted as one of the growth areas. Can you maybe talk about, is it more in the infotainment side? Or are you seeing adoptions for windshield and or the external glasses? The bulk of our current revenues are in the interior set of products. The growth rate is highest in our exterior. Whatâs â youâve seen all the trends on the interior with these very large curved displays being introduced in more and more products. And when that happens, that is by and large us with our patented ColdForm technology. But as well, especially with electric vehicles, because they are so quiet, you experience them as noisy, at least the outside world is more noisy. And so as a result of that and the amount of energy it takes to maintain the HVAC system within an electric vehicle, weâre seeing the adoption of laminated technologies beyond the windshield in sidelights, [rooms], backlights. And quite often, that is leading to adoption of one of our new technologies, which we pair with Gorilla to create a unique laminate structure that is both performance, weight and cost advantage. And weâre seeing very nice take-up of that as well. I actually had a question or a 2-part question on display. I know you outlined your thoughts around display and the lower panel maker utilization you're seeing in 1Q. Could you just give us a bit more color on sort of what are the range of sort of volume changes you're expecting sequentially into 1Q? What sort of typical seasonality there in terms of volume? How much of a difference or variance to the normal seasonality are you expecting in display in 1Q? And sir, the second part to that, I know you outlined China consumer spending as a sort of a watch point here, but any thoughts on TV sales or TV unit sales for the year, even if it's markets outside of China at this point? Samik, let me make sure I understand your first question. I understand your second one. So you're asking how we expect to see beyond quarter 1 in panel maker utilization within the quarter? Okay. So I think -- to answer the Q1 one, I'm actually going to start a little bit. I'm going to go back in time, talk a little bit about Q4. You will remember on our last quarterly conference call, what we talked about was that -- we called that panel maker utilization was at bottom in September, but it was too early to tell sort of timing and shape of the recovery. As we entered into quarter 4, we saw a significant increase in panel maker utilization in October and then another significant increase in panel maker utilization in November. And we -- our models were telling us that information, along with panel price increases and what we were seeing in order behavior in the industry, meant that the recovery was underway and that recovery would continue to arc upwards after adjusting for seasonality through Q1 and throughout this year. In December, when China changed its approach to the pandemic, we saw panel maker utilization rather than continue its next step up sort of level off. And then as we look at January, it looks to us like as they reduced it back really about to the levels we saw in October, that the recovery is sort of delayed a quarter is the way we would tend to think about it, adjusting for seasonality. And then that ties to your retail piece. So we would expect panel maker utilization to grow through the year because as Ed shared with you, this UT now -- the production rate is below the even relatively depressed level of set demand that we see in the end market. Which takes us to the next part of your question, which is we would expect to see the retail market recover as the year goes on. And it doesn't have to be much, even relatively flattish set demand year-over-year, given the state of panel maker utilization, will still result in pretty significant growth for us at the glass level. I wanted to talk about Hemlock, which was an outperformer this quarter. Wendell, can you talk a bit about the long-term opportunity that you see for polysilicon and sort of the trajectory, especially with the IRA? And then Ed, maybe could you talk about the margin potential for this segment? Because I would assume there's a fair amount of scale leverage that's there as you're able to utilize some of the excess manufacturing capacity that you have? So our goal, Shannon, we'd like to build about $1 billion solar business for us here at the company, and it could take a variety of different product forms. It's too early right now for us to make any specific announcements. But given the IRA, we see many opportunities to both grow and enhance the profitability of this business. Again, Shannon, I would add 2 things. One, sort of Hemlock's overall gross margin is similar to our corporate average in the same zone sort of in normal circumstances, half the business or more is semiconductor and you've got solar, right? So you've got those both product sets in there. That's all within our Hemlock and emerging growth segment. And then the second thing I would add is that we have added solar capacity which was, as we described, very inexpensive capacity because it was previously mothballed. We were able to turn it back on. As we think about the next phases of growth, there may be some costs to do that and there may be just some impacts to gross margin as we go along that journey. But in the current state it's in, think of it as around the average for Corning. I was just wondering if you can maybe explain the productivity ratio improvements or the adjustments that you talked about in terms of what kind of costs were involved and what exactly you were doing there from both a near-term standpoint and what it implies for your ability to maybe control your own destiny on the cost side should end markets remain tough this year? Yes. Thanks, Steve. Maybe the way to think about it is as we talk about what our priorities were through the pandemic, one of them was serving our customers. And we disproportionately erred on the side of being able to do that, right? In the beginning, when inflation was coming in, we made sure that we got our customers what they needed over time, we were able to raise price and offset that. And similarly, in the production space, we did whatever we needed to do to ensure that we have the products available to ship to our customers, in a very difficult supply chain environment in a very difficult pandemic environment where being able to staff your factories, have all the materials you need and be able to make the products you need was very difficult over this sort of long sweep of time starting in '21 and running through the end. So we've been able to improve the way we operate, improve our yields, improve our staffing levels and in some cases, take some adjustments and realign our capacity allow us to get back to what we would consider to be our benchmark or our historical productivity metrics. So making sure we have the right output at the right cost at every level in all of our factories. That's our objective. We're not completely there yet, but we've taken a lot more action in the fourth quarter, and we've made a significant amount of progress that will improve our cost and therefore, improve our gross margin. Well, I think longer term, it almost if you think about it, it gets us back to being able to operate like we did pre-pandemic, right? Pre all of the supply chain disruption, we are humble, at least I will be humble here that we have been surprised by a lot of things, including this recent change in the way China has operated during the pandemic, which clearly impacts us and our customers and our suppliers. But putting that aside, I feel like we now are able to run more like we did pre-pandemic levels, which then allows us to grow as our demand comes back and our margin should get back closer to our historical levels. I was just curious in specialty. Is there a way to think about the pace of new content wins over this next year? So you shared you grew almost 10 percentage points greater than the market in '22. How would that metric look in '23 based on what you know now? We have a number of significant new content, new value-added products that will begin to be introduced for upcoming model launches. So we would expect to have sort of a more Corning dynamic happen again. Now the actual degree of overperformance will really depend upon the success and pace of adoption of those new innovations. So I'd like to see both how our product does add sort of our customers' unique products using this technology does before I would characterize a specific numeric level of outperformance. Okay. And if I could just follow up on the cost side of things. So you talked about your productivity. Is there anything we should be considering energy or otherwise flowing through differently for you guys given your hedging strategies over the past couple of years? Yes, Josh, I think with respect to inflation, as we've shared sort of throughout the year, we continue to be surprised primarily to the negative on all the things that we consider sort of input costs to run our business. Things have normalized a little bit as we come to the back half, and I think our price increases are allowing us to get to close to sort of neutrality as we go into 2023. Energy is certainly a cost that remains elevated relative to pre-pandemic levels, as do many other costs, by the way. I mean I think even though the rate of inflation has slowed and, in some cases, retracted, we're not back to pre-pandemic levels of costs for inputs. So I think it's -- energy is certainly one to watch, but nothing specific that I'd call out as we go into 2023. I think, Josh, that we're -- we've been able to -- with the actions we took in the fourth quarter, which is pretty significant. We've been able to catch up to the inflation that we have experienced, like looking in the rearview mirror. And that's one of the reasons that we're able to have the step up in our profitability in quarter 1 or sequentially from quarter 4. I think where we still have work to do is really in the area of what you're asking about, which is how accurately we see what's coming at us from an inflation standpoint and sort of getting ahead of the game. We're still working through that. Got a great team on supply chain who's trying to help us do it, but I think we need to improve there some more, Josh. Yes, I'd like to ask kind of a 2-parter on the optical coms business. First, kind of on the revenue side. It felt like last quarter or through the quarter, it was mostly like one large carrier that was part of the weakness. Now it seems like it's a little more distributed. It looked like enterprise was kind of weak in the quarter, and a lot of folks are worried about cloud spending into next year. So can you just talk a little bit about kind of the maybe enterprise telco mix there or how you see the dynamics differently in those 2 markets? And then secondly, obviously, profitability was weak in the quarter. Could you talk about that? Is that just component cost or is there something else going on? There's a pretty big dip in profitability there. So I think that perhaps it was any other industry players who would have just said this was one player. But I've always said it is -- in the carrier space, we had a number of carriers who were pacing their projects and also relative to what they've been doing to manage their supply chains one way or the other. Yes, clouds had a ton of activity as well. But by and large, we still think this is a carrier story. And we're -- we expect to work through that as we go through quarter 1 and then get the benefit of elevated demand levels as we go through the rest of the year. Yes. And I'll take the cost one or the margin one, profitability one. I think Opto is a good example of sort of all of the things we've talked about, inflation impacting the segment significantly, productivity levels impacting the segment significantly. Those things are depressing margins in optical. And the fourth quarter volumes also came down, and we also took inventory down in the fourth quarter in optical. And all of those things impacted our margins. So it's sort of a good example of all the things we've talked about. However, on the positive side, the actions we've talked about significantly impact optical as well. So as we go into 2023, that's a place where we would expect to see profitability improvement. Just 2 if I could. One, maybe bigger picture. As we think about maybe a slower start to the year, EPS, I think, is implied to be about $0.38 at the midpoint in 1Q. Is there any framework to use when thinking about the trajectory for EPS in 2Q onwards? And really what I'm getting at is any visibility you have towards when you get back to maybe a $2 a share sort of annualized EPS run rate? And then maybe just a follow-on to the last question. On Optical, have you seen any inflections or resumption of activity in 1Q? And then maybe when you would anticipate a more meaningful bounce back this year? So to the first question, what we've tried to do with our profitability actions is that to have that sort of run rate in EPS that you're talking about, that's a $2 run rate to be when we hit revenues that are like quarter 4, sort of 3,6, 3, 7 level. That's when with our actions on productivity and pricing that if they are effective, which we believe they are. Then, at that revenue level, that's when you should expect that type of EPS level. That's the way we're thinking about it, and that's the way we're modeling it. Did that answer your question, sir? That does. That does. And then just on Optical, have you seen any sort of resumption or bounce back yet in 1Q? Quarter 1 is like no time to call optical, right? So let me get another month or 2 into it, and we should be able to tell you how this all looks. We're very close with our customers. We're watching what they're doing. We're talking to them a lot on their project timing. And we just finished executing perhaps the most significant price increase -- not perhaps, the most significant price increase in my 30-plus years of being associated with optical communications, and we did it successfully, which gives you an idea of the extent of planned demand in this business. But just on free cash flow, Ed. Just -- I know a lot of questions have been asked on revenue, sales and how you guys think about margin improvement. Can you shed some light on cash flow and your adjusted free cash flow post the levels in '22? Yes, sure, Asiya. I mean I think on capital, I shared our view that we expect to hold CapEx similar in 2023 as we did to 2022, and that was sort of similar to the prior year as well. And I think what you saw in 2022 that really impacted our operating cash flow the most was the inventory build. We built about $500 million of inventory in the year. So obviously, that negatively impacts our operating cash flow. Our goal is to make inventory go the other way. We made a small step in the fourth quarter here. And even not building inventory, just holding inventory flat helps our cash flow going forward. So our goal is to make our operating cash flow go up, keep our CapEx flattish, and so that should make free cash flow go up. But we've got work to do to be able to do that, and it's primarily in the inventory space. Okay. And are you expecting like a lot of resumption in share buyback here? I know you talked about dividends -- an increase in dividends. How should we think about the pre -- how should we think about share repurchase in '23? Yes, I'm not going to guide that specifically. But what I would say is our priorities are investing for organic growth, and we will continue to do that. We believe there's a lot of opportunity out there. That's sort of the highest priority for our operating cash flow, and then we want to return cash to shareholders. We shared what we plan to do on the dividend. And then, of course, buybacks are important to us. As a reminder, we did a very large buyback in 2020 -- I'm sorry, 2021 with Samsung's conversion of their preferred shares. We bought back about 4% of our outstanding shares, and that sort of is still -- we're still paying for that. We've got one more tranche to pay for that in April of 2023. And then we'll have that behind us. That should give us more flexibility. And buybacks, of course, will remain important. Operator, I think we're out of time. So I'm just going to shut us down for today. And I want to thank everybody for joining us. Before we close, I want to let you know that we're going to attend the Susquehanna Financial Group 12th Annual Tech Conference on March 2. And on March 7, we'll be attending the Morgan Stanley Technology Media and Telecom Conference. Additionally, we'll be hosting some management visits to investor offices in select cities. And finally, a web play of today's call will be available on our site starting later this morning. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
EarningCall_1040	Good morning, and welcome to Sify Technologies Financial Results for Third Quarter and Fiscal Year 2022 to 2023. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Praveen Krishna. Praveen, the floor is yours. Thank you, Jenny. I would like to extend a warm welcome to all our participants on behalf of Sify Technologies Limited. I'm joined on the call today by Raju Vegesna, our Chairman; M. P. Vijay Kumar, Executive Director and Group CFO; and Kamal Nath, CEO. Following our comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please call Grayling Global at 646-284-9400, and we'll have one sent to you. Alternatively, you may obtain a copy of the release at the Investor Information section on the company's corporate website at www.sifytechnologies.com/investors. A replay of today's call may be accessed by dialing in on the numbers provided in the press release or by accessing the webcast in the Investor Information section of the Sify corporate website. Some of the financial measures referred to during this call and in the earnings release may include non-GAAP measures. Sify's results for the year are according to the International Financial Reporting Standards or IFRS, and will differ somewhat from the GAAP announcements made in previous years. A presentation of the most directly comparable financial measures calculated and presented in accordance with GAAP and a reconciliation of such non-GAAP measures and of the differences between such non-GAAP measures and the most comparable financial measures calculated and presented in accordance with GAAP will be made available on Sify's website. Before we continue, I would like to point out that certain statements contained in the earnings release and on this conference call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company sees protection afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed from time to time in the company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements, but are not intended to [indiscernible] a complete list of all risks and uncertainties inherent to the company's business. Thank you, Praveen. Good morning, everyone, and thank you for joining us on the call. India's resilience demonstrated post-COVID has formally established, it has an economy that is not easily disturbed by changes in the business enrollment. This is with an aggressive adoption of digital tools, has worked well for the economy. The government's larger agenda of ensuring that social measures reach the intended beneficiaries is a work in progress, and we'll continue to drive the domestic IT demand. International demand is expected to continue due to the comparable attractiveness of the Indian market in spite of the tightening world economy. And you together, this worked well for an economy that is still at the early stages of realizing its potential. Let me now bring in Kamal, our CEO, to expand on some of the business highlights for the past quarter. Kamal? Yes. Thank you, Raju. Indian enterprises have fast-tracked their digital initiatives based on their success and navigating the pandemic and are now operationalizing pandemic era innovations. Enterprise priorities are building business aligned digital models, enhancing end-user experience, deploying resilient business continuity models and mitigating security risks. Our Data Center and Cloud Services, Digital and Network Services are all important building blocks to enable customers' business priorities. And we expect each of the businesses to grow with the related investments. Let me now expand on the business balance for the quarter. Revenue from Data Center Services grew approximately 19% over same quarter last year. Revenue from Digital Services grew approximately 90% over the same quarter last year. Revenue from Network Services grew by 8% over same quarter last year. The revenue split between the businesses for the quarter was Data Center Colocation Services at 27%; Digital Services at 35% and Network Services at 38%. Sify commissioned incremental data center capacity of 4.1 megawatt in the quarter. As on December 31, 2022, Sify provides services via 846 fiber nodes across the country, an 11% increase over the same quarter last year. The network connectivity service has now deployed 5,900 -- service bonds across the country. During the quarter, Sify has invested in start-ups in the -- U.S. dollars in the Silicon Valley area as part of our corporate venture capital initiative. To date, the cumulative investment stands at USD 4.69 million. A detailed list of our key wins is recorded in our press release, now live on our website. Let me bring in Vijay, our Executive Director and our Group CFO, to elaborate on the financial highlights for the quarter. Vijay? Thank you, Kamal. Good morning, everyone. Let me briefly sum up the financial performance for the third quarter of financial year 2022, '23. Revenue was million, an increase of 31% over the same quarter last year. EBITDA was INR 1,619 million, an increase of 3% over the same quarter last year. Profit before tax was INR 227 million, a decrease of 52% over the same quarter last year. Profit after tax was INR 258 million, a decrease of 25% over the same quarter last year. The profit after tax is higher than the PBT, profit before tax due to recognition of a deferred tax asset. Capital expenditure during the quarter was million. Our investment into the Data Center side of the business continues with incoming demand from both retail and hyperscale customers. We have scaled up investments, both capital expenditure and operating expenditure in our fiber network in select metro cities to scale our network business and in people for our Digital Services business. Network connectivity, cloud interconnect and resultant investment in tools, processes, people will augment this demand. Fiscal discipline will be of constant, particularly in our investment process. Cash balance at the end of the quarter was INR 4,256 million. I will now hand over to our Chairman for his closing remarks. Thank you, Vijay. Enterprises now view digital adoption as a business imperative. Based on the size of their investment and ambitions, it will require continuous engagement with service providers like us. Our aim is to become a constant in their considerable bracket -- in their consideration bracket. Thank you for joining us on this call. I will now hand over to the operator for questions. Operator? The EBITDA margin came in a little bit below what I was expecting. I think some of that's due to mix, but was there anything outside of the higher mix of digital services that led to the lower margin? You're right. There is -- it is essentially due to our investments into people cost for our digital services business. And as I mentioned, it is also due to operating expenses, investment in our network fiber expansion in select metro cities. Okay. Do you see the margin contracting further from here? Or are you going to start to get some leverage on these investments, I guess, when will you start to see the revenue from these investments offsetting some of the incremental spend? Correct. I think the incremental spend should help us to scale up our revenue and margins in the future. As you know, these infrastructure businesses require continuous investments for us to scale on both revenue and profitability. So these expenses are in that direction. Okay. Maybe just to ask another way, do you expect to increase investments further from here? I mean -- or margin -- is this a good margin level to model out? Or are we going to contract a little bit more before we grow them again? I don't -- Yes. I don't want to sound forward-looking, but we believe that we have made investments over the last few quarters. And at current level, we should start monetizing the same in the Future. Okay. Perfect. And then just to dig into what drove the strong growth on the digital service side of the business. What was the main driver of that? So 2, 3 reasons I will assign. So we had order books for some medium-sized and large-sized projects. So as and when we have completed the projects, we have been able to recognize the revenue. So there were some seasonal aspect to it with respect to the completion of the project and the recognition of the revenue, during the quarter. That is one. And of course, we are also seeing -- Yes, so the other aspect is that we are also seeing increase in business acquisition on the digital services space. And as Vijay was mentioning, we are continuously investing in and around Digital Services. So those are the 2 primary reasons. Okay. So as some timing on projects on the technology integration services side of the business. And I guess that looking out, we would expect that to step back down maybe next quarter or maybe not if the pipeline is strong, but -- how should we think about that going forward? Right. These projects take a lot of time because these projects are very transformational in nature, which includes, of course, the technology introduction service as well as bit of managed services as well as cloud services. So the clients are expecting as a part of the scope of work, transformational outcomes, post which we get the sign off. So even if the projects are great, but these are complex at the same time. So we may see -- irrespective of the business acquired, we may see such seasonal revenue recognition increase based on the time line of the project implementation. That's how define these characteristics. Okay. And then in terms of the capital from Kotak, how much of you've drawn from Kotak and how much remains outstanding? Yes. In INR -- in rupee terms, we have so far drawn INR 4000 million. And we have option to draw a further INR 6000 million -- INR 6,000 million. Okay. Perfect. And in terms of your data center capacity, how much incremental megawatts of capacity do you expect to come online this year? In the fiscal year ending March '23, the incremental capacity will be small, but there are 3 greenfield projects which are presently under construction at 3 major cities: Mumbai, Delhi, which is Noida and Chennai. All the 3 are expected to become operational end of calendar year '23. And they're all designed for an initial capacity of about 78 megawatts, but we will start delivering it in stages to our customers. Okay, perfect. Okay. And the start-up investments you're making in Silicon Valley, is that to acquire technology? Or is that purely just a financial investment you're making there? These are basically to access technology, which we can take it to our enterprise customers in India, in their journey for digital transformation. Okay. All right. And then just lastly, the revenue -- the data center revenue, the growth was a little bit lower than I was expecting and it was actually down a little bit, I think, sequentially. So what drives that. I would think of that business more as just kind of a secular steady growth but maybe there's other things driving some fluctuation quarter-to-quarter there. There's actually no fluctuation. As you rightly observed, it is a steady revenue. The last quarter, we had some onetime capacity delivery revenue, which accrued to us. The recurring revenue continues to be stable. And the recurring revenue will start seeing a growth as in when new capacity gets operationalized. [Operator Instructions]. Okay. We don't appear to have any other questions, so I will now hand back over to the management for any closing remarks. Thank you, everybody. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.
EarningCall_1041	Good afternoon. Thank you for attending the Sandy Spring Bancorp Earnings Conference Call and Webcast for the Fourth Quarter of 2022. My name is Matt, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Daniel Schrider, President and CEO. Daniel, please go ahead. Thank you, Matt. And good afternoon everyone. Thank you for joining us for our conference call to discuss Sandy Spring Bancorp's performance for the fourth quarter of 2022. As Matt mentioned, this is Dan Schrider speaking and I'm joined here by my colleagues, Phil Mantua, Chief Financial Officer; and Aaron Kaslow, General Counsel and Chief Administrative Officer. Today's call is open to all investors, analysts, and the media. There is a live webcast of today's call and a replay will be made available later on our website. But before we get started, covering highlights from the quarter and then taking your questions, Aaron will give the customary Safe Harbor statement. Aaron? Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risks and uncertainties. These forward-looking statements include statements of goals, intentions, earnings, and other expectations, estimates of risks and future costs and benefits, assessments of expected credit losses, assessments of market risk, and statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon or affected by management's estimates and projections of future interest rates, market behavior, other economic conditions, future laws and regulations, and a variety of other matters, which by their very nature are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp's actual future results may differ materially from those indicated. In addition, the Company's past results of operations do not necessarily indicate its future results. Thank you, Aaron. And thank you all again for being on the line today to discuss our fourth quarter and annual performance. As you read in our press release and I shared last quarter, we're managing through what continues to be pretty challenging operating environment including high inflation, these rapid increases in interest rates we've experienced and a continual threat of recessionary pressures. And while the economic forecasts as well as the probability of recession are driving the provision for credit losses, we are not seeing any trends that indicate that our credit quality is on the edge of deterioration. Now these are complex issues, but we have managed through challenging seasons before. Continuing to balance the long-term view we have of our company and the immediate business needs, our focus is centered on growing client relationships and driving core funding. So with that, let's shift to review the details of our financial performance. Today we reported net income of $34 million or $0.76 per diluted common share for the quarter ended December of 31, 2022, compared to net income of $45.4 million or $0.99 per diluted common share for the fourth quarter of 2021 and $33.6 million or $0.75 per diluted common share for the third quarter of 2022. Core earnings were $35.3 million or $0.79 per diluted common share compared to $46.6 million or $1.2 per diluted common share for the quarter ended December 31, 2021 and then $35.7 million or $0.80 per diluted common share for the quarter ended September 30, 2022. The decline in core earnings is primarily the result of the provision for credit losses and the expected decline in fee income. Looking at our earnings through another lens, pre-tax, pre-provision income was $56.6 million compared to $64.1 million in the linked quarter and $61.7 million in the prior year quarter. The provision for credit losses was a charge of $10.8 million compared to a charge of $1.6 million in the fourth quarter of 2021, and a charge of $18.9 million for the third quarter of 2022. The quarterly provision expense contained a provision charge of $2.9 million which was associated with unfunded loan commitments. Excluding the provision for unfunded commitments, the provision reflects the declining economic forecast and the increasing probability of recession. And to clarify, we break out the provisions expense for funded and unfunded loan commitments for accounting purposes, but the primary drivers are the same. Shifting to the balance sheet, total assets grew 10% to $13.8 billion compared to $12.6 billion in the prior year quarter. When you exclude PPP loans, total assets increased 11% year-over-year. Total loans, excluding PPP, increased 16% to $11.4 billion at December 31, 2022, compared to $9.8 billion at December 31 of last year. Total commercial loans net of PPP grew by $1.2 billion or 15% during the previous 12 months. Gross commercial loan production over the past 12 months was $3.9 billion of which $2.5 billion was funded, offsetting the $1.2 billion in non-PPP commercial loan run-off. Funded commercial loan production during the fourth quarter of 2022 was $341.7 million. Commercial run-off in the fourth quarter was 38% lower than the linked quarter and 45% lower than the prior year quarter. The annualized run-off rate in the fourth quarter was 10% compared to a historical average of anywhere between 12% and 15%. We expect run-off to settle in the 7% to 9% range for the next few quarters. Commercial real estate, as you know, has been an important business line for the bank representing deep relationships with the region's best builders, developers, and investors. And while we'll continue to serve this important client segment, we're also working hard to diversify our lending concentration by attracting more C&I relationships and focusing all client-facing teams on core funding initiatives. If you look at Page 17 in the supplemental deck, you can see that this approach is already starting to take effect as our C&I growth has outpaced our CRE growth for the first time in many quarters. As we look forward into 2023, we expect the commercial real estate portfolio to be flat or even slightly down for the quarter. C&I owner-occupied are shaping up to be slower in the first quarter, but expect around 2% to 3% growth per quarter starting in the second quarter of the year. The mortgage construction portfolio will continue to fall as production is significantly slowed. A construction conversion should drive growth in the permanent portfolio, which again will likely to grow 2% to 3% per quarter. Recognizing that macroeconomic changes could impact our results, at this stage, we expect our overall loan growth for the year to be in the mid single-digits and more weighted in the second through fourth quarter. At the end of the quarter, our commercial pipeline was at $944 million compared to $1.3 billion for the linked quarter, representing 32% reduction. This indicative of both a change in demand and our shifting focus to do more C&I lending. And shifting over to the deposit portfolio, deposits grew 3% during the proceeding 12 months as interest-bearing deposits grew 6%, offset by a 3% decline in non-interest-bearing deposits. Additionally, borrowings increased by $928 million during the period. Excluding broker deposits, total deposits decreased 4% in the fourth quarter. The combination of higher interest rates and seasonal runoff drove non-interest-bearing deposits to be lower during the fourth quarter, but we expect to see some recovery in the latter half of this first quarter. DDA balances are also experiencing pressure due to lower title company deposits, which totaled $437 million in the fourth quarter of 2021, but fell to $227 million at the end of 2022. Core money market in time deposits perform well during the quarter with core money market accounts growing $91 million or 3% and core time deposits growing $199 million or just slightly under 18%. We are clearly relying on more wholesale funding sources while we navigate this challenging rate environment. As I shared last quarter, we have several near and long-term efforts underway to respond to these challenges. We continue to offer some of the most competitive rates in the market. Every salesperson is being incentivized to drive deposit relationships with both retail and commercial clients. And earlier this week, we launched a more sophisticated online account opening platform that will expand client channels, make the account opening process faster, easier, and more convenient for our clients. Moving to the margin, the net interest margin was 3.26% compared to 3.51% for the fourth quarter of 2021 and 3.53% for the third quarter of 2022. The decrease in the net interest margin for the current quarter compared to the fourth quarter of the prior year and previous quarter was the result of the increase in the rates paid on interest-bearing liabilities outpacing the increase in the yield on earning assets. The overall rate and yield increases were driven by multiple Fed rate increases that occurred over the proceeding 12 months. Excluding the impact of the amortization of the fair value marks derived from acquisitions and interest in fees from PPP loans, the net interest margin would have been 3.26%, compared to the net interest margin of 3.31% for the fourth quarter of 2021 and 3.5% for the linked quarter. On a go forward basis, we anticipate that the margin will further decline in the first quarter into the 3.10 to 3.15 range and then start to rebound under the assumption that the Fed will complete its tightening cycle by the end of the first quarter. Non-interest income decreased by 37% or $8.2 million compared to the prior year quarter. The reduction as a result of several factors, primarily the impact the economic environment is having on mortgage banking activities and wealth management income. Obviously, the decline in insurance commission has given the fact that we dispose of our insurance business in the second quarter of 2022 and then lower bank card income due to regulatory restrictions on fees since we became subject to the Durbin amendment. Income from mortgage banking activities decreased $2.8 million compared to the prior year quarter and $800,000 compared to the linked quarter. The decline is a result of the rising interest rate environment, which continues to dampen mortgage origination and refinancing activity. In light of current origination levels, we did execute a reduction in staff in our mortgage division in the fourth quarter and we'll continue to evaluate that going forward. However, total mortgage loans grew $377.5 million during the 12 months ended December 31, 2022. We expect near-term mortgage gain revenues to settle into a range between $1 million to $1.5 million per quarter. Due to ongoing market volatility, wealth management income decreased $390,000 compared to the linked quarter and $1.1 million compared to the prior year quarter. However, assets under management finished strong at $5.26 billion compared to $4.97 billion at the linked quarter. Despite a challenging market, our teams continue to win and drive new relationships. And looking ahead, we see wealth revenue significantly influenced by fluctuations in equities and bonds. But if the market does not take a step back, we anticipate 2% growth per quarter. Non-interest expense for the current quarter decreased $1.8 million or 3% compared to the prior year quarter, driven primarily by the decreases of $2.1 million in compensation and benefits expense, $1 million in occupancy expense and $0.5 million in other non-interest expense. These decreases were partially offset by increases in various other categories of operating expenses. We look demand as growth in operating expenses in the 5% to 6% range off of fourth quarter levels with an immediate bump in the first quarter of 2023 due to certain compensation related costs that reengage early in the year and increases to the run rate related to some of our technology initiatives. We then looked to manage quarter-over-quarter growth by targeting a non-GAAP efficiency ratio within the range of 51% to 52% and continuing to evaluate our expense levels commensurate with revenue trends. The non-GAAP efficiency ratio was 5 â Iâm sorry, 51.46% compared to 50.17% for the prior year quarter and 48.18% for the third quarter of 2022. Moving to credit quality. As I noted in my opening remarks, we do not see anything in our metrics that indicates our credit quality will begin to deteriorate. Again, the provision charge is being driven by the economic forecast and not based on any change in current or projected credit based performance in the portfolio. The level of non-performing loans to total loans improved to 35 basis points compared to 40 basis points at the linked quarter and 49 basis points at December 31 of 2021. These levels indicate stable credit quality during a time of significant loan growth and economic uncertainty. Loans placed on non-accrual amounted to $5.5 million compared to $500,000 for the prior year quarter and $4.2 million for the third quarter of 2022. Within our NPA portfolio, we have no office or multi-family assets. We realized net recoveries of $100,000 for the fourth quarter of 2022 compared to net charge-offs of $400,000 for the fourth quarter of 2021 and $500,000 in recoveries for the linked quarter. The allowance for credit losses was $136.2 million or 1.2% of outstanding loans and 346% of non-performing loans compared to $128.3 million or 1.14% of outstanding loans and 289% of non-performing loans at the end of the previous quarter. Compared to the end of 2021, the allowance for credit losses was $109.1 million or 1.1% of outstanding loans and coverage of 224% of non-performing loans. The tangible common equity ratio decreased to 8.18% of tangible assets at December 31 compared to 9.21% at December 31 of 2021, a decrease as a result of the $25 million repurchase of common shares during the previous 12 months and the $123 million increase in the accumulated other comprehensive loss in the investment portfolio that resulted from the rising rate environment and the increase in tangible assets during the past year. At December 31, the company had a total risk-based capital ratio of 14.20%, a common equity Tier 1 risk-based capital ratio of 10.23%, a Tier 1 risk based capital ratio of 10.23%, and a Tier 1 leverage ratio of 9.33%. And before we move to your questions, letâs quickly recap leadership announcement we rolled out this quarter. Our President of Commercial Banking and Executive Vice President, Ken Cook is going to retire from Sandy Spring Bank at the end of February and then thereafter join our Board of Directors. Ken has dedicated his 40 year career to help me clients in the greater Baltimore and Washington regions. Iâm really grateful that he will continue to help lead our company as a Director. We are actively interviewing for a new executive to lead Commercial Banking, and we look forward to making announcement here in the near future. Maybe weâll start with the margin and the guide you sort just gave. I guess if the Fed pauses do you have an idea of how much that margin could rebound from the first quarter level, which I think you gave a 3.10% to 3.15% range? And then I guess my follow up would be just sort of against the loan growth guide you gave, what sort of assumption should we make on the deposit side, I guess the core deposits for growth? Okay. Casey, this is Phil. I would suggest to you that beyond that first quarter guide on the margin if in fact the Fed does, at least pause or stop their upward march here that we could probably see the margin come back anywhere from five basis points to 10 basis points a quarter from that point through the rest of the year. Now the caveat on that is that we get the kind of deposit growth that weâre really looking for in terms of the core DDA, and other interest-bearing categories as opposed to the continual need to fund either through wholesale or broker deposits or some form of similar borrowing. Because if that continues to occur, then that expansion in the margin most likely doesnât happen, just based on the differential in those rates. Okay, got it. And then, sorry if I missed this Phil, but just the other fees whatâs in that number and what was the dragging that down this quarter? It looked pretty low compared toâ¦ Yes, quarter-over-quarter, it was mostly the absence of swap fee income and prepayment penalties that we were able to generate in the third quarter that did not replicate themselves in the fourth quarter. Okay. And the last question Iâd ask, you touched a bit on office just in your prepared remarks. Do you have â do you happen to have your total office exposure? And maybe with that, can you just talk broadly about some of the larger loans you might have in that book and sort of how youâre positioned suburban versus metro office and just how youâre viewing that asset class? Yes, right now our total office exposure if you think about our investment real estate probably led by retail and about half of that amount at about a $1.7 billion and office is about $840 million in terms of outstandings. Thatâs up against the total CRE portfolio of about $4.7 billion. The office for us has always and continues to be kind of suburban office, professional office space as opposed to large four plates. So talking about medical office, office buildings that have smaller units that are easier to turn over the â and then within that context as well are some data center assets that we originated over the past few years that have been very strong performers at origination and these properties have weighted average loan to values in the low-60s and then coverages in the mid-150s. So, we have never been a big urban player and weâve never been a large office player. If you kind of think about some of the like Tysons Corner downtown office, large four plates, it just hasnât been our sweet spot and then very little out of the ground most has been refinance activity from assets that have been under investor ownership for a number of years, which is whatâs driven that combination of loan-to-value, and strong cash flow coverages. So, we continue to look hard at that actually every asset class within the CRE portfolio. But office is one that we have not seen significant growth in and just given particularly the last three years given the uncertainty around change of behavior in the post-COVID world. Thank you for your question. The next question is from the line of Catherine Mealor with KBW. Your line is now open. Just one follow-up on the margin, just back to Caseyâs question on the on loan price, I mean, excuse me, deposit pricing, where were deposit costs maybe towards quarter end or were youâre seeing them come as we test look into trying to back into that 3.10% [ph] to 3.15% margins to see deposit costs might be as early as next quarter. Yes. Catherine at the end of December, our overall cost of interest-bearing liabilities was about 2.10 [ph], and overall interest-bearing deposits was in the â was around 1.83 [ph]. Okay. Great. This would fit with your commentary that you think you might get net expansion in the back half of the year, just depending on how deposit balances go. But would it be fair to characterize like â how do you think about kind of over the cycle potential beta for you? Because as I look at where you are, cycle to date you're at around a 40% cumulatively, and that's where a lot of companies might be saying that their cumulative cycle betas will be maybe over the next couple of quarters. But is there a case to be made that for you, your cycle beta will still be higher but not significantly higher, and your pace of change should start to moderate as we go to the next couple of quarters? Just especially given your outlook for growth to be flowing in the next...? Yes, Casey [ph], I think that's a reasonable way to look at it. I mean we've really all along said that our model beta and our expectation on beta was around that 40%. So having it kind of average out there is not terribly surprising. It would most likely continue with â but probably a little bit higher. Even with the last 25, I guess, 50 basis points at the Fed, we think has in mind here for the remainder of this quarter. So we were probably averaging this quarter a little higher than that. But I think over time in the past that we've been proven capable of having the beta in the other direction move fairly quickly to allow us to take advantage of when rates either stabilize or ultimately drop back in the other direction. It's really a question of relative pricing between home loan bank borrowings and other forms of brokerage when necessary. We won't really lock into one form over the other. And I think that's what's reflected, in fact, in the fourth quarter here where we really traded out of a couple of hundred million of advances for some â about the same amount, maybe a little bit less in the brokered CD market. So we really kind of look at those things very similarly in terms of how we use them and we really just kind of trade one against the other on relative price and value. And we â I think we said it before; we've tried over the course of the cycle to keep all of those relatively short. And so, for example, we have a fair amount of maturity in both of those areas here in the first quarter, and we will replace them according to that same general pricing concept. And how about on loan pricing? Where are new loan yields coming on and â your loan portfolio is not as highly variable rate, which is partly what's happening to your margin now, but I kind of view you as â it will be just kind of a slow grind higher over the next couple of years as your longer-term loan portfolio continues to reprice and churn through. So how do you kind of look at maybe the pace of loan yield increases over the next couple of quarters? Yes. Well, I think that's also embedded in that guidance relative to forward-looking margin is that we'll continue to get some upward contribution from loan yields throughout that period. Just for pricing within the last quarter, albeit the levels of production in booked loans was slower than customary for us. I mean we in the commercial area alone, we ranged on average from the high 5.80%, 5.90% range up into in some cases over 7%, 7.5% on various categories of new production. And so that should continue to accrue our benefit as we move into the latter part of the year. Thank you for your question. There are currently no further questions registered. [Operator Instructions] The next question is from the line of Manuel Navas from D.A Davidson. Your line is now open. Hey good afternoon. The non-interest-bearing deposit, have come down a little bit. How far could that drop over the next couple of quarters? Well, thatâs a really good question. I mean one aspect of whatâs happened there is weâre certainly related to title company type of deposits balances, which probably canât go a whole lot lower than where they are today. And I think, in that respect weâve probably â we probably have bottomed out. But within the other categories that, are related to small business and just broader commercial type of deposits. Iâm not really sure; I could give you a definitive type of answer. Just not knowing exactly kind of what that pattern is related to other than the stuff that we have normally at year-end. So, I mean, we have â we have it continue to come down and through the first part of this quarter traditionally, and then have it rebound towards the end of the quarter. So, itâll probably trough during the quarter and you really wonât see it because it will ultimately report on the end of the quarter where itâll probably bounce back up. Okay. Thatâs helpful. And so thatâs kind of like working capital needs and kind of normal trends and is just a little bit larger the move this quarter than in prior quarters? Yes, I would say, so this quarter the kind of rundown on demand deposits, on the core demand deposits started earlier in the quarter than normal. And it happened more throughout the quarter than just at the end of the quarter, which is the traditional draw down activity with our commercial client base. I would say the obvious difference this year in that trend is, the availability that this intermediation that would occur within our book of DDA deposits moving into interest-bearing given the availability of actually earning something on your money this year relative to prior periods. So that and hopefully thatâs also, a trough that weâll see end as well and see that DDA balance is start to build back. Yeah. And fact, just a detailed tidbit, but in the premier money market account through the quarter embedded in $123 million increase just in that product line was $109 million of commercial based balance increase. To Danâs point about the potential of disintermediation. Okay. Thatâs good. Thatâs interesting to hear. As youâve been out of the market in over the last quarter and a half, how have you seen composite competition shift? I think the last, over that timeframe that youâve talked about? I think itâs still; this is a highly competitive market. Weâve continued, have been and continue to be near or at the top of the market in our various specials that weâve offered on both guaranteed rate as well as some select time deposits. So, I wouldnât say thereâs been a material change competitively in that window of time. Still very competitive. And, as weâve gone through obviously the last week and a half of earning season, it seems like that trend continues of pressure on the funding side and weâre seeing it in pricing. Yes, and I donât think the, the mix of competitors has changed to any large sticker either. I think itâs still, generally the usual suspects in this market. Thank you for your question. There are no additional questions waiting at this time. So, Iâll pass the conference back to Daniel Schrider for any closing remarks. Thank you, Matt. And thanks, Catherine, Casey, Manuel for your questions and for everyone else who joined todayâs call. With no other questions, our call is now concluded and we hope that you have a wonderful afternoon.
EarningCall_1042	Greetings, and welcome to GSI Technology Inc. Third Quarter Fiscal Year 2023 Results. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Lee-Lean Shu, Chairman, President and Chief Executive Officer. Thank you, Mr. Shu. You may begin. Third quarter revenue of $6.4 million was within guidance but at the lower end. Revenue growth was impacted this quarter by the uncertain outlook for the global economy. Despite this, we continue to see demand for our SRAM products, a interest in our radiation hardened and radiation tolerant products. While customer order patents are variable right now, these fluctuations are related to economy and external factors, not changes in the market requirements for our products. Despite the lower revenue in the quarter, increased sales of higher-margin products, resulting gross margin of 57.5% exceeding the high-end of our guidance range. While research and development costs declined sequentially, we saw an increase in selling, general and administrative expense, primarily related difference in the level of quarterly adjustments to contingent consideration and the severance expense related to recent layoffs. To ensure success and align our resources with the Company's goals, we announced several cost-reduction initiatives as at the end of November 2022. The executive team took a comprehensive approach to identify and implement our expense reduction measures, which included a thorough review of all expenses and was streamline process and improve operational efficiency. We have two objectives with this strategy, one to reduce our cash burn; and two, to align our resources around developing the APU. We are on track to achieve $7 million in savings on an annualized basis to target cost reductions. These measures aim to rightsize our operation and precisely manage spending to increase efficiency and focus our resources on advancing the proprietary APU technology. Let me update you on where we are today with APU hardware and software. The hardware development team is on track to take out Gemini-2 in the first half of this calendar year, which puts us on the schedule to see the first win by late summer. In that case, we could test the Gemini-2 chip by ['24]. If everything goes accordingly, we could have a second table to fix back to early last calendar year. In parallel, once we have achieved that the software team can use, they will start developing the API and the library for Gemini-2. Keep in mind that it took [indiscernible] in the Gemini-1 and forth to increase the EU and speed. Gemini-2 has 8x memory density over Gemini-1 and has 30x cost performance improvements. Gemini-2 can greatly enhance our market push of APU technology and provide further substantial savings in power and mono server footprint while enabling large-scale real-time search and HPC workloads. Software for Gemini-1 is an area of intense focus currently. We have a full build up [TV MAU] library deployed and used by customers and one research institute has been able to rely on library based only for their projects. Our GRA library is developed for SAR applications, and we have completed a POC project with IAI/Elta [indiscernible]. The Elta is also evaluating a GPU solution to benchmark against the APU. We could see some initial sales once the APU performance is proven favorable. In the meantime, we are marketing the SAR solution to other customers. We have recently improved our GSI library for similarity search applications. We are engaging with a large corporation for the POC project for our own print similarity search project that requires very high accuracy and a low latency. The improved GSI library is perfectly suited for this application. On the competitor front, we have completed C competitor that customers are using to program APU with [CPU]. We are in the process of completing [indiscernible] competitor to allow customers to run API application and their library in person. Currently, [indiscernible] is still in internal use and will be released for general use in July. Let me switch now to customer and product breakdown for the third quarter. In the third quarter of fiscal 2023, sales to Nokia were $1.3 million or 20.0% of net revenues compared to $1.9 million or 24.0% of revenues in the same period a year ago, and $1.2 million or 13.6% of net revenues in the prior quarter. Military defense sales were 26.2% of third quarter shipments compared to 27.1% of shipments in the comparable period a year ago and 22.4% of shipments in the prior quarter. SigmaQuad sales were 45.2% of third quarter shipments compared to 40.5% in the third quarter of fiscal 2022 and 58.1% in the prior quarter. Regarding increased production costs, we are evaluating where we can pass on the increased wafer prices that TSMC announced last year, which became effective starting January of this year. Gemini-1 hardware is now market-ready. We have two board configurations, the leading E which is in production and the leader S, which is an SSD form factor Board and is being finalized today. In the third quarter, we shipped one LiDAboard to potential SAR customer, and we shipped one [LiDA-e] server to a research institute that will explore Gemini-1 for encryption applications. We reported a net loss of $4.8 million or $0.20 per diluted share on net revenues of $6.4 million for the third quarter of fiscal 2023 compared to a net loss of $4.6 million or $0.19 per diluted share and net revenues of $8.1 million for the third quarter of fiscal 2022 and a net loss of $3.2 million or $0.13 per diluted share on net revenues of $9 million for the second quarter of fiscal 2023. Gross margin was 57.5% compared to 55.3% in the prior year period and 62.6% in the preceding second quarter. The changes in gross margin were primarily due to changes in product mix sold in the three periods. Total operating expenses in the third quarter of fiscal 2023 were $8.5 million compared to $9 million in the third quarter of fiscal 2022 and $8.8 million in the prior quarter. Research and development expenses were $5.5 million compared to $6.2 million in the prior year period and $6.4 million in the prior quarter. Selling, general and administrative expenses were $3 million in the quarter ended December 31, 2022, compared to $2.8 million in the prior year quarter and $2.4 million in the previous quarter. Third quarter fiscal 2023 operating loss was $4.8 million compared to $4.5 million in the prior year period and an operating loss of $3.2 million in the prior quarter. Third quarter fiscal 2023 net loss included net interest and other income of $61,000 and a tax provision of $84,000 compared to $15,000 in net interest and other income and a tax provision of $64,000 for the same period a year ago. In the preceding second quarter, net loss included net interest and other income of $14,000 and a tax provision of $37,000. Total third quarter pretax stock-based compensation expense was $654,000 compared to $740,000 in the comparable quarter a year ago and $661,000 in the prior quarter. At December 31, 2022, we had $35.2 million in cash, cash equivalents and short-term investments and $0 in long-term investments compared to $44 million in cash, cash equivalents and short-term investments and $3.3 million in long-term investments at March 31, 2022. Working capital was $39.2 million as of December 31, 2022, versus $45.8 million at March 31, 2022, with no debt. Stockholders' equity as of December 31, 2022, was $54.8 million compared to $64.5 million as of the fiscal year ended March 31, 2022. Regarding our outlook for the upcoming fiscal fourth quarter, we anticipate net revenues in the range of $5 million to $5.6 million, with gross margin of approximately 49% to 51%. [Operator Instructions] And our first question will come from [Kurt Terriman Dennis with Carl Heing, Inc.] Please proceed with your question. Hi, guys. What are you thinking cash burn looks like maybe out kind of looking out this year with the revenues now being looking quite a bit lower, per quarter may be? Well, we were looking at somewhere around over $13 million a year and the cost cutting will save us about $7 million a year. So we'll be better off than we were a year ago I believe. Oh no, no, no. I think we'll probably be something less than $12 million or $13 million over $13 million that we were previously seeing for the year. Okay. Is the sale leaseback and option for the building or is that been looked into as you - other measures? Okay, sounds good. Well, good luck, hopefully something with the APU comes through here in the next few quarters for number one. Hi, wondering if you have come across any new application ideas and just generally, which APU applications are you most excited about and this kind of been in context? Sorry yes. Yes, I was going to clarify that maybe in the context of, as you've all been exploring your technology and exploring marketing channels going to conferences like the Buzzwords Conference, just wondering if anything new has arisen or yes light bulbs getting brighter? Right, so right now, we're focused on the SAR, as Lee-Lean mentioned so that's - we've done a POC, and we've obtained some very nice algorithm to go along with our hardware. So the benchmarking we've done against CPUs and GPUs are very promising for us, both on a performance level, a power level and a form factor level, which is important depending on where they deploy some of these systems. And so that's one area that we've started - well, not started, but we've been contacting all the SAR players, both on a commercial level and on a government level. As far as - I'm sorry, the other market is the fast vector search is something that we have already put in a plug and we've talked about in the past. Since then, there are a few other applications that we've had customers come to us with. One of them we - I mentioned in my script, which was one of the boards or systems, I should say, it was a server that we shipped last quarter was for encryption application. And there are a few others that have recently come up. I'm a little early to talk about them just because we haven't gone through the process of seeing what our advantage is yet. But there are, certainly no lack of different applications for the Gemini chip. That's excellent. Yes, it's really good to hear you can be able to move forward confidently yes checking off more boxes. Okay, that kind of I think discharge is one of the other question, because I know you're - well, I guess, I'll just throw it out there as a general prospect, not necessarily for the yes the near term - not near-term, but I saw that Amazon Prime Air launched their first test sites for their delivery drone program, [indiscernible] adviser was the original leader of that program? Yes, so just curious if that could be looking at mobile data and autonomous vehicles, drones, vehicles, yes like small flying vehicles for commercial transportation and personal transportation. I wonder if you're still seeing that as a potential field for coordinate managing mobile data like that. So we are, but more for the Gemini-2 chip. And the reason I say that is, if you're familiar with our solution, our Gemini-1 chip goes on a leaderboard, as I mentioned. And the leaderboard for the Gemini-1 has an FPGA on there that has certain functionality that is critical for our solution. With Gemini-2, we take that functionality that's on the FPGA, and we put it with - in the Gemini-2 chip. And so now we can rid ourselves of that large FPGA. And so some of the applications you're talking about power and form factor being smaller is more important. And so being able to rid ourselves of that FPGA will allow us to pursue those markets that were really a bit too challenging for our Gemini-1 chip. Yes, all right. Yes, because I'm thinking about that and there's like next step prospects is kind of thinking about the sensitivity of timing and business relationships, especially these advanced fields that are requiring a lot of R&D and my engender kind of a commitment from these large companies that are developing their programs and the component companies and how they're yes say, making systems on chips that are highly customized and requiring a lot of investment? They hope to get something back on and just trying to think about how they might approach or how you might approach that relationship in terms of holding the place and for the future development and not having to directly compete with all these - like inefficiently developed system on chips toe-to-toe? But rather kind of for them to anticipate being able to adopt your hardware and even your software and to kind of have that in mind as they develop these programs. Yes kind of wondering if that's something that you are seeing in terms of a one to two-year development plan as you talk to potential clients? So I want to make sure - I'm not sure I fully understood your question. But as far as custom silicon and system on chips and everything out there - most everything has really been geared towards the training portion of the market. And as we've discussed in the past, that's not the application we're focused on. We're focused on similar research. And there are obviously other applications or computation and intensive that our solution, lends itself well. And because of the way we've architected our part where we actually do the processing and the search in place as opposed to having effective data and rewrite data. We - that technology we have is PAM protected, and we haven't seen anybody try to do that at this point. And so, we have carved out a niche in the similarity search. And so as far as other silicon coming in or other SoCs, it's really, like I said, most of the solutions we've seen have really been geared around trying to make the training faster. All right, yes I understand it. Yes thanks for answering and excited you all have gotten just confirmation after confirmation keep rolling. Good day to everyone there. George Gasper here, could you relate a little bit more detail about how many employees you have now versus when you started to disengage employment? And how does that relate? What - how many total people have left? And what is your employment number now? And could you give us an idea of the - how much of the stack - how many shares of stock were helped by the employees that you've left go? So we had approximately a little over 180 in total. Now we're down to like right around 165 or so. The paper that left, I don't recall the exact number of options that were canceled upon them leaving, but it wasn't a significant number. I mean, we still have about, I want to say maybe about 8.5 million or so option shares outstanding. 8.5 million, and then the $654,000 of base - tax-based stock issuance in this recent quarter. How does - that stack up in terms of the total expense for employees non-cash and then cash? Gasper, I can get back to you offline. I don't have all that information in front of me right now, but I can get it for if you need it. But the stock-based compensation expenses is -- we've been running around that level for several years, and I don't see it going up significantly. It will probably be a similar number. Okay. But obviously, this is -- the stock-based -- stock issuance is important to stabilize your total expense structure. And we have to assume that, that's going to stay in that range of the last quarter, would you say that $654,000. And that isn't -- that's not shares that we've issued. That's just assumed value of the options that we've granted to employees. The accounting rules require us to place the value on the option grants and then expense them over a period of time. Right. Okay. And then this $654,000 is rated as an expense in terms of your operation on a quarterly basis, correct? In other words -- It's a noncash expense? Okay. Yes. All right. Okay. And the gross margin decline that you're looking at for the current quarter. Is there some cost structure associated with that in terms of employees that recently have left or other things that are going on, what you're looking at less sales that you've expressed in your release today so that obviously could easily have an effect on the gross margin decline. But is there something else going on in terms of the cost structure associated with further development of Gemini-2 relative to other quarters. What -- how does it -- what's the comparison in terms of cost structure relative to what you've done on Gemini-1 and now you're doing in Gemini-2. Well, Lee-Lean can talk about your last question, but -- in terms of the gross margin, the layoffs really didn't impact it that much. Most of the layoffs other than a couple of $100,000 are all in operating expenses, not cost of goods sold. The gross margin is lower because the revenue is lower, and we still have fixed overhead expenses that need to be covered by the margin on sales. So that's why the gross margin number is down. The product mix is still a good product mix with good margins associated with each shipment. I see. Okay. Now last question would be back on the progress being made in Gemini-2. This has taken a long time for the company to really generate customers giving you orders and expanding what they are going to use it for. Do you feel like you're very close now in that by the end of the current quarter, say, the end of March, that you'll be able to actually have orders in Gemini for Gemini-2 going forward or is -- or do you envision that it's still going to take more time into the -- in the June quarter or the September quarter. Can you kind of give us an idea of what you're thinking about in terms of really starting to spin out some revenue stream here? Yes. So at this point, we're still seeding the market and building the pipeline. As I mentioned, we shipped a couple of systems last quarter. We're anticipating to ship a few more, and it's building that pipeline now. And so we don't have any production orders at this point. It's still building that pipeline. I see. Okay. And have you been affected negatively on the tremendous storm conditions in California from the middle of the state up. Has that created any kind of problem for you to deal with? Okay. All right. Okay. Well, I think that this has taken a long time in terms of years to get this action going forward on to Gemini-1 and into 2. And if something's got to really start to happen here in terms of getting -- and the interesting thing is that with this decline that is being seen in your business, generally speaking, I mean when I say your business, I mean, the general business associated with the chips, it would seem like what has been happening in the last couple of three quarters generally for the industry, would really put you in a position to take advantage of really getting up on track and going with some business that would be developed from what you've been trying to accomplish in, say, the last year. Can you say anything about that? I'm not sure we follow the trend of thought there. I mean, certainly, we've had the general slowdown in our legacy business, and we're continuing to pursue the new products, but I'm not sure we followed that your trend of thought there. Okay. Well, what I'm just saying is that with the business having fallen off and trying to see ways of taking advantage of moving into a broader customer base as you're starting to move forward into the Gemini-2 area that may be the fact that the industry has got to come out of this decline that it's experiencing. But with you having something new to bring to the market that we -- it would be possible for GSI to really take advantage of maybe some momentum because of what's happened in the industry going downward and that if you're really getting close now to introducing innovations that you've been working on in Gemini-2, I would think that the shareholders of your company should be certainly looking forward to a turnaround in revenue stream beyond the first quarter -- beyond this current quarter. Exactly, yes. Yes, we do anticipate -- even in the legacy, we anticipate a bounce back by the middle of the year as far as the revenues go based off of input from customers. And again, it's just we need to continue the process with the APU, continue the development we're doing with researchers with the government applications and continue to just move forward. It's a process. In the marketplace, we are in. We see the Gemini-1 has a better solution than all the competing products. And the Gemini-2 is the least and bounds better than the Gemini-1. And we are pretty confident that will create the market leader for the -- in the area we are in. [Operator Instructions] As there are no further questions at this time, I would like to turn the floor back over to management for closing comments. Thank you all for joining us. We look forward to speaking with you again when we report our fourth quarter and full year fiscal 2023 results. Thank you.
EarningCall_1043	So, ladies and gentlemen, a warm welcome to this conference covering the Q4 and Full Year 2022. My name is Claes Eliasson, and, today we will be listening to a presentation by the Volvo Group President and CEO, Martin Lundstedt; followed by our Chief Financial Officer, Tina Hultkvist. After the presentations, there will be a customary Q&A session, and I will urge you to limit your questions to two in order to make room for as many of you as possible. Thank you, Claes, and good morning, everyone, also from my side to this quarter four and full year 2022 reporting for the Volvo Group. Maybe to summarize a little bit before coming into the slides here, in the fourth quarter as well for the whole year it is also the full year reporting and really taking that holistic view as well. I think that Volvo Group continued to deliver very strong outcome, both from operational perspective, customer perspective, that is very important now when we have a very strong demand, and business perspective supported by solid financial results. What is important in this time, in this transformational time is that, we also really did see how we were picking up when it comes to paving the way for the transformation of our industry, not at least when it comes to battery electric vehicles. And I will show that later when it comes to the sales of -- and not at least when it comes to the pickup of deliveries for battery electric machines in quarter four. But maybe, again, most significant, we are still living in unprecedented times with a lot of moving and uncertain parameters, obviously. And 2022 was absolutely not an exception as you know. Continuous COVID situation, lockdowns, logistical challenges not at least Europe with a lot of operational challenges, both as regards to supply chains, but also as regards to volatility in cost situation and energy being one of those. And I have to say, to start with, it is a pleasure to work with an organization and with partners that have been able to actually go through 2022 in this way. So coming in then a little bit to summarize this, what does it mean from a yield perspective and take a stance on that. As I said, strong results in 2022. Sales growing with SEK101 billion, of course, FX included, but just taste that a little bit, SEK101 billion in one year, up to SEK473 billion, an all-time high, obviously. But, also our adjusted operating income growing with almost SEK10 billion to SEK50.5 billion, so for the first time north of SEK50 billion, also that's an all-time high. I'm also very pleased to see the strong cash flow generation, since we are also continuing to invest for the future, both in CapEx, but also when it comes to actually working capital, and Tina will come back to that. And when I say invest in working capital, we have been forced to do that in order to create resilience, obviously. But that has also made us come into a situation where we have a net cash position of SEK74 billion, while we are also continuing to expand, by the way, the customer finance portfolio. A return on capital employed, the most of all the metrics remained strong and grew during the course of the year to 27.4% and we managed to deliver these strong results, as I said, despite all the turmoil. So a strong overall year. When we then come into the quarter, it was again a very strong development when it comes to topline, more than SEK30 billion, up to SEK134 billion in topline and that was 17% growth, adjusted for FX. The adjusted operating income amounted to SEK12.2 billion and at a margin of 9.1%. We delivered also in this quarter a strong cash flow of almost SEK19 billion and as we have also communicated, and we had the discussion already in the quarter three reporting and partly in previous quarters. Our strategy to stay close to customers in this time when they really need the equipment, delivering as much as possible from the order backlog remains. This has resulted in a good EBIT growth and higher market shares. That will serve us well also with installed fleet for future service business and resilience, but it has also meant, and I want to be clear on that, that the marginal last trucks or equipment, because we see the same pattern mostly also in construction equipment. They have been expensive. They have been costly. But when we see the underlying quality of this business, the price realization, the value that we're providing, this is, as we deem it, the right balance. And, of course, they have been more costly in Europe given, so to speak, the mitigation activities we have been doing together with our supply chain temporarily. This balance between performing here and now and to invest and lead the transformation, because it's true also we have continued to invest significantly to expand our range of electric products. Those investments in CapEx and OpEx goes both for research and development that we often talk about, but also the ramp up as such, because being early out and I think you know a number of other examples in, for example, the Paccar industry where it takes some time to do it and that we are really now on the ramp up curve, will really benefit the group moving forward, both when it comes to really trim the industrial footprint, but secondly, really to make sure that the business models are as we expected, and thereby it's so important to continue to drive this. Volume development, very straightforward. I think it's fantastic given all the moving parameters that we have both a production and a delivery record on the truck side. Truck deliveries increased 4% and that was quarter four record. Volvo Construction Equipment also plus 4%, so a great job done by the whole value chain here, of course, across our internal value chains, but also together with our supply chain partners. It is unbelievably well done, I have to say. I have been some years in this industry and when I've seen what has happened, it's just great. When we look at -- as I was into electrification progress, we can also see that it's starting to take off now. And the good news is that we see some of our major customers are really taking bigger orders. So we are moving from this pilot phase into really electrifying depot by depot and segment by segment that we have been talking about. So 5,000 orders and the deliveries actually close to 2,200 electric vehicles and machines during the course of the year. And as you can see in the graph, also, very steep now increase in the quarter of deliveries. And as we see it, a very, very important part of the value creation moving forward and we are proud of having that leading position. Also, on the service sales development, a strong -- in quarter three we said that for the first time moving 12, we were at over SEK100 billion. Now we are moving 12 or for the full year above SEK110 billion. As you can see, strong development in all segments with the exception on construction equipment, where you see a flat development, so that is partly and quite a big proportion due to the fact that we had a rather significant service business in Russia. And the other part is that we have a little bit of flattening and softening -- say flattening situation in Europe mainly. But generally speaking, as you can see, activity levels strong on the service side. Then you can, of course, say that if you look at the relation between vehicles and services, even if we're growing faster, we have not been growing as fast as we have done on the equipment side, as it's natural, because that is a more long-term investment. Coming into trucks, a lot of things have happened obviously also in quarter four. As I said, a lot of investments, but just to talk a little bit about that and summarizing also some key highlights for 2022. In October, already we passed the milestone of having produced 1,000 battery electric trucks in the medium-duty operations in Blainville, very important for us, obviously, so they are really now coming more into a real type of the serial production mode. Major customer for mainly Northern XPO, former Norbert Dentressangle for everyone that has been around for a while, ordered also 100 trucks to their fleet. A very important sign, because they are a major player, obviously, not only in France, but in surrounding countries. And most important is that, there have been extensive testing done also in their operations, so that is a really good sign also, that is now scaling here. And in the quarter, the Volvo Group also signed in addition to what we have done in Europe now with Milence. That is the joint venture together with Traton and Daimler on charging infrastructure in Europe. We signed a partnership that we are very proud of and that is actually to really partner with the Pilot Company and Flying J, so those are the two brands. And for everyone that has been traveling U.S. on highways, you know the importance of that when it comes to resting areas and to services for not at least commercial operations. So having that opportunity will be a great opportunity for really creating the right footprint when it comes to electrification. The last thing is more interesting from how we leverage also the group assets when it comes to modularity. We have been for a long time been out of the medium-duty offering in North America. It has been a constant dialogue not at least on the Mack side and we decided in 2018 and 2019 to get that going, a very fast project starting then in the mid-2020. And now where we have been ramping up, I'm very proud to say that already for the full year 2022 we have a 5.3% market share, obviously, very important for us, but also for the American footprint for the Mack network with a big success. So that is also a showcase of how we can continue to leverage the global cost system as we call it. When it comes to forecast, I'm dramatically positive, I should say, in these uncertain times that we are reiterating our forecast in all major markets as we already stated in quarter three and that means, obviously, that we are forecasting strong markets in -- or on good levels and solid levels in North America and Europe. And that can also lead to stabilization for our supply chains moving through the year here, even if short term it will still be a number of challenges to continue to work on, but really, really positive that we see this -- and I note that other -- others have been out also. So, I don't think we need to comment that anymore. When it looks for truck orders and deliveries, as you remember, in quarter three, by the way, we had a book-to-bill that was 1.2. So then it was -- and now we have a book-to-bill and then that isâ¦ This is the operator. You were disconnected. Your sound did not go through. So, we've spoke in an interruption. I would put you now back into the conference. We did not hear anything from your start. Okay. What do we do with this information? Then it will be the short version. We continue? Okay. So, truck orders and deliveries done. As I said, coming back to quarter three, then we had positive and rather strong book-to-bill and this time a little bit weaker. The reality is, as we have reiterated many times, very, very strong order board, it depends on when we open up the order books for different segments, regions and business areas, and we see it both in trucks, but also in construction equipment. So, I think, the main message here is that, how do we look at the total market? What are the market forecast knowing that we also have a strong order board that we need to continue to deliver on. And the reality is that, for trucks we didn't open the order book for a big part of quarter three, for example, during quarter four than last year, meaning, that we could not get in more order, but that is to remain with the quality and the inflationary environment and we had a good dialogue with the customers on that. So decrease with 21% should absolutely not be over read. We see now when we gradually are opening that we have a good refilling into the remaining of the year. And deliveries, as we have said, increased with 4%. And market share is also a strong development during the course of the year. Europe for the total market, very, very strong for Volvo and Renault combined, almost then 28%, 18.4% for Volvo, and 9.4% for Renault was a good development and also continue to see a strong, strong position when it comes to the market share in electric, as I said, above the 50% combined. So that is also a very good -- that we are creating in this market as we speak. North America, we were growing slightly for Volvo, but Mack dropped a little bit on the back of supply chain constraints for us that were more problematic for Mack than for Volvo during the course of the year. For the remaining regions, strong development. Brazil is extraordinarily strong also for us. So, in total, we have really created a strong footprint for the future, not only the market share, as such, but also translated into the deliveries and thereby the installed fleet and the service business. And construction equipment in the quarter introduced, continued to also -- we talk a lot, of course, about the propulsion systems and the transformation of our sectors into electromobility, but also very important for our customers, continuous efforts on safety, utilizing the new technologies. So here we see a collision mitigation system for confined areas and also for all areas, by the way, but very appreciated that has been introduced. And, also, electric sales volumes still low, but accelerating and we see the same trend now from our customers here and I will come back to it later. But, as you know, we are electrifying airports, as we speak, and have now solutions up to 23 tons. VCE market forecast, the same here. All market forecasts for 2023 are unchanged in relation to what we actually talked about last quarter, in quarter three. And so, construction activity has remained on good levels in most regions, so that is the -- yeah, obviously, the reason why we are reiterating what we already did see then. So, of course, there are certain uncertainties, but if anything, we have got more confidence also in those sectors for these forecasts. Order intake, again, a little bit of the same story. As you can see, net order decline with 23% and I think the most or the best way to look at that is really then North America. And the reason was that we had order intake closed in quarter four more or less during the entire quarter four, very, very long order board, really needed to make sure that we continue and remaining with a high quality in the order board. We have now opened both for Europe and for US in beginning of quarter one here. And we see that it's refilling well. Deliveries then increased by 4% as we said, and demand in North America, Asia, and the pre-buy effect in China, but, again, mainly due then to the balance between order intake, order board and production output. Volvo Buses, net order intake increased by 70%, primarily supported by coach sales in North and South America and important -- number of important city bus orders in Europe as well. We still see, of course, with these high figures a recovery phase from the severe effects that, in particular, was hitting buses due to tourism restrictions and public transport restrictions. Deliveries increased by 64% with high deliveries in primarily South America. And in the quarter, also, coming back to safety, recognized by Time Magazine's list of Best Innovations 2022 for what is geofencing solutions using really the connectivity digital solutions of creating safety. One example, really limiting speed around vulnerable areas, such as schools and other public areas. So, regardless of what the driver is doing, you cannot, for example, go quicker than or faster than 20 kilometers per hour. So these types of systems and connectivity. Penta, same declined order intake with 18%. The reality is that the order book for 2023 is full. We've been working with our customers here that are both on the industrial and marine side, so largely sold out here. So focus as for the other business areas on deliveries, which increased by 11%. And, important, also innovation here, Volvo Penta continued to work towards net zero, leveraging the group solution. They're utilizing now what we call the group Cube battery technology that we are mainly utilizing that introduction on the heavy-duty side of trucks, where they then can benefit and leverage both technology, leadership and scale. So, in this case, for Penta and the industrial customers, it gives a 40% increase in energy density compared to previous offers and a very flexible installation. That is the sign of Penta. Finally, VFS, record quarterly and annual new business volumes. So that is going along actually with our deliveries to customers, continue to see good performance with the low levels of overdue and credit provisions and one very important reason for that is that, customer activity and profitability remain high, and the finance penetration level slightly dropped. I mean, we had a quick growth in equipment, but also partly due to Russia that was high penetration levels. Thank you, Martin. Good. So let's move into the financial update of Q4 and starting with the revenues. We have revenues of SEK134 billion in the quarter. It's an increase of SEK17 billion if you exclude currency impacts. We have strong revenue growth in all regions and in all business areas where trucks is the main driver of the revenue growth. And I think we have to step back a bit and recognize that the sales in this quarter is the strongest sales quarter for the group ever. Price increases and service sales is also supporting the revenue growth. If we look at the operating income. We have an operating income of SEK12.2 billion in the quarter and it's supported by currencies of SEK1.8 billion and we have a margin of 9.1% in the quarter. This excludes costs of some SEK600 million connected to claims from the European Commission's Antitrust Settlement decision. All-time high truck deliveries is supporting the financial performance and the good service growth is also supporting the financial performance in the quarter. We have, due to the energy situation in Europe, continued to support our suppliers financially just as we started to do in Q3 and particularly by the end of Q3 that has continued now also in Q4. At the same time, we see increased costs for freight and material in the system. On the other hand, we see a little bit less headwind on raw material, less than what we saw in Q3, but still more than what we saw by the end of last year. Price realization has continued in the quarter and we have been able to offset the extra cost for inflation. We are also continuing to invest in new products and new offerings and we are also continuing to invest in the more well-known technologies. On top of that, we have an increase on the operating expenses, partly connected to the higher activity levels, but also connected to currency impacts. The guidance on net capitalized, amortized R&D for 2023 is that, we think we will have a positive impact of some SEK200 million quarterly for 2023. Guidance on transactional currencies is that, we don't expect any significant impacts on transactional currencies for 2023. We had a cash flow of close to SEK19 billion in the quarter. This is partly connected to the result and partly connected to seasonable reduction of working capital related to a normal buildup of payables. We have also somewhat released inventories in the quarter, but we do have structurally a little bit too high inventories in the system connected to the supply chain disturbances that we are still seeing and having in the system. We continued to give good return on our assets and we have a return on capital employed of some 27% for the full year with a strong balance sheet and net cash of SEK74 billion. We're moving into trucks, despite the challenges that we have in the supply -- that we have had in the supply chain, we have record deliveries and we have increased deliveries in trucks of some 2,500 trucks compared to last year. Also, for trucks, it's the best sales quarter ever in the history. On top of the deliveries, also service sales has continued to increase in the quarter and it's mainly connected to the price increases that we've made. We have continued to proactively increase prices and thanks to really strong efforts by the commercial areas we have been able to offset the extra cost for inflation in the quarter. At the same time, as we are supporting our customers with the deliveries, we also recognize that this comes with a bit of extra cost in the industrial system and it's connected to extra cost for freight on the material side and the support to suppliers, but it's also connected to the fact that we have a bit of extra capacity installed in the industrial system to really secure the deliveries that we are making for the customers. We have a margin in trucks of 9.5% and an operating income of SEK8.3 billion, partly supported by currencies in the quarter. If we move to construction equipment, the supply chain disturbances has continued also for VCE. We also start to see a bit of need to support our suppliers financially. Just as we saw in trucks in Q3, we have started to see now also in VCE in this quarter. The deliveries are up in the Volvo segment and on SDLG, they are basically on par with where we were last year. This is mainly driven by China and driven by the fact that we have a pre-buy impact due to new emission regulation coming up in China for SDLG. The increased sales is both connected to increased sales on machines and on services, but it's mainly connected to price increases that we've made and the currency impacts. If we take a little bit step back when it comes to construction equipment, we have to recognize that this is the first time that our construction equipment business is generating revenues of more than SEK100 billion for the full year. We are, in VCE, offsetting the extra cost for inflation in the quarter, but we also have a bit of higher activities on the commercial side, which is impacting the financial performance. Despite the supply chain disturbances, VCE is delivering a stable profitability and a margin on par with last year. If we look into buses, in the quarter, we had quite large deliveries in buses mainly then in South America. We have also seen a rebound on coaches, particularly in North America, which is connected to the fact that traveling is coming back now after the pandemic. Overall, we see an increased utilization of our bus fleets and our coach fleets, which is really then driving and supporting the service sales and we have a service sales in buses, which is now back at pre-pandemic levels. Profitability has increased in buses and it's mainly connected to the volumes, to the price increases that we've done and the increase of the service sales. And buses leads the quarter with a margin -- with a good margin in relative terms of some 3.4%. If we look at Penta, we have good sales growth in Penta in all regions, both on engines and services. This is mainly connected to the price increases that we've done. The quarter has continued to be challenging in terms of supply disturbances in some segments in Penta. We are also in Penta offsetting the extra cost for inflation with the price increases that we've made. The investments in electric products are increasing and we also do have a bit of increase on the operating expenses connected to the higher activity levels and also partly connected to currencies. And Penta is delivering a margin of 9.7% in the quarter. If we then look into financial services, our customers and our customers' customers business is remaining to be high, both -- that goes for both trucks and for construction equipment, and therefore we have been able to build the volumes in the customer financing operation. We have a portfolio that is performing well with low write-offs and low delinquencies. The financial performance is basically on par with where we were last year and the higher portfolio is offset by somewhat higher operating expenses. But we leave the year with a healthy credit portfolio in the customer financing operation. Thank you, Tina. Thank you for that presentation. So before then coming into the Q&A to conclude, as we said, I'm really taking a step back to your point, Tina. From a yearly perspective and we start with the perform piece here and now strong performance from the group in a turbulent and challenging year. And I think starting by the return on capital employed of 27.4% and combined with a net cash position of SEK74 billion. Sales growing over SEK100 billion to SEK473 billion and adjusted operating income exceeding SEK50 billion for the first time. And, as you can see, also two milestones when it comes to topline, about SEK300 billion for trucks and above, then as Tina said before, SEK100 billion for VCE. An important volume increase also and market share gains in key regions and continued growth of services and continued growth of the installed fleet. On the transform side, a lot of very important milestones, obviously, 5,000 orders and over 2,000 deliveries. We are now starting to see that this is becoming much more material, which is good for the company, for our customers, but also for the society at large. This is one of the key parameters for future success rates. And the great news is that, we have a broad range of electric products in the serial production today and that production is ramping up and we continue then to focus on this. As a consequence of -- or a positive consequence of this strong year in very turbulent times, the Board of Directors are then proposing to the AGM an ordinary dividend of SEK7 and an extraordinary dividend of equally SEK7, resulting in a dividend yield of approximately 7%. So just happened to be three times seven here. And the proposal is, as also from management and, of course, it is the Board proposing this. As we see, it's a sound balance between giving a good shareholder return and also keeping a strong financial position to allow forward leaning investments and create the leading position in the ongoing transformation of our industries. Thank you very much, Martin, Tina. And terribly sorry if there was a disturbance earlier. We didn't really understood what the matter was, but I hope it works now at least. So let's go to the Q&A session. And remember that we will do the Oscar thing here. So more than two questions, and we will put on the music and there will be no more questions. Let's start with the operator, and then we will take the room here. Yeah. Perfect. Thank you. I'll stick to two, and I'll ask them one at a time. But first, just actually starting with the dividend and, sort of -- can you elaborate or give us some color on why the Board proposes sort of -- it's been a few years of specials, why specials and not a higher ordinary? You seem to have been able to generate enough cash in every sort of market circumstance, so just interested on why one versus the other in terms of mix of special and ordinary? That's my first question. And the second one is more on operational. Thank you for that question. Again, I mean, we are -- first of all, we want to have a consequent view on our ordinary dividend and that is what the Board has discussed. And I think it has been also a consistent way of working. And as I just ended also the presentation to say, in total, it's about also finding the right balance about, of course, being creating good returns for our shareholders in the short-term, but also make sure that you're creating good returns to your shareholders and to the company in the long run. And in these times, I think, first and foremost, this is the forward leaning with a 7% yield, but also it is a good balance to really make sure that we have the maneuverability to continue in uncertain times operationally, obviously, but also that we have the muscles for the transformation. So then you can always discuss, and I think that is for the Board to answer, I mean, how should the division be. But I think it's wise also to keep that flexibility as long as you are transparent and long-term in way you're working. I don't know, if you would like to add something on that. Thank you. And my second question, just wanted to look at -- sort of, the -- looking at the margins and basically your deliveries in truck are exactly -- almost the same number as they were in 2019. Your overall group sales are obviously a little bit higher. I guess, there has been some FX benefits, but you had higher margins in terms of operational -- the industrial operations, like 60 basis points higher margins back then. And I recall in 2019, in calls you've said that 2019 wasn't the optimal peak margin or necessarily that you had more potential beyond that. So as we look and compare the 2019 to the 2022 numbers, is the gap just the disturbances in the supply chain, is it price cost, is it something structural, how should we think about that gap and the potential that you still had in 2019 when you had exactly the deliveries that you have now? Thank you. First and foremost, I think, when we talked about it, do not remember that in 2019, we said there are more to be done, it's always more to be done by the way. But I think then we are talking about, okay, how do we continue to actually operationally refine. It was a rather I mean stable situation. And, I mean, if you compare 2019 with 2022 or the years in between, it has been a significant, so to speak, disruption in the way you're thinking, not only related to the latest areas of logistics and supply chains and energy prices short term, et cetera, but really to mitigate the situation. So, I think, from that reason, obviously, it's much more related to the fact of short-term disturbances that are related to this very, I mean, unprecedented situation, different type of turmoils. Having said that, when it comes to price cost, we feel -- and Tina you were clear about that, we feel good about that situation. We have done a good job when it comes to ASP, both when it comes to products and services. And we see that, I mean, underlying quality of that business is well in balance. And that is, of course, super important. Then, as Tina said, also, it is about now short term and not the least in Europe with energy prices and mitigating, so to speak, cooperation with our supply chains. It is also overmanning, because we have been firm, and we still think this is the right thing to do short term to support our customers, they need their equipment. And as long as we are not disturbing the underlying quality, it is the right time -- it is the right thing to do. So the short answer is, it is related to these turbulent factors. Then you can optimize the margin, if you like, a little bit more. As we said in quarter three, we do not think that is the right thing to do now, because at the end of the day to having loyal and satisfied customers getting their equipment will be mid and long-term, much more important than short-term abstain volumes in order to optimize, because the reality is that the last trucks coming out now are expensive, as we said, and in particular, in Europe. And that is how it is. We have a good view on that and that has been the right choice. Then, on the other side, we should also be clear about that. I mean, of course, you can say that you should have a better leverage on certain factors under the gross margin, such as R&D, for example. But, also, on that side, we have said that we are in a decisive moment of accelerating now. We are still, from a percentage point of view, managing this very well and we are investing for it. So we are not losing out, because the coming decade will be the important decade in this transformation. And so, generally speaking, it is related to what I said. It's not the cost price or any structural deficit in the system. I don't know if you would like to add something to that. Thank you, guys. And thank you. I think we can take one more caller from the queue here. Is it Olof? Thank you very much. Much appreciated. Just a couple of questions, please. Tina, can you comment a little bit around your thinking for key positives and negatives in terms of the margin development for the truck division in 2023? Just the big buckets. What are the big positives and negatives we need to bear in mind? And, Martin, can you comment a little bit around the competitive landscape in North America when it comes to trucks? I think, arguably, we are seeing -- not just you, just for the whole industry, right? We've got the Tesla with the semi and we've got Navistar coming back on long haul as well. Can you comment a little bit about how you position yourself product wise in North America? And when it comes to electrification, how are you positioned to win market share? Thank you. Yeah. I think, if I start then, I think the main things to look into is, of course, the things that we have also seen during this year or 2022 and how that plays out going forward into 2023. And it is -- of course, the main part is the supply chain, will the supply chain continue as it has been lately or will we see some easening on that with the components coming in and we can be a bit more efficient in the industrial structure in that case. That's one main driver. The inflationary pressure, of course, will be one main driver also to see where that is going. And that is partly then connected to the supply. The support to suppliers that we have seen during the autumn and how that will play out for next year. That can be both positive and negative, of course, depending a bit upon the inflation and how that plays out, particularly in Europe. So, I think, that's the main three things to look into how they will impact the truck performance going forward. I fully agree. I will not add anything to that, but just to maybe underline what Tina said about, I mean, if we can gradually get stability, that will, of course, play a very favorable -- Because how we are running it now, I think it's extraordinary just to getting out the volumes that we do, but it's coming with a price, obviously. So the market forecast here, I think, is important. If that could be with a certain stability that will be a positive that we are obviously working on. And then keeping, as Tina said, the balance between price and costs that we have done in a good way. On the competitive landscape in North America, I think the good news for us is that we still have headroom for improvement. We see that we have a strong offering, both on the Volvo side and not at least on the Mack side. We must continue to be more resilient when it comes to our value chains. And that goes both internally and externally. We have done progress here. But we see in relation to other parts that here we can do improvements. And so, when it comes to our commercial offering, we feel that we have a competitive offering well appreciated. We have done a number of upgrades recently and we are continuing to invest here, both for Volvo and Mack in their specific segments. It's always interesting when you are getting new competitors, so we are following that and we have, of course, noticed that deliveries are starting now. And let's see how that is playing out. But we are feeling good about our commercial offering, how we are interacting with customers. We need to continue to strengthen our value chains in North America in order to gain market share. That is the most critical. Okay. Thank you very much. To showcase our Solomonian Justice, we will have two persons from the room now, and we're starting with Hampus. Thank you very much. Hampus Engellau, Handelsbanken. And two questions then for me. Starting off on from trucks, could you talk a little bit about lead times where you are Europe and North America? And also put into perspective where you would like to be on lead times as you're running very tight on the production. Second question is related to your outlook. 300,000 could be debated if it's flattish or if it -- but at least it's a repeat and it's a very solid outlook. At the same time, we have a macro deteriorating and people worried about the economy and you're still running in a situation where supply is determining sales and market. Is the outlook very linked to the reason you're seeing being very restrictive and supply determining how much you will sell, or is there any other thing coming into that market outlook? Thanks. Thank you, Hampus. First and foremost, I mean, as I said, we are in -- on the truck side, we are at least in quarter three, both for Europe and North America. And, obviously, I mean, in a normal world, where it's also stability when it comes to, I mean, better type of visibility when it comes to [indiscernible] et cetera, it should be the normal like two months as we are normally working with, but we are far away from that right now. I think the important thing is not only that it is filled up like that, but also that we are constantly having dialogue both with dealers and customers on what is happening here, how is the quality, how does it look like? What is the mix, et cetera. So I think there is a structural improvement that in order to get hold of is it's still true, how does it look like from what are really, really firm orders. We have a number of ways of doing that, et cetera. So -- but still -- and that's the reason, by the way, that we had in quarter four more restrictive way of looking at the order intake. We often get the question, are you losing out? I mean, it's an absolute and relative game, right. And, relatively, we have been gaining market shares globally. So, I think, this is a conversation that probably the industry is having overall. But you should also remember the dynamics when you have, for example, most of the customers are not only in one truck per year, so to speak. It's more a conversation also for them to play out a little bit, how should we put firm orders, how should we think about, so to speak, forecast, et cetera. So it is a much more, so to speak, sophisticated way you work and then it might seem as, okay, now we're close and now we are open. It is -- but the firm part in the order board, it's into at least quarter three now. And on -- what was the other? Yeah, yeah, sorry, on the demand supply and outlook. Now, I think, it's fair to say then that it's still about supply to your point, probably. I don't want to speculate. It could be so that during the year, it can be better balance, it depends on. But if you really look into what has happened over the last year, obviously, it has been a constant undersupply into the market, and we see that also -- and we see and we hear it from customers when it comes to average fleet, age and when it comes to bilateral discussions that people want to also to upgrade from repair and maintenance, technologies advancing, et cetera, uptime. So, need to calculate proportion. So, we feel confident about the forecast that we have said. And still early days, obviously, things can happen. So, flexibility is key. I don't knowâ¦ Yes. Perfect. Agnieszka Vilela from Nordea. I just wanted to understand a bit more your operational leverage on volumes. Volumes were strong, but then compared to some of your peers, you have worse margins basically. And I believe that they live in the same kind of world with supply chain issues and so forth. So the question really is, what is specific for you? Do you see that it is you who needs to compensate your suppliers maybe a bit more than your peers? And, also, were you satisfied with your pricing so far? And what do you expect going forward? Yeah. I think to start with the prices. I think, we are satisfied with the pricing and what we have done in that area, we feel that we have been able to offset the inflation and we have been working actively with that since quite a while back and we get a good impact out of that, of course, that goes for both vehicles and services. So, I think, that's good then. When it comes to the margin side and whether we are -- where we are different from the competitors, it's difficult to say a little bit where we are. But, I mean, we have had a clear strategy for quite some time now to really prioritize the customers. We know that that is happening to some extent on the short-term margin at the expense of the short-term margins, but in the long run, we can see -- we see that we will have sort of profitability from that in terms of increased service sales and also keeping the relationship with the customers. So, we strongly believe in that strategy. It has been good so far and we think that in the long run, it will pay off well for us. So that is the most important, I think, for us. And I fully agree, maybe also you have to comment on that. I think everyone needs to take a step back and say, okay, how does it look like? I mean, a little bit longer than one quarter. What is the starting point when you start to calculate the leverage? I mean, the baseline is also an important pure mathematically. And, thirdly, the regional mix is fully different, because, I mean, Europe is right now, of course, hit by this given the fact that energy prices. So the short-term mitigation activities together has been very much related to Europe for us, naturally so with this very fluctuating prices. And then, I think, as a matter of fact, when we look at volume increase for us, it has been very good. So, to Tina's point, the volume investment is obviously very asymptotic when it comes to the margin benefit in a short game. But from a customer satisfaction and customer loyalty and an installed fleet and service business, it's crucial. And we are not playing games with our customers. We are B2B. We are staying behind them, and we are frustrated every day that we couldn't deliver the last 5% or 10% even if that's coming with a short-term margin compression. And, I think, everyone should think through that a little bit. Question for me. Yeah. Martin, you mentioned the muscle that you will need for transformation. And I just wonder if you can be a bit more transparent about that in terms of what will you need when it comes to R&D costs. You're running at about SEK23 billion in P&L? Also, what will you need in terms of CapEx? Can you share that with us? And then Tina will fill in and make it more clear. Now, first and foremost, we have been clear that we are in a situation now when, as I said, also when things are, of course, decisive to really make sure that we are ramping up to -- because it's not only about leading a transformation, but creating also the transformation, right. So we will -- as we have said a number of times, we will continue to focus on this. We think that we have the financial maneuverability is very important, and we have been ramping up. But, at the same time, we should not over read it in relation to, I mean, R&D in terms of -- in relation to topline. And we are making sure that we are, of course, building in the flexibility here also if we have further down the road, bigger troughs in the cyclical business. So that is a setup that we have. But when we have the opportunity to move fast, quick and install this now, we think it's decisive for us, because to have a too long period will be even more challenging. So that is number one. And also on the CapEx side, we'll be clear that there are a number of years now where, of course, we -- notably completely changed our footprint, because there, I think, we have a benefit, but where we need now to really make sure that we are installing this type of mixed model situation and are converting some parts of the sites will create a higher short-term CapEx situation. But if you look at -- I mean, the magnitude of that over a number of years, it is not -- I mean it, of course, can be seen in a discrete year rather dramatic, but over a longer period of time, no drama at all. And that is also why, I think, we have a very good balance. Again, what I said with dividends, how we think about our financial position, how we think about our cash flow. Think about it, I mean, we had SEK50 billion in operating income. We generated SEK35 billion in cash flow. I mean -- so some in net income. And then we have already this year expanded, I mean, when it comes to CapEx, and we have invested a number of billions in working capital as well in order to keep the customer satisfied and we are generating SEK35 billion and ending with the SEK74 billion. So I think we have a strong story about managing this. Here, it is important to say, perform here and now, but also transform. I mean, where do we really want to be in 2027, 2030, in order to make sure that this is a strong, resilient company for customers and for shareholders. Thank you. It's Olof from ABG. I'll try to squeeze in two questions. On the supply extra costs in Europe, you're supporting the suppliers. You've mentioned the energy cost being the key driver here. Now it looks like with a fairly warm winter, energy costs are stabilizing a bit, maybe even going down. Is this something sort of that we can expect then to ease for you going forward? I was just prepared for another question, but it's usually two or three. I think that exactly what you are saying is an important area. We have methods and routines on how to handle this. We do this from time to time, otherwise, also, it's not only now, but it's just that now it has been exaggerated due to the energy situation in Europe. So, we are working. We have very clear methods how we work on this and how we analyze the need to support, et cetera. So that's why I mentioned this is one -- could be one of the opportunities also going forward if you compare with the run rate where we end the year and going into 2023, of course. I mean, if the energy situation easens up and the inflation goes down, of course, that can be an indicator of us not having to support the suppliers to the same extent as we have done in the autumn. And, Tina, if I can squeeze in a half a question, there is no chance you can quantify these effects in the second half of the year, right? Okay. So I hope it's okay. That was my half question. Outlook on electric truck volumes. We see an acceleration now in orders and deliveries in the second half of the year. Can you share some thoughts on how you believe this will continue going into 2023? Are we sort of accelerating sequentially here, or was Q4 an especially strong quarter? I think, yes. In the two last comments that you did, I think we are accelerating. But I also think, I mean, sequentially that quarter four was an exceptionally strong quarter in relation to the others sequentially. And the reason why I say that is that obviously, in -- still in mature type of supply chain you're getting also and then on top of the general type of supply chain situation, you'll get a little back and forth. So I think here it was a strong delivery. I think the more important is to see how the order intake now is also -- really also taking off, because at the end of the day you need to deliver that. And as we see 5,000 for last year in order intake on all electric machines and trucks is also a steep increase. So, it will continue. And it will continue segment by segment and market by market that we have talked about. We see that for the urban applications. We see that for specific regions that have been ahead of the curve when it's about thinking not only about the equipment and different type of programs to roll it out, but also where they have been ahead of the curve with infrastructure and certainty about the energy supply and green energy, et cetera. And, obviously, we will see also continuous effects of programs like the Inflation Reduction Act in US. We had very strong situation in the US also here. We were not allowed actually to -- it was not quality assured enough to actually disclose the market share figures, but they were promising also there, if I put it like that. So, I think, it will continue. And just maybe, Olof, on your half question there, and I will not quantify it to Tina. But, as Tina said, what I think is important to understand is that in a supply chain situation, where you're working with a lot of supply chain partners, obviously, you need to have a very diligent and transparent methodology, about -- I mean, we have base contracts, obviously. Some of them have been moving parameters, but some of them are extraordinary fix. And you need to -- but the important thing is that it's not okay, we take something and to compensate cost inflation on input material or cost inflation on energy or volatility. It is -- and Tina said it clearly, but I just want to be super clear to everyone. This is a very in-depth methodology and transparency to make sure that it is the moving parameters, specifically in extraordinary times as we have seen in Europe. Thank you. Hi, Martin and Tina. A couple from me. I'll take them one at a time. So, first, on the service growth of 9%. It looks like this is now only pricing. So service volumes are now flat year-over-year in trucks. And, I guess, down in volume terms in construction equipment, if we strip out pricing. And I hear you on the Russia impact. But are we seeing any softness on the utilization side of the fleet, or are we just comparing against the tough compare of starter? I mean, I think it's fair to say that, generally speaking, you are right on that assumption. But I think the main thing is actually a tough compare partly Russia, as we said, on both sides. But, at the same time, on utilization of the fleet, we see a flattening out, but on high levels. So, again, I think it's also an opportunity for us if it's setting it out, because we have had not only supply chain issues on the equipment side, but also on the parts and service side, actually. So, there is an opportunity anyhow. But you are right in that assumption, I think that's fair to say. Okay. Thank you. My second one is on the underlying cost situation ignoring the energy side for a bit. And we've heard from others that the situation is improving on the semi side. We have less trucks being parked up waiting for the ECUs. Are these costs now starting to drop out for you, because if that's the case and when energy inflation abates, then the truck margin should take a pretty big jump up eventually, if we can talk about cost side, outside of energy and through the quarter, please? Thank you. Yes. I think your assumption is correct, and it's coming back to what we said before also that it is very much connected to -- the cost levels that we are having in the industrial system is very much connected to the supply chains, the inflation and the fact that we have a bit higher capacity installed to really secure that the last trucks and vehicles are getting out. If the supply chain is a little bit going down, then we can make the industrial system a bit more efficient and the cost levels will go down. We have talked a lot about costs when it comes to supply chain, but I would like to stress also that it also has a cash impact. And I mentioned that briefly in my presentation that we also do have a bit higher inventories connected to the supply disturbances. And if that comes down a bit, we should be able to address the little bit structurally higher inventories that we are having right now. So -- And it's interesting, as Tina said, because you have, so to speak, the pure cost. And what are the moving parameters there, so to speak, temporary or not temporary. But then you have the stability as such and the dynamics effects around that, that are often difficult to calculate, but to having a smooth machine that is running is, of course, we are talking about it as, I mean, on planned overmanning, et cetera, but the dynamic effect of having much more of a harmonized system is very important. I'm cheating a little bit, but it will be very, very quick. I think you've said before that given if supply chain is easing, then effectively the first 5% to 10% down on truck volumes could effectively mean that you can keep the margin relatively stable, right, in the sense that you have those extra costs you carry that will eventually drop out. Is that still the case, Martin? No. But I think it was also related to questions here from, I don't recall who it was now, but I mean about comparison 2019 and 2022. And I think we should think about it like that, obviously, that, as I said, with all the moving parameters that we've had now and thereby creating a system in harmony that is, of course, affecting that. So, I think, it's very much related to the answer that we had on that question. So, meaning it's yes, basically. Thank you. I am glancing the room here to see if we have anyone, any hands? Anyone, anyone, Buhler? No. Okay. So, let's move over to the list on the phone then. So, let's take the next one, operator. Yeah. Thank you. It's Nicolai Kempf speaking from Deutsche Bank. Thanks for taking my question. And I have two questions on the construction equipment. And if you look at China, the market has been very weak last year and you guide for another 10% decline midpoint for this year. However, given the lifting of the COVID restrictions, do you see upside for this? And I do understand that January might be a bit weaker, because of cost of manufacturing, but could there be upside? And my second question would be on the pre-buy effect in China you mentioned, could you roughly quantify how much this business was in terms of units? Yeah. First and foremost, I think you're absolutely right. We actually discussed that also in our preparations here that we see -- it is a difficult situation to really forecast now the Chinese market given all the, again, the moving parameters and not the least, so to speak, the lifting of the restrictions and what effect that will have then coming in after the Chinese New Year. So that we have to follow. I think the good news for us is that we have a very flexible type of setup in China. We have shown that also through this trough now. So by that also, both for the SDLG that is volume wise, the most important for us. But also on the Volvo brand, we have shown a good level of flexibility. But, if anything, I think it's not fully factored in in these forecasts. It's more about, I mean, the growing concern. Then when it comes to prebuy effect, I mean, I cannot quantify that directly. I think it's more important to say that we know that when you have these type of events, there is a dynamic that we want to be clear about, so you can understand what is what when it comes to ups and downs, so to speak. No. It's difficult to quantify. But I think that when we saw in Q4, now they were -- SDLG are basically on par. If you go back a few quarters, you can see that we were quite substantially lower. If that gives kind of indication of the underlying market and -- Okay. I think this concludes this meeting. So, thanks for watching us today and see you next quarter. Maybe here, maybe in Gothenburg. We'll see. So --
EarningCall_1044	Good day, everyone. Welcome to the conference call covering NBT Bancorp's Fourth Quarter and Full Year 2022 Financial Results. This call is being recorded and made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbancorp.com. Before the call begins, NBT's management would like to remind listeners that as noted on Slide 2, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. As a reminder, this call is being recorded. And I would now like to turn the conference over to NBT Bancorp President and CEO, John H. Watt, Jr. for his opening remarks. Mr. Watt, please begin. Thank you, Chris, and good morning, and thank you for joining our earnings call covering NBT Bancorp's fourth quarter and full year 2022 results. Joining me today are NBC's Chief Financial Officer, Scott Kingsley; our Chief Accounting Officer, Annette Burns; and our Treasurer, Joe Ondesko. We achieved superior operating results for the full year 2022, defined by strong loan growth in connection with our strategy to build scale and create higher operating leverage. We're very pleased to report operating earnings per share of $0.86 for the quarter and $3.55 for the year, excluding acquisition-related expenses and securities losses. Return on average assets was approximately 1.3% with return on tangible common equity for the year at 16.9%. In a year underscored by volatile interest rate movements and unfavorable equity and fixed income market returns, we're pleased that our operating results drove total shareholder returns of over 15% in 2022. Also, in line with our strategies around scale building, we were very pleased to announce an agreement to acquire Salisbury Bancorp in December. This all-stock transaction is expected to close in the second quarter of 2023, pending the required regulatory and Salisbury shareholder approvals. Loan growth was 10.2%, with our commercial and residential solar lending businesses finishing strong in the fourth quarter. Credit quality remained strong throughout the year with nonperforming loans down 4% in the fourth quarter. In 2022, our customers continued to embrace digital services with a 94% cumulative increase in consumer digital adoption since the start of 2020. Across our markets, our commercial and business banking customers are active and their sentiment is generally optimistic. Projects funded by the 2021 infrastructure bill are moving ahead in upstate New York and our customers are bidding and winning their fair share: the planning work associated with the Micron chip fab plant build out near Syracuse has begun; and in Utica, New York, Wolfspeed recently announced a new large chip fabrication contract with Mercedes. NBT is preparing on many fronts to support our customers and communities across the Upstate New York chip corridor over the next five years. Yesterday, our Board approved a $0.30 dividend payable on March 15. In 2022, it's notable that we marked 10 consecutive years of annual dividend increases and continued our commitment to providing consistent and favorable long-term returns for our shareholders. So, I'll conclude my remarks by emphasizing that it was the talented and dedicated team at NBT who made our 2022 results possible. We could not be more optimistic about how well that team has positioned us to enter 2023. With that said, I'll turn the meeting over to Scott, who will walk you through the detail of our last quarter and the prior year. Scott, I'll turn it over to you. Turning to the results overview page of our earnings presentation, our fourth quarter earnings per share were $0.84, and $0.86 per share excluding the $0.02 per share of acquisition expenses we incurred in the quarter related to our previously announced combination with Salisbury Bancorp. Fourth quarter operating results were consistent with the $0.86 a share reported in the fourth quarter of 2021 and $0.04 a share lower than the linked third quarter of 2022. These results were achieved despite a $7.5 million decline in PPP income recognition compared to the fourth quarter of last year or $0.13 a share. The improvement in net interest income over the two comparative quarters was the result of solid organic loan growth, incremental deployment of a portion of our excess liquidity into investment securities in the first half of the year and higher asset yields from the continued increases in the Federal Reserve's targeted Fed funds rate. We recorded a loan loss provision expense of $7.7 million in the fourth quarter compared to $3.1 million expense in the fourth quarter of 2021 or an $0.08 per share difference. Fourth quarter 2022's loan loss provision was also $3.2 million or $0.06 a share higher than the $4.5 million provision recorded in the linked third quarter. Net charge-offs in the fourth quarter were $3.7 million or 18 basis points of loans compared to 22 basis points of loans in the fourth quarter of 2021 and 7 basis points of net charge-offs in the linked third quarter. Our reserve coverage increased slightly to 1.24% of loans from 1.22% at the end of September, which provided for loan growth. The next page shows trends in outstanding loans. Total loans were up $245 million for the quarter and included growth in both our consumer and commercial portfolios. Loan yields were up 38 basis points from the third quarter of 2022, reflective of higher yields on our variable rate portfolios as well as new higher volume rates. Total loan portfolio of $8.15 billion remains very well diversified and is evenly balanced between consumer and commercial outstanding. Total deposits were down $423 million from the end of the third quarter and ended the year $739 million below the end of 2021 or 7.2% lower. The decrease in deposits was primarily concentrated in certain larger, more rate-sensitive accounts. The effects of tighter monetary policy, inflation and higher rate alternatives, including a laddered treasury security strategy deployed by our wealth management group for our own customers, continue to weigh on balances. Even though deposit balances declined from 2021, year-end 2022 deposits are still 25% higher than the pre-pandemic end of 2019. During the fourth quarter, we shifted from an excess liquidity position to a net overnight borrowing position. Our quarterly cost of total deposits increased to 17 basis points compared to 9 basis points in the linked third quarter. Interest-bearing deposits moved up from 14 basis points in the third quarter to 27 basis points in the fourth quarter. And our total cost of funds increased 19 basis points from 18 basis points in the third quarter to 37 basis points in the fourth quarter. The next slide looks at detailed changes in our net interest income and margin. Net interest income increased $14.7 million as compared to the fourth quarter of last year and was up $5.4 million from the third quarter of 2022, reflective of higher yield on earning assets. Reported fourth quarter net interest margin was 3.68%, up 17 basis points from the linked third quarter and 60 basis points higher than the fourth quarter of 2021. With interest rates expected to continue to modestly rise in the near-term, the yields on our variable rate earning assets are expected to continue to move higher over the next few quarters. We also expect to reinvest cash flows from our interest-earning assets at levels above our current blended portfolio yields. Although we believe our deposit funding profile remains a core strength, we would expect increased levels of deposit beta in 2023. Going forward, retaining and growing deposits will continue to be a critical element of our ability to sustain the significant improvements we achieved in net interest margin during 2022. The trends in noninterest income are summarized on the next page. Excluding security gains and losses, our fee income was down 17% from [Technical Difficulty] $3 million in the linked third quarter. Our retirement plan administration and wealth management businesses revenue decreased a combined $1.2 million, reflective of challenging market conditions as well as certain seasonally higher revenues in the third quarter. Similarly, fourth quarter revenues in our insurance agency are typically lower than the first three quarters of the year and were $450,000 below the linked third quarter. In 2022, on a full year basis, the company's retirement plan administration business recognized $2.5 million of service revenues related to statutory plan document restatement requirements that generally recur on a six-year cycle. Card services income decreased $3.9 million from the fourth quarter of 2021, driven by the bank being subject to the provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of 2022, which caps our per transaction compensatory opportunity for debit card interchange activities. Lower levels of card utilization and changes in transactional mix resulted in lower card services income in the fourth quarter compared to the linked third quarter. In addition, we continue to experience comparatively lower commercial lending fee opportunities in this rising interest rate environment. Turning now to noninterest expense. Our total operating expenses were $79.5 million for the quarter, which was $4.4 million or 5.9% above the fourth quarter of 2021 and $2.8 million or 3.7% higher than the linked third quarter and included $1 million of merger-related expenses incurred during the quarter. Salaries and employee benefit costs of $47.2 million were 2.3% lower than the linked third quarter, reflective of one less payroll day in the quarter and more favorable experience in certain of our benefit plans. The quarter included some higher seasonal costs, including some external services for several tactical and strategic initiatives. We'd expect core operating expenses to drift modestly upward over the next several quarters as we continue our efforts to fill open positions in support of our customer engagement and growth objectives. We would also anticipate somewhat higher than historical levels of merit-based compensation increases in early 2023, probably 4% to 5%. In addition to investing in our people, we expect to continue to invest in technology-related applications and tools in order to advance our customer-facing and processing infrastructure. On the next slide, we provide an overview of key asset quality metrics. A walk forward of our loan loss reserve changes is also available at the appendix of the presentation. As I previously mentioned, net charge-offs were 18 basis points in the fourth quarter of 2022 compared to 7 basis points in the prior quarter. In the selected financial data summary provided with the earnings release, we have summarized the components of our quarterly net charge-offs by line of business. Consistent with previous quarters, fourth quarter net charge-offs were concentrated in our other unsecured consumer portfolio, which are in a planned [run-off] (ph) status. Nonperforming loans declined again this quarter. We are continuing to benefit from our conservative underwriting and have continued to experience higher than historical levels of recoveries. As I wrap up my prepared remarks, some closing thoughts. We started 2022 on strong footing and are very pleased with the [Technical Difficulty] results we achieved. Improving net interest income, additive results from our diversified fee income line and favorable credit quality outcomes have more than offset higher levels of noninterest expense, which has allowed for productive gains in operating leverage. Our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for 2023 and beyond. Thank you, sir. [Operator Instructions] And our first question will come from Steve Moss of Raymond James. Your line is open. Maybe just start off with loan growth here. You had good quarter for loan growth. And just kind of curious as to how the pipeline is now versus before. I hear you guys in terms of the ongoing investment in Upstate New York supporting business activity, but commercial growth was -- continues to remain strong. Just curious as to expectations going forward. Appreciate the question. First of all, with respect to economic development in Upstate New York, that's a long-term growth opportunity for us. And as I said before, NBT is best when we are playing that long game. Those pipelines are going to build over periods of years, not immediately. Although, under the infrastructure funding that's been released recently, several of our customers have been quite successful in receiving awards to be involved in large infrastructure projects. With respect to the commercial pipeline itself across the seven states, it's healthy. Clearly, we did a lot in the fourth quarter to take a pending pipeline and convert it to close, and there's refilling of the bucket going on. But we feel pretty good about the opportunities that we're given to look at and the diversity of those opportunities. On the consumer side, there's no doubt that the residential mortgage business has slowed down. So, loan growth there is more muted and will be in this rate environment for a while. Although, on the back half of the year, we'll see whether or not the housing market shifts again. We're watching that very closely. We mentioned our growth in the Sungage lending program, very strong third and fourth quarter. I think Scott also will talk to that subject. We expect that to level off now going into this year as our partner Sungage diversifies its funding sources and it's actively engaged in that. The beauty of that is we'll retain the servicing in all likelihood and there'll be other investors to hold the asset. So, generally speaking, optimistic with those exceptions. Okay. That's helpful. And then, maybe just on loan pricing, what's the rate on new loans coming on these days, and any color you can give there? Sure. So, sort of holistically across the board, Steve, new loan production is clearly above 6% in all of our portfolios. From a pricing standpoint, I think that discipline in the market around us has been pretty fair as people have started to experience some increase in some of their funding costs or have actually started to experience a little bit less excess liquidity on their balance sheet. I think some of that discipline is even a little bit more pronounced, which is what we're seeing in the market today. So, important for us going forward from a pricing standpoint, price to the forward curve, I think as most people have probably noted, 2022 probably didn't force that until at least the midyear point of the year or maybe even later because of the excess liquidity that exists on most banks' balance sheet at the time. But I think generally, we're not getting a lot of pushback relative to our pricing proposals that are out there today. And they are certainly at levels of yields that are meaningfully above the blended portfolio that's on the books today. Okay. That's helpful. And then, maybe just one last one for me. If we get 25 basis points in February and 25 basis points in March, just kind of curious how you guys are thinking about the margin. I mean, I hear you there's some uptick in deposit costs, but just curious how to think about that in the next couple of quarters. Yes. For us, I think we probably would have told you a quarter ago that we would have thought that, that would have allowed for a little bit of the tick up in net interest margin expansion possibilities. I think with the drop in funding levels in the fourth quarter, probably a little bit more cautious about that than we were in September. So, yes, I think we'll get improvement relative to variable rate assets with those two moves, and we're anticipating that. The question is can we still find the logical sources. I think as, probably, we pointed out before, I mean our deposit beta remains very low. We have a very granular deposit base. But to the extent that we've had drops in balances, not drops in relationships, but drops in balances, those have been primarily focused on our largest 150 customers. And I think as, again, most people realize short-term treasury yield at the front end of the curve are in the high 4%-s today. And people with the high treasury acumen, some we're helping and others have got there without us, have just found other opportunities in a higher yielding. So, Steve, to come back around to your question, I think we'd like to believe that NIM stability is a possibility for the first half of the year, but I think that will be incumbent upon us holding our funding sources in place. Thank you. [Operator Instructions] And our next question will come from the line of Alex Twerdahl of Piper Sandler & Company. Your line is open. First off, just kind of going back to deposits, I was just curious, you sort of talked about what happened this quarter, but do you have any sort of line of sight on sort of expectations for what deposit flows might be over the next couple of months? So, good question. So, what we have out there today, what we're seeing is that with other opportunities relative for higher yield, there's a little bit of pressure on, again, higher balance accounts, Alex. The general broad cross section of our deposit base has not been that much -- has not been that influenced by that. Again, level of granularity in our deposit base is the huge advantage. I think relative to where we think competition is going, remembering that everybody has an investment portfolio which is probably a little bit higher than it was pre-pandemic. So, cash flows off the investment portfolio will be important sources of net liquidity not only for us, but probably for everybody. But today, one can't stimulate that because one is probably in a loss position relative to the front end of some of those. So, with that in mind, I think there's a little bit more competition even in our markets, which have historically been very stable for incremental deposit dollars. So, I think that's how we're sort of framing that, Alex. Typically, the first quarter for us is a net inflow quarter on the municipal deposit side. And I think we think that as much as they have some other choices as well, we'll still benefit from that. Okay. That's what I was looking for. Are you able to quantify or give us a little bit more color on sort of the frothier -- some of the deposits you saw this quarter that you kind of alluded to like sort of a percentage of overall deposits that might be in that category, where it was last quarter, where it is this quarter, and sort of what might still be considered "at risk"? Well, [indiscernible] getting this right, Alex. Deposits that -- higher balance deposits that left the balance sheet typically found a wealth management or a short-term treasury solution that had yields in the 4% to 4.5% range. And again, something like $600 million of our $730 million decline in balances for the year related to customers in our top 150 in terms of outstanding deposit balances. So, an enormous concentration in the small group of accounts in fairness. Other than that, Alex, I don't know if there's anything else. If your question was sort of geared toward what are other people doing in the market for offerings, I think, we're certainly seeing some near-term or some mid-term offerings, whether they be CDs or just high-yield money markets that are approaching 4%. But I think they typically have some other requirements attached to them relative to achieving those yields. Got it. And then, just a point of clarification on the expense or on the fees, the $2.5 million that you alluded to that's on a six-year cycle, is that something that we're going to see fee go down by $2.5 million in 2023 and then come back in 2028? Or how do we -- can you just maybe explain that a little bit better? Yes, sure. So, there are statutory requirements either within the premise of [indiscernible] or other benefit plan requirements that foretake -- documents to be refreshed on a recurring typically a five to six year cycle. So, you'd be exactly right. We had $2.5 million in 2022 that we don't think recurs in 2023. And depending on the statutory changes, requirements to plan legal requirements, is that a 2027 or 2028 event? Probably most likely, be more important for that line of business for us. The run rate of the fourth quarter is probably more indicative of where we'd expect 2023 to start before any organic growth opportunities that we would be able to capitalize on. Okay. So, the $2.5 million was kind of earlier in 2022 and 2023, the $10.7 million, that's kind of the starting point for the retirement plan administration fee line? Yes, that's a fair conclusion, Alex. Absolutely much more concentrated in the first three quarters. I think we sort of finished up that program early in October. Okay. And then, just a final question for me. I think I saw in the presentation that commercial lines of credit utilization rates have gone down a little bit into the end of the year. I'm just curious, is that a function of customers paying down those lines, or is it a function of increased lines available that just haven't been drawn out yet? Well, I think it's a function of couple of factors. Clearly, smart customers with excess liquidity, they're using some of that excess liquidity to pay down their debt. And I think also there are several large unfunded lines of credit in that portfolio that are accommodations to draw customer relationships that have many other components to them and they remain unfunded and are likely to stay unfunded. So, it's kind of a mixed bag there. And I think going forward here, as excess liquidity moves out of the system, we're likely to see incremental borrowing there that we didn't see in 2022. Just following up on the deposit flows question and having some of the investment portfolio cash flows helping out with loan funding there, can you guys give us the either monthly or quarterly cash flows that are coming off the investment portfolio? Sure. Chris, the large piece of our investment portfolio is mortgage-backed securities. And so, those cash flow got slowed down a little bit since rates started to rise. But I still think it's safe to think about $15 million to $17 million a month of cash flows off the portfolio. And that's given where current rates are. Maybe that accelerates again in the second half of the year, but... Okay, got it. And I guess along those lines, any chance you could quantify some of the commentary around the deposit betas, which obviously have held in extremely well so far, but you guys expecting to kind of increase on a go-forward basis just relative to either last cycle or, I guess, to peers for this cycle? Yes. So, Chris, I'll kind of frame it like this. Deposit costs were higher in December than they were in October, and they'll be higher in January than they were in December. And I think generally that marching up effects will happen throughout the quarter. Certainly, would not be surprised if deposit costs were up 12 basis points to 15 basis points in the quarter. But the trend line would suggest that, that's going to be necessary to hold balances. It's important for us to retain some of those balances, really important for us to retain the operating side of those relationships. Excess liquidity can come and go from the balance sheet, but sustaining the operating accounts is always our first objective in all those cases. So, this is kind of how we're thinking about it. The alternative for us -- and again, we're 92% deposits funded and 8% borrowing funded at the end of the year, and that's the high mark for the last two years. So, it's important to know that we have an apparatus for deposit gathering, and we're pretty good at it and historically have achieved good growth rate. If we get back to more of a normalized cycle, I think we would suspect that we're capable of growing deposits in any rate environment. Will there be a little bit more pressure now with short-term yields? Yes, maybe a little bit more. But I think that's something that reconciles itself after you get to stability of rate change. Okay, great. That's helpful. And in -- on the insurances, financial services line, I believe there's like a little bit of seasonality between third and the fourth quarter versus fourth and the first quarter of the years. Can you just remind us of what that seasonality is, or what the expectations for that line is going into the first quarter? Yes, absolutely. And, Chris, actually thanks for asking the question, because there is -- it sounds good at least once a year to remind people about some of the seasonality. So, as it relates to insurance revenue specifically, the fourth quarter is normally our weakest quarter. The first and the third quarter are stronger, and I think that's really centered around effective dates of the type of insurance that we originated in our agency. Whether it's commercial insurance, property casualty on the retail side or benefits-related stuff, it's not unusual for people to make changes to their plan or have renewal dates that tend to be January 1, July 1 centric in each of those cases. So, again, just back to your question around seasonality, we normally see $0.01 to $0.02 improvement in insurance and wealth management combined in our first fiscal quarter compared to the linked fourth quarter. However, it's not unusual for us to incur another $0.01 per share of costs on the utilities and maintenance side in the winter just relative to the geography that we live in. And quite frankly, I think, most people remember this that we typically incur $0.03 to $0.04 a share in the first quarter associated with elevated payroll tax obligation and some equity compensation that just tend to be front loaded. So, past that from a seasonality standpoint, not anything that's substantial or that sticks out for us. I will make a comment a little bit quirky, but 2023 has 65 payroll days in each of the four quarters, which is -- it's highly unusual, normally there's a one or two day fluctuation that goes along with that. So, I think in terms of the stability of some of our operating costs should probably be something that's a little bit easier to model next year. Okay, great. And then, lastly, I mean credit held in super well so far. There doesn't seem to be a ton of movement in the buckets for you guys this quarter. But generally, can you just give us an outlook on what you guys are seeing in your markets in any kind of areas or cause of concern in either the commercial or the residential portfolios as you look out into 2023? I'll take that one. Thank you. Last week, we completed a comprehensive review of both our commercial and consumer books from a credit risk management perspective. We did that with our Board. And the year ended at a place that we've never seen in the history of this company in terms of the quality of our credit portfolio. With that said, I would expect as we head into a more normalized environment that there'll be a reversion towards pre-pandemic 2019 levels over time, certainly not immediately, but over time, and we'll see that initially in the consumer portfolios. We don't see it now, but it'll come. Commercial portfolio, very strong. Business banking portfolio, very strong. I don't think there's a nonperforming loan in excess of $1 million in the total credit book and the sustainability of that will probably revert back to a more normalized nonperforming level as well over a longer period of time. So, we feel good about it now. We don't see cracks. I know others talk about certain segments of the CRE product line, but we're not feeling that now and we feel pretty good about the loan deposit -- I'm sorry, the LTVs in each one of those asset classes in CRE. So, pretty stable there. Let me add to that real quick that our philosophy has been that we will provide a provision for net charge-offs and we will provide a provision for loan growth. And sometimes that loan growth is in different segments of our portfolio and that has a higher coverage level in certain portfolios versus others. But I think important to -- the takeaway here is we have not wavered in that at all. So, coverage ratios of 1.24%, I think, you'll find are probably slightly above our peer group. And we think that's appropriate and judicious certainly given the dynamic of the economic conditions that we expect to go forward with. Thank you. [Operator Instructions] Our next question will come from the line of Matthew Breese of Stephens Inc. Your line is open. I was hoping you could break out the crystal ball on deposits again. I have a follow-up. I guess, I was wondering do you think the overall mix of noninterest-bearing is at risk here? And could we go back to levels we saw pre-COVID or even prior? I mean, just given -- I mean, Scott, you talked a little bit about the granularity of the book. Assuming that continues to be a structural advantage, how granular is it? And is it continually at risk from mobile banking offers that we see every day north of 3% or 4%? So, I would frame it this way, Matt. It's a really good question. And by the way, our crystal ball is not that clear this morning. But at the same point, I guess what I would say is that we have seen a little bit of migration away from pure noninterest DDA into other alternatives, but it has been typically our customers with a much higher treasury acumen relative to larger businesses with full-time professionals managing their net cash flows. So, we've seen a little bit of that. I think in the lion's share of the broad cross section of our business, a lot of our customers, whether they're retail or small business, just don't have that much excess liquidity where they think that going through the machinations of moving certain of that amounts off into alternative instruments even in the near term, is that prolific. It's just -- for them, if you've got excess balances of $25,000 or $50,000, what is the net differential? We have some products in our deposit portfolio to address moving people up over time, peer-based products. So, I think those will be affected, they've historically been affected. But I think what you're even seeing is that our customers still have higher than historic levels of pure checking balances, but they're becoming a little bit better at moving those off into money market type products even on our own deposit portfolio. So, Matt, I think I'd come back around to say, I think on a peer comparison, our granularity of our retail and small business portfolio will be an advantage on the deposit side. I think like everybody, managing some of the large customer expectations and, in fairness, reminding some of those large customers how low their borrowing rates still are will be something that will continue to be a challenge for us and a task for us. But truly, that's about managing relationships and I think we'll be really effective at that over time. Got it. Okay. And then, just acknowledging that the loan to deposit ratio ticked up still well below 100%. But at 86%, any limitations there you'd put on yourself, or any ceiling you'd like us to keep in mind? And at what point does it start to impact your loan growth outlook? So, let me start there and then Scott will pick it up. I think, historically, anybody installed NBT for a long period of time knows that we have very successfully operated this company pre-pandemic at a loan to deposit ratio in the low 90%-s, and we feel comfortable being in that territory. I don't see us getting there very fast. But that's not a place that we're adverse to being at if the loan demand presents itself at the right yield. So, we still view that we got headroom here and loan demand, if strong, we'll keep funding. I think that the only thing I would add to that, John, is that, Matt, I think we've been pretty transparent about this and John made some comments on that, we certainly don't expect loan growth in the solar residential portfolio in 2023 to be similar to 2022's results. I think we've talked in the past about where we are today. We think we have a little bit more balance sheet capacity for that type of instrument. We're very happy with that instrument from both a credit performance as well as effective yield performance. It's also a borrower base that has a meaningfully higher than average FICO score. So, we like the borrowing base there. But I will say that as that business has matured and our partnership with Sungage has matured, getting to more forward flow opportunities for them, warehouse lines of credit that ultimately become securitization, that's where that business is headed. And so, the utilization of our balance sheet won't need to be anywhere near as proliferate going forward. So, I think that gives us a little bit more room relative to that loan to deposit ratio. I also should remind people that not only do we think we have a couple of hundred million dollars of cash flow coming off our investment portfolio, but the portfolio was $600 million to $800 million larger than it had ever been. So, over time, that will also be a source of net liquidity for us, may or may not change our loan to deposit ratio depending on how much demand we see on the loan side, but in fairness, lots of other liquidity sources that exists within our world. And now that yields on most lending instruments are 6% or north, some mix of wholesale funding is not really a bad thing. It's a little bit more expensive than the deposit base, but not a bad thing. Understood. Okay. As you can imagine, this stage in the cycle and everything going on during COVID with car prices, we're getting more questions on exposure there. Could you just remind us within that dealer finance book, how much is indirect auto versus floor plan lending? And then, kind of stratify the FICO exposures you have? Sure, absolutely. So, that portfolio that's just under $1 billion is all indirect auto. We have very, very small amounts of dealer finance and/or floor plan financing, just some really older legacy relationshipâ¦ So, most of that is indicative of that. In terms of FICO band for indirect auto, an average FICO above 750. And to your point, the Manheim Index is still very, very high, very buoyant from historical standards. I think the silver lining to that is we made loans during the last couple of years in indirect auto that were lower than historical yield, which meant that the customer is very quickly working through their pay down of their instruments. So, I think from a loan to value standpoint, we're not concerned where we are today. There is still a little bit of a backlog relative to vehicle inventory. And especially in our markets that don't enjoy a lot of public transportation -- everybody drives the work. So, from a commentary standpoint, I'd say not concerned about that portfolio and still being able to manage the customer outcomes. Historically, in that employment characteristics or unemployment characteristics and the performance of that portfolio have been [late at the hit] (ph). So, from a productive standpoint, we think that portfolio will still be something that's meaningfully additive to our net mix all year long. Got it. Okay. Thank you. Last one for me. Scott, you had mentioned that you expect a slight migration higher on overall expenses in 2023. I was hoping you could just be a bit more specific there. Are we looking at low single digits or mid single digit expense growth this year versus next? Yes, dealer side? Yes. If I framed it this way, I would tell you that the midpoint between our third quarter operating expenses and our fourth quarter operating expenses is probably a really good baseline before we start to talk about merit increases. We expect sort of a late first quarter merit change for our folks in the neighborhood of 4% to 5%. And what we think about that is the combination of merit changes and some compression needs that we have with the -- with people being hired in more recent times at rates, maybe a little higher than some of their peers. We do have some compression to deal with. I think that's across the board for most enterprises. So, we suspect instead of sort of the historical standard of 3% type of inflationary increases, we're a little bit above that going forward. As it relates to the rest of our nonoperating base, maybe expect a little bit more utilization of some technology tools on a fully incurred basis next year that push that up a little bit. But other than that, we're not seeing signs that anything else is really being meaningfully impacted by inflationary price change in our operating base. Matt, let me give you one more. Someone just reminded me. Our friends at the FDIC are trying to collect a little bit more on a per deposit dollar assessment basis next year. We think that probably cost us $0.04 a share next year in terms of that higher base. And I think this goes without saying, but as a reminder, in the first half of the year, we still have a negative comparison because of the Durbin impact, because, obviously, that started for us in July. So, $8 million less in debit interchange revenues in the first half of the year is our expectation compared to 2021. Got it. Okay. Do you have that -- you said $0.04. What is that on a dollar amount or relative to deposits in terms of basis points? Yes. So, it's $2.2 million of expected expense. And in my head, that must mean it is 2 basis points or 3 basis points. Thank you. I am now not showing any further questions. I will now turn the call back to John Watt for his closing remarks. Thank you, Chris, and thank you all for participating in our fourth quarter and year end 2022 call. Look forward to catching up with you at the end of the first quarter. Have a great day. Thanks.
EarningCall_1045	Greetings, and welcome to the Oshkosh Corporation Fiscal 2022 Fourth Quarter and Full Year Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you, sir. You may begin. Good morning, and thanks for joining us. Earlier today, we published our fourth quarter and full year 2022 results. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call, and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide 2 of that presentation. Our remarks that follow, including answers to your questions contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. As a reminder, we changed our fiscal year to align with a calendar year effective January 1, 2022. All comparisons during this call to the prior year quarter are to the quarter ended December 31, 2021. All comparisons to the prior year are to the 12 months ended December 31, 2021. Thank you, Pat, and good morning, everyone. We delivered strong earnings growth in the quarter, both sequentially and compared with the prior year. For the quarter, we reported revenue of $2.2 billion, highlighted by year-over-year sales growth in all four segments, leading to adjusted earnings per share of $1.60. Strong sequential improvement over adjusted EPS of $1.12 in the third quarter and even stronger improvement over the prior year quarter. Importantly, we delivered another quarter with a double-digit operating income margin in Access Equipment of 10.8%, which is a record margin for the fourth calendar quarter. Demand remains solid and we finished 2022 with strong orders and a record consolidated backlog of more than $14 billion. We are continuing to prudently invest in capacity in all of our segments to take advantage of long-term demand trends. We also continue to invest in exciting new products, including our growing stable of purpose built electric vehicles that we expect will charge future growth. Our EPS results for the quarter were lower than our expectations of approximately $1.86 caused by two factors. First, the mix of aftermarket parts in our December JLTV order in the defense segment was less favorable than our expectations. And second, Access Equipment deliveries, while strong were lower than planned. We have several important highlights during the quarter. In November, we announced an agreement to acquire Hinowa S.p.A., an Italian manufacturer of compact crawler booms, as well as other tracked equipment and a long-time partner of JLG. I'm proud to announce that we are closing on this acquisition today. Hinowa brings innovation leadership with lithium-ion powered equipment that supports our expansion into adjacent markets. We believe this acquisition is an outstanding growth platform and provides expanded manufacturing capabilities in Europe. Hinowa represents another attractive bolt-on acquisition in line with our disciplined approach to M&A that supports our commitment to grow shareholder value. Additionally, we were once again recognized for our strong sustainability practices by being named to the Dow Jones Sustainability World Index for the fourth consecutive year. We were also named one of America's Most Responsible Companies by Newsweek, a recognition of our commitment to our core values and excellent corporate citizenship. Please turn to Slide 4 for a recap of 2022. We grew revenues by just over 4% in 2022 compared to the prior year, delivering adjusted EPS of $3.46. Adjusted EPS was lower than the prior year, largely due to manufacturing inefficiencies associated with supply chain disruptions and unfavorable price/cost dynamics, including unfavorable cumulative catch-up adjustments in our Defense segment. Our teams have made significant progress combating inflationary pressure by implementing multiple price increases over the past year and persevering through supply chain disruptions. These actions enabled us to more than triple our adjusted operating income from the first half to the second half of the year, providing us with important momentum as we expect to significantly grow revenue and earnings over the next few years. Our outlook remains consistent with our Investor Day presentation based on strong market drivers and our innovative products, including USPS Next Generation Delivery Vehicle and electrified products including the Volterra line of electric fire trucks, as well as our pioneering DaVinci all-electric scissor lifts. We believe these products will be important drivers of growth as we move toward 2025 and beyond. In addition to Hinowa, we also acquired or invested in other businesses during 2022 that will facilitate growth in the new product categories and adjacencies. These include CartSeeker with its patented AI-based recognition technology used on refuse collection vehicles, Robotic Research, a global leader in autonomous mobility and Maxi-Metal, a Canadian leader in fire truck manufacturing headquartered in Quebec. As we look to 2023, we expect the continued execution of our innovate, serve, advance, growth strategy, price cost management and strong tailwinds supporting our business will allow us to drive significant improvement in our earnings compared with 2022. We are initiating 2023 earnings per share guidance in the range of $5.50. While demand remains very robust, we expect that supply chains will continue to constrain revenue during the year. Mike will provide more details in his section. Finally, we are pleased to announce an increase of $0.04 or 10.8% to our quarterly dividend rate today. This is the ninth consecutive year that we have announced a double-digit increase to our cash dividend. Before we talk about our segments in more detail, I wanted to discuss an exciting change to our business segments. Please turn to Slide 5. This morning, we are forming a new Oshkosh Corporation segment called Vocational. We are combining our Fire & Emergency and Commercial businesses, which all design, develop and manufacture purpose-built vocational vehicles for people in our communities who do tough work. By combining these businesses, we expect to drive enhanced efficiencies across the board while better leveraging our scale and technology development at an accelerated pace. We believe the Vocational segment will also serve as a platform for further organic and inorganic growth opportunities in several important end markets. We expect that the Vocational segment will initially be a $2 billion plus revenue segment with the opportunity to grow organically at a high-single digit compound annual growth rate to near $3 billion with 12% plus operating margins in the next few years. We are also announcing that we've entered into a definitive agreement to divest our rear discharge concrete mixer business. We expect to complete the sale by the end of the first quarter. This will enable us to focus on attractive end markets that value technology and innovation and will drive higher margins overtime in our new Vocational segment. Going forward from today, our businesses will be aligned in three segments: Access, Defense and Vocational. The Vocational segment will be led by our current Fire & Emergency segment President, Jim Johnson. Jim and his team have successfully transformed the performance of the Fire & Emergency segment over the past decade, and I am excited for our talented teams in both segments to come together as a force multiplier for future success of the Vocational segment. We look forward to sharing more details in the coming quarters. Please turn to Slide 6 and we'll get started on our segment updates with Access Equipment. Our Access team delivered solid performance in the fourth quarter with a double-digit operating income margin and 620 basis point year-over-year margin improvement. Supply chain challenges limited our production output, but we have seen some improvements, particularly in December as supplier on-time delivery metrics climbed above 70% for the first time in several months. While this is still well below our historical level of 90% plus on-time delivery, it represents improvement. The team at Access made progress by qualifying additional suppliers, dual sourcing and leveraging alternate sourcing strategies. The team resourced more than $270 million of parts in the past year with plans to do more in 2023 to further improve supply chain performance. We also continue to implement changes to our products and processes to improve both output and manufacturing efficiencies. Demand remains very strong for our market leading JLG products driven by strong utilization rates, elevated fleet ages and the large number of mega projects underway across the United States. In fact, the percentage of Access Equipment in rental fleets deployed the mega projects, which are generally defined as projects with a value of $400 million or more has more than doubled over historical levels. We expect that mega projects, including factories for EVs, batteries and chips as well as non-residential projects such as data centers and healthcare facilities will continue to contribute to strong demand for our equipment for the foreseeable future. We ended the quarter with a record backlog of nearly $4.4 billion. Fourth quarter orders were strong once again at $1.55 billion, and we continue to have visibility to demand well beyond our current backlog. Please turn to Slide 7 and I'll review our Defense segment. The Defense segment continues to engage in a significant number of new business opportunities, as well as current programs. During the quarter, we received two separate contract awards for JLTV I, valued at a total of $645 million. The first award was for domestic requirements, while the second included several hundred units of foreign military sales, many of which will be bolstering the tactical wheeled vehicle fleets of Eastern European nations. The DoD's announcement date for the JLTV II contract has been pushed back from late January and we expect an award decision this quarter. The JLTV has been a foundational product for our Defense segment, and we are confident that we can deliver even more value to our customer in the future. In December, our Defense team was selected to produce Eitan Armored Personnel Carrier hulls for the Israeli Ministry of Defense under a contract expected to be valued at over $100 million. This is another key adjacent program win for our team similar to the Stryker MCWS and NGDV programs that demonstrate the success of our offerings and programs beyond tactical wheeled vehicles. I'll close out my comments on our Defense segment with an exciting update on our progress with the USPS's NGDV program, which allows for delivery of up to a 165,000 vehicles over the 10-year duration of the program. In late December, both the USPS and President Biden made important announcements that express the Postal Service's intention to increase the number of units in initial order from 50,000 to 60,000 units and increase the percentage of battery electric vehicles to approximately 75%. This change will enable the USPS to electrify their fleet at a faster pace. We are actively engaged with our customer to formalize the contract modifications to reflect the change. This is great news for the USPS, communities across our country and our company. We believe we are well positioned to supply the increased percentage of BEV units and continue to expect a significant ramp up of production in 2024 and 2025. Let's turn to Slide 8 for a discussion of the Fire & Emergency segment. Our Fire & Emergency segment made progress to improve output as indicated by fourth quarter sales that were up approximately 21% sequentially and approximately 37% versus the prior year quarter. While production output remains constrained by current supply chain dynamics, the improvement in production outputs and deliveries is encouraging. The improvement was driven by higher supplier on-time delivery metrics as well as the benefit of operational improvement initiatives. Our operating margins remain below typical levels for Fire & Emergency due primarily to supply chain impacts on production as well as the time lag in realizing the benefits of our significant price increases with municipal customers. We remain confident that we will return to strong double-digit margins as production output increases and we realize a greater portion of the price increases we have implemented. Demand for municipal fire trucks has remained very high bolstered by aging fleets and solid municipal budgets. Order rates have remained strong, leading to a record $2.9 billion backlog, which provides us with good visibility and supports our outlook for higher margins over the next two plus years. Our lead times have extended beyond our optimal timeframes. But we believe the actions we're taking to improve parts supply as well as our capacity expansions, including robotic painting in Appleton will help us increase output as we move through 2023 and into 2024. I had the opportunity to participate in our Pierce Annual Dealer Meeting this past month. I continue to be extremely impressed and inspired by our dealers. They are continuing to make significant investments in parts and service capacity to support our customers and drive growth. We believe these investments are critical to our long term success as the population of Pierce fire trucks in the field continues to grow. Please turn to Slide 9 and we'll discuss our Commercial segment. Commercial sales increased by 34% to nearly $283 million versus the prior year, despite persistent third-party chassis and component constraints limiting production. We expect that chassis and other materials will remain a significant constraint in 2023 as well. We've previously highlighted the success we're having with our first refuse collection vehicle automated high flow line in Dodge Center. We are beginning to work on our second high flow line, which is expected to go live in the second half of 2023. Our high flow lines leverage integrated automation to drive improved quality, shorter build cycle times, lower direct labor hours and increased manufacturing efficiencies, all of which are expected to drive higher operating margins. As we previously discussed, we see significant opportunities in electrification, automation and other advanced technologies, particularly in the RCV space. We expect to continue to make meaningful investments in new products and manufacturing facilities over the next several years. We look forward to sharing more details overtime. With that, I'm going to turn it over to Mike to discuss our results in more detail and our expectations for 2023. Thanks, John. Please turn to Slide 10. Consolidated sales for the fourth quarter were $2.2 billion, an increase of $412 million or 23% over the prior year quarter. All segments contributed to the sales increase, led by Access Equipment, which was up by $241 million, or 29% versus the prior year. The consolidated sales increase was driven by increased sales volume and higher pricing to offset the impacts of inflation, particularly at Access Equipment. Fourth quarter consolidated sales were approximately $70 million lower than our most recent expectations, largely driven by lower volume at Access Equipment. Moving to adjusted operating income, we implemented an inventory accounting method change in the fourth quarter, moving the approximately 80% of our inventory that had been valued at LIFO to FIFO. The FIFO method of inventory valuation results in better matching of revenues with expenses since it more accurately reflects the current value and physical flow of inventory. FIFO also aligns our inventory valuation methodology with the majority of our peers and results in a consistent inventory valuation method throughout Oshkosh. Current and prior year adjusted operating income amounts have been restated on a FIFO basis. Adjusted operating income increased $111 million over the prior year quarter to $153 million, or 6.9% of sales, representing a 460 basis point improvement versus the prior year. The improvement in adjusted operating income versus the prior year was largely driven by improved price cost dynamics and increased volume versus the prior year, particularly at Access Equipment, partially offset by production inefficiencies. Adjusted earnings per share was $1.60 in the fourth quarter versus $0.36 in the prior year. Our adjusted earnings per share was lower than our most recent expectations as a result of lower volume at Access Equipment and a less favorable mix of aftermarket parts in our December JLTV order. Now let's turn to our outlook for 2023. Please turn to Slide 11. We're estimating consolidated sales and operating income will be in the range of $8.4 billion and $530 million, respectively. We are estimating EPS will improve to be in the range of $5.50, representing significant growth versus adjusted EPS of $3.46 in 2022. Included in our expectations is the EPS impact of approximately $0.80 related to incentive compensation costs returning to typical levels and increased new product development investments of approximately $0.30. Demand remains strong as indicated by order intake of $3.3 billion in the fourth quarter, leading to our record backlog of over $14 billion on December 31, 2022. Our guidance reflects modest supply chain improvements in 2023, but we expect that supply chain impacts will continue to limit our revenues and contribute to production inefficiencies during the year. At a segment level, we are estimating Access sales and operating margin to be in the range of $4.2 billion and 11% respectively. The expected 300 basis point improvement in operating margin versus 2022 is driven by the full year benefit of improved pricing and a modest volume increase. We expect supply chain dynamics remain a limiting factor of more significant revenue growth as demand remains very robust. Turning to Defense. We are estimating 2023 sales of approximately $2 billion, or roughly $140 million lower than 2022. As previously discussed, we anticipated that revenues would be down in both 2022 and 2023. Importantly, we expect that revenues will begin to grow in 2024 as the USPS NGDV production begins to ramp up. We're estimating our defense operating margin will be approximately 4%. We expect lower sales, unfavorable product and aftermarket mix and NGDV related pre-production operating expenses to account for the mid-single digit operating margin. We also expect margins will improve, as new programs ramp up in 2024 and beyond. Moving to our new Vocational segment. Our guidance includes the combination of our former Fire & Emergency and Commercial segments and reflects the planned divestiture of our Rear Discharge Concrete Mixer business during the first quarter of 2023. We expect Vocational sales will be in the range of $2.2 billion, which is roughly flat to the combined revenue of the Fire & Emergency and Commercial segments in 2022 despite the approximately $150 million sales impact of our planned divestiture of our rear discharge mixers. Similar to Access, demand remains very strong, but our revenue is expected to be constrained in 2023 by supply chain dynamics. We expect the operating margin in the Vocational segment will be approximately 7.5% reflecting the impact of constraint output manufacturing inefficiencies due to supply chain dynamics, the impact of price protected orders and higher new product development investments. Municipal customer orders in our backlog to be delivered in 2024 were booked with significantly higher prices and we expect them to drive meaningfully improved margins in the future. We also expect margin benefit overtime from the integration of our two segments into Vocational. We estimate corporate expenses will be approximately $170 million versus $141 million in 2022 driven by a return of incentive compensation to typical levels and increased investments in growth initiatives and new product development. We estimate the tax rate for 2023 will be approximately 25% and we are estimating an average share count of 65.7 million shares. For the full year, we are estimating free cash flow of approximately $300 million, which is impacted by a higher than typical capital expenditures of approximately $350 million as we complete the NGDV facility in South Carolina and invest in manufacturing capacity as well as new product development initiatives throughout the company. Recall that organic investment is a top capital allocation priority for us. Looking to the first quarter, we expect consolidated sales to be in the range of $2.1 billion, down approximately $100 million versus the fourth quarter. We expect a lower revenues compared to Q4 2022 will be driven by the timing of deliveries in our Access and Vocational segment as well as lower sales at Defense. We expect EPS will be around $1 reflecting lower sales, unfavorable order mix in the Defense segment and the return of incentive compensation cost to typical levels when compared to the fourth quarter of 2022. We expect that the first quarter will be the lowest quarter of the year for EPS based on these factors. We delivered significant sequential improvement in earnings and strong overall performance in the quarter. We are also making investments that will drive future growth, supply chain dynamics remain our most significant challenge and we are taking actions to drive higher output overtime. We believe the fact that fundamentals in our end markets remain very strong and we expect to deliver robust earnings growth in 2023. Thanks, John. Excuse me, I would like to remind everyone to please limit your questions to one plus a follow-up and please stay disciplined on that follow-up. Afterwards, after your follow-up we ask that you get back in queue if you'd like to ask additional questions. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question. If you could just start with the outlook for Access. So I think the revenue guide implies kind of like 6% full year growth. Can you just talk about what you're embedding for price versus volume and maybe how that relates to what you're hearing from your rental customers going into the year? Sure. I guess from a revenue guide perspective, I think foundationally, there's limited volume increase. A lot of it is just benefiting from the full year of run rate. We did implement an additional price increase of 3.5% on the first of the year, that's incremental to where we were in the fourth quarter. So right now, again, obviously, we have very, very robust demand right now. Supply chain is really the constraining factor from revenue being higher. So that's really what we're going to be continuing to watch over the course of the year is what transpired the supply chains. Yeah. And I'll just emphasize that, Nicole. Our revenue and Access is not constrained by the order rate. We've got really strong dynamics in the market. You saw the healthy backlog continuing to grow really strong orders, it's entirely supply chain driven in terms of how much we can produce and ship in 2023. Understood. That's really helpful. Thanks. And then maybe just shifting to Defense. I guess, I was a little bit surprised by the 4% margin outlook in '23. It sounds like that's mostly mix. I guess, like, how -- what is the timeframe or how possible is it that this segment could return to more of a normal high-single digit margin cadence? Thank you. Yeah. So our expectation is that again, that because of the lower volume that we had last year and again this year combined with the mix, that's certainly creating a headwind. And obviously, we have had some impacts of inflation there. So I think, as we look to the future, as we get into 2024 and Postal Service as well as other significant programs continue to ramp up, we expect those margins to begin to return to more typical levels, aided by the additional volume. One other thing that I did forget to mention, we do have that still have about 1% drag in 2023, similar to what we had last year. Just related to NGDV SG&A that's not capitalized before the program starts. So down -- we expect to be down this year, should begin to grow. And of course, as we look at new programs as well, with the economic price adjustments, particularly as we look at programs like JLTV II, over time, those will -- those should offer more protection than we've had against inflation. Yes. Hello. Good morning and thanks for taking my questions. John, one of your comments about Access were about the U.S. market. I was wondering, if you can update us on how conditions are internationally for Access going into 2023? International positions at Access have been relatively healthy, especially when you adjust for constant currency, currencies hurt us a little bit with the strong dollar. But if you adjust for constant currency, the European market is for us or our business in Europe, I should say, is up nicely. We're up really strong in Latin America. I think the one outlier there is, of course, China. China is a huge market for the Access Equipment business, and we all know what's going on in China, starting with the COVID lockdowns and how that's really hindered the economy in China. So Asia-Pacific in total has been down year-over-year. Now some nice pockets of growth in there, but China kind of being down, pulls the whole region down. We still do expect China to be over longer periods of time, a nice growth market. So this is likely a shorter-term phenomenon where we've seen China come down so sharply. But I would say, outside of China, it's been maybe even better than expected around the world in terms of conditions and our ability to generate revenue. Great. Thanks. And then just turning to Vocational. You had mentioned wanted to grow this from $2 billion to $3 billion over the next couple of years. I'm just trying to get a sense as to why combine these two. Do you have plans to enter other locations over the next couple of years or is it going to be strictly fire, waste and whatever that of concrete going forward? Just some feel for what the mix might look like in a couple of years? Yeah. So we're really positive on the creation of a Vocational segment. This is going to do a lot for us. When you really look at what we're doing in these -- in the businesses that are in the Vocational market, they are purpose built vehicles designed to provide productivity and safety for a specific end market. And that's what we do in that segment, whether it's a fire truck or it's a refuse or recycling collection vehicle and the other things that we do. This simplifies our business. Of course, it's going to deliver some overhead or back office and production synergies. But the real positive that's going to come is we're going to leverage our scale to drive technology development at an even more accelerated pace. You've seen us do a lot electric fire trucks, autonomous features coming online. We think we can do that faster to organically grow the business. We expect to organically get to $3 billion on the planning horizon that we've got. But then when you look at the inorganic moves that we believe we can make, we think that we potentially can even exceed that $3 billion. So this is a really exciting area for our company. And we did this because we believe we can drive margin growth with the revenue growth that we see on the horizon. Our next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question. Chad Dillard, your line is live. Hi. Good morning, guys. So I was hoping you guys could talk a little bit more about your expectations for price cost cadence as well as just manufacturing absorption as you think about first half versus second half of this year? Sure. From a price cost perspective, I think the back half of 2022 is a good starting point because as we expected, we were pretty much price cost neutral in the back half of the year as a company and so that carries into next year. We've implemented additional price increases. So if you break that down a bit more by business, we're at -- particularly with the increase that we implemented at access were in that neutral to positive territory there as well as our historic commercial business. We have a little bit longer leg with our municipal customers and in Fire & Emergency just because of bonded orders. So we don't necessarily get better and we have more price coming online. So we don't necessarily get better with inflation in 2023. So we looked at 2024, which we essentially have a pretty robust backlog for 2024 already, there is significant price increases like double-digit versus where we're sitting today. So we expect as we get into 2024, those margins will return back to normal. But really, our expectation is as a company price cost neutral to positive for the full year. And that's really measuring back to the start of inflation at 2021. Of course, from first half, we'll certainly see quarter-over-quarter in the first half of the year, the benefits that we saw in the back half of 2022. That's super helpful. And the second question is just on Access. Clearly, you have a pretty strong backlog in that segment. So how far out do your build slots go? Like, what share of the backlog is getting shipped in '24? And I know there are some supply chain constraints, but let's just assume that the they lift. So what extent do you have appetite to add further ships to drive further production this year? Yeah. So I'll take that. This is John, Chad. So in the Access business, we talk about a $4.4 billion backlog. So clearly, we're now going out into 2024 with our current level of capacity. Now our capacity is constrained by supply chain primarily. We expect to continue to make improvement as we go through the year and how we operate the supply chain, and we're doing a lot of dual sourcing, resourcing, better use of analytics to predict problems before they happen. And that's all manifesting itself in some of the improvement we've seen, and we'll continue to do that. But when we look at a $4.4 billion backlog, plus another probably tranche of close to $1 billion of orders that have not been entered yet. And you look at the -- that's with $1.5 billion of orders we just booked in the quarter. This is a healthy business, and there's a lot of dynamics creating health that we see over the long term. So we're also actively looking to expand capacity because we know we need more capacity. As we improve the supply chain, we'll need not just more shifts, but we'll need a little bit more capacity in our facilities, and we'll be able to leverage the facilities that we have to add capacity so that we can deliver faster. Yes. Hi. Good morning, everyone. John, I wonder if you could just go back to the Access Equipment outlook for a second. So essentially, up 6%, given the price increases implies volumes that are down and your customers are looking for CapEx to be up this year on a unit basis. And so I know you're not in the business doing any market share? Is it just a function of, hey, look, it was a tough supply chain year last year, so let's make sure we're in a position to hit our guidance or are there other moving pieces that are specifically impacting any particular components that are still very hard for you folks in this business? Well, I think the way that we're looking at it is we're trying to be realistic, Jerry. We've been through the past six quarters of pretty intense supply chain disruption and we've done a lot of work, which is starting to have some impact. But we're also wanting to be realistic with our customers in terms of -- based on what we've experienced over the past six quarters, being realistic on what type of improvement we can expect. We don't expect anyone to flip a light switch and all of a sudden, everything is going to be back to perfect with the supply chain. So we're really just trying to be realistic. Now we're going to add capacity so that we can deliver faster. We have to do that prudently along because it doesn't matter if we add capacity, we can't get the supply chain improve. So we have to do that prudently along with our ability to make work with our suppliers to improve the supply chain part of it. I guess that's the best way I can describe it. Super. And relative to your guidance if Access volumes do surprise to the upside, if we're able to deliver on the supply chain. Is it fair to expect 25% to 30% incremental profitability on any incremental volumes, if we are able to ramp deliveries? Generally, I would say incrementals in the low-20s. I think certainly, as we add volume, the pricing is obviously there to generate typical incrementals, but obviously, there is a drag -- continues to be a drag from a manufacturing efficiency perspective. So I would say probably a little bit lower than normal. But obviously, it -- as volume increases, though some of those efficiencies will subside. Hi. Good morning, everybody. I want to go back to Defense, but more on the USPS side, so that contract has changed quite a bit since we first started looking at it, obviously, more volume and more mix of battery. I assume that makes a pretty significant difference in kind of the cost per unit, which obviously means you're going to get more revenue as we go forward. Please disagree if you want to. But I'm also trying to think about, are these BEV margins sort of the same as ICE or would those also be higher? And then sorry, I'm throwing a lot at you, but does it also mean that there's going to be higher R&D and development and startup costs than we might have otherwise assumed. Yeah. Great question. The fact that they're moving towards 75% BEV and I think they've even indicated that by â26, they go full BEV from '26 onwards. That's all positive. It's great for the USPS. And as I said in my opening remarks, it's good for communities across the country where we see communities wanting more electric, and it's good for us. So as you said, the price level on a BEV is higher than on an internal combustion vehicle because the costs are higher. Now the margin dollars, the margin percents are about the same, but the margin dollars are, of course, higher as well. When you look at the investment, I wouldn't say that the investment changes materially. It does not. But the timing could shift a little bit when you talk about the initial order started with 10% BEV, and now they've gone -- they're likely going to 75%, that can change a little bit of the timing. I don't think it's going to be material timing change a little bit one way or the other. But this is a great program. We'll essentially be getting into production in '24, and we'll be expecting to reach full production in '25. That's what we've said in past calls as well. So none of that changes. This is a good news story for everybody involved in the program. Okay. Great. And just as a follow-on, do you have BEV units now that are sort of out on the road doing tests and all that? I assume you must -- if it's going to start... Well, we want to be a total solutions provider to our customers. It doesn't matter if it's the United States Postal Service, a municipal fire station, we intend to be a total solutions provider. So we're there to support the U.S. Postal Service in any way that they want us to provide support and that's what we'll do. But it's ultimately up to the U.S. Postal Service as to exactly how they want to execute the recharging part of it. Hi. Good morning. I just wanted to dig into the Vocational margin guide. It was even understanding we're combining Commercial and Fire & Emergency, but it's lower, I guess, than I would have thought, not really much of a year-over-year improvement. So can you talk to the path to get to, I guess, F&E margins would be the driver there to double-digit? And then, John, just given where the guidance is today, can you talk about your comfort level with your 2025 financial targets or should we assume that just gets perhaps pushed to the right? Thanks. Sure. I'll start with Vocational. So the way to think about it, Jamie, is we're really -- you put the two segments together, I think, ultimately, some modest growth there that you back out $150 million to $200 million on a typical year for Rear Discharge Mix Service. I think that creates a little bit of noise. I would say this year too, we do have a transition services agreement. So we're going to have -- we're not going to fully benefit from some of the cost synergies materially yet this year. So that's something we'll continue to look for, for the future. I think the biggest thing that's driving the margins, obviously, as John mentioned and I mentioned in our prepared remarks, Fire & Emergencies typical margins or municipal fire trucks are down a bit right now. really because of legs and realizing pricing as well as some of the inefficiencies of manufacturing right now and the tight supply chain environment. What we do expect, though, is that as we get into -- we have more price coming online in 2023, about in line with inflation. We have significant double-digit increases already in backlog beyond the current levels as we get into 2024. So we would expect as supply chains to improve and we get those additional pricing benefits in that business that we'll get back to our typical margins in 2024 and beyond. Yeah. Let me address your question, Jamie, on 2025. We provided our 2025 outlook in May. We still look at that outlook as what we're expecting to achieve. And I'll just break that down a little bit. If you talk about our backlog continuing to grow. We're now at over $14 billion. That's because we are designing and developing really effective new programs and winning contracts in the Defense business that we really like. So the great sign is that we continue to see strong order rates and really strong backlogs. We've got great program development, a lot of exciting new programs from electrification to autonomy. This is what we want to do, and this is what we want to drive our future, and it's driving that backlog that we've got. So the only thing that's been holding us back in the short term is, a, getting over the inflation that we've had to deal with, and b, getting over the supply chain disruption dynamics. We've come a long way to get through the inflation problem. You'll start to -- you'll continue to see that get better and better. And as we go through and we continue to execute improvement in the supply chain you'll see the same there as well. But ultimately, that's what's been holding us back. When you look at the long-term outlook of the business and the business we're winning and the programs that are being developed and some to be announced yet, it gives us confidence that $25 is right there where we thought it would be. Hey. Thanks. Good morning, guys. Maybe sticking with the USPS contract. How much revenue, if any, is embedded in your 2023 outlook? And my recollection is that in your 2025 targets, you had something around $700 million worth of revenue associated with this contract. So I guess the question is, based on all the changes that have occurred since you issued those targets, is that still a reasonable number and can you give us some perspective as to how we're going to ramp in '24 to get to that 25% figure. Sure. Mig, I guess from a -- the revenue and margin that you have for NGDVs is pretty minimal this year, consistent with what we've said were, we'll be starting production late in the year. So not really a driver, ramping up meaningfully in 2024, closer to full rate production in 2025. Certainly, as John mentioned earlier, based on the question, obviously, with the mix shift, that should be that should be a bit of a revenue tailwind as we think about that, the program because, I guess, or the quantities and so on that we're thinking about in 2025 are not necessarily different than we were thinking about during Analyst Day. Right. And I don't know, if this is going to ramp linearly or if there's some kind of a more back weighted sort of mechanism that you guys are anticipating right now? Great. Okay. Then my follow-up, going back to Vocational. I appreciate what you're trying to do here combining all these business lines, but it sounds to me like your ambitions are obviously a little bit greater than the product lines that you currently have. Is there some thought here that you can lean a little more aggressively into M&A, and maybe really add some new verticals here in the next couple of years? Yeah. This is a segment that, first of all, we like businesses, the businesses that we have that -- where we can deploy technology and continue to expand our business like the Volterra electric fire truck. That will be a growth platform for many years, that product. But we also do look at this as a fruitful M&A opportunity. When you look at what we do and what we know how to do, purpose built Vocational product. When I say purpose built, I'm talking about we design and develop the entire vehicle from ground up to survey purpose for an end market. So when we look at that, we do see opportunity. There will be inorganic opportunity. It's a little bit hard to predict the timing on inorganic opportunity, but that's certainly part of what we want to do is continue to grow this segment beyond the current organic position that we have. But we like the organic position that we have. We expect the organic position alone to get to $3 billion without any M&A, so. Hi. Good morning. Thank you so much. I have a couple of quick questions for you. So the first one is, can you comment on the margin profile of the Rear Discharge Concrete Mixer business that you're exiting, I think you mentioned about $150 million in sales, but I didn't catch the margin profile of that business. Got it. And the $0.30 new product development investment headwind this year, should we think about that completely reversing in 2024 or should that stay in the base for the next couple of years, but then it kind of reverses. So how should we think about that? Hey, Tami. I think if you think about what we talked about at Analyst Day, I would expect that we continue to have strong investments over the next few years. So I think that would be representative of over the next few years. Got it. Can I squeeze in one last one. Can you provide some quantification on the cost synergies you expect by combining the F&E and Commercial segments? Yeah. We're not providing quantification yet because, particularly this year, with the transition services agreement, there's going to be a bit of a delay over the next several months and being able to act up on those. But we do expect them over time. And certainly, we'll provide updates as we go. Hey. Good morning, everyone. Thank you all for taking the question. A quick question on the new Vocational group with the waste collection vehicles and then also with the fire vehicles. How aggressive do you see those end markets moving to pursue more of an EV sort of, or battery electric vehicle offering that you guys have been testing in the marketplace currently? Yeah. It depends on the end market, Stanley, but let's take the Volterra electric municipal fire truck. You could even take the Volterra airport rescue and firefighting vehicle. Now we go in -- we release this for sale and go into production in 2024. So when we talk about units going to Portland, Oregon and the unit in Madison, Wisconsin and a few other places, these are really call them beta test units. There are municipalities that want to be partners in development, and that's going extremely well. But the amount of interest that we are getting from municipalities across the country is really, really strong. And it can be -- of course, it's a little bit regional. So think about the State of California. The state of California, I think we'll be probably one of the leaders in terms of pull rate on this product because as of their interest in electrifying faster than other regions. But I think this is going to go across the country. We've seen -- it's not just California. We've seen a lot of interest from all over the country from every single one of our dealers. So this will be a really nice long-term growth product. Now you get into other end markets that we're in, and it could be even faster than that. So this is one of the reasons we are so bullish on this new segment. Hey, guys. Good morning. I apologies if I missed this, but I wanted to better understand the Access margin guidance for this year. If you guys are going to be doing $4.2 billion of revenue, and it sounds like price cost is neutral to positive. Your 11% margin is below what you guys did in 2019 or it's about on par with what you did in 2018 at lower revenue. So I'm just trying to understand what's changed here and why margins aren't better with the higher revenue? Thanks. Sure. It's really two things, Seth. Number one, obviously, we talked about price cost that I would say that because of the supply chain environment, the impact on manufacturing is still significant. So we're seeing much higher manufacturing inefficiencies than we would have seen in those previous periods, which as supply chain normalizes, that will improve. And again, even though the volumes lower from a throughput perspective, there's fewer units. So that obviously has a bit of an absorption impact as well that sort of plays into that. So I think that's really probably the biggest thing. What I would say is, I guess, one other piece, too, we do -- with the new product development piece, obviously, with access equipment being one of our larger businesses, there's certainly an element there as well, I would add into that as well. But as volume increases, our view hasn't changed as volume increases and we get those absorption and manufacturing benefits, their margin will improve over time. Right. Okay. And then just on the free cash flow, is CapEx -- is this kind of a one-off spike here in 2023 up to $350 or is it -- do you think it stays at that high level for the next couple of years as you're adding -- it sounds like you have a bunch of new capacity addition plans that are in the works. Yeah. I think if you go back even to Analyst Day, we expected that this past year and then in 2022 and 2023, it would be pretty robust. We're really looking at through 2025, averaging about $250 million of CapEx, that's still our view. So I think we'll continue to run probably a little bit higher. I don't know that it's necessarily going to be at the same level it is this year. I think this year, with a number of programs sort of converging. It's probably our peak year. Great. Good morning, guys. Thanks for the question. Just wanted to ask a longer-term one on Access first. I feel like it's been pretty clear that a lot of the rental companies still will not be able to make a dent in their fleet age this year. And just given your commentary around non-res construction, it still feels like you have multiple years of visibility there too as well. Just from our perspective, most of the consensus are still not giving you credit for the longer-term sales targets that you put out there at the Investor Day. Can you speak to kind of any multi-year visibility that you still have been in access that can actually maybe kind of give us confidence in actually hitting those targets over the long term? Yeah. Sure. First of all, I really want to emphasize, we feel great about the underpinning factors that are driving the demand dynamics in the Access marketplace. Our equipment is, of course, more driven by non-residential and industrial spending. And the important thing to note here is we are not seeing the slower residential metrics translate to non-residential. There's kind of a bifurcation of those two metrics. And we're hearing the same thing from our big customers as well. They're seeing the exact same thing. So there's -- it's unusual times right now with both aged fleets and a lot of mega projects and huge government spending as we've seen with several bills that have been passed like the CHIPS Act and others that are really driving demand, driving those mega projects that's going to happen for a long time. As I said in my opening remarks, a lot of fleets being absorbed in the mega projects, and many of them have not even come online yet. So as you said, the customers that we have, have not been able to do much fleet replacement, they're primarily providing growth for their fleets because of the demand on equipment. But remember, they, over time, really need to replace their fleets. So that's an added dynamic that's driving demand. So these are the primary reasons that we see multiyear continuation of the demand in this segment. Got it. Thanks, John. If I just ask a follow-up then on the bus mix and the USPS contract again. Can you just speak to kind of the overall maturity of the supply chain, how that's developed over the last year or so? You've still been working with Microvast, but just kind of their own ability to handle your own ability to handle in terms of sourcing those components getting that battery supply chain kind of up and kind of ready to actually supply those higher volumes that you're expecting over time? Yeah. Well, I think the thing that we pay most attention to is, the new components that get supplied to us and i.e., that means the BEV type components, like, the lithium-ion batteries. And we feel really good about our supply chain for lithium-ion batteries as one example. And we pay attention to it right down to the cell and where the cell is coming from. And we will continue to pay attention to it because as we all know, there's a lot of demand on lithium-ion battery supply today, and it will continue to grow as we see the automotive industry and other industries like ours continue to electrify. So we'll continue to pay very close attention to it. We also have contingency plans to the current path that we have. But we feel good about it. In terms of e-drives and other systems that go into a BEV. They're household name companies that are our partners. And we'll continue to pay very close attention to it with every day that goes by. We'll get into production over the next year, and we feel good about where the program is. Hi. Thanks. Good morning. Just wanted to ask about the cadence of the Access margins in 2023. It sounds like you expect lower Access revenues in Q1. So I think that should imply lower margins. And then just higher margins than exiting the year relative to that full year 11%. So I guess I'm curious if you agree with that. And then to follow up on Jamie's question, how that exit rate margin in access in 2023 might relate to your 12.5% to 13.5% on 2025 margins. It seems like if we're going to be above that 11% exiting this year, you should be getting pretty close to that long-term margin range before 2025. Sure. First of all, I guess, talking about the -- I'll just start with your last question first. On the exit rate, I think -- so yes, I think, indeed, if you look to the first quarter, generally, our margins in all of our businesses are going to be lower in Q1. I talked about in my prepared remarks, we have a mix issue with a mix headwind with an order in Defense that's driving the margin down. And then in Q1 and then Access and Vocational the revenues are down due to some just really timing of deliveries not so much production related. So that's going to apply to margins. It is the lowest -- we expect it to be notably the lowest margins of the year so it will improve over the course of the year. I think in terms of Access exit for margins, right now, to the extent -- going back to my earlier comments, the extent to which access is lower than like a 2019, it really comes down to -- our units are still lower. So absorptions have been unfavorable, and we have manufacturing inefficiencies right now. So it's really a supply chain function that's causing the margin as unit volume increases and so on, those margins that we're talking about for 2025 are absolutely attainable. So that's really -- what I'd really do is focus on supply chain cadence. Okay. And then did you comment at all about how you're thinking about catch-up adjustment potential in Defense in 2023, assuming there might be more inflation, what's your expectation for catch-up adjustments this year? Well, our expectation is -- we have them every quarter. So our expectation is that we're building in everything that we know. We certainly don't expect that inflation is going to be lower this year. And certainly, that's reflected in our estimates. I think the -- really, what I would watch with the cumulative catch-up adjustments is the cadence of inflation to the extent we've had so much variability over the past year and inflation was so much higher than what expectations were, say, 18 months ago. I think even though inflation is higher now, it tends -- it's not moving at the same pace, and that's where you that's where the estimation challenges come in. So I would say, even if inflation is higher, our going-in proposition is that there should be less volatility there. Hey, guys. Thanks for squeezing me in. Apologies if this was asked earlier, just how should we view the continuing resolution headlines with the Defense and Defense budget. Does that have any impact on some of your programs or just timing of awards that we have to monitor. Curious what you guys are hearing on that front? Really, from a CR perspective, that really shouldn't have any impact on our existing programs. It really, I think, is obviously had a little bit more impact if there is a government shutdown at some point. New program starting up might be effective but affected, but that really in terms of... [Multiple Speakers] Great. Good to know. And then just curious, is there are some signs of Access Equipment used pricing just sliding over the last few months. It's still elevated but moderating from those highs. I'm just curious, when you look at your backlog and the price increases of the new equipment there, how should we kind of look at used Access an aerial values in that market? Well, used equipment is, I think you have to look at it over periods of time, it's still elevated significantly versus where it normally is. So the fact that it came down a little bit. At this point, we don't think it means much. I think we need more data points to see a little bit more of a trend before we can make much of it. But just the moderation right now is not something that we think means anything at this point in time. And when I say that, Michael, I'm really talking about that because of the continued strong demand that we feel from the market and from our customers. And I'm talking about longer-term demand too, not just the here and now demand. Okay. Thank you, everyone for joining us today. We're committed, of course, to driving long-term profitability and growth as we continue to innovate, serve and advance our company. Stay safe, healthy, and we look forward to speaking with you throughout 2023. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
EarningCall_1046	Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s Fourth Quarter 2022 Earnings Call. On the call today is Jim Eccher, the company's CEO; Brad Adams, the Companyâs CFO; and Gary Collins the Vice Chairman of our Board. I will start with a reminder that Old Second's comments today may contain forward-looking statements about the company's business, strategies and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors. On today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com on the homepage and under the Investor Relations tab. Good morning and thank you for joining us today. Same format as prior quarters. I have several prepared opening remarks. Give my overview of the quarter and then Iâll turn it over to Brad for more additional details. Weâll then conclude with some summary comments and thoughts about the future and then open up for some questions. Net income was $23.6 million or $0.52 per diluted share in the fourth quarter. Net income adjusted to exclude West Suburban acquisition related costs, less net gains for brand sales was $24.1 million or $0.53 per diluted share in the fourth quarter. On the same adjusted basis, return on assets was 1.61%. Return on tangible equity was 28.33% and the tax equivalent efficiency ratio was 51.29%. Fourth quarter earnings were also negatively impacted by a combined $1.3 million in pre-tax security losses and fair value adjustments for mortgage servicing rights. In aggregate, obviously an exceptionally strong quarter with more than 20% earnings growth linked quarter on annualized. Our financials continue to be favorably impacted by the increase in market interest rates with a 15% increase in the net interest income or $8.5 million over the third quarter of 2022 due to relatively stable funding costs and increasing asset yields across the balance sheet. The fourth quarter marks a full year since our acquisition of West Suburban Bank and I believe both, our execution and the positive impacts of the acquisition are apparent in our financials. We have outperformed our own internal expectations on cost saves, loan growth in revenue that we had set out for ourselves. These internal targets became more aggressive as we move from deal announcement to the months following the closing of the transaction. We have been more successful than we had hoped in bringing on new sales teams along with experienced, back office managerial talent. We are a better company today than we were at the close of the acquisition. Plenty of work remains and this will be the full extent of our self-congratulations, but it seems appropriate to close the loop on this with a full year behind us. Overall, we cannot be more pleased with where things stand today from both a balance sheet positioning and operational standpoint. The fourth quarter of 2022 reflected minimal loan growth due to both the usual seasonal slowdowns and reduced demand with an increased cost of borrowing. Exclusive of PPP loan run off, we had $1.1 million of loan growth quarter-over-quarter. Prepayments continue at a lesser rate than prior years, but origination activity slowed considerably in the fourth quarter. However, activity within loan committee remains better than expected for this time of the year and our confidence in loan growth in 2023 has not changed. January pipelines are building nicely and we believe originations will be strong in 2023. The net interest margin continued to expand this quarter with loan yields reflecting recent increases in market interest rates. Overall, the tax equivalent net interest margin was 4.63% for the fourth quarter compared to 3.96% in the third quarter. The margin benefit resulted from balance sheet mix improvement, the impact of rising rates on the variable portion of the loan portfolio and strong loan growth for both the second and third quarter, which are now represented in the growth in net interest income. Loan to deposit ratio is now 76% compared to 73% last quarter. As we said last quarter, the focus for us now has shifted to balance sheet optimization and Brad will talk about that more in a minute. Turning to credit, we recorded net charge offs of 940,000 in the fourth quarter 2022, compared to 68,000 of net charge offs in the third quarter. Total classified loans decreased $4.8 million to $108.9 million from $113.7 million last quarter. Other real estate owned reflected no change in the fourth quarter and remains deminimis at $1.6 million. We remain confident in the strengths of our loan portfolios. The allowance for credit losses on loans increased to $49.5 million at the end of the year, from $48.8 million at the previous quarter, which is 1.28% of total loans and just a few basis points more than the total ACL to gross loans at September 30, 2022. At quarter end $1.6 million of provision for credit losses on loans was recorded, partially offset by a reduction of 74,000 up for provision for unfunded commitments. The increase in the ACL on loans was primarily driven by a slightly higher loss rate in the fourth quarter compared to the prior few quarters, primarily due to the sale and related charge-offs resulting from one larger non-performing credit, which we have spoken about on this call for over a year now. Our outlook is cautiously optimistic as the underlying economy appears strong, albeit with significant uncertainties. We believe that we are more than adequately reserved under base case scenarios, but continue to overweight more pessimistic scenarios given that a higher degree of uncertainty. Recession probabilities increased relative to last quarter in our estimation. Credit remains very well behaved that we remain mindful and diligent in monitoring trends, both within the portfolio and more broadly. Non-interest income continues to perform well with growth noted in the fourth quarter of 2022, compared to the third quarter of 2022 in wealth management fees, bowling [ph] income and card related income. Pre-tax losses of $910,000 on security sales were incurred related to strategic repositioning within certain security types in our portfolio. Expense discipline continues to be strong and we are far ahead of schedule on cost save targets announced with the acquisition. Total merger related costs of $645,000 were recorded in the fourth quarter. In addition, we recorded net gains on branch sales of 28,000, all pre-tax. The branch sale gains are recorded within occupancy expense. The sum total of these non-recurring, non-interest expense items discussed total of net $457,000 expense after tax, which resulted in adjusted earnings per fully diluted share of $0.53 for the fourth quarter. As we look forward, we are focused on doing more of the same, managing liquidity, building commercial loan origination capability for the long term and making prudent investments in the securities portfolio in the short term that did not carry excess spread or credit risk. The goal remains to continue to build back towards an 80% plus loan-to-deposit ratio in order to drive the returns on equity, commensurate with our recent historical performance. Thank you Jim. Net interest income increased $8.5 million relative to last quarter and $35.5 million from the year-ago quarter. Margin trends increased due to a loan portfolio growth, as well as due to the increases in security and loan yields from market interest rate increases. Total yield on interest earning assets increased 76 basis points to 489 basis points over the linked quarter, partially offset by an 8 basis point increase in the cost of interest bearing deposits and a15 basis point increase in interest-bearing liabilities aggregate. Obviously, exceptional margin performance. The fourth quarter continued to see a significant movement in rate, albeit this time in the opposite direction, with inversion across the entirety of the curve that leads many to read this or that from the tea leaves. Obviously the short end of the curve remains high and this is where Old Second largely lives. I won't bore you with my take on macro things, other than to briefly mention that I don't believe that a Fed focused on inflation is going to whipsaw short rates absent a significant shock of some sort. The once popular belief that zero interest rate policy had no risk has proven shockingly misguided and any expectation and a reversion to that mean is foolish in my opinion. Obviously I'm biased as a decade-long sufferer of the belief that core deposits matter. So take that opinion for what it's worth and feel free to unsubscribe from my newsletter going forward. The implications for investors in Old Second is that we aren't in a hurry to place a large bets on the path of interest rates. Duration is being added to reduce asset sensitivity in numerous ways, including remixing out of the variable securities that has served us so well, and the addition of received fixed swaps. Few saw this coming and fewer still will nail attempted inflection point trades. Old Second is a very good Bank in my opinion and should not attempt to be a hedge fund. Our positioning over the last 18 months was undertaken to provide us with flexibility to fund in an environment where deposits become expensive. The success of that strategy is somewhat on display this quarter with $76 million in liquidity provided from the securities portfolio, with only a small loss realized. The loan-to-deposit ratio remains very low and our ability to source liquidity from the portfolio has increased relative to the color we gave you last quarter. I would like to remind you that longer duration â portfolios with longer duration than Old Secondâs would have seen relative outperformance to ours given the sharp end version from the short end. The mark on the securities portfolio remains high, but will be recaptured relatively quickly. The net result is that Old Second should build capital quickly as evidenced by the 57 basis point improvement in the TCE ratio linked quarter. At 12/31 the portfolio duration was approximately three years. The weighted average life was approximately 4.5 years, and a little less than a third of the entire portfolio was still variable. I would also remind that Old Second has not moved anything that held the maturity, so what you're saying is not maybe directly comparable to others. The tax equivalent yield on the securities portfolio increased by approximately 55 basis points during the quarter and we are continuing to project a little less than $50 million per quarter in cash flow from the portfolio quarterly. If necessary, we can quickly sell several hundred million dollars at a loss of approximating 3% to 4% of net book value. That may not sound great at first blush, but I think it compares exceptionally well to others on a relative basis. The end result of that is that I don't think it gets a whole lot worse with tangible book value increasing by more than 8% this quarter. I'm optimistic we have turned the corner. The trend should be very positive from here. The rest of the balance sheet looks fantastic. The deposit base as many of you know is extremely granular and insensitive to rates. On the loan side Old Second is transitioning quickly to a higher rate world, with rapidly improving profitability. The coming quarters will likely see us pay down the notes payable with $9 million coming off in the first quarter and our attention turning from here to senior debt, perhaps later in the year. On the expenses front, a little bit elevated in the fourth quarter, in large part due to incentive compensation and Old Secondâs performance this year on loan growth and bottom line performance relative to budget. There should be some relief in the first quarter of 2023. Wage pressure continues to be real in our markets, but has lessened considerably in recent months. The fourth quarter did represent the first full quarter impact of wholesale wage increases across the retail network. That being said, I would expect quarterly wages and benefits to more closely approximate $22 million going forward. Given the revenue performance, investment has been running high, but we will maintain the ability to dial back as conditions warrant. I'm very pleased with the way the team has come together in identifying the improvements we need to make to transition into to a larger and more dynamic company. Deposits decline 3.2% from third quarter levels, primarily from tax payment seasonality as some parked funds exited. We also had a modest impact from a rate-sensitive acquired accounts. In aggregate though, trends were stable throughout the quarter. The resulting remix and improvement in the loan to deposit ratio clearly benefited the margin. 67 basis points of margin improvement is by any measure a lot. Margin trends from here will be more subdued. The trend remains positive and soon the fixed rate portion of the loan portfolio will begin to contribute as well. As Jim mentioned, we do feel good on the loan growth side, but I would expect slower growth until the second quarter of 2023. Deposits are a tougher game now, with a couple of local banks recently going very big on the time deposit and teaser rate front, but I still believe the Old Second will perform as well or better than it did during the last tightening cycle. The end result is that margin trends are expected to continue to trend in the right direction. Non-interest income decreased from last quarter by $2.6 million, driven by a $1.1 million net decrease in mortgage banking revenues, primarily stemming from a reduction in MSR income, as well as $910,000 net losses on security sales. So reduction in other income due to pretext gains recorded in the third quarter of $743,000 from the sale of our Visa Credit Card portfolio and $180,000 due to the sale of the land trust business, both acquired with the West Suburban acquisition. Wealth management boldly and card related income, each reflected growth in the current quarter. Provision for credit losses of $1.6 million and our economic outlook remains largely unchanged from the third quarter, with an unemployment rate projection of approximately 4.5% to 5.75% through December 31 of this year and over the remaining life of the loans. I would expect loan growth to be roughly consistent with provision growth over the near term, though that could change with significant worsening in the macro environment. We recorded a reversal of provision of credit loss of approximately 74 grand on unfunded commitments. Non-accrual loans declined a bit this quarter. 90 days past due declined considerably from the $20.8 million balance from the third quarter to $1.3 million at year-end. Classified loans decreased modestly as Jim noted and I would add that a larger credit we downgraded in a prior quarter was sold early in the first quarter 2023, resulting in an $800,000 charge off taken at year-end. Overall, we are pleased with how credit has performed and continue to consider credit metrics as both stable and excellent. Expenses were difficult to manage this year and into 2023 with mid-single digit increases in salary and double-digit increases in benefits, reflecting wage inflation and a difficult environment to hire. We are managing through this and thankful for the flexibility and revenue strength that exists for us right now. Our efforts in the coming quarters will be continuing to bring additional talent on board, helping our customers and funding quality loan growth with the continuing trend of excellent overall core profitability. We expect loan growth to outpace earning asset growth for the bulk of 2023. We are continuing to look to build capital back a bit following our investment in West Suburban and think it will happen quickly. Okay. Thanks, Brad. In closing, we remain confident in our balance sheet and the opportunities that are ahead for Old Second. We're paying close attention to both expenses and credit. We believe our underwriting has remained disciplined and our funding position is strong. Today, we have the balance sheet and liquidity flexibility to take advantage of a rising rate environment and will be aggressive in looking at new talent and new relationships. That concludes our prepared comments this morning. So I will turn it over to the moderator and open it up to any questions. Thank you. The floor is now open for questions. [Operator Instructions]. Thank you. Our first question is coming from Jeff Rulis with D.A. Davidson. Please go ahead. Just wanted to try to get some detail on the success of the NPA reductions in non-accruals. If you could just kind of give us a little color on the â you know with these loans acquired through West Suburban with a legacy, you know what type. Iâm just trying to get a sense of what declined in the quarter. Yeah, the big mover Jeff was a large commercial real-estate property, a retail property that we have been â it has been in our workout team for the better part of the year. We finally were able to find a buyer that took a corresponding charge off. Finally moved that one off the books. Absent that, it was a combination of some prepayments, some pay downs, some upgrades, but the large real estate property where we took about a $900,000 charge was long-standing workout credit. Okay. Was there any interest recoveries included in that? What â you know the margin is pretty big. I was just wondering if that added to any you know? No, okay. Got you, okay. Brad you rattled through the expense expectations a little bit. Sorry if I missed it. Obviously â22 digesting some hires and comp increase. I think you alluded to sort of digesting some of that and I guess expectations for â23 growth as we kind of muddled through the year. You know, I think like I said or tried to hand to maybe gracefully maybe not, I'll do a little, maybe a Mea culpa here. We kind of blew through stretch incentive goal and it had a big impact on compensation. We beat our budget quite handsomely in 2022. Met at implications for incentive comp. Perhaps it would have been better if that could have been approved more gracefully, but we had well in excess of 100 basis points of margin expansion in two quarters, less that two quarters. So it was a bit lumpy on that front. We should see a step down in compensation expense in the first quarter, that will be somewhat mitigated by FICO coming back on board, full boat. But I still think overall operating expenses are kind of like a 4% to 5% type number on a full year, absent that step down. Okay, okay. And maybe the last one. Just on the fee income side obviously impacted by the securities losses and MSR, just your expectation on expect mortgage to stay low. Can we look at a quarterly run rate in the $9.5 million $10 million range? Any feel for fee income growth in the coming year? Well, what I'd like to see is, I'd like to see commercial loan fees and slot fees start to contribute more meaningfully. We've seen some momentum here recently in the second half of the year. I think weâll get a big kick from that. I don't expect mortgage banking to perform very well in 2023. I don't think I'm alone in that opinion. So I think we'll see kind of mid-single digit growth on the fee side this year. I think weâd be pretty happy. Hey Brad, Hey Jeff. The comments about earnings assets trailing loan growth, if I heard you right Brad, $50 million is coming off of the bond book, is it one? I mean it feels like that could fund mid-single digit loan growth by itself. So it sounds like no growth in Q1 kind of seasonally or low growth and then what mid-single over the course of year. Is that kind of flat earning assets or you think any assets will grow? Yeah Chris, I mean historically we've been a shop that's had pretty good loan growth in the second and third quarters. Yeah, obviously fourth quarter was pretty flat. I will say in recent weeksâ activity loan committee is picking it up. If you remember, we set out to double our origination capacity last year and we actually tripled it, going from about $500 million to about $1.5 million. I certainly don't see that kind of production in 2023, but certainly could see somewhere in the $1 billion range in production. But, I'm optimistic. I think mid-single digit growth is very achievable. Okay. And then on the margin, there was a comment in the release about upward pressure on deposit cost, but I think here the word was moderate. So I guess maybe a little bit of color there. I think the banks that have held out so far on deposit betas have more or less signaled an acceleration. Are you signaling, perhaps not the same degree of pressure Brad and margin lift from that 4.6. So, as you can see, we've seen a little bit of deposit attrition. It's largely been concentrated in public funds, fewer districts, that sort of thing. And that is money that flowed in while the spigots were on full, right? I mean everybody saw that. Absent that we don't have a lot of very high balance accounts here. We are â I've said this before, it's a little bit folksy, but we are funded largely by $1000 checking accounts and that serves us well in times like these. We do have, you know from an outpost stand point we do have some time deposit contribution and the cost of that is early going up. There are 4%âs being thrown around in our market at this point. And you see the usual games, where people are basically gaming the Fed Funds Futures curve and trying to capture 10 basis points here and 25 basis points there, it's the same old game. Weâll keep some level of time deposit just to keep things balanced from an outgo standpoint. There is obviously some pressure, but not a ton. We are doing really well. So, just to push on the margin again. You talked about perhaps taking some of the asset sensitivity off, but not making a huge bet. If the market is right, that we get another hike or two in the first quarter or two. I mean where do you kind of see peak margins? Okay. And then one of your peers in Chicago I think has managed to balance sheet just very well like you. Wouldn't that be the time to make a little bit more of a bet to lock in that really, really high margin? I mean, we're â don't misconstrue me. We are certainly taking off assets sensitivity and adding duration and doing so in a measured manner. A big part of that is stepping out of these variable securities that we bought and that comes without a fee and it also comes without accounting risk. I don't want to give the impression that we're not locking in, to some extent we certainly are. But right now what you see is, you see a sharp drop-off, but that the three-year portion of the curve, and after you take the fee into account and start looking at the economics of that and you balance that against what has shown up here recently which is 50 basis points cuts at the end of the year and youâre not locking in you know 4.5% margins, your locking in basically 3.5% margins, the net-net of it. So I think what Iâm trying to say is that weâre not lurching at anything, but weâre certainly reducing asset sensitivity as quickly and as prudently as we can. But bear in mind that it was never my intention to have 30% of the securities portfolio and variable, simply we had no choice, what fixed rate yields were and what the risks were and if I could get out of them tomorrow with no loss, I probably would. Brad, I like your core deposits manner of newsletter. Do you have a balance sheet management newsletter? I believe some of your peers may want to subscribe to that. But no, serious on this, the non-interest bearing deposits to total open deposits still running around 40%, you know your very core funded and a lot of like you said $1000 deposit accounts. But do you expect that number to veer any lower to net. You know do you see that close to 30%, 35% at some point or is 40% a good run rate? Yeah, it feels pretty stable right now. You know things happen when rates go up and certainly one of â and it gets slashed away in a headline as that liquidity â the liquidity evaporates and that always becomes more profound than people expect. You know itâs been a long time since we saw what happens in these scenarios, but I can tell you that itâs better to be a retail funded, granular deposit base when liquidity gets tight. And I think when you talk about volatility of those deposit basis, its lesser in that kind of makeup than what youâd see in a commercial funded bank or something like that. So itâs good to be what we are right now. I certainly recognize that environments can change and weâll do what we can, but we are fundamentally what we are, Iâve said that many times, and we shouldnât start making giant bets to be something different than that because thereâs not a darn thing we can do about it. Got it! Cool! Thanks for that one. And then, one of your competitors did a deal in your neck of the woods. Any appetite from any at this point? Is there â are you having any conversations? Have you seen an increase in dialogue there? Yeah David, you know weâve obviously been working real hard to integrate less suburban. You know itâs been a year. Weâll certainly be open minded about a strategic opportunity. I would say this dialogue in our markets is ongoing, but certainly not at the level it was you know a couple of years ago. But yes, we would be open to a transaction if we found one that â there are criteria. Thank you. There appear to be no further questions in queue at this time. So I hand it back to Mr. Eccher for any closing comments. Okay, all right thank you. Thanks everyone for joining us this morning and we look forward to speaking with you again next quarter. Good bye! Thank you and this does conclude todayâs conference call. You may disconnect your lines at this time and have a wonderful day and we thank you for your participation.
EarningCall_1047	Good day and welcome to the Dynex Capital Fourth Quarter and Full Year 2022 Earnings Call. Todayâs call is being recorded. [Operator Instructions] And I would now like to turn the conference over to Alison Griffin, Vice President of Investor Relations. Please go ahead. Good morning and thank you for joining us today for the Dynex Capital fourth quarter and full year 2022 earnings conference call. The press release associated with todayâs call was issued and filed with the SEC this morning, January 30. You may view the press release on the homepage of the Dynex website at dynexcapital.com as well as on the SECâs website at sec.gov. Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The companyâs actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which maybe found on the Dynex website under Investor Center as well as on the SECâs website. This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through a webcast link on the homepage of our website. The slide presentation may also be referenced under Quarterly Reports on the Investor Center page. Joining me on the call is Byron Boston, Chief Executive Officer and Co-Chief Investment Officer; Smriti Popenoe, President and Co-Chief Investment Officer; and Rob Colligan, Executive Vice President, Chief Financial Officer. Thank you, Alison. Good morning and thank you for joining us today. We started this decade at Dynex, believing that surprises would be highly probable and 3 years into it, the surprises continue to come. I have been active in the financial markets since 1981, with a four-decade long career that began with a deep curiosity for economics. As a trader and banker on Wall Street, I learned disciplined processes for risk management. And my experience since then has laid a tremendous foundation for navigating this current period. I can say with all my years of having been on this planet that we are at a big moment in history. Last year, we saw more volatility than I had witnessed since my early years on Wall Street. Bond markets had the worst year of returns since 1926. Our performance for the year reflected some of this turmoil. Our total economic return for the year was negative 9.45%. We are a big proponent of preserving book value and we never like being in a position of losing capital. So on a standalone basis, this is a disappointing result. Nonetheless, Dynex outperformed major fixed income indices and our peer group and we continue to deliver industry leading returns. In the context of a worst performance in almost 100 years for the bond market, we made disciplined and deliberate choices in managing our risk. And as you can see on Pages 4 and 5, we remain the top performer over for 3-year and 5-year period. Against a historically difficult backdrop and markets, I take enormous comfort in this relative result. As a fellow shareholder, I focus on how we are building long-term value. Please turn to Page 9. You can see we started the decade at $18.01 in book value and we have delivered $19.51 as of December 31, including cumulative dividends. Although book value is lower, we did not subject our shareholders to large unrecoverable, realized losses in either 2020 or 2022. As I stand here today, looking at the investment landscape, I see a favorable investment environment that supports a recovery in book value over time without the need to take excessive risks to recover capital while we continue to generate a solid return for you. As I said earlier, we are at a significant moment in history. We are anticipating that this decade will bring new opportunities and unique challenges. Global markets are fragile because of the rapid buildup of debt. We believe central bank balance sheets matter. The removal of liquidity has the potential to impact a broad section of the investing landscape. Global complexity continues to be amplified by human conflict. As such, we are making decisions with these factors in investing your savings with a long-term in mind. As your asset manager, we have demonstrated the ability to shift risk over the past 15 years. I want to emphasize we do not consider ourselves an agency-only REIT nor we invested in an agency RMBS, because it is the hot thing to do. We believe that this environment calls for liquidity and flexibility. Agency RMBS are highly liquid, government guaranteed assets and offer excellent returns. Therefore, they are our current investment of choice. We remain prepared for an evolving macroeconomic environment, which we believe will eventually lead to a wider set of investment opportunities. As the captain of the Dynex ship, I want you to know that we have the tools to manage through this environment. Inverted yield curves are unique to periods of significant Fed tightening. Smriti and I have shared the experience of managing through an inverted yield curve in 2003 through 2006 in a public company mortgage REIT, where significant amount of value came through our hedging strategy. As Smriti will describe, hedging is an important part of how we navigated this inverted yield curve environment. As demographics shifts globally towards an aging population, the need for income is getting increasingly apparent. Dynex Capital is an expert in delivering income. As such, we are making decisions to invest in people, processes and technology as we build our company for the long-term. Our business model and strategy are designed to thrive and find opportunities across multiple markets scenarios. We believe that this sets us apart and you are seeing evidence of that differentiation in our results. I am proud of the loyalty, dedication and efforts of our team. And I am very proud of the results that produced both in 2020 and 2022 and so far this decade as a whole. Our commitment to providing attractive long-term returns for our shareholders is unwavering and we are excited about the opportunities ahead of us. And with that, I will turn the call over to Rob Colligan to provide more specifics regarding our fourth quarter performance. Thank you, Byron and good morning to everyone joining the call today. For the quarter, the company reported book value of $14.73 per share and comprehensive income of $1.17 per share. The book value performance plus the dividend delivered an economic return of 6.2% for the quarter. The portfolio benefited from spread tightening which occurred in the fourth quarter and drove increases in the value of our mortgage-backed securities and TBA positions. Our thesis of book value recovery based on spread tightening still holds true. We believe that our portfolio should recover a significant amount of value when investor demand for mortgage-backed securities improve or simply as pay-downs occur over time. Smriti will cover more granular details as well as our views on recent market activity and our outlook for the future in her comments. Earnings available for distribution was $0.03 for the quarter. As discussed last quarter, this does not include the benefit of our hedging activities. If the company utilize swap instruments instead of futures, EAD would be dramatically different. Our decision to use futures is based on the depth and liquidity of the futures market as well as lower capital requirements compared to a comparable swap instrument. That provides equivalent rate protection. While itâs rare for extended periods of interest rate inversion to exist, itâs not a completely new market environment. With rate inversions, income needs to be generated from the management of interest rate risk, primarily from appropriate hedging strategies. In the fourth quarter, Dynex realized $205 million of hedge gains bringing our year end hedge gain to $691 million. This is a material number that has insulated the company from rising rates and has protected book value from a dramatic rise in short-term rates as the Fed continues to use rate policy in an attempt to tame inflation. As mentioned last quarter, these hedge gains are amortized into REIT taxable income over the hedge period of approximately 10 years. The benefit of interest rate hedge gain amortization was approximately $12 million for the fourth quarter and $22.5 million for the year. The earnings release provides our estimate of hedge gains by quarter for 2023, for the full year 2024, and then years thereafter. The total amount of the hedge gain to amortize into REIT taxable income can go up and down depending on the companyâs hedge position and movement in rates in subsequent quarters. We have experienced some value degradation in our hedge book so far in 2023 as long-term rates have receded, although the hedge loss has been outpaced by asset gains, which results in our book value increasing to $15.10 to $15.20 as of now. If the current shape of the yield curve persists, we do expect to have additional hedge gains in 2023. Since hedge gains that are a component of REIT taxable income, they will be part of our distribution requirements along with other ordinary gains and losses. As we discussed last quarter, we expect the hedge gains will be supportive of the dividend in 2023 and beyond even if net interest income and earnings available for distribution decline due to financing costs. Please see Page 8 in our earnings presentation that highlights these earnings components and recent trends in net interest income and hedge gains. In the release, you will see the effective yield on our assets has increased this quarter. This is due to two primary factors. At the end of the third quarter, we reduced the balance of our lower coupon 2% and 2.5% securities and added 4.5% and 5% coupons to our portfolio. Also given the rise in rates, prepayment speeds continue to slowdown, which added a modest increase in yields this quarter. Lastly, we added $92 million of new capital this quarter via our ATM program. We added liquidity to our balance sheet at a time where returns are mid to high-teens and exceeded our cost of capital. Thank you, Rob and good morning everyone. Rob has covered a great deal of detail on our financial performance in 2022. My comments today will be focused on our current macroeconomic thinking, our risk, portfolio posture, opportunities and outlook for 2023. There are three key elements underlying our macroeconomic thesis. First and this one has been a consistent theme since 2015. The global environment is increasingly complex, with rising global debt, increasing human conflict, rapid technology changes and shifting demographics. This leads us to favor more liquid strategies. Second, global central banks have embarked on a monetary tightening cycle against this complex backdrop. How long the tightening cycle lasts, how effective it is? The intended and unintended consequences are yet unclear. This leads us to prepare for multiple scenarios and unforeseen events. Third, quantitative tightening, which is seen currently as running in the background, can have a significant impact on the price of risk going forward. We believe the draining of liquidity has the potential to be a major driver of the repricing of risk in this decade. We think this can occur even if the Fed is cutting rates as the balance sheet continues shrinking. This leads us to hold assets that can be easily valued and traded at those valuations, saving dry powder for when valuations on all assets, especially less liquid assets reflect fundamental value with less distortion from central bank balance sheets. In our view, these factors have shifted the yardstick by which to measure what is a fair return for the risk environment. It is easy to be beguiled by a return that seems higher than we have seen in the last 8, 10, even 15 years. We are taking the approach that the last 15 years of market history must be viewed by considering the distortion of quantitative easing on prices. The team and I have focused on evaluating returns in the context of the future. This is a key foundational element of our thinking. Finally, a characteristic of the investment landscape that we are calling a flat distribution, fat tails, making predicting outcomes very, very difficult, because there are more probable outcomes, more equal probability of each outcome, a wider range of outcomes and the possibility of skewed distributions and exogenous events. Many investors use models with implicit normal or log normal distributions to measure risk and return. We believe the results from such models must be viewed with the lens of a very different reality. Our risk and investment strategy are set in this context. Next, I will discuss the specifics of the investing environment. I will tackle financing costs and the inverted yield curve first and then address asset valuations, our spread outlook and expected returns. A key feature of the investing landscape today is the inverted yield curve. Short-term interest rates are higher than long-term interest rates. This has been driven by the Fed tightening to almost 5% and long-term interest rates falling driven by investor expectations for future Fed easing either due to recession and/or inflation declining to 2%. Whether you believe what the market has priced in or not, an inverted yield curve has consequences for levered investors like us, because it means that in the short-term, financing costs will be higher, but they are expected to fall in the intermediate and long-term. If we funded all our assets in the repo market and had no hedges, our income would suffer in the short-term, but improve in the long-term assuming the marketâs prediction came true. But the reality is different. Dynex shareholders have benefited from our hedging strategy, which locks in financing rates for longer periods of time, so that fluctuations in short-term interest rates are mitigated. Our current strategy of hedging with treasury futures in September 2020 effectively locked in 10-year financing at very low rates on hedges, largely mitigating the impact of the 400 plus basis points rise in financing costs. As Rob mentioned, those hedges have generated a gain position of $691 million as of December 31 and they are reflected in book value. Another important point to remember in an inverted yield curve environment is that asset returns must still be viewed on a hedged basis so that you can incorporate the value of locking in lower long-term financing costs by hedging. When we view returns today in this context, we see the investment environment as continuing to be favorable offering low to mid-teens returns in agency RMBS. So, the key takeaway on inverted curves, they can be managed with hedges and the Dynex team has significant experience managing through these types of environments. A last point on financing, the availability of financing remains very strong. Repo markets are functioning smoothly and financing remains widely available, especially for the liquid assets that we own. Letâs now turn to assets. Credit spreads are broadly tighter year-to-date. We see this as the evidence of the power of the liquidity that still remains in the system and the need for cash to be put to work. Our book value is higher as a result, as Rob mentioned, between $15.10 and $15.20, up from $14.73 at year end. As shown on Page 14, agency RMBS spreads to 7-year swaps are settling in about 80 basis points higher from the tight level seen in 2021, a more than doubling of spreads. We see this as a favorable investment environment, because itâs possible to earn hedge returns using leverage of 7x in the low to mid-teens. We have currently invested at these levels with the option and flexibility because of our liquidity position to add assets when spreads are wider. You can also see on the chart that most times that spreads have gotten this wide or wider, there has been a reversion to the mean, if you will. This is a longer term tailwind to book value. We say longer term because there is a major difference between the past spread cycles and the one that we are in. The past spread cycles had the GSEs, Fannie and Freddie with large portfolios supporting spreads in the 1990s and early 2000s. I know because I was there and probably executed some of those trades bringing spreads back in line. Post-2008 you have the Fed. In todayâs environment, we have neither. In fact, the Fed is shedding mortgage assets from its balance sheet. We are now seeing the ability for MBS to tighten 10 to 20 basis points as volatility declines, but the catalyst for much tighter spreads the 30 to 50 basis points tightener is not as apparent. Where could this bid eventually come from? Over time, we think banks maybe a powerful bid. If fixed income funds experienced major inflows money managers could be a strong bid, but new cash will be needed to increase exposure to RMBS. So we are not investing today with the hope of an immediate reward of tighter spreads. We have invested capital with the idea that todayâs returns meet or exceed our all-in cost of capital. And if spreads go a lot wider, we can add incremental value by adding assets at wider spreads. So for this reason, we feel like we can be more patient in our investing process. For now, we expect spreads to be range bound, reflecting technical factors of demand and supply. Agency RMBS spreads have been highly correlated with risk assets in general and we believe that trend continues in 2023. We anticipate that volatility in the macro economic environment will translate into chances to deploy capital. We believe it is essential to maintain lower leverage, higher liquidity, a more neutral duration position and a patient disciplined approach to fully capture the value offered when volatility hits. You can see this is reflected in our risk positioning on Pages 15 and 16. I want to make another point as we look at the risk position. Our leverage as of December 31 was 6.9x to common with $6.4 billion in assets. As you can see on Page 16, for a 20 basis point tightening and spreads on agency RMBS and a 50 basis points on CMBS IOs, our book value rises by 9% or $1.35. Conversely, if spreads widened 20 basis points the opposite happens. And therefore, we respect and maintain lower leverage and liquidity so that when we do get to those wider levels, we can potentially invest. But as you can see at plus or minus 9%, this profile does not suggest that we are under-invested, under-levered taking a defensive or cautious approach. In our view, we have plenty of risk on for this environment. It produces an economic return to support the current level of the dividend. You can expect us to continue to reallocate assets opportunistically and manage the portfolio dynamically, because this is what we expect the environment to dictate. Iâd like to leave you with the following thoughts. We have focused on preserving capital and generating returns for the long-term. Our performance in 2022 positions us to recover book value without the need to take excessive risks to recover capital. We are highly respectful of the evolving macroeconomic environment. We are focused on measuring risk-adjusted returns with an eye to the future and not the past. As such, we will be patient and deliberate in our decision-making. Our portfolio and liquidity is currently structured, support the economic return necessary to pay the current level of the dividend about 10.5%. We continue to have upside potential from dry powder and the ability to deploy capital at accretive levels. I am deeply grateful for the trust you placed in us as we manage your capital. Thank you, Smriti. Let me conclude with some final thoughts. We are in an evolving environment and at a unique transitional period in history. It is important now more than ever to be able to rely on a team with a clear strategy and deep experience and navigating complex environments. We are patient, disciplined, focused on execution, and on driving long-term shareholder returns. We are investing our money alongside you. So our goals are aligned and we take the responsibility as managers and stewards of your savings very seriously. We believe that Dynex Capital represents a compelling investment opportunity. Our stock trades at a discount to book. We pay an attractive and consistent monthly dividend that we believe is sustainable. And we have ample dry powder to take advantage of attractive investment opportunities as they develop. For our existing shareholders and stakeholders, I thank you for your trust and joining us on this journey. For those of you who are not yet our shareholders, I hope we have made a compelling case for you to join us. Hey, thanks. Good morning. I got a few questions. In the higher coupon pools, can you say what the loan age is and the prepayment profile more generally, maybe just how you plan on toggling between the TBAs and the pools and the higher coupons? And then the second question is do you see any risk or potential that mortgage rates could come down into the 5s, call it the mid-5s and what kind of read-through do you see with respect to supply and demand for MBS and other kind of scenario? Thanks. Hi, Eric. Good morning and thank you for your questions. So in the higher coupon pools there are new [wallet] (ph) pools, mostly I would say, not excessively high pay-up. So again, we are trying to limit the exposure to high pay-up pools to be able to cut down on that the pay-up exposure, right. So the idea there is again, you are playing the hedged return game, right, between TBAs and pools. And so over time we are kind of thoughtful about where we purchase our convexity. Sometimes that convexity is better off in pool form. Sometimes when the securities are trading at a big discount, we like the flexibility of TBA and then eventually being able to swap out. So thatâs kind of been our mindset with the higher coupons. And our pool position at this point is mostly in the 4.5% very, very small position in the 5s. With regard to your second question, do we think that mortgage rates could drop? And I think the answer to that is yes, I think we actually included a slide in our investor presentation this time, it might be in the appendix that has some of our views on the mortgage market dynamics. Itâs on Page 12 actually, but yes, I mean, we believe that just even if interest rates in the broad markets donât change, there is the possibility of primary, secondary spreads coming in because of competition, the need for mortgage originators to continue producing, profitable returns for their shareholders, that is a strong impetus for mortgage rates to decline regardless of whether treasury yields decline. So could you get that to below 5%, I would say is a stretch, definitely below 6% is a possibility. And then how that affects demand and supply? I think that was your last question. Am I right? Yes. So, look, right now, I think there is levels of cash-out refinancing that are starting to get limited a little bit by the GSE policy. But the bottom line on any kind of decline in mortgage rate from here on out is an increase in supply without necessarily a corresponding increase in demand. So that is a technical factor that we are very focused on. Hey, Smriti, you want to â letâs make one other comment here about these higher coupon 6s and others that have been originated. What I found fascinating was an article in the Wall Street Journal about Rocket Mortgage and their sales pitch at this point. A lot of loans have been made on around debt consolidation. And it is â as they make these higher coupon mortgages, many originators are assuring to the borrowers that they will be able to refinance these mortgages within 2 years or so. So there is â itâs very interesting to see you want to understand whatâs happening between the borrower and the lender to get a real understanding of value. These higher coupon mortgages are being originated and especially the really highlight the 6s, the 6 handles, where they are being assured â the borrowers are being assured, they will get the opportunity to refinance within a couple of years. So itâs an interesting dynamic that you want to really understand that is happening at the front end of the mortgage market. Thanks. Can you just talk a little bit more about the decision to raise capital through the ATM and kind of how you view the tradeoff of near-term dilution versus future returns from that capital? Sure. So really, I appreciate the question, Doug. I think one of the things that we think about the main thing we think about is the spread between the return on investment versus our all-in cost of capital. That is the main driver of capital issuance at all times here at Dynex. We think about what can we invest the capital in and when we adjust the all-in cost of capital for dilution in the near-term, are we able to earn that back over time? How quickly can we earn that back? And one of the key points about this particular environment and when we talk about it as being a sustained return environment that is favorable is that we feel like the investment opportunity a) is sustainable and b) itâs the return on investment is higher than our all-in cost of capital. So it is a very accretive investment environment. And when we see periods like this, it makes a ton of sense for us to go get the dry powder, so that we have in our pocket to be able to put the money to work at the right time. Before you add. Yes, just I guess when you are thinking about that â is that kind of assuming kind of static spreads? And in that cost of capital and I guess, if you were to think about the $0.28 of dilution, I guess at what points in the quarter were those shares issued? And would there have been some appreciation on the assets that you bought that would offset that dilution? Right. I mean, look, book value is up since quarter end, right. So we have already gotten appreciation on anything that was issued last quarter. And Iâll remind you guys, when we talk to you for our third quarter results, we were reporting book value in the 12.95 to 13-ish area, right. But we have had a massive increase in book value since the lows of the fourth quarter. And the existing shares at the time have benefited in all of that. So, yes, we do feel like there is, we are investing capital at levels that are accretive to our shareholders relative to the all-in cost, including what we paid to issue the capital in the fourth quarter. Hey, Doug. Just one other thing too, when you think about what happened in the fourth quarter, there were times in the fourth quarter when new investment opportunities had a return of north of 20%. So I understand that there is a temporary dilution factor, but the opportunities were there that we could put investments on the pile of investments that will deliver returns for years to come and thatâs why it made sense for us to add capital during the fourth quarter. You should also note we are long-term investors. We are building our company for the long-term. So, there are some definitive statements. We have no desire to be as large as the largest companies in this industry, zero. We are going to continue to go, build up our technology and processes, our capital base over time. With â it will add resilience. It will add liquidity for our shareholders. And then when we think about costs, costs are costs, where is my technology costs, where is the issuance costs, can we generate a return above our costs. And so, I will direct you to some of the charts that we have shown you. I love the one, especially on Slide 9, because thatâs the way we think about it. And if you look at the far bar, fourth quarter â22, you will see it says $19.51. Look at where we are today. That number is probably closer to $20. And over time, we will think about that, itâs like a buoy in the water with a rising tide. So, costs are costs. We are building our company for the long-term. We have no desire to be as large as some of the largest balance sheets have been. Our nimbleness is extremely important to us and itâs been extremely valuable especially this decade so far. And I guess just one follow-up on that. I mean to the extent that, like Rob said, you saw returns in the 20% range at points during the quarter. How do you weigh kind of temporarily letting leverage increase to take advantage of that versus raising new capital and then kind of if spreads tighten, just kind of letting leverage naturally come down. Just kind of that thought process versusâ¦. Yes. I mean I think a big one there is thinking through the risks and the risks of allowing leverage to continue to ride up, okay. And in this particular macroeconomic environment where you do have the possibility of surprises, such as what happened in September and October, you want to be very, very thoughtful about allowing your leverage to rise into those kinds of events versus taking some action to address increases in leverage. So, there is a big difference, actually. When you have surprises like the ones you had in September and October, it wasnât readily apparent, which direction things were going to go. And in those types of environments, we have chosen to not expose our shareholders to going out of business risk. We have chosen not to do that. So, there will be times when we take up leverage or allow leverage to write up in that situation. That was not one of those times. So, we think very long and hard about the risk reward of making those types of trade-offs. When there is existential risk involved, we are not going there. In other times when there is a reasonable chance that we are going to recover capital from allowing leverage to write up, itâs a different trade-off. But last quarter was not that type of an environment in our opinion. Hey. Thanks. You guys mentioned this sort of near-term outlook for spreads, you expect them to be kind of range bound and to remain correlated with other risk assets? Can you maybe talk a little bit about your outlook for interest rates this year, including kind of how you guys are thinking about volatility trending over the course of the year? Thanks. Wow, Trevor, you asked me if I have a crystal ball. It is, I would say like, I have been in these markets for a long time. And I think the environment that we are in is, it is among the most difficult environments that I have sat in, in the last 30 years to be able to look forward and say, with any degree of confidence, that x, y or z is going to happen with respect to interest rates, okay. We do have a name for it here. We are calling this flat distribution with fat tail for a reason, which is that it is really, really hard to come to a conclusion about inflation, the level of inflation, the level of growth, the exogenous events that could happen. Itâs really difficult to say things are going to go in one direction or another. So, we have actually got a very neutral predisposition to interest rates. You can see that in our risk position, up or down, curve shocks were pretty flat, because this is in an environment where you can â we think you can actually put your shareholdersâ capital at risk for those types of moves, because you are not as certain about that. So, that we â leads us to that kind of a risk position. So, we are in that â our view on interest rates right now is, you cannot predict, you cannot predict. I would say the other thing that that informs us and I mentioned this in my comment is, the last 15 years we have had a massive distortion from quantitative easing, whether people necessarily recognize it or not, itâs been a massive factor in the price of risk. And you are now entering an environment where that is actually being taken away globally by all central banks. And so the price of risk has to change. Itâs going to happen slowly over time, potentially, shocks like September or October, those are going to be more normal as the liquidity gets taken out of the system. So, you donât want to lean too far in one direction or another in terms of interest rates. And so all of these things lead us to say, better have a more neutral kind of position with respect to that. Now, the markets have done an incredible thing here by being very confident that interest rates are going to come down. And we will see what the Fed has to say about it later this week. But we are not ready to go in that same â in the same direction per se. Thanks Smriti. Just can you talk about how wrong the market has been? Thatâs an important point that is overlook and most people donât see the forward curve and see where the market was predicting rates just a year ago, 1.5 years, the market has been wrong throughout time, it had been extremely wrong recently. Can you just discuss that a little bit? Yes, sure. I mean like the â if you look at the forwards on December, in December of 2021, I mean the market would have told you that interest rates will be up at like 50 basis points or 75 basis points at the most, right. So and look, even the Fed didnât really believe that inflation was something, really they had, if you guys remember they had FAIT, remember that thing, flexible average inflation targeting. That was basically saying we are going to average inflation out over time and so we can stay more dovish. All of that has gotten thrown out the door. So, the ability to predict here is very, very hard. And look, in general, predictions are hard. We try not to predict here much. And so thatâs kind of what informs our opinion. Yes, but [indiscernible]. And throughout time, there are better probability distributions than we have today for investing money. This is and itâs very important, we will stand firm on this at Dynex Capital. This is an evolving environment. And you have one of your best ways to understand and look back at the forward curve, and look at how wrong the market has been this decade. And then consider the surprises that have happened. We came into this decade, we believe surprises were highly probable. Not only have we had surprises, but almost all have come from overseas. You have first, you had the pandemic, then we had the government response to the pandemic, then you had inflation, we had another government response, and we had a war and then we had the craziness that came out of Britain in September. So, when you start to talk about a prediction, and anyone wants to forecast, any economists, I want to ask you what precedence you are going to do, what is Russia going to do. And then that can go down a huge list of other questions for you that will challenge your forecast. And then finally, one of the best statements that Jay Powell made this year is when he said you canât trust any forecast today. Thatâs our opinion at Dynex. Yes. Good morning. Actually wanted to ask just about this current levered ROE, I mean you guys noted this is above the dividend, but just any more color on kind of a range of where current ROEs are would be great? Right. Yes, I think the â what I would say, so I quoted just 7x leverage, because thatâs the leverage to common that we have on right now. I would say that â so we are assuming the spreads of about 125 to 130, 135, there about. Those are in the 13 to 15 ROE, depending on the coupon that you pick out. And this is for like 4.5 to 5. That would be where they are at the moment. Okay. Great. Thanks. And then actually, you have noted that you didnât sell assets during the quarter or nothing meaningful in terms of recovering book value. But just on the TBAs side, with the TBA positions that were closed, I mean were there sort of losses there to think about? I mean, yes, you get one thing we did disclose right at the end of last â I mean during our conference call in our earnings presentation for the third quarter was a change in our risk position. So, if you go back to the third quarter earnings deck, we provided information, not only in terms of our interest rate risk, but also our spread risk exposure, which declined during the early weeks of October. So, that was in our numbers for the full quarter. Okay. Thank you. And just from a P&L standpoint, is that â are those changes, is that floating through that derivatives line, along with the TBA drop income? Hey, guys, quick question. Follow-up on Boseâs question on leverage, does that 7x include TBA or was that simply just thatâ¦? Okay. And I guess my follow-up question would be, given the increased reliance on hedging for income, should we look at EPS, distributable EPS to be somewhat more divorced from the overall performance of the company? We have talked a lot about EAD being a limited metric in general. And I would say, focus on total economic return. Rob can take you guys through once again, just like the A plus B plus C plus D on the hedge gains. And maybe you should do that. Now, Rob, in terms of just how to how to think through EAD plus, what is more directionally correct. Sure. So, yes, thanks for the question. One of the things that we added this quarter, just to highlight rate moves and how we look at the portfolio. We added a chart on Page 8 of the earnings deck. So, you would see, as you would expect, repo expenses are up. Both our interest income and our hedge gains have also ramped up this year. So, thatâs how we are feeling that we are insulated from a lot of the rate moves and how we are using our hedge book to supply either a buffer against rising rates or even just simply income. I think itâs an interesting market factor that right now, if you have a future on because the rate curve is inverted. We actually get paid to put a hedge on whether that is a future or a swap. There havenât been that many times in my career that that has happened. But itâs an interesting market dynamic that will actually add to that hedge benefit in 2023. We will see how long it lasts. But the market dynamics are a little bit different now. So, we are adjusting to that and doing a good thing for earnings and book value. And Chris, I am going to just finally just chime in on one other piece as a long-term investor in Dynex Capital. And a very, very â we are very responsible for our shareholders. I am looking at this graph that we have shown you on Slide 9. So, when we talk about performance, whatâs the worst in that? I am simplifying it for you. On Slide 9, I am going to be looking at that $19.51. And I am going to be looking at it as I continue to add a monthly dividend to that number. And we are looking to regain our book value over time. And I am going to be looking at that number to go up. Thatâs what I am looking to do. And thatâs the way I am going to be thinking about our performance here at Dynex Capital. And the other piece in this would be to really understand, and Smriti made this comment in her statement. We didnât take permanent hits to capital in 2020 or 2022. So, when you look at that bar, and please make â you do the same graph for every company that you might consider to analyze or invest in, and then look and compare to us again. Over time, this says, we are concerned with our shareholders savings. We want to deliver a solid cash income. And then we want to make that final bar continue to move up over time. So, when we say performance and how do we think about our performance, we simplify it in that graph. You can come up with all kinds of funky GAAP terms. But at the end of the day, our shareholders are expecting an above average dividend cash, cash income, which we are looking to continue to pay on a monthly basis. And we are looking to maintain the book value over time. And that does conclude the question-and-answer session. I would like to turn the call back over to Byron Boston for any additional or closing remarks. Thank you so much for joining us. I want to emphasize to you that we are long-term investors, skilled risk managers, disciplined capital allocators. Today, we have allocated our capital to the agency mortgage backed security sector. I will emphasize, we are not an agency only REIT. We are not doing the new hot thing. We are investing for the long-term. When we think about our costs, Doug, I appreciate you are asking that question. We are thinking about our costs over time and can we generate a higher return. And then I will emphasize to you. Get familiar with that slide, Slide 9, we like that. It shows our accumulated dividends along with where we are and our track record in terms of our book value. And when you are a little confused about who is managing your money in this decade, very important to ask yourself that, create that graph for every company that you consider and then compare it. We appreciate you joining us this quarter. And we look forward to chatting with you again at the end of the first quarter sometime in April. Thank you very much.
EarningCall_1048	Good morning, and welcome to the Kirby Corporation 2022 Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. [Operator Instructions] Please note this is being recorded. I would now like to turn the conference over to Mr. Kurt Niemietz, Kirby's VP of Investor Relations and Treasurer. Please go ahead. Good morning and thank you for joining us. With me today are David Grzebinski, Kirby's President and Chief Executive Officer; and Raj Kumar, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call, as well as the earnings release, which was issued earlier today, can be found on our website at www.kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under Financials. As a reminder, statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated as a result of various factors, including the impact of the COVID-19 pandemic on the company's business. A list of these risk factors can be found in Kirby Corpâs Form 10-K for the year ended December 31, 2021 and in our other filings made with the SEC from time-to-time. Thank you, Kurt, and good morning, everyone. Before we get into the details of our fourth quarter and full-year results, I'd like to take a moment to touch on a press release we issued earlier this month. The Board initiated a process in early 2022 with the support of our independent financial and legal advisors to review a range of alternatives, including a potential sale or spin-off of the Distribution and Services business. The Board is keenly focused on maximizing value for shareholders and regularly reviews and actively manages Kirbyâs portfolio. Following a thorough exploration of potential options, including discussions with a number of potential strategic and financial counterparties, the Board concluded that under current financial market conditions, the best way to enhance shareholder value is to continue to execute on our strategic plan for both the marine transportation and distribution service business. As always, we remain committed to maximizing value for shareholders. And we'll continue to evaluate all opportunities to do so. But as you know, the difficult financing environment is impacting the ability of both sponsors and strategics to pursue and consummate transactions. We have deep operational expertise and unique capabilities that position both of our businesses to deliver long-term growth and enhanced performance. This is underscored by our strong financial results and operating performance in 2022. We are encouraged by the bright prospects of the company's two segments and look forward to continuing to operate these businesses from a position of strength. Now turning to our financial results. Earlier today, we announced fourth quarter revenue of $730 million and adjusted earnings of $0.67 per share. This compares to 2021 fourth quarter revenue of $591 million and adjusted earnings of $0.27 per share. Both of our segments performed well during the quarter delivering significantly higher revenue and operating income year-over-year. The fourth quarter's results reflected steady market fundamentals in both marine transportation and distribution and services, partially offset by unfavorable weather and low water conditions, normal seasonal slowness, as well as ongoing supply chain challenges that delayed deliveries in distribution and services. In Inland Marine transportation, strong refinery utilization led to steady demand with our overall barge utilization running in the 90% range. Tight market conditions, due to strong demand and limited supply of barges coupled with continued inflationary pressures, put upward pressure on prices with spot prices up in the low single-digits sequentially and in the 20% to 25% range year-over-year. Term contracts also reviewed up in the 10% to 15% range versus a year ago. Overall, fourth quarter Inland revenues increased 24% year-over-year and margins improved into the low teens range. Low water conditions on the Mississippi River, as well as the onset of winter weather made for difficult operating conditions in the quarter with a significant increase in delay days. While we continue to pace headwinds with inflationary pressure in the quarter, we started to witness some moderation and operating margins continue to improve reaching their highest level since 2020. In coastal, market conditions steadily improved with our barge utilization in the low to mid-90% range and some incremental pricing gains with spot prices up in the low to mid-single-digits sequentially. Better coal shipments in our dry cargo business also contributed to improved revenues and increased operating margins. Overall, fourth quarter coastal revenues increased 8% year-over-year and operating margins were in the low single-digits. In Distribution and Services, demand remained strong across our markets with continued growth in new orders and backlog. In manufacturing, revenues were up sequentially and year-over-year, driven by healthy demand for our environmentally friendly pressure pumping equipment and power generation equipment for e-frac. However, as expected, significant supply chain issues delayed many new equipment deliveries during the quarter. We continue to work diligently to manage continued supply chain challenges. In our Commercial and Industrial market, overall demand remains solid across our different businesses with growth coming from the marine repair, power generation and on highway sectors. In summary, our fourth quarter results reflected continued strength in market fundamentals for both segments, despite meaningful weather and supply chain challenges. The Inland market is inflecting nicely, demand is strong and rates are moving higher. While the coastal market remains challenged near-term by industry-wide supply dynamics. Our barge utilization is good and we've realized modest rate improvements. Strong demand in Distribution and Services is contributing to further growth in our backlog, while supply chain issues are expected to persist for the foreseeable future, the outlook for the market is strong. We continue to focus on working safely, efficiently and responsibly to meet and exceed our customer needs and expect to drive incremental earnings growth into 2023 and into 2024. I'll talk more about our outlook later, but first I'll turn the call over to Raj to discuss the fourth quarter segment results and the balance sheet. Thank you, David, and good morning, everyone. In the fourth quarter of 2022, marine transportation revenues were $423 million and operating income was $47 million with an operating margin of 11.1%, compared to the fourth quarter of 2021, marine revenues increased $72 million or 21% and operating income increased $21 million or 82%. Compared to third quarter of 2022, marine revenues were down 2% and operating income increased by 12%. As David mentioned, the historic low water conditions on the Mississippi River Â¸as well as freezing weather along the Gulf Coast that curtailed refinery and plant utility made in the quarter negatively impacted operations. These negative factors were partially offset by solid underlying customer demand and improved pricing. The Inland business contributed approximately 80% of segment revenue. Average barge utilization was in the 90% range for the quarter, which is similar to the utilization seen in the third quarter of 2022, and compares to the mid to high-80% range in the fourth quarter of 2021. Long-term Inland marine transportation contracts or those contracts in the term of one year or longer contributed approximately 55% of revenue with 60% from time charters and 40% from contracts of affreightment. Improved market conditions contributed to spot market rates increasing sequentially in the low single-digits and in the low to mid-20% range year-over-year. Term contracts that renewed during the fourth quarter [Technical Difficulty]. On average in the 10% to 15% range, compared to the prior year. Compared to the fourth quarter of 2021, Inland revenues increased 24%, primarily due to increased barge utilization, higher term and spot contract pricing and increased fuel rebuilds as the average cost per diesel was up 60% year-over-year. Compared to the third quarter of 2022, Inland revenues were down 2%, driven by unfavorable operating conditions due to low water on the Mississippi River and winter weather. Inland operating margins were negatively impacted by 147% sequential increase in delay days. However, the margins were in the low-teens and improved both sequentially and year-over-year as delay days and inflationary cost headwinds were more than offset by gains in pricing. The coastal business represented 20% of revenues for the Marine Transportation segment. Average coastal barge utilization was in the low to mid-90% range, which compares to the 90% range in the fourth quarter of 2021. During the quarter, the percentage of coastal revenue under term contracts was approximately 65% of which approximately 90% were time charters. Average spot market rates were up in the low to mid-single-digit sequentially and renewals of term contracts were higher in the low teen range year-over-year. During the quarter, coastal revenues increased 8% year-over-year with improved barge utilization, higher contract prices and higher field rebuilds. Overall, coastal had a positive operating margin in the low single-digits. With respect to our tank barge fleet for both the Inland and Coastal businesses, we have provided a reconciliation of the changes in the fourth quarter, as well as projections for 2023. This is included in our earnings call presentation posted on our website. Now I'll review the performance of the Distribution and Services segment. Revenues for the fourth quarter of 2022 were $307 million with operating income of $17 million, compared to the fourth quarter of 2021, the Distribution and Services segment saw revenue increased by $67 million or 28% with operating income increasing by $10 million or 127%, when compared to the third quarter of 2022, revenues decreased by $5.4 million or 2% and operating income decreased by $5.2 million. The sequential decrease in revenue and operating income was attributed to ongoing supply chain delays, as well as some seasonal slowness activity. In the oil and gas market, favorable commodity prices and increased rigs and completions activity contributed to a 44% year-on-year increase in revenues. We experienced strong demand for new entrants and parts throughout the quarter. As David mentioned, we continue to navigate a tough supply chain environment, especially in our manufacturing business. Despite the supply chain headwinds, the manufacturing business experienced continued favorable trends in new orders and backlog. Overall, oil and gas represented approximately 42% of segment revenue in the fourth quarter and had operating margins in the low single-digits. On the commercial and industrial side, strong activity contributed to an 18% year-over-year increase in revenues with improved demand for equipment, parts and service in our marine repair and on highway businesses. Power generation was also up year-over-year. Compared to third quarter of 2022, commercial and industrial revenues increased by 8%. Our Thermal King business continued to experience delays due to supply chain constraints that impacted revenue growth. However, this headwind was offset by increased activity in marine, power generation and on-highway repair. Overall, the commercial and industrial business represented approximately 58% of segment revenue and had an operating margin in the high single-digits during the fourth quarter. Now I'll turn to the balance sheet. As of December 31, we had $81 million of cash with total debt at $1.1 billion and our debt to capital ratio improved to 26.2%. During the quarter, we had cash flow from operations of $132.9 million and we generated cash proceeds from asset sales of retired marine equipment of $4 million. We used cash flow and cash on hand to fund $52.3 million of capital expenditures or CapEx, primarily related to maintenance of equipment. During the quarter, we decreased debt by $39 million. There was no repurchases of company stock during the quarter given the blackout associated with the company's strategic review. As of December 31, we have total available liquidity of approximately $585 million. For 2023, we expect to generate cash flow from operations of $480 million to $580 million. We continue to work through supply chain constraints that are challenging working capital in the near-term, but we expect to unwind most of this working capital as orders shipped in 2023 and into 2024. With respect to CapEx, we plan to provide further guidance on 2023 expected CapEx later this year as we gain more clarity on projects, including planned shipyards and the impact of supply chain delays. We are committed to a balanced capital allocation approach and will use this cash flow to opportunistically return the capital to shareholders and continue to pursue long-term value creating niche investment and acquisition opportunities. Thank you, Raj. As discussed, we achieved strong fourth quarter results in both our segments and we expect that to continue into the first quarter. In Marine steady demand driven in large part by high refinery utilization and chemical plant utilization should continue to support high barge utilization. Limited new barge construction combined with inflationary pressures are expected to further support Inland rate increases. While all of this is very encouraging, we are mindful of the ever-changing economic landscape and the potential recession. We continue to expect refinery and petrochemical plant activity to remain high with an increase in customer volumes. Barge availability is constrained as there is minimal new barge construction expected in 2023. These positive factors are expected to contribute to our barge utilization running in the low to mid-90% for the foreseeable future. These favorable supply and demand dynamics are expected to drive further improvements in the spot market, which currently represents approximately 40% of our Inland revenues. We also expect continued improvement in term contract pricing as renewals occur throughout the year. Overall, we expect Inland revenues will grow approximately below double-digits year-over-year and expect near-term Inland operating margins, the average in the mid-teens and to continue to gradually improve throughout 2023 ending the year close to if not 20%. In Coastal, market conditions are expected to remain steady, but will remain somewhat challenged near-term by underutilized barge capacity across the industry. Even with some market softness Kirby's coastal barge utilization is expected to remain in the low to mid-90% range. Full-year 2023 coastal revenues are expected to be flat year-over-year, driven primarily by continued good fundamentals in our core liquid cargo business and higher coal shipments in our dry cargo business, offset by the company's plant, maintenance and ballast water treatment installations, which are driving an almost doubling of maintenance days, compared to 2022. Operating margins for coastal are expected to be near breakeven to low single-digits on a full-year basis. Looking at distribution and services, we have a favorable outlook with anticipated strong demand for equipment parts and service distribution and a growing backlog [Indiscernible]. In the oil and gas market, high commodity prices, increased rig counts and growing well completions activity are expected to yield strong demand for manufacturing and OEM products -- parts and service in the distribution business. We expect the current commodity price environment will contribute to further increases in rig count and frac activity in 2023. U.S. land rig counts have grown to over 770 rigs, which represented a full-year average increase in 2022 of approximately 28% and we expect that growth to continue into 2023. Similarly, the active frac spread count is approaching 295. With this growth, we expect to see increasing demand for engine parts and service in distribution. In manufacturing, we have a growing backlog position. We added new incremental orders in the fourth quarter and we expect this trend will continue As I mentioned earlier, we expect that supply chain issues and long lead times from four OEM equipment, which in some cases are extending beyond a year to remain a challenge. These issues are likely to contribute to some choppiness with new product deliveries, which could potentially shift between quarters in 2023 and perhaps even into 2024. In Commercial and Industrial, we are forecasting steady demand in on-highway with increased on-highway and municipal repair work, continued improvement in bus ridership and increased demand for Thermo King refrigeration products offset by lingering supply chain delays. In power generation, new backup power installations, parts and service activity are expected to remain solid as demand for electrification and 24/7 power grows. Marine repair is also expected to be strong with increasing activity in the Gulf of Mexico and improved commercial markets on the East and West Coast. For the 2023 full-year, we expect revenue growth in the low-double-digit range for commercial and industrial. While supply chain issues are expected to continue impacting new product and equipment deliveries in distribution and services, we expect 2023 segment revenues will increase by 10% to 20%, compared to 2022. With Commercial and Industrial representing approximately 60% of segment revenues and oil and gas representing the remainder. We expect segment operating margins will be in the mid to high-single-digits for 2023. To conclude, Kirby's 2022 results showed steady improvement in the base of ongoing challenges. Both our segments performed well during the year delivering improved revenue and operating income and our team executed well on near-term objectives, as well as our long-term strategy. We exited the year with healthy long-term fundamentals for both our businesses and they're both very well positioned to continue delivering value. Although we see favorable markets continuing and expect our businesses will provide improved financial results, we are closely monitoring the potential for a recession. Having said that, as we look long-term, we are confident in the strength of our core businesses and we are confident with our long-term strategy. We intend to continue -- capitalizing on strong market fundamentals and driving shareholder value creation. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jack Atkins with Stephens. Your line is now open. Okay, great. Good morning. And guys congratulations on being able to really capitalize on the pricing opportunity in the fourth quarter. Nice work there. So I guess, I would love to kind of get your thoughts as we kind of think about the 2023 outlook David and Raj, you may want to tag team this one. But as you sort of think about, sort of, what's baked in there, can you help us think about are you factoring in any, sort of, mild recession, soft landing, hard landing, kind of help us think about that? And then to what degree do you feel like the market is going to be able to support continued rate renewals in Inland above inflationary cost increases. Can you kind of walk us through both of those items in terms of what's baked into your outlook for 2023? Yes, sure, Jack. Well, look, I mean, the market fundamentals particularly with Inland are really strong right now. Demand has continued to be strong. We're seeing refinery utilization as everybody knows is strong. We did see a little pullback in chemicals in the fourth quarter, but it -- that started to come back again in the first quarter, but not enough to impact kind of the demand picture. So the demand picture is still very strong on the [Indiscernible] the supply picture is even better. Nobody's really building any new equipment of substance. And because prices are high, rates aren't anywhere close to justifying new construction. But then there's a big maintenance bubble that's hitting the entire Inland industry for the next two years. And it's really about -- there's a five-year shipyard major process and it's about one, most of the barges were built or a good portion of them were built a number of years ago. So the industry is going to hit pretty heavy maintenance schedule in â23 and â24. So that's actually going to help barge availability remained really tight. So when we look at the outlook for Inland, it's very strong. It's about as strong as we've ever seen it in terms of supply and demand balance. So that's a long way of saying, I think the rate environment is going to increase and continue it needs to, by the way, if we're ever going to get to rates that justify replacement capacity. That said, as we look through â23, we didn't factor in a big recession at all. We think as we look at the demand for our products, most of it should continue even with a mild recession. That said, if we get a sharp down recession that could impact us. We did not factor that into our guidance. We think weâll -- to use a phrase power through this potential economic weakness. And it's really all about our supply and demand position. It's about as strong as we've seen, Jack. Okay, David. That's really helpful. Thank you for that. And I guess maybe, kind of, shifting gears, Raj, I'd like to kind of dig into the cash flow and the CapEx comment for a moment. Can you maybe walk us through why you all are not comfortable providing a CapEx outlook for 2023 at this time? And maybe if it's possible to kind of give a range? I think folks are trying to -- you guys are generating very strong free cash flow. To me that's a very important part of the valuation case around the stock. Any sort of help you can give us there in terms of what's going on from a CapEx perspective? Yes, Jack, good morning. Yes, thank you. Yes, you're absolutely right. We generate very strong free cash flows, but David mentioned the maintenance days that we're going to have to deal with, itâs an industry-wide phenomenon and we're seeing -- the shipyards that we're seeing is across the board, itâs both for Inland as well as offshore, right? Inland loan is going up like 20% to 25%. So we're dealing with this situation right now. We're dealing with also the supply chain issues. We've also impacted some of us CapEx spend, as well as whatever other inflationary pressures that we're seeing. So right now, there are a lot of puts and takes. The team is penciling it out, I think we should be in a position to give you better CapEx number, more meaningful CapEx number very soon. We should be able to -- be able to do that. But right now, we're not in a position to provide a real CapEx number. Yes. I think, Jack, just to add to that. Look, the cash from operations is going to be strong. Obviously, we've got maintenance CapEx cycle here that we're still working through. But I would just tell you in terms of deployment of free cash flow. Obviously, you saw the share repurchase authorization we're pretty excited about that. As you look at opportunities, kind of, the best parts company go by right now is Kirby. So we're pretty excited about it. And we'll have updates as we progress through the first quarter. And just to follow-up on that really briefly though, I mean, is there any reason why you still wouldn't be in a position to generate very healthy free cash flow in 2023 even though there's still a little bit of uncertainty around what the CapEx should be. There's not a scenario where you would not be of strong free cash flow generator this year. Is that correct? Please standby for our next question. Our next question comes from Ken Hoexter with Bank of America. Your line is now open. Great. This is Nathan Ho dialing in for Ken Hoexter. Great quarter guys. Just on Dave's comments on strong inflationary -- on the inflationary pressures coming off a little bit on the Inland side. We're just recalling back to your November update where some of the cost items were up 70% and above. Just wanted to see how the management team sees cost turning into 2023? And with this new backdrop of normalizing commodity costs, how does that affect the exit rates of 20% Inland margins for 2023? Yes. No, inflation is -- it's still here as I think most of us feel. What I would tell you on inflation is we haven't seen grow any further. But look, when we look at food for our marine crews, those prices are up 10%, but they haven't gone further up. But it's still a lot higher than we've traditionally had. If you look at crew transportation, whether it's rental cars or airline flights, those costs are up significantly from, kind of, the norms anything electronic-related, for example, radars or things on our boats are still up. What I would say, maybe we didn't state this right in our prepared remarks, but inflation hasn't come down, but it hasn't grown any further. So we like to say that's abating, but we haven't really seen prices contract, we've just seen them not go up as much as they were kind of flattish from where they were last quarter. So that helps. Obviously, we've needed price increases just to keep up with inflation. If inflation stays in check and doesn't grow anymore, that obviously would help our margin profile and kind of get to where we talked about in our prepared remarks in terms of the end of the year. Now if inflation goes up further, that's going to obviously have an adverse effect to margins. But right now we feel pretty good that things are kind of flattening out. Obviously, the Fed will see what they do today and it's being very aggressive to tame inflation. So that's good and bad. Obviously, we hope it doesn't trip us into a recession. I see. And just to clarify, on the margin targets set for 2023 across the segments, that's baking in sort of a flattish cost structure into this year? Would that be correct? Yes, flattish in terms of general inflationary. I think, obviously, we're going to have crew labor costs go up. I think everybody is seeing labor costs continue to rise. But that obviously is going to happen. We factored a little bit of that in. If it gets acute, that we'd have some headwinds. But right now, we've factored in a little labor inflation. But the rest of the inflationary pressures we think will just kind of stay where they are at. We don't anticipate any sharp price increases across most of our supply chain. Great. And just as a follow-up on the capital strategy into 2023. I'm aware that the CapEx plan is still on the works. But in terms of capital deployment, are there any updates on how the company is seeing M&A into 2023? How are you viewing, say, the availability of opportunities here? Yes. [Indiscernible] is there are opportunities out there. It's best for us not to comment on any of those, but look, there are opportunities out there. But I would tell you, look, we've had a history and we always like to consolidate particularly our Inland tank large market. That said, I feel strongly and the Board does too, the best barge company to buy right now is Kirby. When we look at our prospects in marine and in our distribution business, itâs about as good as we've seen in the long while. So we're quite excited and we believe that it's going to be multi-years. It's not just a one year, kind of, phenomena. So when we look at capital deployment for acquisitions, we're factoring in Kirby looks pretty good right now. Yes. Hi, thank you and good morning, everybody, and thanks for taking my question. Definitely good to see as [Indiscernible] is starting to find its groove. I did want to touch a little bit on kind of the, I guess, ongoing dynamics in that market and a lot of us to follow the refinery products industry or looking at that Russian oil embargo on products that's coming out in February and some of the challenges are that, kind of, the refining industry might have to face or actually more of an opportunity than challenges, I guess. But as we think about that coming next month, is there any way we can think about or how are you thinking about potential changes in activity feedstock? We're hearing a lot about, obviously, it's going to be problems with DGO. What type of setup does that should we think about that creating in the first part of this year? Yes. Let's break it into a few of our trade lines. I don't want to get too specific for obvious reasons with competitors and customers. But look, the refinery complex is really strong right now. Demand for refinery type -- refined product moves is very, very strong right now. Probably the strongest we've ever seen in. Yes, I think a lot of that is kind of reopening, we're also seeing export volumes look pretty good. So look, the refiners had great cracks spreads and they're pulling back a little bit, but they're still in terms of traditional crack spreads are still pretty strong. And the refinery complex in the U.S. is probably the most efficient in the world. I think refineries in Europe, that's a home another situation. And then if you pivot to chemicals, it's really more the same, right? The chemical complex in Europe obviously, the natural gas price is high and energy price is high, it's really suffering the U.S. position in chemicals one, you've got brand new plants or very efficient plants that were recently built in the last four, five years. Good feedstock position. So chemicals though did pull off a little bit in the fourth quarter. They've been coming back slowly here so far in the first quarter. It's a little early to say how far that's going to go. Obviously, when you listen to the Chemical Company's earnings calls, Europe is hurting him a little bit on housing starts, hurting a little bit as well. But so far, it feels pretty good and things are -- the volumes and pulled off enough to really impact our demand and supply picture. When you look at black oil and other things that's pretty strong. I will tell you we talked about the maintenance bubble that's hitting the industry. I would tell you it's more acute in black oil than it is and anything else. There's a huge number of black oil barges that are going to have to be maintained across the industry in 2023 and 2024. But demand seems to be holding up in black oil. And then if you look at Ag products, that's been pretty strong as well. So we look at each of those trade lanes and have been very encouraged by the demand picture. Now that said and you heard it in my cautionary comments about the potential recession. I mean, it could come, it could pull back a little bit. But right now, when we look at the demand side of things and the supply, it's still really positive for us, Greg. Okay. That's great to hear. And then you did touch a little bit on pet chems, you know, I guess Q1 is seasonally the weak quarter for you. I guess maybe given the fact that we've seen, I guess what natural gas price is down 30% year-to-date, could that kind of collapse in natural gas prices maybe help Q1 be a little less weak just given the fact that as a pet chem plant, that's got to be -- we have must be in a very -- much more profitable environment than we were, say, six to eight weeks ago? Yes. Look, you're right, our first quarter is almost always our weakest quarter of any year and that's really weather related. It's one thing with low water, but fog just really shuts us down on the Gulf Coast through the first quarter a lot, and then we get impacted. So that's part of the weakness. But to your point, I think natural gas prices being a little lower, certainly is going to help the chemical complex be a little more profitable, which should help volumes a bit. And then I think at some point we're going to see China open back up and China is a big consumer of chemicals as you know. The other interesting thing that Venezuelan crude for example imports -- that's positive. It gets a heavier fruit slate into the Gulf Coast that has more byproducts as you know. That really helped the entire barge complex just all the different derivatives that can come from a heavy crude slate. So maybe that helps a little bit in the first quarter. But look, first quarter, as you know, it's been our weaker quarter of the year. But again, the overall supply demand picture for us in 2023 is very robust. And we're pretty excited about what we see in front of us, Greg. Please standby for our next question. Our next question comes from Greg Wasikowski with Webber Research. Your line is now open. Yes, thanks. Thanks for taking the questions. First one, David, curious if you -- can you just talk about what you've seen with rate movements so far? Or through Q4 and so far into Q1? I know, it's a smaller sample size. But from what we've seen, there's been maybe a little bit of plateau in that period. So could you comment on that? And then if you revisit your thoughts around the pace of the recovery versus the overall sustainability of the recovery of that relationship, where we were towards the back end of 2022 versus how 2023 is shaping up from a sustainability perspective, it would be great? Sure. Sure, Greg. Look, in our prepared remarks, probably heard some of this, but sequentially, we saw spot rates up mid-single-digits. That was off of a very strong third quarter. So fourth quarter sequentially was still up mid-single-digits on spot. Contract -- well, and then if you look at spot year-over-year, it's still up 20%-plus from a year-over-year on spot. Term contracts were up double-digits, which that's on a year-over-year basis, which is pretty strong. I would tell you we're still seeing a good pricing environment. It's still very tight and prices are still rising. Really haven't filled of plateauing. Maybe some of the market checks are seeing that, but we're not. It's still very, very strong. And it needs to be. I mean, it's -- we've talked about inflationary pressures, but we've got a situation where we're still a long way away from being -- having rates to build replacement capacity. So we need to continue with a good price momentum. And given as tight as we're seeing it in terms of supply and demand. We're not seeing a pullback in rates at all. And again, I talked a little bit about the maintenance cycle that the industry is going to see. It's going to have a profound impact too, itâs -- profound is probably too strong at work, but it's certainly going to add some momentum to this. So that's a long way of saying, again, we're pretty optimistic you can't get noise in the winter months. I'll just say that, so maybe I don't know what your market checks are telling you, but sometimes you hear some noise in the winter months. But again, we're very positive, Greg. Okay, great. That's helpful. Thanks, David. And then somebody has got to ask about D&S, so I guess I'll do it. Are you expecting to -- I'm just trying to see like kind of where that stands heading into 2023 now that the strategic review is closed? Are you still expecting to kind of market that business for sale into 2023? Are you only entertaining unsolicited offers at this point? Obviously, under the caveat that you're always evaluating all options for shareholder value yada, yada, yada. But just trying to see how front of mind this is for -- going into 2023? Or is it more of -- in the rearview mirror at this point? It's more in the rearview mirror. But look, I mean, you said it well, we're always open to ways to hedge shareholder value. And should the market change? Or something happen that makes us spin off -- makes sense? We'd absolutely look at it. That said, the business is really strong right now. We've had good in-bound, our electrification kind of a product offerings are very strong. E-frac is doing really well. Whether it's backed up power generation, that's always also doing well. And if you think about it, everybody wants power 24/7 and when you start worrying about the fragility of the grid that makes even more sense. On highway, our commercial and industrial business is strong. Our marine repair business is strong. So as we look at KDS going into â23 and into â24, it feels pretty good, kind of, reiterating some of our thoughts about Kirby. But both our marine business and our KDS business are in good solid up slings that we feel will last for several more years. So KDS is strong, but that's it. I'll go back to kind of the way you've phrased it. We're always open for ideas. We ran a very thorough process on this and we're focused on executing our strategy right now. But if something changes, weâll absolutely look at it. Good. I wanted to -- if I could, just circle back to where we were just left off from the D&S side and then also mix it in there a little bit with what you were talking about. With respect to pricing for inflation. The margins were a little bit lower than I thought given, sort of, everything that's going on in tracking equipment and the pricing power that seems like it should be there? Should we think of that as just a function of there's been a lot of inflation in that market. And so you've had a lot of pricing power, but it basically kept up with inflation. Now to the extent that maybe inflation is beginning to moderate, that's really where you should see margins? Or is there some sort of economies of scale, dynamic where -- now you get to a certain point where margins just inflect, because you're able to do a little more volume? Or how should we think about the margin profile on that side of the business? No, I think you characterized it very well. In slates, we've been raising prices in with D&S, but it's basically kept pace with inflation. The other thing we have is a little bit of a supply chain, kind of, margin erosion. And let me give some context around that. Talk about $1 million piece of equipment with 400 to 1,000 parts and all of a sudden you can't get some parts, certain parts and so you reengineer a replacement part and this is pretty sophisticated equipment and we like to make sure we've nailed the engineering down. So every time you shift a source or shift a part design or something to meet a supply chain headache, it adds a little cost. So there's that dynamic as well. So it's an inflation and a supply chain dynamic that's impacting margin. That said, our guys are pushing price and they need to, right? I mean, we've got to offset these costs. But I would just say, particularly on our KDS manufacturing, the supply chain has been really, really tough. It's not new. Everybody's saying it. But some of our OEMs for some engine deliveries, we can't get engines until 2025 even ordering now. So the supply chain issues are still real, but it's something we're working through. And the good news is demand from our customers is there. And it's really us in hand-to-hand combat dealing with delays that come inevitably. When you've got a parts list that runs in the hundreds and you're short one or two parts that are key to finishing the equipment. That said, you know, we're keenly focused on getting KDS margins up into the high single-digits and got the whole organization working hard towards that. Okay. That's helpful color. I appreciate it. And then I wanted to talk a little bit about just barge supplies. You mentioned it with respect to supply and demand pricing really enough. We've seen that what I think that we're 22 tank barges delivered last year, some ridiculously small number. It would seem to me that there's probably likely to be a shrinking of the barge fleet this year and that would lend itself to substantially higher secondhand prices. I was wondering, if you could maybe characterize that? And then to that answer, how do you feel about buying equipment or other companies, if there is a little bit of price escalation for secondhand equipment? Yes, I don't think you hit them. One of the reasons we actually think Kirby is a great barge company to buy. But no, you're right, I think with the maintenance cycle that we've talked about here on the Inland side, a lot of companies are going to be taking their barges in for their five-year maintenance cycle and look at it and they'll just say, man, it doesn't make sense to continue it. So we will see retirements over the next two years, because of this maintenance cycle. So with little building and in a pretty heavy maintenance cycle, you should see some pretty healthy retirements over the next few years, which to your point is going to point to -- one is going to help the supply demand situation get even tighter, but it's going to make people look for equipment. So, yes, I think there is a situation just, because the replacement cost of equipment that any transaction or buying a consolidating transaction, price expectations could be very, very high. So as you know, we're pretty disciplined about that. And we certainly not going to chase a consolidating move, particularly when we feel as strong as we do about Kirbyâs outlook. Thank you, very much and good morning, Dave, Raj, [Chris] (ph). Raj, could you comment a little bit on the cash from operations here in the fourth quarter? Looks like that at least based on what you were talking about at the end of the third quarter that, that didn't come quite at the level that you had anticipated as you talk about the factors that, number one, am I interpreting that correctly? And secondly, if so, what contributed to a little bit of a shortfall there? Yes, Bill, you are right. Cash, cash from operations in the fourth quarter missed our expectations and that was driven actually by on the D&S side. We had inventory build, and I think between David and I have used the word supply chain quite a [fat bit] (ph) on this call, but it's a true phenomenon, so weâve had issues in terms of getting product shipped out. And what's happened is that's resulted in a build of working capital in the fourth quarter. My expectation is as we get into the 2023 time-frame, we will shift those products. So whatever does it work in progress right now, we'll get -- we'll go into finish goods over three and three and three and get shipped out. So yes, we put ourselves out there, we set ourselves a higher expectation. We tried to execute through it, but the supply chain challenges just got the better of us. Yes. Just to put a little color on that, Bill. We probably had $50 million worth of sales at KDS that didn't materialize that we would have expected in normal supply chain environments to have materialized in the fourth quarter. So if you think about construction in progress or work in progress, those inventories are higher. Our working capital certainly is a lot higher than we like, and the bulk of that is from supply chain issues. But there's also a phenomenon on receivables, so I think with higher interest rates, we've seen customers push out their payables, which are our receivables. And so we've seen a little build in working capital. We've got to go after that, but it's something that's perhaps economy-related and supply chain. That's very helpful. Thank you. Secondly, I was going -- on the supply chain issues, you mentioned engines being a very critical product that's not being delivered. Are there any other important components or parts that you could highlight that are given you a real issue on supply chain on shortages? Yes, there's an electric component trade. On the e-frac side and kind of the natural gas reset power generation side. For example, things like electric panels, you would think that would be a pretty easy thing. But there's a lot of pieces and parts related to electrification that, that are jammed up in the supply chain. Is there any visibility there, David? As you look out in 2023? I mean, do you have any line of sight on meaningful improvements? Yes, we do. I mean, each component, we put our supply chain team on and they get a path forward. And then something else, Raj calls it whack a mole, it's kind of like the gained whack a moleâ¦ You know, some other supply chain piece pops up. But it is component-by-component. We get in a pinch on a component. We work with fire, work with alternative sources, reengineered some things and get it back lined up. But then, frankly, something else pops up. It's a bit frustrating. But look, we're managing through it. We still had a pretty good revenue quarter in ADS and itâs just we're still taking inbound and delivering. It's just the deliveries are taking longer. Yes, Bill. If I could add, our book-to-bill is about one. So that's a very healthy order rate that we're looking at. So it's not the lack of demand today at this point. No, no, it's got to be very frustrating. And also it seems like I mean, a number of your product lines obviously have applications far beyond the oil and gas business. And so you got opportunities that you could be out there going after that or just right now you're limited on doing? Yes. No weâre -- look, just the electrification, whether it's a micro grid or whatnot, but it is amazing. When we look at our, for example, our backup power rental fleets, our utilization last year, even with the light Hurricane Storm season, our utilization was probably the best it's been. It's just every company needs and wants to have power 24/7. So the electrification of the U.S. and the world for that matter seems to be a real phenomenon. And itâs actually -- it's driving many opportunities from design and new product standpoint for KDS. Just one last really clarification, David. If I read correctly in the release, you indicated that in the Inland barge business, you were looking for net -- small net increase in net new barges in 2023? And what I hear on the call would not lead me to. To think that's going to be the case. Did I read that correctly in the release that there would be a net increase? No. Maybe for us, we are -- we had some barges on the bank that we brought back, maybe -- but it was only a handful. Yes, it was two. Kurt is giving me the -- keep signing. Correct. Yes. We don't see any as I think one of maybe Ben said that there was 22 barges built last year in the industry. Yes, that's about right. The order book from what we hear is anemic and we don't see anybody building. Now there could be some people that tied up some barges during the pandemic and there may be some of those coming back. But again, I think you see a net decline in barges in 2023. Right. Well, I knew that had been your expectation for quite a while and I just misinterpreted what was said in the release there. And that comment pertains to Kirby, not the industry. So that clarifies it. I appreciate it. Thank you very much. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kurt Niemietz for any closing remarks. Thank you, operator, and thank you everyone for joining on the call today. If you have any follow-up questions, please feel free to reach out at me at 713-435-1077. Thank you.
EarningCall_1049	Good morning, everyone, and welcome to the Horizon Bancorp Conference Call to discuss Financial Results for the Fourth Quarter and Full Year of 2022. [Operator Instructions] There will be a question-and answer session after today's remarks. [Operator Instructions] Please note, this event is being recorded. Before turning the call over to the management, please remember that todayâs call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including factors noted in the slide presentation. Additional information about the factors that could cause actual results to differ materially is contained in the Horizonâs current 10-K and later filings. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, you can access it at the companyâs website, www.horizonbank.com. Representing Horizon today are Chairman and Chief Executive Officer, Craig Dwight; President, Thomas Prame; EVP and Chief Financial Officer, Mark Secor; EVP and Chief Commercial Banking Officer, Lynn Kerber; and EVP and Senior Retail and Mortgage Lending Officer, Noe Najera. At this time, I would like to turn the call over to Mr. Craig Dwight, Chairman and Chief Executive Officer. Thank you, and over to you, sir. Thank you, Rocco, and good morning. And thank you for participating in Horizon Bancorp's fourth quarter earnings conference call. Our comments today will follow the investor presentation and press release that we published yesterday, January 25. Horizon is pleased to report record earnings for 2022 in fourth quarter that continues our momentum into 2023 with strong commercial and consumer loan growth, efficiencies gained from closing seven offices and effective expense control. The challenges during the quarter were the magnitude and velocity of the short term interest rate increases by the Federal Reserve's Open Market Committee and the corresponding increased competition for deposits, which drove our cost of deposits up at a faster rate in the fourth quarter. The outlook for 2023 calls for the Federal Reserve Bank to slow the pace and magnitude of raising the Fed's targeted interest rate with an expectation that our deposit betas will also moderate during the year. In addition, we see 2023 as a transition year as we continue to focus on reinvesting cash flows and maturing loans into higher yielding assets. Now starting on our presentation slide deck of number four. Horizon met or exceeded most of our 2022 goals as announced in fourth quarter 2021. And revised upward in the second quarter of 2022. Total loans excluding PPP and sold commercial loan participations increased 14.6% for the year, led by consumer and commercial loan growth of 30.6% and 11.4%, respectively. Thomas Prame, our President will provide more detail on Horizon's loan growth in a few minutes. Other notable Horizon financial measures for the year include return on average assets of 1.24% and return on average equity of 13.66%. Given the size of our balance sheet, efficient operation, talented workforce and solid additions to our team, Horizon is well positioned to capitalize on significant organic loan growth as we focus on shifting our balance sheet to higher yielding assets and continue our disciplined approach to expense control. So why invest in Horizon? Horizon continues to report solid returns to the low credit risk profile due to our diversified balance sheet, excess liquidity and low-cost core deposits. Horizon's historical credit metrics, even during the Great Recession, have outperformed the U.S. commercial banks as a result of consistent underwriting and active portfolio management. Horizon's deposit mix has improved compared to our pre-pandemic deposit mix as a result of the stabilizing the prior year's 14 branch acquisition and good organic growth. We are located in attractive Midwest growth markets where real estate values are not as volatile as in others in the country and where our manufacturing outlook calls for continued expansion. Regional infrastructure improvements are attracting record inflows of private investment to Indiana and Michigan and include the commuter rail expansion in Northwest Indiana, known as Double Track in West Lake County extensions, which is forecasted to have multi-million dollar â billion dollar positive economic impact into Northwest Indiana. The investment in quantum communication lines between Chicago, Lafayette, and South Bend, Indiana. Indianaâs $6 billion state surplus with plans to increase infrastructure spending. The continued outbound migration by Illinois, businesses and residents as they move into our attractive markets due to our quality of life, affordability and lower taxes. Horizon has a proven history of organic growth, supplemented by strategic acquisitions as evidenced by our compounded annual growth rate for 2002 through 2022 for average assets at 12.7% and net income at 15.2%. In addition, Horizon has historically outpaced the change in GDP, which clearly demonstrates our ability to add market share, attract talent and grow organically. This is further supported in reviewing Horizon's top 10 deposit market, five were entered into via acquisitions and five represent our legacy or de novo markets. In the acquired markets, we increased market share over time which results of hiring and retaining local talent in our disciplined approach to market development. Since 2010, our legacy and de novo markets have also demonstrated our ability to increase market share. A key long term focus for Horizon is digital transformation. Horizonâs advantages in technology over other community banks include our in-house CRM and core platforms, resulting in a lower cost per transaction than our peers and the ability to expedite the onboarding of new fintech partners and flexibility in data management by not relying on a core service provider. Horizon is able to select technology partners based on best-in-class and who can deliver strategic products and services at the best price with the optimum flexibility. Our in-house core strategy has also proven very attractive for integrating acquisitions, including our most recent 14 branch deal. As a result of our investments in technology, our digital transactions increased from 44% in 2018 to 70% of total transactions in 2022. We increased online consumer deposit account openings to 19% in 2022 and 84% of our online chats are answered by our programmed bots. Horizon manages and deploys capital efficiently, as evidenced by our most completed the integration of 14 acquired branches and continuing focus on organic growth in 2022. Through the fourth quarter end, Horizon Bank continues to report strong regulatory capital ratios which exceed the regulatory definition for well capitalized banks. In addition, Horizon has a consistent dividend policy as we fully expect to continue our 30 year plus of uninterrupted quarterly cash dividends. We last increased our dividend in the second quarter of 2022, reporting a 6.3% increase from $0.15 to $0.16 per common share, which represents our tenth dividend increase in the past 11 years. Horizon's historical dividend increases are aligned with earnings growth, sound capital management and as of December 31, 2022, our dividend yield was attractive at 4.2%. Now I'd like to congratulate Thomas Prame on his recent appointment to Chief Executive Officer of Horizon Bancorp Inc. and Horizon Bank, effective June 1, 2023. We're delighted with his addition to the team, with big bank experience and passion for strategic planning, technology and focus to move the company forward. Thomas Prame and our senior leadership team has what it takes to continue the bank success. Thank you, Craig, and appreciate the comments. As mentioned previously, it was another solid quarter in total loan growth of $145 million or just over 12% annualized. That's excluding our PPP and sold loan participations. Highlighting the quarter was our commercial balances, increasing $63 million or just over 10% annualized. Net commercial loan fundings of $98 million was well balanced across our commercial asset classes and our markets. The commercial loan pipeline is position at $134 million and continues to provide confidence in our ability to generate mid to high single digit growth in 2023 with yields continuing to increase as new production replaces our paydowns and our payoffs. As we transition to slide 16, consumer loan balances increased $49 million or 21% annualized. As we discussed in Q3, the short term nature of the consumer portfolio creates opportunities to shift loan growth to higher yielding assets. In Q4, we enhanced the pricing structure of our indirect lending, increasing production yields and slowing the historical portfolio growth. This strategy was coupled with an acquisition of high quality variable rate home equity loans that provided over 300 basis points in improved yield when compared to the indirect portfolio. These loans are also well positioned with higher floors to protect against potential down rate environments. We anticipate having similar opportunities throughout 2023 as we leverage the diversity of our loan platform and manage new origination yields. Looking at slide 17 with mortgage. Our Q4 production and fee income results aligned with industry trends and the team also completed proactive steps to further reduce staffing levels and overall costs relative to volumes. Mortgage warehouse balances also reflected current industry trends at $69 million, down slightly of $4 million from Q3. In concert with the consumer portfolio, we continue to be smart in our balance sheet deployment with mortgage balances growing about $18 million in Q4 with higher new production yields compared to payoffs and paydowns. Looking at slide 18, our credit metrics remain strong as evidenced by our 0.01% charge offs and low non-performing loans in the quarter and also the last several quarters. Additionally, our allowance for credit losses is well positioned at 1.21% of total loans. This is down from 1.27% in the third quarter. This is primarily due to low historical charge off levels and improvement in specific segments adjustments, such as hotels, that was offset by increased allocation for consumer loans in indirect auto. As we look at slide 19, Horizon's historical credit metrics display our ability to outperform the market during the previous economic cycle. We attribute this to our consistent and conservative underwriting practices. As Craig mentioned earlier, the strength of the markets we serve and the talent within our local bankers and credit teams. As this graph shows, the performance of our credit metrics lessens the impact from credit cycles and we exit the cycle at a faster pace. As we move into a fluid economic environment, we feel confident our current credit profile will produce very similar results. Thank you, Thomas. Horizon reported a solid quarter for net income and loan growth as interest rates continue to increase in the competitive landscape for funding and pricing intensified. Starting with slide 21, fourth quarter net income results were primarily impacted by lower net interest income, offset partially by improvements in non-interest income and expenses compared to the third quarter. Annualized total loan growth of 13%, excluding PPP loans and sold commercial participations was a strong contributor to the quarter. Slide 22, the company's diversified business model has provided leading returns over various periods. Over the last 10 years, Horizon has produced a return on average tangible common equity greater than peers 71% of the time and was 35% less volatile. This was through economic cycles including the recovery from the Great Recession, the pandemic shutdown and reopening. In addition, during the last three years, through September 30, 2022, peer data, Horizon beat the KRX Index for return on tangible -- average tangible common equity and return on average assets 92% and 85% of the time, respectively. Slide 23. As deposit betas increased during the quarter, deposit balances remain flat. However, we are experiencing movement from lower cost deposit products to higher yielding money market and CDs, resulting in the balance sheet continuing to be liability sensitive. As a result, at an up 100 basis point parallel shock as of December 31, we model a decrease in net interest income of approximately $5.1 million or 2.48% over the next 12 months. During the quarter, core net interest income declined approximately $900,000, excluding the change in loan fees, purchase accounting and dealer reserve amortization, which was in line with the modeling at the end of the third quarter. Contributing to these results are the expected deposit betas used for rising rates, which currently range from 6.5% for consumer deposits to 60% on public funds with an average beta for non-maturity interest bearing deposits of approximately 31%. The actual beta for the fourth quarter was 24% from non-maturity interest bearing deposits compared to 23% in the third quarter. Including CDs, the beta for this interest rate cycle has been 24% with a projection of interest rates peaking in the first quarter of 2023. The estimated full interest rate cycle beta is estimated to be 28%. We have approximately $2.2 million of assets, representing 30% of earning assets, which are expected to reprice within the next 12 months. Included in this estimate are adjustable rate loans representing $90 million that adjust immediately -- $900 million that adjust immediately with short term rate move and additional $400 million that adjusts within 90 days and $60 million that will adjust throughout the year. The estimated remaining $840 million in assets that will reprice represent investment cash flows, principal loan payments and prepayments and loan maturities. This liquidity is forecasted to fund the growth in our higher yielding originations and increased overall portfolio yields. Slide 24, during the fourth quarter, we determined that a revision for the treatment of the indirect dealer reserve asset and the related amortization expense to be made to prior periods. This revision has no impact to net income or total assets and was determined to be immaterial. The results of this revision decrease other assets for the dealer reserve asset on the balance sheet and increases total loans. On the income statement, the amortization expense of the dealer reserve asset currently expensed as non-interest expense and loan expense is now recognized as a reduction to loan interest income that reduces the net interest income. The results of this revision reduces the net interest margin and reduces non-interest expenses. All prior periods have been revised for this revision. The details are included in the press release and the presentation for the change to the balance sheet, income statement and ratios. Slide 25. In the fourth quarter, adjusted net interest margin decreased 16 basis points and adjusted net interest income decreased by $2.6 million, primarily due to $1.2 million in lower loan fee income and $490,000 higher amortization of the dealer reserve asset compared to the third quarter. As I previously mentioned, the remaining $900,000 was due to the increase in funding costs. There is volatility in the recognition of purchase counting loan fees and the amount of dealer reserve amortization that will affect net interest income and the margin. With the pace of rate increases anticipated to slow and potentially stabilizing and decreasing towards the end of 2023, we believe that Horizon is nearing the low end of its margin and is expected to begin to stabilize over the next two quarters. This will be the result of assets continuing to reprice, replacing asset cash flows into higher yielding assets, continuing to grow interest earning assets and the stabilization of short term borrowing costs. Slide 26. Our stable deposit base continues to provide core funding as rates have rapidly increased. The increasing betas and some deposit flow from lower cost to higher cost products has increased funding costs, but they still provide a strong spread to the earning asset yield of 3.88% for the quarter with a total cost of deposits of 71 basis points. By maintaining a disciplined approach with deposit pricing, the total cost of deposits increased 43 basis points during the quarter compared to the average Fed fund rate increase of 147 basis points, while deposit account retention remained strong. Slide 27. The core funding mix, which is non interest and interest bearing deposits, has remained stable and has slightly improved compared to the pre-pandemic funding. At the end of 2019, core funding was 65% of total funding at the end of 2022. Core funding was 68% of total funding at the end of 2023, a 3% increase. Stimulus money, the branch acquisition in 2021 and the long term customer base have all contributed to providing consistent core funding. Slide 28. A lower unrealized loss on available for sale securities in the fourth quarter helped increase tangible common equity from 6.25% at September 30 to 6.56% as of December, 31. This is a result of the inversion in the yield curve reducing the unrealized losses on the longer duration AFS investments. Because we have the ability and the intent to hold all investments to maturity, these unrealized losses are expected to decline over time as investments pay down and mature. The bank's regulatory capital is strong and exceeds the regulatory definition for well capitalized and will continue to fund our growth without restricting our ability to utilize our capital to fund organic growth in the future. Slide 29. Non-interest expenses were 1.84% of average assets for the quarter compared to 1.91% last quarter. This was partially attributed to the reduction of direct expenses from the changes in business cycle, including mortgage and indirect lending. These expense percentages reflect the revision for the dealer reserve expense. Expense management will continue to be a focus in 2023 to help offset lower revenues. Slide 30. As competition for funding has quickly increased in the latter part of 2022, and expected to continue into 2023, there is an increased focus on balance sheet liquidity. Due to the structure of our balance sheet, which includes the majority of our investment portfolio unpledged, we have approximately $2.7 billion of available liquidity from borrowings, brokered CDs and unpledged investments. In this time of uncertainty, safe and sound liquidity provides additional strength to our balance sheet. Thank you, Mark. To summarize Horizon Bancorp's key franchise highlights. Horizon is a growth company as evidenced by 20 years of compounded annual growth rates for net income and total assets of 15.2% and 12.7%, respectively. Our balance sheet had diversified loan portfolio with a product mix and geography, with ample liquidity and cash flows to fund future growth into higher yielding assets. Horizon's asset quality has historically outperformed the industry in varying economic cycles. The combination of Horizon's historical solid returns in average assets and average equity, our ability to increase market share in our top 10 markets and weather varying economic cycles, our diversified balance sheet and current high dividend yield offer support that we have an attractive long term investment. This concludes our prepared remarks today. And now, I'll ask the operator to please open it up for questions. Thank you. Thank you. We will now begin the question and answer. [Operator Instructions] Today's first question comes from Terry McEvoy with Stephens. Please go ahead. Craig, just maybe a question for you. In your prepared remarks you talked about 2023 being a transition year and were you just specifically talking about the margin outlook and the interest rate sensitivity or should we read into that more than just the margin? Okay, great. And then maybe you talked about, Mark, the margin kind of bottoming out. I was wondering if you could maybe frame some expectations about the first quarter based on the interest rate environment and the forward curve? And maybe specifically net interest income, when do you think that is positioned to bottom based on kind of the loan growth and the outlook you just ran through? Yes, Terry. Thanks for the question. I think as we're going into the first quarter, we will see the additional pressure with some of the traditional -- hopefully smaller rate increases. Because we have the borrowing side, in the short term we impact that -- most of that impact hit us with all the rate increase through the fourth quarter. And our super sensitive deposits also moved during the quarter. So we would anticipate less, although, when you're getting into the cycle, the betas on the rate increases are higher, which is why we see that the cycle beta right now is about 24% and we see it increasing to about 28% for the full cycle. Assuming that rates will flatten out or the rate increases will flatten out in the first quarter. So I think the first quarter is a challenge and then is our assets reprice going into the rest of the year, we would anticipate to see the stabilization and then improvement as assets reprice. And then maybe just one last quick one. The CET1 is really strong at 13.6% and nice to see some recovery in the TCE ratio. And when the stock hit 1.3% of book, is the buyback being discussed at all? Yes, I think as we -- and Craig and Thomas, you can comment too. I think as we see stabilization in the economic factors, I think that is a discussion to have. And -- but we want to see -- we want to make sure that we have a good outlook for credit and the economic issues. Good morning, everyone. And let me say congratulations, Craig as well on the fine retirement and Thomas to adding the CEO role. So congratulations to both of you. My question is, looking at the deposit base here and you're at 22% at non-interest bearing. Where do you see this going over the course of the next couple of quarters when you think about a couple more rate hikes baked in? Thanks for the question, David. This is Thomas. We anticipate that our non-interest bearing portfolio directly will be relatively quarter-over-quarter. That's a very granular portfolio on the consumer side, specifically as we brought in some of the new assets or the new teams from TCF. It does have a little bit of volatility with some seasonality around the public funds, but I'd say on an average quarter basis, it should be relatively consistent. Great. Thanks, Thomas. And then thinking about the borrowings, obviously, up year-over-year loan growth, it sounds like, or loan demand still seems like it's prevalent. If you do have a flat environment, how are you going to fund that? Will your use of FHLB increase? And where do you see overall the borrowings as a percentage as you move through the year this year? Yes, it's twofold. The cash flows from investment portfolio flowing into higher yielding assets into the loan portfolio. We won funding source to help keep borrowings steady through loan volume growth. The other is, we are trying -- we have been successful and continue to look at retail CD opportunities to be able to use CDs to fund the growth and to help maintain the borrowing. Our goal would be to try to keep the borrowings fairly stable if we can succeed in getting those deposit flows. Got it. Thanks Mark. And then just as a follow-up, when you talk about the cash flows, do you have a contractual number of cash flows that you -- that you're expected to see in 2023? From the investment portfolio, we -- right now, it looks like it's about $130 million to $150 million and that range has slowed due to prepayment speeds than what we originally had worth seeing last year into the first part of this year. So that would be the cash flows. Additionally, as discussed, we've got $840 million of loans that will reprice payment and so forth. That includes the investment portfolio that can reprice into higher yielding assets. Yes. Hi, everyone. Good morning, and appreciate taking the questions. I just want to echo David's comments and congratulating Craig on your upcoming retirement and Thomas, as well on the promotion of CEO. I guess first question, just as we kind of zoom out on the margin outlook perhaps into the back half of this year, just given the liability sense of nature of the balance sheet, if we were to get one or two Fed rate cuts, do you think that would drive some margin expansion under that scenario, or how you guys kind of think about the margin trajectory with perhaps more [Technical Difficulty] Yes, Nate. Thanks for the question. Yes, I think the nature of the balance sheet and what we're modeling with the lag of repricing on the asset size versus the loan portfolio, that would continue to improve and then the immediate repricing of short term borrowings. And we would look to be as aggressive bringing rates down as we -- as the market would allow as they -- as we've seen an increase here on the deposit side, especially the more rate sensitive deposits. So yes. Okay. Great. And is the kind of loan growth environment or the loan growth environment were to soften to some degree, what potential is there to maybe unwind some of the higher cost borrowings that you guys have brought on balance sheet? Just to maybe kind of reduce the overall liability sensitive nature of the balance sheet. Again assuming kind of overall loan growth kind of slows to some degree in 2023? Yes, I think we're going to see -- the loan growth projection will probably require some funding. And like I said, I think we would like to see that funding come from the retail side of CDs. But if we had opportunities, we would definitely be replacing those short term liabilities or short term borrowings. Okay, great. And then just one last one from me, just on the kind of reserve outlook from here. Obviously credit metrics continue to improve generally in the quarter. How do you guys kind of think about where you can expect the reserves to kind of settle out maybe as percentage of loans or on absolute dollar basis as 2023 progresses and kind of absent any meaningful seasonal adjustments relative to the two factors? Hi. So as far as the allowance go, we continue to work within our model. And as you know, there's different components to that and drivers. We are seeing some change in mix as far as outlook for possible recession. So you see some increase related to some of the econometrics. And as Thomas mentioned earlier, just overall consumer area and watchful in that. Meanwhile, we've seen some reduction in some of the commercial sectors that we had heavier allocations on, because they've been performing really well. And so, personally, I think the outlook is pretty stable. But some of that's going to depend on the economic conditions, of course. And is that stable outlook percent, the economic conditions on an absolute dollar basis on the reserve or as a percentage of loans? Hello everybody. This is [Matt Ryan] (ph) filling in for Damon DelMonte. Congrats to Craig and Tom. Most of my questions have been asked and answered, but just as a follow-up to Nate's questions on credit. Could you provide a little color on your office segment and what types of exposures do you have there? Yes. Thank you. We have -- let me just turn to that page. We have both medical and general office exposure just for some context though. I know that there's been a lot of focus on office exposure and a lot of the metropolitan areas. And Horizon, as you know, our primary markets are considered midsize cities. So Grand Rapids, [indiscernible], Indianapolis. And those have all been performing very well for us. So I would say, overall, there's really been no deterioration in credit metrics. Lease rates have been maintained. And we traditionally have done business with very strong sponsors and some conservative loan to values in that space. So it's been performing pretty well for us. If you turn to page 35, we've got our office metrics there. As of December 31, 2022, we had $164 million and it was 6.6% of our commercial portfolio, 3.9% of the total bank portfolio, so not a significant exposure. Just a -- I guess, want to touch on the expense side of things, maybe if I missed it. Just kind of your thoughts about how to think about expense? I know you guys have talked and met your goal on the expense assets. Just thinking about that as you go into 2023, if there's a new target on that if that's kind of how you're still thinking about things or any outlook you can provide on just kind of your expense guide? Yes, Brian, we still expect it to be under the 2% and also maybe in the range of $185 million, $195 million. We've -- as it commented, we kept expenses lower this quarter, some due to business cycle reduction in staff in those business cycles that are slowed. We -- that's going to flow into the first quarter. A lot of the reduction was done right at the end of the year. So that's going to give some kind of help to expense control. And then just overall, just in this environment, a hard look at controllable expenses and wanting to be as cautious as we can on where we're spending. So we anticipate that expenses should be in that range coming into 2023. Got you. Okay. Thanks, Mark. And then just the loan pipelines, unless I missed it, just kind of your -- if someone, I guess, can you just give a little color on just kind of the different buckets, the consumer, the commercial and the residential, just kind of how you're thinking about growth for 2023 and just kind of the pipelines where they are today? Thank you for the questions. This is Thomas and I'll pass it over to Noe or Lynn to give some color on the individual lines of business. Overall, as we exited the fourth quarter, our pipelines were strong. Quite a little bit stronger in the commercial side. The consumer side has seen the cyclical portion of the fourth quarter and also the adjustments that everyone has seen across the marketplace in mortgage. But our pipelines overall look like they're well positioned and continue the mid upper single digit loan growth throughout 2023, but I'll pass over to Noe to give some additional color. Yes. Good morning, everyone. This is Noe Najera. Yes, our consumer pipeline has remained consistent. We are at a cyclical as well. In direct, we expect to remain flat for the most part. We are going to see some single digit growth in direct consumer, primarily in the HELOC portion of our portfolio. On mortgage, we will again remain in low to single digit growth expected in the first quarter as well. And we will mimic really the industry standards that's being published in the forecast as well. This is Lynn again. Concerning commercial, as we indicated in a deck, we're positioned with a pipeline of $134 million as we go into Q1, 2023. This is on -- following on for the Q4 quarter, which was $126 million gross pipeline. So pretty consistent, a little bit better actually than what we had maybe anticipated for first quarter with all of the interest rate increases. Overall demand has been pretty good. I will say that with the rate increases, as far as new projects, those are getting a little tighter for some of the developers. But at this point, the metrics are working and we're seeing some continued demand there. So a little over 10% annualized growth in the fourth quarter. For 2023, we're looking at high single or mid-single digits. So we're looking at that perhaps moderating a bit with the rate environment and the economy, but overall it's been good growth and good demand. And we're continuing to entertain new packages. Perfect. Thank you for the added color and maybe just the last one or two for me. Just on the mortgage side, I don't know if it's Noe or who, but just kind of the dollar amount that we saw on the gain on sale this quarter. I know the expectations relative to the peers is likely to outperform, but just kind of in dollars how we should be thinking about the mortgage operation this year? I mean, is this kind of a base to build off of in fourth quarter, I think it's just over -- a little over $1 million or just any thoughts on your outlook on mortgage? Yes, thank you for the question. And the first quarter outlook will be very similar to what we saw in the fourth quarter. As far as the pipeline, we obviously saw a decrease late in the year with the rising rate environment as the forecast for the pricing has stabilized somewhat. We still expect a few rate hikes, but -- So we expect that will perform very similar to the fourth quarter as far as dollar wise. Okay, perfect. And last one was just on -- maybe for Mark, on the margin. I think you said a little bit lower second quarter. And I guess is the -- I guess is that the inflection point, Mark? Is the third quarter kind of in your mind today how we should -- as assets begin to reprice trending higher, is that what I'm hearing or maybe I missed what you said there? No, I think that's the trend as we have a lag in the asset repricing and we see -- with the anticipation that rate increases will stop here in the first quarter and let the assets start to catch up. That would be the trajectory, Brian. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Dwight for any closing remarks. Thank you, Rocco. In closing, we'd like to invite you to join us for our 2023 Virtual Investor Analyst Day on Tuesday, February 21st, starting at noon Eastern Time. Registration information will be sent out next week and we will post on the Investor Relations section of our website. Thank you for participating in today's earnings call. And we look forward to speaking to you again at our Investor Day conference. Now I'll turn the call back over to Rocco to close out the conference. Thank you. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
EarningCall_1050	Hello, and welcome to Signify's Fourth Quarter and Full Year Results 2022. [Operator Instructions] Today, I am pleased to present Eric Rondolat, the CEO; Javier Van Engelen, the CFO; and Thelke Gerdes, the Head of Investor Relations. Good morning, everyone, and welcome to Signify's Earnings Call for the Fourth Quarter and Full Year 2022. With me today are Eric Rondolat, CEO of Signify; and Javier Van Engelen, CFO. During this call, Eric will first take you through the 2022 highlights, after which Javier will review the company's financial performance for the fourth quarter. Eric will then discuss the full year 2022 performance and 2023 outlook. After that, we'll be happy to take your questions. Our press release and presentation were published at 7:00 this morning. Both documents are available for download from our Investor Relations website. The transcript of this conference call will be made available as soon as possible. Thank you, Thelke. Good morning, everyone. Many thanks for joining. So let's start with some of the highlights of 2022 on Slide 4. 2022 has been a year with a challenging external environment, which became increasingly volatile throughout the year. This led us to adapt our expectations and adjust accordingly while making further progress on key strategic priorities. Our connected lighting sales grew to â¬1.6 billion and our growth platforms grew to â¬400 million. Our Digital Solutions and Digital Products divisions now represent more than 85% of sales, profit and cash, up from 80% last year as the transformation of our business accelerated, driven by high demand for energy-efficient lighting solutions. We also made continued progress in the second year of our Brighter Lives, Better World 2025 sustainability program, which I will detail later. As far as the financials are concerned, comparable sales growth for the year, as you can see, came in at 1.2%. Margin and cash were below our expectations for the first time since our IPO as we delivered an adjusted EBITA margin of 10.1%. And the free cash flow at 5.9% of sales. Net debt over EBITDA ratio over to 1.3x from 1.4x last year, including the impact of the Pierlite and Fluence acquisitions. Excluding these acquisitions, we reached our goal of reducing the net debt-to-EBITDA ratio to 1x at the end of 2022 from about 2.7x after the Cooper acquisition in March 2020. Finally, we are proposing to increase our cash dividend over 2022 to â¬1.5 per share. Thank you, Eric, and good morning, everyone. Let me start by diving into the quarter 4 results starting on Page 6. We increased the installed base of connected light points from 109 million in Q3 to 114 million at the end of Q4. LED-based sales represented 82% of total sales. Nominal sales in Q4 were â¬2 billion, translating into a nominal decline of 1.5% and a comparable sales decline of 8.8%. As mentioned in our previous announcement, the Q4 under delivery versus our expectation was mainly driven by continued disruptions in China due to the zero-COVID policy, a slowdown in the OEM channel, lower sales in professional indoor lighting and the continued softness in the consumer segment. Adjusted EBITA margin came in at 10.2% versus 13.2% in Q4 last year. Gross margin continued to be stable versus Q2 and Q3 as pricing again offset the impact of product cost increases. However, under coverage of fixed costs due to the lower volumes and continued negative impact of FX were the key drivers behind the year-on-year margin decline. Net income came in at â¬86 million, compared to â¬170 million in Q4 last year. The year-on-year decrease is due to the lower income from operations and higher financial expenses, the latter due to the combined effect of higher interest costs, a negative adjustment to the value of our virtual power purchase agreements and the recognition of a monetary loss due to hyperinflation in Turkey. Finally, cash flow. Free cash flow was â¬364 million in the quarter, an increase of â¬107 million versus Q4 '21 with faster collection and lower inventories only partly offset by lower operating profit and lower payables. Now let's move on to our divisions, starting with Digital Solutions on Slide 7. Nominal sales in Q4 were â¬1.1 billion, with comparable sales showed a decline of 5.8% against a high comparison base of plus 11.2% in Q4 2021. Q4 CSG was negatively impacted by the COVID-related disruptions in the Chinese market. We believe this is a short-term effect as China has now opened up again. While the outdoor segment and especially the public segment continued to grow, we saw a more challenging indoor professional business, particularly in Europe and in the U.S. Adjusted EBITA margin was 9.7% against a high comparable base of 14.1% in Q4 2021. The lower margin was the combined result of an under absorption of fixed costs and adverse year-on-year currency impact. On the next slide, Slide 8, I would like to discuss a couple of business highlights of our Digital Solutions division. We installed a suite of smart lighting solutions at NSG Group. These include cutting edge connected lighting systems via our Lighting-as-a-Service model, innovative 3D-printed luminaires, Trulifi and Interact. We have upgraded the lighting at those 2 U.K. sites and have ongoing work across several sites in the U.K. Canadian grower Den Haan Greenhouses switched to our LED horticulture lighting for both its tomato and cucumber cultivation. We installed Philips GreenPower LED interlighting and toplighting linear at their facilities. The decision to move to our LED horticulture lighting was driven by high electricity prices, insufficient natural light during winter and year-round demand. As a result of the switch to our LED horticulture lighting, production increased by as much as 40%. Let's now move on to Digital Products on Slide 9. In the fourth quarter, the Digital Products division saw a comparable sales decline of 12.9%, while the adjusted EBITA margin remained at a healthy 14.1% level. On the sales side, we continue to see weakness in the consumer segment also during the peak sales period. Our business in China and in particular, Klite, which is reported in Digital Products division was impacted by continued COVID disruptions. We also saw a slowdown of [ LED ] electronic sales in the OEM channels leading to lower growth than what we had anticipated. This follows several quarters of strong growth in the channel. Adjusted EBITA was 14.1% compared to 15.5% in Q4 2021. While pricing and mix compensated the increase of material and logistic costs, the margin was impacted by lower fixed cost absorption due to the volume reduction. Moving on to Slide 10 for the business highlights of Digital Products. Our sustainable 3D-printed Coastal Breeze pendant plant won the prestigious Gold IDEA 2022 design award and received an honorable mention in Fast Company's Innovation by Design Awards. The collection is 3D printed using discarded fishing nets. It helps us in cleaning up the ocean, and it has a low carbon footprint. Next, with the launch of the Philips Hue Festavia string lights, we move into yet another application of Hue. The Festavia string lights helped create the perfect ambiance inside your home for the holiday season. The string lights allow users to dim and brighten lights, change color, create a gradient light effect, set timers and schedules and more. The string lights include unprecedented effects such as the Sparkle effect and Scattered style. The launch was well received as we saw a great level of interest from consumers. Moving on to Slide 11 and Conventional Products. Comparable sales declined by 11.4% with further pricing partially compensating a continuing volume decline. The adjusted EBITA margin declined to 12.9% as a combined effect of the following items. Indirect cost savings were not fully offsetting the negative impact of volume decline and an adverse FX impact. Further price increases did largely compensate cost increases and the Q4 margin was negatively affected by one-off bookings. As we move into 2023, we are taking steps to protect the profitability of the business and are expecting to move back to more normalized profitability levels. Moving on to our adjusted EBITA bridge for fourth quarter on Page 12. Adjusted EBITA decreased from â¬265 million to â¬202 million. As you can see, this was mainly driven by a large volume effect worth â¬103 million, coupled with a negative mix development. At the same time, the positive impact of price increases worth â¬69 million in quarter 4 continue to fully offset the â¬45 million negative impact of higher input costs. Although our indirect costs improved by â¬47 million, they were not sufficient to offset the volume decline. A negative currency effect caused an impact of minus â¬16 million versus Q4 '21. This is a combined effect from the weakening of the euro versus U.S. dollar and the Chinese RMB and the continued yet temporary headwind for hedging. The resulting Q4 adjusted EBITA margin declined from a high base of 13.2% in Q4 '21 to 10.2% in Q4 '22. On Slide 13, I'd like to zoom in on our working capital performance during the quarter. While the bridge shows our working capital performance year-on-year, I would like to shortly highlight our performance versus the end of Q3 2022. Versus the end of the third quarter, working capital declined from â¬820 million to â¬564 million or 7.4% of sales. This decline was mainly the result of a strong reduction of inventories, a notable reduction of receivables and a favorable impact of currency. The strong reduction of inventories is a sign that our inventories have peaked and are starting to come down. The working capital bridge versus the end of December 2021, shown on the slide shows an increase in working capital of â¬314 million. That increase was mainly driven by the settlement of payments related to the buildup of inventory in 2021 and it was partially offset by lower receivables and lower inventories. We remain confident that we will return to previous mid- to low single-digit levels as supply chain lead times continue reducing. On Slide 14, you can see our net debt to leverage evolution. At the end of 2022, our net debt position was â¬1.356 billion, a reduction of â¬329 million versus the end of September. The lower net debt is mostly driven by our free cash flow generation of â¬364 million in Q4, which benefited from a reduction in working capital. Other had an impact of â¬35 million and includes new lease liabilities, derivatives and the FX impact on cash, cash equivalents and debt. As a result of the lower net debt, our net debt-to-EBITDA multiple reduced from 1.5x to 1.3x. Excluding the acquisition of Fluence and Pierlite, Signify reach its goal of reducing the net debt to EBITDA ratio from 2.7x after the Cooper acquisition to a 1x multiple at the end of 2022. With that, I would now like to hand over back to Eric for the full year '22 performance and the sustainability update. Thanks a lot, Javier. Let's go to Slide 16, where you see that in 2022, Digital Solutions, Digital Products further increased their contribution to our business, now reaching 89% of sales, 86% of adjusted EBITA and 90% of free cash flow. This is driven by innovation in energy-efficient and digital lighting technologies that have generated substantial growth over the past 10 years. Sales of connected lighting and growth platforms grew to â¬1.9 billion. That's what I want to talk to if we move to the performance of connected lighting and growth platform on Slide 17. Connected lighting sales grew by -- to â¬1.6 billion, and connected lighting had a very strong performance this year, mainly driven by our professional systems' brand Interact as well as a consumer brand WiZ. Philips Hue saw a slowdown due to a weak consumer segment and the exceptionally high growth during the previous year. We believe that Philips Hue will go back to its growth path as soon as we start seeing a recovery in the consumer segment. On the other hand, the growth platforms grew to â¬400 million, and we saw an accelerated transition from conventional to LED in horticulture. The acquisition of Fluence, further strengthen our LED horticulture business. While at the same time, the growth platforms were negatively impacted by the discontinuation of UV-C surface cleaning products and of conventional horticulture lighting. Let's now look at our 3 divisions in more detail on Slide 18. Digital Solutions had a comparable sales growth of 7.8%, showing a strong recovery during the first 9 months of the year despite the negative impact of China and Russia. The adjusted EBITA margin decreased by 130 basis points, reaching 10%, mainly due to negative currency impact, partly offset by operating leverage from higher sales volume. Digital Products had a comparable sales decline of 3.8% due to lower consumer sales and the COVID-related disruptions impact on the Chinese market. The adjusted EBITA margin declined by 180 basis points to 12%, mainly due to a negative impact from currency, lower volumes and an adverse sales mix. Conventional Products had a comparable sales decline of only 12.6% as lower volumes were partly offset by substantial price increases. The adjusted EBITA margin decreased by 410 basis points to 14.6% as price increases and indirect cost savings were more than offset by higher input costs, the surge in energy costs and an adverse impact from currency. We are taking a very proactive approach in managing the business with a goal of securing a strong management performance. The year 2022 was particularly challenging for the conventional business as high energy costs not only increased the production cost, but also led to a faster market decline and the discontinuation of certain business areas like conventional horticultural lighting. Next, I would like to discuss our sustainability performance on Slide 19. We completed the second year of our Brighter Lives, Better World sustainability program and made continued progress towards achieving our goal of doubling our positive impact on the environment and society. First, the cumulative carbon reduction across our value chain is on track and to double the pace to the Paris Agreement. This is mainly driven by our energy efficient and connected LED lighting, which reduced emissions in the use phase. Our circular revenues were 29% on track to reach our 2025 goal of 32%. Circular revenues were mainly driven by serviceable and circular luminaires. Brighter Lives revenues constitute 27% on track to reach our 2025 target of 32%. Women in leadership position was 28%. And while it is an improvement versus the end of 2021, we are slightly off track to reach our 2025 target. In the fourth quarter, we focused on improving inclusive hiring practices and internal talent development. These actions support our diversity ambitions. In the fourth quarter, we also received external recognition for our leadership in sustainability and climate action. We were included in CDP's Climate A List and were included in the Dow Jones Sustainability World Index for the sixth consecutive year. To wrap up this full year 2022 presentation, let's move to Slide 20 to discuss our intended capital allocation for the year. So for 2022, we proposed to increase the cash dividend to â¬1.50 from â¬1.45 in 2021. This is subject to shareholders' approval at our AGM that will take place on May 16. It represents a total cash dividend of â¬188 million and a yield of 4.8% over the year-end share price of â¬31.38. I would like to remind you of our capital allocation policy, where we aim to pay an increasing annual cash dividend per share year-on-year. In 2022, as we already said, we reduced our net debt over EBITDA ratio to 1.3x. And excluding the acquisition of Fluence and Pierlite, we already reached our goal of achieving a net debt ratio of 1x by the end of 2022. Going forward, we remain committed to maintaining a robust capital structure and investment-grade credit rating. We will also continue to invest in organic and inorganic growth opportunities in line with our strategic priorities. Let's now conclude with the outlook on Slide 22. And while we continue to aim for growth both organically and through selected acquisitions, we expect the volatility in our markets to persist in 2023. Therefore, we will not provide a comparable sales growth guidance at this stage. In 2023, we will focus our efforts on improving our profitability and returning to a free cash flow generation in line with the previous years. For 2023, Signify expects to achieve an adjusted EBITA margin in the range of 10.5% to 11.5% and free cash flow in the range of 6% to 8% of sales. We are confident that we will manage the external volatility with the same agility as we demonstrated over the past years. The fundamentals of our business remain stronger than ever, driven by the ever-growing need for energy efficient and digital lighting and technologies. And with that, I would like to open the call for questions, which both Javier and myself will be very happy to answer. I will -- I have 2 related questions. But I'll start with the first one, which is actually really just a clarification on your Q4 bridge to start with. So you have â¬47 million restructuring or indirect cost benefits on the bridge. And then you also have â¬47 million restructuring costs below. Is this just the coincidence of numbers? Or are you exceptionalizing -- is it because you're exceptionalizing some costs? Can you explain sort of what does it relate to the 2 parts? And then my second question will be just more looking into your guidance for 2023, the free cash flow conversion of 6% to 8%. I guess this now puts you below your over 8% '21 to '23 guidance. And just to understand specifically for '23, what drives the slightly lower cash conversion than usual? Is it higher restructuring because you say you're intensifying the focus on managing down the decline in conventional? Is it working capital that is still a drag? Would think you have quite a lot of room to destock still. So any clarity on why maybe that is below the over 8% next year, that would be great. Thanks for the questions. I'll take both of them and then if Eric has any additions, I'll open it up to that. Let me go to the quarter 4 bridge. So the â¬47 million is just coincidence that they're equal. So there is no typo or there's no kind of wrong assumption there. So let's talk both of them. The â¬47 million NMC reduction year-on-year, as we mentioned before, it is really the NMC reduction after we compensate on an apples-to-apples basis, the effect of FX and also acquisitions. So this is the cost saving on the base business, if you exclude those 2 and as we talked about in terms of compensation of volume decline, we probably have to still look at what we need to do in the future to get more of that cost savings also down. On the free cash flow, 6% to 8% for 2023. When you look at the reasons why the guidance is, is the second of the reasons that you mentioned from a working capital point of view. Yes, we are still sitting on an inventory, which, although it's been coming down since the peak period of the second quarter, we see it coming down at the end of the year, but we still need to see it further going down if and when we see the global logistics and supply chain being more stabilized. So at this point in time, we're guiding for 6% to 8%. 2 things need to happen for us to basically go towards the upper side. It's logistics really adjusting globally. Number two, China does have an impact and recovery of China also because they have longer payment term there is. So there are a couple of variables in here which can swing the number a little bit up or down. But at this point in time, with the current visibility, we prefer to guide for the 6% to 8% range. Sorry, my bad maybe, but I didn't quite understand the answer to the first. Because if you have 60 -- minus 16% and minus 8% on currency and other on the bridge. So maybe I didn't understand your explanation of the positive â¬47 million there. And then the other â¬47 million further down, I guess, is much higher than in the prior quarter. Is it just -- is it because the prior quarters were -- had net real estate gains or sorry, maybe I just didn't get the answer. Sorry, let me go back. So the â¬47 million that you mentioned was about the NMC basically. So the positive on the NMC [indiscernible], the Indirect cost, which is a year-on-year saving on our indirect cost, if you exclude the FX impact in absolute and you exclude the impact of acquisitions. So that is just a saving on NMC. It's not related to the â¬47 million that you talked about in terms of restructuring. In terms of restructuring on the conventional, especially what we see in Q4 is that there are some charges for a horticulture business and for discontinued business. But so the numbers are not related to each other. The first one is actually on the outlook for '23. And I understand that you don't provide a quantitative revenue guidance yet, but at least it sounds to me you expect positive organic growth. You just don't know how much yet? Or is the uncertainty also potentially including a negative organic growth rate? That's the first one. Yes. Look, we do have a regular exercise of forecasting and just a few days before -- we talk together, and that's a normal process we have in the company. Now what we're trying to describe when we do that exercise is the traction that we see on our end markets. And when you look at the potential volatility that we see on those end markets, we really come with very different types of results, which can be negative, which can be positive. It depends. If the world goes into a situation where the war is ending in Ukraine and we get on the consumer segment, an environment which is less recessive than it is at this point in time. If we have an ease on inflation and specifically the price of energy, then we will surely expect to have a positive growth. If things are continuing the way they are and eventually degrading a bit more, that it's going to be much more complicated because we're going to have a consumer market, which is going to continue to be soft. We're going to have a very high probability to see investments on the private side, on the professional side of the business that are not going to be as dynamic as they should be, not fully compensated with the investment in infrastructure. So at the end of the day, what we see in front of us at this stage is a very high volatility on the end markets that concern one way or another way. So we didn't have all the discussions we had with our team, and we do really a worldwide check. We didn't have any certainty of where things could end up at this point in time. It can go in one direction, it can go into the other one. That's why we said also, but the priority will be to recover what we have lost in terms of operating margin and to also rebuild our cash position in 2023. Now if we see clearer in the coming quarters, we may be more assertive and give a direction, but we are not in a position to do that at this point in time. Yes. Thank you, Eric. And I guess what you also quantified in the press release that it's a volatile H1 and then improving performance in the second half, sounds like a bit of a tough start than in Q1 given that there the volatility is probably the highest end, especially in China still. Yes. What you have also, Sven on the complexity of managing performance is that we have very uneven base of comparison. So when you start 2023, a very high compare in Q1 slightly lower but still high compare in Q2. And then you have H2 where the compare is lower. So at the end of the day, we have also on a quarter-by-quarter approach, look at the base of comparison is not always making the numbers very speechful but we have also to deal with that. So that's the reason why we see, given the volatility and the short-term situation of the economies, we see in H1 that's going to be less dynamic than H2. And maybe the second question is just on what you're observing on the pricing dynamic. I mean, obviously, the last year was quite positive on pricing now that some of the cost inputs have come quite down on the energy, logistic costs and so forth. I mean are you observing that your peers are starting to reduce prices? Or is it still quite stable at the moment? Well, what we have seen is that a lot of our peers had a big impact on the P&L, especially the ones that didn't transmit on prices at the right time. And many companies in the lighting industry is -- are listed, so you can have a look at it, and it's public information. Now when you look at our pricing strategy, what was very important for us was to cover the increase of the cost of goods sold. And if you look at the bridges that we are showing on a quarterly basis, you've seen that in the past quarters, we're doing that. Now what we have not covered with our pricing up is what I have always called the transitory part of the inflation, namely cost of logistics or cost of energy with which we believe are going to go down in the future. But they have impacted our margin in 2022 as we didn't price up for those because we expect them to go down in the future. So we don't see at this point in time, the price decreasing. Our bet is we should see partly the cost reducing especially cost of logistics, especially cost of energy and to a given extent, the bill of material, while we know that the direct labor cost will increase because of inflation. At the end of the day, we expect to see a rebuilding of the gross margin without massive price reductions on the market. I'd like to just start with a little bit of context on the outlook, if possible, in terms of the market dynamics that are happening right now. Clearly, there's a lot of general weakness in construction markets, and it appears to be fairly indiscriminate to whether products deliver energy efficiency or not. So I just wondered as a result, do you expect your activity levels to just flow with the broader market dynamic regionally that you're seeing in sort of construction activity levels? Or is there any indication that you could outperform on the basis of underlying building energy efficiency demand? That's the first question. So, George. Look, to be very simplistic, let's try to split the market on the professional side in 2 different buckets. The first one is what I would call the infrastructure, investment in all different types of infrastructures. So we see in the U.S. and in Europe, a very good dynamic on that front. IGA in the U.S. We have the Green Deal being implemented in Europe, and we see an increased level of business linked to that. So that's a positive. On the other hand, when you look at, what I would say, the rest of the construction non-res market, we see today projects being delayed because of the overall pressure that companies are experiencing on the P&L. So probably that investments are not lost, but they will slightly be delayed. And we see that in most of the geographies where we're operating, namely Europe and U.S., I would say that the case of China is a bit particular because the market was really impacted by the COVID measures when it was blocked and when it was unblocked. We had in China, in some instances, more than 50% of our teams that were COVID positive. Thank God, with no big consequences, but we had to stop our activity there. So China being a bit of a specific case, I would say that we see traction on infrastructure, and we see a softer market on the construction on West. Okay. And then maybe a couple of follow-ups on some of the things that have already been asked. But just on the free cash flow comments you made in terms of trying to get that back to what you've had historically. Do you mean in absolute euro terms to the cash that you delivered each year or just the free cash flow margin, that would be the one of the follow-ups. The second one would just be on China. Could you give us some context to just how much that market declined for you in the fourth quarter? I'll take the free cash flow. So we -- on free cash flow, we keep on focusing on a percent of sales, also on working capital. You've seen working capital has gone down from over 10% in the middle of last year, now to 7%. And so that's going to be the focus why percentage because it's very difficult to beat the absolute numbers with all the ForEx volatility we have. So the focus is absolutely getting back to the percentages of working capital where we have been, and there's still a way to go for us on that one. The percent of sales is what we focus on. On China, I think, Eric, you can add some perspective. Maybe let me just give some data that can explain the free cash flow dynamic. George, maybe also to illustrate a little bit the question that Daniela asked previously. So if you look at some of the fundamental elements on how the supply chain is behaving, what we expect to see in 2023 is a reduction of the supply chain lead time. And that's absolutely critical for our cash generation. That's what has impacted us in 2022, and we expect to go to a more normalized levels in 2023. But that's not going to happen or it didn't happen January 1. It will improve during the year. But there are some selling figures. So for instance, if we look at our supplier commodity lead time, in the commodities where we were the most impacted, components namely, we have reduced by nearly half the lead time to be supplied. Our component scarcity, that's an indicator that we get to you on a regular basis. If you remember, I surely remember the 232 escalations, level 4 in Q2 last year, we are now at 5. So we have gone back to historical levels. If you talk about Ocean carrier reliability, which is a statistic that we follow on a monthly basis, 80% when everything was okay. It went down to 30% and we are now back up to 57%. Our replacement lead time of our DCs has dramatically gone down, and that's an improvement of nearly 30%. So all these elements are telling us that the supply chain is improving. While the supply chain is improving, we should be able to reduce our time from supply to sell, and we should be able to recover on the cash. But that is not going to happen at the very beginning of the year, is going to improve gradually over the period of 2023. China, we have been declining substantially in Q4. I don't know if we communicate on that number specifically. But you can imagine it's a double-digit decline pretty substantial. At the same time, George, we have 2 elements in China. We have our market position where we declined double digit, but we have also Klite that was extremely impacted in Q4 because we had at one stage, let me remember, but in a plant, I think we had more than 70% of the people that were touched by COVID, and we could not operate the plant normally. So really, China has been a big, big, big negative impact for us in Q4. My question is on destocking in Q4. I mean if I look at your overall growth and back out the volume decline in Q4, I get to low double-digit decline. And when we look at your geographic breakdown of sales, we see that this deadline is kind of broad-based rather than concentrated in China or one region. So the question I have is how much of this decline is driven by destocking in OEM channels as well as some of the distributors? And do you have any view on where do we currently stand on the channel inventory i.e., could that be an incremental headwind in terms of destocking in the early 2023 or we done with most of the destocking? Yes. Very clearly, and you have picked it up well. We saw destocking in Q4. I would say that on the distribution side of the business and on the professional side, it had started earlier, but we saw still some destocking in Q4. Where we were very surprised in Q4 was linked to the destocking of the OEM channel, but let's not make any mistake. The OEM channel has done quite well during the year. It follows the performance of our professional business, but we expect it to do much more in 2022 Q4 than what we actually did. And we think that destocking was effectively back to the game for the OEM customers. When it comes to the consumer part of the business, I think the -- I think our e-tailers or our distributors off-line have done relatively good job at bringing the stock down since the end of Q2 and Q3. And in Q4, the inventory was just adjusted to the volume that needed to be sold. So as we see things at this point in time, I don't expect headwinds in 2023 coming from further destocking except if the market for whatever reason, would go substantially down from where it is today. I mean if the market is sustained or improving, I would -- rather see a tailwind than a headwind on the stock and on destocking. And my follow up is on the margin guidance. I mean, you're guiding 40 to 140 basis points implement in margin. Can you explain the drivers like what needs to happen for you to get to the top end of the range and also with respect to level of organic growth that you might need -- and I guess, I mean, you earlier highlighted that wage would be a headwind, but then you have logistics and energy cost and some input cost as a tailwind. So maybe -- and if you can explain what can take you to the upper end of the range? And what will be driving lower end? Look, Akash, if you look at the performance in terms of operating margin and then translate it to the gross margin, I mean, the name of the game has been gross margin loss in 2022, which about 210 basis points, which translated to an operating margin loss of about 150 basis points. So we could compensate a bit but not completely. Now what is very important to see in the structure of our gross margin at this point in time is that we could cover with price, the increase in cost of goods sold. And that was really the objective in 2022. Now we had additional elements that were not forecast, which was the continued increase of cost of logistics, but also the inflation on the energy prices. Now when you go towards 2023, we expect to see a few things that would help us to rebuild our gross margin to start with, which is the reduction of cost of goods sold and we're negotiating with suppliers now, I would say, on a monthly basis to take advantage of the cost going down. We would expect also at one stage, and we have also already seen the energy prices going substantially down. And the cost of logistics are also going down. So all in all, this should have a positive contribution to the gross margin rebuilding and to a given extent, also to the indirect cost. So first element is a real focus on the gross margin. Now we are also operating on our nonmanufacturing cost in order to have a further contribution to the improvement of the operating margin. But we lost 150 basis points in 2022. When you look at how the business is structured, our portfolio is well positioned. When you look at conventional LED and connected and growth platforms, respectively, about 15%, 16% and 20% to 25%. So at the end of the day, the portfolio is well structured. Our underlying gross margin potential is there. We need to have an improvement on the macro element that I've been discussing with you just right now to see an improvement of the gross margin. And we see them happening, we believe they are going to happen. Now how do we go to the higher end while the higher end is an improvement of 140 basis points, which is basically what we've lost in 2022. I think to be at the higher end of the guidance, we need also to be helped by growth, and we need to be helped by macro economies that are going to be giving a positive level of traction. If that's not the case, we still believe that we can improve our operating margin, but probably not at the upper end of the interval that we have given. My first question is on your FX impact on adjusted EBITA margin. So you had 220 bps negative impact in Q3 and 150 bps in Q4 from euro weakening and the tempering FX hedging headwind. Could you quantify how much is from the FX hedging headwind and what exactly is that coming from? And given it's been there for 2 quarters now, do you expect any more impact in 2023, assuming current spot rates? Thanks for the question. It's a bit of a complex question, but let me try to go through it in the logical steps. So evolution from -- so within FX, I think you have to separate 2 topics that we've also commented on in Q3. There is a general movement of exchange rates where typically year-on-year, you look at especially the strengthening of the U.S. dollar and the Chinese RMB versus the euro, which impacts us, obviously. And then there's a hedging component that we've talked about as being more transitory and that would be decreasing over time. If you look at Q3 versus Q4, in general terms, you would see that the impact of FX, the natural impact of FX has gone slightly down versus a year ago. That's because, of course, in Q4, the Chinese RMB and U.S. dollar versus euro have weakened. Therefore, the gap versus a year ago is a bit more favorable than what we had in Q3. From an FX point of view, a hedging point of view, we roughly had a similar impact in Q4 as in Q3. So that hedging that we talked about and on the dynamic there, what we've discussed last time is this is a question of hedging positions that we have. We had taken with the assumption of growth -- significant growth at the start of 2022. We have taken hedging positions, especially on the U.S. dollar, counting on a faster growth of the U.S. business and that hedge basically is then hurting us in terms of the, let's call it, an over-hedge that we had done at the beginning of the year, which we are gradually unwinding and that should be gone in Q1. So that overhedging impact, especially of U.S. dollar, it has impacted us in Q3 and Q4, but that effect should disappear as of 2023. So if I look forward to 2023, look at currencies, of course, the base currencies of 2022 will start looking different, which means that at current spot rates, the variability that we had seen in 2022 will be much less. Of course, we don't know what exchange rates will do for the future, but the best forecast isn't the spot rate to take. So we should there see a slight improvement, I think, versus the underlying assumptions we have for 2022. And as I mentioned before, the hedging of the overhedging position at this point in time, we have lowered that significantly. We'll have to see how the business develops. What we have done on hedging, as we just talked about, is we have intervened. We have changed a couple of things. We are in viewed volatility of the market. We're not hedging as far out as we used to do. We used to hedge out for a certain percentage of our -- currencies about up to 15 months out with a decline in percentages by quarter. We have shortened that so that we have more visibility on how much we hedge and that we avoid that we over-hedged in a volatile environment. And we've also looked at the amount of currencies that we're hedging. So we've taken some hedging policy adjustments, which would make that temporary impact of 2022, largely disappear in 2023. That's very clear and very helpful. My second question, can I just dig a bit deeper into your margin guidance. I appreciate you're not guiding on revenue growth, but can I get an idea of what magnitude of revenue or volume downturn can you tolerate while still achieving the bottom end of your margin guidance of 10.5%. And for 2023, what is the pricing carryover we're assuming? It's on pricing. Look, you -- you can look at how we performed over the past years, and you will see that we were able, when the top line was declining to still improve our bottom line. So if you look at the trajectory that the company had in the past years, I think you will see the potential we have moving forward, increasing the operating profit despite declining. From a price perspective, we don't expect to price up in the coming quarters. When you look at the gross margin, price is covering the increase in cost of goods sold, and you see the strategy that we had, we achieved it. We don't want to be overpriced on the market because we want still to stay competitive and drive top line. Look, I think the exact number is not -- we don't have them here. But if you look at the perspective of quarter 4, in quarter 4, there's about the 290 basis points of pricing and mix, which have positively affected this quarter-on-quarter still versus a year ago. As you know, there's a big discrepancy between what we do on conventional where we had to continue significant price increases compared to the 2 other divisions. So if you look at quarter 4 down to quarter 1, 2, you see that effectively going down. So I would not expect a significant assumption there on pricing, except from conventional side. The first one, and thank you very much for the helpful color on the inventory destocking. Can I sort of make sure I properly understand it. There seems to be a difference between what you're seeing in the professional channel and what you're seeing in the consumer channel. Could you talk specifically a bit more about the professional channel in particular, in North America? I'm sure you're aware, but one of your major competitors Acuity Brands has said that they see an inventory destock lasting several quarters throughout 2023. Yes. Ben, good to talk again after many years. Look, yes, it's different between consumer and professional. And let me talk to the situation in U.S. On the consumer channel, we had very early destocking in 2022, in line with the perceived recession or the softness of the consumer market that was also felt by our distributors. It's been different in Professional. There was still some destocking, maybe not at the same level, and it happened a bit later during the year. And we have seen that on the professional side, not only in Europe but also in the U.S. Now the destocking doesn't only depend on our distributors, but it depends on how much inventory we have at these distributors. So it could be the case that some of our competitors have more stock at those distributors, and they see potentially more destocking in the coming quarters that we see, where we believe that our stock has already been substantially reduced and what we're going to see moving forward is not a further massive destocking also in the U.S. And if the market is giving signs, especially on the construction non-res that it should be activated, we believe that our distributors will have to replenish and rebuild stock. So it's not -- the distributors may not have the same policy or the same situation depending on competition, but that's the way we see it. So the destocking has, for this part already happened in Europe and in U.S. for us as far as we're concerned on the Professional channel. That's very helpful. And the second one is really a follow-up to an earlier one. I guess everybody is trying to understand how big the drawdown -- in the minus 8.8% how big China is. If I think that China is down 30% to 40%, it's less than half of your -- of that minus 9% growth number. Am I thinking about this the right way that China is sort of a bit under half? Yes. So basically, when you look at the Q4 number, you need to look at the Q4 number in perspective of Q4 last year. And Q4 last year has been very strong because it was also on the base of Q4 in 2020, that was the quarter that -- where we less declined during the COVID year. So basically, you start on a base that is quite strong. Now China will be less than half of the decline, Ben, it's not most of the decline. But it's China, it's also the impact of Klite and that will not be in the Chinese market, but also collateral impact it has on other businesses, but also weakness in the consumer market that has continued and some projects that were delayed on the construction non-res. These projects of medium to big size that customers are delaying even the volatility or the lack of visibility that they have on the economy moving forward. So we should not see China as the 9% of the decline or even less than half at this point in time, but it's substantial. The first question is actually on some of the previous calls and updates. You talked about a relatively high backlog. Is that something that's still important at this stage? I know you still have a relatively high backlog that you can convert? Or is that completely done now? So Marc, we were looking at 2 things. We're looking at order book and backlog. So order book is your order position when you entered the quarter, and backlog is basically the orders that you should have converted during the quarter and that you have not converted. At the beginning of the year, we are back to normalized levels. So if you remember, back in Q3 2021, these 2 elements increased quite substantially and probably the peak was in Q2 2022. And from that point on, we have reduced our backlog and our order book. So at this point in time, we stand with an order book and starting the quarter, which is pretty much in line with what we had before the crisis. And we're talking about 20% to 30% of sales. This is very typical of what we do, and the backlog has also come back to historical levels. Okay. And then the other question is on the weakness in the consumer segment and also mentioning some negative effect from mix. Is it been true that the UA product is weaker than average in the mix? And if that's the case, what are your outlook there? I think it was a very strong product in COVID. And then you said, yes, you expected them -- that people get used to the product that you would see the return orders. And now maybe because it's also a little bit higher priced product, maybe you see some extra consumer weakness. Can you talk a little bit about those dynamics? Yes, I think you have summed up them quite well. The [industry] was effectively declining in 2022, also on the basis of an exceptional growth in 2021. So what you see is effectively a decline, we see that worldwide, very much linked to the consumer market, which is also softer. Now when you look at the offer, the offer is expanding. Every time we do an offer expansion, we get positive traction. So we really believe that when the consumer market will go back to a higher level of traction, we will benefit from it. The price positioning. You'll probably -- it's an offer that was not so much price increased. We did something, but it was minor compared to other businesses. The gross margin is still well positioned in key geographies, which is very important for us. So at the end of the day, we entered in a situation that was very high base of comparison and then a market which was slowing. I don't know if you have seen, but we have brought to the market a very interesting innovation at CES, which is the possibility for people who have a Samsung TV to invest in an app, which is in the TV. And in doing so, they're going to be able to synchronize 10 lights that they have close to their TV with whatever is as seen on the screen. That's the fabulous innovation, we were doing that with -- and we're still doing it with an HDMI Sync Box. But in that specific case of Samsung TV, you don't have to buy an additional piece of hardware. We do it with software. And the traction, specifically on that new offer was very strong. So at the end of the day, we continue to invest. We continue to make the virtual environment very unique. And I think this will give positive outcomes whenever the consumer market is becoming stronger. So my question is specifically on your growth business. And so what kind of pricing environment do you see in your growth business and the demand for 2023? And the second question is like can you still better manage your FX exposure and reduce the volatility in your margins driven by the FX-related changes? On the growth business, if we talk about connected lighting and everything we do on the growth platforms, we don't expect massive price increases in 2023. A lot of these businesses are project businesses, so they are more managed on the gross margin and on the price because there's no price reference on the market. When you do a fully connected office project, there's no market price. So this is really a margin driven, no specific price intervention there. Better FX exposure. Yes. I'll come back to what I also mentioned before is if you look at the FX exposure we have, again, let's break it up into the normal FX movements and our total net positions globally and then there's a hedging policy. So if you look at what we are doing or what we can further do to decrease the volatility of FX is, of course, we cannot impact the FX movement itself. But if you look at our global positions, as we always said, we are short on Chinese RMB, and we are long on U.S. dollar. Depending how the business move into different regions and how we do in terms of localization, more of supply or more regionalization supply longer-term that might have an impact on just the balance of currencies we have and perhaps will be slightly less exposed to the Chinese RMB and the movements there. So that's more from a macro point of view, and that is not, let's say, short-term because we don't fully control all that. The other part, which I mentioned before is the hedging policy. And what we've done recently in the last quarter is revised managing policy. Fair to say the hedging policy, which was a standard policy that we had for a long time. It was a hedging policy that basically hedges out 3, 6, 9 , 12, 15 months out at decreasing percentages, 80%, 60%, 40%, 20% but the lower end of that 40%, 20% went out 12 to 15 months, which means that we were locking in hedging positions on especially the big currencies like the RMB and the U.S. dollar with a forecast, which was supposed to cover 12 months in advance. As you can imagine, the volatility on that hedging position can be positive and negative. So it's not like it's always in the negative, but in 2022, clearly, because of the over-hedge position on the U.S. dollar, we got a hit on that. In order to decrease the volatility of what we're going to see in 2023, we have changed that hedging policy that, number one, we hedge less currencies. Number two, we don't hedge out until 15 months out, we look only at the 9 months visibility. And therefore, that should decrease, let's say, the part of the hedging over under hedging that, again, can hit both ways. It could have been a positive and a negative throughout the year, but at least it takes out that volatility on a quarter-by-quarter basis. And that's what we're doing with the hedging policy change that we effectively have in place as of the first of Jan 2023. Maybe a couple of follow-ups on both the questions. So first, on the connected lighting part. So I think you mentioned that there is no reference price. So does that mean that there are no major competition with respect to your product portfolio in the connected lighting space or the competition is relatively less as compared to the LED portfolio? And on the hedging part of currency, so by when we are targeting to achieve maximum optimal regionalization of your supply chain so that we can have a fairly natural hedges against the currency movement? So Rajesh, on connected lighting. So let me take it by part. In connected lighting, in general, we have much less competition than in non-connected offers. That's true both on the consumer side and on the professional side. We have more product to product comparison on the consumer side, but on the professional side because on top of having less competition on the professional side, what I wanted to say is that it's very difficult to compare one solution to another one. So imagine that we're going to put connected lighting in a warehouse. We're going to guarantee to our customers' savings. We're going also to provide a software, which is helping the customer to do an integration of the usage of the workspace on any tap of time integration. We would also explain how accident rates will be improved and how the productivity of the people working in the warehouse is going to be also improved. So all these elements that we bring to a professional customer when we talk about connected lighting. And they are adapted and collateral benefits in other segments more linked to the business that the customers are driving. And when you look at everything that we bring, it's difficult to compare one offer versus another one. That's what I wanted to say. But what is true is that in terms of competition, we have less competition in connected lighting than we do have when it comes to non-connected offers. Yes. And on the hedging part, let me go back to that for a second. First of all, in terms of regional footprint, let's first talk about the top line, okay? So if you look at our hedging position, U.S. dollar, Chinese RMB from a growth opportunities point of view, there are 2 regions where there's clear growth opportunity. So I would not make that a distinction factor in terms of would that rebalance from a top line point of view or short or long positions on either currency? So what really plays here is, as you mentioned, it's going to be more the supply chain. On supply chain, as you can understand, regionalization of supply chain is not a short-term project. It's something that will take time, and that will basically be a moving number over time. But let's not forget that from a short position point of view on the Chinese RMB, the dependency of supply from China is still going to be there. So yes, there's going to be regionalization, which will move the needle but they're still going to be -- I assume there's still going to be a short position for a long time in Chinese RMB because of dependency of all component sourcing, all of that. So I would not expect that, that is going to materially change short-term. It's going to be more a long-term gradual shift to perhaps a bit more balanced portfolio, but I still expect the Chinese RMB to be short for a long while. Ladies and gentlemen, that's all the time we have for Q&A. I will now hand it back to the host for any additional or closing remarks. Thank you. Ladies and gentlemen, thank you very much for joining our call today. If you have any additional questions, please do not hesitate to contact Philip or myself. We will also follow up with those of you who did not have an opportunity to ask questions during this call. And again, thank you very much, and enjoy the rest of your day.
EarningCall_1051	Good afternoon. And thank you for joining Atlassianâs Earnings Conference Call for the Second Quarter of Fiscal Year 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassianâs website following this call. Welcome to Atlassianâs second fiscal year 2023 earnings call. Thank you for joining us today. Joining me on the call today, we have Atlassianâs Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes; our Chief Revenue Officer, Cameron Deatsch; and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter fiscal year 2023. The shareholder letter is available on Atlassianâs Work Life blog and the Investor Relations section of our website, where you will also find other earnings related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains managementâs insights and commentary for the quarter. So during the call today, we will have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our managementâs belief, assumptions only as of the date such statements we are made and we undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission from time-to-time, including the section titled Risk Factors in our most recently filed annual quarter and quarterly reports. During todayâs call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the IR website. Please keep in mind, we would like to allow as many of you to participate in Q&A as possible. To facilitate that, we will take one question at a time. Please rejoin the queue if you have another question or a follow-up and we will do our best to come back to you later in the session. Thank you all for joining us today. As you have already read in our shareholder letter, we closed out 2022, proud of everything we have accomplished in yet another unpredictable year. Despite the current macroeconomic environment, the massive opportunities in front of us has not changed. We continue to make great strides towards our long-term goals and we are ready to execute with relentless focus in 2023. We have achieved a ton this quarter, shipping many platform enhancements and product features that deliver incredible value to delight our customers in the cloud, including delivering data residency in Germany, launching automation in Confluence, helping our customers to the cloud with migrations up nearly 2x from the prior year and completing several of our largest migrations to-date and showcasing our unique position in the ITSM market with impressive customer growth, multiple large swap-out stories and recognition as a leader by industry analysts and these are just a handful of examples. We have always prioritized putting our customers first and we are seeing customers increasingly turn to Atlassian as a trust vendor asking how to operate their businesses better. 2023 will be all about helping our customers navigate these challenging times, absorbing the downstream impacts on our business and setting ourselves up for continued long-term success. Okay. Thank you very much, and good afternoon, everyone. So it sounds like the macro has had no impact on migration activity so far, even though really, you are seeing it in some other areas. You are still expecting migrations to add 10 points of cloud revenue growth this year. But in an environment where customers are clearly tightening their belt, why is it that you think migrations will continue unabated? Is the TCO advantage strong enough to compel customers even though they have to make a financial commitment, is the end of support date having a real impact there as well, any color would be helpful? Thank you. Hey, Gregg, this is Cameron. I will start off with some details and then I will probably let Mike add some more from what heâs seeing. So, as you already know, more than two years ago, we announced the upcoming end of life of our server products, and ever since then, we have been on this migration journey, helping our on-premises customers move from both server and data center to our cloud offerings. And I have to say that even in the uncertain macroeconomic times, every day that goes by, I am more confident in our ability to not only attract our customers to the cloud, but convince them of the additional ROI savings that going to our cloud, the additional benefits from a feature perspective, from there we have been able to get increasing our ability to get through the contractual, legal and data privacy aspects and move to our customers to the cloud. We made huge strides in actually migrating their data and their users to the cloud and then from there actually onboarding their users so they understand the new experience. This obviously can be an extremely complex exercise. But once again, we are two years into this and every single day goes by, we have been getting better. I also want to recognize that we purposely built an engineered kind of this path over this three-year timeframe, using loyalty discounts, improvements in our products, so it would provide compelling events along the way for our customers to move. And this just further establishes the demand for our migrations and we continue to feel strong about that additional 10% growth that we see coming from migrations going forward. Mike, do you have anything to add? Yeah. Thanks, Gregg. Look, I just wanted to say, itâs incredibly important in this environment to help our customers through as well and you talked about the TCO of moving to the cloud. I do think in an environment where customers are looking to get efficiency to optimize their spend, thereâs increasing recognition that the cloud itself is a great ownership model for them. Itâs a cheaper way for them to run and own and operate their software. And secondly, the benefits of the platform that we have built and the integration across our products, especially as they are experimenting and trying new things, allows them to consume more of Atlassianâs products, and at the same time, do so while making their businesses more efficient, which is what our job is to help them become more efficient businesses, especially in these difficult times. So I think we are really well positioned in that way. Excellent. Thank you guys for taking the question. In the shareholder letter, you talked about more focused investments on a go-forward basis and the operating margin target for the full year comes up by a little bit. But it doesnât really seem -- it seems like most of that came from sort of a better margin performance in the current quarter versus really changing sort of the investment profile for the second half. So you could talk to us a little bit about kind of where you are moderating investment, is there a potential offset and maybe to be really to the point, why not sort of more moderation considering the environment and work to drive the margin perhaps back to where we saw them historically in the low 20s? I will start -- yeah. Keith, this is Joe. I will start and then I will pass it off to Scott for additional thoughts. You are right, our overall view of H2 margin has not fundamentally changed from the prior quarter. We expect revenue growth to moderate in H2 driven by macro impacts we saw in Q2. And then in addition, we had some timing impact on the pull forward of OpEx savings into Q2 that wonât repeat in H2 and we will continue to invest and hire against the terrific long-term opportunities we see. So those are the primary factors. You asked about the broader work that we are doing around reprioritization. What I would say there, the work happening there comes in a lot of different flavors and takes a lot of different shapes. Sometimes itâs about stopping something. It could be about sequencing of the events, moving something to a more milestone-based funding model, structurally lowering the investment level based on a strategy adjustment. So as I think about the work we have been doing around focused reprioritization and resource allocation, itâs really included some flavor of all these things to drive the right overall business outcome. And so we will continue to invest against the long-term opportunities, while balancing that and being responsive to the macro environment in managing costs in conjunction with revenue growth. And I will pass it over to, Scott, if he would like to add anything. At the risk of repeating you, Joe, just a reminder for those that may be new to the Atlassian story. Back in April, we chatted with you, our investors at our Investor Day and we talked about cluster of four growth opportunities that we saw ahead of us is those were around of cloud migrations, our ITSM opportunity to take market share there, better serving enterprise customers and launching and growing new product that we built on the back -- prior investments we have made in the Atlassian platform. And what we have seen, though, is that those four areas are having great returns. We have got incredible momentum in those four areas. And we said about Atlassian in times of good and times of bad that we think about things for the long-term, where we want to invest over the long-term and make the right choices as a business to get the right returns. And so we continue to invest in those four areas, we are regarding from other areas of our portfolio into these great opportunities that we have identified and shared with you, of course, responsive to the current macro environment and our commitments on it targets that we have given out to you. Hi, there. Thank you very much. I wanted to ask in regards to just what you are talking about in terms of product innovation as you are investing during this period. Certainly is notable, the focus on ITSM, could you take a moment perhaps and talk about how you think of product innovation development and just where Atlassian can innovate and drive another leg of growth as we just navigate and think about the other side of this macroeconomic environment? Yeah. Fred, I can take that one. Look, it may sound like a boring answer to you. I think the way we think about product innovation in the current environment doesnât change to the way we thought about it a year ago, two years ago or three years ago, right? We have a job to unleash the potential of every team and thatâs all about making our customers more efficient at running their businesses. Again, we canât help them make cars or rockets or drugs or provide financial services, whatever it is our customers are doing, but we can make their team is more efficient and we really try to keep that as a North Star across all of our markets. At the same time, we continue to rebalance our priorities as we hear from customers and as we look at our resourcing. One of our advantages, I would say, is having a large investment in R&D, which is quite unique, is we are able to move those resources around a little bit more fluidly than other companies may be. So we continue to innovate, we have a lot of new products that we have built over the last couple of years and we continue to work with customers in testing, things like Jira product discovery, Encompass and Atlas, and a couple of upcoming ones like is in alpha and beta. Those are examples of ability to ship new things. At the same time, we continue to deepen our platform investment and one of the things as I just mentioned, to Greggâs question earlier, when customers move to the cloud, their ability to consume multiple Atlassian products via the platform and connect them together with things like Smartlinks or analytics running across them is a huge advantage of the cloud and that all comes from the innovation and investment in our infrastructure and ability to manage all of that sort of thing. At the same time, the innovation doesnât just come in new product form. So we continue to work on the big enterprise aspects of our cloud in terms of scale and performance, in terms of accessibility. As you said, this roll out new data residency regions this month and we continue to work with our customers on what regions they want to see us data residency remain, things like BaFin and HIPAA and all sorts of the acronym soup that comes with the enterprise. So those are all examples of where we spend our R&D dollars to continue to try to innovate on the things that customers want and are looking for. At the same time, we are obviously responsive to the environment that we just didnât launched. Hey, there. Thanks. Appreciate you taking the question. On the cloud target, can you just expand on what goes into the new range and what makes that the right range going forward? Thereâs some useful language in the letter, just around some assumptions that the macro worsened in the second half of the fiscal year. So maybe just what those impacts are, what gets worse and the letter calls out December as especially pronounced. I am just curious if thereâs anything you can say on whether those trends how consistent in January or if things are getting worse or better? Any color there as we are just kind of sorting through everything thatâs going on is helpful? Thank you. Yeah. Thanks, Michael. This is Joe. We did take a fundamental change from our prior cloud guide in the prior quarter and that we have three months more of data points, including December, which you mentioned and we have a much clearer picture of the trend line. And using that, our cloud guidance range assumes the macro environment gets worse in H2, and as a result, the trend lines from H1 continue into H2. You will also notice we have maintained a 5-point range on that guidance with the low end of that range, not only assuming continued weakness in free-to-paid conversions and paid seat expansions that we have seen year-to-date, but also some macro impact areas that have held up really well, frankly, through the first half of FY 2023 like churn, upsell and migration. So the rest of the picture is largely in line or better than three months ago. In terms of what we have seen in January, Iâd say, we have incorporated that into the guidance and itâs consistent with the assumptions that we formulate the overall approach. Hi. Thank you very much. So we have taken the right step in bringing down the cloud targets, I think, it happened a couple of quarters consecutively. What gives you the confidence, therefore, how can we get the confidence that we are at the point where we can assess, what are the leading indicators for your cloud business kind of the rest of the business seems to be in pretty decent shape. Are you seeing any signs of stability at all, it does look like December ended on a slightly worse note than September did and hence the forecast. But what are the leading indicators that you are looking at that we should be looking at for any signs of stabilization that could help us get comfort in the cloud forecast that have moved on? Thank you so much once again. Yeah. This is Cameron. I will take that one. So the two primary trends that we are seeing today that our headwinds are the free-to-paid conversions that we spoke about in Q1 continuing into Q2. We still see plenty of customers coming to our site, click in the try button and signing up for free versions of our products. They are just more -- they are converting to paid customers, they are taking out their credit card at a slower rate than what we see in historic trends and thatâs definitely continuing from Q1 to Q2. But, obviously, we can see as forward looking, we know how many people are signing up for our products. We know the activation rates of those customers. We know they are out there and actively using the free versions of our products and we are just simply trying to get them to add their 11th and convert to a paid customer. On the user expansion side, thatâs the other major headwind. This is basically people going from 20 users of Jira Software to 30 users of Jira Software. That, too, is another headwind we are seeing. We are seeing that largely slowed down across Q1 and Q2, and became more pronounced in Q2 within our smaller customer base. Once again, we see that in activity rates, we see the people adding their users and we see that in the overall monthly billing going forward. That said, as we look into this particular quarter compared from Q2 to Q3, we have seen largely the amount of customers that were downloading or downgrading from the paid plans down to our free plan. Thatâs all people going from 11 or 12 users to 10 or nine users, actually start to subside and thatâs come back in January a little bit more positively. So we believe those are still the two headwinds that we are looking forward in the second half of the year and we have plenty of telemetry across our customer segments, geographies, industries and so on to understand if any of those trends are changing going forward. Got it. I mean how close are we to stability in those leading indicators you are looking at if you have a view? Thatâs it for me. Listen, thereâs plenty of variability in the business overall today. On the top of funnel, people coming to our site and converted. I feel they are very stable between Q1 and Q2. The end user growth is much harder to predict and it might be hard to basically say whether thatâs going to be leveling out or that we will see some change in the variability in the future. Hi. This is Luv Sodha on for Brent Thill. Thank you for taking my question. Just wanted to ask, thank you, Scott, for laying out those top four growth priorities going forward. I guess where does Jira Work Management and Atlassian Together rank in those priorities and what traction have you seen with that product suite? Thank you. Yeah. Luv, I can take that one. Look, we maintain incredible bullishness on our position in the Work Management space. Trello continues to be a monster. Confluence continues to grow really, really strongly. You see that with all of the enterprise improvements in the cloud, as well as automation and also of other things we shipped during the quarter. So we are very confident in the overall position we have in Work Management and especially with its connection to both the software and ITSM spaces as companies increasingly get more digital, itâs a very unique position that we play. A part of that Work Management strategy, as you pointed out, is to have multiple leading vectors, in terms of Trello, Confluence and Jira Work Management, depending on the structure people are looking for and where they are coming from and what they already have. We see great traction for Jira Work Management in terms of usage in people who are heavily into the Jira role already. If you are into the Jira family, you have Jira Software, Jira Service Management. Itâs an entirely logical step for you to add Jira Work Management, and obviously, integrates with all the rest of our products very well. Thanks to the Jira platform and the Atlassian platform. Itâs very early days in that product evolution. We are sort of a year and a bit in, and we continue to work with customers. Itâs increasingly gratifying to see forms of standardization where people are moving off other project management vendors and collaboration vendors to standardize on Jira and Confluence and the Atlassian suite. And thatâs why you see us investing in two things. One is the platform story, things like Smartlink that I have mentioned beforehand, analytics, automation, being able to automate across our product set is a big part of what customers are turning to Atlassian for. And secondly, you mentioned Atlassian Together. For those who are new, again, Atlassian Together is a packaging offering, which allows our customers to choose to take Atlassian wall-to-wall for Work Management in exchange for getting a series of different products being Jira Wealth Management, Trello, Confluence and Atlassian Access, all in the one package. Itâs extremely early days for Atlassian Together, I would say. It is still in beta testing with our customers, but the reception so far has been has been really good, largely for all the customer reasons that we talked about earlier in terms of the platform and the product set. Hey, guys. Thanks for taking the question. So maybe just a two-parter. If we look into the trends around cloud revenue growth. Is there any way to get a little bit deeper in terms of the exposures for how many contextualize just the customers that are coming from the SMB side versus the enterprise side and maybe parse out where the trends got worse or stable in December and January? And then similarly, we picked up some anecdotes of server customers maybe wanting to wait a little bit more closer to the end of their service support date before migrating to either cloud or data center. So I would love to just get a sense of what you guys are seeing there versus a year ago or a quarter ago in terms of your assumptions. Great. Once again this is Cameron. Happy to dive into both of those. So, first and foremost, on the -- what did we see last quarter when it came down to SMB or smaller customer growth versus enterprise. As we have already stated, the primary headwind that we saw more pronounced in Q2 was user expansion within our smaller customers who are largely on monthly contracts or we are moving from monthly down to our free tier and that was definitely the new piece of information that we saw in Q2. On the other side, our enterprise side of our business remain exceedingly strong with migrations with cross-sell with Jira Service Management and Jira Align, as well as our addition upgrade standard-to-premium and premium-to-enterprise offerings continue to provide very stable growth within our enterprise customer base. Obviously, with more than 250,000 customers, we believe that having such a massive customer base, a mix of SMB and enterprise globally across all industries and geographies is a massive advantage long-term for our business. As those small businesses become big businesses or more importantly, see people going from small companies into big companies and bringing the preferred tools and standards with them and thatâs been core to the Atlassian strategy for some time. To answer your question on the server side of things, thatâs more good news. Like, as I already mentioned, this whole transition of server customers migrating to their data center or cloud is a multiyear journey, and obviously, the core focus there was to migrate customers to the cloud and we are largely in line with all of our goals that we have set for migrations ever since we started this journey a couple of years ago. However, when we did this, whenever you announce an end of life of a product, we know we are going to lose some customers through the transition, and the good news here is, over the last couple of years, we have seen an increasing number of customers move to data center and you see that in the numbers, but as well as many of customers staying on server probably for longer than we expected. Thatâs actually a good thing. I see that customers will continue to go -- until February 2024 before they are going to choose go into cloud or going to data center. But overall, it shows our ability to retain our customers, shows how sticky our products are and shows how mission-critical our applications are going forward. And as I mentioned, whether Jira customer chooses server to data center or data center or server to cloud, all that shows future investment within Atlassian and commitment to our products. And I feel increasingly confident in our ability to get those customers to the cloud over the long-term regardless. Thank you. Perfect. And maybe just small, small follow-up. And is it possible to -- is that percentage of SMB enterprise for cloud, is that 50-50, is it -- from a revenue basis, is it much more weighted towards SMB than enterprise. Any kind of quantification there? Yeah. We do not break out the split of SMB versus enterprise. As I mentioned before, the one uptick in headwinds we saw in Q2 was the SMB user expansion. Our enterprise business continues to remain strong. Yeah. I think -- well, I think, I will just take a question regarding developer headcount, because obviously, thereâs been large numbers of headcount cuts in tech. For the most part, you donât hear any discussion of it being better or worse for development engineering. But what are you seeing out there since where you came from is still on developer side? What are you seeing in terms of your selling into that user case of the development team? Is that getting impacted the same or disproportionately than others as people maybe slow down on new development projects I think thatâs what we are seeing? Yeah. We have taken -- so as I mentioned, back to the one primary headwind we have seen that was different in Q2, which is user expansion within our smaller customer base. When we look into that, thereâs no competitive differentiation, thereâs no competitive dynamic thatâs changed. So itâs not like people are choosing other options or turning to other products that we see that some new competitive offering. Itâs largely these customers slowing down their hiring, potentially trying to consolidate some of their licensing and the software that they over the last couple of years. But we believe long-term, technology is still a major driver of growth across many different companies and many different industries, and that will only continue to grow across all geographies. So we look across our entire customer base. We see itâs not just the tech or engineering-focused companies, but itâs in the companies in every industry, every geography have adopted technology and we see that why whenever we look at these trends that are happening, that happens broadly across all these different customer bases. So long-term, we believe, is there going to be more technology, more developers in the future that are going to use our products to get their work on and collaborate with the rest of the business? Absolutely and we are set up with our multiple offerings to take advantage of that growth. Okay. But no relative difference in the decele between serving teams for software developers versus for IT versus for work for enterprise for business, is that correct? Yeah. This is Scott, obviously, talking, Michael, on that one. Look, just a reminder, we always started early on serving just the developer in an organization, the person writing code. We have around helping those developers, collaborate with the rest of the organization. And so I believe that our latest number is something like a quarter of the users into software ops, developers writing code and the rest of it is product managers all the way through to designers and we -- a lot of our benefit we get exactly coordinating the work of the broader software and technology organizations through our ITSM offering that now go broader into the IT teams out there. And so whilst we sort of core of what we do is helping developers like the broader problem we solve is actually how people get work done across their organizations. And thatâs I think where we remain strong versus maybe point development products that are really just for developers. And the other part is echo Cameronâs is that, no one -- itâs still early in the days of last and other things of other companies, but I havenât heard that these developers, I am not getting other jobs elsewhere. What I am finding is those companies that struggled to hire developers previously are now able to pick up people where they couldnât before. And so I think that further proof points that development is not and software more broadly is not going anywhere at the long-term trend. And so, yeah, there certain bumps up and down, like, as we are seeing. I donât think we are in five developers sitting on an unemployment line for very long just because the long-term trend is more and more software. Perfect. Thank you, guys, for taking the question. I wanted to touch on JSM and the ITSM opportunity. You certainly talked about that a lot in the shareholder letter and from what we can pick up, thereâs a lot of customer partner excitement about the product. How do you -- how are the capabilities that you have developed with JSM compared to some of the larger incumbents that are in that market? And as you are increasingly selling JSM, how are you positioning it to larger enterprise customers that may already have an ITSM solution in place? Thanks, Arjun. Thatâs a great question. We built our ITSM solution in three areas that I remain the reason to our customers buy it. One is it is like a consumer-like offering out there and people will choose to use something else at the back end and install JSM the front end, because of its consumer-like offering. And so in some situations in very large organizations, we fight coexistence with existing solutions where we get put in at the front end to all systems there. I guess thatâs just sort of proof point thatâs a great advantage for us. The second is our time to value and that time to value means that we can target the Fortune 500 with our solutions, whereas many of our competitors taking enterprise target a much smaller subset, they are willing to pay for the financial services in the six-month to 12-month onboarding and all the stuff that goes along with that and so thatâs our second value prop. And the third value prop for us is that we bring IT and development closer together, and no one else can say that. And again, thatâs been the history of our long association with our developers work and deep integration with all of their tools. And so our approach to this market is a long-term one. We are not aiming to go take the largest customers in this IT market to start with, because if you did that, you end up with a check box feature delivery mechanism where you need to check every box in order to switch something out and thatâs not the product we want. We want to build a product that is loved by people long-term and serve the Fortune 500. And so, looking the largest of instances, we find a coexistence, where people want the things that we can bring that the incumbents canât, but they havenât got the bandwidth or the desire to break out some of the core systems that those large incumbents provide. In other cases, where you just donât operate in that space at all. But we are very happy with the small, mid market sales that we make and the coexistence in those large areas, and for us, itâs a long-term gain and we believe those three advantages will play out over time. I will just add a couple of other items just from our go-to-market side of the house, because obviously, we have espoused the benefits in share expansion for some time. But even the last month, we have taken advantage actually of like, listen, there is macroeconomic uncertainty. People are trying to save money. In Jira Service Management, we actually increased the entry level from three agents for free to 10 agents for free, which actually is for, like, if you think about it, a company of 200 people will largely have 10 agents at most. So we are helping really get many, many, many of our existing customers or new customers coming in the door to start using Jira Service Management in anger at no cost whatsoever. And of course, over time, we will continue to get them to upgrade the paid plans or move to premium versions of our products. So, once again, in this downturn, we are taking advantage to capture market share. And then on the larger side of the house, like, in -- while we absolutely go into, hey, how do we start at a team or in a department, where can we basically help companies be a little bit more nimble, a little bit more fast and not have to think about it ripping to replace the entire IT platform, thatâs been our primary strategy. However, there are many companies out there that are trying to save money, trying to consolidate spend and Jira Service Management is a massive savings compared to many of the alternatives in the industry and we give a great compelling offering for customers to move to. So we have seen other strategies across the Board pay off in the recent quarters. Thanks for taking the question. So data center continues to gain share as a percentage of your sales. Are you seeing stronger than expected migrations to data center instead of cloud at this point and what is driving the commentary for moderating data center growth in the second half? Thanks. Yeah. This is Cameron again. And yeah, data center is a fantastic offering. I just have to say that. Like, thereâs a reason people use data center, itâs provides the scale, mission criticality performance that many of our customers demand, especially in many of our largest enterprise customers. As I mentioned prior, this is all about a multiyear journey away from server and to cloud and data center, and we have been making cloud the primary destination for these customers and we have been seeing those migration rates to cloud, hitting very much in line with our expectations. However, many of the customers that potentially we might have seen say on server longer or potentially go to alternative solutions are choosing data centers. So we have seen data center continue to be an increasing space of demand for many of our server customers in the interim. But I also need to call out that the path from server to data center is not a dead end. We treat -- continue to see many people moving from data center to cloud. In fact, half of our migrated paid seats that go from on-premises come from data center customers to the cloud. So we see this as just a -- moving to data center is a great thing. The future investment in Atlassian, itâs more commitment to our products and absolutely sets us up for future cloud migrations in the years to come. And then, Ryan, to take the second part of your question. In terms of the guide, we continue to expect data center revenue growth to moderate in H2, thatâs primarily because we are lapping some of the event driven growth in the prior year. I would also highlight, though, our outlook is better than we expected three months ago, driven by the strong Q2 billings performance that we saw. And then, lastly, itâs always good to remind everyone that data center revenue growth can be volatile given the portion of upfront revenue recognition in DC sales. So, as you think about the DC business performance, keep that in mind, as well as some of the pricing changes that are being implemented this month. Thanks. I want to go back to Work Management at the last Investor Day, this was one of the three key pillars of growth for you going forward and not mentioned even once in your press release, which I found quite strange. Can you -- outside of Confluence, can you talk about the rest of the portfolio there, would it be fair to say that growth over there is perhaps underwhelming, that competitively you are not getting the win rates that you would like to see against, yes and no, the Mondays of the world [ph]. Help me understand why such an important area of investment growth is not mentioned even once in your press release? Yeah. I will take that, Ittai. I am not -- no, I wouldnât be curious at all. Look, I think, we are incredibly bullish on Work Management. So to your question there, I donât think so. Itâs -- I would say, itâs a different point in its life cycle as a market currently to where ITSM is, which is why us calling that out particularly in the press release. There are no favorite children at Atlassian donât worry. Atlas is doing really well, right? But itâs a very new product. We always say it takes two years, three years, four years, five years to build a great product and a franchise, and we are patient long-term investors towards doing that. Everything in Work Management is targeted towards the Fortune 500,000. So Atlas and Jira Work Management, both of which are the newest offerings in that space. Itâs early in their journey. I canât say that enough, but we are pretty bullish, both Scott and I have been around two decades now and seen plenty of 1.0 products and 1.1 products and 2.0 products and understand how product S codes of adoption work in our customer base and so we are working diligently on that and both the teams are working really hard there. Confluence continues to go from strength-to-strength. Itâs always been a shining light in the Atlassian portfolio and continues to be so. So it doesnât mean from the press release or anything else that we arenât there. Again, we continue to get analyst recommendations and plaudits in various different waves and charts and all the different bits and pieces there. And we continue to get great encouragement from our customers that we are the only Work Management vendor at scale and we are one of the largest scale wealth management voters out there that combines their technical and non-technical teams. This is increasingly a challenge for customers as they look across all sorts of different work that they are trying to manage. Just as Cameron and Scott were talking about, ITSM being close to the modern ways of operating DevOps and DevSecOps and everything else. Same with work management, how do you get your marketing and finance and business teams closer to your engineering and operations teams, thatâs a huge strength of ours in the area that we continue to do well from. Can I just come in there, if I -- just before we move on, because one thing we tried to do, we have got so much great news at Atlassian and one thing we try to do with our shareholder letters, we focus on one of our three markets at a time. And so last quarter, we focused entirely on Work Management, and this quarter, we chose another market. And so, hopefully, we donât continue to -- we are doing that. But what we really wanted to do is go deeper on one market at a time to help educate you our investors. And so, I have to say, I want to get that across to people, maybe next quarter this people will think if we provide something else and that was the intent behind it. And again, think like, for us the way the collaborative work highlighted were a strong performer in our press release and so forth. But our intent is to go deep once a quarter with one market. Itâs Fatima Boolani from Citi. Thatâs the first time I heard that. Thank you for taking my question. Either for Joe or Cameron, I wanted to ask a broader question about your pricing strategy. So we appreciate you have been very consistent and transparent with your pricing increases in the base as it relates the server offerings and related maintenance offerings, as well as data center and data center maintenance. But I am curious to get your perspective on what type of customer feedback you are getting clearly because we are kind of in a different state of the market environment and in the macro environment. So I wanted to assess if thereâs maybe potential fatigue from customers in terms of the discussions you are having on this front as you take prices up. And as a related matter, if you raise the floor on the pricing on these predecessors or form factors, relative to cloud, why is it that we are not necessarily seeing a more pronounced follow-through in cloud migration? Thank you. Yeah. This is Cameron. I am happy to talk about pricing strategy. It is a large portion of my day. So effectively, I think, you nailed one of the key points is consistency. Largely, we have been very consistent in the last few years in the size, quantum and timing of both our cloud price increases, as well as our server and data center price increases. And that actually is to our advantage. Many of our customers understand, they expect and they budget ahead of those pricing. You also realize from a macro pricing perspective, Atlassian, our overall strategy is still to be the value leader that we are, when you look to a potential alternatives that at any -- they are close to the feature comparison, we are a fraction of the price of those competitors. So we always maintain that from that perspective. I will be perfectly honest, going into this fiscal year and planning out our price increases, the cloud price increases in October and the server data center price increases in February that, I had my concerns, I have met with many of my customer -- my customer-facing teams, our renewal teams and so on to discuss how we were going to address potential customer feedback, and of course, how we are going to plan and address that. I am very happy to say that, actually the price increases that we have done recently, both in October and now, actually it had no material different feedback from our customers than we have seen in previous years. So I have to say that, thatâs a very big positive for us right now and once again shows the value that our products deliver. On your next piece is, well, hey, you are doing these price increases, you are doing larger price increases on your server and data center products to effectively more incentivize the customers to choose cloud and I have to say, actually, that is driving exactly what we have expected on our cloud migrations and thatâs why our cloud migrations are going -- driving that 10% growth that we have communicated over and again. However, whenever we do a price increase on, say, server or data center, we also see customers having the option to go, hey, you know what we are thinking about data center, now is a very, very good time. Letâs do that before that price increase goes fully effective and we will see that uptick as well. Thatâs really impossible to understand exactly those dynamics of whoâs going to choose cloud or data center through all of that. But in general, what we have seen overall is much more customers sticking with us, either choosing to renew server or move to data center or move to cloud than we originally expected when we started this journey a couple of years ago. So, overall, no major pushback on our pricing strategy and our pricing strategy is delivering exactly what we engineered it to do, which is to incentivize our customers to choose cloud. Thank you for taking my question today and all the details that you have been providing on all these other questions. Going to piece together a couple of comments that you have made so far and see number one, if I am understanding this and what the implications might be. Correct me if I am wrong, but it sounds like more of the headcount headwinds you have been seeing are really more on the non-technical side. I think you had a good case around developers are finding jobs easily and the strength in JSM and things like IT suggesting strength there. So correct me if I am wrong, that thatâs where more the headcount headwinds are on the more non-technical side? And then I am trying to square that with what I have considered to be a very understandable story for these non-technical people being a very natural and important part of delivering products. What are you seeing thatâs driving the weakness in those employees and how your customers are working? Are they changing how they work -- how they work and what confidence do you have that after this macro, they are going to go back to having the scale of teams that they might have had before on the non-technical side that will bring back the growth on that side of the business? Hey. Itâs Scott here. And I think what you are asking is, hey, thereâs a lot of tailwind behind software over the last couple of years. What does the future look like in those areas? And I get confidence around Atlassian for a whole bunch of ratings. One is that, software is a general category and going anywhere, like, itâs in every area, whether itâs cards or itâs delivery or the AI/ML and stuff like that, thatâs all going to affect everything like that we believe like all these innovations are going to require software developers. And so thereâs macro time, like, yeah, people rebalancing their software teams at the moment, but the long-term trend is strong, but like there can be more and more people there. Two is that because Atlassian helps connect the entire organization to get work done and we hope basically move more forward across the entire organization, we are not to holding to just the R&D headcount. And so as companies increase all the people involved with technical areas or non-technical areas, we are there to help them collaborate and so that helps me do well. Also, if you look at our penetration inside companies, our largest accounts are smallest accounts, like we still have large increases like we are very well penetrated in the organization. And so I get comfort that over time our seats per customer will go up and we are not any sort of point of saturation there. And lastly, if you look at the products, like, our product customer or products to see is still relatively low compared to the opportunity we have ahead of us. And so we have always tried to focus on not the things that do change but the things that donât change over the long-term, I know Jefferies just talked about at Amazon, thatâs something they focus on is -- focus on things on -- investments on areas that donât change. And teamwork and humans working together is a problem thatâs always going to exist over the long-term and thatâs where our investments have been. So I canât predict the next 18 months, what look like in the broader macro economy, but I woke up and I feel like very well placed for the long-term. Thanks for the question. This is Mark on for Adam. I kind of wonder how level that the TEAM was asking and I was wondering if you could expand upon the impact of migrating data center and server advantage pricing customers to list pricing in regards to how thatâs baked into the revenue margin guidance you just provided? Thank you. Well, I can speak. This is Cameron again. I will speak to the overall -- how we think about the pricing strategy broadly. The idea here right now, as you know, many of our server -- the server pricing that we have today, especially for higher tier customers, above 500 users on our 2,000 user 10,000 limited. Thereâs a significant price difference between server and data center or cloud. Today, if the customer chooses cloud over data center for those customers, cloud is a less expensive option. However, the bulk of our data center customers are sitting on pricing that is significantly less than our cloud list price today. And what you have seen over the last few years is us doing incremental price increases to effectively close that gap. All that pricing is available online. We expose all of it to our customers. None of it is hidden. All of our customers get the same price. And if you look to our historic price changes over the last few years, you can see that we are slowly closing that gap between legacy data center pricing and our cloud list price. So within the next few years, eventually all customers, at least ,from a pricing perspective, have the incentive to choose cloud regardless. As far as how much growth thatâs driving for our business, once again, that goal of 10% of revenue growth in the cloud is coming from these server or data center to cloud migrations. And then, Mark, this is Joe. The guidance -- the revenue guidance incorporates what Cam just said. We continue to assume that migrations will remain healthy. And then I would also say from a pricing impact on the model, just keep in mind, we do have ratable recognition on subscription which is over 80% of our revenue. So the timing on the renewals that happened throughout the year, you wonât see an impact when we go through those types of pricing changes. So we have also included that in the guidance as well. Yes. Thank you for taking the question. Just wanted to double click on some of the investments you are making around the enterprise strategy. Can you just give an update what you are doing there to drive traction, maybe speak to some of the partner consolidation thatâs occurred recently. And if thereâs anything you are doing differently there to drive further migration and maybe speak to some of the multiyear contracts that were called out most recently to exit this quarter? Thank you. Yeah. Hi, Ari. Let me take the first half of that and then I will leave Cameron do the second half on the multiyear contracts. From the point of view of what we are doing, we have been on a long and consistent journey, right? We continue to be long-term oriented and thoughtful about how we approach the enterprise space as one of our major transformation as a business over the last decade, you would argue. In terms of specifically what we are doing? Look, you have seen us continue to open performance and scale. So the scale offering we have continued to move up in the cloud. We now have 35,000 users in GA and 50,000 users is in EAP and you can bet that we have teams continuing to work on those sorts of aspects. At the same time, our performance for individual customers has massively improved at those life scales over time. So itâs not just the ability to handle user volume, it is about the performance that those customers get, especially in lower spec to desktop environments with other Internet connections as we continue to get more and more global and have customers and users all around the world. We continue to work on governance. We long believers that, if you look forward, you are going to have more governmental regulation in different countries, different geographies, different industry areas and that our platform and our infrastructure has to handle that. You saw that this quarter, we shipped a data residency in Germany. We continue in testing in other regions. We continue to do things like BaFin and financial services compliance in different areas of the world and we will continue to add more in those areas as we build them out over time. You can see all the details in the apps that we give over time. And the third part we are working on is continuing and extensibility in the cloud. The reason that, thatâs an enterprise concern is, because obviously, the larger our customers are the more they customize our software for themselves. Forge is a fantastic mechanism to customize our cloud offerings for themselves. Larger customers tend to have very bespoke things they want to integrate with various internal systems. The ability to do that have us run it for them, have us handle things like data residency and handle the server loads and everything for them is a huge benefit of the cloud and we see customers moving for reasons like that. It simplifies their offering is one of our goals with the cloud right. We do all the hard yards so they can just focus on their businesses. Cameron? Yeah. And in addition to all of the R&D investments we have made to better serve our enterprise customers, I am extremely happy and proud of what we consider our enterprise transformation on the go-to-market side of our business. We have invested heavily to get closer to our largest customers and help them through this strategic transformation to the cloud, while maintaining some of the most efficient sales and marketing spend that you see in the industry and thatâs the balancing act that we have had over the last couple of years. But do you think we have had much more enterprise account managers to take care of our customers. We invested in technical account managers and solution architects to have more strategic conversations about the road map with our products longer term. We have things like executive advisory boards and deep dives and CIO counsel. This has actually allowed us to have strategic relationships with our customers and think much more long-term about how our products will be used in the future in their businesses. You also mentioned you saw this in our channel with our partners that we have seen significant outside investment, as well as consolidation in our massive solution partner network. While we have over 700 solution partners, we see many of these customers or many of these partners starting to consolidate. I see this as a massive advantage for our customers as these companies provide more scale and more optionality for our customers and once again deliver more value, but also good for our ecosystem. Like any additional investment in our ecosystem will only drive higher, better outcomes for our business and for our customers. And lastly, on the multiyear piece, itâs simply the nature of larger, more strategic deals. If we are going to go into one of the largest banks in the world or a large pharmaceutical or telecommunications firms, we are having a conversation with the CIO about a transformation to the cloud or enabling IT service management or work manager for their organizations. They are going to want a longer term commitment and thatâs where you see these multiyear contracts increasing in the enterprise. Thank you. Thatâs all the questions we have time for today. I will now turn the call over to Scott for closing remarks. Thanks everyone for joining our call today. As always, we appreciate your thoughts or questions and your continued support. And thank you to all the Atlassian all over the world for your dedication and resiliency. We hope that you are able to join us next week, either in person in Berlin or virtually at our Agile and DevOps event, Unleash.
EarningCall_1052	Good afternoon, ladies and gentlemen. Welcome to the Sartorius and Sartorius Stedim Biotech Conference Call on the Preliminary Full Year 2022 Results. Today's conference is being recorded. At this time, I would now like to turn the conference over to Dr. Joachim Kreuzburg, CEO. Please, go ahead sir. Thank you very much. Happy New Year, everyone to our todayâs conference call on the preliminary results of the year 2022 for both Sartorius AG as well as Sartorius Stedim Biotech. Thank you for your interest. Together with, Rainer, our CFO, I will kick it off. We will first talk about the results of Sartorius Group and then later on, on those of Sartorius Stedim Biotech. Let me start with a brief overview on the most important results for 2022, it has been another successful year after two years of very dynamic growth. We have been able to grow both divisions double digit. Overall, we met the targets that we try to achieve even though the Corona business came in substantially lower than we thought at the beginning of the year, as I think everybody has recorded for 2022. Also underlying EBITDA is up substantially. Our margin is pretty close to the high three-year yield level. For 2023, this is a bit special now and I think some of you will have seen that already when looking at the respective guidance by other companies from the industry. We expect the low single digit sales growth overall mainly because of we are now seeing the tail of the corona effects. Excluding the COVID business, we are expecting high single digit top line growth. For the underlying EBITDA, we expect the margin to be around the same level, as in 2022. For 2025 and we said that since mid of last year, we have looked into our ambition, we fundamentally confirm those numbers in regards to all essentials, because we see all the underlying market fundamentals to be completely intact. However, because of the higher price levels that we are seeing following the higher inflation rates for 2022, and the one that we would expect for 2023 and beyond, we have shifted up our total sales revenue target to EUR 5.5 billion, we leave the margin target unchanged at 34% for the Group. I think it goes without saying that the uncertainties overall remain very high both from a political as well as economic sense of standpoint, I believe. And with that I hand over to Rainer Lehmann. Thanks Joachim. Also welcome from my side today's call as well as happy new year. As always, let's have a look at the figures. As Joachim mentioned, really another very successful year, revenues increased by 21% and reached EUR 4.175 billion. So that's actually we cracked another milestone here by breaking the EUR 4 billion mark, in constant currencies it was in a growth of 15%. Out of that two percentage points were contributed by acquisitions. And also this number includes a bit less than what we anticipated in COVID revenue, this one mounted at the end of the day to EUR 220 million in 2022. Order intake decreased as expected by 10%. So the normalization continued in the fourth quarter, as we anticipated, due to mainly of course, the lower COVID business, if we would exclude the cause related business, we would actually have a slightly positive growth on the order intake, which at the end amounted to EUR 4 billion. The underlying EBITDA grew by 20% to EUR 1.4 billion. So that's pretty much the margin as on the previous year level, reached 33.8%. So 0.3 percentage points lower than last year here, mainly attributed to the, yes, anticipated to catch up in our cost base that we talked about during the last quarters, as well as some slight FX related headwinds. If we look at the geographical distribution of the revenue, let's start from the left-hand side we see the Americas, fantastic growth 21.5%, almost EUR 1.54 billion. The Americas contributed here, both â it was both divisions to that success. In the EMEA region in the middle, we achieved a revenue increase of 9% to also EUR 1.5 billion. Let's keep here in mind that we really had tough comparables, the growth rates here in 2020, as well 2021 were fueled by the COVID related business. Let's also keep in mind actually that the business in Russia decreased significantly in 2022. Asia Pacific, also a nice development here, double digit 16.2% growth to a little bit over EUR 1 billion. Also both businesses performed well, and also against actually fair fight, quite high comps. If we have a look at the donut on the right-hand side donut chart, we see actually a little shift between the regions. If we look at, if we compared to 2021, EMEA has now 37% of the revenue share, that is down four percentage points. And those four percentage points were actually gained by the Americas that also now on 37%. Of course, let's keep in mind that also the strong dollar had an impact here. But nevertheless, it also reflects the better growth rates that we could achieve in the Americas. Asia Pacific contributed as previous year was 26%. I also want to point out here that in that region, the partial lockdown that that incurred over the last quarter in China really had no significant impact on our business and the growth in Asia Pacific. So let's have a deeper look into the divisions. On the next slide, we see Bioprocess Solutions, revenue increased 22% to EUR 3.3 billion, that's an increase of almost 16%, in constant currencies, here as well acquisitions contributed two percentage points, the COVID related business significantly down compared to previous year amounted now to around EUR 200 million. And the order intake on the left-hand side, we see as expected, down 10.4% to EUR 3.1 billion in constant currencies here, a reduction of 14%. Again, let's keep in mind, if we would exclude here, the corona related business, this would have been slightly positive. The underlying EBITDA margin was pretty much on previous year level, maybe a little bit, of course, impacted by the anticipated increase in the cost base that we talked about us throughout the last quarters, that now is pretty much in effect, and therefore is around 35.7%, in absolute numbers, almost EUR 1.2 billion, an increase of 20.5%. If we look at Laboratory Products & Services, and here we also have really very successful year, sales revenue increased in constant currencies by 11.5% to EUR 848 million here only, acquisitions contributed one percentage point. And we also pointed or many hit the COVID related business is around EUR 20 million, of course, significantly lower the impact of that, then on the Bioprocess Solutions Division. Order intake, up 7.5% by in constant currencies to EUR 885 million, really a very dynamic development may also mainly be driven by our biologic business which is performing very well over the last years. And also was the driver of the 2022 increase or growth for order intake as well as sales revenue. The margin record slightly increases to EUR 222 million, basically EBITDA margin of 26.2%. And that was actually despite also here, the anticipated increase of the cost base, but also some FX related headwinds that we have here. We then have a look at some key performance indicators on the next slide, we actually could not fully let's say translate the underlying EBITDA of EUR 1.4 billion to the same growth or growing by 20%, the operating cash flow that is mainly due to higher inventories to support our supply chains. So here, the cash flow related from interest of working capital is around roughly EUR 300 million, just to put some color to this. The financial result, as in the previous quarters, we mentioned is mainly driven and influenced by the valuation of BIA Separationâs earn-out liability, the underlying net profit increased therefore, by 18.4% to EUR 655 million, the reported net profit increased. And let's keep in mind here that of course, the valuation has a big impact on here by increased by 112% to EUR 678 million. Investing cash flow around EUR 1.1 billion. That actually is roughly EUR 536 million is attributed to acquisitions. Keep in mind the acquisition of ALS at the beginning of 2022, but also Novasep as well as then the biggest acquisition in 2022 of Albumedix in the third quarter, and the remainder of the EUR 1.1 billion. So the EUR 593 million is related to CapEx mainly to in our production facilities around the world so that ultimately, our CapEx ratio stayed a little bit below our guidance was 12.5%. Keep, as you know, we got it 14%. So we had that adjusted, yes, at the end came in was 12.5%. And the next slide, we see our usual development of our equity ratio, nice increase of 30% to 38%. So very healthy financials net debt increase, of course, driven not only by working capital, but mainly also by the acquisitions to almost EUR 2.4 billion, but the more relevant figures and net debt divided by underlying EBITDA at healthy 1.7. And on the right-hand side you can see, of course, after each acquisition, which we always try to deleverage in the following quarters. And we'll plan to do so as well going forward. And with that I would give back to Joachim. Thanks Rainer. So you already heard of a bit about acquisitions and CapEx. When Rainer talked about the cash flow key figures, I would like to highlight just briefly the CapEx side of things. But maybe before I do so I just want to remind everyone, as I mentioned before, we made three acquisitions also during 2022. While we take a little bit of broader perspective on the years 2020 through â22, it has been 10 businesses that we have been acquiring and integrating, and just saying that because we were doubling our sales revenue in that time period, or more than doubling our sales revenue, actually in that during the time period, and made quite a number of acquisitions. So, we have been quite busy also on the front of adding capacities globally. And you see this, on this chart, we invested a bit more than EUR 0.5 billion during 2022. The CapEx ratio was 12.5%, you have heard that before. And you can already see here that we are planning the same level for the year 2023. This is very much a global exercise or international exercise; we are expanding our capacities in all regions. And also for all product segments as we have a broad distributed growth. We are growing in both divisions and also within the divisions across all product portfolio. Just a few pictures also on those sites where we are running larger capacity expansion projects. Ann Arbor, Michigan is one example that is quite advanced, the same as GÃ¶ttingen where we will start casting membranes in these new buildings quite soon. In Yauco, we have expanded our manufacturing footprint substantially added cell culture media to it. Aubagne, France, where is the main location for our back manufacturing, we are expanding our footprint substantially. The same on a smaller scale is in Beijing, China, where we are expanding our local manufacturing of bags so bags made in China for China. And then in Songdo, South Korea, we are just about to start building a significant facility to serve the quite relevant South Korean market and also the market outside Korea in the Asian region. So now, I would like to shift the perspective on 2023. I already mentioned at the beginning, that we have to really take a look on two or take two perspectives on those numbers. One is what I would call the, yes, let's say the all-in growth rate that we are expecting which is low single digit for bioprocess and mid-single digit for the lab division and therefore also overall for the Group low single digit, but that includes a further significant decline that we expect for our COVID related business. If we exclude that then we are expecting both divisions in their parts of the group to grow high single digit for BPS, and accordingly also for the Group this includes one percentage points from acquisition. So I think it's the Albumedix acquisition as this took place rather late last year. We expect the underlying EBITDA margins for both divisions intergroup to come in around the level of 2022. What I would like to underline is, we believe that we should again perform at least on market level, we have been growing substantially stronger than the market throughout a long period now and particularly also during the period 2020 through â22. And again, therefore explicitly also during â22. I don't think that I have to read out all the comments made here, CapEx ratio I mentioned already, net debt underlying EBITDA I think have been touched upon Rainer before. So, therefore, what I would like to do before then shifting to Sartorius Stedim Biotech is briefly talk about the midterm ambition for 2025. Just as a reminder, we first published our perspectives for â25 at the beginning of 2019, I believe. At that time we were shooting for EUR 4 billion of sales revenue. In the meantime, we have shifted this to EUR 5 billion. And we also shifted our margin expectation quite a bit to 34%. And while we leave the margin expectation unchanged, we think that we have to adjust the top line guidance a bit upwards by approx. 10%. And this is because of inflationary effects. But before I come to that, I would like to draw your attention to the fact that we are currently running ahead of our midterm plan by roughly one year even a little bit more than one year. And what you can see on this chart is the yellow line that represents a growth curve from â19 through 225, even including now this upward shift a bit, which would lead to a compound annual growth rate of 20%, excluding this shift, it would be 18%. And this rate is already quite significantly higher than the historical compound annual growth rate of 13%, from â15 through to â19, which again, was higher than the market back then. But as you can see, for the period from â19, to â22, the compound annual growth rate has been 32%. And as we already were talking about since mid of 2020, this growth rate is not that, hasn't been backed by a respective fundamental increase of demand. But it was driven by this additional Corona demand, but also substantially by temporary effects of different ordering behavior of customers. And what we're seeing now is like the correction of this, and customers are now shifting back to normal, more normal stock levels. And that, of course, leads to also us now moving back towards the underlying growth path. And this, we wanted to share with you in this graphical representation on this chart. But again, nevertheless, we have shifted our ambition for 2025 by 10%, you see that this is the case also for both divisions, it's just rounding that we came up with 4.2 and 1.3 for the two divisions, which looks slightly different than 10%. But essentially, it's 10% for both divisions, and therefore for the group EUR 5.5 billion now is our top line target for â25. And as said before we leave the EBITDA margin target unchanged at 36% and 28%, respectively, and 34% for the Group. And I would like to talk briefly about the results of Sartorius Stedim Biotech Group. As always, they are very much in sync with the development of the Bioprocess Solution Division. So what you see here is that our sales revenue was up by 15%, including one in constant currencies, including two percentage points from inorganic growth order intake was down by a little bit less than 10%. Because of the effects that Rainer was explaining before EBITDA was up by about 18% then margin slightly below the previous year's level or, yes, partially of course and currency effects, but mostly because of the expected catch up of the costs. From a geographical standpoint also here, most comments have been made before, we should keep in mind of course, that EMEA which is posting the lowest growth rate for 2022 has been showing extremely high growth rates before because of the strong portion of European players in manufacturing COVID or corona vaccines. So overall, a healthy distribution of our geographical growth and also healthy distribution of our sales by region as you can see there. Regarding cash flow, again, this there was very much our high level of investments as well as the effects coming from working capital and then also those from the earn-out of BIA Separationâs and other effects that Rainer was talking about before already. CapEx ratio you see here has been 12.3% for Sartorius Stedim Biotech. Therefore, also the balance sheets and other financial KPIs look very healthy, I would say. Equity ratio almost 50%, net debt to underlying EBITDA still below 1.0 even though we are investing significantly, both in organic and inorganic growth. And then I don't want to walk you again through this conceptual chart on why we are run and how we are running around one year ahead of our midterm plan. But you can see that this particularly holds true for our Bioprocess Solutions division and therefore Sartorius Stedim Biotech. And of course, we also have shifted, therefore, our midterm ambition, but before we show that one, I briefly talked about the outlook for 2023, which is at low single digit all in as I described that before, but then excluding the COVID related business and the respective effects that we expect for â23. We expect mid to high single digit growth for Sartorius Stedim Biotech, CapEx also around two point 12.5%. And the further decline of our indebtedness ratio, provided that we would not make any further acquisitions. As always, we never try to factor those into the numbers. We update rather such forecast if we make any acquisitions, and underlying EBITDA margin, we expected the same level as for 2022. So and then finally coming back to our â25 ambition also here, we increase the top line ambition and target to EUR 4.4 billion, after EUR 4 billion before reflecting the higher price levels because of the inflation that we've seen in 2020. And that we anticipate going forward, we leave the profitability target unchanged at above 35% for Sartorius Stedim Biotech. Thank you so far for your attention. And now we are looking forward to your questions. Hi, Joachim. Hi, Rainer. Thanks for taking my questions. So firstly, taking from your peers recent statements ordered backlog and customer discussions, would it be fair to assume a stronger H2 â23 Compared to H1? And would you expect book-to-bill ratio to improve to historical levels by the second half? And secondly, also, given that you had some FX headwind in your full year 2022 EBITDA margin, what negative profitability factors will essentially replace this negative FX impact for you to guide 2023 margins in line with 2022? Is it simply a factor of increasing your co2 emission reduction expense from 50 to 100 basis points or other factors involved as well? Thank you. Thank you very much for your questions particularly the first one, I believe is an important one, and one that is discussed widely in the industry at the moment. So absolutely, as you assumed, we also expect as other players as well, different halves of the year 2023. We would expect H2 to be quite a bit stronger than H1 indeed, we expect and we, I think we were talking about that during our last two or three calls already, that we would expect the beginning of the year to still show quite some effects of normalization as we talked about, whereas around mid this year, we expect then to rather see orders and sales revenues to be more in sync again. And that this reduction of order of stock levels at some customers to also have come to an end. It's very difficult to speak very precise at this moment. I think it's too early to be more precise than that. But from our today's perspective, we definitely would expect H2 to be stronger than H1 Indeed. And for the FX effects, I hand over to Rainer. Yes, so regarding the nature of our FX effects are, of course, a positive one is the strengthened dollar that we've seen in 2022. But of course, that, unfortunately, is being compensated by the hedging. Hedging, hedges that we do. And here again, the dollar is the most relevant one for us. We're of course, we hedged 12 to 18 months ahead. So this is actually rolling forward. Therefore, in 2022, the positive impact of the general P&L effect has been diluted or actually even completely compensated by those negative realization of hedges. Going forward, and it really depends, we're down pretty much to parity in around Q3, also, beginning of Q4, now we are back a little bit to the euro gain a little bit of strength. So we still will see a little bit of FX headwind, most likely at the beginning, but that should then bleed out hopefully over the end of the year. Thank you. That's very clear. And sorry, just to squeeze one more in there. So that 100-basis point cost that you're assuming for your CO2 emission reduction program, is that going to be relevant after 2025? Or should we not consider it as such? Yes, we expect that to continue playing a role. We, at this point believe that the -- those costs for example, energy with a lower co2 footprint or transportation services with a lower co2 footprint, et cetera to rather be more expensive than whatever more traditional sources and suppliers. That probably will change at some time. But I don't think that this will be already the case after 2025. So they will, we believe continued playing a role. Thank you. Two for me, please. The first just to follow up, Joachim, do think that the BPS book- to-bill ratio has dropped in 4Q of â22? Or do you think it's potentially got further to fall as we get customer order normalization in the first half of this year? And then secondly, a question about price trends. On the 3Q call, you alluded to the fact that you anticipated taking another substantial chunk of price at the beginning of â23. Could you let us know what's happened in terms of pricing for LPS and BPS going into this year and what that means the underlying run rate is likely to be for the full year. Yes, sure. So to be more precise than we have been so far for b2b. So book to bill ratio is honestly also quite difficult on a quarterly basis as this is quite a, I mean, to our standards, a rather short period of time. So what we believe and we said that already, I think mid of last year, is that we would expect the beginning of 2023 to also rather show book-to-bill ratios below one. Again, quite difficult to be more precise. I think in our perspective, most important message is that all the market fundamentals, we really consider to be fully intact, be it the let's say the fundamental demand for drugs, but then and so therapeutics, vaccines, et cetera. And then also for the respective technologies to develop and produce those products, but also in regards to the pipeline of innovations, both of the developers and manufacturers of medical products and pharmaceuticals in particular, but also in regards to their need for innovative technologies for such, yes, new modalities partially. So that's the key thing, we believe. And we believe that even though of course we fully understand the interest in as precise as possible predictions on some more detailed trends, we believe that those are not really important for any fundamental setup. So long story short book- to-bill, we expect to be below one, maybe for the first two quarters this year. But it's difficult to be more precise. Price trends. We, indeed, shared with you before that at the beginning of 2023, we would introduce another adjustment of the price levels in sync with the inflation, I think what one can say is that the inflation rates have been going down already a little bit. And the perspectives seem to be also a bit more optimistic in that regard going forward, the level of price adjustments that we are introducing now is reflecting that. So we are rather introducing mid-single digit price increases, but the guardrail for us anyhow, is to balance the effects that we see on our cost side coming from price effects there are on the -- on our sales prices. So and there we are quite optimistic that this should be the case. And we factored that into our guidance for 2023 accordingly. Oh, yes, actually, itâs actually Oliver Reinberg from Kepler Cheuvreux. Thanks for taking my question. And the first one is on market share. And you reference data -- different dynamics, you were able to deliver one other didn't have any kind of capacity. But can you just talk about to what extent that is clearly a headwind from certain accounts excluding COVID. And on the other side of the equation, obviously you were able to get a foot into the door with some kind of new clients where you're probably may gain going forward, so can you just talk about the dynamic of these two factors? And second question then on LPS, and if I look at your guide for 2023, it points to mid-single digit growth, I guess, when we consider the dynamic in bio analytics, as it's probably lone drive for more than 7.5% growth in that division. So is it the right way to think about that you are expecting negative growth outside [inaudible]. And the third question also on LPS, and obviously mid-single digit growth for 2023. But in order to get to EUR 1.3 billion guide that requires more than 20% sales growth in â24 and â25. So can you just share with us your thoughts in terms of the split of this growth between organic and M&A? Thanks so much. Yes, let me answer questions three and four. And maybe then you can repeat your first two questions, please. Because on market share, because it was hard to understand them here the line isn't that good, unfortunately. So on LPS 2023 and our old guidance, therefore, topline development. So we are not planning for negative growth for our what we call LPS essentials business, the fact that we are not more aggressive in regard so growth targets reflect the fact that we have been seeing quite a high level of demand and therefore also growth in that division. Again, also we were growing above market, but overall the market was rather healthier during the last two years. And I guess you are partially also discussing these. The question of in how far the more difficult funding environment for early stage, biotech firms, for example, would have an impact on growth. So we are not that exposed to customers that are depending on funding. However, we would say that the overall, yes, investment mood in the, also in the lab domain is a little bit more muted than it has been probably before. So therefore we believe that 2023 will be showing a lower market growth than the years before and our growth expectation here is mirroring that. So it's not that we are particularly having a negative view on our LPS essentials business. And on â25, you are right, we are including some assumptions on inorganic growth, this portion of inorganic growth will may be a little bit larger portions, not necessarily the absolute numbers, the portion will be possibly a little bit larger for LPS and represented in the more significant double-digit percentage of the overall top line growth that absolutely correct. By the way, also in line with what we have said, even back in 2019, when we were defining the target the first time for â25. At that time, it was EUR 1 billion for LPS, but even then, we said, well, inorganic growth contribution for LPS might be relatively higher than for BPS. But then of course, let's see, it all depends then also on the size of targets, the timing, et cetera, whether that then materializes exactly in that way. But yes, our model is built like that. And then again, please, could you repeat your question around market share? Yes, of course, Joachim, sorry for the line quality, I hope you continue now. It's just about the dynamics and BPS. And so obviously, during the last two years, you've been able to deliver capacity compliance, we're competitive, didn't have any kind of leeway. So now the entire industry is of ramping up capacity. So in these accounts, would we expect any kind of headwinds in terms of market share? And I guess, in other clients where you did not have a foot in the door, you now enter this account and may probably well, I'm just wondering if you can talk about these kinds of dynamics. And which are one of this is more relevant. Or another way of asking this is obviously, do you believe from here onward, do you believe you can continue to gain market share? Yes, okay. Thank you very much. Now it was clear. So yes, absolutely correct. What you were saying during the earlier phases of the pandemic, I think we, our delivery ability was above average. And that's then resulted in exactly the effect that you were summarizing, we were gaining business over proportionately also from customers that we were looking for a second or third source in some areas. There is no one answer that fits all cases, yes, there are different behaviors by customers, by and large, we would say we would consider quite a significant chunk of these market share gains that come from that very effect. And it's not the only effect where we are gaining market share to be sustainable, we don't think that everything will just bounce back. That's not what we are seeing. And as it is not the only effect for our market share gains, we also believe that we should be able to continue gaining market shares. There are a couple of main drivers for this, and also the drivers that have been playing a role before the pandemic. And those have been one clearly that our presence and relevance also in the US is a completely different one than 10 years or 20 years ago. And that means that the portion of new business that we are winning is much larger than it has been back then. But of course, the overall business always reflects to a good portion as so much of the sales revenue is recurring that the overall business always reflects a good portion of the past. So that's one driver and the other driver is of course the, yes, let's say the bandwidth and again relevance of our product portfolio in quite a number of areas our product portfolio has been strengthened substantially when focusing on BPS. And the effects that you were mentioning before is a -- has been a BPS effect. I will just mention that we have strengthened our portfolio in downstream processing substantially in regards to classical chromatography, but also intensify chromatography, for instance, and then we have built quite a comprehensive portfolio of what we call critical raw materials/reagents media for particularly new therapies. And that pays off, yes, we are winning a substantial chunk of business in that market segment, or in those applications and we expect that to continue. Oh, thank you very much. Two questions, please. One just to follow up on the market shares, and customers have gone to deal specking some processes. Do you expect it to reverse? And those process going back to single specking? Or do you think that you're specking is now there to stay? And we shouldn't worry about who gets kicked off projects over time? And a second question just on the inventories in to channels, is there a degree of expires for those that matter? Is that a variable that could help reducing inventories as 2023 progresses and inventories just expires because the shelf life is over? Thank you. Yes, thank you very much. Really relevant and interesting questions. Addressing quite some detail mechanics of the market indeed. So we don't see that customers who have gone through the effort of establishing a dual or a second source would go back to a single source typically, so that we wouldn't see that doesn't mean that both sources are used to the same level. Again, there is not one answer, probably to the question in that regard, or in a quantitative manner. But qualitatively, one can say that nobody would really go back to a single source effectively. On inventories and limited shelf life. Yes, you're absolutely right. Products, the products we are talking about here and when we are talking about vendors, indeed, we are talking about consumables, single use products, those are sterilized before use, and they are ready to use at customer. So they have been sterilized. That is one reason not the only one but one reason for limited shelf life. But we wouldn't expect the limited shelf life to play a major role for at which point in time, the inventory levels at customers are back to their desired levels. We, again, it's relevant aspect per se. But we don't think that this would play a major quantitative role. Hi, thanks for taking my question. Joachim, way back in the end of â21 you highlighted I think that you thought five percentage points of growth in â21. And I think an additional five percentage points of growth in â20 had come from maybe stocking up at customers, which could equate to a couple of 100 million of destocking. Is that what you're thinking about in terms of the total level of destocking through 2023? And also just a clarification, a lot of your peers are sort of suggesting that the destocking would only be coming from customers involved in COVID and other areas? Is it that COVID type customer that you're seeing that destocking. Is that way you're seeing it? And then second question. Just I mean, sort of related, and I think you might have touched on it. But the order backlog that you have based on the delivery dates, you see, is that coming out in Q1 and Q2 or is some of that backlog deliveries in the second half as well? And then final question, please. Just thinking about the M&A priorities in â23. Obviously, you mentioned 10 deals, they've been I suppose some of them are big, some of them small, where are you sitting in terms of deal size at the moment and areas like mRNA, et cetera. Thanks very much. Yes, I think thanks for the questions. So, we think that maybe the best number to use to estimate the exceeding stock levels at customers is to take a look on the book-to-bill ratios that we have seen during â20 and â21. And I'm saying that absolutely being aware of the fact and also with wanting to ask everybody to take this always with a grain of salt, that the more you take a, let's say, a more narrow view on book-to-bill ratios like on a quarterly basis or so, I would not recommend to take those numbers for being too relevant, but on a longer time horizon, they make quite some sense. And for â20 and â21, the book-to-bill ratios have been approx. 1.25-1.28, whereas our usual level has been around 1.08, somewhere around that figure. So, we had two years, where the -- where we had 15 to 20 percentage points, higher order level than we usually would have had. Now, if we take that, and then deduct approximately EUR 500 million, for example, of COVID business in â21, and then the EUR 220 in â22, a bit already before in 2020, then you get a feeling for the exceeding orders that have been not directly related to COVID. business. So, and therefore, I would say, if you do the math, you come up with a higher three digit, million euros numbers of orders, that are rather representing exceeding stock levels. Has it that being just companies that have been involved in manufacturing, Corona vaccines? No, but clearly, they have played a role here, clearly. So some of those have been particularly been exposed to the need for ensuring their supply chains. And they've been particularly keen to do everything that was necessary to maintain that. So, therefore, I would say, we wouldnât define the group of customers that have acted like that, as narrowly as maybe some others have experienced that. But clearly, those customers have played a particular role. And on M&A in â23, I mean, I guess you understand that this is a question that I can almost not answer. What I can say is that we continue to be interested in adjacent additions to our portfolio, complementary additions. We believe that there are a number of highly interesting companies out there, maybe some won't be for sale, maybe some others might be open. What one can say is, it's also a very competitive landscape out there. So one thing is what we find interesting, the other thing is what might be then achievable and executable. So let's see. But clearly, we, I think, have a clear focus. We have a decent track record; we have reasonable financing power. So let's see what we will be able to achieve. Hey. Thank you for taking my questions. And to circling back on the pricing impact and you mentioned in the middle last â22 you had a high single digit price increase and then you had even you highlighted a mid-single digit price increase for start of this year. So can you just let us know what the pricing impact is on average throughout 2023, across BPS and LPS respectively. And then as we think about modeling in the BPS division with the 13% CAGR that you highlighted before as being sort of the historical CAGR above market growth, so would that be the best place to start and then making our adjustments for price and COVID and destocking. Then on investment in intensity, you mentioned again that said CapEx is around about 12.5% of sales there abouts. Can you remind us how this should trend for the coming years? And where normalized level would be? And then as we think about the projects, you're investing in, you highlighted some on the slide, but where are the key areas that you are investing in across the sort of five portfolio areas that you mentioned in BPS and similarly in biometics as well. So which areas you are benefiting most from your investments? And finally, on the order book, because, again, similar question as other quarters, have you seen any cancellations outside of normal course of business? Or outside of COVID orders? Thank you. Yes, thank you very much. So on price increases, I think you're very well aware of the fact that we have to consider here before I mentioned the number that we had a price increase that was reflecting the substantially higher inflation rates around the mid of last year only. And then, of course, until this hits the sales revenue, it still takes some time, because you always have quite some order book that you're executing first, where orders have been put in at the previous price levels. So therefore, we would consider it there's not much difference between the two divisions, the effective price effect above the usual level of being lower single digit, because you have timing and so on and so forth. So, therefore, that was definitely, yes, as I said, a low single digit number. And for the year 2023 and I guess I said that before, we are introducing a pricing, round and price adjustment round, that is a bit lower than the one that we have adjusting, I think we have introduced -- been introducing last year. But of course, in turn, it will become effective for most of this year. So maybe the effect, then, including this time shift, again, will lead to a lower single digit effect above the 2022 price level, at the end of the year. And that will mean that overall, the pricing effect above the usual inflation rates will be in total, when they have been fully become fully effective, will be around 10%. And that's exactly mirrored in our â25 ambition, these 10%, they have become fully effective are mirrored in our â25 ambition. And therefore, I'm not 100% sure whether we can help you to detail out your model here in this call, maybe there should be a separate call with our IR team later. But because by â25, and also towards the end of this year, we expect that all those temporary effects to have to come, to have fully phased out by then, be it stock levels and so on and so forth. So but again, maybe that's a separate call. On CapEx, the 12.5% as we mentioned in the presentation. And you are asking for specific areas that we are focusing on. Well, I think as I said, we are very satisfied with the fact that we are growing pretty much across all product portfolio. And therefore, we are very much taken care of making sure that we remain having a high delivery ability across our portfolio to the benefit of our customers and that means that we are indeed expanding our capacities in and let me start with bio processing in separation technologies. Now I could go into more detail and say filtration and both and purification and indeed we are investing in both areas. We are investing into our fluid management technology capacities. We are investing into our cell culture media capacities including reagents to cell culture media and in the LPS division we are particularly of course investing into the fast-growing area of bio analytical instruments, respectively, the capacities that we have here. So the latter would be particularly the facility in Ann Arbor whereas before cell culture media one to highlight would be Yauco. But there's also one in Germany that we are expanding. Then when it comes to the food management domain, the first one to mention would be Aubagne in France, as I said for China, also Beijing, and then on separation technology I would particularly mention the one in GÃ¶ttingen, but also the one in the Yauco again. So it's really across the board. And then on your last question, order cancellations. Yes, I think as everyone else in the industry, we have also seen some at the lower double digit million-euro range, and that particularly in the fourth quarter, which as explained before, came in even a little bit lower than we thought as the vaccine manufacturing has been further been in decline across the board. Thanks for your time, congratulations on the quarter, Joachim. The question I have is, are you seeing a heightened activity in mRNA in cell therapy, and antibody drug conjugate work? And if so, are you better positioned to capitalize off of those trends? Yes, so I think maybe the answers would be a bit different when discussing the different modalities in more detail. But in general, I think and I guess that's -- that wouldn't surprise you. We are always taking a little bit longer, yes, perspective on longer time periods and one can clearly say that we are living in a different, completely different phase in the biopharmaceutical industry than 10 years ago is maybe too simple, but even five years ago, back then, it was just monoclonal antibodies you could say and of course they are still dominating the market. They are playing the most significant role and they are still growing. So it's very important to still have a relevant and also constantly a portfolio where innovation plays a role. Let's think of intensified manufacturing for instance, which is I think an interesting direction in manufacturing monoclonal antibody. So but you are asking for the new modalities and here we are seeing a lot of activities, of course, a lot of investments into new mRNA therapeutics also that has been kicked off since 2020. And we have seen also a lot of activities and do see that still in cell and gene therapies. Of course, at the beginning when such markets are young, when only few products have made it to the market volatilities are extremely high. And therefore, an even in the maps market, we're seeing quite significant volatilities overall in demand when you think of the effect that has come from biosimilars way. Yes, so we are talking about a market where I would say, again, it's probably not recommendable to take too short term oriented look on things. And therefore, we wouldn't say, well, maybe it has been a little bit less demand for technologies in the cell and gene therapy domain during the last whatever, 12 months or so, because that can have it very often just is driven by one or two drugs that have made it to the market only. So it's early stage, though, in this market. But we believe it's a highly attractive, increasingly relevant market, it's a market for which we are offering relevant technologies. And where we have a very close look on and where our sales revenues have been growing quite a bit over the last couple of years. Thank you. And then last, should COVID related business really be more in the latter half of 2023? Pretty slow in the beginning? Yes. That is, I mean, I tend to say it's my first pandemic. So therefore, it's, let's see what exactly will happen. But we tend to say, well, there have been a large part of the population that has been getting vaccinated three times during 2021. Whereas a smaller part of the population has been vaccinated just once, during â22. And a very significant part of the population now already has been going through an infection on top of their vaccination status. So therefore, I would say the overall level of immunity in the population is completely different than it has been two years ago. And therefore, I wouldn't expect the, yes, let's say willingness, or the demand for such vaccinations to pick up again, I don't expect that. Of course, all this is very much depending on okay, will there be another variant that is more dangerous, so to say, but if that doesn't happen, we would rather stick to our view that we already applied more than a year ago when we said we expect sooner or later the corona vaccine business to rather become a very a rather small one. And part of that might become even part of the what we call flu vaccine business today. So that the net effect will be really rather small, and not really too relevant to talk about. Thanks very much. And thank you for sharing that the order intake would have been slightly positive if you execute COVID in â22. Could you by any chance also, tell us what the order intake would have been if you exclude COVID and exclude the destocking that you witnessed in 2022? Just trying to get a feel for the very true underlying trends in â22? And then my second question is whether there's anything that stands out when thinking about growth in China in 2023. Thank you. So on the -- so the first question, I'm sorry, that really would become a little bit too granular for the public communication here. But what I can say is because as you are asking for order intake, there hasn't been, as you would expect, as you know, the demand, or the manufacturing of vaccine has been slowing down substantially during this year, and there have been a lot of orders been placed before 2022. So you can imagine there hasn't been much order intake for that during â22 and for stocking. Maybe as a reminder, we have seen the stocking playing a role in our order intake, particularly in the five quarters, Q3 2020 through to Q3, â21. So â22, again, hasn't been seeing much of that, if at all, I would say pretty much nothing on the order level, and you were asking for orders. So I hope that helps, even though we wouldn't make an explicit calculation for that. So, and on China, and I guess you ask for China â23. So, as maybe for the entire business for different reasons. We expect growth in China to be maybe a bit slower at the beginning of the year. I think it's very obvious that maybe first the wave of Corona infections has to has to come down again, in China, I think as it has been a quite intense one, obviously or still is an intense one there on the positive side hopes that we will see the tail of that wave already during Q1, but there should be and will be an impact in Q1. Overall, we are absolutely not pessimistic for China for â23. We expect 23 to be a decent year. Again, we usually are seeing healthy double digit growth rates in China, that is what we are expecting for â23 again, as well, but again, not in a linear manner. Yes, hello. Hi, good afternoon, everyone. Follow up on many points. And so you talk about China. But I think it's very much of interest for why everybody to know, what sort of size in terms of business we can achieve in China with ramp up in terms of manufacturing. So if you can give us any idea or any comparison in terms of business, for any country would be very much interesting. Other question regarding the business development at BPS. So when we consider your guidance for this year for â23, exclusively mid to high single digit, I was very much interested in knowing what all your underlying assumption, let's say on the client category, meaning that what does that mean for your let's say, traditional long-term contract versus the one off or the short term you may have? Due to the research, due to the biotech, due to any specificity on the cell and gene? So can we have just a flavor of your assumption? Are you still having a number for the small category one off time? Or you've already plugged everything into this? I'd say continue on with long term contracts. Many thanks. Yes, sure. So on China, we are running currently around 11% of all global business that we make in China overall for the Sartorius Group. And we expect that ratio to slowly but steadily increase, I mean, slowly, simply because saturation doesn't move that quickly. But we usually are growing a bit stronger in China than globally. Mostly because simply the market is growing very strongly. Now, of course, one could say, well, in how far will that probably change in the course of global economic tensions, I think that's pretty much impossible to factor in a decent way. So far, we do not see any significant limitations to doing business in China, we also don't see US based companies to changing their ambitious approach towards making business in China. So therefore, consider that maybe to be a disclaimer, so around 11%, at the moment, and then that should further grow a bit, maybe to again confirm, we are not manufacturing products in China for the rest of the world with one smaller exception, where we are also making sure that we are narrowing that at other places. We never shifted manufacturing towards China. So and therefore, whenever we have built up manufacturing China, and that holds true for more than two decades now already, this was China for China. And that is what we are still doing. But of course, we are still important, quite a lot into China. And even before the more apparent economic tensions that we're seeing now. We were working based on the assumption that sooner or later, also, in our industry, policymakers would ask for a higher local content. So we believe that over time, we have to make sure that we are maybe producing even more in China for China than we are doing today, because our scope of what we're manufacturing there is a bit limited. But again, no limitation for us to making business there currently. I guess you were asking for quite a high level of granularity regarding our BPS growth assumption. And I'm really sorry, but that level of detail, we for sure cannot share publicly, in principle, and I think I said that before when you accept now for single quarters and other short periods of time and take a little bit of broader look then we expect the market segment of new modalities to rather grow faster than the one for monoclonal antibodies. And therefore, also our business that serves those different market segments should grow a bit faster. But and maybe then conceptually, what I can say when we are building such or when we are building our budget, which is the basis for our guidance, then, of course, we are taking quite a detailed look into those different market segments. But, yes, again, it's, I think you understand that we cannot share that publicly. Hi, thanks for the presentation and some excellent good results. I have three please. First of all, in CapEx last year, early in the year you had a -- for 40% CapEx. You ended the year with 13% and 12.5% and -- outlook, so I was wondering each and one of the three acquisitions you did throughout â22. Did you submit for support and -- as well position -- that was coming to an end of the vaccine demand. Secondly, in biosimilars, how do you see your competitive position there? Do you think that the market share you gain throughout the pandemic can also utilize, and gaining more market share in biosimilars business? Then how do you see your positioning there? And lastly, the -- business in did not -- in your outlook for 2023 mid to high six quarter growth versus high single digit COVID growth in Sartorius. So maybe if you could elaborate on that -- business and how we should see the impact also going forward? So I have to say the line was incredibly bad. I donât know whether anybody else in the call got more than 10% of your question but we didnât. I have to say it's extremely difficult to answer that we think we heard something like why our guidance excluded COVID business is a bit different between BPS and SSB. I thought I heard the word bioanalytics. But don't quote whether there was a question around that. I really have to admit it. The only one that I can answer is that the reason why we say mid to high single digit for SSB in comparison to high single digit both excluding COVID for BPS is it's basically, it's a very minor difference, of course, as you can imagine, but yet, it's a slight difference. And the reason is that the SSB Group is supplying some products to the LPS division of Sartorius AG. And mainly we're talking about OEM membranes, membranes that have been, or are used in the diagnostic test kits in various applications. And one of those has been and still is, of course, for example, food tests, but also Corona tests. And that has been the reason as this played a role, I will let's play a role into 2023. This dilutes a bit to grow. But maybe you can repeat. And I can only hope that the line is a little bit better. Maybe you can repeat. May ask, speaking slowly repeat one or the other of your further questions. Okay, I hope you can hear me better now. The first question you answered was perfectly the right question. So I just wanted to ask about CapEx. Earlier in 2022, you have guided for 14% CapEx. Now it's 12.5% actual â22 and â23 guidance. So I was wondering if one of the three acquisitions you made, removed or reduced the need on CapEx on that side. And the last one was on your positioning in biosimilars. Now that COVID vaccine demand is going to be what it looks like, it's going to be less and biosimilars demand probably more so, how they see your positioning there. Yes, thank you very much for repeating the questions, I think, now it was much better. So, CapEx is a bit higher, partially because we are expanding capacities also at sites that we have acquired, like we are expanding or our capacities at cell genic for instance, we will expand our capacities or are started basically to expand our capacities at cell and then going forward is not yet part of that. Expanding our capacities in Albumedix, so those acquisitions would not dilute our CapEx overall, the reason why it has been a little bit lower than we initially thought in 2022 has basically our timing effects. It's, but we didn't stop or whatever any of our activities there. We were rather taking a mindful look on when exactly we would need certain capacities. Because we need them mid-term guidance and mid-term demands unchanged. But now as we really, as soon as we saw that the expected normalization really kicked in, we looked where we could relax our timelines a little bit. So that was basically the background there. And on biosimilars absolutely right, our biosimilars are a driver of or a component of our growth. Overall, we would say also an area where we rather have been gaining market share or through which we have been gaining market share as we typically have a larger share in the manufacturing of biosimilars than in some of the original products. I think it's maybe less of a dynamic driver than it has been. That always depends a little bit on the number of products or patent expirations. But, yes, overall it's a relevant part of the market and one where I think we would play a decent role. Hi, there. And thanks for taking my questions. In the past, you've spoken about some of your customers are being able to get insight into the inventory levels at some of your customers. Where you have that insight? Can you see how much inventory they have left till they get back to the current normalized levels? And secondly, sorry thatâs on BPS, and again on in terms of supply coming on stream in BPS is obviously lots coming on in the next 12 to 24 months. I am just trying to understand if you, where you see utilization at these plants, and whether it can stay as high as it was in 2022, this year, and then next year, and what that impact that might have on kind of margins, you have to say transcend utilization levels as these new expansion projects come on stream. Thank you. Yes, thank you very much for these two questions. So indeed, exactly, as you said that insight into inventory levels is in general limited, but of course, it's different from customer to customers. And at some we have some more information, some more detailed insight and those and this insight that we have very much back the view that we have been expressing before here in this call, when we said that we probably would expect the first two quarters to be quite impacted by the rundown of the high inventory levels of customers, whereas maybe in the second half of the year, we should be seeing them in more than typical pattern there. So yes, again, that's, where we have more insight, we would project, yes, these timelines roughly. On the capacities that have become or will become online in this space. I think I guess what you are indicating here is that maybe the capacity utilization will be not that high at the beginning. That's right. For us, as a supplier into such processes, that's not necessarily a big topic, what we probably will see indeed that other than we have been seeing during the last few quarters that as you would expect that the demand for systems and instruments et cetera has been rather high because those are not subject to inventory or stocking that we might see maybe a little bit more, yes, let's say kind of uniform demand for both systems and consumers. I'm talking order intake, orders, right, for sales revenue, then everything is a little bit more flattened out anyway. So maybe that is what I would expect. But in general, I wouldn't say that we see a particular unusual situation in the industry. You will always have certain fluctuations of capacity utilizations and then very often capacity utilization are high, a lot of investments are started and then of course logically this reduces the average capacity utilization significantly and then you will see less in new capacities being triggered. So I would see as quiet in a normal cycle here and would not have like any additional caveats to our expectations here. Thank you very much and, Joachim, thanks for your patience with the follow on. It's just a quick question about client inventory at COVID manufacturers. And I'm just curious if I ordered a great deal of Sartorius inventory for mRNA manufacture. And subsequently, I realized I didn't need it. But I was a buyer manufacturer who did make many other things that you Sartorius products would you entertain it if I came to you and said, would you have it back? And I will swap it for stuff that I need for everything else? Or that inventory sits with the customer? And there is nothing that you will do about it Yes, thanks for that question. I think it's a question that quite logically comes to one's mind. And I know that, that there have been some comments made by other players in the industry, the quarters before that somehow, I think left the impression that this was quite a usual whatever behavior and kind of negotiation or so. But I wouldn't see that very much. And the reason is the following, a very significant portion of vaccine manufacturing have been made by CD, it was CMOS. And there are, for those products that are standard products. They can typically use them also, indeed, in other processes. I think that was a comment that was made before, as I just said, by other players, that we would also see where the products are custom made for that very process. There is no point that we could take them back. So both ways, it's rather not a scenario where we are taking back products. Yes, once again, thanks everyone, for participating in this call and your continued interest in Sartorius and Sartorius Stedim Biotech. We appreciate that a lot. I think I just close the call by saying that we are looking forward to be in touch when we will publish our Q1 figures in roughly 12 or 13 weeks from now. Take care. All the very best for everyone. Bye-bye. Ladies and gentlemen, the conference is now concluded. And you may disconnect your telephone. Thank you very much for joining. And have a pleasant evening. Goodbye.
EarningCall_1053	Good morning, and welcome to Blue Foundry Bancorp's Fourth Quarter 2022 Earnings Call. My name is Graham, and I will be your conference operator today. Comments made during today's call may include forward-looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Blue Foundry encourage all participant to refer to the full disclaimer contained in this morning's earnings release, which has been posted to the Investor Relations page on bluefoundrybank.com. During the call, management will refer to non-GAAP measure, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. As a reminder, this event is being recorded. Your line will be muted for the duration of the call. After the speakers' remarks, there will be a question-and-answer session. Thank you, operator. Good morning, everyone, and welcome to our fourth quarter earnings call. And once again, joined by our Chief Financial Officer, Kelly Pecoraro. After my opening remarks, Kelly will share the company's financial results. Earlier this morning, we reported fourth quarter net income of $562,000 or $0.02 per diluted share and a pre-provision net revenue of $299,000. Our performance was largely driven by continued growth in commercial loans. Our lending team originated $68 million of loans, primarily in non-residential and multifamily. While this origination activity was not as robust as in previous quarters, net loan growth remained strong as pay offs slowed. In 2022, we generated net income of $2.4 million or $0.09 per diluted share and pre-provision net revenue of $1.4 million. These financial results reflect the execution of our strategic priorities. Core deposit growth remained strong in 2022. Core deposits grew by $99 million or 13%. Our focus on attracting and retaining the full banking relationship of small- to medium-sized businesses led to an increase in core business deposits. Business balances increased by 56%. As of December 31, loans totaled $1.54 billion, up $51 million from the prior quarter. This represents loan growth of 3% quarter-over-quarter. Deposits totaled $1.29 billion, increasing $22 million sequentially. While the competitive rate environment in our primary market has put pressure on our ability to retain deposits, we are committed to attracting low-cost core deposits within our customer-friendly suite of consumer and business products. We continue to repurchase stock at a discount tangible book value. During the fourth quarter, we repurchased 632,000 shares at a weighted average cost of $12.40. We have now repurchased a total of 1,299,000 shares, which is approximately 46% of the approved stock repurchase program. Tangible book value per share was $14.28 at year-end. This increased $0.19 during the quarter as the aforementioned share repurchases were executed at a discount in tangible book. With that, I'd like to turn the call over to Kelly, and then we will be delighted to answer your questions. Kelly? Our financial results were highlighted by net income of $562,000 compared to $1.2 million during the linked quarter. This reduction was largely related to funding pressures from the competitive rate environment. While we realized a $1.2 million expansion in interest income, our interest expense also increased $2.1 million, resulting in an $888,000 reduction in net interest income. Yield on loans increased by 9 basis points to 3.80%, and yields on all interest-bearing assets increased by 18 basis points to 3.55%. Remaining competitive in deposit pricing, the cost of interest-bearing deposits increased 36 basis points to 82 basis points. This coupled with an increase in short-term borrowings drove the cost of funds to 1.17%, a 51 basis point increase compared with the prior quarter. We expect pressure on our margin to continue due to the liability sensitive nature of our balance sheet. During the quarter, we released $224,000 from the allowance for loan losses and $203,000 from the allowance for commitments due to positive credit metrics and the continued change in the mix of our loan portfolio. Our asset quality continues to remain strong in the current environment. During the quarter, non-performing loans to total loans decreased 6 basis points to 50 basis points, primarily driven by a reduction in non-performing loans. While our allowance to total loans decreased 4 basis points to 87 basis points, our allowance to non-accrual loans increased to 173% from 162% the prior quarter due to a reduction in non-accrual loans. As a reminder, we are currently operating under the incurred loss model and will adopt CECL as of January 01, 2023. Expenses, excluding our provision for commitments, declined $427,000. Management continues to be focused on expense management. This quarter, we reduced our reliance on temporary personnel and consultants, continued to focus on our advertising spend and successfully negotiated a credit for technology services. As we move into 2023, we will continue to explore opportunities to save to offset the pressure we expect from inflation. Moving on to the balance sheet. Gross loans grew by $51 million or 3.4% sequentially, driven by originations of $68 million, primarily in the non-residential and multifamily segments. During the quarter, the bank also purchased $18 million of high-quality residential loans in our principal market, which were originated to Fannie Mae standards. With the duration of 4.3 years, our securities portfolio continues to provide cash flow that is being used to fund loans. $9.3 million of the quarterly decline in the securities portfolio was attributed to maturities, calls and scheduled paydowns. Funding our balance sheet has been challenging as rates continue to rise. While we experienced an outflow of $28 million from non-maturity accounts, we more than offset this with $51 million of growth in time deposits through both retail and wholesale channels. This drove an increase in total deposits of $22 million during the quarter. Additionally, during the quarter, borrowings increased $15 million to help fund loan growth. So, just wanted to start off on some of the margin components. I guess first, where are you guys originating loan yields at in recent weeks or periods? Okay. I guess, I'm just surprised it seems like the -- I mean, you guys have put on quite a bit of loan growth in the past two to three quarters, and really, I mean, the loan yields have gone up less than 20 basis points over that time period. Any particular reason for that? Or anything that's -- you guys originating -- was there lower pools or rates of some chunkier stuff coming on at some point in the past couple of quarters? It just seems like it would have moved up more given the pace of growth. I think if you look at what we put on in the second and third quarter, they were lower rates. Also, in the beginning of the quarter, our originations lag a little bit in terms of the pricing. Okay. And then, as far as the deposit side of the business, I mean, how are you guys thinking about kind of overall deposit growth over the next couple of quarters? And how much of that can be generated by core deposits versus reliance on more wholesale funding channels? Chris, in this market, we are definitely seeing pressure on attracting deposits and retaining those on our balance sheet. We are very focused on driving the business relationship into the bank and hope that, that will be successful as we move forward. We are also looking at alternative funding sources as we move into the quarter, knowing that there's the pressure on the deposit front. Over the course of this cycle, it's difficult to say where we're going to be based upon the pressures that we're seeing in the market. From industry perspective, betas are around 30% as we look forward. Are they going to be more difficult to manage at that level? They could be. We need to be responsive to our market and see where we're going to land on that. But we are fluid and able to be reactive and responsive. Okay, got it. And I mean, will the level of success on the deposit inflow side or the overall kind of funding efforts, would that change your loan growth outlook at all as you move through '23? I mean, I think you guys are generally targeting kind of double digit -- low double digit pace on loans. Does that change if it becomes increasingly difficult on the funding side? Yes, Chris, I think you're right, that does change our outlook. Cognizant of how we fund our balance sheet, looking for those core deposits to help fund. As we look forward, loan growth, we don't envision to be as robust as it was this year, at the 20% growth rate. We are tagging low -- high single to low double digit loan growth for 2023, knowing that there are other pressures on the deposit side. Got it. And I guess just kind of putting it all together on the margin outlook, I think you mentioned in the commentary some continued compression expected. Any way to frame that or kind of characterize that in any type of range even just over the near term, the next quarter or two, given how big the jump was this quarter? Yes. I think as we look out to Q1, we're looking for the range to be in the low 2.50% range from a NIM perspective. Definitely challenges. We don't have any guidance for any further out than that, but we continue to closely monitor and manage -- try to manage that NIM. Thank you, Chris. We have our next question that comes from Laurie Hunsicker from Compass Point. Laurie, your line is now open. Yes. Hi, thanks, Jim and Kelly. Good morning. Just wanted to stay where Chris was thinking about margin here, you mentioned on the funding side, thinking about alternative, I assume you're talking federal home loan bank. Can you take us through a little bit -- I mean, obviously, we saw an increase there. Can you take us through a little bit of how you're thinking about adding in that category? And just also from the standpoint that your mix is shifting and we're seeing this challenge across the board, but as funding headwinds continue to weigh on deposits, just maybe help us think a little bit about that. And certainly, appreciate the guide that you gave for the first quarter margin. But thinking a little bit further out, just trying to put all of those pieces together. Sure, Laurie. I'll try my best to answer that. We're looking at things other than just FHLB straight borrowings now. We've looked at swaps. Right now, the swap market has a positive spread to a straight up FHLB borrowing. Those are coming in the mid-3%-s for instance. We will look at corporate deposits from time to time, listing agencies that we can buy, what I'll call, wholesale CDs. There's a lot of different funding sources. And then, we're exploring some of the digital avenues for opportunities where we may be able to find some wholesale funding at lower cost. But there's a multitude of options that we are working through and we're always focused on what's our best source of funding and trying to get the mix correct obviously. Got it. Okay. And then, your brokered CDs, I had that at $5.7 million last quarter. Do you have a current number on that? $75 million, okay. Great. And then, can you share with us where your spot margin is for the month of December? Laurie, we normally don't share monthly guidance. However, we provided what we think the outlook is going to be for Q1. Okay. And then, on expenses, obviously, with CECL, that provision for letters of credit moves up. So, obviously, thinking about that, adding that back, we're already over $13 million in a quarterly run rate for noninterest expenses. Can you help us think about how that's going to look for 2023? And then, specifically, can you remind us in terms of the benefit plan expense, is that all fully baked for this quarter? Or is there anything still that's going to come online on the expenses there? So, from the equity plan perspective, Q4 was shy by about $50,000, knowing that the management awards went out late in October. A full quarter, we're looking at right around $590,000 in equity plan expense for what's been issued to date. Relative to the overall range of what we're looking at from an expense on -- for an operating expense, we're looking at the mid to high $13 million range, as we continue to look at avenues to optimize our business model and being laser-focused on managing those operating expenses. Okay. And was there anything outside non-recurring and noninterest expense? In other words, did you have embedded in there, I don't know, CECL professional fee help? Or is there anything that potentially is coming out of that $12.9 million reported number outside of the provision recovery on letters of credit? While there are some professional fees that will be reduced next quarter, there are always additional initiatives. So, the guidance that we provided includes those ins and outs relative to our professional fee. Got it. Okay. And then, on provision, maybe you could just help us think a little bit about that, more generally, your reserves to loans sitting here at 87 basis points. Obviously, you'll be at CECL. Just any color you can give us there would be super helpful. Yes, I think, Laurie, under the incurred methodology, we came in at an 87 basis points coverage ratio. We're looking, as we adapt CECL, for there to be an adjustment, it's not material. We're looking at a couple of basis points increase in the reserve coverage, again, forward looking at CECL [Technical Difficulty] looking at it, not a material change that will come through equity. Okay. And then, maybe, Kelly, can you comment a little bit the outsized loan growth that we saw in commercial real estate? It looks like 17%. This quarter, 67% annualized is a really big number. Can you help us think about what's in that? And then, I know some of the hot button loan categories you really had de minimis exposure to, but if you could provide a refresh on what you've got in office, in hotel, and in restaurants, that would be super helpful. And any color you could give us around those, if you have LTVs or whatever detail you've got would be great. Thanks. Sure, Laurie. So, yes, we had loan originations of $68 million this quarter, which were strong. $24 million of that was in the multifamily space. $35 million was in the CRE space. Again, there were two large credits in there that are in retail, anchored by investment-grade tenant, so feel comfortable relative to that exposure. In regards to office, our portfolio, our commercial loan portfolio contains around 3% of office. None of that office is in New York City. And the LTVs on that portfolio are around 50%, on the LTV. We have no hotels in our portfolio and we have no direct exposure to restaurants. Great. Okay. And just to clarify, the 3%, it's the 3% of commercial real estate that's in office or 3% of all loansâ¦ Okay. And then, the commercial portfolio, are you adding multifamily and CRE together? Or just the straight 3% of the CRE only, the $216 million? The combination. Okay. Great. Okay. Love seeing the buybacks. I assume with the stock here, you're still thinking about it the same way, Jim, or any forward comments on that? Sure. I mean, as we're trading today, I think everyone around the table is thinking about it exactly the same way. That's about all the guidance I can provide. But yes, we believe in stock buybacks, so, yes. Okay, great. And then, just one last question. Assuming you're profitable, even minimally profitable next year, how should we be thinking about the tax rate? And then, take us through if you're not profitable, what that may look like? All right. So, for minimal profitability, our tax rate we're pegging at the 10% to 12% as we are able to utilize the valuation allowance as we have earnings. If we are in a loss position, there is no tax benefit recorded or a tax expense recorded. Thank you, Laurie. We have no further questions on the line. I will now hand back for Jim -- to Jim for closing remarks. Thank you very much, operator. I'd like to thank everybody who joined us today on our call. Look forward to speaking to everybody next quarter. Thanks, and have a great day.
EarningCall_1054	Good morning and welcome to Coda Octopus Groupâs Fiscal Year Ended 2022 Earnings Conference Call. My name is Rob, and Iâll be your operator today. For this call, Coda Octopus issued its financial results for the fiscal year ended October 31, 2022 including a press release, copy of which will be furnished in the report filed with the SEC and will be available in the investor relations section of the companyâs website. Joining us on todayâs call from Coda Octopus are its Chair and CEO Annmarie Gayle and itâs CFO, Nathan Parker. Following their remarks we will open the call for questions. Before we begin, Jeff Grampp from Gateway will make a brief introductory statement. Mr. Grampp, please proceed. Thank you, Rob. Good morning, everyone and welcome to Coda Octopusâs fiscal year end 2022 earnings conference call. Before management begins their formal remarks, we would like to remind everyone that some statements weâre making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors many of which are beyond our control, which could cause actual results and events that differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures and our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date before looking statements are made, except as required by law. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business, as well as uncertainties and other variable circumstances including but not limited to risks and uncertainties identified under the caption âRisk Factorsâ in our 10-K. You may get Coda Octopusâs Securities and Exchange Commission filings for free by visiting the SEC website@www.sec.gov. I would also like to remind everyone that this call is being recorded and will be made available for replay via link in the investor relations section of Coda Octopusâs website. Thanks, Jeff. And good morning, everyone. Thank you for joining us for our fiscal year-end 2022 conference call. Iâm excited to speak to you today about Coda Octopus. Iâm very, very excited about the company. Now before we discuss our recent results and performance, I would like -- I would first like to provide some background about our company to those listeners who may be newer to Coda Octopus Group. Coda Octopus Group is an established business with a strong pedigree in underwater technology and defence engineering. We operate two discrete business operations, our underwater technology business, in our filings sometimes referred to as our Products business, and our Engineering business. We have a strong culture of intellectual property rights ownership in our technology business, and have a number of patents covering our technology. And with the engineering business, we have sole supplier status for a number of proprietary parts sold into mission critical integrated defense systems. We view these business units as complementary and synergistic to each other, as we can jointly bid on projects where the combined skills provide a competitive advantage for such projects. We believe our business units also provide us with significant growth opportunities, combined with solid current revenue and profitability. Iâll be talking more about that today. Now, turning to our marine technology business. This business develops and supplies technology solutions to the underwater and diving markets for both commercial and defense customers. We have been operating as a supplier of solutions, comprising both hardware and software products for over 25 years, and all design, development and manufacturing of our technology and solutions are performed within Coda Octopus. Now, weâre, weâre a market leader in real time 3D underwater imaging sonar technology as we have the worldâs only real time 3D imaging sonar capability. This technology is the only one that can generate a real time 3D Image of moving objects underwater in zero visibility conditions. So the only technology in the world that can generate underwater, a real time 3D image of moving objects underwater in zero visibility conditions. And thatâs important because much of subsea operations are plagued by zero visibility conditions and then we are the only solution in the market at that point. We market this technology under the Echoscope brand, that is the Echoscope brands. Our other core technology relates to the transformational diving technology, the DAVD, which is Diver Augmented Vision Display system, which is the result of a direct requirement from the U.S. Office of Naval Research under its future naval capabilities so the DAVD came out of the requirements from the Office of Naval Research for its future naval capabilities program. The DAVD is the only technology that provides the real time data platform to both the diver and dive supervisor where the data hub for the diver is on a pair of fully transparent glasses embedded in the divers helmet, face mask or other diving suits. So in other words, we are providing data to the diver on a pair of transparent glasses and that becomes this data hub for all types of different real time information. And this real time information is also shared by the dive supervisor on the surface. Now our sonar technology is used in a variety of underwater applications. These include construction, mining, bridge inspection, offshore renewables, oil and gas, dredging, port and harbor security, survey and mapping, and more generally, for monitoring and inspecting moving objects on the water. It is the only technology that can generate a real time 3D Image of moving objects underwater in zero visibility conditions. This is significant as many underwater operations are stalled due to poor visibility conditions, resulting in significant cost overrun. Now turning to our engineering business, our other operating segment, this is conducted through our two engineering subsidiaries, Colmek and Martech, where we act primarily as a subcontractor to prime defense contractors. These engineering subsidiaries supply embedded solution and subassemblies into mission critical defense programs, where we have long established relationships with U.S. and U.K. prime defense contractors, such as Raytheon, Northrop Grumman, and BAE. We have a number of programs that we have been supplying proprietary parts for over 30 years, such as the U.S. Close-In-Weapons Support program for the Phalanx radar-guided cannon used on combat ships. These long-term relationships provide us with long tail recurring revenues. Now, the engineering businesses seek to leverage these long standing relationship with primes to expand the number of programs it supplies into these programs. This is crucial for the growth strategy of the engineering business. That is to grow the number of programs that it supplies proprietary parts. And thatâs really its business model, to really supply subassemblies into larger defense programs, where thereâs the opportunity for long tail recurring relationships and because we have these longstanding relationships with Primes, we often get the opportunity to bid for work on these programs. Now, turning to our growth pillars, that we are really postulating our growth on, Iâd like to talk about these a little bit more. Our key growth pillars are our Echoscope and sonar series, our Echoscope sonar series technology, and our DAVD. In order to fully understand where the companyâs growth opportunities lie, let me start with our sonar technology and the evolution we have made over the last several years. If you look back several years ago, we had limitations, gaining broad adoption of our technology due to size, weight, power requirements and price. Our technology was very expensive. Until February 2019, our technology was limited to use on work class vessels. These are very large vessels at sea, which is only a small section of our target market. And at the time, we only had one type of sonar to service the entire market. And because of those form factors we talked about, size, weight, power and also price, the market was very limited for us. In February 2019, we launched our fourth generation sonar series, and expanded our range of sonar offering to cover six base models with various options, these options covering frequency, depth, range and resolution of the sonar. That is really what gives the type or model that weâre selling, frequency, depth, range and resolution. With this 4G sonar series, we have removed the barriers to adoption and opened the market opportunities for technology as we have models that are suitable for all types of underwater vehicles, be they large or small. We built on this traction with our 4G sonar series by recently introducing our Echoscope PIPE, an acronym for Parallel Intelligence Processing Engine. This is the most technologically advanced imaging sonar available in the market. The Echoscope PIPE introduced significant new capabilities to the subsea market by providing a single sensor that can generate multiple 3D images simultaneously in real time, using up to 10 different acoustic parameters such as frequency range, and many other filters. Now, our previous generation of imaging sonar, was capable of generating only one 3D image in real time. Our new generation of imaging sonars, which is the Echoscope PIPE can generate multiple 3D images, and the data is therefore available to different parts of the survey operation. This therefore allows customers to rely on one sensor and not having multiple sensors to do different tasks within this survey operation, thus reducing costs and making operations much more efficient for the subsea market. So weâre really not only move the market on to real time 3D imaging sonar, but also generating multiple 3D images for the different parts of the survey operation from a single sensor. And thatâs the promise of the Echoscope PIPE. And this is why we are excited about the markets. With our company being a first mover in innovating, and commercializing real time 3D sonar technology, as well as shifting market requirements, to real time 3D imaging in the subsea market, we have positioned Coda to be the market leader in real time 3D underwater imaging visualization. Real time 3D data underwater transforms the market because users can make real time decisions in -- as opposed to the current competing technology, which uses one mission to collect the data and another mission to process the data. And this is the key difference between our technology and what I describe as the legacy technology. The legacy technology, which is the multi beam technology goes out to sea, collects the data, come to wave process, the data. Now the environment at sea [ph] is all is fast moving. So that is stale data, our technology provides the only solution for real time decision making. I can go out on a bridge doing a bridge inspection, I can see all of the impairments in the bridge, I can see discover right there and then, I can prepare my customer deliverable immediately there. I donât have to go away and post process the data. So weâre really excited about our technology. Now Iâd like to give you an update on our PIPE, the Echoscope PIPE progress we have made in fiscal year 2022. Well, the headline here is that weâve been successful in getting our Echoscope PIPE sensors into new defense programs. This is really we have the opportunity before the company is at these prime defense contractors roll out the new generation of underwater vehicles. We have the opportunity to be the sensor of choice on those platforms. And this year, we sold into four different UX programs who are working on the new generation of underwater vehicles. We also sold into one new Japanese program, again working on the new generation of underwater vehicle for the Japanese defense market. In addition to that, in the commercial space, we sold four Echoscope PIPE sonars on a new underwater vehicle that is going to be used in that exciting application of offshore renewables, where we have the lead in many areas. So weâve made really good progress around Echoscope PIPE. So this progress made by our technology over the last four years, both in expanding the available models within our sonar series and getting onto some key new underwater vehicle programs in the defense sector, paves the way for us to increase our market share of imaging sonar market over the next two to three years. Our goals as a management are to cement our place in the existing programs that weâre currently working, and also, of course, to identify new programs, all the while expanding our share of the commercial market for our sonar. In this way, we aim to increase our marine business revenue, selling depending on the model type and configuration between say 60 and 80 sonars per year along with VAPB [ph] sales. And therefore in the next two to three years, weâre targeting approximately 25 million in revenue for our technology business on a standalone basis compared to 14.7 in the fiscal 2022. So weâre really hoping that year-on-year weâre increasing the number of sonars weâre selling in the market and Echoscope PIPE will be that new platform as the demand is more and more for a single sensor with multiple 3D images. And at the same time, weâre hoping to add to our revenues by the rollout of DAVD and weâre now going to talk a little bit more about DAVD which is our second growth pillar. So this DAVD technology, this is transformational, as it radically changes diving operations by providing enhanced vision and operational awareness, even in zero visibility conditions. And this technology is applicable to both defense and commercial markets globally. For the DAVD, we are the first movers in the market to transform diving operations by providing buyers DAVD solution, real time media content of all descriptions to the dive operations. Importantly, our technology is scalable and transferable to all types of diving operations. Our main focus currently is in the defense, including the military and commercial, but excluding leisure diving at this stage, thereby providing Coda with a significant market opportunity. So the DAVD which is transformational for the global diving market, is really weâre targeting the defense market in the commercial market. And at the moment, weâre leaving the leisure market. The DAVD technology moves the diver from the dark room operations and diving by touch to a real time information platform shared by the diver and the dive supervisor on the surface and also moves away from a largely voice directed dive operation. So really, we are introducing a real time platform, real time data platform for the diver and the dive supervisor. This in turn significantly enhances efficiency, safety, timeliness, cost of operations and guarantees the success of the dive operations. We should remember that divers have limited time in the water. Anyone time itâs approximately 20 minutes, and you have to get the diver in the water to the dive side to do the activity and out of the water. So there are six key transport transformational aspects that DAVD provides for the market. First is location where we provide real time diver compass information, depth, and positioning information underwater. We provide navigation to the dive site. And we also identify along the way all hazards and waypoints to the dive site. Second, we provide visibility, can we enhance the diver experience with real time video data, our 3D sonar data were required and augmented reality scene awareness for the diver underwater using our 3D model of the environment. Third, communication. Here we communicate between diver and dive supervisor with rapid text messages, images, detailed instructions where required and digital speech and audio. Fourth, we provide data; care, the diver and dive supervisor can share and access importantly, all project data and information on demand in real time. This includes engineering information of all forms, drawings, videos, text messages, manuals, 3D models of installation, shapes for whatever theyâre looking for. So really a rich media content, which supports the diver and a dive supervisor in real time. This is safety as we provide navigation and dive time data synchronized in real time to ensure the diver monitoring including location, oxygen levels, path finding hazards and waypoints. And fifth, weâve made significant advancements of the audio quality for diving operations underwater. So weâve moved away from noisy analog to digital audio link that was served the entire diving community. The DAVD is an approved Navy Use item, including the accompanying Echoscope sonar, and it is currently in use by the U.S. by a number of U.S. Navy teams, such as MDSU, which is Mobile Diving and Salvage Unit. UCT, Underwater Construction Team, EXWC, which is Expeditionary Warfare Center and NSWC which is Naval Surface Warfare Center in Panama City. And SERMC, which is Southeast Regional Maintenance Center. During the fiscal 2022, we made significant progress in expanding the market for the DAVD. First we have in 2022 performed the customization of the DAVD for a U.S. military command, which is the most significant opportunity for the DAVD in the U.S. currently. This is also this was done as a pay development, and we expect to deliver the first working prototype by early February. If trials are successful in spring, we expect to supply multiple units in rapid succession for further evaluation. And then, we expect a production order from this military command in fiscal 2023. Second, the second important milestone for the DAVD is that -- the DAVD Gen 3 systems have now been supplied to the -- the U.S. which have now sorry, which have now been supplied to the U.S. Navy have now moved from R&D to field operational status by the U.S. Navy. So theyâve now moved the DAVD projects from R&D to feel operational status. This is an important milestone for the adoption of the technology in higher quantities. To date, we have supplied 20 of the latest Gen 3 systems which excludes the earlier generation. And for Gen 3, we have sold approximately $2 million worth of DAVD purchases, including some of our imaging sonars. Our first mover advantage and progress with these customers provide a high barrier to entry into this market by competitors. The DAVD is a complex product with hardware and software components. The software development takes many years. In addition, the use of the transparent glasses on the water, where we render the data to the diver which is the divers harbor is patented in the U.S. and Coda has the exclusive license with this. Lastly, we at Coda Octopus are leveraging our years of underwater experience and incorporating our own proprietary technologies such as our real time 3D sonar, and software. Our real time 3D sonar is the only sonar that can produce real time images underwater, including 3D models of the underwater environment in all water conditions in convenient fear of visibility conditions. Weâre targeting to grow this stream of revenues for the business, adding approximately $2 million to $3 million in revenues annually to the business over the next several years, representing about 50 incremental units of growth per year. So let me now turn the call over to our CFO Nathan Parker to walk you through our financials before providing my closing remarks. Nathan? Thanks, Annmarie and good morning, everyone. Let me take you through our fiscal 2023 results for the 12 months ended October 31, 2022. For the fiscal year 2022, we recorded revenues of $22.2 million representing 4.2% growth compared to the $21.3 million of revenue we recorded in fiscal 2021. The increase in revenue was attributed to further penetration and markets for Echoscope and DAVD solutions and strong growth for our services business. It is important to note that we recorded this year-over-year growth despite currency headwinds of approximately $1.2 million as the U.S. dollar, which is our reporting currency strengthened significantly during fiscal 2022 compared to the currency of the many countries where we conduct business. This dynamic has started to reverse itself more recently, which is encouraging to our business for the fiscal 2023 year. Without the adverse movements of currency resulting in lower translation of our revenues from our foreign subsidiaries, revenue would have increased by 9.9% instead of the 4.2% that we recorded. Our marine technology business recorded revenue of $14.7 million for fiscal 2022, representing a 7% decrease compared to $15.8 million in fiscal 2021. This decline is primarily due to the negative currency translation impact resulting from the strengthening of the U.S. dollar. Excluding this impact, revenue was approximately in line with the prior year at $15.6 million. Our marine engineering business recorded revenue of $7.5 million in fiscal 2022, representing growth of 36% compared to $5.5 million in fiscal 2021. As sales orders began to materialize, and performance returns to more normalized levels. For fiscal 2022, we generated gross profit of $15.2 million representing growth in 2.9% over the $14.8 million in fiscal 2021 due to the favorable year-over-year increase in revenue, which was partially offset by higher material costs. Our gross margin percentage for fiscal 2022 of 68.3% compares to 69.2% for fiscal 2021, has a greater percentage over overall 2022 fiscal sales were generated from the marine engineering business, which should additionally has lower margins. Our marine technology business gross margin improved slightly to 80% in fiscal 2022 compared to 79.9% in the prior year. Our marine engineering business gross margin improved noticeably to 45.4% versus 38.6% in the prior year, as a greater percentage of revenue was generated from our engineering services contracts. Now moving to our operating expenses, our total operating expenses for fiscal 2022 totaled $10.2 million, which is a 6.8% decrease from fiscal 2021 of $10.9 million due to lower research and development domain costs. Our research and development costs for fiscal 2022 totaled $2.2 million, which is a 25% decrease from fiscal 2021 of $3 million due to reduced spending in our marine engineering business related to the Thermite Octal development until we can really gauge both the market and customer requirements for this product offering, as well as a shift in our marine technology business expenditures, away from the capital intensive developmental phase of our real time 3D sonar technology. And thatâs to [Indiscernible] series to feature enhancements including firmware and software improvements. As a percentage of revenue, our research and development costs for fiscal 2022 decreased to 10% of total revenue, compared to 14% in fiscal 2021. Our selling, general administrative costs for fiscal 2022 totaled $7.9 million, which is essentially unchanged from fiscal 2021. As a percentage of revenue, our selling, general and administrative costs for fiscal 2022 decreased to 35.5% of total revenue compared to 37.1% in fiscal 2021. Looking forward at our cost structure, given the significant progress that we made in R&D in the last four years, we anticipate refocusing a significant portion of our resources and strategy from research and development to global business development, brand building and investor relations. We believe, we have developed world class products and solutions that provide market leading positions for Coda and now we can have we can make meaningful progress in our markets through these investments to create shareholder value. Operating income for fiscal 2022 totaled $5 million, a 30.4% increase from $3.8 million in fiscal 2021. Operating margin for fiscal 2022 was 22.5% compared to 18.1% in fiscal 2021. The increase is primarily due to the higher revenue we generated coupled with our lower operating expenses for the year. EBITDA for fiscal 2022 totaled $5.9 million, which is a 5.1% decrease from $6.2 million in fiscal 2021. The slight decrease is due to our lower net income in fiscal 2022 compared to the prior year. Net income before taxes for fiscal 2022 totaled $5.1 million or 23.1% of revenue, a 2.3% decrease from $5.3 million or 24.6% of revenue in fiscal 2021. The slight decrease is due to a onetime $1.4 million benefit in fiscal 2021 from this payment, Payroll Protection Program, and employee retention credits, partially offset by higher revenue and lower operating expenses. When adjusting for the Payroll Protection Program and our employee retention credits, we recorded in fiscal 2021 we grew our net income before taxes by 29.2% from $3.9 million to $5 million, which we think is a more accurate depiction of our strong results for fiscal 2022. Net income after taxes for fiscal 2022 totaled $4.3 million, or $0.40 per basic share, compared to $4.9 million or $0.46 per basic share in 2021. The decrease is largely driven by an increase in the companyâs effective tax rate in fiscal 2022 as we have exhausted our past net operating loss carry forwards, as well as the one time Payroll Protection Program and employee retention credit that I have previously mentioned. Moving on to our balance sheet, as of October 31, 2022, we have approximately $22.9 million in cash on hand and no debt. This compares to $17.7 million of cash on hand and approximately $64,000 in debt at October 31, 2021. We are able to grow our cash balances during fiscal 2022 while simultaneously continuing to invest in our business, as we generated $6.7 million in net operating net cash from operating activities. Thank you very much Nathan. Thank you. So as we look, look into our fiscal 2023 our key management goals are to continue to develop the market for our main technologies, particularly in the defense space, where there are various new programs for the new generation of vehicles -- such as underwater surface vehicles and autonomous vehicles, where theyâre looking for the new generation of defences, which we believe our Echoscope technology will be front runner for many of these new underwater vehicles that are emerging. And secondly, to introduce the DAVD technology to foreign navy and the commercial offshore sector. We have been pleased with the attraction of Echoscope PIPE for DAVD fruition that have been receiving and are hopeful about our future prospects representing these main pillars of our growth. Weâre excited about the outlook for Coda, as we have world class products and solutions that are transformational to the underwater imaging and diving market. And we mean transformational because our technology, the Echoscope PIPE and our DAVD are certainly the next generation of technology for these markets, which is set to displace the legacy technologies that are way behind our technology and where the market is now moved on to a real time information platform. This therefore provides us with significant growth opportunities in our market. We have a demonstrated track record of generating high margins and solid profitability. And we have a very healthy balance sheet with cash and new debt. Thank you. Weâll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Brian Kinstlinger with Alliance Global Partners. Please state your questions. Hi guys and congratulations on hosting your first conference call here. First as it relates to the revenue for the products business, excluding foreign exchange, it definitely had an impact that you highlighted. What were the other major challenges to growth in fiscal 2022 as sales in that business was relatively flat year-over-year? Yes, I think thatâs a great question, Brian. And hi, thanks for the question. I think what we saw in the last fiscal year, and which actually, we reported on, I think, in Q2, I think that our pipeline in terms of opportunities that weâve been tracking and the level of quotes that weâve been doing and preparing, theyâve been definitely much higher in the 2022 period. But what weâve seen is the conversion rates, many of the -- our pipeline centered around 2023. So we work closely, much more, but things were shifting into 2023. And I think this is partially where weâre going to see a rebalancing or rebounding in oil and gas and preparatory work for that, when you start say youâre going to prospect a new oil and gas installation, then I think that takes time to plan. So what weâre seeing is a lot of pipeline activities and then, moving out into 2023. So what we expect, for example, in the 2023 period is to see rentals taking off much more than they had in the last two years, for example, Brian. So I think itâs largely to do with timing more than anything else. And also, we still had the overhang from COVID. We should still remember that can boost the sectors in which we operate. People are still working from home. What that means is that theyâre not really [prosecuting] (ph) as many projects as we were doing pre pandemic. So things are just being normalized, I think. Great. My second question as it relates to the Echoscope being used on several defense contractors for underwater vehicle programs. You said selling to those were an opportunity for you, for your technology to be embedded as vehicles are rolled out. My question is, are these contractors still evaluating competing technologies to Echoscope? Or have you received design wins for any or all? And whatâs the next data point for these contractors? Well, I donât know if theyâre evaluating other technology. But I think if you are evaluating, then youâre not purchasing our technology. The fact that weâve been able to sell into these prime defense contractor is good evidence that we are part of the solution that theyâre working on. So, they wouldnât invest so much money just for evaluating. So I think we have a high degree of confidence from the moment we sell the first two systems into the program, that weâre part of the design. And, more importantly, we have been allocated part numbers for those parts. So we think within their overall solution, when we get a contract, it would be for that particular program with this part number. So, so I donât know if theyâre evaluating other technology, but the fact that our technology, and this is whatâs happened in the past, where we were -- had this sort of difficulty in expanding the market for technology, because there was no new vehicles coming to the market. But you can say now that thereâs a whole new set of opportunities for the business because of the new generation of underwater vehicles that are coming to the market and replacing the old generation that would have been equipped with the legacy technology. Thank you. I have a couple more, but first on the DAVD. Can you speak to the advantages of being of operational status for the DAVD, as opposed to being an R&D program? Well the thing is, when youâre in R&D, youâre still evaluating the technology. When itâs operational, it means itâs in the field for use. And now itâs now up to all of those commands to now purchase the items. When itâs in R&D, then itâs not being purchased. Itâs just being evaluated. Now it is operational, itâs now issued to come on at. This is the diving technology that weâre using. And itâs now up to these commands to start putting in their orders. Thank you. And then similar to the question on the products business. Do you look at Colmek, or the entire engineering services business? Youâre still a bit below fiscal 2020 of $8 million, and the peak of $12 million in fiscal 2019. So what have been the prohibitive factors in that business? And how should we think about the timing of the recovery to get back to some of those levels? Well, itâs the same with I mean, Iâm pleased with where the engineering business has got to this year. But as youâve rightly said that we need to get to that point of where we were in 2019, for example, where I think on a standalone business, that business was trending as a $10 million business on its own. So I think it has to do again, with the, they supply into broader defense programs. And weâve been found it very, very slow. And really not a lot of visibility on the activities that are going on going with the primes on these programs. So this year, again, weâre quoting, more and hopeful for more than we did last year. But having said that, I think Iâm pleased with the progress it has made over 2021. And we anticipate that it will continue in that direction. Clearly, Brian what, that business got a couple of new programs last year, that are key. And the whole, the business model of the engineering business is to really get on to new programs year-on-year. And our target is to continue to expand the number of programs that weâre supplying proprietary parts to. Right. Last question, you gave us some good insight into kind of two to three year outlook of where the business could be, as things continue to execute well. First of all, the first quarter is basically done tomorrow. So any update on, youâve been youâve had a business, itâs very lumpy. Any update on the first quarter trends as the quarters basically closed, or any insight into the lumpiness you might expect in this year in fiscal 23? I wish I could talk about the -- weâre still evaluating the quarter. But what I can see, weâve been - I see good traction in the level of quotations so far. So we always measure the business and its progress by the number of proposals weâre putting out or, a number of inquiries and actually writing proposals because by the time that weâre writing a proposal, weâve been really, really qualified that this is our opportunity. Itâs a timing issue. And I can say that I see we are definitely writing more proposals than we were this time last year. Hi, good morning. Congratulations on the progress with the Echoscope PIPE. What do you attribute the success you had in that, in that area? Is it more in terms of whatâs driving growth? Is it more of cost savings that you are able to provide or in the efficiency? Or is it the technology benefits versus the other solutions out there? I think itâs all of the above. Because then if you imagine thatâs exactly right. The key thing about the Echoscope technology is that, although upfront, itâs very, very costly. Thereâs quite a significant return on investment for users. If we take just block placement, if youâre placing a block on the water, like breakwaters, before we enter that market, youâre placing four blocks per day. With the EPA [Ph] score, depending on the type of block weâre placing anywhere between 180 to 270 blocks per day, hugely transformational, hugely. So the cost. Then when you think of the Echoscope PIPE, letâs think about our previous generation of our technology, the Echoscope. We generated on the water, one real time 3D image and thatâs powerful, because if youâre in a darkened room, and you canât see anything and you have one torch, that is a no torch, way to think about PIPE is that Echoscope PIPE is that there are many torches now. And therefore the many torches, what that is going to do to the industry is that they can use a single stencil for different parts of the survey operation. Currently, youâre using the Echoscope, youâre using a different sensor for short range, youâre using many, many different sensors. And the fact that we can now have a light in one sensor, we can do a long range of short range, we can set up if you like 10 sequences, if you think of a music, we can set up 10 sequences and therefore using you can get 10 different images. Think of your iPhone, where you can have all these different filters and use all these different targets to get a different image. This is what the Echoscope PIPE is doing underwater. So its capabilities, its cost, its time, itâs data security. It is all of the above. So weâre really excited about Echoscope PIPE. Right. Great. Thank you. And then one other question. Thatâs a theme, thereâs a tremendous amount of money being invested in the offshore renewable space. Are you starting to see demand from that area now? Or is that more of a trend thatâs going to be growing next year and beyond? No, weâre seeing that and weâre quoting a lot of rental opportunities, because then thatâs a great question for us. Thank you for raising that. Thatâs really actually right in our swim lane. And because then itâs the only technology that can visualize the moving cable, as you are taking out your cable, you have a precise cable touchdown point on the water within your engineering spec. And weâre the only technology that can image this moving cable. And in addition, as you saw last year, we were awarded a new patent where now we can also using the Echoscope we can automatically track the cable into position and predict the cable touchdown point. So offshore renewables and I remember in 2019, where there was quite a lot of offshore renewable projects going on. Without exception, we were almost on all of those projects. And I think thatâs the year our rentals went through the roof. And so we are very, very excited. And also in the U.S. also whatâs going to happen because Europe has the lead in terms of the experience for these offshore installations. Many of our customers are moving to the States like Boskalis, and the [Indiscernible] of the world. And those are people we supply into and already talking about the U.S. market for that and supplying our technology for those operations in the U.S. So offer renewables, weâre super, super excited about it. Similarly, for oil and gas, which our business started as an oil and gas we donât now because then oil and gas, then the price of oil fell over the last three, four years. We sort of created new markets for technology, but on the rebound of oil and gas projects. Thereâs also that opportunity for the business. So weâre super excited about offshore renewables and similarly about oil and gas, where we started our business. Thank you. [Operator Instructions] The next question comes from the line of David Wright with Henry Investment Trust. Please proceed with your questions. Yes. Hi. Good morning. Thank you for having the call. Question for you Annmarie. And talking about Echoscope, you said quite a lot about it being good for being in the dark things moving around. But youâve also used the term subsea several times. As I understand it, subsea is whatâs going on below the ocean floor. First, I guess it wouldnât be much stuff moving around. Can you straighten me out on my understanding of the use, right? Yes. Yes. Yes, thatâs probably some equality, some laziness in technology. What are think about it as underwater then itâs anything underwater. And so in our industry talks, without having that precision that youâre talking about, but what we mean is just anything underwater. Got it? Okay. And then looking at your IR deck, it seems different people are in different places. For example, it says the year in Denmark it says that the Nathanâs in Orlando, can you talk about whoâs where? And whatâs done where? Yes, certainly. So the biggest part of our operation is in Scotland in Edinburgh. And there is where we have our Center of Excellence for R&D, and where we do our innovations, and also our manufacturing. Having said that, weâve started the process of transferring the U.S. side of the DAVD development because thatâs a requirement of the U.S. that we produce the DAVD in the States that weâve started, that was interrupted by COVID. But weâve started to build up our manufacturing capability in Orlando for the DAVD. But outside of that, for the products business, all of the development and manufacturing is done in Edinburgh. And thatâs where we have the largest part of the team. Then also in the U.K, we have particle engineering business, which is Coda Octopus market. And that is in Dorset. And in Orlando, we have our President of Technology, Blair Cunningham, and that is really exchanged office more than anything else. And really, where we have our relationship with the Navy, we do a lot of work with the Navy outside of our out of our Orlando office. And then Nathan listen, as you said, Coda Octopus Colmek where heâs co-locating there. And Colmek is our engineering business in Salt Lake City. So thatâs really the spread of the business. And we have because of Brexit, we have a small office here in Denmark, where Iâm based, because then with the U.K. leaving the European Union, itâs really important that we have a presence in the European Union and weâve established small office here, which are base, but my I actually live in Denmark. Okay. And thatâs a question for Nathan, in terms of the companyâs cash. Can you tell me where itâs held geographically? And also how you have it invested? Yes, so for our cash, again, itâs around $22 million, [Indiscernible] $9 million, so $8.8 million of that is in foreign and our foreign subsidiaries? And around $14 million of that is U.S. based. Just to be more specific, sorry, is to say that the bulk of that cash in the foreign subsidiary is based in Scotland, HSP, Scotland, soâ¦ Right. And then your U.S. cash union? Do you have any of that invested, you could be earning quite a lot of interest, I imagine. Yes, weâre we are in the process of doing that right now. Weâre going to be investing in short term securities for right now on just getting up to speed so that we can make additional interest with the rate movements that weâve seen in interest rates. So that is our plan for the short term. Okay. Last question in the press release you talked about wanting to put some focus on investor relations this year? How do you see that actually manifesting itself? Well, I think weâve started that process by -- weâve got our first earnings call, which clearly, weâll be doing a lot more conferences this year. And Jeff, maybe you can talk a little bit about our IR program. But weâre talking to investors more, weâre going on the road more. Weâre trying to raise our profile. So, in the past, I mean, weâve been focused inward. But now really, we are focused on GC, IR and brand building. So Jeff, can you talk a little bit more about our IR program, please? Sure. Hi, David. So as Annmarie said, I think thereâs going to be a much more focus prospectively on investor engagement, conference attendance, engaging with various Wall Street investment banks that are interested in Coda from a potential research standpoint. And again, just making sure weâre having a much more concentrated effort on those on those points going forward. Thank you. Congratulations on a good quarter. I got a couple of questions for Nathan. In fiscal 2023, what do you estimate the income tax rate will be? For fiscal 2023, we have used up all of our U.S. net operating, loss carry forward so we anticipate a similar tax rate to what weâre seeing this year. So thatâll even though the R&D, well, I donât know, maybe the R&D effect will be the same? Is that what youâre expecting to? Sounds good. And in the 10-K, there was some discussion there about the supply chain and how the semiconductors were really hard to come by. And the prices were way up there. And all of that. Has that kind of eased off or those? I mean, is there a chance that things will improve on the supply chain front? Well, we donât know what the outlook is but we continue to be challenged in that area. But let me emphasize this, this is not a Coda issue. This is a global issue that we see. So we donât see any easing at the moment. I mean, weâve been able to bear the cushion, both in price and, and availability, because historically, we have carried a lot of inventory. But that inventory is running out. So we continue to be concerned about supply chain. Okay. And you mentioned also in the 10-K, that it was really hard to find certain employees. In any case all on your website, thereâs only four jobs listed. So are you trying to hire or you just kind of gave up on that? Well, the way weâre hiring, weâre hiring software. And normally, that really is through sort of recruitment companies because of the specialized skills that we need. So generally, we are not just using indeed, we have recruitment consultants because of the kinds of skills weâre looking for. So we have a number, weâre looking for business development, for example, but global business development, weâre looking for software developers, as a scale and electronic engineers. I see. And then one last thing, I donât know if you can comment on it, but would reassure the investors I think, like for 2022, the revenues were $22 million or on average $5.5 million per quarter. I mean, is that like kind of a rock bottom revenue run rate? Or is it possible it could even go lower than that? Walter, I really canât see that. And I really this call, and itâs I just really want to give any guidance on that actually, we will be putting out our management targets. And when we released them, please have a look on this call. Weâre still working through our targets and Iâm not able to discuss these on this call. Iâm sorry. Thank you very much everyone for joining the call today, and for your interest in Coda Octopus. Have a great rest of your day. And thank you again.
EarningCall_1055	Good morning, everyone. Welcome to Banco Santander-Chile's fourth quarter 2022 results webcast and conference call. This is Emiliano Muratore, CFO, and I'm joined today by Robert Moreno, Head of Investor Relations; [indiscernible], Head of Strategic Planning; and Claudio Soto, Chief Economist. Thank you for attending today's conference call. Today, we will be discussing the trends and results seen in the fourth quarter and give some insights into our expectations for this year. Our successful digital strategy and customer oriented product offering continues to attract new clients, indicating great growth opportunity going forward. Thank you, Emiliano. The economy has continued slowing down although at a slower pace than expected. According to the latest figure of the Central Bank, GDP grew 2.7% in 2023, above our previous estimate of 2.25. Consumption has been more resilient than expected and investment has rebounded as postponed projects to resume in second part of last year. Also, a weak peso has helped the external sector of the economy. Going forward, we forecast the economy will continue slowing down as financial conditions remain tight. While political uncertainty has moderated, it is still relatively high and will continue conditioning investment. On the other hand, the economy will benefit from the reopening of China, which has pushed up copper prices. All in all, we estimate the economy will contract between 1% and 1.5%. In 20 24, we will see a recovery back to its trend. The labor market remains relatively weak and employment has been oscillating around 8% and total employment is still below its pre-pandemic trend. This year, the impairment rate may increase slightly as the economic moderates. The current account deficit, which was widening until the third quarter of last year, should start shrinking during the following month, as domestic demand contracts and turn off (ph) trade improve. Inflation remained elevated but has shown some signs of slowing down. December CPA was in line with expectations after a negative surprise in October and a positive one in November. Finishing the year with a 12.8% increase year-on-year. During the first quarter, CPA will continue increasing fast (ph) in part due to seasonal factors. But from the second quarter onwards, we will see a moderation due to the selectness of the economy, the appreciation of the currency and the flow of fuel prices. As a result, we expect the CPA inflation will be running at 4.75% by the year end. The Central Bank concluded its hike (ph) in cycle with a monetary policy rate at 11.35% in October. We expect the board will begin an issue in cycling during the second quarter as inflation moderates. Given the high level of the monetary policy rate, once they begin cutting, the board will proceed at a fast pace. As a result, we expect the monetary policy rate to finish the year between 6% and 6.5%. The government position improved in 2022 amid strong revenues and a sharp fall in expenditure. All in all, the fiscal balance ended with a sub 10% of GDP, somewhat lower than what we were expecting. Gross debt increased moderately up to 37% of GDP. This year, there will be a mild expenditure expansion with gross debt climbing up to 39% of GDP. As a result, public finance will remain in good shape. On Slide 5, we have the details of two of the main reforms of the government, a tax reform and a pension reform. So far, progress has been slow. For them to advance in Congress, a political agreement must be done with the position was a majority in the Senate. Therefore, the discussion on these reforms will require certain compromises by the government. We do not expect they are going to be approved anytime soon. On the 4th of January of 2023, the new fintech law became officially allowed (ph) did update the relation of financial -- on the financial industry recognizing the existence of new business models based on technology. According to the law, new technological payers will be under the regulation parameter of the CMF. Also the law regulates of finance, establishing that consumers are the owners of their financial information. Although there are pieces of regulation that are still due by the CMF, we consider this new law a step forward that opens different opportunities for the financial industry. On Slides 6 and 7, we have some details about the new Constitutional process, which should be finished by the end of this year. This new process in case proposing a new constitution with a defined framework of main ideas. The new text (ph) is expected to be ready by November 2023 and there will be a referendum with mandatory participation on December 17, 2023 to accept or reject this new draft. Thank you, Claudio. We will now move on to Slide 9 to begin discussing our positive client and business trends. Year-to-date, the bank's net income totaled CLP809 billion, an increase of 3.8% compared to the same period last year. With this results, our year-to-date return over average equity reached 21.6% in line with our guidance. Our net income to shareholders in the fourth quarter reached CLP102 billion weaker than previous quarters and mainly due to lower NIMs in the quarter as inflation decelerated and interest rates continued to rise. As we show on Slide 10, this was offset by very strong results from our business segments. The net contribution from our business segments increased 19.7% year-to-date with all segments presenting a significant rising profitability. It is important to note that the results from our client segments exclude the impact of inflation and the cost of our liquidity and therefore present a clear view of the sustainable and long term trends of our business. Moving on to Slide 11, the results of Santander Corporate and Investment Banking or SCIB have been impressive during the year. Total net contribution from this segment increased 49.3% year-over-year, driven by an increase in all profit lines items. Net interest income was 49.1% year-over-year due to the increase in loans and a higher spread earned over deposits. Also noteworthy was the year-on0year increase in treasury income of 44.4% and 19.8% in fees income in line with this segment's focus on non-lending income. Net contribution from the Middle Market increased 30.6% year-over-year with an increase in total revenues of 20.4% due to a 19% growth in net interest income as a result of a better loan and deposit spread and volume growth. Additionally, commissions increases by 25.7% in line with the greater client activity with the banks. On Slide 12, we show the results from our largest segment, which is Retail Banking, which include the results from individuals and SMEs. The net contribution from this segment increased 6.2% year-over-year. The margin increased 9% year-over-year due to a better mix of funding and loan growth, based (ph) in this segment's strong increased by 15.1% year-over-year, led by card fees due to higher usage and increased customer base, as well as fees generated by Getnet. Provisions increased 43.9% year-over-year mainly due to a normalization of asset quality of our retail loans after historically low levels of non-performing loans due to the increasing liquidity of our clients during the pandemic. Operating costs increased in a controlled manner by 3.2% year-over-year as the bank continues its digital transformation generating greater operating efficiencies. These positive results can be broken down to a single key factor, client growth. As can be observed on the left of this slide, our active individually clients that is clients that have a minimum average balance and introduction levels are growing 7.2% year-over-year and our checking account customers are growing at an impressive 13.5% year-over-year. Our SME client base is also evolving favorably with active clients increasing 14.6%, checking account clients are up 29.4% and loyal clients have grown 7.4% year-over-year. As we show on Slide 13, the success of Santander Lifeâs among individuals is now being replicated in the SME market. This clearly demonstrates the versatility of this digital platform With minimum additional investments, Life has opened a new segment of growth in the SME market that previously was enabled to digitally open or checking account. Not only is Life growing pretty quickly, it is also rapidly monetizing as we show on Slide 13. Total Life claims increased 22% in 2022 with active clients increasing 13% and loyal clients growing 21% year-over-year. The major innovations in 2022 were the expansion in to the SME market and the ability to open a U.S. dollar checking account a 100% [indiscernible] for an additional fee. Santander Life's clients are also rapidly being monetized with gross income from Life's clients increasing 44% year-over-year. Demand deposit remained high at CLP931 million surpassing by many times the amounts clients have deposit in similar competing platforms. The other important driver of our SME client base is Getnet as shown on Slide 15. Getnet has already sold some 157,000 POS, 91% of Getnet's clients are SMEs are target clients, and 99% of the POS are sold through the bank's distribution channels. Getnet is currently processing CLP580 billion in monthly sales. This product has been quick to monetize generating CLP27 billion in fees year-to-date. During 2022, Getnet launched e-commerce attracting some 8,500 business with some CLP5 billion in transactions in the month of December. On Slide 16, we show how we continue to innovate and evolve our brand solutions. In the fourth quarter of 2022, we launched the Work Cafe StartUp. This is an initiative that aims to offer an integrated solution to all the entrepreneurial needs and especially to increase bank penetration carrying out pilot programs with the bank and even offering financing. It is directed at companies that have three main characteristics. Firstly, for them to be in shading activities and presenting an accelerating growth; secondly, that technology is part of the value proposal; and third, that the proposals will be scalable to a real problem. Thanks to all of these initiatives. We can see on Slide 17, how we consistently continue to lead our main competitors in net promoter score. After a slight dip in our net promoter score at the beginning of the year, following some necessary changes implemented to improve cybersecurity protection. The NPS has rebounded to our digital platforms, app, website, contact center and work affair continued to be highly valued by our customers. In 2032, we also fulfill all of our banking targets, as can be seen on Slide 18, and are well on our way to fulfill all of the goals we set for 2025. On Slide 19, we highlight some of our most recent achievements. Once again, we received the top employer certificate for the fifth consecutive year. This positions us as one of the companies with base labor conditions in Chile. Secondly, our ESG rating on behalf of Sustainalytics was significantly upgraded. We improved our rating from 29.9 medium risk to 15 lowest reaching the best score among Chilean banks. Thank you, Tristian (ph) for that excellent highlight of our strategy. We will now move on to discuss the discussion of the balance sheet and results. So moving on to Slide 21, we start with loan growth, which grew 5.5% year-over-year and remained flat in the quarter. During the quarter, loan growth was subdued mainly as a result of the translation loss produced by the 12% quarter-on-quarter appreciation of the Chilean peso against the dollar, approximately 20% of our commercial loans are denominated in foreign currency mainly dollars, especially in the Middle Market segment. As the large corporate segment continues to grow by 3.4% Q-on-Q and 32% year-over-year due to various successful large loan operations and the fact that large companies continue to seeking short term financing through corporate loans because of fixed -- local fixed income market remains somewhat illiquid. (ph) Retail banking loans grew 1.8% Q-on-Q and 5.5% since December 2021. With loans to individuals increasing 11% year-over-year and 3% quarter-over-quarter. Consumer loans increased almost 5% quarter-over-quarter and 6% compared to the close of 2021. This was driven by an increase of 23% in the year by Santander Consumer, our subsidiary that sells auto loans and a 20.6% increase in credit cards. During the pandemic, credit card loans decreased 7% as clients reduce large purchases such as travel and hotels, which yields credit card loans. At the same time, many clients paid off credit card debt with the liquidity obtained from government transfers and pension fund withdrawals. In fourth quarter â22 as household liquidity levels return to normal and holiday travel resumed, credit card loans began to grow again and this trend should continue to be visible in 2023. Origination of new mortgage loans has fallen as inflation and rates remain high. As for SMEs, the demand for new loans remained moderate after a strong increase in 2020 and 2021 for the FOGAPE programs. Given the above SME segment loan book decreased 5.7% Q-on-Q and 20.6% year-over-year as SMEs repaid for FOGAPE loans. For 2023, despite negative GDP growth, we expect loans to grow in the mid-single digit range. Consumer loans will continue to be led by the rebound of credit card loans, SMEs will probably benefit from a new FOGAPE program to be announced soon. At the same time, we expect similar growth rates as the average portfolio in our corporate segment. On Slide 22, we show the evolution of our funding. Total deposits decreased 3.4% year-over-year and 4.3% quarter-on-quarter as the bank focuses on reducing funding costs. The Central Bank continue to raise the monetary quality rate, which reached 11.25% and the yield curve is sharply inverted. In order to control funding costs, we have been maintaining our market share and demand deposits while replacing wholesale time deposits with longer term funding sources that today are much cheaper than time deposits. Moving on to Slide 23, we can see how the movements of volumes, rates and inflation has been affecting our margins. The U.S. variation continued to decrease from the highs of mid-2022 and reached 2.5% in the quarter. This was coupled with an increase in the average monetary policy rate. Although, these factors drove down the bank's NIM to 2.2% in the quarter and 3.3% for the full year. As shown on this slide, this is mainly a phenomenon that affects our non-client NIM for the net interest margin from our ALM activities, including the U.S. GAAP and our liquidity. The client NIM, which is defined as the NII from our business segments over interest earning assets has and will remain stable in 2023. On Slide 24, we give further insights into our margins for this year. For every 100 basis points decline in inflation, our NIM falls on average by 20 basis points. And for every 100 basis points rise in the average monetary policy rate, our NIM falls by 30 basis points. Our base case scenario for 2023 is an average monetary policy rate of 9.2% and a UF inflation for the full year of 5.3%. Under this base scenario, the Bank's NIM in 2023 should reach 2.8%, starting below this level in the first quarter of 2023 and rising back to levels of 3.6% by the end of this year. Moving on to asset quality on Slide 25. The rise in the NPL ratio to 1.8% in the quarter is mainly related to household liquidity levels gradually returning to the post-pandemic levels and the softer economy. This has mainly affected clients who already prepared pre-pandemic. The coverage of NPLs as of December reached 185% and has been no reversal of the voluntary provisions. As we can see on Slide 26, these overall positive asset quality indicators led to a cost of credit of 1% for the full year, in line with our guidance for the year. During 2022, our regulator, the CMS, publish to draft of new standardized provisioning model for consumer loans. We expect this new model to be implemented in the second half of 2023. Our initial estimate is an increase in provisions of between CLP100 billion and CLP150 billion, mainly in our auto lending and credit card portfolios. We are permitted to use voluntary provisions to comply with this new regulation. During the fourth quarter, we saw cost of credit picking up reaching 1.2%. This was mainly due to specific clients in the Middle Market segment and construction sector. Given the trends and our economic outlook for this year, we are updating our guidance for cost of credit for 2023 to 1.1% to 1.2%. On Slide 27, we move on to non-net interest income revenue sources, which continue showing exceptional growth trends. Fee income increased 16% year-over-year and 1.2% Q-over-Q driven by higher client activity, new products such as Getnet and the growth of our client base as previously described. We expect these trends to continue in 2023. As shown on Slide 28, we can also see the bank's efforts to continue increasing productivity and to control costs. Operating expenses increased 6.7% year-over-year and decreased 5.7% Q-over-Q well below inflation trend. The bank continues ahead with its CLP260 million technology investment plan for the years of 2022, 2024, And because of these investments, we are expecting cost to grow significantly below inflation levels in 2023. As shown on Slide 29, the Bank continues with its process of optimizing the branch network. This year, we have closed 12% of our branches and have opened 11 new Work Cafes there, not only a major improvement in client experience, but are also more efficient. As a result of these initiatives, coupled with our digital strategy, productivity is rising significantly with volumes per point of sale increasing 16.2% and volumes per employee increasing 8.5% year-over-year. Moving on to Slide 30, we observe an excellent evolution of our capital ratios. At the end of the fourth quarter, the bank reported a core equity at CET1 ratio of 11.1% up from 9.2% in December 2021. Our total CET1 increased 20.6% compared to a 0% rise in risk weighted assets year-over-year. Despite lower net income falling rate and inflation expectations benefited OCI and equity and therefore, book value growth has outstripped net income, a trend that should be also visible in 2023. With this high capital level, we expect to maintain our historical payout of 60% over 2022 earnings. This still requires final Board and shareholder approval in April 2023. With this payout, our current dividend yield is close to 8%. On Slide 31, we will conclude with some guidance. Despite 2023 being a somewhat more challenging year on the macro front, we believe our strong client activities will continue expanding. Coupled with this, we will continue with our investment program, which focus on digitization and automation. We will continue investing to improve our leading NPS scores as well. We also expect client growth to remain robust as in 2022, led by Santander Life and Getnet. In terms of loan growth, we expect mid-single digit growth with a focus on all segments and non-NII to expand by at least 15%. NIM should contract the 2.8, but with solid client NIMs. As the NPR comes down, we expect NIMs to rebound to 3.6% by year-end. Asset quality should deteriorate somewhat, but the cost of risk will remain at a manageable level of 1.1% to 1.2%. Cost control will be a major focus and we expect low-single digit expansion of cost. Regarding capital, book value growth should continue. And as we mentioned, we currently have an attractive dividend yield. In summary, we will start the year with ROEs in the low-teens. As the year progresses, ROE should improve and for the full year, we are guiding an ROE of 18%. Thank you. We will now move to the question-and-answer section. [Operator Instructions] So our first question comes from Yuri Fernandes from JPMorgan. Please go ahead. Hi, guys. Thank you for the question -- asking questions. I have a first question regarding our ROE guidance, the 18% your call for 2023. And Robert, it's very clear that PAT (ph) right, like a more challenging first half and ROE is improving the second half. But when we look to the margin guidance that basically implies 50 bps decrease on your NIMs, right from 3.30 to 2.8. We have a hard time getting to the 18% for the full year because you have around CLP50 billion, CLP53 billion on interest earning assets and these pressure on margins, it cost some CLP200 billion to CLP250 billion on your NII. And we've got other numbers like G&A, the things we have, it's hard to get you those 80%. So my question is, where is the source here, right? It's lower taxes, maybe higher fees, other than very good G&A, and this NII pressure, what could be the drivers for you to reach those 18%? And can I ask a second question after you reply this one. Thank you. Okay, Yuri. So you have the margin, a picture clear. So the margins were for the 2022 were 3.3. For the full 2023, it will be 2.8, 50 basis points, so NII will probably fall. So the good -- so that's, let's say, the difficult part as we said before, the ALM is the main responsible for that. The client NIM should be relatively stable. Here the key thing for NII is, is the velocity at which the Central Bank lowers monetary policy. Okay. On the one hand, we know that for that to happen inflation comes down okay, that's kind of a headwind, but that's only a headwind in the very short term. If that triggers a rapid decline in rates, the faster that goes down, the better. Okay? So today, think of this as more a play on, let's say, on rates falling than the new plays (ph) come down. So the faster rates come down, the better it will be for outlook for NIM. But given the base scenario, that's 2.8%. Provisions should grow a bit, but under control. And then from there on, we should have a quite good news, okay? So first of all, it's fees, okay? Fees we're expecting as a 15, 20% growth. The same -- that includes fees and treasury, okay. We continue to see -- this is something we try to stress, but with [indiscernible] in the beginning of our presentation. Everything that's client related is doing very, very well, okay? You saw the results of corporate banking and Middle Market retail. So for there, I think in a client growth everything that's non-lending should continue to be pushed, okay. Just to give you an example, we increased SME checking accounts by 30% last year. We grew individual checking your grounds, I think, believe by like 20. So everything that's product use is getting it. That's good news. And then there's cost. And when we talk about costs, we're talking about personnel, administrative, depreciation and other operating expense. And how their operating expenses, we should have -- including those items, we should have a very, very low growth of cost Obviously, we talked about 2%. It could have been even lower. So there's probably the difference in your model is other operating income and other operating costs, which we're going to see a big improvement, okay? There, for example, we have and a lot of insurance cyber costs. We did a lot this 2022 to improve that. So a lot of things are going to come down there as well. So that's going to be a big boost to the bottom line to get the '18. Okay. Taxes, now taxes with lower inflation. We're not -- we'll be paying like say 16, 17, but overall everything that's not margins is going to that leaves -- we feel confident with the 18% ROE, okay? No, that's a pretty clear Robert. And maybe a little bit of cost of risk with the detractors and all the other lines helping you to have a better 2023. I have a second one regarding capital. And by the way, congrats. I guess our capital position was under pressure. We saw 2021, we had a lot of mark to mark and see equity -- shareholders actually suffering a little bit. But this was a good quarter for capital. So if you can explore a little bit more what drove the RWAs down? I guess you comment on some derivatives strategy and also the mark to mark. So basically, it's clear that message, right, you keep it at 60% payout on dividends. But could we see ongoing capital improvements in similar levels? Like, what is the -- again, it's clearly a bit the change. And what should we wait ahead for your capital position? Thank you. Hello, Yuri. Thank you for your question. So in the quarter basically the main source of risk weighted assets contraction, let's say, that main -- the overall risk weighted assets stay flat for the year was the market risk with assets. As you may have discussed it in the past with you and the market. I mean, the change of regulation for market risk is the standard model more basic approach to Basel III. So basically that penalizes the let's say the more sophisticated business as the one we have and we are the leaders in the derivative market in January (ph) far. So the bigger the book, the bigger the risk weighted assets and that's without considering the real sensitivity or the real risk of the book. So basically, what we have started in the fourth quarter and we plan to keep for this year. It's a big program of compression of positions have been basically netting down or netted out balancing positions without risk and leaving both positions out of the books. And so that's what's helped risk weighted asset. And then in terms of mark to market of the -- our inflation on hedges, I mean, the fall in the inflation in the second part of the year and then the recent months also helped the mark to market of our inflation hedges. So going forward, we are still optimistic about our capital position. We still see some room efficiency in the risk weighted assets coming from market risk. So that will be a tailwind for this year. Book value also like doing well in this new scenario of inflation moderate interest rate also going down. So as going forward, we think that we're going to stay from 10.5% to 11% CET1 with relatively easy even today with our 11.1% after paying the 60% in April in case the board decides to propose it on the ATM to approve it. Even with that, the CET1 should be at 10.5% or higher, which would be like the highest CET1 after dividend in the recent year. So we are we are optimistic going forward in terms of capital book value and risk weighted assets trend. Hello. Good morning. Thank you for taking my question. [indiscernible] talk about the high and update of regulation on provisions for the consumer portfolio and how you would have to provision for that? Any changes in that and what is your expectation? And second, going back to the initial question about the margin, I mean, you emphasized a lot that rates are going to come down and what impact is going to have? What if rate to stay up and it don't decline as you expect? Would that be positive or negative for you? And could you give us an order of magnitude? Thank you. Hello, Carlos. Thank you for your questions. In terms of the new provisioning for consumer loans. No change. I mean, we still are expecting an impact between CLP150 billion in the stock of provisions. The recent development is that at the beginning, it was expected to be in place during the second quarter of this year. Now we -- that this has been like a postponement of -- in the process, so we are seeing now for second half or maybe last quarter of this year, but no change so far in the impact we are foreseeing. And in terms of your question about the sensitivity to interest rate, definitely, if the rates go down at a slower pace or it might be worse for us and the opposite, if they go down at a faster pace and that's why we included the heat map, we call it on Slide 24. Where there you can have the different impacts, different inflation, monetary policy rates. I mean there you can see that in case, we -- the average monetary policy rate for the year stays like 100 basis points higher than our base case. We have an impact in NIM of 30 basis points. And well, basically, there you have the -- it's quite linear the effect. So it's just a matter of a few, let's say, put in what you think the average monetary policy rate could be. We include this two axis chart basically because inflation definitely will also be different if rates are different. So that's why we think that it's important to have both the sensitivity in the same chart to play. If you are more on the [indiscernible] side, higher inflation or higher rates, what would happen? And if you are more on the salvage side, what would happen with lower inflation or lower rates? Thank you very much. And this is very clear. Thank you very much for showing this slide. To what extent can you change this during the year. I mean, this is your restructure of position presumably as of now. If you change your view, if you think rates are going to evolve in a different way, can you change this in the next two or three months or is this set for the NIM of the year? No, I mean, I would say that the midpoint, let's say, for the NIM of the year, it's -- it would be like around there and what we can change. And if you compare this chart to the one we showed last quarter, you will see that the sensitivity to inflation went down because basically we reduced the U.S. GAAP. So this is due to inflation now. Basically, we kind of secured higher levels of inflation. So now we have like less risk to that. And at the end, managing this is a matter of what trajectory of fitters' rate the market has implied in the prices because basically we can changed this by adapting the sensitivity by paying fixed rate or reducing fixed rate and basically today, we see that what the market is implying, it's close to our base case scenario in terms of inflation and trajectory for interest rates. So we don't see any significant value in fixing or locking in that scenario. So that might change in the future if basically the market starts discounting a more [indiscernible] scenario that make us, let's say, take a position there. But so far we expect to have this dispositioning at least for the first part of the year. Hi. Good morning. Thank you for the call and taking my question. I guess a follow-up to Yuri's question on the ROE guidance and sorry to ask kind on a little bit more short term basis, but even get into that low-teens for next quarter. Maybe if you can help us think how do you think the interest rates will evolve, like, when do you expect [Technical Difficulty] start to come down and also even evolution a little bit on the inflation? Because it seems inflation should probably be lower in 1Q, but rates still not coming down. So not even sure how the margin would improve next quarter to get to that low-teen ROE, particularly because this quarter you had the negative tax rate. So if you could just help us think about just how that ROE is going to evolve sort of throughout the year with your macro assumptions on a kind of shorter term basis? I would appreciate it. Thank you. Okay, Tito. So in the first quarter, as we said, the NIMs in the fourth quarter are like 2.2 and they should be like 2.2 in the first quarter. At the same time, remember, there's a lot of seasonality in costs in the first quarter. So that's going to help. But effectively, the ROE in the fourth quarter was in the 10% range. In the first quarter, there's a lot of moving parts, but the margin slightly lower. Provisions should be stable or lower fees more or less the same and costs are seasonally lower as well. So overall, I think the first quarter and also there's what I was talking with Yuri, I think cost is going to be a big difference, okay? So in the end, you end up having a very similar net income in the first quarter. And then going on basically what we have is, is the seasonality of the race. And here, I think I'll turn it over briefly to Claudio if you can mention that. And then I'll wrap it up, okay? Yeah. Well, in terms of inflation, in the first quarter, we will have to â things that are important to have in mind. First of all, there was a change in access on services that will impact the CPI in January, that will be transitory. And there was a -- there will be a high teen prices due to these one-offs and that will help with the UF. And then in March, we usually have high inflation in Chile because of seasonal factors. So we will have a first quarter with a relatively high CPI. Then the decision for cutting rates by the Central Bank will be done. We expect during the second quarter, there are three meetings in the second quarter, so it could be in any of those meetings. But at that moment, we expect inflation would be going down in a very clear trend and that will help the Central Bank to cut rates in a very rapid fashion. You have to have in mind that the monetary policy rate in Chile is particularly high. If you compare previous cycles for trades or if you compare to other countries, the tightening in Chile was very aggressive. And therefore we expect also the cutting phase will be also aggressive. Yeah. So basically it's also like first quarter NIM is around 2%. And then as we follow what we expect to be the base scenario in rates and inflation. Second quarter inflation, UF inflation is always seasonal a little bit higher, but basically NIMs of like 2.6, 2.7 in the second quarter, third quarter 2.9, fourth quarter 3.6, more or less that depends on your interest asset earning growth as well, okay. So we are seeing some volume growth as we said 5%, 6%. Overall, you got a NIM of like 2.8% for the full year. And as we said before, this coupled with very good non-NII risk rising a bit, but it also a lot of things on the cost, okay. So this gives you an idea of the sensitivity we talked about, okay, that it's quite sensitive to the fall and the monetary policy and there's a big difference between first quarter NIMs and fourth quarter, okay. And the other thing that this is also a little detail, but something I wanted to mention is that we still have a significant amount of liquidity held in the held to maturity portfolio and that, that all comes due in 2024. So basically, there we have -- remember that's the collateral against the Central Bank line. We took cheap funding from the Central Bank, where we had a hold collateral. Some of that is held to collect. So it doesn't affect our volatility of equity, but obviously those are a lower rate. So this is looking forward to 2024, which obviously is a far away. But in 2024, we kind of return to normal interest rates, normal inflation, the uptake is paid back. A lot of this collateral, it has exact same maturity. So in 2024, we should also have a jump in it (ph) even with inflation coming down, given that we finished the [indiscernible] program our held to collect portfolio should be repriced at a higher rate. So basically in 2024, once again, it's quite [Technical Difficulty] we're looking back at NIM, the 3.3%, 3.5%, okay, or at least where we left off in the fourth quarter. So basically, we have to kind of travel through this first half, okay? But from then on, as a Central Bank, a lowest rate and obviously in 2024, when the Central Bank financing comes due, rates should definitely have an upward trend -- sorry, NIM is an upward trend. Great. Thanks, Robert and Claudio is very clear. Just one quick follow-up, I guess. Should we also expect a negative tax rate in 1Q like we saw this quarter orâ¦ Okay. So regarding the negative tax rate, basically that does make factors are complicated, but that's a simple answer. Even though the -- remember that for tax purposes, in Chile, you still do inflation accounting not in our financial books, but in our tax books, everyone, every company, every person, you still do tax accounting. So our equity continues to grow because of inflation, okay? So basically that monetary correction of capital was larger than, let's say, net income. So that's why you have a reversal of tax in the fourth quarter. In the first quarter, it should be still very low because we're still having some inflation and our book value has been growing, okay. As you saw, as we mentioned before, our book value for different reasons has been expanding at a faster pace and the book value is readjusted for tax purposes by price level restate. So said that, our tax rate should kind of have a similar trend as ROE in a certain sense. We're starting out low and then paying much higher tax. I don't know if it will be negative, but the tax rate should be very low-single digits or low-teens. And then slowly rising at the year and finishing at the year in an average of like 17%, okay. But once again, it should be relatively steep like the ROE. Thank you for the opportunity. Two questions from my end. One, the CLP260 million CapEx. Can you give us some details around it? What is it about and in which quarters do you intend to spend this? Okay. So basically, we usually do an investment plan that expands three years. So we're in the middle of our CLP260 million investment plan that we announced in 2022 -- sorry for 2022 to 2024. Itâs roughly equal per year. That's just digital, okay? Obviously, there's other investments and fix that, whatever. But basically, that entails the transformation of the branch work, automation, everything that's the new robot, taking a lot of the systems and products to the cloud. So basically, it's a big overhaul in line with the digital transformation that a lot of companies and banks are doing worldwide. And for us, it's very important because obviously with margins coming down, we're cost conscious, okay. We're doing a lot to control costs, but the idea here is not to touch the technological part and not to like cut costs today and then have to reinvest or invest more in the future. So basically, we have been reducing branches. Headcount has been coming down a bit. There's other cost initiatives, but the whole investment plan, which is transformation of the branch office, the front end and transformation of the back end operations, which means a lot of automation and digitalization and other technological improvements is what is covered by that plan, which is CLP260 million total and roughly one-third per year. And then maybe by the end of this year, we will announce a new plan for the next three years. Okay. And from the corporate tax perspective, given the current changes in the contradiction being contemplated. Is it fair to expect that this corporate tax rate of 17 would not continue and it should rise in the future by a certain percentage point? And if yes, then what is the expectation you have for the increase in corporate tax rate? Okay. So, in Chile, the corporate tax rate is 27. Okay, in your tax book. So we're always paying 27 in our tax accounting. But when you look at it, our financial and remember that -- for tax accounting, you have to readjust for the inflation account. And basically, what happens that means for banks is that your equity is increased by inflation every year. So if you have equity of 100, 10% inflation at the end of the year, your equity and your tax books goes to 110. That additional 10 is a tax loss in your tax books, okay? So that's why the effective tax rate is lower than this statutory tax, okay? So therefore as inflation rises, the monetary price dollar restatement of equity goes up and your effective tax rate goes up. As inflation slowly normalizes, okay, the tax rate will go up. And in inflation -- our normal inflationary environment was inflation around 3% to 4% our effective tax rate should be around 21%, okay? And that should be the normal in line with the 27% corporate tax rate plus the monetary price level restatement of equity, okay? In terms of the discussion about the constitution or the tax reform, it is not under discussion an increase in the corporate tax rate. I mean the discussion goes in other direction more on the on the personnel and the wealth tax and all that, but no discussion so far on increasing the corporate tax rate. Hi. Thank you for the time. I have two questions. One, if you can remind us what are your refinancing needs for this year and next? And how do you plan to cover for those. And are liquidity conditions still pretty favorable overall and if you can comment about that? And the second question is on asset quality. I'm looking at your non-performing loans and it almost doubled for consumer, the increase was also pretty meaningful even for commercial and mortgages. Is that all explained by the change in liquidity conditions or is there something else? Perhaps you can give a little bit more color on maybe a specific industry or products that are driving that as well? Thank you. Okay. So thank you for your question. Regarding the first one, our funding needs will be seen here like, say below the average we usually have on a yearly basis, I would put it in the CLP1 billion ballpark. So we are like comfortable with that and we plan basically to use the same mix we have been using lately between deposits coming from clients and institutional investors some [indiscernible] funding lines from banks abroad and very active on the capital markets domestically and abroad, I mean, more on the private placements side. Even though this last few days, weeks, I mean, the public capital markets abroad have improved like dramatically. And so now even public transactions in the U.S. market and another public market, it could be an offset. So on the funding needs for this year, we are quite comfortable and about liquidity conditions. The capital markets, the domestic capital markets is in better shape and used to be in the middle of the pension fund withdrawals and all that tension the market had. Now situation is, itâs better even though the total sizes of the transactions are not the ones we had in the best moment of the market, but the situation is quite favorable. Definitely, any potential risk of additional pension fund withdraws would put a pressure on that, but it's not let's say, our base case for the year. And the good news is that public markets abroad also are improving and that give us much more flexibility either to that the domestic or international markets for our funding needs, which are below the average on a yearly basis. And Bob, do you want to comment on asset quality? Yeah. So asset quality, regarding consumer lending, that's really the rebound post and the excess liquidity. So that's just going to go back to where it was pre-pandemic. It might overshoot a little bit depending on how strong the recession is. But remember last year, I believe NPLs and consumer were like 0.9%. We had never seen it that low and clearly this is a direct result of normalizing liquidity and the levels of last year were extremely low. The good news is that we still have very high coverage. We haven't touched the voluntary provisions and we're good or for worse. We're going to add on 120 billion, 150 billion more of provisions in consumer obviously redirecting voluntary, it's not going to have an effect on the P&L, but the consumer coverage is going to be on the year at very high. And mortgage, I think it's very similar. Even though I think mortgage, there is some impact of the higher inflation and rates, especially higher inflation. We always talk about the good news on margins, but obviously higher inflation results in higher mortgage payments and there was a little bit of impact there. Once again, still very low and we have much higher coverage and the value of collateral is still quite good even though it's done very conservatively. In commercial loans, a bit the same, but in commercial loans, there has been some sectors with a little more weakness. And as we said in the presentation and in that management commentary, I would say, particularly in the core of the construction sector, without being not even near a crisis, there has been some weakness in the construction sector and that drove up provisions, especially in the Middle Market. In the Middle Market, it's a broad segment, but it includes everything that's construction and real estate. The real estate developers have been very, very, let's say, healthy. But when you have very little construction going on with high rates, obviously, construction companies of all sectors are probably the ones that are suffering the most in Chile. We have like 1% of our loan book I believe in construction. So that will be a weakness probably for a while until rates go down and until real estate developers begin their projects again. So basically, and under the segments like restaurants, all of that, those are coming out of the pandemic getting better, but still weak. And then with the recession, it's kind of hard to go through a pandemic and now a recession. So some of those sectors, which once again, they're like 1% of the loan book, but there should be some weakness as the economy slowed down. So therefore, that's why we finished the year with a cost of credit of 1% but in the last quarter, 1.2% and we think for this year, the average will be 1.1% 1.2%, okay? So once again, a rise, but still we have a lot of coverage. We haven't touched our voluntary provisions. We think that 1.1%, 1.2% is quite realistic. Hi. Good morning and thank you for the presentation. I have just one question. And it's regarding derivatives. What is the strategy regarding derivatives? If for example, if we saw -- if we see the first three quarters of 2022, when you see the accounting hedge of interest rate risk, it represents roughly 48% of the total interest expense without considering their adjustment, net interest income. So considering also that the royalties decreased from CLP17 trillion to CLP11 in this quarter. What will be the effect of these on margins going forward? What will be the strategy for derivatives and what will be the fate of the decrease in derivatives for margins going forward? Thank you so much. Okay. So there's two effects there and they're kind of unrelated, okay? So first of all, we have, let's say, three big groups of derivatives, okay, that are in the balance sheet. What is the biggest is, what we do with clients, okay? The client needs a forward on an interest rate swap and that is all managed with advancing our risk metrics, et cetera. Okay. And those are basically matched on the asset liability, okay? But given that we're a big bank, we're a lot of clients come to ask for protection, especially against FX movements, yeah. So our derivatives, and with a little bit what Emiliano said before in Chile, accounting for derivatives, basically, you have the asset and liability, okay, and there isn't much netting, okay? So basically, when the Chilean peso depreciated, that inflates the asset and liability of our derivative volumes, but the net doesn't really change, okay. So the big growth you saw in the derivatives as a percentage of assets and liabilities was because as a bank that does a large forward derivatives, especially with clients and through these type of things. The depreciation of the peso leads to an inflation of that volume asset liability and now when the peso appreciates that comes down, okay? And also the compression we have been performing in order to net that out and to reduce the decrease with assets for the capital ratio has alsoâ¦ Sorry, just bear with us a moment. I think we're having one or two technical difficulties. Please bear with us just a moment. We've lost the host, but we're just trying to recap now. Thank you. Thank you for your patience. If you just hold on for a few more minutes, we're just reconnecting the host. Thank you. Apologies for the delay. We're still trying to reconnect the host. If you can please continue to be patient while trying to reconnect them now? Thank you. Thank you. Okay. Sorry. I connected. I was really inspired, but I don't know why I left off. So basically, I was talking about a -- so when the peso appreciates the volume at [indiscernible] is false. Do you know if anybody tell me where I left off? I'll just summarize it up. And then we have the UF GAAP. So we control the UF GAAP using cash flow hedges. And those are -- the asset is a mark to market with strong mortgages, but the derivative is against equity, okay? So that explains during 2022, while part of the year, we had a loss in OCI because as inflation expectations went up, that that produces a loss. But as inflation expectations go down, even though there's an impact on margins, the book value growth. So there's another reason for book value growth because of these cash flow hedges, okay? So basically and that's always going to be that way. But as long as long term inflation expectations remain anchored with the Central Bank, what the Central Bank wants. That shouldn't be a noise. This happens when you have big sharp turns and inflation expectations, okay. And then there's a third type of derivative, which is a derivative we use in order -- because as -- remember, we always talk about we're long inflation and we're also short liability sensitivity to rates, okay? And part of that sensitivity to short term rates is also done through a hedging okay, but those type of hedges are not recognized against equity. The cost of those hedges of those swaps are recognized in net interest income, both the cost of that and the mark to market. So when you look at our NII, you're going to see that last year 2022. We had a big increase on what is valuation, what is inflation because we're -- we increased the inflation gap. Well, we also had a policy, we go long inflation, but we don't like to be on both sides of the equation. We go long inflation and long rates because if inflation goes down, rates usually go down, maybe not at the same moment, okay? But our biggest fear here is that if inflation goes down, rates will go down. So basically through what we have today is a situation where we see that inflation is going down and therefore rates should begin to go down, okay? And therefore, this year if rates begin to go down, not only would you have a decrease in funding costs, but also that increase in the value of that -- of those swaps, which is also included in NII, will also start to reverse, okay? So long story short, with inflation and rates coming down, you're going to see an improvement in the book value because of the OCI and you're going to see an improvement in margins. I don't know if that was clear or not. Yes. Okay. Thanks. Yeah. I wanted to follow-up on the return on equity clearly it's going to be lower in the first half of the year, increasing in the second half. For you to get to 18% you probably need to be closer to 20% towards the second half of the year and you're talking about potentially margins being even higher in 2024. So my question is, when you look at your sustainable ROE potentially in a mid-cycle situation with rates, let's say, around 4 or 5 normalized inflation. Should we think that your sustainable ROE is now above 18% given this trend and this momentum 2024 looks like it will be probably closer to 20%. Okay. Yeah. So basically, we've always stated that the long term ROE is 17%, 19% because there's always -- it's hard to tell the future now. But basically as we said, if we go back to normal rate and inflation with margins going back to their historical standards, what we don't know is, is things like unexpected legislation or things like that, okay, or worse is going to be. But if everything goes back to normal, we don't have any like surprises a 19% ROE is in the long term is absolutely feasible, okay? We keep the range 17%, 19% to take an account of unknowns, but clearly going back to normal levels of inflation in rates and then our strategy continues to be successful, 19% ROE is the high end of that range is clearly absolutely feasible for the launch. Thank you. Sorry. Thank you for the opportunity. Three questions. The credit cost for the full year, the guidance is 1.1 to 1.2. In terms of quarterly, do we have any expectation of whether it will be like front loaded or back loaded? That is question one. It should be a front loaded, maybe second and third, but as I said, this has a lot to do with the involvement of the economy. So as we're seeing the weaker economy now and then picking up at the end of the year, sometimes there's lags and asset quality, but I would say that it's going to be probably higher in the beginning of the year coming down towards the end and obviously that the goal of the bank is to reach a cost of credit of 1% in 2024. So our view is that it will be higher in the first half coming down, especially in the fourth quarter probably. Yeah. So basically, as we said, 1.2 maybe a little bit higher in the beginning and then going down to 1, 1.1 okay? So it doesn't change too much like the margins for example. Perfect. Secondly, when you are answering the previous question on derivatives. There was a question about three different aspects. First was about the line predicted derivatives. The last one was about our balance sheet, your long inflation and short [indiscernible]. In the middle you explained about the UF account. If possible, can you explain it once, I couldnât get that? Okay. So the UF Chilean banks are very plain vanilla, but we have this special thing called the UF, which is the currency, especially in inflation linked pesos. And the bank by that nature are most long term loans in Chile and [indiscernible] inflation. As a result, since banks usually are taking deposits, which in Chile are either non-interest bearing or time deposits and time deposits tend to be a stable source of funding but very short contractually. So think of it this way, we're capturing nominal pesos and we're lending U.S. okay. So we're lending inflation linked and we're mainly capturing pesos that are not inflation linked. And this produces the inflation gap, okay. And if we do nothing, the inflation gap goes very, very high and that would indicate the bank would be taking on too much interest rate risk. And so we have a cap. We put a cap on how large the inflation gap could be. In order to control that gap, you can issue inflation linked bonds, which we do, but there's not enough, okay, in the Chilean market. So the other way to control the inflation gap is through derivatives, okay. And those are the derivatives that we do under cash flow hedging and accordingly under so where basically you do is, is you take a bundle of mortgages and you take a derivative and we basically lower or we control the UF GAAP, okay? So it's very efficient and that basically it's very well documented, okay, but since that is technically defined as a cash flow hedge, that cash flow hedge by accounting rules everywhere under IFRS has to go against equity to that. So if we did a bond, you would have the asset liabilities, okay, matched and you would have no mark to market. If you don't use a bond, and you have to use derivatives, the accounting forces you not to mark to market the asset but yet, but the derivatives. So â and that's the part that goes under equity, okay? Going a little bit further, remember that under Basel III, those cash flow hedges don't go under CET1, okay? So as we phase in CET1, these cash flow hedges will have no impact on capital. But today, in Chile, we're not there yet in terms of the phasing in. So this impacts capital and impacts CET1 even though later on, the CET1 will not be impacted by these cash flow hedges, okay? So as inflation expectations come down, we should see that impact of these derivatives fall or have less impact on capital. And under Basel III in the future, this will have zero impact either positive or negative. I don't know if that makes it more clear or not. No, that's perfectly clear. Many thanks. And the last question is, this derivative of the three varieties reasonable part of our overall operation. From the counterparty risk perspective, how do we get confidence that the counterparty good enough to kind of honor (ph) this. So can you give us a sense of who are the counterparties as these international investment different banks or Central Bank in some case or domestic corporates. So how do we get confident that these derivatives will be on a -- if there is excessive volatility? So the big chunk of the loan book, because as Robert said, I mean, we have this activity with clients basically, the counterpart is one of our clients, who are corporate, sometimes SME, sometimes the corporate. Depending on the profile of the client and [indiscernible] of the clients, some of them do have collateral agreements that basically have like daily revision and posting of collaterals for the decision. And in that sense, basically we assess the equivalent credit risk of the derivatives as a loan to the clients. So that is part of our credit risk management with clients. I mean, some of them use their lines with derivatives. And if we aren't alone, maybe we don't have space for the derivatives and that will run. I mean, so just on the client basis, it's just part of the credit exposure management we do with any clients and the derivatives itâs just another product that we factor in that exposure. And then when we, let's say, with hedge or we go to the market to hedge that exposure to clients. There we -- the counterparts are basically banks. I mean either domestic or international banks depending on the product or a peso swap. Sometimes it's a local bank and for dollar swap. Usually, it's an international counterpart, but it's there. We have all of them with collaborative agreements with CSAs on with daily revision and daily mark to market and let's say either cash or very high quality collateral. When you have bilateral trading and then you have a significant part of the duration through current houses like SCH or CME and even we have a com derivatives which is the local TCF here in Chile. So from the credit exposure point of view, the derivatives portfolio is quite secure because it's either collateralized on a daily basis or managed as any other exposure to clients within our credit risk management policies. Just one follow-up, we have in our financial statements when we publish them for the full year, but we always include a table that shows the derivatives, the assets and liabilities, which ones have the threshold in the collaterals and the big majority do daily margin calls. Okay. So that's really good. So basically we put that because now we want to make sure that people feel comfortable that this is correctly done. But I would say that 80% or more has daily post in Oclaro (ph) and CSA. That's in that note I was talking about, okay? Yes, that's important that. Because even if it is, we have it out with the bank. We have also daily market calls. I mean, the difference is, if you're doing on a â whether it's either house or you are doing it on a bad debt basis, but even the other house are highly volatile. Yes, it's threshold zero, so basically every day, okay. So yes, that portfolio especially decline has we have no trouble. There's a lot of moving parts, but basically the client businesses has been very safe. And as Emiliano said, that's included -- for example, we do a big deal with a large Chilean corporate, that's included in their credit and exposure. So, no, that has worked very well. And the trend is to go to clearing houses and when we can because it's efficient on the capital point of view for us for the counterparts. So the trend there is to go to more clearly -- centrally cleared derivatives. Sure. And lastly, from a capital convention perspective, all these derivative assets on the balance sheet. What percentage of capital is consumed by these or what is the risk weighted assets that come from these derivative assets? I mean, the total exposure for market risk in our case is around like 16%, 17% of the risk weighted assets, which is large, but again because in Chile with that, we are under the standard approach on the Basel III. So when you -- if you look at our market risk exposure under the European Basel III version, which is the one we report to our company, our risk weighted assets for market risk are like one-fourth of what we see here in Chile. So if you look at our risk weighted assets on the Chilean version, market rate represents 15%, 20% of risk weight asset. But if you see the same picture under the European version that allows the use of different models that are the ones we use to manage our derivative business that goes to one-fourth basically 5% of the risk weight assets. Okay. So, well, yes, I think we'll conclude here. And so if anyone has more questions or comments, please contact us. So thank you very much everyone and talk to you soon.
EarningCall_1056	Greetings everyone and welcome to the Calix Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the brief prepared remarks. [Operator Instructions] As a reminder, this conference is being recorded. Thank you Paul, and good morning everyone. Thank you for joining our fourth quarter 2022 earnings call. Today on the call we have President and CEO, Michael Weening; Chief Financial Officer, Cory Sindelar; and Chairman, Carl Russo. As a reminder, yesterday after the market closed, Calix issued a news release which was published on our Form 8-K along with our stockholder letter, which was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of the Calix website. Before I turn the call over to Michael for his opening remarks, I want to remind everyone on this call, we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy, and market outlook and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in the fourth quarter 2022 letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. Also in this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the fourth quarter 2022 letter to stockholders. Unless otherwise stated, all numbers referenced in this call will be non-GAAP measures. Thank you, Jim. In the fourth quarter, the Calix team once again executed with [their funds] [ph]. Continuing our track record have improved financial performance across the four measurable objectives that we have outlined for investors: deliberate revenue growth, gross margin expansion, disciplined operating expense management, and continued predictability. Demand from new broadband entrants, progressive broadband investors and legacy minded communication service providers that are transforming from dumb pipe providers to a Calix platform based broadband service provider was strong in the fourth quarter. The team delivered 39% year-on-year growth in Q4. This closes out an incredible 2022 delivering our third consecutive year of greater than 25% revenue growth. Calix [connections] [ph], our customer success and innovation conference posted more than 3,000 attendees coming together in-person and virtually. The excitement after connections was a key contributor to our fourth quarter results as we added 26 new broadband service providers, bringing the 2022 new BSP total to 119. As of fourth quarter, the number of BSPs started their platform journey with us increased by 20% year-on-year. We ended the year with 950 BSPs leveraging the Revenue EDGE, the Intelligent Access EDGE or both. In addition, RPOs were 199 million in the fourth quarter, up 59% year-on-year, and 15% sequentially as more BSPs leveraged Calix platforms and managed services to transform their business. Our platform and managed services bookings were more than 90% of our total bookings in fourth quarter, thereby completing our transformation to a platform company. As our transformation is complete, we will no longer talk about this metric. Instead, we will talk about how our team is enabling BSP customers to transform their business through the power of platform and managed service offerings. Every 91 days, our cadence of innovation delivers new capabilities that help the Calix platform based [BSP succeed] [ph]. Thank you, Michael. On the supply front, the Calix team outperformed again, allowing us to deliver revenue of $245 million at 51.6% gross margin, both slightly above our guidance range. At the same time, [we built] [ph] incremental inventory of $8 million relative to the third quarter at an inventory churn of 3.0, which remained within our inventory guidance range of 3% to 4%. While the supply chain environment is improving in some areas, the challenging areas remain unpredictable and result in surprises. These times remain extended, decomits still happen, and sourcing components in the secondary markets require extraordinary effort. We continue to expect the supply chain environment to be challenging through 2023, balancing our strong demand expectations. With our current view of supply chain performance, we reiterate our target financial model of 10% to 15% revenue growth that we offered during our Investor Day last February and again last quarter. Albeit, we expect to be at the high-end of this range for 2023. We also reiterate 100 basis points to 200 basis points of gross margin expansion. Furthermore, as we continue to evolve and our platform in managed services grow, we are making modest changes to our operating expense model. The sales and marketing operating expense range will increase to 18% to 20% of revenue from 17% to 19%. R&D operating expenses will be 29% of gross profit versus 30% of product gross profit. Remember, we are no longer breaking up product and services revenue, and gross profit going forward. And G&A operating expenses will decrease to 7% of revenue from 8% of revenue. Calix is leading the disruption occurring in the communication industry and to address this opportunity, we plan to invest wholesomely to the target financial model. Thanks, Cory. The market is entering a period of inflection. The legacy provider is faced with the growing reality, the speed of the go-to-market strategy will not succeed in the long-term as most consumers simply do not understand broadband speed. In markets with more than one provider, a speed only strategy will result in the commoditization of their product, which always starts a price eroding battle with no path to revenue, or subscriber gains. This is the once in a generation opportunity that Calix is uniquely positioned to address. 12 years and over a billion dollars in investment into our platform and growing portfolio of managed services has enabled Calix to be the company that is uniquely enabling a growing number of broadband service providers to dominate their market and beat the legacy provider. We remain committed to our mission. To enable our BSP customers to simplify their business, which consistently delivers new levels of operational efficiency, excite their subscribers through a growing portfolio of managed services, and grow their business, delivering subscriber based expansion, improved profitability, revenue growth and an ever growing positive impact on the community they serve. We thank everyone for their continued interest and support of Calix. Thank you. [Operator Instructions] Thank you. Our first question is from Ryan Koontz with Needham & Company. Please proceed with your question. Good morning. I wonder if you could expand on your impressive surge in RPO you saw in Q4? Is that driven at all much by change in mix or contract duration, across your customer segments, any kind of color there would be helpful? Thank you. As we said, we had strong demand and across our broadband service providers as they continue to adopt our platforms and adopt our managed services, part and parcel of that as you see growth in RPOs as we close more contracts. Anything else you'd like to add Cory? Yes, right. I think it had more to do with the strength of coming off the connections. We also saw some specific around our new product marketing cloud plus, but it was on contract duration extensions. It was just increased business activity following the over, you know, the strong attendance coming out of connection. Yeah. I'll just add one piece on that, Ryan, is that, like I said, there were over 3,000 attendees not just in-person when we ran the event in October, but also we ran a very successful virtual connections two weeks later. So, with over 3,000 people attending those different events, there was a huge amount of interest in what we're doing. That's great. Really helpful. And wondered if you're making a comment at all in, kind of the bookings climate out there in Q4. I know this is seasonally a softer time for major CapEx investments and there's been some commentary in the industry around booking softness as customer lead times, customers don't order product in quite as far lead. Any color you can share with us there on, kind of the general climate around bookings? Thanks, Ryan. As you know, we do not disclose bookings or backlog. That said, demand for our platform and managed services was strong in the quarter as you can see by the RPO growth and our new land and expand chart, which we provided in the investor letter for the first time, gives you good insight into the growth of that land and expand. Brian. This is Carl. I want to take the benefit of [indiscernible] advanced age and advantage of the Chair position to just share with folks the fact that I've been through these cycles not pandemic induced multiple times. And I want to highlight what Michael I just alluded to and what Cory spoke about in your conference and say that from my perspective, a [indiscernible] company, by the way, which Calix 1.0, we remember way back when it was, we experienced in this time, higher book-to-bill ratios because of your point lead times extending out, customers will order further out, sometimes they'll double order. For example, if you have a distribution channel, you're going to take double ordering. We saw that back in the dot-com bubble in [MERS 2002] [ph]. Those are factors that to get people the same we're going to have the same, sort of thing. And I suspect you'll hear from vendors, book-to-bill that are less than 1. Calix is not Calix 1.0 anymore. And what you're seeing is the strength of the platform to manage services and the difference it makes in our demand profile and the team's ability to forecast that demand. And so, while I appreciate the question, I will employ you to understand that this is no longer that, sort of animal. And so, I'll simply amplify on what Michael said, and what Cory spoke about in the conference, demand visibility here is very good, and the demand for the platform to managed services business is strong. Fair enough? Hi guys. Thanks very much. I was just looking at the shareholder letter and there's a chart that focuses on platform and managed services adoption. I think you just refer to it, the land and expand slide. So, it's great to see all the new customer adoption, but I guess the question I have is like when you when you look at the growth of the software side of the story going forward, do you think more of it is really predicated on adding new customers or do you think more of it is really about deepening your penetration in existing customers? Like how do you think about those dynamics? Thanks, George. So, as we put in that chart, it gives you good indications of the three levels of adoption, right. Starting out with the platforms and the second bar is what we're doing on the cloud. And the third bar is, as we've always stated, the early inception of us going down the managed services. And so, to your question, we actually think about it in all the ways that you identified. On one side of it, we're acquiring new customers. We talked about how or on quarter we keep adding more new customers. That was 119 in the year, right? Once we're in, they generally start out with our platforms. So, if they're a new broadband service provider, they're deploying a new network, if they're a brownfield existing service provider, they're maybe doing a new build-out. They're overbuilding their old technology, whether it's old DSL or old cable, right? And then as they start to embrace the transformation of their business from a speed orientated dumb pipe company into an experienced company, then they start rolling-out our clouds to transform their call centers. So, they have a great experience and they have a managed service and their marketing organization and operations. They have automation and ROI, which then leads them to the third stage in their transformation, which is then going beyond speed and offering full managed services. And so, my point is that, it's a staged model that we go through with every customer. Many of them are at different stages in this scenario. So, we have huge opportunities in all kinds of places. And a great â I'll give you one last example is that if we have an existing competitive account, wasn't a huge opportunity for us to go. And then we can start by transforming the marketing organization or we can start by transforming the managed Wi-Fi and incremental services, you know, so we have a land and expand all [of those] [ph]. And let me just add on to that George. I look at that in three dimensions. So, first dimension is adding customers. Second dimension is adding subscribers. So, as they grow their networks and evolve their networks, and then adding new applications on top. So, to your point and to your question directly, we could stop landing new customers and continue to grow for a very long time. Most of the growth is still going to come out of the additional subscribers that they take. And grow their subscriber base and as they add additional platforms. Got it. That's helpful. And then one other one for you Cory. I noticed the change the target model. Could you talk a little bit about why you're making that change right now? Is there something you see that's different about the ultimate profitability of the company or anything you're seeing fundamentally in your business? Is it more just a recognition that you guys have been, kind of undershooting relative to some of those targets on the cost side previously? Yes, George. Itâs more of a function of the evolving business model, right. Remember, as we started adding additional software to the business mix, we will invest more in the sales and marketing side, right. So, I'll be at the increase that you're going to get on the sales and marketing side will be offset by higher gross margins. But over time, if you think about a mature software model, sales and marketing is higher than where it is today. So, what you're seeing there is, we're going to, we took up that range to, they could affect any greater software contribution. At the same time, now that we've grown for 25% for the last three years, our G&A model is too high, and you've seen that we've consistently underrun that by about a percent. So, all we're doing is really lowering the G&A model to reflect the realities of where we're at the size of the business and the synergies that we've achieved. And moving that up to the [sell to the market] [ph] reflecting the software contribution. That makes sense, George. Thank you. Can you remind us relative to the [950] [ph] that adopted the platform managed services, the total customer count now is, I think last time you gave was 1,700 plus, what's it now? That's right. We look at it. That's right. We look at it all. Oh wait, it's 50% penetration of one platform or more. Starting the platform [period] [ph]. Starting a platform journey. So that means that they could have the Intelligent Access EDGE, the Revenue EDGE or both. Understood. You're anticipating my next question, which is, if I look at the 844 disclosed customers that have adopted one or more clouds, can you give us some sense for â from a depth of penetration standpoint, what was the incremental adoption for those who had already previously adopted 1 or 2 clouds, how many when added a second or third cloud or the bulk of those 84 already at 3 clouds? Yeah. The bulk of those are not at 3 clouds. And so, but we are not providing any further granularity on that Paul. It was [good help] [ph]. Can you give us qualitative insight as the ads are going to help you progression? I assume most customers start with 1 cloud as opposed to 2 or 3 and then progress over time. Any sense for what's been the average? I recognize in one case, you just launched this past year with [indiscernible] on what the progression has been qualitatively? Well, you're right. We always start with one cloud. They don't like â the majority of the time we start with one cloud. And then what happens is that depending on the cycle of their deployment, and their transformation again. So, let's say they start out with support cloud. So, you're transforming a call center and if you take a traditional network company, that transformation of a call center is very part and parcel of what you do every day. And then it goes into the next one, which is do you actually understand the need to transform away from a speed based go-to-market model? And then you're going to go after the marketing cloud or you're looking for operational efficiencies and you're going to deploy operations cloud because it drives massive reduction in OpEx. So, it really just depends. So, qualitatively, you're right. It depends on the length of the deployment before they go to the site and [indiscernible]. And Paul, this is Carl. I'm frankly amazed that you weren't simply overwhelmed by the addition of this new metric, and I didn't have you, like, literally, the oxygen snaps from your lungs to the [indiscernible] of this chart. You just passed the oxygen from my organs, Carl. So, if Ryan already asked this, my apologies. I don't think he did, but from a macro perspective, of course, the investment community understandably worries about the current climate, the increase in interest rates, macro environment, I know you get asked at least once every 90 days, but if not more often. But any sign of a pullback in BSP deployments projects, delays, project cutbacks, whether due to interest rates or the ongoing need of constraints and on the latter, are you seeing any improvement? Given what's going on in economy, the layoffs, etcetera, are you seeing any improvement in labor constraints, [indiscernible] more complex projects going forward? Yes, it's a good question, Paul. And I think what's very interesting about interest rates as they have moved. And the general economy is, it actually highlights the differences in the market and the disruption, but rather than me answer that, Michael obviously has relationships with many, many of the leaders in our segment and I think can speak more eloquently to it. Yeah. So Paul, interest rates create an opportunity [cost buyer] [ph], if you're running a low ROI business, the opportunity cost buyer is above your business case, so you stop investing. If you have a high ROI business model and the bar is lower, while you'll continue to invest even when interest rates go up. So, now I'll slide that to a service provider. The legacy provider uses terms like [indiscernible] and only competes on speed and price, they're really just an infrastructure player. Where the Calix BSP uses subscribers served and net promoter score, which enable them to drive a dramatically higher ROI. So, when these interest rates happen, it is irrelevant because they're ROI is way over the bar. So, that's kind of how we're seeing the market. And on the recession side that Paul asked about from a jobs labor potentially layoffs or whatever? What are you seeing there from our customers? Well, so with regards to the recession at this point, actually [job adds] [ph] are still strong. So, if you look back, if I â correct me if I'm wrong, Cory, but in December, [job adds] [ph] in the United States for 230,000, I think they were â a month before our job adds for 261,000. So, while we hear this general noise in the market for people who follow tax, it's actually a completely opposite scenario across the United States. When I can still go into it to full day and get, you know I see the signs of hiring, hiring, hiring and they're offering $22 to $25 an hour, that doesn't really translate into labor markets bring up in the real market at all. Yes. So, now I just had a conference with a bunch of CEOs and they all said the same thing and said labor remains a constraint. All right. Before I pass it on, just to clarify your previous comment about carrier activity, deployment activity. I've heard you make the comment before I understand your point about your higher ROI and therefore being less of a challenge, but if I could just ask you this simple question, independent of that fact, are you seeing any pullback, any delays by carriers and project deployments? Great. Thanks. I guess, I want to talk about the supply chain and some of the comments made at the conference a couple of weeks ago that there were, you know decommits in the quarter, I think if you hadn't said that in the conference, we wouldn't have noticed it in the results. So, could you talk a little bit more about this quarter's decommits versus last quarter's decommits, the kind of changes in the environment in the supply chain, and then what do you expect going forward for the next few quarters? Yes. Thanks, Mike. Over the last two, three years, it's been a challenging and supply environment. We've had decommits and schedule-outs all the time. So, it's a continuation of the same that we've been experiencing. And what you've seen us this quarter do again continue to execute with excellence and our supply chain has met those challenges and rose above them. So, I think I've said that we think the worst is behind us. Last quarter, we talked about the supply chain bottoming and improving. So, we expect that the supply chain will continue to improve, yet it remains challenging in certain regards. And so those things will continue to work through, but if I were to go year-over-year, it's a better supply environment than it was a year ago. And I guess just my question, our follow-up to that is, so if it's better than it was a year ago, I mean, do you expect the improvement in 2023 to be, sort of smooth sequentially with this improvement out in through the year? Or are you braced for potential lumping back and forth throughout the year and that later quarter could be tougher than in the earlier quarter, if that question makes sense? Well, that's the interesting thing about a challenging supply environment. There's surprises. So, I can't tell you what's going to happen in the future. But I can tell you that if you look back a year ago, we were only forecasting revenue growth of 5% to 10%. We're sitting here today saying, we're going to grow at 15%. You're seeing that we've built inventory up year-over-year. We're sitting here at a turns ratio of 3. So, we feel a lot better about where we are today, but yet you have to understand it's still a very challenging supplier environment and surprises do happen and we will continue to manage through it like we have in the past. Okay, perfect. Last question for me because I feel like I always have to, kind of ask you guys a question just about level of disclosure and what kind of new stuff we can get? And you obviously gave us new disclosure on the platform and managed services customer count over the last five quarters. And I guess my question is that if you're disclosing that customer count, it's not too far away from just telling us the revenue breakout. What are your thoughts on that? If you're not trying to give away too much, but it's not that far of a step from just telling us more of a revenue segmentation of the company. Could I just get your thoughts on that? Mike, let me take this real quickly. It's Carl. I'm excited by the change in leadership at Calix with Michael and Cory leading the show. I'm excited that they chose to share this new graph, but I'm still on the room. And so, to be clear, you're right, directionally, you're getting closer. But remember, competition still is something that I have no personal interest in encouraging. And so, I think the combination of RPOs combined with customer land and expand penetration gives those investors who have been following us an even better sense for the power of the model and probably hate them modeling the business. Subscriber counts, ARRs, things of that nature are way off in our future. So, I think you now have the new chart. We'll be speaking to it more as we go forward. I'm excited that Michael and Cory chose to show it. And I think we would best stand pat on that. Fair enough? Yes, thank you. Question on sales and marketing levels. You've partially addressed my question with raising the guidance on that. I did notice that your Tier 2 customer breakdown was up most significantly in your letter. How does that correlate with the increase in sales and marketing? In other words, is that because you are targeting the Tier 2s a lot more now and that's requiring higher sales and marketing resources? Thanks. No. Actually, it has no correlation still in marketing. It's actually just focused on what we're doing with regards to platforms and software. That's what's attracting them, but that doesn't require incremental in Tier 2 at all. So, there's no correlation. Good morning. Thank you for taking my question. I want to go back to the supply chain comments. If I look at the level of beat you had in Q3 versus the level of beat versus the consensus you had in Q4, that is, you know, it's narrowing yet your commentary about supply chain improving. So, I'm trying to maybe understand, are you still like having golden parts missing and that impacted the quarter? Just if you can elaborate a little bit more on that. Yes, sure. So, I think we were clear in the stuff over letter last quarter. That last [quarter's revenue] [ph] was more of the anomaly, right? We had a certain amount of our inventory line up that allowed us to over perform in the quarter. I think we also said that that was more of an exception at that time. Then what you should expect from us is to have narrower differences between what we actually execute too in the guidance we've performed. So that's what you've seen in the fourth quarter. We did what we thought we would do and now it wasn't anything related to golden screws or anything along that line. We just continue to work the problem and made steady progress on the quarter. Got it. If I revisit your new disclosure, can you give us a sense, I know you mentioned that there's a three dimensions to your opportunity. One is the number of service providers, but there will be other subscribers that they serve and how many subscribers they have enrolled onto your platform? Can you give us a sense on what percentage of your or maybe transactionally give us some helpful hints on how we should be thinking about the subscriber penetration within your broadband service providers that you have disclosed as those who have adopted the cloud versus those who are, you know, just adopting one portion of your cloud service? Yes. So, as we've stated frequently, it's early days, right? So, when you think about the penetration on the suites, we've demonstrated in there, if you look at the number, there is 293 [indiscernible] more and more suites into their subscribers. But that also, they have different go-to-market models with regards to, I think [indiscernible], are they included as an embedded into their platform, there's all kinds of different ways to look at this. So, I would say because it's early days, there is no additional insight other than they have at least one. It's against a portion of their subscriber base and there's lots of upside. As we've mentioned in the letter, there's currently seven managed services that are available for them to deploy and we've announced another four on top of them. So, lots of opportunity ahead, but it's still early days, Fahad. Hi, good morning. My question is about, kind of growth metrics, I guess, at a high level. And you've given us some new ones here with the platform adoption, kind of indicators and at least if you take the big ones, those appear to be growing, kind of in the 15%, 20% range in terms of platform adoption. Of course, as you mentioned, you've got customer additions on top of that. And I want to contrast that with the RPO growth rate. In the 60% range, 15% sequential. So, as we look at those two metrics, I guess, which one would you say is more important in terms of speaking to the overall future growth rate of the company and how do you reconcile the delta to those two and where do we end up and also relative to your overall 10% to 15% growth rate? Looks pretty conservative relative to the metrics. I'll leave it there. Okay. Thanks, Tim. Complex question. I would say that Cory mentioned that we were in the range of 10% to 15% now confident and said, we're at the top of that range as we look into 2023. So, I think that's a pretty clear indicator. With regards to future opportunity, that's why I stated in my opening remarks that we're at this inflection point in the industry where we have all these service providers who are legacy minded who have been really focused on one go to market, which is [speed] [ph] and they're realizing really quickly that that's a [coffin corner] [ph] in the future because of the fact that it leads to the commoditization of their product and they need to differentiate. And so, they're looking to us. And as you can see, there's a small number of the potential base, which is up to 2,000 service providers who have deployed our, at only one or more managed services, right? So, there's that 293 that have one or more. So, I would say with the future growth rate, we're just at the beginning of what's possible. That's the best way to state it. Hi, guys. Thanks a lot for letting me follow-up here. I guess, I wanted to ask about the tax rate. So, you guys changed the long-term model a bit on tax rate. I also noticed that your deferred tax assets are not going down. If I look at DTAs relative to some prior quarters, can you just talk about, sort of the picture on taxes going forward? Sure, George. Happy to do that. I can't believe I'm doing it this early, but go ahead. Yeah. So, we continue to generate some DTAs through R&D tax credits and stock compensation that keeps on adding back to it, but what you saw in the quarter was a benefit that was realized in the fourth quarter. And that has largely to do with some of those deferred tax assets that Iâve talked about. As far as the rate going forward, a couple of things are happening. Obviously, our level of income is going up and the way some of that, and I think I referred to this before, with a [guilty] [ph] and peace was based on foreign operations and that's relatively fixed relative to our growth rate. So, you should expect that to come down unless you've seen us bring down the effective rate by 8%, relative to last year. Thank you very much. And then also you mentioned foreign operations, obviously the company is still very North American centric, could you talk about your opportunity with the cloud platforms products looking into the UK or Europe or other parts of the world? Are you starting to invest there more aggressively and what's the catalyst for getting that side of the business growing? Yes, George, let me just clarify. When I said foreign operations, it was really our offshore development teams in China and India. But I'll carry over Michael to talk about what we're looking to do on the revenue side for international expansion. Yes, George, we've been really clear that the focus on North America because there's such a significant opportunity ahead. While we are running a limited expansion in the international market, primarily in the United Kingdom, we are making it limited. And the reason why is that until we have reached our full opportunity in North America, will be a full [indiscernible] of us to go into other markets where there's so much opportunity ahead. And you're going to see that from us consistently for the foreseeable future. Appreciate it. To go back to Tim's question, Michaelâs response, I appreciate that [indiscernible] disbursements are always slower than a lot of us would like and you folks would like. And I appreciate that the supply chain is still challenging. And I appreciate that there are risks to CapEx pullbacks, although you guys have said again and again with your return on investment that you enable that risk is not as promised a lot of us pursued. So, all that said, and I said, I'm sure the investment community appreciates you all having been pretty conservative historically, but all that being said, is there anything wrong with the logic that supply chain directionally will improve? Volume disbursement will increase over time, there will be overlap in all of the things being equal, and your clouds will progress and breadth of adoption, depth of adoption, as well as the server based applications. Shouldn't all that translate into revenue acceleration over time? In the future, yes. Maybe, you know, the point is that Cory came out with confidence and said, if you look back on, let's step back a year or two years ago, we were saying 5 to 10, now we're at 10 to 15 and Cory was pretty clear in his commentary that [DC] [ph] is 15%. And so, I think the key thing for us is that we look into 2023 and we're going to cross an incredible milestone. We're going to be right at a billion dollars organically. And the reason why we're doing that and accomplishing that as a leadership team and as an organization is because we're sticking to the tenants that we've intimated over and over again to be excellent at execution, we're focused on those four things. Deliberate revenue growth, gross margin expansion, disciplined operating expense management where we're investing [fulsomely] [ph] to ensure we capture all the opportunity and then most important or as important continued predictability. So, what we're giving you, Paul, is that continued predictability by executing against all those things. So, in the future maybe, but this is what we feel confident as leadership team. But Michael, just to be clear, if the substance of the disbursement did accelerate, if supply chain does improve meaningfully, all things being equal, unless there's some other factor that would present upside 15% or that's embedded in the 15%? We feel comfortable at 15% and that's with all the different variables affiliated with it, if that's what we actually do as we â when we determine what is the growth rate that we feel is a predictable one for our investors. And so, we take all those different inputs, if this was faster, if this was slower, if that was faster, to come up with our recommendation, and our predictions for 2023. And our prediction for 2023, Cory speaking away that he hasn't spoken before, but he actually, he, you know, would always [indiscernible] 10 to 15, he said I see 15. So, that should be an indicator of confidence. Yes, I think your [indiscernible], you know, if and if, I mean, it's sort of like a mathematical proof. Yes. If you take assumptions and [may guess] [ph], as we've said, this â we think this is a huge multi-generational opportunity. You know, if I think back, if I was [indiscernible], I never mind. [Multiple Speakers] Well, I was thinking about it, and then I was thinking, itâs not possible. No, but can you expand on one thing though that you've been through multiple for example, government funding, say, you know [indiscernible], right? So, give [Multiple Speakers]. Michael is looking over here and seeing a lot of gray hair. Well, all of this and Paul, you actually, I know you have some gray hair on this too because you remember broadband stimulus in 2009? And the challenges are, I agree with the ifs. The problem is predicting the ifs. So, the goal here with the team is to execute in the planning horizon knowing that this is a big opportunity, but predicting it is just too hard. Cory. I appreciate that. I'm not [indiscernible] that. I appreciate the conservatism, but to me, it seems like it's stating the obvious. It's really not single and wants to say that if there's acceleration in disbursements, it has a meaningful improvement in constraints, labor and components that that should translate to acceleration for all, not just for you, but for the whole industry. What's so terrible about the logic, butâ¦ Well, wait a minute. Wait a second, sir. It's not a matter of the whole industry. I can't speak to the whole industry. It's not a matter of the way you are conjugating the â and that's the theorem, which is if that does that happen, I agree. The challenge is, it's not conservatism. It's actually realism. I've been through this before. You've been through this before. And it's not being conservative. These programs simply don't happen that way. They never do. And standing in front of them, predicting them, youâre just better off waiting until you start to see the demand, the actual orders and then getting through the coin of revenue and then you got to get to deployments through a labor constraint or other issues. So, there are so many steps in that sequence that if you simply go to the end and say, yes, yes, sure, but it's not being conservative. It's literally being realistic. Hey. Thank you for getting back to me. So, follow-up on your previous discussion, can you give us a sense on where your â how much of your revenue base is currently coming from RDOF? What's your expectations for this year from stimulus funding? And then I have a follow-up. Sure. I'll take that. So, today, I think we've been pretty consistent with what we told folks. There is some money coming through, but I understand that that program has had challenges with it. We did start seeing some of the money roll-out last year. That money comes over a 10-year timeframe. So, it's just a small amounts of revenue that we are seeing today. This is a lot more in front of it, you know, [to come] [ph]. Correct me if I'm mistaken, but historically, you â I think your previous outlook has been, like, 10% to 12% of the funds ended up in the [comm equipment] [ph] supplier base. Is that still true? Okay. So, my long-term question to you is, clearly your model has evolved to a point where it is almost getting close to, if I look a little bit around the corner that you're almost tracking to a Rule of 40 model that will suffer peers are tracking. Why not begin to convey a Rule of 40 framework as opposed to the current framework that you're still using, which is more consistent with box and ship type of companies? Fahad, that's a much longer conversation on the Rule of 40 and the reality of it. We're not â I'll take that one offline because I have a whole different set of beliefs. I'm looking at the market and the Rules of 40, etcetera. So, rather than bore everybody with that here, find another one of my [indiscernible] lectures. I'll take that one offline with you. Thank you. There are no further questions at this time. I would like to turn the floor back over to Jim Fanucchi for any closing comments. Thank you, Paul. Calix leadership will participate in several investor events during the first quarter of 2023 and information about these events, including dates and times for public webcasts of management presentations when available will be posted on the Events and Presentations page of the Investor Relations section to calix.com. Once again, thank you to everyone on this call and webcast for your interest in Calix and for joining us today. This concludes our conference call. Have a good day.
EarningCall_1057	Thank you. Good afternoon, everyone. I am Brett Larsen, Chief Financial Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here in our Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer. As always, I would like to remind you that during this course -- during the course of this call, we might make projections or other forward-looking statements regarding future events or the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K, quarterly 10-Qs, and 8-Ks. Please note that on this call, we will discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in today's press release and a recorded version of this call will be available on our website. Today, we released our results for the quarter ended December 31, 2022. For the second quarter of fiscal 2023, we reported total revenue of $123.7 million compared to $134.5 million in the same period of fiscal 2022. For the first six months of fiscal 2023, our total revenue was $261 million compared to $267.2 million in the same period of fiscal 2022. As previously announced, our revenue for the second quarter of fiscal 2023 was impacted by a six-week delay in starting production for a large program with a leading power equipment company. This delayed revenue by approximately $20 million from the second quarter of fiscal 2023, but production for this program is currently underway and increasing in the third quarter. While constraints in the global supply chain continued to limit production, we saw some gradual improvements with respect to lead times of certain key components. For the second quarter of fiscal 2023, our gross margin was 7.2% and operating margin was 2.9%, compared to a gross margin of 7.3% and an operating margin of 1.2% in the same period of fiscal 2022. The gross margin in the second quarter of fiscal 2023 was adversely impacted by business interruption and other operational losses related to storm damage in our Arkansas facility, as well as by preparations for expected sales growth in the second quarter and increased labor costs in both the U.S. and Mexico. While profitability is expected to improve in coming quarters with expected increases in revenue, higher interest rates on our line of credit and increasing wages will limit a portion of that expected improvement. For the second quarter of fiscal 2023, net income was $1 million or $0.09 per share compared to $0.6 million or $0.05 per share for the same period of fiscal 2022. Our results for the second quarter of fiscal 2023 included a gain on insurance proceeds of $2.7 million or approximately $0.19 per share related to equipment damage -- damaged in the storm at our Arkansas facility. We are still determining further business interruption proceeds related to the operational losses incurred in the past two quarters as a result of the storm damage. For the first six months of fiscal 2023, net income was $2.1 million or $0.20 per share compared to $1.4 million or $0.13 per share for the same period of fiscal 2022. Turning to the balance sheet. Despite the continuing production delays due to supply chain problems and the continued ramp and transfer of new programs, we ended the second quarter with total working capital of $190.7 million in a current ratio of 2.1 to 1. Compared to the prior quarter, we're encouraged to see our receivables decrease by $4.7 million and DSOs at 78 days, down from 91 days, which we believe reflects some improvement among our customers with respect to disruptions from COVID-19 and supply chain issues. At the end of the second quarter of fiscal 2023, our inventory increased by approximately $2.5 million or by 1.5% from the prior period, reflecting the delayed production for the large outdoor power equipment program and our preparations for expected growth in coming quarters. While the state of the worldwide supply chain still requires that we look out much further in the future than in historical periods, we attempt to carefully balance customer demand and the likelihood of successfully bringing in parts in time for planned production. In future quarters, we expect see our net inventory turns slowly improve to more historical levels. Total capital expenditures were $1.4 million for the second quarter of fiscal 2023 and we expect total CapEx for the year to be around $9 million. We're also utilizing the $2.7 million gain on insurance proceeds for storm damage to modernize our operations, which should increase efficiencies in our Arkansas facility. While we are keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment and plastic molding capabilities, utilizing leasing facilities as well as make efficiency improvements to prepare for growth and add capacity. Despite the ongoing disruptions from the global supply chain that will continue to limit production and adversely impact operating efficiencies, we are expecting significant growth in fiscal 2023. For the third quarter of fiscal 2023, we expect to report revenue in the range of $160 million to $170 million, and earnings in the range of $0.15 to $0.25 per diluted share. While profitability is expected to improve in coming quarters with increasing expected revenue, higher interest rates on our line of credit and increasing wages will limit a portion of that expected improvement. While our facilities in the U.S., Mexico, China and Vietnam are currently operating, uncertainty does still remain as to the possibility of future temporary closures. Customer fluctuations and demand costs, future supply chain disruptions and other potential factors, any of which could significantly impact operations in coming periods. In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for Key Tronic. We believe that we are increasingly well positioned to win new EMS programs and continue to profitably expand our business over the longer term. We're pleased with the successful ramp of new programs and our expanding customer base in the second quarter of fiscal 2023 despite six-week delay for production from the large previously announced power equipment program. Production for that program is now back on track and rapidly ramping up. In essence, the revenue from that program simply pushed by a quarter. During the second quarter of fiscal year 2023, we continue to see the favorable trend of contract manufacturing returning to North America. Currently awarded new business has created backlog that will support over 65% growth in the U.S. sites over the next fiscal year. We won new programs involving outdoor power equipment, battery management, automated sprinklers and biometric sensor technology. We move into the third quarter with record backlog and we're seeing improvement in the global supply issues for certain components that have severely limited our production in recent periods. Global logistics problems, the war in Europe, China-U.S. geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies. We believe these customers increasingly realize they had become overly dependent on their China-based contract manufacturers not only for product but also for design and logistic services. Over time, the decision to onshore or nearshore production is becoming more widely accepted as a smart long-term strategy. As a result, we see opportunities for continued growth. As we've discussed in prior calls, we built Key Tronic to offer the ideal solution for customers as they move to respond to geopolitical pressures. Our facilities in Mexico represent a campus of 1.1 million square feet in Juarez, most of which is [contiguously] (ph) located in nine facilities acquired over time. Our three U.S.-based manufacturing sites have also benefited greatly from the macro forces driving business back to North America. Moreover, our new Vietnam facility continues to increase production levels and the abatement of COVID-related government restrictions in Vietnam is allowing us to travel there and tour the plant with potential customers. Our Shanghai plant has added capabilities in management staff and systems that allow it to serve Chinese customers directly. Shanghai has replaced the business that we moved to Vietnam and our procurement group in Shanghai, which serves the entire corporation, is important for managing the supply issues that crippled many of our competitors without boots on the ground in China. The combination of our global footprint and our expansive design capabilities is proving to be extremely effective in capturing new business. Many of our large- and medium-size manufacturing program wins are predicated on Key Tronic's deep and broad design services. And, once we have completed a design and ramped it into production, we believe our knowledge of a program-specific design challenges makes that business extremely sticky. We also invested in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection blow, gas assist, multi-shot, as well as PCB assembly, metal forming, painting and coating, complex high volume automated assembly, and the design construction and operation of complicated test equipment. This expertise may set us apart from our competitors of a similar size. As a result, a customer looking to leave their contract manufacturer will find one-stop shopping in Key Tronic, which is expected to make the transition to our facilities much less risky than cobbling together a group of providers each limited to a portion of the value change. Moving further into fiscal 2023, the headwinds from the global supply chain continue to present uncertainty and multiple business challenges, but do show some signs of gradually abating, particularly with respect to the recent price stabilization for some commodity components. At the same time, these price reductions are offset by increasing wages at our North American facilities. We believe global logistics problems, China-U.S. political tensions and heightened assurance of supply concerns will continue to drive the favorable trend of contract manufacturing returning to North America, as well as to our expanding Vietnam facilities. The fact that we see record level backlogs and expect record revenue in the third quarter indicates our growing momentum. Along with the records we are setting for backlog and revenue, we see a dramatic improvement in all metrics associated with business development. For example, over the past year, a number of active quotes with prospective customers has increased eightfold. This unprecedented increase in demand for our unique mix of skills, location and people has powerful implications beyond the obvious revenue growth potential. In particular, we have been able to negotiate more favorable pricing terms and business parameters than in the past, as well as to be much more selective in the new customers we bring on. While this shift in leverage will not manifest in the short term, its effect on our long-term performance should be profound. As the implacable effects of global demographics combine with the unique attributes of the North American economy to drive the re-industrialization of the U.S. and the accelerating industrialization of Mexico, Key Tronic should be uniquely positioned for significant growth in fiscal 2023 and beyond. Thank you. Let's start, if we could, with the power equipment customer that had the delays and that led to the preannouncement. Walk us through, if you would, what happened there? And what if anything that Key Tronic could have done to influence those revenues coming in sooner? Well, Bill, I'm not sure I can be as specific as you would like about what happened there. I can, in general, only say that it was a brand new program on a brand new product that we shared in the joint design and development thereof. There were delays all across the board. In fact, the final delay was the artwork for the packaging. So, we were six weeks off out of a 11 months design program, which was pretty annoying. But on the other hand, we got it done. And in fact, we mentioned the new programs involving outdoor power equipment, that same customer has just awarded us another piece of business on another product. And before you ask me, it's about $11 million. Continuing with them, so -- since I've never been in the position of doing artwork for packaging, six-week delay sounds like a lot, but walk us through kind of that? That just seems extreme to me. It is actually more common than you would hope in our business, where we are manufacturing a product for a customer that is selling it to a retail customer. So, retail packaging, as you know, is very, very critical for sales and product market acceptance. And unfortunately -- or probably fortunately knowing how artistic I and the rest of my engineers are, we have no say in the artwork. And it's a joint agreement that has to happen between our customer and our customers' customer. And it's a joint agreement that has to happen between quite a few artistic people. So, it's fairly common that we are, with our backs against the wall, trying to get either packaging or artwork for packaging done and approved and actually produced. In fact, we're looking at a big upside right now for a different product, and yet again, the delay is our ability to get packaging in time with the customer's increased demand into a new market. Fascinating. Thank you. And so, with this power equipment customer, just to help us have a perspective of the trend line that's taking place, what was the revenue level in October, then the month of November, the month of December and then in January? What does that look like? And is January, probably not at the full run rate given that they were zero in December, so that will be even higher in coming months? Okay. That's helpful. And then, originally, if I have the right customer in mind, I think you had a press release that stated that you anticipated that they would be an annual run rate of about $80 million. Is that still this piece of business is looking like? I'm excluding the new piece of business that you won, but just this original piece of business? This original piece of business, we expect to be somewhat less than that in this first period as far as an annualized run rate. But at the beginning towards the middle of next fiscal year, it should be up to that number for a run rate. Okay. That's quite helpful. Thank you. And then, you did allude to the fact that I asked about the new product wins and the size. Would you talk through the other three in terms of the size? And then, whatever discussion that you have on these four wins would be helpful. Those would be headed into the Midwestern facilities. And those are pretty -- what's the right word, those are pretty representative of what the Midwestern -- the three sites in the Midwest have been winning at a really amazing rate over the last year. When we said that they're going to be over 65% growth, that's pretty astounding since they had been basically stable for the last 4.5 years, 5 years. As I've always told you, we expected everything that's happening to happen. It was a little bit delayed, but now it's actually happening to a larger extent than we thought it was going to. So, they -- the folks in the Midwest are uniquely constituted to run programs in the $1 million to $10 million range. And these size programs just continue to come in over the transom and then be gapped and hooked and cleaned. That is just an amazing rate to me. It's been really, really fun. And presumably -- even though it's maybe more exciting for us externally to talk about a large customer, presumably these smaller ones, I'll call them bread and butter ones, are higher margin than a large piece of business? Yes, you can pretty reliably predict that something that's going to be run in the U.S. facilities is lower volume, higher margin, stickier overall and typically quicker to develop also, unless there's a design program that went with it. Thank you. And I don't want to take up more than -- more time than I should here. But I would like you to talk through the change that's taken place with the U.S. facilities or the Midwest facilities, going from essentially flat for a number of years to this accelerated growth. What happened? What changed to lead to this? Well, as we said in the narrative, as more and more of the general agreed opinion is that it's risky to be overseas. And the size of the company that will command the attention that you need to be successful with that piece of outsourced business continues to grow more and more of the smaller pieces of business that just automatically went to Asia are now more automatically staying in the U.S., as Asian prices have gone up, as uncertainty with Asian supply has increased, and as the friction -- the business friction of doing business overseas has become more generally acknowledged. It's just so much different than it was five years ago when every piece of business we won, we had to dig out from under a rock. Business is now coming to us. And people aren't just kicking tires. People are -- have been given edicts by their corporate leaders and business leaders to get stuff out of Asia because it's too risky. Yes, it's -- we -- as you know, we've been doing this for a while now and we used to have probably five, six years ago, we'd sit around and agonize over four or five big quotes that we had to land one of them in order to replace the leaks out of the revenue bucket and maybe grow. And now we've got four pages of single-line quote opportunities that are all of them have passed our screening process, all of them are real opportunities, and it's just -- it's hard to even fathom as you -- for somebody like me that's been through what we were going through four, five years ago, but it's really fun. Well, good afternoon, everyone. First question I'm going to ask is the Arkansas facility, is it fully up and running, or is it still being repaired or what's the status? It's probably 90% up and running, and that's a bit more down to the weather than it is anything else. We just had the last machine arrive today in the snowstorm and everybody's home, but the General Manager and the VP are out there driving forklift trucks and getting it off of the trailer. But, yes, it's -- like I say, it's 90% and they had a good couple of weeks, last two weeks, and so we'd expect that to continue to ramp. Okay. And as far as the insurance situation, there may be more money coming in from that as things get determined, or do you expect it to be neutral from here? No, I think there's going to be some more coming in. Our insurance policy was well written and the company has been very forthright and honorable, which has been a -- in the world we live in today, it was a very pleasant surprise. They've been good people. So, the cool thing about that is that the equipment that we have replaced was aged, but the policy was for replacement. And as we said in the narrative, just to put some flesh on those bones, the stuff we got in there now is five times as fast. And so, that has a very massive impact on capacity and cost out of that Arkansas facility. Okay. Now I don't know how to phrase this question, but based on what you're saying, you're seeing probably at least in the short or medium term more demand than you can actually meet in a relatively short period of time. Are we looking forward to a major growth cycle for Key Tronic as far as you can tell? Just from a macro sense of what's happening in the world and as I've gone through the various metrics that we analyze and I think are relevant, it certainly seems as if we should be looking at a very nice growth rate for us going forward. Well, I've been following your company for a long time and it always seems that something gets in the way of getting to the bottom-line. So, I just keep on hoping every quarter that we're finally going to break out of that and get some real sense of what potential you can do here. So, I wish you good luck and that the world hasn't been an easy place to operate. So, let's hope it gets a little bit easier for you and you are able to pick the right contracts, et cetera. I'll let someone else take the floor with question. Sort of I want to follow-up on the two previous callers. And sort of want to sort of look into the future, and I think you're saying that quoting is very strong, that has an impact on pricing, on business terms, you can choose your customers better. But then, I guess you have to make some kind of balance between growth and margins. And I'm wondering how you think about that. I'm always thinking about margins and where could those margins go. And is there sort of an idea that maybe the idea would be to grow X percent in order to reach 9% margins or 9.5% margin? Can you sort of elaborate on that? I don't know if it makes sense, but maybe I'd love to have a discussion on that. Well, what I was trying to say, I'll just try to do a better job of explaining is that five, six years ago, actually from the time we became a contract manufacturer until about a year ago, we were ahead of our time in predicting that what's happening now is going to happen. And so, very much so at the beginning of our contract manufacturing days, it lessened over time. And then, no commentary on the goodness or badness of Trump, but certainly the Trump Presidency sped up the realization of what we already knew was going to happen and then COVID accelerated it even further. So that's -- the difference between now and the old days, let's call it before the pre-realization that overseas is risky, so the difference now is that we would be sitting in a room, doing the final negotiations with the customer and the customer would say, "Well, we're close to a deal, but you need to drop your margin by a 0.5 point because you're higher than these other guys." And we would be sitting there sweating bullets trying not to show the fact that we desperately needed that deal to happen. And so, we would act as good as we could act and they would see through us or not see through us depending on how perceptive they were and how good we were acting on that day. And we would get driven down to where our margins were. At the point where -- it was basically at this point, we don't care anymore. If we lose this business even though we really want it, we're going to have to walk away. And today, the situation is quite a bit different. When our prospective customers starts down the road of -- this is just like buying a used car, it's a very predictable and prescribed interchange between buyer and seller. But when they start down the road of, you're too high or we need you to hold inventory for a year or we need payable terms of 360 days and then maybe we'll pay you, we can just say, yes, no thanks. We're not interested, and walk away. And it's hard for me to tell you George what that's going to do to gross margin, but I can for sure tell you it's going to make it better. And we don't have any hard and fast rule that says that, well, anything under 9% we're walking because as we're analyzing a piece of business, there's not only the margin, there's also the potential for growth, there's the behavioral patterns that we see exhibited by the customer as we go through quoting and negotiating, there is the attractiveness of the business from an operational standpoint. So, there's a gob of factors that we're considering as we're negotiating. But we're negotiating from a position of strength rather than a position of semi desperation that we have to win this deal. So, I know that you would like a nice number that you could plug into your equation, and so would I, but I can't give you that. I can just tell you it's going to get better, at least I believe it's going to get better. Okay. And then, that is really driven by, A, your design capability? And two, sort of -- that you sort of becoming a one-stop shop for really being able to not just do component, but a whole box, a whole product, right? And it's interesting because you're talking about patching some delay in the artwork, in the packaging, because it means that you're going to put your product in that packaging and then it goes directly to the retailer. So, it's a finished product. So, those are two of the key capabilities that you have in queue sort of the real advantages that you have in the marketplace system? Yes. And to give you an example, one of our pieces of business, new piece of business is probably the perfect embodiment of the overall macroeconomic process that we're watching and that we predicted and that we're enjoying. So probably, I'm going to just give you this for an example and I apologize, this is going to take -- I'll time it, but I can do it in less than two minutes. So, 30 years ago, a guy invented a new product that required a pretty complex manufacturing process, all kinds of welding and vacuum forming and hydro forming. And 20 years ago, that product moved to a town in China and a number of his competitors also copied him, and then moved their product to a town in China. So, that town in China became the world's preeminent location of manufacturing that type of product. And then, as time went by, in the last two or three years, that company and their competitors realized that in order to really service the market here, they needed to have a lot less than 12 weeks uncertain ship time over the ocean and a slight increase in price was more than offset by the increase in business and margin they could make by having a much quicker turn. And so, they chose us to bring that manufacturing back to Mexico. So, it left the West Coast of the States, went to a town in China, and now it's come back to our factory in Mexico. So, we are, in fact, reverse engineering the Chinese who reverse engineered the guy [indiscernible]. And I just find that to be an amazingly big circle of whatever you want to call it that's going on right now. But that is exactly what's going on in many different industries. In some cases, our customers have lost the knowledge and ability to manufacture. In other cases, they've lost not only that, they've lost the ability to design and manufacture. So, as we talked about the re-industrialization of the U.S. and the industrialization of Mexico, that's the perfect example. And that was a minute -- two minutes and 10 seconds, so I just overshot that. I think nobody was keeping track, Craig, but that's great. Okay. Let me push you a little bit more on margins. What are the margins goal that you would like in, let's say, fiscal '24? What is it from a gross margin perspective -- because they've fluctuated, and I think we were always trying to gunning for 9% or slightly above 9%, but we fall in short. What would be your goal? I don't know, George. I keep telling you, I'm not going to give you a number for your equation because I can't. I hope it's better than that. From what -- if I look forward from what I'm seeing, if nothing goes wrong, it should be better than that. But something always goes wrong. Okay. And then, from a growth perspective, how much growth is too much growth? How much growth would be very difficult to manage? Is 20% growth sort of a good number? I mean, 20% is a lot. Well, if you take the Midwestern site as an entity, which they used to be, they are going to manage 65% plus growth in the next half a year. And I don't see that there's going to be any significant problems within the operations in doing that. There may be problems with getting parts, but in terms of managing it, I don't see an issue. There are -- every piece of business is different. Some of it is highly IQ point intensive to bring in. Some of it is just a simple slam dunk moving a PCB assembly from our competitor to us. So, all those factors go into my answer of, I don't know, but certainly a lot more than what we've done in the past is possible. Thank you. So, you had mentioned that the outdoor power equipment company had awarded you another $11 million piece of business. Given that you have -- they presumably awarded that before you had actually produced any of the current program for them, what led them to, to want to give you more business before you had done any? Well, we've been interacting with them for over a year now. We've had people in their factory and they've had people in our factory for over a year. We've been in the design process for over nine months. We started quoting on this new piece of business while we were still trying to get the current design done. But in fact, it wasn't awarded to us until just last week. So, it wasn't really awarded until they saw the first chunk of [indiscernible] first chunk of product go off the back door. Congratulations. Okay. That does help. And then, let's talk a little bit about Vietnam. You had mentioned that customers or prospective customers can now go and tour the factory. What does the prognosis look like for filling that factory? And since I have not been to that factory, what does the availability of land facilities and labor look like in that near area? Is it as convenient as Juarez where literally everything is contiguous? We're not currently considering anything. We're just beginning to think it would be wise to have a good understanding of what's close and how fast it's going to get gobbled up by other folks. Labor still looks good in the region we're in. Some of the other regions are getting tighter, but where we're at looks very good so far. Hey, Bill, speaking of labor, maybe we're going to the same place. In the last two months, we've hired 1,000 people in Juarez. And how does that compare to a normal amount of hiring that you would do? Because presumably some of those people are replacing those who have left and just the whole great resignation concept, but talk to us about that. I thought you said. So, normal run rate of 100 people a month, you'd be hiring and now you're hiring 500. That might -- okay. So, that might start to answer my next question, which is wage pressure in Mexico accelerating, decelerating or kind of what's your view of what's happening there? Okay. And are you a bit surprised that as you're trying to hire five times as many people as you normally would in a period of time that you're sensing the labor pressures or wage pressures are mitigating? I mean that sounds pretty positive. Well, I'm kind of enthralled with the whole demographic situation across the globe. And if you spend some time looking at that Mexico and the States are basically uniquely positioned compared to the rest of the world, and the fact that we aren't about to age ourselves into oblivion. And so, I would expect that even though they may raise prices by law in Mexico, the availability of generally younger people who are looking to start their professional life continues to be good in Mexico and in the States compared to the rest of the world. Okay. Well, you're tempting me as I listen to all these questions and answers and you've mentioned that your bidding activity is going up at an extraordinary rate and your backlog is growing rapidly. How much do you think you could increase unit volume? I know units are all different in this business, but how much do you think you could increase unit volumes if you had the contracts in hand in -- let's say, in the next two years? Are we talking 50% or 100%? It sounds like you're not -- we're not talking about 20%. Sheldon, I don't want to be dismissive of your question, but in the reality that we face, I can't answer it. Because we have pieces of business that are $8,000 per printed circuit board and we have other pieces of business that are $0.15 for a sensor. So, when I talk about -- when you ask about unit volume, it's just -- it's impossible for me to even answer. There is square footage that we have availability of. The equipment to replicate lines continues to get faster and faster for a given dollar of expenditure. And the availability of that equipment, which used to be almost unobtainium is now getting better. The big question for us and you as an investor is, do we see a big recession coming or do we see the improvement in commodity availability and unemployment and everything else kind of swamping over the efforts of the Fed to drive inflation down, that's more to the question of what's going to happen to our growth, then is our ability to add three or four SMT lines in $1 million a piece. What do you think the -- aside from the macro economical, you've just been dealing with a few years of craziness between COVID and supply chain difficulties. What do you think would be the major constraint? Again, aside from the general macro economy, what would be the biggest constraint on your growth? Would it be in the design side? Would it be on the manufacturing side? Or just on the marketing side? I think the major constraint at this point would be continuing to absorb programs while providing the level of service that a new customer expects and demands. I don't think you guys had -- it's not to say that you're foolish or dumb or anything, because I'm not saying that, but I don't think you have an appreciation -- I don't think you have an appreciation for what has to happen to move a program from a competitor to our factory or to start up a new design and move it into our factory, it's incredibly complex. I think -- I don't know if I shared with you guys that we buy over 2 billion components in a nine-month period. So, every one of those components has to get into our system, has to get purchased at a timely period, has to be purchased at the right price, has to be delivered through whatever delays are happening, and has to get through our incoming inspection, and has to be used in a way that has been documented and laid out by our engineers. So that process is incredibly taxing and time consuming. So, it's a soft constraint rather than a, do we have enough square feet? Do we have enough mold machines? Do we have enough placement machines? Do we have enough stampers? And each piece of business can be dramatically different. You can have a customer who doesn't even have his bill of material anymore, because he's been in China so long that he's just been counting on his China suppliers to do it for him, doesn't have any engineers anymore. So, there's really nobody we can even talk to about what's important and what's not important about the design. Doesn't have a pipeline of components ordered. So, depending on lead times, it could take nine months to a year to get components here, and who has got a bad relationship with the supplier he's leaving. And so, the ability for us to step into that pipeline and just assume POs is very minimal. Thank you. I thought I was done. But Craig, I'm going to take the bait. You referenced the economic environment. What insights or indicators do you have of weakening economic environment versus not? I read all the stuff I can get my hands on as far as what people are predicting and then I try to compare that to what we're seeing from our customers. We have yet to see any indication whatsoever of a broad-based slowdown or push out of orders. We have seen people who cut their forecast coming back with, "Oh God, we need upside now." That has been more prevalent than people cutting their forecast and leaving it cut. We do see a better availability, as I said previously, on SMT equipment, which is said to be a leading indicator. We do see a better availability of componentry, but better is a relative term, it still sucks. We still see inflation in component costs. We see people coming in just today a component that goes on one of our highest volume products, that integrated circuit manufacturer came in with the about a 4% increase, and it's not a less negotiated about it. It's a take it or leave it. We got other people that want to buy it. So, as of right now, I don't see a broad-based slowdown coming. But that seems to be in conflict with everything I read and hear from people that are talking about it. So, right now, we've become as a result of everything we learned during COVID, we've become very hardcore on forcing our customers to pony up for any upsides or on the [comforts] (ph) we make. Because we're being extra cautious due to the fact that the world thinks a recession is coming. So, I don't know, you're the more economist than I am, but that's what we see from our order book and from our purchase book. This does conclude today's question-and-answer session. I will turn the call back to Mr. Gates for any additional or closing remarks. Okay. Thanks again to everybody for participating in today's conference call. Brett and I look forward to talking to you all next quarter.
EarningCall_1058	Good day, and thank you for standing by. Welcome to OSI Systems, Inc. Second Quarter 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Edrick, Executive Vice President and Chief Financial Officer. Please go ahead. Thank you. Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. And I'm here today with Deepak Chopra, OSI's President and CEO. Welcome to the OSI Systems Fiscal '23 Second Quarter Conference Call. We are pleased that you can join us as we review our financial and operational results. Earlier today, we issued a press release announcing our second quarter fiscal '23 financial results. Before we discuss our results, however, I would like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise. During today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results. For information regarding non-GAAP measures and GAAP measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings release. I will begin with a discussion of our Q2 financial performance and then turn the call over to Deepak for an overview of our business performance. We will then finish with more detail regarding our financial results and a discussion of our outlook for the overall fiscal year. Our second quarter financial results were solid as we navigated the current economic environment, which continues to be impacted by supply chain delays and increased costs, disruptive geopolitical events, inflation and rising interest rates. Our bookings and book-to-bill ratio were very strong last quarter. And we were awarded some significant contracts, which we will discuss during this call. But let's start with a high-level summary of our Q2 results. First, we reported Q2 revenues of $296 million. representing a year-over-year increase of 7%, driven by solid revenue growth in our Security and Opto divisions, which were in part offset by soft Healthcare division sales and an approximate $4 million unfavorable FX impact. Second, we reported Q2 adjusted earnings per share of $1.19, down from $1.28 in Q2 of the prior year as a result of a less favorable mix of sales, which was anticipated, and additional interest expense. And third, our Q2 bookings were over $500 million, representing a book-to-bill ratio of approximately 1.7, leading to a record quarter end backlog of nearly $1.5 billion. Before diving more deeply into our financial results and discussing the fiscal '23 outlook, I will turn the call over to Deepak. Thank you, Alan, and thanks to everyone joining us on today's call. Our performance in Q2 of fiscal '23 was solid as we grew the top line while continuing to successfully operate in a macro environment challenged by the multiple factors that Alan mentioned. Our Q2 bookings were very strong, resulting in a record quarter end backlog. We believe we are well positioned for the second half of fiscal '23, and this also positions the Security division, especially really well entering for fiscal '24. Let's discuss each division's performance, starting with Security. The Security division delivered Q2 revenues of $167 million, about 15% higher than Q2 in the prior year. We were pleased with the division's profitability, expanding our operating margin to 12.9%. Our Security bookings were very strong and resulted in a book-to-bill ratio of 2.3 for Q2 and 1.9x for the first half of fiscal '23 for this division. We continue to deliver on the large existing U.S. customers border protection, CBP programs we announced in fiscal '22. These CDP programs focus on improving Security at the U.S. borders by utilizing our cargo and vehicle inspection platforms, Search Can integration software and gatekeeper vehicle checkpoint lane control solutions. Search Scan is our proprietary software solution that helps manage inspection image data, traffic, vehicle identification and integrates with other systems at checkpoints to streamline and facilitate the inspection process. Search Scan is also comparable with third-party inspection systems, making it a versatile option in the marketplace. Based upon CBP's current timing, some pushout from Q3 to Q4 has happened from what was previously anticipated. While Q2 year-over-year Security division revenues were up double digits and operating margin expanded, we believe the most notable item of the quarter was an exceptional bookings highlighted by a $200-plus million international order that we received in December and announced shortly afterward quarter end in January. Our deliverables are expected to include a number of our cargo and vehicle inspection products and radiation portal monitors, along with the managing the civil works and providing operator training and ongoing maintenance in the coming years. We are not forecasting any significant revenues related to this award in fiscal '23, but this contract provides strong visibility into fiscal '24 Security revenues. We are currently working on the schedule with this customer and expect to have more to share on future calls, though we will start some of the manufacturing production in fiscal '23. During November and December, we were proud to support the Security efforts at the FIFA World Cup in Qatar as the primary provider of security detection products. This event was held at multiple stadiums around Doha, and our Orion 920 CX baggage and parcel inspection systems and Metor6X walk-through metal detectors were successfully utilized to provide screening for over 2.5 million ticket holders and their belongings. In addition, these products were also used at the primary airport, hotels and other venues throughout the city. This order was and will be a great showcase for Rapiscan products in Middle East for time to come. In turnkey services, our projects in Albania, Puerto Rico and Guatemala continued to perform well. The initial planning phase is underwear for the new turnkey airport services multiyear contract, which we received earlier in fiscal 2023. As part of this contract, we expect to manage screening services at a European airport for the staff, airline crews and vehicles at perimeter entry points. Initially though, as we have said before, this is a small contract, but it's a first in the aviation space. Looking ahead, we believe that Security with a strong backlog and visibility into other key opportunities in the pipeline is well positioned for the second half of fiscal 2023 and beyond. Shifting to Optoelectronics division, that had another great quarter as third-party Q2 revenues were $80 million, which represented a new quarterly record for the division. This division achieved a solid operating margin in spite of continued supply chain cost pressures extra. Opto serves a diversified OEM customer base in aerospace, defense, health care and consumer technology, among others. In these markets, certain OEMs are seeking to reduce their exposure to China sourcing and further derisk their supply chains by transitioning to other viable manufacturing regions in the East. We believe we could benefit significantly from this given our global manufacturing footprint covering Malaysia, Indonesia, India, United Kingdom and the U.S. Looking ahead, with a strong Q2 ending backlog that is almost 20% higher than this time last year, Opto is well positioned. Moving to the Healthcare division. This was a disappointing quarter, but we believe and expect stronger second half of the fiscal year in this division. We continue to significantly invest in developing new products to further strengthen our patient monitoring and cardiology portfolio. Subsequent to the quarter end, we bolstered the sales leadership in U.S. with talent that we believe will help drive stronger results and position the business to thrive. Going forward, we plan to maintain our focus on innovation and operational execution while staying flexible to handle the opportunities as markets can change quickly. Overall, we are pleased with the company's fiscal 2023 second quarter performance as we grew our top line, achieved significant bookings that have resulted in a record backlog. In addition, with the record backlog and a strong pipeline of opportunities, we believe we are well positioned for the second half of fiscal 2023 and '24. I would like to thank our employees, customers and shareholders and look forward to the second half. I will now turn the call back over to Alan Edrick to further discuss our financial performance before we open the call for questions. Thank you. Well, thank you, Deepak. Now I will review the financial results for our second quarter in some greater detail. As said, our fiscal Q2 revenues were up 7% compared with that of the prior year Q2. Q2 Security division revenues were up 15%, largely due to the growth in our cargo and vehicle inspection products and related service revenue. The Security division's book-to-bill ratio was approximately 2.3%, positioning the division well for strong revenue growth in the second half of fiscal '23 and into fiscal '24. Opto sales increased 8% year-over-year with strength in third-party sales to a diversified customer base as well as intercompany sales to support the anticipated upcoming Security division revenue growth. Opto bookings were again solid, leading to a record Q2 backlog for the Opto division. As Deepak mentioned, the Healthcare division, which is our smallest business unit, representing about 15% of our overall first half sales, reported a 17% reduction in year-over-year revenues in a more challenging marketplace and in part due to a tougher year-over-year comp given the prior year elevated demand during the COVID Omicron variant surge. The Q2 gross margin was 32.5%, which, while consistent with that of Q1, was about 3.6% below that of the prior year Q2. This year-over-year change was primarily driven by lower sales in the Healthcare division, which carries the highest gross margin of our three divisions; higher Opto sales as a percentage of total sales, which carries the lowest gross margin of the three divisions; and a less favorable mix in security division sales. Our gross margin was also impacted by increases in certain component costs. In general, our gross margin will fluctuate from period to period based on revenue mix and volume, inflation and impacts of supply chain, among other factors. Based upon our forecasted conversion of backlog to revenue and pipeline of opportunities, we anticipate a stronger gross margin in the second half of fiscal '23 compared to the first half of this year. Moving to operating expenses. We continue to work diligently across each of our divisions to improve efficiencies and to prudently manage our SG&A cost structure. Our Q2 results reflected these efforts. Q2 SG&A expenses were $54 million or 18.3% of sales compared to $54.9 million or 19.8% of sales in the prior year Q2. While foreign exchange created a headwind for Q2 revenues, it did have a beneficial impact on our operating expenses again this quarter. Research and development expenses in Q2 of fiscal '23 were $14.5 million, consistent with that of the first quarter and just below the prior year amount of $15 million. We continue to dedicate considerable resources to R&D, particularly in Security and Healthcare, as we remain focused on innovative product development, which we view as vital to the long-term success of our businesses. In Q2 of fiscal '23, we recorded $2.3 million of restructuring and other charges compared to just under $1 million of such charges in Q2 of the prior fiscal year. Moving to interest and taxes; net interest and other expense in Q2 of fiscal '23 increased to $5.2 million from $2.2 million in the same prior year period, primarily due to rising interest rates and the maturity of our 1.25% convertible notes on September 1, which carried a lower rate than our current bank borrowings. We executed an interest rate swap during Q1, picks a portion of our floating rate bank debt. On the tax side, the reported effective tax rate at our GAAP was 19.5% in Q2 of fiscal '23 compared to 26.3% in Q2 of fiscal '22. In Q2 of this year, we recognized discrete tax benefits of $0.8 million as compared to a discrete tax expense of $0.3 million in Q2 last year. Excluding the impact of discrete tax items, our normalized effective tax rate in Q2 of fiscal '23 was 23% compared to a normalized effective tax rate of 25% in Q2 of fiscal '22. I will now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our non-GAAP adjusted operating margin in Q2 of fiscal '23 decreased to 10.7% from 12.0% in the same prior year period. This was primarily driven by the weakness in revenue in the Healthcare division, which carries the highest contribution margin of our 3 divisions, coupled with the reduction in the Opto operating margin due to a difficult prior year comp. The adjusted operating margin in the Security division increased to 14.7% in Q2 from 14.2% in the prior year second fiscal quarter, driven by higher revenue and disciplined OpEx management. We expect to see sequential improvement in this division in Q3 and in Q4 on stronger revenues and a more favorable revenue mix. We were pleased with the adjusted operating margin in our Opto division of 13.1% in the second quarter of fiscal '23, representing our second best result historically for this division. We believe Opto is also poised for second half year-over-year adjusted operating margin expansion. With lower revenues and a less favorable revenue mix, the adjusted operating margin of our Healthcare division decreased to 8.6% from 13.8% in the prior year. We currently expect the Healthcare division to show significant Q3 operating margin improvement over Q2 driven primarily by revenue growth. Moving to cash flow; cash flow used in operations was $9 million in Q2 of fiscal '23 compared to cash provided by operations of $14 million in the same prior year quarter. For the first half of fiscal '23, our operating cash flow is ahead of where we were for the first half of fiscal '22. That being said, we typically deliver much stronger operating cash flow. In the first half of this fiscal year, we have increased inventory to support the anticipated sales growth as well as to mitigate supply chain risks. In addition, we have an elevated level of DSO due to slower customer payments and have other working capital uses, including the timing of payments. CapEx in the second fiscal quarter was $3.6 million, while depreciation and amortization expense in Q2 was $9.6 million. We continue to be active in our stock buyback program, during which we spent approximately $4.5 million to repurchase about 53,000 shares this past quarter. Our Board increased the buyback authorization earlier this fiscal year. And as of quarter end, 1.86 million shares were available to repurchase under the program. Our balance sheet is solid with net leverage of 1.8 and significant capacity for acquisitions and additional stock buybacks. The size from a little north of $7 million of annual required principal payments under our bank term loan, the bulk of our debt matures in fiscal '27. Finally, turning to guidance; we are tightening our fiscal '23 revenues range guidance by $10 million at the top end, primarily attributable to the softness we saw in the Healthcare division this past quarter. However, we are reiterating our previous non-GAAP earnings per share guidance. This guidance implies revenue growth in the range of 8% to 12% and non-GAAP adjusted diluted EPS growth of 17% to 23% over the remaining six months of fiscal '23. The non-GAAP diluted EPS range excludes potential impairment, restructuring and other charges; amortization of acquired intangible assets; and noncash interest expense and their associated tax effects; as well as discrete tax and other nonrecurring items. We currently believe this revenue and non-GAAP earnings guidance reflects reasonable estimates. The actual impact on the company's financial results of disruptions and increased cost in the supply chain and inflation and interest rates is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance. Actual revenues and non-GAAP earnings per diluted share could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings. We continue to remain focused on the growth of our businesses and proactive management of our cost structure. We believe our efforts in these areas will enable OSI to continue providing innovative products and solutions. We expect to continue to navigate through the current dynamic and challenging environment while gaining traction in key strategic growth areas and positioning the company to capitalize on certain improving end markets. We would like to take this opportunity to thank the global OSI Systems team for its continued dedication in supporting our customers and partners. Yes. So first question is on the large -- on the Security side, the large $200 million-plus international order. Can you talk a little bit about -- you talked a little bit about timing. But what does the plus mean? Is that all on the maintenance side? How big can this contract get? And the timing, is it all going to get produced in fiscal -- and delivered in fiscal 2024? Brian, this is Deepak here. All I can say that is that majority or a significant portion of the $200-plus million contract is equipment. There is some civil works and some maintenance. And regarding the manufacturing and delivery, we said it in our speech, there's insignificant revenue in the rest of '23. It's all focused on 2024. Second thing that you answered is, long term, yes, there could be more potential add-ons. Definitely, service and support. This kind of equipment has 7-, 10-year plus life cycle, upgrades and stuff. So we're very excited about it, and this is a significant win. And also, this was an international competition, and we got the majority of the business. Was it -- that's the first time I heard that the business was split between you and I assume your largest or one of your largest competitors. Is that correct? Okay. And then moving on to pipeline on the Security side. This was a very large award that I wasn't aware of you were bidding on. Are there other such large awards as in the couple of hundred million or $100-plus million that you're working on? Can you discuss a little bit what's in your pipeline? Because this was so significant. Are there other ones like that out there? Well, Brian, you know that we don't talk about any specifics, but I think you already got the answer yourself. This is not the only one. It's international. Our equipment is very much desired. It's a marketplace which looks at security all over the globe, including U.S. So we have others in the pipeline. And this is in the cargo side, and there are also areas in the aviation side. So the pipeline continues to be quite strong. Great. Then just a couple of quick questions on the other divisions. Healthcare was weak. What do you anticipate -- seasonally a little bit weak. What do you anticipate out of Healthcare coming up new products and what areas? Well, though, we've mentioned that before, and Alan also talked to you, our focus is primarily our products are patient monitoring and cardiology. Patient monitoring, we have a lot of innovative new products being developed. It takes time. We are developing a whole new product line, and we think it's basically late to '24, '25 kind time line. We are also much -- very much focused on home care, connectivity remote monitoring. So that we're doing a lot of investment in expanding our reach in the patient monitoring stuff and on what we call cardiology in like patches and wireless and kelly kind of a thing. Okay. Very good. And then just last question on the Opto side. It doesn't appear that there's any slowdown in demand. Is the supply chain normalized enough for you guys moving forward? Or are there things that you can't produce that if you had a proper supply chain or a normalized supply chain you'd be producing? Brian, this is Alan. Good question. And while we see some signs of the supply chain improvement, there's still certain challenges. And you're right, there's a certain backlog that we have that we'd be able to convert to revenue on an accelerated basis, if not for those final missing components that are still supply chain-challenged. So yes, we still see nice strong demand. We've got a heck of a backlog. And as the supply chain issues begin to ease up, that should help as well. Brian, this is Deepak. Just to add on to what Alan said that it's been a very good success. Kudos to the team. But I said in the last October call also, there is a big focus on the OEM customers who are trying to get away from dependence on China. And our facilities in Batam, Indonesia; Malaysia; our new facilities, expansion in India, we have a lot of opportunity to work with our customer base. We're happy with us and feel confident that we can be there longer term for them. That's been a big growth story, and that's been -- and we think that will continue. Just, I guess, a couple of follow-ups. On the large deal, it doesn't sound like you have great 100% visibility on timing at all, but it does sound like it will be pretty much a few quarter type of delivery. I'm just curious at the maintenance part of the service part. How should we look at that? Is that like -- I know your service revenue today is like 25% in total revenue. But is this more like a recurring piece, would be like a 10% to 20% type range? Any way to just kind of think of that? And then the second part of that question, is this government customer, I suppose, or private? Larry, this is Alan. Good questions. This is a sovereign customer, so we like that aspect of it. We're working with the customer currently on the anticipated timing, and we'll have a better feel, probably by the time of our next conference call as to what that rollout may look like. But it will begin in fiscal '24 and expect it to be substantial. While Deepak mentioned that it's predominantly product sales and civil works, there is a service element of it, too. And you're right, as the initial service contract ends and warranty period ends, there's always a nice recurring revenue that comes with service and spare parts thereafter. So we are looking for that to be a nice recurring revenue base for us. Okay. And is this -- and I know it's not full turnkey. There are missing aspects that sort of somewhat quasi turnkey. But is it -- could we assume this is a better margin than sort of your normal product sales? Yes. So Larry, this is not turnkey. This would be a sort of a typical product sale, except on quite a large scale. As you know, we don't go into margins on specific programs, but we do like the economies of scale and benefits that we get when we produce products and volume, so that's usually beneficial to our margins. Okay. That's fair. And speaking just on the service revenue on that topic. You had a nice little bump this quarter. I think service revenue grew like close to 10% and have high. And I didn't look back, but it's certainly like the last eight quarters, maybe more than that. So was there something -- I know you're sort of ramping up maybe a little bit more in Guatemala than you have. Or what -- was there anything specific driven that? Really, as some of our products rolled off of warranty and came on to service contracts, they accelerated some of the service revenue for us, and we think that's maintainable. So as we look forward, we expect to have continued strong service revenues. Okay. Fair enough. And then on -- just on security. You mentioned margins were -- you guys said you were pleased, and you thought performance was good there. So it just seems like it's predominantly a mix issue there. I know they're up a little bit sequentially and even year-over-year. But if you look back the last couple of -- in the back half of last year, I know margins were quite stronger. I just want to clarify, you kind of expect that same -- it feels like that same kind of cadence this year? Yes, Larry, this is Alan. We do expect the operating margins for security to be much stronger in the second half than we saw in the first half. As Deepak mentioned, a few pushouts. We're a little bit more weighted to Q4 than Q3, and we would expect strong operating margins in each of those quarters. Okay. And just to follow up on Brian's question on the Healthcare, on the sort of the patient monitor side. '24, '25, is that -- would that be like a whole next-generation, a hold swap out? Or would that just be partial? Or any more color on that? Well, it's Deepak here. It's not like an overall pushout kind of a thing. You add on to your products that's more applications, more connectivity, better results, more reliability and more features. So that it will be -- it will start coming in late '24 and '25. But when you do that, you basically are looking at what we call, and that's why there's significant R&D investment. It's a significant, what we call it, upgrade to the next generation for the next 10 years, the next generation of the whole system. Okay. Great. Last question, just on free cash flow. Alan, you mentioned it was up a little bit on the first half year-over-year, but basically pretty close to flat last 2 years in the front half. And usually, I think the front half is a little bit better for you guys historically. So what's your thoughts sort of in the back half of this year for cash flow and then even going forward just from a high level over the next few years? Yes. Great question, Larry. And we're really excited about -- we move into fiscal '24. In fiscal '23, outside of this new large contract, we would say the opportunity for strong operating and free cash flow in the second half would be extremely robust. That being said, with this large contract and prepping for fiscal '24, there's likely going to be a substantial investment in inventory as we begin to produce and manufacture these products. So we'll probably see a little bit more muted cash flow than we've historically seen in fiscal '23, with the opportunity for a very strong cash flow in fiscal '24/'25. So I had a couple of questions also on this kind of convergence of 2 large projects, the CBP and the new international win, just addressed one on the free cash flow side. But I'm curious, as you have these 2 large programs set to both be materially active in fiscal '24, curious about your capacity. And are you walking away from any nice margin, kind of $0.50 pieces of business to execute on these $10 bills? Well, this is Deepak here. Absolutely not. We have the capacity. We have facilities in England. We have facilities in the U.S. We have facilities to help. And this is a thing that we've been saying all along that differentiates us from our competitors. We also have what we call intercompany relationship. So that when we want to expand the cargo product line or the detection product line in Rapiscan, we have the ability to go to the vendor base that's friendly to us, plus expand our own intercompany manufacturing of Optoelectronics division, which supplies key componentry to these areas. So no, we're not going to pass any business just for this. This was planned. And we are very much focused, and that's one of the things that Alan said that this is a significant win, but we've handled these things before. And we're going to start manufacturing. And yes, there's the inventory increase. Yes, there will be more production pressure in fiscal '23 towards 24%, but we are capable of it. Alan, do you want to add anything? I agree. On my follow-up was on O&M segment. It's kind of in and around the electronics area. We're starting to see a lot of destocking. You've noted consistently you're expanding scope with existing and adding new because of your fulfillment capabilities and great global presence. Just from an end market point of view, I was curious. I think you're kind of insulated there, too, maybe two thirds of your business is defense. Health care and automotive certainly hasn't overshot from a cyclical perspective. So do you feel you're kind of insulated from the so-called electronic cycle that's clearly rolling in some areas? Well, very good question. The good news for us is we are so diversified. We have such a broad customer base that no one industry or no one specific area affects us up and down. We are very broad. Our marketplace, as you mentioned, aerospace, defense, medical, automotive, it's a very broad portfolio. And that's been our success story, and that has been very well done. And at the same time, I've emphasized again and again that for the time to come, this big focus on our customer base looking to get less dependent on China makes the big plus long-term investment with their vendors. And if we are a good vendor, we have a long-term relationship to keep expanding, and we can have the ability to talk to our customers. Do you want us to manufacture in India for the Indian market? Do you want to manufacturer in Malaysia, Indonesia? We can do all that, and that's been a very big plus story, and we look at that as a broad-based not dependent on any one specific thing or customer or industrial. Wanted to get a sense as the large international carbon vehicle inspection order was a competitive bid. Curious, what factors do you believe ultimately led to you limit award? Sorry, not very clear. Basically, we have said that before, we consider ourselves one of the top performers in the cargo space. Customers rely on us. We have a very good reputation. And being a vendor and a good supplier to CBP also is a big plus as a good reference. So that all over the world, we are considered. And we always say that, if there is going to be a dinner party, we definitely get invited. If there's a dance, we get invited. And then we feel proud about it that we -- our dancing steps are good. We don't trip over each other. And our technology is good. Search scan software is a unique thing. Our product base is very broad we have what we call the broadest product portfolio to offer to the customer, transmissive backscatter combination. So all I can say is that our competition advantage is that we have the product base, we are well regarded, and we have a very good reputation to deliver the product and to maintain our credibility long term. Alan? Sure. The product quality, the service organization, the reputation, all of those really factored in, in addition to all the areas that Deepak mentioned. Okay. Great. And then with respect to your anticipated improvement in the Healthcare division for the second half of the year, are there any specific factors that come into play there? And is the challenges you've had in the first half, how much of that do you think is internal factors versus market -- external market factors? Jeff, this is Alan. So good questions. Some of the reasons why we have a bit more confidence in this second half as we enter Q3 compared to the first half really is based on the pipeline of opportunities that we're looking at. We're seeing some more sizable opportunities that weren't available in the first half. You talked about why were we softer in the first half. Part of it was indeed the marketplace. The hospital market has been a bit more challenged, their own financials at hospitals. And then some of it was a little bit self-inflicted as well from a timing perspective on some of our products as well. It's a little bit a combination of both, but we do feel better for this for the second half and with a very strong contribution margins. As our revenues go up from what you saw in Q2, there's a big pull-through to operating income and operating margin. Yes. Okay. And then last question for me is with the FIFA equipment on display, it has been the event to card. You mentioned that opportunities in the Middle East with show thinking and equipment. Curious if there's near-term opportunities or if that's a longer-term expectation. Well, Deepak here. What I meant was it's a great showcase. It's been very well received. Lot of kudos, a lot of exposure to various people in Middle East. I would say, and we don't comment on it, there are opportunities all over the world. Middle East has always been a strong pipeline opportunity. And we continue to look at it, but I do want to comment on anything specific that's there. Alan? It's just a broader application. And it's out there, and we feel that it's very good for us to be a showcase as what happened. And it's a very successful event. Just kind of to extrapolate a little bit further. Clearly, the company is positioned for a pretty strong second half given what we're seeing with the backlog and the order flow. On the gross margin front, I think last year, you were doing 35%, 36% and gross margin. Do you expect that, that's kind of achievable in the second half of this year, given that you're targeting kind of 10-ish percent top line growth in the back half? Josh, this is Alan. A very good question. And we do expect to see stronger gross margins in the second half than the first half, and I think the numbers you alluded to are not unreasonable by any means. Yes. And then just for cash flow, understandable, right? There's some upfront investment for these big orders, a lot of which it seems like you're going to be coming through next fiscal year. Fair to assume that like the free cash flow cadence is going to be, let's call it, maybe comparable to last year, but next year likely to be in excess of the $100-or-so million you've kind of historically achieved as some of the revenue materializes. Yes, Josh, I think there's a fantastic opportunity for next year in fiscal '24 and '25 for extremely strong cash flow kind of getting back to historical levels and then some. That being said, perhaps there's other new, large opportunities as well that could factor into that as well. But yes, big opportunities for '24 and '25 based upon what we see today for cash flow. Perfect. And then last question for me. Just trying to figure out the timing a little bit. So of the $200 million or so of CBP orders, I know you've been delivering on that. But like how much is left? And like how much of that is going to be coming in, in the back half versus like next year? Is it -- I assume the majority will come next year, but any clarity you could provide on that would be helpful. Sure, Josh. This is Alan. Yes, we do expect significant CBP revenues in the second half of this fiscal year, more than we saw in the first half, and we do expect substantial CBP revenues in fiscal '24 as well. We don't quantify by the dollar amount, but we do see a big uptick happening here in the second half and into fiscal '24 as well. Thank you all again for participating in our conference call. I want to thank specifically our employees and our stockholders supporting us. We continue to focus on the product line, manufacturing, challenges with supply chain and working with our customers' needs. And we look forward to speaking with you at our next earnings call. Thank you very much. Have a good day. Bye.
EarningCall_1059	Good afternoon, everyone, and welcome to Associated Banc-Corp's Fourth Quarter 2022 Earnings Conference Call. My name is Dough and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of this conference. Copies of the slides will be referenced during today's call are available on the company's website at investor.associatedbanc.com. As a reminder, this conference call is being recorded. As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute, projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important risk factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Pages 24 and 25 of the slide presentation and to Page 10 of the press release financial tables. Following today's presentation instructions will be given for the question-and-answer session. At this time, I would like to turn the conference over to Andy Harmening, President and CEO for opening remarks. Please go ahead, sir. Well, thank you, Dough, and good afternoon, everyone, and welcome to our year-end earnings call. I'm Andy Harmening, and I'm joined here today by Derek Meyer, our Chief Financial Officer; and Pat Ahern, our Chief Credit Officer. I'd like to start things off by sharing a few highlights from the quarter and then reflecting on 2022 as a whole. From there, Derek will walk through the update on margins, income statement trends and capital, and then Pat will provide an update on credit. So no matter how you slice it 2022 was a statement year in Associated's 162-year history. It was driven by a relentless focus on customers and on our colleagues. We executed against our strategic plan with several milestones achieved in 2022. We staffed and ramped up new commercial and consumer verticals that have since met or exceeded their initial targets, given us a little bit more flexibility to drive balance loan and balance deposit growth for the bank. We attracted top talent from several major competitors within our footprint and added 20 net new commercial RMs during the year, giving us momentum as an employer of choice. We launched the most significant digital platform upgrade in our company's history with our new associated bank digital platform and then within 90 days we follow that up with a new account opening platform. This gives us a much improved digital experience for our customers and the ability to make future enhancements more frequently. And leveraging these digital enhancements, we officially launched new mass affluent and digital sales strategies, giving us the ability to attract and deepen more quality customer relationships. All of these efforts have enabled us to drive positive operating leverage, improved our returns and serve our customers more efficiently and more effectively. And while we've grown a lot in a lot of ways in 2022, it's important to reiterate that we've done so in a controlled fashion. We remain firmly committed to maintaining our discipline around credit quality and expense management. These foundational strengths have been developed over the course of a decade and will continue to serve as our foundation as we look to deliver enhanced value for all of our stakeholders. These results also set the table for 2023. And in January, we continue to be impressed by the strength and resilience of our midwest markets in the face of macro uncertainty. Unemployment rates remain stable and with Wisconsin and Minnesota continuing to come in below the national average. Our consumers remain resilient with increased debit and credit card spending levels in December of '22 versus December of '21. Our business customers continue to preserve - pursue growth and expansion opportunities where it makes sense, but the uncertain macro environment is front and center in all conversations. Taken together with the rising rate environment, these trends have enabled us to enjoy another strong quarter here in Q4 and have given us momentum into the new year. We continue to monitor the significant macroeconomic and geopolitical question marks that remain. But we believe we put ourselves in a good position to build on our momentum and drive value for our stakeholders without stretching to take additional risk. With that, I'd like to highlight a few items outlined on Slide 2. Our fourth quarter results reflected continued loan and deposit growth, further margin expansion and benign credit impacts. We once again saw strong long growth across all major segments. But as we anticipated, the pace of growth slowed somewhat versus the prior quarter in most key categories. Based on a combination of our customer activity in our markets, the execution of our strategic plan and the rising rate environment, our net interest income increased 9% quarter-over-quarter and 55% versus the same quarter in the prior year. With the expenses held flat for the quarter, we once again drove positive operating leverage, and we pushed our return on common equity north of 16% for the quarter. On the credit side, we're continuing to closely monitor our portfolios, but fourth quarter trends remain benign. During the quarter, we saw just 2 basis points of net charge-offs. We did add provision again this quarter, but as once again largely a function of our loan growth. Looking at 2022 as a whole, our fourth quarter results were a fitting exclamation point on what has turned out to be the most profitable fiscal year in Associated's bank's history. Through a combination of strength in our markets, execution of our growth initiatives and help from rising rates, we drove a 41% increase in PTPP income, posted double-digit operating leverage and added nearly $4.6 billion in high-quality loan balances. Despite a $121 million provision-driven headwind versus the prior year, we were still able to drive a 6% increase in our net income available to common equity year-over-year. And while we're proud of these accomplishments, our focus is on building off this momentum in 2023. With that, I'd like to provide a little bit more color around our loan trends. Slide 3, once again, underscores the broad diversified impact of Associated's loan growth story. For the third consecutive quarter, we reported growth in nearly every major loan vertical. Our construction portfolio led the way with the bulk of balanced growth driven by funding of prior commitments and a slowdown and pay off activity as opposed to new production. We did see broad high-quality loan growth in several other businesses. But in most cases, the pace of growth slowed versus the prior quarter as expected. Shifting to Slide 4. This annual view of our loan trend shows a clear picture of the broad base growth and optionality provided by our various lending initiatives. As discussed in the past, this dynamic reflects the strength of our markets and franchise, but it also highlights the diversified nature of our initiatives. This gives us additional levers that we can pull to drive balanced, durable growth across the portfolio over time in different economic and different economic environments without feeling like we need to stretch in one particular area. Slide 5 provides a bit more color on the status of our strategic initiatives. As we discussed last quarter, our effort to bolster our commercial ranks with talented RMs in markets like Milwaukee and Chicago, have played a significant role in adding quality core commercial loans to our balance sheet. While some of the balances came from draws on existing lines, we also increased the volume of new commercial relationships by 57% year-over-year, with a vast majority of new names coming in our core three state footprint. This activity helped us achieve our full year commercial loan growth target by September, but it also sets us up to drive a more holistic relationship that includes deposits, treasury management and other services. We expect to see additional core commercial loan growth in 2023, but at a slower pace compared to '22. Our new ABL and equipment finance verticals also established solid momentum throughout the year as each team developed their respective pipelines and steadily added balances as a natural fit for our customer base. As a result, the team's comfortably cleared their $300 million growth target for '22 and we expect to continue growing these businesses in 2023. On the consumer front, our auto finance team has continued to produce high quality fixed rate loans that helped diversify our consumer loan book. With decades of experience executing a prime, super prime strategy in a variety of environments this team knows the auto business, and their approach is a natural fit for our conservative credit culture. With that said, I've also stated previously that the diversifying impact of our initiatives give us the ability to scale up or down without having to over index on any one approach. And with that in mind, we've intentionally slowed our auto production rates slightly to reflect current market conditions as we head into 2023. We also continue to expect residential mortgage balances to remain relatively stable through the end of the year. And all in all, we expect to drive a total period end of its loan growth of 7% to 9% in 2023. Turning to Slide 6, we highlight our fourth quarter deposit trends. On an average basis, we grew deposits by 2% quarter-over-quarter and by 3%, versus the fourth quarter of 2021. This growth came despite inflation and increasing competitive pressures in the market and was a reflection of the strategic actions we've taken to cultivate our low cost, granular deposit base and attract and deepen holistic relationships. As we've discussed in the past, we recognized that generating low cost funding is more crucial than ever and particularly as we look to fund our growth strategies on the lending side. While we did add broker CDs and network deposits to our bounces in Q4, a majority of our balance growth for the year was driven by core customer deposits. We're comfortable flexing wholesale and network funding levels in the short term, but we expect to hold this type of funding and check as we move through the year. We continue to monitor the competitive environment closely and remain confident in our ability to fund the bank at a reasonable cost in 2023 and beyond based on the initiatives we have in sight. Slide 7 highlights an annual average view of our deposit flows. In 2022 we saw average deposit growth for the 11th consecutive year. Despite the steadily increasing inflationary and competitive pressures we saw throughout the year, we were still able to grow average annual deposits by 4%. On a quarterly year-over-year basis, core customer deposits were once again the driving force behind our growth led by savings, money market and interest bearing demand categories. Shifting to Slide 8. There is no denying that the competitive pressures will be amplified in 2023 as the battle for deposits continues. That's why we've been hard at work for the past year on several initiatives designed to help us cultivate customer relationships, fund growth with lower cost core deposits. In fact, some of these initiatives have already started to have an impact. In '22, we drove a 21% increase in commercial RMs compared to year in '21. This in turn led to a 57% year-over-year increase in new customer names, many of which brought deposits and non-loan business to the bank, as renewed our focus on driving holistic relationships. These efforts have been complemented by a sharpened focus on businesses that allow us to deepen those commercial relationships, including treasury management, where we've increased sales activity by 50%. HSA where we've hired a new national sales director and other deposit centric businesses. On the consumer side, we launched a new digital account opening platform providing customers and prospects with a modern simplified digital storefront. This upgrade gave us the confidence to launch our new acquisition focused mass affluent and digital sales initiatives in the fourth quarter. While it is still early, we've seen promising initial production in the segments such as savings and CDs. With each of these initiatives launching over the course of '22 some have impacted our 2022 results more than others, but all of them are expected to provide a full year impact in 2023. And to further capitalize on this momentum in '23, we've shifted our marketing spend from a sponsorship focus to a customer acquisition with a new brand campaign set to launch next month. And beginning of the second quarter we intend to launch a new product or digital service every quarter in 2023, with an eye towards increased customer and deposit acquisition. In summary, with the battle for deposits continuing to heat up, we are actively pursuing a variety of levers to drive core customer funding at a reasonable cost. I've directly experienced the launch of similar programs several times in previous stops, I'm confident that we can achieve positive results at Associated regardless of the environment. In 2023, we expect to drive total core customer deposit growth, 3% to 5%. Finally, on Slide 9. Our initiatives have helped generate strong revenues for our company in 2022. Coupled with our diligent management of expenses, we've continued to deliver significant operating leverage and PTPP income growth. For the full year of 2022 our PTPP income grew by 41%. We remain committed to delivering positive operating leverage in 2023. With that, I'll pull up there and hand it over to Derek Meyer, our Chief Financial Officer to provide further detail on our margin, revenue and income statement trends for the quarter. Derek? Thanks, Andy. Slide 10 highlights our yield trends and the asset sensitive nature of our balance sheet. On the asset side average earning asset yields continue to expand meaningfully in the fourth quarter. Over the course of the year, earning asset yields increased by 187 basis points, or roughly 52% of the increase we've seen in the Fed funds target rate over the same period, reflecting our core asset sensitivity. On the liability side 2022 interest bearing liability costs have now increased 131 basis points or roughly 37% of the move in Fed funds target. While the pace of liability costs started to increase in the back half of the year this increase has largely tracked with our expectations, and we continue to monitor these costs closely. Despite the rising liability costs in the fourth quarter, we continue to see significant quarter-over-quarter expansion in our net interest margin as shown on Slide 10. I'm sorry, Slide 11. We view this as a reflection of our recent loan growth coupled with our structural assets sensitivity. Here in Q4 our net interest margin expanded by 18 basis points versus the prior quarter. This expansion equated to a $25 million lift in our net interest income versus Q3 and then a full year basis our NII grew by 32% or $231 million as compared to 2021. Moving to Slide 12. Several factors have enabled us to continue benefiting from the current rate environment. As we've discussed, these factors include our natural assets sensitivity, reduced reliance on wholesale network funding versus the prior rate cycle and our ability to manage interest bearing deposit betas. While we do expect the betas to continue increase into 2023 these broader dynamics have us poised to continue benefiting in the near term. With that said the lack of clarity around the macro economic forecast carries significant uncertainty for the industry into 2023. As a result, we continued to take meaningful actions to manage to this uncertainty and reduce our interest rate risk. Over the back half of 2022, we executed over 2 billion interest rate swaps. We did not intend to call the peak on the interest rate environment in 2023. But we will continue to take reasonable steps over time to dampen our asset sensitivity and manage our downside rate risk. While the macro economic outlook remains uncertain, our current expectations are for short term interest rates to rise by 25 basis points, following each of the FOMC meetings in February and March, with a rate cut in October. Based on these assumptions in the balance sheet dynamics I just discussed, we expect net interest income to grow between 15% and 17% in 2023. Shifting to Slide 13. Non-interest income continues to see pressure from the market driven headwinds we've discussed throughout the year, and the customer friendly fee adjustments we implemented in Q3 of 2022. In the fourth quarter, modest increases in wealth management fees on both the income and stabilization and mortgage banking were more than offset by reduction in service charges, other fee based revenue and capital markets. Also contributing to the quarter-over-quarter decrease was a $6 million investment securities gain recognized in Q3. As a reminder, we expected to see deposit account fee income moderate beginning the third quarter of 2022 based on implementation of the OD NSF changes we announced earlier in the year. These changes were both proactive and pro customer nature. When coupled with our relationship, focused deposit initiatives they give us additional competence in our ability to strengthen our low costs deposit base and enhance our broader profitability profile in 2023. With this in mind, we expect total non-interest income to remain under pressure throughout the year, with compression of 6% to 8% in 2023. Moving to Slide 14. Fourth quarter expenses came in at $197 million, as we continue to scale up our investments in people, technology and business development and advertising. For the full year expenses grew by 5% versus 2021 in support of our initiatives. Despite this expense growth, our efficiency ratio steadily improved throughout the year. On a point to point FTE basis, we've now decreased our efficiency ratio by approximately 11.38% compared to the same period last year reflecting our ability to maintain expense discipline while driving higher revenues. This point is further underscored by the chart on the lower right, which shows our non-interest expense actually decreased in 2022 as a percent of assets. While we continue to invest in strategies that support our growth aspirations we remain committed to keeping expense growth below revenue growth. On an ongoing basis, we will continue to pursue opportunities to shift expense from underperforming assets to more productive means where possible. We expect total non-interest expense growth of approximately 4% to 6% in 2023. Shifting to Slide 15. We continue to manage capital levels towards our target ranges while supporting growth. We remain comfortable with our capital levels given the enhanced profitability we drove throughout 2022. Given current market conditions and the expectation for short term interest rates to remain elevated into 2023 we now expect to maintain TCE in the 6.75 to 7.25 range. We expect CET1 one to land between 9% and 9.5%. Thanks, Derek. I'd like to start by providing an update on our allowance as shown on Slide 16. We've utilized the Moody's November 2022 baseline forecasts for CECL forward looking assumptions. Moody's baseline forecast remains fairly consistent with recent trends and assumes continued Fed rate action, minimal GDP growth, and modest employment deceleration in 2023. On a dollar basis, our ACLL settled at $351 million at year end. This figure represents another increase in the prior quarter. But that build was once again largely driven by significant growth in our loan portfolios. In alignment with this dynamic, our reserves to loan ratio increased just two basis points from 1.2 to 1.22 during the quarter. Moving to Slide 17. Our quarterly credit trains remained largely benign during the fourth quarter. Non-performing assets, non-accrual loans and net charge offs all decreased from the prior quarter and the same time period a year ago. The slight increase in delinquencies as compared to recent periods largely reflects the normalization of our maturing auto book. Following a $17 million provision built in Q3, we added another $20 million of provision in the fourth quarter. As mentioned, this provision bill was largely a function of loan growth and not a reflection of larger credit quality concerns within the portfolio. With 2022 representing one of the strongest loan growth years in our history, I'd like to reiterate that this growth has not come from an expansion of our credit box or overextending ourselves in one particular area. The recent growth in our loan portfolios has been driven by investments in our core business, growth of core relationships, and expanding our engagement with familiar customer segments. Our strong credit foundation in place at Associated today was built over the course of a decade. We have an experienced team that continues to work hard to bolster this foundation with a disciplined underwriting culture, improved risk controls and a proactive approach to portfolio management. With that said, we are fully aware of the warning signs in the economy and we remain stringent in our credit discipline, with current underwriting reflecting elevated inflation, supply chain disruption and labor cost to name a few of the economic concerns, as well as continued interest rate sensitivity analysis across the portfolio. Going forward, we expect any provision adjustments to reflect changes to risk rates, economic conditions, loan volumes and other indications of credit quality. Thank you, Pat. Before we move to Q&A I want to reiterate a couple points from our discussion this afternoon on Slide 18. First, we remain confident in our ability to drive quality balanced loan growth throughout the year, but not at the pace we saw in 2022. With that in mind, we expect total end of period loan growth between 7% and 9% in 2023. We continue to work on dampening our asset sensitivity, but we expect to continue to benefit from the rising rate environment in the near term. Based on our current forecasts for balance sheet growth, deposit betas and Fed action, we expect to deliver a net interest income growth of between 15% and 17% in 2023. Lastly, we continue to invest strategically in people and technology and expect non-interest expense to grow by 4% to 6% in 2023. As always, we remain disciplined on expenses as we work to continue delivering positive operating leverage in future quarters. Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jared Shaw from Wells Fargo. Please proceed with your question. Maybe starting on loan growth. You had great growth in construction this year. What does the visibility look like into the pipeline heading into '23? And are there any areas you're focusing on or shying away from as we go forward? Yes. That's a really good question. I'll just speak to the CRE construction that that's a point in time rather than a trend in my mind. We saw the growth because of the funding up of some of the construction loans. And then a brief hesitation on some folks to refinance in the permanent market as opposed to new production that we put out there. We see very little new production, particularly in the industrial side of the equation. The pipelines are significantly down in commercial real estate. So I think you'll see that category moderate, as we go throughout the year. We expect to have very balanced growth between consumer and commercial and that's purposeful. As you know, we have several levers right now. So we can start to maximize higher performing portfolios, portfolios that are more holistic as opposed to single deals, businesses that will deemphasize third-party origination already have, we did that in December. And that pipeline is, frankly, flowing through in December and diminishing as we go into January. So we expect C&I to continue to be solid, but really within our footprint and with holistic relationships. And we've already seen the evidence of that as we brought on RMs throughout the year. That's why we feel like bringing those RMs on during the year, it has a full year effect in 2023 and even stronger focus on ancillary business, including deposits and TM. Okay. And then as we look at margin and spread income, I guess where could we see margin sort of peaking out - peaking with some of the changes you took. And then just to confirm as the NII growth target 7% to 9%, is that full year '23 over full year '22? Or is that from annualized fourth quarter levels? Jared, this is Derek. Those are full year numbers. And so -- and our guidance on NII is based on the yield curve assumptions we made and the loan growth that we outlined in terms of expectation. So we're not giving guidance on where we're calling the peak on race, we sort of talked about that. I talked about that in the script. When we saw, as we went into this year and looked at all the plans, the rate moves even while we were planning in December and even in the first weeks of January, I think, it's pretty dangerous to try and call that. What we're really anchored on are the fundamentals are going to drive durable margin. We came into this very asset sensitive. We are going to remain asset sensitive but we're taking some of that asset sensitivity down which we talked a little bit about with our hedging, but we also are putting a stake in the ground with the outperformance on deposit growth. And you saw that this year, you put that into perspective with the initiatives we put in place. So we've outlined on Slide 8, many of which have year-over-year impacts on our ability to generate deposit growth beyond just interest rates. Then you have new initiatives that will have a full year impact this year going out. And then you start to fill in the blanks behind that other kinds of funding that we might need to support that level of loan growth. We're still committed to our 95% loan to deposit ratio. And we still expect our wholesale funding to be below what we had historically during the last time. We had rising rates. To get to the NII guide, I guess that implies a pretty significant step down in margin as we go through the years is that the right way to be looking at that, even though you're still asset sensitive and we're still expecting a little bit of rate moves up earlier on. Yes, I think what year-over-year, on a full year basis, it's a step up. I think when you look at sequential quarter, you're still trying to and everybody's trying to figure out where is your peak quarter and we're not making that call. Okay. Okay. And then on capital, should we expect that you could be more active in capital management to potentially get to the lower end of that range? Or is that just a function of the natural movement of the balance sheet and we shouldn't really be expecting a buyback or any significant change to capital return strategies? Good afternoon, guys. Thanks for taking the question. I wanted to also ask about sort of NII and trajectory there. So I guess, just looking at guidance suggests that the quarterly average of NII for the full year '23 will be about $10 million a quarter less than what we did in the fourth quarter. Now, granted, fourth quarter was just an extraordinarily strong number. But maybe do you have, Derek, a sense for how NII in dollar terms would traject throughout the year? In other words, would we stay high for say, the first half of the year, as long as the Fed is still raising rates and we get that benefit? And then does it taper off? Or was there anything in the fourth quarter that would have kind of elevated it? And then we maybe step down, but have a steadier dollar average throughout the year? Yes, I don't - again, I don't think I'm going to be that specific. I think we recognize that deposit betas are catching up. When exactly they - which quarter they catch up, and you see some of that quarterly compression. I don't - again, I don't think we have that called. So I think we're more comfortable giving the full year guidance. And with the options we've got, we think we can get to that number. Okay. All right, perfect. And then just given some of the hedging actions that you've taken, or took in the second half of the year, do you have sort of a sense where, like, maybe what, like what might represent a floor for the margin, once it does begin to taper off by any chance? No, we don't. I think you can back into some scenarios, using our asset sensitivity that we have there. if you do some little bit of cowboy math, that a 25 basis point shock might impact you $7.5 million, $7 million on a full year basis. And you can see, we've been managing that down to combination of the swaps and the evolution of the portfolio. Because as far as I'd go with that the biggest [indiscernible]. One of the things that [whether] everybody's faced with and I know everybody on the call is interested in is how do you continue to the hedging strategy with the shape of the yield curve and so, if your natural balance sheet isn't offering you protection or is with some of the growth we've got in the auto book, then you might start thinking about swaps or floors. But we're not at that point yet. And we're still monitoring each quarter and we'd like the progress we're making. And we want to stay asset sensitive. Maybe another stab at the NII from a different point of view. But just looking at the balance sheet. Would you say you're at the point with excess liquidity now, where you expect that the balance sheet growth to more or less matched loan growth at this point? Yes. So the way I'd characterize it, I mean, that's a shorthand, I haven't done that view, we are going to, we have bottomed out on securities as a percent of fixed assets. So there is a component of our funding plan and deposit growth that includes supporting investments and securities. So it probably gets you closer to what you're talking about. Yes, that makes sense. Okay and then I appreciate your comment on expecting positive operating leverage in 2023. Is there any kind of environment from a rate perspective that would restrict that the ability to achieve that or you feel pretty comfortable with that guidance? Yes. Look, that the rate question, the yield question, the impact in the market is being asked on almost every call and just there are obvious reasons. And that's because there's a lot of contradictory information out there to understand what the future might be. With regards to what we see in our portfolio, the tailwind that we have from the growth that we've already experienced in '22 heading into '23, the initiatives that we have that show that we're able to find a little bit, we've been able to fund on the deposit side a little bit ahead of what the marketplace is. Our ability to shift expenses from a low return area to a higher return area all those things at this stage, give us confidence in what our forecast is. The economy doesn't seem to be falling down quickly in our mind. And there could be a slow roll towards that. We also see pipelines and have conversations about automation, and what that can mean on the loan demand side. And we have a lot of levers there. That's really choosing which levers we want to go forward with. But we believe those exists. Those will match largely what our deposit funding is and that is our expectation. And the other point that I'll make is and I know we're talking about '23, but we're talking about actions we're taking as a company to structurally change how we fund our balance sheet over time. So that starts to give you more and more competence that we have opportunity for improvement. As we drive those core deposits that means that you over time lessen the wholesale funding. So the answer, the short answer is yes, we have as much confidence as we can have in an uncertain world on what will happen, because we have many tactics and strategies both on the loan side, the deposit side, but also where we invest our capital and where we invest our money on people. And also where we invest in digital versus shifting the digital spend, shifting to digital spend from physical spend. So taking all those things together and the environment we're in we today have a confidence level in the 2023 forecasts. Appreciate all that color Andy. Just lastly, on the expense guide. It came in below actually where I was looking for it. And I'm just curious in terms of the pace of expense growth through the year, if there's anything that we need to keep in mind or if it's just you're considering rather steady growth through the year. Thanks. Are you disappointed that's not higher Daniel? Sorry, rhetorical. Sorry, no. The reason that we feel confident in this space is because we've taken an approach, frankly since I've been here, which is we're look very strongly at the expenses that we have and say, are we spending in the right place? Let's start with that. And then we cut expenses in those areas going into the year. We've targeted in the first year of taking out I think it was roughly $10 million. And we have a similar approach going into the year on what do we do in our physical branches, what are we doing in third party origination, which has less, typically less margin in return on it, then we took action with our staffing and as we brought that lever down, so it's not just a function of investing in new areas, it's also simultaneously taking the expense off the table in areas that cannot yield as much to us on the long term. So when we say 4% to 6%, it's because we are taking actions proactively to cut expenses before we grow expenses. As long as the increase in expense leads to an increase in revenue, we will continue on that path. But we will ask the team also, if it doesn't, where do we proactively slow down the investment. And that exercise already is, already a course of business for our team. So to answer your question, I like the discipline in an environment where we've been able to grow revenue. I very much like the discipline that we've had with regards to expenses. We also happen to bring in a CFO that has years and years of experience as the head of FP&A. I will tell you, that's not an accident, bringing disciplined execution is very important, not often talked about, but incredibly important when you're trying to balance growth and bring in that discipline towards expense management. So I feel quite good about the 4% to 6% range. And I will tell you, we're not immune from the issues that everybody has, which is consistently looking at different areas of your business and knowing that we're competing for talent. So we have factored in increases that we have already had to make or going to make with regards to count talents and key areas to retain them. Hi, thanks. Good afternoon. In prior presentations, you provided the 2023 loan growth outlook by those three categories commercial down to auto finance. So I guess my question is kind of in an ideal world, what bucket would you like to grow and how would you like that mix of growth to be in 2023 and is auto finance kind of the filler so to speak, because to allow you to hit that target, given just some of the lower returns that we hear in the marketplace? Yes, it's a great call out Terry. And what I would say is we have a lot of levers. And we want to see where the year is going, as opposed to going in the middle of the year and say, we're going to go hard in this asset class, only to find out that maybe that is not the area offering the best returns. And so we look very closely at our mortgage business. Now our mortgage business in production is off 80% so far, versus the prior January. So how do I want to forecast that out in a year where we're seeing pay downs at historic lows, and we're still seeing that grow. So we're trying to pull these levers through, but what we know is, we have the ability to manage what our long growth number is, because we've taken action with quality people in quality segments. And then we're going to look at what the returns in those areas are. So what I give as guidance during this period, I'll also say asset based lending and equipment finance, while they're new businesses to us [their] middle market, that is middle market lending all day long. So to call those out at this point, we feel like it's part of our business, it's how we're selling, it's integrated into our process. Then we'll look at the consumer side and try to create bounce growth between that residential and then pick up the slack with our auto lending. I'm not sure I'd call it a filler product. And I'm certain our division would not really like that as the label. I would say we have professionals that look for Prime paper that have low risk to them in a high risk, higher risk, potentially environment. So I like the position we're in there. So I finished that commentary by saying we have optionality within where we are. Our goal over time is to drive margin. We think we have an opportunity we look at, we look at that very closely in the industry. And we see what that mix shift can be. So the idea is that we can drive higher yielding assets over time. But for 2023, what I would like to do is drive balanced growth. We are not the auto lending company. We are a company that can choose between consumer and commercial and try to balance the growth between those two, while maximizing the areas on margin. So that's a little bit of why we haven't broken that out going into the year. It's also the reason that I have confidence that we can hit some of our projections. Appreciate that and then just as a follow up, I mean, what do you say to investors who are concerned with what they might feel is late cycle loan growth and how those loans may perform in a downturn. When I look at page 4, that right hand category, there has been significant growth for a bank your size in commercial and CRE and construction and even auto finance or especially auto finance. What's your response? Well, I would say if you look at 12 months, you probably started too late. And what I would say is we've worked on fundamentally changing the balance sheet to derisk it over in that case. And specifically, I could call out, for instance, our residential real estate portfolio, we're oversized in residential real estate, but we're oversized in a portfolio that is prime and super prime, in a market that doesn't have large fluctuations up and down. So inherently, our balance sheet is less risky, in our opinion, going into that, and that has seen some growth. When we look at auto and calling that out specifically, it is the oldest new business I've ever experienced. And by that, I mean, we have people that joined us with decades of experience across the board in that space. Not only do they have decades of experience, we also brought the data, the historical data to understand how the portfolio operates. So we know how that operates. Then on top of that, we went into prime and super prime. And I'll specifically say to the investors that by traditional standards, 97% of that book is prime and super prime. If we take a scorecard approach, which takes a lot of other factors, and we think is a better way to look at it, it's 99% of our portfolio. And we know that because we can check that against historical data. So those would be the things that I would say with regards to what the portfolio is. The next thing that I'd say is we did not expand our credit box anywhere. In fact, we've tightened up our credit box, as we've seen, the world change. So we've tighten that up on commercial real estate underwriting. We tighten that up on commercial underwriting. And we already had a pretty conservative approach. So we've added balances in areas that we know quite well. I get a lot of passion on this. And I'm looking across the table at our chief risk, Chief Credit Risk Officer, I think maybe he should make a final comment on this. No, I would agree with everything you said. We did not change our credit box relative to the growth you've seen. And we are continuing to look at, like as Andy said, what's going on in the marketplace, whether that's interest rate adjustments, whether it's sizing, whether it's underwriting to an exit. So all that stuff is kind of evolves in relative to the marketplace. And what it's also done is the growth you're seeing again, it kind of reflects the core client that we've been focusing on. So we didn't stretch to add in a new vertical. We didn't stretch to add in some new geography or anything like that. So we feel we're comfortable with the core focus we had coupled with the adjustments we're making to reflect what's going on in the economy. Just a quick follow up on that for you, Pat. On Slide 17 you mentioned some normalization, driving the delinquencies up. And I know these are small numbers, but what do you expect that to look like in a couple of quarters just so we're not surprised by that? I think it's going to revert back to kind of pre-pandemic numbers. How long that takes year ago, we were thought maybe we'd be there by now, but it's not. I think, again as we've mentioned, the portfolio continues to outperform. We're seeing the loan book, the auto, indirect auto book is a little over a year now. So we're kind of reaching some normalization there. But really, the rest of some of the consumer delinquencies that we saw this quarter are really small and we haven't really seen a significant trends. So when we get back to say 2018, 2019 numbers is to still to be determined. That helps. I was just going to ask about the delinquencies as well. Non-financial question for you, Andy. The brand campaign you talked about, what is the message on that and what do you think needs to refresh your emphasized in terms of messaging? I sure hate to spoil it for you, Jon. I feel like I'm going to email those commercials to you though, as we're launching. But what I'll say the interesting part to me is we brought in a new chief marketing and product officer and his expertise is in customer research. And so when you launch something that's about the brand, first you want to know what you're about. But then you also want to know what your customers are about. And so we are going to combine what the messaging is, that's kind of true to us and what we do, but it's also going to be what's in it for me. And as we think about [marrying] a marketing message, we also think about our product execution. So we will, the significance of the products that we're going to launch in the second, third and fourth quarter should marry up with that brand message. And it does, that's a big deal. And then, when you think about the triumvirate, you think about the new branding, you think about the product, and then you think about digital, because at the end of the day, you're driving them to your digital platform, and you need to be relevant. And the final thing I'll say on that is, you want to make sure you're relevant, particularly to the people that are switching banks. And those are typically people that are 40 years old and under. So that is right in the sweet spot of what we're doing in digital. It's right in the sweet spot of the ease of use and satisfaction, we are seeing from our digital account opening. It will be consistent with the message. And it will also be with those folks in that range have told us are important from a product standpoint. So it's been a heck of a lot of work going into all of that. And we've been on that path for more than 12 months even before our new product and marketing executive came on board, but it's coming together nicely. So I'm making a note to myself, email Jon all the commercials. I'm sure I'll see them. Okay and then just a couple of more cleanups, just back on Terry's question on Slide 5, on auto, I understand what you're saying there, but do you expect auto to grow very materially from here and you kind of achieved what you wanted to get in terms of some of the portfolio diversification? I would say that we have the option to grow it. I would say that we have to look at our mortgage portfolio is initially set up as a natural hedge to a decreasing mortgage emphasis. And we're seeing right now why that's important. And so we believe that it will have growth in 2023. The exact number on that will be dependent upon what our overall position is, what the other categories do, what mortgage specifically does, what we can find in liquidity, as well. So a little bit too early to put a finer point on that, which is why we really kind of message that it's more of a balanced growth between commercial and consumer. Well, look, I really appreciate the interest that you've had in Associated bank. We will be on the road, telling our story of what's happening with the company and look forward to speaking with many of you later this quarter at various locations. In the meantime, if you have questions, contact our leadership team me, or contact Ben. And again, thank you for your interest in Associated bank. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
EarningCall_1060	Good day, ladies and gentlemen, and welcome to today's Xcel Energy Year End 2022 Earnings Conference Call. For your information, today's conference is being recorded. Questions will be taken from institutional investors, reporters can contact media relations with inquiries and individual investors and others can reach out to Investor Relations. At this time, I turn the conference over to your host today, Mr. Paul Johnson, Vice President, Investor Relations and Treasurer. Please go ahead, sir. Good morning, and welcome to Xcel Energy's 2022 fourth quarter earnings call. Joining me today are Bob Frenzel, Chairman, President and Chief Executive Officer; Brian Van Abel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer questions if needed. This morning we will review our 2022 results and highlights and share recent business developments and regulatory developments. Slides that accompany today's call are available on our website. As a reminder, some of our comments during today's call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our SEC filings. Today, we will also discuss certain metrics that are non-GAAP measures. Information on the comparable GAAP measures and reconciliations are included in our earnings release. We had another very successful year at Xcel Energy, continuing to execute on our strategy while delivering strong financial and operational performance. For our investors, we delivered EPS of $3.17 representing the 18th consecutive year of meeting or exceeding our initial earnings guidance. In February, we raised our annual dividend for 19th straight year increasing at $0.12 per share or 6.6%. More recently, in November, we extended our long-term investment plan which features a 10-year capital outlook with an approximate 7% rate base growth. We ranked in the top quartile in customer reliability or CAIDI and a residential electric bills are more than 20% below the national average. And amidst the backdrop of significant commodity increases this year, Xcel Energy's 4,500 megawatts of owned wind farms continued to be an industry-leader in net capacity factor performance, generated approximately $1 billion of fuel-related customer savings in 2022 and almost $3 billion since 2017. Our nuclear fleet remains the top performing fleet in the country and achieved a capacity factor of 96% last year. We had an active regulatory year and resolved multiple rate cases in Uri storm cost recovery proceedings. Commissions in Minnesota and Colorado approved resource plans that will add nearly 10,000 megawatts of utility scale renewables to our systems through this decade. The Minnesota Commission approved our 460 megawatts Sherco Solar project, the Colorado Commission approved our $2 billion Power Pathway transmission project and MISO awarded us $1.2 billion of transmission projects and we accelerated our timeline for transitioning out of coal and now expect to be coal free by the end of 2030, all of which contribute to our leadership in clean energy transition for our customers. We continue to lead in carbon reduction as well. 2022, our estimated carbon emissions were approximately 52% below 2005 levels and we remain on track to achieve 80% carbon reduction across the company by 2030. The passage of the Inflation Reduction Act will reduce the cost of renewables for our customers, improves cash flow and credit metrics for the company and enhances the competitiveness of our renewable offerings. Continue to execute on our electric vehicle vision, implementing multiple new programs for our customers. We also filed comprehensive transportation plans in Minnesota and Wisconsin that are pending commission approval. We've advanced our ESG leadership and have been recognized by multiple entities, including an upgraded rating by MSCI from AA to AAA. And finally, we remain among the world's most ethical, admired and responsible companies and we're recognized for being the best veteran employer as well for our disability inclusion in the workplace. I'm really proud to lead a team that can deliver on operational, financial, environmental and diversity goals, all simultaneously. Looking ahead, we're well-positioned for sustainable organic growth over the next decade, including affordable renewable additions in our resource plans, the transmission needed to enable those carbon-free resources and responsible community transitions as we retire coal plants. We've recently issued a requests for proposals in Minnesota, Colorado and at SPS seeking approximately 6,000 megawatts of new renewable generation, a portion of the 10,000 megawatts that have been approved in our jurisdiction. We'll submit our recommended portfolios of generation assets to our commissions by the middle of this year and anticipate decisions in the second half of this year. We also expect to issue additional RFPs in Minnesota and Colorado this year and next year for the remainder of our approved needs. As we've discussed in the past, we believe that we have a geographical advantage in the clean energy transition due to the strong wind and solar resources in our service territory. This access to low cost renewable energy should also give us further advantage in developing green hydrogen and other clean fuel projects, which are becoming more feasible as a result of federal support from the Infrastructure and Jobs Act and the IRA. Late last year, we submitted hydrogen hub concept papers for both the Rocky Mountain and the Upper Midwest regions to the Department of Energy to compete for awards from the $8 billion hydrogen hub program. In December, we received favorable notice from the DOE for our concepts and we're encouraged to submit full applications in April. In addition, our pink hydrogen production pilot at our Prairie Island nuclear generating station is expected to be operational this year. Finally, we expect to bring forward opportunities this year to utilize clean fuels and green hydrogen blending at both our gas-fired generation stations and in our gas network for Home and Building heating. As we continue to utilize innovative technologies to decarbonize our business, we are well-positioned to take advantage of potentially significant hydrogen capital investment opportunities in the future. As the penetration of renewable assets in our states increases, we're also interested in pursuing advanced storage opportunities to balance our electric system needs. Today, we're excited to announce a new partnership with Form Energy to develop two long-duration energy storage pilot projects. Form Energy's 100-hour battery technology could be a critical component to our decarbonization strategy providing the resiliency and reliability that we need on the system to support our significant renewable portfolio. We plan to deploy a 10 megawatts multi-day storage system at a retiring coal plant in both Minnesota and Colorado. These projects are expected to be online as early as 2025. And as we wrap up, I want to thank the thousands of employees who worked in below zero temperatures, sustained high winds in several feet of wet, heavy snow, keep the lights on and the houses warm during our recent winter storms. Your efforts exemplify our company values of connected, committed, trustworthy and safe, and I believe that our dedicated employees and partners are what distinguishes Xcel Energy with our customers. We had another strong year recording earnings of $3.17 per share for 2022 compared with $2.96 per share in 2021. This represents EPS growth of 7.1%, slightly above our long-term growth rate target of 5% to 7%. The most significant earnings drivers for the year included the following; higher electric and natural gas margins increased earnings by $1.05 per share, primarily driven by regulatory outcomes and riders to recover capital investments. In addition, a lower effective tax rate increased earnings by $0.15 per share, but keep in mind, production tax credits lowered the ETR, PTCs are flowed back to customers through lower electric margin are largely earnings neutral. Offsetting these positive drivers were increased depreciation expense which reduced earnings by $0.40 per share reflecting our capital investment program, higher O&M expense which decreased earnings by $0.24 per share, higher interest expense and other taxes, primarily property taxes, decreased earnings by $0.23 per share and other items combined to reduce earnings by $0.12 per share. Turning to sales, our weather-adjusted electric sales increased by 1.8%, largely due to higher C&I sales driven by strong economic activity in our service territories. We anticipate a modest slowing of our sales with growth of 1% in 2023. Shifting to expense, O&M expenses increased $170 million for the year, driven by cost related to technology and customer programs, storms, vegetation management inflation and additional actions due to weather. We also invested in our employees, ensure we retained our top talent. While we expect inflationary pressures to remain, we continue to focus on our continuous improvement programs, which we expect to drive increased productivity and efficiency. As a result, we anticipate O&M expenses will decline approximately 2% in 2023. We made progress on a number of regulatory proceedings. In the Minnesota Natural Gas rate case, the ALJ recommended the commission approve our settlement which reflects a rate increase of $21 million, an ROE of 9.57% and equity ratio of 52.5%, the decoupling mechanism and a property tax tracker. We anticipate a commission decision later this year. In the Minnesota electric rate case, the commission accepted our proposal to reduce our requests from MISO capacity revenue and establish our tracker. Hearings were completed in December and we continue to meet with the parties to see if we can reach a constructive settlement. However, we have a strong case and are comfortable with a fully litigated outcome absent this settlement. We anticipate a commission decision later in 2023. In November of 2022, we filed an electric rate case in Colorado seeking a net increase of $262 million based on an ROE of 10.25% and equity ratio of 55.7% in a 2023 forward test year. We anticipate a commission decision and implementation of final rates in the third quarter. We also filed a New Mexico electric rate case seeking a rate increase of $78 million based on an ROE of 10.75%, equity ratio of 54.7%, the forecast touch here in the early retirement of the Tolk coal plant. We anticipate a commission decision and implementation of final rates in the fourth quarter. As far as future filings, we plan to file our Texas rate case later in the quarter and Wisconsin in the second quarter. As we have discussed in the past, the Inflation Reduction Act provides significant customer benefits, key elements include the following; tax credit transferability will provide $1.8 billion of liquidity increasing cash flow and reducing equity needs. We've met with companies in our service territory and expect to enter into bilateral tax credit sale contracts later this year. Our FFO to debt metrics improved by 100 basis points during the forecast period, the solar PTC and tax credit transferability improve the competitiveness of our renewable bids and we anticipate pricing will decline in solar projects by 25% to 40% in wind projects by 50% to 65% due to the new and extended tax credits, which is great for our customers as we embark on this clean energy transition. Finally, we don't anticipate any material impact from AMT as a result of makers' depreciation and existing tax credits on our balance sheet. We are reaffirming our 2023 earnings guidance range of $3.30 to $3.40 per share, which is consistent with our long-term EPS growth objective of 5% to 7%. We have updated our key assumptions to reflect actual year-end results which are detailed in our earnings release. With that, I'll wrap up with a quick summary. We had a strong operational and financial year in 2022. We delivered 2022 earnings within our guidance range, the 18th consecutive year and increased our dividend for the 19th consecutive year. We received approval of our research plans in Colorado and Minnesota, which results in approximately 10,000 megawatts of new renewables. The Inflation Reduction Act has passed a significant benefits for our customers in the company. We are reaffirming 2023 guidance, consistent with our long-term earnings growth rate. We remain confident we can continue to deliver long-term earnings and dividend growth within the upper half of our 5% to 7% objective range as we lead the clean energy transition and keep bills low for our customers. [Operator Instructions] First question is coming from Mr. Nick Campanella calling from Credit Suisse. Please go ahead. Your line is open, sir. Hi, thanks for taking the question. So, I guess just on the O&M and the '23 guide that really stuck out to us and I heard some of your comments in the prepared remarks just talking about continuous improvement. Can you maybe just give us a little bit more on what levers you're pulling that's leading to that O&M reduction and is this -- we are more one-time in nature at '23 or sustainable through the plan? Thank you. Hi, Nick. Yes, good question. In a couple -- let me make a couple of points out, one is a little bit of a function of where actuals in 2022 ended up in terms of updating our 2023 O&M guidance, but we're really proud of the continuous improvement efforts that we've had underway and they've been underway for a long-time from 2014 to 2021, we kept O&M flat and that's something I'm really proud of our employees for doing and really good benefit to our customers. We did have inflationary pressures in 2022 but also took actions given the good weather year to reinvest in 2022 and this is similar with our employees. As I think about 2023, couple of things, one is, now we're investing a lot in technology and how do we make us more efficient in our plants, we have some of the digital operations factory which is really using AI in our plants to move from more reactive, proactive maintenance. We're investing significantly in, call it, real time scheduling in other opportunities to use AI. We also are starting to get on a treadmill of shutting down our coal plants, we have a broader coal unit a year that will start to shut down which provides us with a tailwind as we think not only in '23 but through basically the end of this decade in terms of as we lead this clean energy transition. And then we also do see some abatement of, call it, the high diesel costs, we had a storm year that was above normal in 2022, for example, we had quintuple the number of storm days in December. So there are some things that happened in '22 that won't happen in '23 that should help us achieve it. So, a long answer, but a lot there to unpack and hopefully that helped provide some color on it. Yes, that's great. Thank you so much. That's helpful. And on the Minnesota electric case, it sounds like you're confident in taking this the full distance to in order of, but I just wanted to be clear, is the settlement more unlikely at this point and how should we be thinking about that taking into consideration, where we are on the docket today? Nick, it's Bob, thanks for the question. And as we said in the prepared remarks, we filed this case over a year-ago, we probably actively working with parties since the September timeframe and we've reduced our total initial ask dramatically through extension of asset lives through the MISO capacity revenues and for bringing down the actual sales that we experienced in the state. So we think that reduced revenue ask is really a tailwind for us in the case, there's probably some pretty decent -- recent decisions in Minnesota, Southern Minnesota Power case the other day in our gas settlement that Brian mentioned in his prepared remarks are data points that we feel confident in taking this, as you say, all the way, but we're always open to engaging with all the parties and if there is an opportunity to move forward with a settlement, we would certainly think to do so. Thanks so much for taking my questions. I was wondering if you might be able to give any preview of what we could expect from the Clean Heat Plan filing later this year in Colorado, whether there might be potential CapEx investments additions to the plan and what new technologies and opportunities that might be to invest there? Hi, David, it's Bob. That's a great question. Look, we're excited about the Clean Heat Plan opportunity, it's really an opportunity for us I think to share and align our vision for a net zero future on the gas business with our commissions in a more formal way. I'm not certain that I would expect to see a significant amount of sort of new investment opportunities as part of that process, but really an opportunity to align on our multipronged strategy to decarbonize the gas business. As I think about it, we're working with upstream providers to reduce methane on the purchase gas that we buy for our customers. We're working on our own system, we have been for over the past decade in methane leak reduction, we've done a terrific job there, but there is always more to work to tighten up our own system and then we work on customer programs that encourage energy efficiency that encourage maybe fuel switching and beneficial electrification and then I think the big opportunity from an investment perspective is really the comments I made around clean fuel in my prepared remarks. We are working with multiple parties in the Colorado jurisdiction on a Rocky Mountain hydrogen hub, we think it's a really attractive project, a multistate MOU has been signed with several of the Western states and the governors and all the energy officers of the states are working together. So I think clean fuel's a real opportunity for us and for our customers to advance the clean energy transition and to help us realize a net zero future in the gas business. Yes, David and I'd just add a couple of points there. One is, we don't have anything in our current five-year plan related to hydrogen investment opportunities. So to the point, if there's an opportunity to pull that forward and move faster on hydrogen, absolutely an upside opportunity as we think about it over the next five years. But also lot of, call it, industry discussion about natural gas commodity cost and the volatility we think longer-term now us owning renewables and creating green hydrogen blending it into the LDC creates more price certainty for our customers and takes that volatility out, so I think that's a longer-term opportunity and benefit as we think about how do we help our natural gas customers and improve the certainty of our overall bills. And then just broadly, and I mentioned this in my prepared remarks was probably worth saying again, which is, we are benefited by the geography that we sit in having great access to low cost wind and low cost solar, not only should we be able to do this for our customers beneficially but you're looking at opportunity of making the Rocky Mountain region or the upper Midwest regions, energy exports centers where we're creating a product that can be broadly transmitted to the rest of the country whether that's electricity via wire or whether that's green hydrogen via pipe or trucking, we should be a destination for those installations which overtime should help economic development in our states and add to employment backlogs as well. That's really helpful color. Thanks for that, lot of initiatives, it sounds like related to that program that you'll be rolling out. And then separately on the announcement with Form Energy and long-duration storage, it's nice to see that crystallizing here. I was wondering if you might have a sense for how much long-duration storage might make sense on your system over time? Is there a certain number of megawatts or a proportion relative to your generation fleet that might make sense. Wondering how you might see the scale up to the extent these initial projects are successful and make it through the regulatory process? Yes, thanks, David. As we go through resource plans with each of our states, we find that we have increasing need for as we have higher penetration of renewables and increasing need for, what we'll call, dispatchable energy resources, and historically, those would have been combustion turbines maybe they are fired with a clean fuel like hydrogen or synthetic natural gas. Over time as long-duration storage might become more feasible and cost effective, you can see duration -- long-duration storage being a part of that solution, and I think if I were to add-up and I'm going to do this math on the fly, but we have several thousand megawatts in our resource plans for firm dispatchable generation. And if we had an asset, lithium-ion batteries are interesting and they have a utilization for our systems, but so do the long-duration storage. These are 20 megawatts projects, there's probably several 100 in our resource plans that could be realizable within the next five to 10 years if the technology proves out. Yes, and I would just add to that, we're really excited about this technology, shows that we're leading and really demonstrating that we're on the forefront of this clean energy transition and we've always talked about we know how to get to our 2030 goals of 80% plus carbon reduction and so this is really about taking that last 15% to 20% out of the stack and providing one of the solutions. So if you think about that and when you look at our resource mix in 2030, you can start to size what do we need to do beyond that in terms of storage capabilities that will be one of the solutions. Hi, good morning. It's actually Rich [indiscernible] on for Jeremy. Thank you for the time today. Maybe starting with changes to one of your drivers. I know we had out O&M already but just curious if you can parse the full range of what are effectively true-ups for '22 actuals versus new expectations for '23, are any of these changes you're putting in higher or lower within the guidance range at this point in time? I'll just read up to start, right, we're still feeling our midpoint of the guidance range, early in the year is where we expect to be and in terms of specific changes, right, gas sales is up a little bit, but that's really a function of where we landed on the year-end and really gas sales for us 1% is less than $5 million in terms of a change. The increase in the rider revenue that's a function of we had a good wind in PTC year in 2022, so that's relatively earnings neutral, we do see a little bit of a benefit depreciation and interest expenses lower. Let's see the forecasted rates for 2023 are lower than in Q3. But overall, we look at it is relatively neutral as we think about the puts and takes and so we're now targeting midpoint of the guidance range and now looking-forward to having a discussion 12 months from now and our goal is to deliver for the 19th straight year. Great, thanks for the color there. And then turning back to Colorado and a lot of their focus on the gas system quite excited, you addressed this a little bit in the equity plan perspective, but I'm curious for your higher level thoughts on how this might impact your electric operations in state as well? Hi, Rich, it's Bob. Look, I did mentioned as part of our Clean Heat Plan in our long-term strategy for decarbonizing on behalf of our customers that we do expect some amount of beneficial electrification to happen whether that's water heaters or cooking or home heating, but we believe that the asset value of the distribution system is incredibly valuable for our customers and has the ability to deliver a significant amount of energy on the coldest days in Colorado, our design temperature that we planned for in Colorado is minus 30, so it's still a very cold weather climate, has a need for a very efficient delivery system which we believe the pipeline system is there. Now, I do think that we can put -- as part of our strategy is to look at clean fuels and green hydrogen and synthetic natural gas and the opportunity that presents for our customers to realize a good product at an affordable price, that's also sustainable, it's important. But electrically, with EV's and beneficial electrification as we think about the future of our electric business in Colorado, there's probably growth there that's driven by both of those aspects. Hi, good morning, team. Thanks for the time and the opportunity, nicely done. So Brian just on the -- so, just first on bills, I just want to understand a little bit on the trajectory of bills, can you talk a little bit on what the rate increases are in customers this winter especially on the gas side? And then also just given the cresting that we've seen in some of the commodity prices here, how is that setting itself up to ultimately get reflected to back to your customers, if you think about the cadence of your hedging programs? Yes. Hi, Julien. Good question, and we think about -- I'll talk a little bit about both sides of the business because we think about on the electric side really well-positioned from overall customer bill perspective. Now we're, call it, 85% electric and if you just look at our income statement and the cost of goods sold and fuel impacts on the electric side is modest given the inflationary environment we saw in 2022, Bob talked about it, right, it's really -- it's our wind build out that we've always talked about been the hedge for rising commodity costs and that's played out in 2022 and really good to see from a customer bill perspective. And also we went into the year, being on a national average, more than 20% lower on residential customer per bill. So, good place and a good place to be on the electric side. Obviously, on the natural gas LDC side, you have a lot fewer levers and lot fewer assets. And so you saw some of the headlines of 40% to 50% bill impacts for our customers, obviously, we do not like to see any sort of bill impacts of that magnitude, but you're absolutely right that that is starting to subside with where natural gas prices are going. And if you caught it, we've just, in the past few months, we twice updated our gas commodity clause in Colorado which lowered the gas -- the commodity portion of the customers' bills by about 30% that will start to feel in Q1 relative to Q4 because we're actually going to be over collected, so we proactively did that and the commission was appreciative of that. So we're certainly taking every opportunity we can to make sure that we have reflecting the lower commodity costs in our customers. So that's really where we see, I think longer-term, we feel really good about delivering bills at the level of inflation as we think about 2030 and beyond and what the IRA is doing for us and for our customers. So we feel good both near-term and longer-term as we think about it. Hi, Julien. I'll agree with everything Brian said and add, if you look at the long arc of history and look-forward over the last 10 years and into the next 10 years. I think that comment around bills at or below the inflation level is consistent on the electric and gas side, this has been a tough year on the gas side, we're empathetic and we've worked hard with the federal government to enable significant amount of -- record amounts of why heap and then actively getting that into people's hands that needed the most. Longer-term, clean-energy transition, I think we can do this as we said, because we are strategically advantage in our position, we can do this very cost-effectively across the country and we have a good starting point in total bills and what our customers feel 20% below the national average or more in our residential electric areas. And our gas business, I think you highlighted this in one of your reports is one of the top two or three lowest gas businesses in the country. So good starting point, but it doesn't mean we don't have work to do and obviously we're always empathetic to our customers who are feeling bill increases at the grocery store, at the fuel pump, at rents and mortgage payments and everything else. So, but thanks for the opportunity to talk about it. Yes, absolutely. You bet, hi listen, just going back to one of the questions from earlier. On the settlement conversations versus fully litigated cases obviously with curve backdrop is an ideal for having rate increases altogether. Can you talk a little bit about expectations we will settle cases broadly speaking here, to what extent could Minnesota be an isolated data point in the current instance given the current fact pattern or are you seeing challenges more broadly, here again without pointing fingers at specific statements necessarily? Well, I'll start Julien and Brian can add-on if he's got anything to add. I think generally, we look for settlements. I think we're encouraged to look for settlements. I even think as you look at some of the recent data points in Minnesota, the commission is looking for settlement. So with that as backdrop, maybe this case is isolated, maybe we saw the path to reach a settlement with the parties and I think we're being encouraged to do so. I think broadly speaking, that's the case for most of our jurisdictions, and most of our staff, we need to make sure that we are delivering for our customers operationally, we're delivering for our customers and reliability, but we also need to make sure that we keep a financially healthy utility, credit metrics are really important preserving credit metrics and our operating companies is critical as we seek to raise capital cost advantageously and to deliver on the capital investment profile that we know we need to do. So, I think there is where the debate happens and again I think we've got a long track record of settling and so I would take your comment as encouraging to think that we're going to continue to settle cases going-forward. Obviously you had a good year with the C&I demand, wondering what's your outlook in that 1% total sales for C&I we see another big year or does that moderate a bit? Hi, Travis. Yes, I can take that one. No, I think we continue to see similar to what we saw in 2022 where strong growth in the C&I, if I parse it out, we have -- what we're expecting is about 2% up in C&I for 2023 and about a 1% decline in residential rate, continued decline from the COVID levels that we saw the increase in residential. C&I particularly good growth in SPS and I think just under the 2022 sales, when you look at the C&I numbers, you see that Colorado C&I is negative, but if you actually make an adjustment, we helped a large customer installed 240 megawatts solar farm to ensure that the state in Colorado, ensure those jobs saving in Colorado. And so if you made that adjustment Colorado C&I would actually have been a plus 2% for the year. So strong economic activity in C&I growth across all of our service territories, we expect that albeit a little bit of slowing in 2023 but to remain there. Okay, great. And then a follow up to the hydrogen hub discussion, I think if I heard you correctly, April was the next point in which you file some more information, at what point is it there or is it later on where you get start getting a sense for given your proposal of non-approval that a proposal for CapEx potential spending? Yes, Travis, I think it's early innings with the departments. April is the next filing date for, I'll call it, full plans, I think the Department of Energy is looking at probably around two dozen. So it's going to take them a while to parse through that in award grants for the -- I'm going to guess four to six that move forward from that perspective. We think both of our projects are incredibly interesting, provide lots of regional benefits from multiple sources and multiple users, which I think is a criteria that the department is going to look at. But if you're going to ask me to guess, I'd say it's at least end of next year before we get any clarity on those April applications potentially longer. Yes, but expect us that's the hydrogen hub concept, which we're very interested in and I think we have a great opportunity to be significant participants, but also expect us to move forward with hydrogen pilots and opportunities both on the electric side and the gas side as we think about working through our Clean Heat Plan in Colorado, our Natural Gas Innovation Act in Minnesota and then also on the electric side as we think about how do we decarbonize the last 15% to 20% in our stack. I think we'll get back to the specific number, Travis, but I'm going to guess it's in the five to 10 in each region. Thank you very much, sir. We'll now take questions from Mr. Paul Patterson from Glenrock Associates. Please go ahead. Your line is open. So, I hear you on the Minnesota regulatory environment, it's pretty much what I've been hearing. But one thing I was little surprised by or I just -- it's hard to keep track of everything, there were some articles about some sort of state goal being below the national average by 5% and I think industrial's made a filing about this sort of saying that the rates are in danger or what have you about being in line with that policy. And I was just wondering, could you just refresh my memory about what is state policy goal is and sort of following-up on Julien's question, that's just sort of the trajectory -- how you see those performance within that thing going-forward because we have changes and moderation in fuel prices are going forward, just you're do not moving pieces I guess I'm just sort of wondering if you could -- and frankly I'm just not up to speed on the wall that they're talking about? Hi, Paul, this is Chris Clark. I'm the President of our Minnesota company. Yes, there is a goal in statue that seeks to have our prices for our commercial and industrial class, be within 95% of the national average. I think the starting point here is really that we provide our customers a great value and I think the look that got some attention is simply a look at the rate. But if you actually look at our total bills for our C&I class, you'll see that over a 10-year period, they've been relatively flat and that's because the EIA data that gets pulled for rates is only one component of the bill. So I think when you look at what we achieved for our C&I class, if you take into account the conservation programs that have been really nation leading here in Minnesota and other credits, and things that those customers have done to be successful, you'll see that our C&I class rates are competitive, and in fact, we do a great job of attracting new business to our state. So, I think it's important when we look at the picture of how we're doing with our C&I rates and really take that into account. And as Brian and Bob have said, when we look at the plans for our clean energy transition, we're confident that we can deliver those results in line or less then CPI. And I think over the long-term, we've shown that we can continue to be a successful company in navigating this, keeping rates affordable for our customers and delivering great value. Okay, also a great answer that. The second question, I have -- and I apologize if I missed this I got just interrupted here. The iron battery deployment, I apologize if you've already discussed this but are you guys going to own these and what's the cost of them or could you just give a little bit more flavor of the economics associated with these two projects? Yes, good question. No, we haven't disclosed the cost of these batteries, yet. We haven't made the regulatory filings yet and we are looking forward to having a discussion on our stakeholders and the commission, but we certainly will O&M, we think there are a valuable grid asset and important to us O&M as we think about how do we start to deploy these new technologies as we look to decarbonizing into harm's and carbon-free. So obviously, with any new technology the cost of more expensive, but this is a $100 battery that we don't see other solutions out there that are viable and it also iron oxide, right, if you think about rare metals, this is something that's readily available as we think about supply chains and what's the ability to scale. So overall, we're pretty excited about this. I think it demonstrates our leadership as an innovative clean tech company and we're excited to work with our commissions, but certainly more to come in terms of disclosing the cost. Thanks for squeezing me in here. Just hopefully two quick ones. I guess when you look at the four major rate filings you guys have, they're all asking for a forward test year. When we look at 2023 and beyond, what do you think is a reasonable assumption for structural like, can that be reduced from say 90 to a 100 basis points or 50, 60? Hi, Anthony, good question. As we think about it from an earned ROE perspective, that's always been a goal of ours, right, we had a goal in 2015 to hold it from 150 bps and we're successful. And then in 2018, '19 and then had some COVID hit and we scale back on regulatory filings. I think as we look forward, our goal is to close that and we had some success from 2021 to 2022, albeit modest about 15 bps. And so our goal is to continue to focus on closing that and probably that 50 basis point range as you mentioned is a good goal as we think about it going forward and something that we're always focused on improving the regulatory constructs in getting now as we think about either multiyear plans or longer-term plans really providing the benefit of price near customers, I think is really important something we'll continue to work through. Great. And just one follow up on top of Julien's question. I think Bob you had mentioned you prefer the settlement route and not just specific to Minnesota, but just in general. It seems like lately some commissions may be or tinkering with settlements if I use that term, it seems that's maybe occurring at a greater frequency, does that give you pause on achieving your settlement? Hi Anthony, it's Bob. Great to see your name in the inbox today. Now, it doesn't give me pause look, I think we've had a long history here. We continue to work proactively with staffs and commission. And sometimes we go before ALJs and there's always things that are around the edges, important, but I think generally speaking settlements are encouraged and I think commissions understand that they want to encourage settlements that they need to be respect the entirety of them without tinkering. I think you've seen some commentary in some of the jurisdictions you might have been thinking about to that fact. Thank you so much, sir. And as it appears to have no further questions, Brian I'd like to the conference back over to you for any additional or closing remarks. Thank you. Yes, thank you all for participating in our earnings call this morning. Please contact our Investor Relations team with any follow up questions. Thank you so much, sir. Ladies and gentlemen that will conclude today's conference. Thanks for you attendance and you may now disconnect.
EarningCall_1061	Hello, and welcome to today's Colony Bank Fourth Quarter 2022 Conference Call. My name is Harry, and I'll be coordinating your call today. [Operator Instructions] Thanks, Harry. Before we get started today, I would like to go through our standard disclosures. Certain statements we make on this call could be constituted as forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, but involve known and unknown risks and uncertainties. Factors that could cause these differences include, but are not limited to, pandemics, variations of the company's assets, businesses, cash flows, financial condition, prospects and other results of operations. I would also like to add that during our call today, we will reference both our earnings release and our quarterly investor presentation, both of which were filed yesterday base, so please have those available to reference. Thanks, D. I want to thank everyone for being on the call today. Before I get into the operating results, I want to cover a couple of other things that you read in the release. First, this week, we said goodbye to our longtime team member and director, Terry Hester, who passed away on Sunday. Terry started with Colony in 1978 and served with the company over 42-years, spending much of his career as our CFO. He is also a director since 1990. Terry was a dedicated member of our team, the Colony family, was really part of his family, and he's going to be sorely missed by his family and in our team. So our sympathies go out to all those that work closely with him and certainly to his family. Second, you saw all that we also announced yesterday that Andy Borrmann, our CFO who is leaving the company to pursue other career opportunities. Andy joined us in 2021 through our merger with SouthCrest and we appreciate all he has contributed in his time here and we wishing well in his future endeavors. We started a search process for replacement for Andy. In the meantime, I've been named Acting CFO of the Holding Company. Most of you know, I spent eight plus years as the CFO of Heritage Financial Group. We have a deep management bench, and I'm confident I can provide the support that our accounting and finance team needs to make sure we have a smooth transition, and I'm going serve as the primary investor relation contact for you during this transition. Also our Chief Accounting Officer, Derek Shelnutt, who's on this call has been named the Acting CFO of our Operating Subsidiary Colony Bank. Derek is a CPA and has experience in public accounting and in banking. He joined our team in 2020 and played a key role in the development of our accounting team. He's handled a lot of our accounting work when it comes to M&A, also ALCO and all aspects of operations. I have a lot of confidence in him and his ability to lead us through this transition as well. So with those behind us, I'm going to get right into the quarter. We got a good bit to cover our earnings were up slightly from last quarter reported $0.31 versus is $0.30 last quarter. And I wanted to note that our earnings completely came from the banking division this quarter. Slide 13 in our presentation shows you a breakdown by segment and banking made up all of it for the quarter net. And so while the earnings are only slightly up for the quarter, we've made significant strides throughout the year in terms of how much of our earnings is coming from our core banking. We of course had significant headwinds from an interest rate perspective on the mortgage banking side this quarter. As rates peaked over seven at the end of the third quarter and going into the fourth, like a lot of other banks was significant mortgage businesses. We saw a real shift from secondary market products into portfolio, adjustable-rate products during the quarter. And so our gain on sale was down about $0.5 million from last quarter and that's down nearly $1.9 million from the fourth quarter of last year. On slide 16 and 17 in our presentation, you can kind of see how originations have been impacted. Our originations actually remained strong, but our sales were down significantly in the fourth quarter as we move to portfolio products. And our strategy really in mortgage right now is to keep our purchase focused origination team together, give them product to get out to our customers, recruit new originators within our footprint and just be poised to take advantage of the opportunity when rates settle out, there's a lot of folks in the mortgage business right now affiliated with banks that are really getting out and I think it'll be primed when rates settle out a little bit. Our net interest margin was down slightly. It went down from 3.25% to 3.23%, but our net interest income in dollars was up over $0.5 million, primarily due to our loan growth. And so what's happening is our loan growth is outpacing our deposit growth and so we are having to fund some things at our marginal cost and that's putting some pressure on our cost funds, but we really feel good about where our deposits are. We've maintained good discipline on deposit pricing and still been able to grow our deposits were up 2.5% quarter-over-quarter and that excludes any wholesale deposits. And you're going to hear D talk about our deposits focus in a minute. It's a tough environment to predict interest rates. We may see our margin stabilize or are compressed slightly from this level. But we have opportunities to continue to put on higher earning assets at levels that may be slightly dilutive to NIM, but are going to be accretive to ROA and ROE and we're going to do that. Our loan growth as you saw was strong, and D will discuss that as well. Our asset quality remained really good. Non-performers were flat and criticizing classified loans went down. And so with that strong asset quality, we were able to provision a little less this quarter despite the loan growth. We are just as a reminder moving to CECL next quarter. And we continue to model that. And as we disclosed last quarter, we think somewhere in the range of a 15% to 25% increase in our reserve is going to happen with that adoption. Core CECL was forward-looking and so how things will look forward now from three months from now, not so sure. So just a reminder that, that could change. Going in, I want to talk about our performance and where we're going. We lay out, kind of, our path to high performance in the presentation. Slides nine through 11, but I want to share three highlights. First is achieving strong organic growth. We are doing that. We're executing that well on the loan side. I think in this environment, we're executing that well on the deposit side. Just growing deposits in this environment is tough, but we're doing it. Increasing non-interest income is the second of our three highlights there. And mortgage being down has hurt us obviously on the revenue side, but I think there is real opportunity for that to return. And still our SBSL team is doing strong and we have opportunity to continue to grow in insurance, merchant and treasury as well. And then lastly is just a real focus now is shifting to internal opportunities. We think M&A is going to be on the back burner for a while. So we're really just focused internally. Driving internal referrals, we just you know, gotten going with our CRM system internally to track that, focusing on the profitability of our new business lines, and ensuring we capture the operating efficiencies from all the investments we've made in technology. And then really, it's managing expenses. We've been in a growth mode and we've been growing significantly. We're limiting our hiring now to strategic end market hires. We're not going to be expanding to new markets right now in this environment. Reducing controllable expenses, business development, travel, those kind of things and then also lowering our core provider costs. We are in the final stages of renegotiating our core agreement and we expect some cost saves to start flowing from that here in the first quarter of this year. And just addressing our overall level of expenses, as you know, since I've been here in 2018, we've averaged 18% growth per year in assets. We've gone from $1.2 billion to just under $3 billion, we've added multiple lines of business, mortgage, small business, specialty lending group, insurance, merchant. We've gone to new markets. We've done whole bank acquisitions. We've done another number of smaller type acquisitions. And so we moved into this growth phase at a time, that Colony platform was not prepared to go into a growth mode, that's not what they have been in. So we've been investing significantly in people in processes and technology. And we really have the team in place now. We largely have the systems in place. But given where we are, the amount of growth we've experienced, looking ahead at where potential slowing economy years. We're really shifting our focus from external opportunities to grow to internal opportunities to improve efficiency and profitability. And so that's where we're focused on. And as we laid out last quarter, slide 12, just talks about where do we get -- how do we get from ROA this quarter was 77 bps. How do we get to that 1.2 run rate by the end of 2024, which is what we've been internally targeting. And I just walk you through on that slide a few things. Excess growth is higher than normal, call some excess provision that 6 basis points in the quarter. New lines of business to get from where they are today. And we have some detail on this in there, itâs a 6-basis point drag this quarter. Mortgage and SBA really year-to-date have only contributed 6 basis points of ROA, 9 net, the 2 netted each other out this quarter and contributed nothing to ROA. And those are businesses that really carried us the last couple of years contributing about 19 bps of ROA. And so those are going to be profitable lines for us and we do expect those to get somewhere in the 10% of range or 10 basis point range. And then finally, loan growth, you all know we've been growing loans; we've really built our infrastructure from a personnel and technology standpoint both on the front line and the back office to be -- to have a fully owned balance sheet. And every 5% improvement in our long -term deposit, we get about 7 bps of ROA. And so, you know, you start adding those up, that I just went through and by the end of next year just with those, we get somewhere around maybe 115. And that's without counting the business lines getting more profitable. That's just them breaking even. That's without leveraging technology, managing expenses down. So that's our plan. Our team comes in every day to execute on that and we think we can deliver on that. Couple more things before I turn it over to D to talk about production side. Our AOCI our unrealized loss in our securities portfolio, we saw that go sideways this quarter, which was nice to see after several quarters of rates going up and really causing a negative there. I added some more disclosures slides 31 to 35 gives you a lot of breakdown of our investment portfolio. We just want you to see that. We don't have a lot of credit exposure there. Interest rates or what's driving our losses. We are seeing our yield creep up a little bit. And I'm hopeful that where rates are, we've reached our peak extension there. So I think we're going to store seeing our duration, our average life come down, and there's a real opportunity to recover a lot of tangible book value as we see that stabilize. And so we are taking opportunities from time-to-time when we see rates move down to Trim Holdings and we would look at potential opportunities if we can get a quick payback to trim the portfolio and take losses, but we're looking to really avoid that if we're successful on our deposit strategy especially. And then lastly, just on the dividend $0.11 for the quarter, we're glad to be able to do that for our retail investors, that's about half of our shareholder base. And so it's a very important component of the investment for them. I think it also expresses the confidence we have and our Board has and our ability to keep improving our earnings. So with those highlights, I'll turn it over to D and he's going to talk about the production side of the bank and our business lines. Thanks, Heath. On the commercial side of the bank, we had another great quarter of loan growth. As Heath mentioned earlier, we had 9.5% growth over last quarter of annualized as of 40% annualized growth rate. I do want to point you to a few slides in here to talk a little bit about the color on the loan portfolio growth. If you look at it starting on page 28, it will breakdown some of these details. I would say the main point that I'd like to leave you with is on slide 30. And really, it gives you a breakdown over the last several quarters of the loan to values with which weâve been originating the CRE. Our non-owner occupied CRE portfolio has, what I would call, a very low loan to value. I guess, my way of saying it is our customers put cash in the deals. And we feel good about the loans that we've originated. We have the opportunity to grow the loans, but as you can see with those originations, we've been able to keep strong credit metrics as well. And really as we move towards the end of the year, we have continued to tighten on our credit based on the environment that we see coming forward. And in addition to that, we've moved rates up as the Fed has moved. We've been moving slowly with them, I would say we approach the end of the year and as we turn year-end, we've been more aggressive in moving rates up. And I'll talk a little bit more about the fact that'll have in our expectations through the first few quarters this year. So as we raise that up, it significantly reduces the loan -- it should significantly reduce the loan growth from our originations in CRE this year. We definitely will see loan growth slowing, but what I will say is for the first and second quarter, I think we'll still see elevated loan growth two reasons. One, we still have a strong pipeline even with these elevated pricing. But in addition to that, we've done construction lending and as those draws happen on those lines, it will continue to add loan growth to what we do in the first half of the year. Our expectation for the second half of the year is to move back more into kind of our long-term goal of 8% to 12% loan growth as we maintain the credit discipline that we've put in place, as well as execute on the pricing strategy that we've put in place as well. You know, to me, one of the things I think that's been really important with us is, I was glad to report that we had 2.5% deposit growth over the quarter and that excludes all wholesale deposits. To me, that's a really good number. In a top rate environment. We've got good markets for deposit growth, and we've got bankers that can deliver on deposit growth when called on. Some of the changes that we've made as we go into 2020 â30 is we've really made some significant changes in our incentive plans for the commercial side and the majority of their plans will be focused on deposit growth, as well as referrals to these other ancillary lines that Heath talked about and then I will go into a little bit more in just a minute. This is a new focus for Colony, and I think we are starting to see the success. We started this in the third quarter, I think we had a good number in the third quarter and then this 2.5% growth in the fourth quarter, I'm proud of as well. In treasury, we spent the last year developing different treasury products and building out the team to help deliver on treasury. It puts us in a position that we can deliver on the customer needs that we have from our commercial customers. In addition, in October, we added a sales manager with years of treasury experience, and a structure really that allows us to proactively approach the way we sell and the way we service our commercial deposits. I will move over and talk a little bit about some of the ancillary lines now. If you look on the small business specialty lending or SBA or government guarantee lending on slide 15, excuse me, I would say that we had a consistently profitable year. If you look at each quarter, we delivered consistent profitability and I think we can see that hopefully going forward. We have a good pipeline coming into 2023 that is slightly elevated over where we went into 2022. I'll talk a little bit about mortgage, Heath has touched on this a little bit, but we -- while our volume were the same, we did reduce secondary market sales. One of the focuses that we do have for this year has really shifting that mix back to the secondary market sales. Rates have helped us in the near-term. Rates have come back a little bit. And it really made those secondary market loans more appealing. The luxury that we did have is we have a balance sheet where we could portfolio loans and we can keep that origination together, but that is not the long-term strategy that we want to have. That is more an interim strategy until those rates stabilize. If you look on slides 16 and 17, we've laid out our production year-over-year. And if you see our 2023 production and our 2022 production were basically flat the difference in profitability was the short-term secondary market sales for the year. I also want to touch on a few of our new markets and our new lines of business or ancillary lines as we call them. For Alabama, we have the LPOs in Huntsville and in Birmingham. We had a little over $20 million in growth at year-end, all of these bankers were hired either mid-year or after. So that's a half a year number. Their pipelines are really good. One of the things that we've done with the incentive plans, but also with direction is shifting their groups away from CRE as much and really focusing on operating businesses. And historically, Birmingham and Huntsville have been really good businesses for C&I or commercial and industrial loan origination and deposits and the fees that go with those. I would also like to say it should become profitable in the next quarter or two based on that loan growth in a way that we look at it. And we look forward to what their pipeline brings in. I've said shortly on marine and RV, we just started originating loans, booked our personal loans last week. And so there will not be much in the numbers here, but itâs some that we've been working on to get off the ground. It's a tremendous opportunity for us in the coming few years. Well, I think the best way to describe it from our standpoint is it is a very efficient way for us to generate loans. And in addition, it gives us flexibility in the balance sheet, because of those abilities to either hold them or to be able to sell them on the secondary market. And in addition to that, it's really just not a big spend for us in the short-term until we get it to profitability. And then in addition, it helps us add consumer loans to our portfolio. My expectation is that we will get too breakeven in the latter part of the year. Lastly, I wanted to mention Ed Cannon, who recently joined our team in November as Chief Revenue Officer, and I wanted to Congratulate him on the early effect he's already making. He came to us from Capital City Bank. He's got a wealth of knowledge in mortgage, which in today's world is a great time to have that resource. In addition to that wealth, but really, he just career banker and has great experience across the board and it's really already starting to make a big difference here. I do like the way he's energized, our different ancillary lines about opportunities that are ahead of them. And even more importantly making sure and pushing that we hit the revenue targets that we're talking about and that we stay focused on driving each of those areas to profitability during 2023. Thanks, D. That that wraps up our prepared comments. And with that, I'd ask Harry to open up the line for questions. Thanks very much. [Operator Instructions] And our first question today is from the line of David Bishop of Hovde Group. David, please go ahead. Yes, good morning. Heath, and D. Appreciate taking the question. Hey, maybe, D, just you had sort of alluded to the fact that you're raising loan pricing and maybe that's going to slow growth here. But given the structure of the portfolio, do you think you were maybe behind the curve or maybe competition in raising loan pricing? And does that maybe give you a little bit of a lift in terms of loan yields and pricing and margin in the back half of the year. Just how we should think about maybe how that plays out in the margin in the second half of the year? Yes, Dave, that's a good question. I do think we could have certainly raised loan prices always quicker as rates moved up so fast. Just to give you an idea of -- we in the fourth quarter our weighted average, you know, put on was about a little over six and the quarter before it was a little under five. If you go back to the end of last year, it was just barely over four. And so there is some opportunity, I think, to see loan, our loan portfolio yield continues to go up. If it wasn't for the interim, pressure on pricing that's really hard to predict on deposits just with what's going on out there and, you know, you see a lot of banks are losing funding which is causing them to get aggressive. I'd be more confident in that margin pickup. But I think there's an absolute opportunity to continue to see a loan yield pickup. I don't know if you want to add to that, D? No, I think we've introduced even further pricing guidance, pricing sheets with our commercial bankers out there that we've been raising as we have moved forward. I would say at this point, we -- I would call us at the curve at this point, while they were new, because rates have stabilized out just a little bit when they were going up, we wanted to make sure we were honoring commitments to our customer and we had a balance sheet to be able to take that as long as long. You know, I was curious of where you're standing the CRE concentration these days? Is that a limiting factor at all for CRE factored at all? We are kind of right at the 100, 300 concentration limits we do have some capital at the holding company. We could push down for that, but we really -- we want to keep the mix is close to sort of where it is today. We're going to see CRE creep up a little bit just as some of the stuff we've already done. Funds up, but we're at a place where we really want to not see a whole lot more CRE added to the balance sheet. Yes. And I would say the other thing I would bring up on that is part of it is us wanting to shift just because from an overall profitability to those operating businesses, because those are the ones that bring deposits with them, which is why we've been putting that. And those are also the ones that we can refer to treasury merchant services and drive our fee income. And as you know, well, anything we can drive in fee income is tremendously additive when we start looking at an ROA standpoint point. So that's -- so I think that's part of the focus on the shift as well. Got it. And then one more question, I'll hop back into the queue. Heath, as you look out, the budget for OpEx probably a slowdown you guys will probably be pretty aggressive in expanding this year and hopefully to get the revenue benefits down the line. Do you have a target in mind either efficiency or a growth rate? Should we see that decline from the teens to be low-to-mid or high single-digits? Just curious if you have any sort of sense for expense targets are? Thanks. Yes, that's a good question. And we have, as I talked about, invested significantly and we've got to now ensure we get the, kind of, returns out of those investments, we won't. So we are focused internally on a lot of projects to reduce operating expenses and certainly to basically hiring freeze that isn't strategic in market type hires. And so I think you'll see a little bit of a creep up from our fourth quarter run rate just from the standpoint of things we've done in the fourth quarter. But I think as we get into the second and third quarter, we have an opportunity to start to reduce our current run rate. And then from a revenue generation standpoint, as mortgage revenue comes back and as these other lines of business get profitable, we'll be able to sort of grow into that run rate that's a little bit lower than where we are right now. [Operator Instructions] And our next question today is from the line of Feddie Strickland of Janney. Feddie, your line is now open. Hey, good morning. Apologize if I missed this in the opening remarks, but I was just curious what drove the rise in FTE headcount in the fourth quarter? And is there a timeline for these new hires to generate earnings if they're producers? Yes. So there's really two things driving that. Number one, is that the fourth quarter was really the first quarter really since some of the aftermath of COVID that we've been able to get our retail staffing. Back to the level that we need to efficiently and service our customers well in our branch network. So that was a good bit of what you saw in Q4. And so those are on the lower end of the pay there. And then we did have a number of mortgage hires and some of those were throughout the year, as we had the opportunity to pick up some production. I mentioned, I think we mentioned either on the call or in the earnings release that we picked up a team in Birmingham, for example, in the fourth quarter. And generally on those type hires, we're dealing with a three-month tight guarantee. I think as we roll into January on the mortgage side, we have rolled all our new producers are out of their guarantee period. And so they'll be in the commission world is how we compensate all our MLOs. And then obviously we had, as D mentioned, some of the Alabama team that came in, in the third and fourth quarter. And those are a detailed about, you know, how -- where we are in loans and that group and where we expect them to get. And so we think that'll be profitable really soon. Got it. Should we think about, I guess, trying to think about the retail investment that we think about that as an investment in deposit gathering effectively on the retail side. I mean, I know it's kind of filling position that you've had vacant for a little bit, but I guess my thinking is, if you have more folks on the retail side, it's probably a little easier to retain some of those deposits particularly in the more rural part of the footprint? Yes. As I said earlier, I said the rural part of the footprint we had is a great deposit gathering franchise that we have. So I would agree with that. There are two things to also make sure we do -- are running everything on a staffing model. So as we have the transaction and those volumes that are out there, those levels will adjust either up or down based on the volume that we have. In addition to that, I think it's a good way to think it on the deposit gathering, because we introduced a retail, which would include all of our universal bankers that Heath was talking about in our banking center managers. We've introduced an incentive plan for the first time this year, and it is very, very heavily driven on deposit gathering. And in addition to that referral to these other ancillary lines. And so, yes, so that investment is really for that group is about getting additional deposits and also, they can help us from an insurance and also merchant and drive these others to profitability. So I think that is the right way to think about it. Got it. Thanks. That's helpful. And then just sticking with deposits, you have municipal deposits in some of these smaller cities, long time relationships. Are these municipalities asking for rate increases? And have you seen any significant change there in the past 10 months or so? We do obviously have municipal relationships in our footprint. It does not represent a large portion of our deposits. I mean, just give you an idea at the end of Q2, it was $290 million at the end Q4, $320-ish million and so ours don't fluctuate as much as some other banks do. We do think we have an opportunity to call on more municipalities in this environment. And we've not seen a lot of pressure from them, because I think really more of the concern a lot of those that we have are operating type accounts. We have not really been active in going out and bidding home municipal deposits and that is one area with the improvement in the product set and our treasury staffing that we think we have an opportunity to go and really add to what we're doing on the muni side. Yes. Heath, in terms of the improvement, the ROA, the decline in loan growth, is that implied that we're going to see a little bit of diminution and maybe a pullback in the level of provisioning as gross flows, assuming credit holds in there in the economic outlook. Just maybe directionally how we should think about the provision if growth does slow in the back end? Yes. So I definitely think the lower loan growth certainly plays into that. And again, as D mentioned, kind of, what we envision or like right now is that we may have a quarter or two of loan growth that is above that, lower than it has been these last few quarters, but above our long-term 8 % to 12% growth rate. However, if you take our growth rate and back it down after these first couple of quarters to a more normal rate, I still got us running to about an 80% loan-to-deposit ratio by the end of next year. That's with a couple of more quarters that are higher and then backing down. And I think provision will go with it. I guess the only caveat to that would just be sort of the new CECL modeling that we'll be doing going forward. We'll take into account some forward-looking economic factors that we really haven't been putting in now. But I think, I see it definitely trending down as our loan growth trends down assuming we're able to hold these credit metrics. Got it. Then my follow-up to that in ancillary question, I think you mentioned the CECL impact. Remind me again that's neutral or regulatory capital, but a negative to TCE and that's going to be -- was it 20% of the state of reserve or whether the estimate at the moment is? Yes. And you're right on that and it is we disclosed last quarter and we will put an updated disclosure in our 10-Q this quarter, but right now we got that 15% to 25% is the range we put there. [Operator Instructions] And it appears we have no further questions being registered at this time. So I'd like to hand back to Heath for any closing remarks. Thanks, Harry, and thanks for everyone. Again, for being on the call today. I appreciate your support of Colony Bancorp. We appreciate it, and we welcome you to reach out to us if you have further questions. Thank you.
EarningCall_1062	Ladies and gentlemen, thank you for standing by. Welcome to the CACI International fiscal 2023 second quarter conference call. Todayâs call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during this call, please press star, zero and someone will help you. At this time, I would like to turn the conference call over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir. Well thank you, and good morning everyone. Iâm Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. There will be statements in this call that do not address historical facts and, as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from those anticipated. Those factors are listed at the bottom of last nightâs press release and are described in the companyâs SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussions of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Letâs turn to Slide 3 please. To open our discussion this morning, hereâs John Mengucci, President and Chief Executive Officer of CACI International. John? Thanks Dan, and good morning everyone. Thank you for joining us to discuss our second quarter fiscal year â23 results. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Slide 4, please. Last night, we released our second quarter results, and Iâm very pleased with our performance. We grew revenue 11% with growth in both expertise and technology. Profitability was healthy with an adjusted EBITDA margin of 10.2%, and we had another strong quarter of contract awards, winning about $3.5 billion which represents a book to bill of 2.1 times for the quarter and 1.5 times on a trailing 12-month basis. About 70% of our contract awards were for new business to CACI and we had strong performance on our re-competes as well. Overall, our execution in the second quarter and first half sets us up well to achieve our fiscal year guidance. Jeff will provide additional financial details shortly. Slide 5, please. Turning to the external environment, market and demand trends remain very constructive for CACIâs business. On December 29, the president signed the omnibus appropriations bill funding the government through September 2023. Budgets in general saw healthy increases, including defense spending which increased about 10% from last year. Below the top line numbers, we see healthy spending trends across both expertise and technology in key areas of focus for CACI, including C4ISR, cyber, digital solutions, enterprise IT, and mission support. CACIâs commitment to invest ahead of need drives differentiation and positions us extremely well to deliver innovation to our customers and value to our shareholders. Slide 6, please. Let me update you on a key recent award. Last quarter, we announced the award of the Air Force Enterprise IT as a Service contract, or EITaaS, demonstrating our leading position in IT modernization. This enterprise technology award was protested and the Air Force subsequently undertook corrective action. Late December, we were notified by the Air Force that, after correction action, the award to CACI was reaffirmed. We were very pleased by our customerâs decision. Not surprisingly, that decision was protested again and now sits with GAO for resolution. Our team is ready to go and we look forward to beginning this important work for the Air Force, which we expect will be a positive driver of growth in fiscal â24. This award is a great example of our strategy to bid less and win more, focus on larger contracts, and leverage our leading position in enterprise IT modernization. Turning to second quarter awards, CACI won a sizeable mission expertise contract to provide network and exploitation analysis in support of foreign intelligence and cyber security missions. As you know, our work in mission expertise engages highly skilled employees who apply their technical and domain knowledge to support critical and complex agency missions. The work on this program will incorporate CACIâs deep, longstanding capabilities in both intelligence analysis and cyber. We won this competitive award and displaced the incumbent by leveraging our superior ability to understand and execute the mission thanks to our industry-leading talent. This award was also protested and the customer is currently taking corrective action. In the space domain, we continue to see strong demand trends and our photonics business continues to grow in scale. As we have discussed before, we supply both government customers and defense primes with our photonics technology. In the second quarter, we received additional follow-on order from a defense prime. Our industry-leading photonics technology addresses the requirements of spacecraft operating in all ranges of space - low earth, medium earth, and geostationary orbits and beyond. CACIâs optical communications technology is the only U.S.-based offering operating in space today that meets DoD and intelligence customersâ stringent security and performance requirements, and we continue to invest in this technology to maintain our leading position as we see increasing demand for secure high bandwidth communications across all domains. I also want to highlight our strong re-compete performance, in particular our re-compete wins of our best private investigation work for DCSA and important cyber-related work for the intelligence community. Our re-compete successes are driven by strong execution and the value we bring to customers. All of these awards, new business and re-competes are for high value, enduring work that addresses critical priorities for our customers and supports our ability to deliver long-term growth, margin expansion, strong cash flow, and shareholder value. Slide 7, please. As we have discussed before, we are committed to a flexible and opportunistic capital deployment strategy that includes internal investments, M&A, share repurchases and other capital deployment options, based on business and market dynamics. This morning, we announced that our board of directors has authorized a $750 million share repurchase program of which $250 million is expected to be executed imminently as our summary share repurchase. With moderate leverage, ample borrowing capacity and confidence in generating strong future cash flow, weâre in a good position to deploy capital to drive additional shareholder value. In summary, weâre pleased with our performance and we remain confident in our long term prospects. We are successfully executing our strategy, making the right investments, hiring and retaining top talent, winning new work, managing the business efficiently, and leveraging our strong cash flow to deliver shareholder value. As John mentioned, weâre pleased with our second quarter results. We generated revenue of $1.6 billion in the quarter, representing year-over-year growth of 11%, including organic growth of 6.2%. Expertise revenue grew 8% and technology grew 14%, which is well aligned with our view of the year. Adjusted EBITDA margin was 10.2% in the second quarter and 10.4% for the first half of the year. Our strong first half performance is on track with our full year guidance. Second quarter adjusted diluted earnings per share were $4.28, reflecting the higher interest expense we discussed last quarter, partially offset by our higher operating profit. Slide 9, please. Second quarter operating cash flow excluding our accounts receivable purchase facility was $22 million. This result reflects $93 million of unusual tax items we have previously discussed, namely the final repayment of $47 million of the deferred payroll taxes under the CARES Act, and a $46 million payment related to Section 174 of the Tax Cuts and Jobs Act of 2017. We have previously disclosed the full year impact of $95 million from Section 174. This quarterâs payment represents the half year effect on our quarterly tax payments. Cash flow also reflects the timing of ramping revenue recognized later in the second quarter and its attendant working capital. We ended the quarter with net debt to trailing 12-months adjusted EBITDA at 2.2 times. As we have previously discussed, the strong cash flow characteristics of our business, modest leverage and access to capital provides significant optionality to deploy capital in support of future growth and shareholder value. To that end, we announced earlier this morning that our board of directors has authorized a $750 million share repurchase program. As John mentioned, we are in the final stages of deploying an initial $250 million of that authorization as an ASR. We expect to finalize and execute the ASR promptly and will provide you with additional details when we execute that repurchase agreement. Beyond the ASR, we expect to deploy the remainder of the $750 million authorization in a manner based on business and market dynamics over time. This approach to capital deployment is a refinement of our strategy to be flexible and opportunistic in the management of our capital structure. We are now even better positioned to respond with agility to changing market conditions and investment alternatives. Slide 10, please. We are reaffirming our fiscal year â23 guidance with the exception of free cash flow, which we are updating to include tax payments under Section 174. Let me also be clear that our guidance does not reflect any share repurchases under the authorization we announced this morning. We continue to expect revenue growth of between 4.5% and 7.5% with growth in both expertise and technology. As a reminder, all of our recent acquisitions have now anniversaried and so future growth in these areas will be organic. We continue to expect our full year adjusted EBITDA margin to be in the mid to high 10% range, and we are reaffirming our prior adjusted net income and adjusted EPS guidance. We are updating our fiscal year â23 cash flow guidance solely to reflect the previously disclosed $95 million cash tax payment related to Section 174, given no changes have been enacted. Lastly, I want to reiterate that our guidance does not reflect any share repurchases under the $750 million authorization we just announced. We expect to provide more information after we finalize the details of the $250 million ASR. Slide 11, please. Turning to our forward indicators, CACIâs prospects remain strong. We won $3.5 billion of contract awards during the quarter, driving our backlog growth of 10% compared to last year. Second quarter backlog includes roughly $1.5 billion from our intelligence customer mission expertise award, as well as roughly $1.2 billion from our DCSA background investigation re-compete win. These reported amounts reflect current customer requirements. For fiscal â23, we now expect 95% of our revenue to come from existing programs with the remaining 5% split evenly between re-competes and new awards. We have $6.6 billion of submitted bids under evaluation, approximately 65% of which is for new business to CACI. This is down from the first quarter primarily as a result of our strong second quarter contract awards, and we expect to submit another $15 billion in bids over the next two quarters with over 75% of that being new business to CACI. In summary, weâre very pleased with our results, which demonstrate the successful execution of our strategy. Our team continues to perform well and we remain confident in our ability to generate long term growth and shareholder value. In closing, the second quarter and fiscal first half keep us well on track to deliver our full year guidance. Iâm pleased with our continued growth, profitability, cash flow and contract awards. Looking forward, we remain committed to delivering long term growth and margin expansion while compounding those returns with a flexible and opportunistic capital deployment strategy. All this is driven by a commitment to grow free cash flow per share over the long term. As is always the case, our success is driven by our employeesâ talent, innovation and commitment. To everyone on the CACI team, Iâm extremely proud of what you do each and every day for our company and for our nation; and to our shareholders, I thank you for your continued support of CACI. John, I donât know if this question is for you or Jeff, but Jeff just talked about the opportunity set thatâs out there and the pipeline. What kind of book to bill should we anticipate after a strong first half, you know, here in the second half, especially with this budget rising? Yes Rob, thanks. Look, weâre extremely happy with the book to bill that we posted. Weâve also been able to boost the trailing 12-months number to, I think, 1.55 times. You know, 13, $15 billion of additional bids in the pipeline. I like our new business win rates, very proud of our re-compete rates that year-over-year continue to stay above a 90% capture rate. What Iâll use as evidence of us continuing to execute, I guess I would say memory management around how we do business development, weâve been on a long term path of this bid less and win more and drive durational programs in our pipeline longer and longer, because to me, at the end of the day, I want predictable, long term growth, right? So weâve got some nice bids in the pipeline. I like the way that the EITaaS Air Force award is trending. Iâm very proud of the team for an extremely well laid out, competitive incumbent takeaway in the intelligence community, and on the DCSA award, that is a driver of both revenue and margins, and that comes not only with some re-compete volume but also comes with some new business volume as our government customer reduces the number of people providing that service from three folks to two. I would tell you, to me on the new business front, everything is in position. We donât get to win them all, but we are very focused on making sure weâre bidding on the right work, and the right work involves looking at top and bottom line growth. Weâve got to sort of keep this mix up, whether itâs expertise or tech. Growth in both of those segments--you know, as Iâve always said, people tell me all the time, you must be happy with that high tech segment growth because it exceeds where the expertise one is, and I consistently say, I want both of them to grow. I think weâre sort of getting ourselves to that point. Yes Rob, look - I think that at least the â23 budget, first of all, itâs constructive that it was passed without a long term CR. It does support very key areas of where CACI is focused. If I look forward, I donât like to look too much further than electronic warfare, [indiscernible] and cyber, and sort of where those three areas go. Weâre beginning to become a heavier player in the space domain. I think those are decade-long budget growth areas, so weâve gotten ourselves strategically, not by accident, into those deeper river, longer flowing streams of funding, and that makes us a very different company going forward. A lot of small left and right turns that has really, I believe, positioned us well so that just about any budget environment--you know, weâre a national security company and the world is a dangerous place, and Iâm very pleased so far with the budgets. And I apologize, I donât want to overstate it, but I want to ask Jeff for a clarification. You know, John, you talk about technology versus expertise, and technology mix is up in the first half yet the margins for the first half are going to be lower than the second half, so Jeff, if you could just explain that dynamic of what changes in H2. Sure Rob. The mix operates in two dimensions, and I think oftentimes people kin of hear fixed price and they think higher margin, and they hear cost-plus and they think lower margin, and thatâs really not always the case. We have plenty of higher margin cost-type work and we have some important fixed price work thatâs also slightly lower margin, reflecting a lot of real business factors, risk and whatnot. Itâs still good work for us but it doesnât necessarily have the same margin. There are some lower margin fixed price sales in the second quarter that you see reflected in that mix. Yes, good morning John and Jeff. John, maybe just to touch base, first a clarification. Is there a deadline date on the GAO when weâd see a resolution on the Air Force contract? Then just as a second question, photonics obviously has been a huge focus for you and the war tech continued to pick up. How does the runway look regarding scale? I know you just mentioned space is going to continue to be big. First off on the Air Force contract, look - weâre very, very pleased, as my prepared remarks mentioned. The protesters were unsuccessful, we were successful at holding onto that award. We have a lot of confidence in the Air Force seeing us through with us. Weâre ready to go. We are very well staffed and already have had discussions with our customer, so we would expect this ought to be wrapped up in the April time frame, Peter. It will not and is not planned to be a large contributor of revenue in FY23, but we clearly would expect as we get things ramped up and started up to see this deliver in FY24. On the space front, where we are with our optical comms business, look - Iâm very happy with where weâre at. Iâve been very transparent. Picking up the photonics business of LGS and combining that with the SA Photonics business really is the best example of putting, I guess, [indiscernible]. I really like what thatâs going to deliver to us. Weâre going to continue to invest in it, so you all are going to continue to see us investing in that area. Thatâs a good decade-long, nice growth business for us at better than average margins. I think weâre on the right path to get onto that on-ramp at the right time and weâre really working on expanding into--you know, already into future related markets that are going to include some airborne systems, potted and non, and then really working on pulling the synergies together between LGS and our SA Photonics business. I wanted to ask about capital structure and your target leverage. Youâve been running kind of two, three times the last several years, but interest rates were very low. Does that change at all given where rates are now, and do you think about the mix of variable rate debt any differently now? Yes Matt, Iâll start off and Iâll turn over to Jeff. For a long time, weâve been talking about we are comfortable in everything up to a 4.5 range, maybe temporarily getting a little bit higher than that to do something that was very transformational. What I like about where we are now, leverage somewhere in the low 2s, but I want to tie it to opportunistic and flexible. If we deploy the full $750 million of the combined ASR and open market repurchase, thatâs going to still leave us around three times, and it really leaves us considerable capacity for other options. To me, thatâs the kind of flexibility and optionality we were looking for. Yes, just to add a little bit to what John just said, you guys are probably tired of hearing flexible and opportunistic, but that really is what this is. Weâre in a really nice spot here to operate the company in the near term kind of the mid-2s, which gives us a good chance to--you know, mid-2s to 3, gives us a good chance to have plenty of options as we approach either organic investment or acquisitions. We really are in a nice spot with lots of options, which is just exactly where we like to be. Got it, thanks. Then if I could do one more, I guess on M&A, itâs been slower than you sort of have done historically. Could you talk about what are sort of the hurdle rates youâre looking at and where are some of those deals falling short, is it just valuation or just not the right assets out there that are the right fit for CACI? There are a few observations weâd make here. The pipeline is not necessarily any smaller. I think weâre starting to see some valuation re-thinking as the market sort of adjusts to the current circumstances. I imagine a lot of that is interest rate driven, or some amount of it is interest rate driven. But we remain very active lookers and weâre going to continue our practice of being very thoughtful and deliberate and strategic, and when the right--thatâs the other part of this optionality, right? When the right opportunity presents itself and the right fit and the right time, weâre poised to move with some speed. Just to follow up on an earlier question, if I think about it maybe on a near term basis, the DoDâs L&M budget is expected to grow high single digits, RD&C is expected to grow even faster than that, but your organic guidance is still for low to mid single digits in fiscal â23. Even if we factor out your Army exposure, at least from our seat, it would seem like higher budgets and easing labor would yield more opportunity just relative to what your view was last summer. Is there a reason thatâs not the case? Yes Bert, thanks. Look, let me start off with saying that weâre really happy with our first half performance - I mean, 5% organic, 10.4% adjusted EBITDA margin, so I like how that sets us well going forward. Weâve said in the past, weâve got a large, growing, addressable market, so thereâs plenty of opportunity for a $6.5 billion CACI. I like the strong awards that Rob highlighted earlier, weâve got a nice pipeline. Back on guidance, look - it reflects a lot of different assumptions and scenarios in terms of how a multitude of factors are going to play out, and thatâs why we provided a range at the beginning of the year. To put a little color on what goes on here when we look at do we hold our guidance, we had a strong first half, do we narrow guidance, do we raise it. We mentioned things like new award timing, facility and customer access, COVID exposures, and the FY23 budget is positive. Those are all trending more position than what we would have seen back in the July-August time frame. Cost of labor, contract expansions, sort of a little unchanged to negative, a little bit of pressure on margins if you look at continuing to retain current employees and hire new ones, and then the whole contract officer resources, those are about the same, so weâve got some things that move us closer to the right goalpost and thereâs some things that keep us somewhere along the left one, so weâre just trying to balance risk and opps. We could probably through in some of the 2024 comms commentary and does that blow back onto â23, so weâre very comfortable with the guidance that we have out there. Weâre very strong and well positioned to land within that guidance, and weâll be able to potentially make different moves and different commentary when we get to the end of our third quarter. Okay, thatâs super helpful. Maybe just as a follow-up to that, if we look at that guidance, it implies a pretty healthy step up in the second half from 428 in earnings in 2Q to something north of 450 per quarter, I guess based on the cadence in the back half. Can you just walk us through what changes, and to your comments there on â24, are you starting to contemplate anything like a potential government shutdown, or are you hearing anything like that? Just any commentary around what steps up in the back half and what those risks are. Yes, I think maybe Iâll start that off and then let John address the second part of your question. The mix phenomenon that I alluded to a few minutes ago, a few questions ago, extends really nicely into your question here about the back half. We see a growing fixed price content, but we see some of that margin mix that I alluded to earlier changing in a way thatâs favorable to margin. You can see a little bit of that if you look at our cash usage and a little bit of inventory growth. You can see sort of the front end of that starting to happen. In my prepared remarks, I referred to that when I talked about ramping revenue at the end of the second quarter and that attendant working capital growth, so weâre starting to see the front end of exactly what we expected to see in the second half. Again, at the risk of repeating myself, itâs really lining up nicely with right where we expected to be at this point in the year. Jeff, thanks. Bert, you brought up a little bit about government fiscal year 2024. Look, weâre hearing the same--I guess Iâll chose my words wisely, Iâll call it commentary. Iâve been asked noise, rhetoric, but look, thereâs always a lot of noise and thereâs always a lot of headlines. Weâre a 60-year-old company, weâve been through many environments and administrations, budget cycles. Weâve heard a lot of commentary and a lot of political-ness over time. Look, in all fairness, on one side you have legitimate concerns about the governmentâs deficit and debt situation, and therefore talk about budget cuts in government fiscal year â24. On the other side, there remains significant bipartisan support to fund defense and national security, just given the geopolitical environment and threats. There is a war in Europe, thereâs near peer threats like China, who has surpassed us on some ways. Cyber is the great equalizer, whether itâs Iran or North Korea. A decade-plus ago, we were at war in Afghanistan, very germane to us. We operate in the skies, in the electromagnetic spectrum, and it remains pretty much unencumbered and thatâs most likely not going to be the case in any type of near peer conflict, and weâre relying much more heavily on space and that domain is now contested, so. If I had to write the pluses and the minuses, weâre going to continue to monitor it, Bert, but to some extent Iâm a guy and weâre a company that are going to work on things that we can influence for now. Weâre going to focus on running the business, delivering long term growth and shareholder value, and what we know is national security is extremely important and they have a lot of critical needs. We know our expertise and technology can address many of those needs. Weâre a strategically based company, strategy is where we come from. Weâre not in these high growing, very important markets by accident, so I like the fact we have a full government fiscal year â23 budget that supports where we want to head, and weâre going to continue to focus on a long term strategy that delivers consistent value, no matter what that commentary happens to be. Thanks very much, and good morning. I think it was a few quarters ago, maybe it was around the middle of 2022 when there was some of the slowness in government funding, and I think you talked a little bit, John, about being unsure kind of in terms of figuring out what might be delayed versus what might be lost. I wonder if six months on or so, if youâve gotten a better sense of that, and particularly maybe on the product side, since it seemed like that was an area where maybe there was some more dislocation in terms of what was expected. Yes, thanks. Iâll start off, as Jeff mentioned, the year is playing out as we expected, and some of the mission tech work that we have out there is clearly planned to deliver during the back half of the year. Back to where we were, and youâre absolutely right, second half of fiscal year â22, we were looking at a funding slowdown in dips and the like, and look - some has come back and some has and will come back in a slightly different form, so the update to that is while funding was the original issue and while the customers struggled through funding, some of the threats and the requirements changed. Itâs requiring an enhanced capability versus what we all may have delivered just about a year ago until now. Now for us, [indiscernible], what that means for us is weâre working on software mods to our hardware solutions, and we can deliver those items that havenât yet come back by the end of our fiscal year and that does drive a stronger bottom line. Itâs something that we continue to watch, but it does unnaturally, Seth, play into this concept of software defined, low size weight and power multi-mission tech that can really take on different needs. If we look at whatâs going on in Ukraine, there is a lot of UAS activity there, and even those requirements continue to change as the pace of battle changes, so the fact that we donât have to push all those mission tech sales out through the end of the year is a great kudo to our earlier acquisitions and that they were very software defined. Weâll be able to get back on track - Iâm very confident in that, and weâll need that, of course, for us to close on our fiscal year â23. Thank you for that. Then maybe as a follow-up for either of you, and I know you guys arenât responsible for all the stuff that we analysts throw into our models, but if I look at the consensus for next year, it looks like people are thinking about kind of a 10.9% EBITDA margin, something close to 11%. Do you think that maybe thereâs still some anchoring around--you know, with the idea of ever-expanding margins and stuff, that might be where things in this environment that weâre in now, this operating environment, where things might take a little longer to deliver on that or be a little bit tougher, and maybe expectations need to be a little bit more in check for now. Yes, I think what Iâll say to that is weâre 186 days into our year, weâve got another 180-something days left. Weâre going to focus on making sure we button up FY23 to our guidance and to a level that our shareholders have come to enjoy. Look, on the margin side, long term is what I would stress to everybody on the call. We were an 8%-ish EBITDA margin business six, seven years back. Itâs great to be having the discussions of mid to high 10s and then where that cap is. The way we see it internally is, look, we are getting into higher and higher, greater and greater funding streams. Itâs how we move from 8 to mid to high 10s, frankly, right? Itâs really strategically taking a look at the book of business we have and not resting on where weâve been but looking at where the trend lines are going to be, and the fact that there was going to be greater spend in some areas that we no involvement. Four, five years ago, six years ago, getting ourselves involved more into the national security side, getting us more into space gives us much better chances at continuing to drive margins than we would have been with our, letâs say fiscal year â17 portfolio, so Iâm going to shy away from crystal balling FY24. I really want to focus on this year and finish strong, get the share buyback executed, look for places where we still think weâre not highly valued enough, and going to take some opportunistic stabs at taking some additional shares out and really trying to position us well for our guidance call that comes along August of â23. For my first question, itâs a follow-up on the commentary, the political commentary about next year, continuing resolution, [indiscernible] about that. Have you seen any impact in your customer behavior from this increased uncertainty? Have you seen that commentary actually impacting the award environment, spending environment? Yes Mariana, thank you. Look, nothing around FY24, right? I think right now, as I shared earlier, from where I sit as a public company CEO in the national security space, itâs sort of an unbalanced scale between--you know, I like what this nation is going to do going forward, and I would say thereâs a higher probability that there are supportive FY24 budgets than not. If we look at FY23, we have a fully approved, signed off and appropriated government fiscal year 2023 budget, so with our customers, thereâs much more certainty. In my senior level meetings, thereâs much more certainty around how theyâre going to push money now. We still have this contracting officer thing and everybody on the federal government sees that and theyâre all working that - thatâs going to take some time to get fully corrected. But I see a much more positive environment with the customer set that weâre supporting. Everything weâre doing in the EW [indiscernible] and cyber and how that begins to converge, what weâre doing in commercial solutions for what Iâll classify with our ID tech acquisition, what weâre seeing in space, those are all highly funded areas that are absolute must-dos within where we had. On the IT modernization side, weâve won some nice sized contracts there. We have to get some of this protest period, but yes, I have not picked up any concerns, Mariana, around funding. Where will we go in FY24? Weâre all going to have to watch. I hear the same things you all hear - you know, could we have a full year CR? Perhaps, but weâre in some pretty important areas, and I believe weâll still continue to receive the requisite funding. Thank you, and then you mentioned these recent wins. You have recently won significantly large multi-billion dollar wins. Has your appetite to pursue those larger contracts, like in the pipeline of submitted bids or the bids that you expect to submit in the near term, how much of that is multi-billion dollar contracts? Yes, look - weâve been on a long term strategy here of bidding larger jobs, and for a company like ours, we have to contrast that against winning a lot of work that gets you a nice revenue pop, doesnât do much with margins, and if you find yourself in that grey area where youâre bidding programs with tighter and tighter rates, the reward for that - trust me - is you get to re-compete on that work even sooner. Itâs why weâve been very strategically focused on duration of contracts in our backlog, which is now around four, four and a half years. Yes, it does mean that awards are lumpy, it does mean that thereâs a much larger price on winning some of those larger ones because youâre not chasing these really small ones that can sort of fill that in. I think weâve got the right--I think we have the knob dialed right, Mariana, in that weâre out there winning some nice C-court wins, but weâre also winning these multi-billion dollar ones that, frankly, provide a nice floor and a nice base so that we can be, again, quote-unquote long term growth. We have the appetite for it. Weâve got an outstanding business development team, an outstanding sales support team. Weâve been building it over the last decade, so weâre going to stay with that strategy because once you win something like that, not only do you deliver the long term tech tail but then you get into the [indiscernible] with those programs and that moves us into really nicely positioned expertise work. Hey, good morning guys, and thank you. John, just on those comments, I feel like you have a good set-up with longer term contracts, but on your organic growth in the first half, you performed pretty well, up 5% organically, and just the full year guidance implies some slowdown, so maybe can you talk about that a little bit more? You touched on it. Then specifically, I know your contract wins are being held up, including EITaaS, but can you talk about what your assumptions are around EITaaS, DFCA and the IC win? What sort of assumptions do you have for those starting to ramp? Yes, sure. I would say on the organic front, yes, Iâm very happy we had 11% overall growth and 6% in the second quarter, and your numbers are, as they always are, spot-on - 5% organic growth for the first half. Look, that is really playing out because of previous large awards that weâve been able book, get through the protest period and then--you know, every one of these larger tech jobs has a slightly different ramp-up plan, so those are starting to all get into alignment. On top of that, the mission technology work - you know, weâve been very transparent on that. Rarely, Sheila, does that make it deeply into our backlog. Weâre usually getting awards thatâs a 30 to 60-day delivery cycle, so we sort of get that award and that immediately goes to revenue, and then better profits - I know Jeff touched on that, looking towards our second half. I like the book of business we have today, and Iâll sort of move forward to the ones that we just won. Look, weâre extremely pleased with what we have won there. They are two really nice jobs that those and a few others are going to set us up well. On the award side, youâve always heard me say it - awards are lumpy, right? Youâll never see me post any kind of headline, record award quarter, because I fear coming to you all and showing you the quarter after that weâre slightly less, so. Look, awards are always going to be lumpy, but we do continue to win new awards and execute against our large and growing backlog. On the EITaaS, look, I think weâll know in the April time frame. I donât like to go to my crystal ball, but I see more upside than downside to that decision, Sheila. I really see that being the next step up for us as we look at how weâre going to solve for FY24 for organic growth. The other cyber-related IC award, for everybody out there, weâre going to continually call it that because it is a very sensitive program. On behalf of our customer set, weâre not going to discuss the program name or our direct customer. I can tell you that that is in the protest period. Weâre waiting for the customer to take corrective action. Weâre hopeful we may hear something before this month is out, but as I mentioned on the Air Force job, when we go for these large awards, weâre always planning a 90 to 120-day protest period, so we know when we can count on revenue from that job so we donât peak too early. I do like what weâve done there. Those were really strong, strategic wins. We had the right best value solution in both cases. We continually shape these awards from two, three, four years before anybody else sees them, and again weâre leading with investment ahead of customer need. Both of these awards will benefit--weâll talk more about it after we get through the protest period, but investing ahead of contract award is showing these customers the art of the possible, okay - hereâs where the threats are going to go, do you want a more technological solution. It really takes the risk of having to find 2000, 3000 cleared folks, how can we bring technology more in to sort of lower their risk. All in all, I like how â24 is setting up, and I do believe that weâll find our way through these protests. Thank you. You mentioned your addressable market increasing substantially. How does the spending growth that the company can tap into compare and perhaps differ from the headline rates of growth of this yearâs budget? Yes, so if I remember right, Tobey, thereâs been talk about itâs a 10% growth budget. We could throw inflation in that, then we have to take out things that we donât do. Weâre always looking at that five-year CAGR budget, and I think weâve called that growth between 22 and 27, somewhere in the 30% range. Overall budgets in â23, some are going to grow faster in any given year, but the work that weâve done says that this is at least a 30% growth market all through â27. You know, what I like is we have a total addressable market of $260 billion, and weâre a $6.5 billion company. That total addressable market, how I measure it is if we hadnât done the acquisitions, if we hadnât been strategically focused, if we hadnât gotten ourselves into these funding streams, if we had done no acquisitions at all - you know, there are some in this marketplace that donât do any, then we would have not have positioned ourselves well and been able to drive initial shareholder value. Look, strategy is a place where we come from, weâre not here by accident. A $260 billion addressable market is almost two times what it was in 2012, so all I can tell you from a macro level, budgets are holding up well enough for us to continue to grow and we like what the future holds. Thanks. Is there anything you or the industry can do to effect change in terms of the chronic and burdensome protests that kind of plague the industry and procurement environment? Just wondering if you see the possibility for change. Yes, you know Tobey, Iâve been in this market a long time, I guess itâs almost 40 years now. The federal government provides the protest path, and I will say for good reason. Thereâs days weâre happy for that process and days weâre not, right - it depends on whether Iâm on the left side versus the right. Look, it would be more helpful to us, clearly, if we could come to you all that we win this job and in the next five days, weâre going to see pops in revenue and margin, but thatâs just not the market in. The best we can do, as youâve heard me say many times, is we control what we can control and we work on, that is when we win jobs like EITaaS and it gets announced in the--in our first quarter, right, we pretty much have to recognize that it may be early fourth quarter before we can recognize revenue, and thatâs if a lot of other factors stay stable. On the flipside of that, doing business with the federal government, theyâre a well paying customer. Iâm not worried about whether 40 million people click on this app. We know what national security needs are, we can be much more strategically focused, and I would say the protest process is just something we have to work through. We have to be reasonable on it, and at the end of the day, you all and our shareholders just have to be patient that these things eventually work themselves out and we all get to move forward. As a follow-up, John, to your reply to Sethâs question, Ukraine has employed a wide range of systems to counter UAS and loitering munitions. Are SkyTracker orders expected to ramp in the future as you develop the software modifications that you referenced? Yes, so letâs talk about--a little bit about what weâre seeing in Ukraine. I would--I donât have to warn everybody there that what we all see is about an eighth of whatâs actually going on there. Look, we have--we are very deep in counter-UAS and EW, as many of you know. Thereâs going to be a lot of technology capabilities that are going to be relevant and are already relevant in the Ukraine fight. Thereâs also avenues for some of our intel analysts, our training and operations support, and our logistics folks in munition expertise issues. Look, I think issues in Ukraine are going to be there for quite a long time. All the supplemental are rightly laden as to your money, but on the other side of that, Louie, is the federal government makes a decision as to what we can export. What weâre hearing and seeing, what youâre all hearing and seeing - you know, allies around the globe, theyâre all talking about expanding their defense budgets just as much as looking at whatâs going in Ukraine. Weâre already delivering some of our technology to the Five Eyes countries. Weâre going to look across our Eastern European allies, theyâre increasingly interested in our counter-UAS methods and systems, Louie as you mentioned, far beyond the SkyTracker line. As they increase defense spending, weâre going to be involved in those discussions. Weâre already out there understanding what their requirements are. Itâs still too early to discuss specifics, but look, itâs another potential market for us. Every time we can do things to grow our total addressable market, better returns come up in the future. So yes, our SkyTracker line, our Korean line, some of our BEAM and B systems that are more manned tech level solutions that do counter-UAS, up to and including moving from kinetics mitigation versus non-kinetic is what weâre looking at next, so I think weâve got a long potential growth line there. Great. It appears as though your work with the Air Forceâs Enterprise IT as a Service program is close to moving forward, you said potentially April. Are you also in contention potentially for the Wave 2 and the Wave 3 associated with that program? You obviously won Wave 1, but thereâs two other ones that are probably big, and does having Wave 1 put you at an advantage to winning either of the other two? Yes Louie, thanks. Iâm going to stick to our long tried and true practice of not commenting on things that arenât awarded. Yes, Wave 2 is the network build of that. I think we were very well positioned on Wave 1 and weâll have to see how that plays out. Those are all the questions we have for today, so Iâll turn the call back to John Mengucci for closing remarks. Weâd really like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-on questions, so Jeff MacLauchlan, Dan Leckburg and George Price are all available after todayâs call. Please stay healthy, and all my best to you and your families.
EarningCall_1063	Good morning, and thank you for attending today's SoFi Fourth Quarter and Full Year 2022 Earnings Conference Call. All lines will be placed on mute during the presentation portion of the call with an opportunity to question and answers at the end. Thank you, and good morning. Welcome to Sofie's fourth quarter and full year 2022 earnings conference call. Joining me today to talk about our results and recent events are Anthony Noto, CEO; and Chris Lapointe, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantages and strategy, macroeconomic conditions and outlook, future products and services and future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our upcoming Form 10-K as filed with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. Thank you, Maura, and good morning, everyone. 2022 was a remarkable year for SoFi. We accomplished more than any of us could have hoped for. Our resilient team drove great execution of our strategy that has proven to provide the benefits of business diversification and durability to deliver exceptional growth and improving profitability. Our adjusted net revenue grew 52% in 2022 to over $1.5 billion, and we delivered nearly 5 times the adjusted EBITDA we did in 2021. We obtained a national bank license, which could not have come at a better time, allowing us to be incredibly flexible in a rapidly changing environment. We're offering a compelling SoFi Money product that is driving high-quality direct deposit customers spending and deposit balances. The deposits bolster and diversify our source of funding enabling us to offer our best rates on loans, while generating impressive returns and improving net interest income revenue. In fact, 2022 marks the first time our lending net interest income revenue of $530 million by itself exceeded our total directly attributable lending cost of $443 million. we grew our deposits 7 times to $7.3 billion from $1 billion over the course of the year, really powering that cycle. We grew our member base by 1.8 million to 5.2 million members, nearly 9 times our size in 2018. We acquired Technisys, adding a critical capability as we build our end-to-end technology stack and bringing us one step closer to being the AWS of fintech. We navigated unparalleled market volatility, macro headwinds, high inflation and increasing interest rates and two unexpected extensions of the student loan moratorium by reacting nimbly and leveraging the diversification of our business to hit record revenue in each quarter of the year. The fourth quarter was an incredible end to an exceptional year. We delivered another quarter of record adjusted net revenue and adjusted EBITDA and strong overall operating results. A few key achievements from the quarter include our seventh consecutive quarter of record adjusted net revenue of $443 million, up 58% year-over-year, which accelerated from 51% year-over-year growth in the third quarter and reflects record revenue in all three business segments. Record adjusted EBITDA of $70 million was up 58% quarter-over-quarter, that is nearly equal to the total adjusted EBITDA in the first three quarters of the year combined. In Q4, we achieved a couple of important financial inflection points. Adjusted EBITDA was $70 million is now largely equal to share-based compensation expense of $71 million, a critical step toward GAAP net income profitability. Additionally, net interest income revenue, or NIM revenue of $183 million exceeded lending noninterest net revenue of $144 million for the first time. And importantly, our NIM revenue is meaningfully greater than our directly attributable lending expense of $106 million. In Q4, we had an incremental GAAP net income margin of 42%, resulting in a loss of just $40 million, roughly half of the third quarter 2022 loss. Said another way, of the $171 million of incremental GAAP revenue year-over-year, $71 million or 42% dropped to the GAAP net income line. Given these accomplishments, in our 2023 plan, we expect to achieve quarterly positive GAAP net income in Q4 2023. Our strategy is to continue to play out with SoFi Money, which allowed us to surpass $7.3 billion in deposits, up 46% quarter-over-quarter, and savings of 190 basis points on cost of funds versus using other sources of debt to fund loans. Another quarter of positive GAAP net income for the SoFi Bank at over $30 million and at an 11% margin. Finally, we grew our tangible book value for the overall company for the second consecutive quarter. Q4 also saw our second highest quarter ever of member adds and our third highest quarter of product adds with strong momentum continuing into Q1. The 487,000 new members in Q4 2022 brings total members to 5.2 million, up 51% year-over-year. We also added nearly 700,000 new products in Q4, ending with nearly 7.9 million total products, up 53% year-over-year. Of these new adds, financial services products grew by 60% year-over-year to $6.6 million, while lending products were up 24% to over $1.3 million. The strength of our results, once again, underscores how our full suite of differentiated products and services provides a uniquely diversified business that has been not only able to endure, but to thrive through market cycles. Now I'd like to touch on segment level results, with a particular focus on the benefits of our diversified business drivers as well as the structural advantage of our bank charter. In lending, we generated a record of $315 million of adjusted net revenue, up 51% versus the prior year period. Our personal loan performance more than offset the continued lack of demand in student loan refinancing and the less robust performance of home loans. Student loan refi continues to be negatively impacted as federal borrowers again await clarity on the end of the moratorium of federal student loan payments. Home loans faces macro headwinds from high rates, while we continue the process of transitioning to new fulfillment partners. The personal loans business maintained its strength in Q4. We originated nearly $2.5 billion, up 50% from $1.6 billion in Q4 2021. This product continues to deliver even as we've raised our coupons to our borrowers as a result of rate increases and maintained our stringent underwriting criteria. While these origination levels themselves are impressive, the strength of our balance sheet and diversification of our funding sources provide new options to fund lending growth while driving efficiency with cost savings. These advantages are a direct result of SoFi Bank. Having more flexibility with our balance sheet allows us to capture more NIM and optimize returns, a critical advantage in light of the macro uncertainty. Additionally, by using our deposits as a funding source, we benefit from a lower cost of funding for loans. In Q4, the difference in our deposit cost of funds and warehouse cost of funds was approximately 190 basis points, where it was 125 basis points in Q3, and just 100 basis points in Q2, a powerful benefit in a rising rate environment. Lastly, the bank contributes to strong growth in SoFi Money members, high-quality deposits and improved levels of spending and engagement. This has led to higher average balances even as average spend has increased. Of the $7.3 billion in deposits at quarter end, 88% were from direct deposit members. Roughly 50% of newly funded SoFi Money accounts are setting up direct deposit by day 30 versus 20% in Q4 '21, and this has had a significant positive impact on spending. Q4 annualized spend was 3.4 times 2021 total spend, and Q4 spend per average funded account was up 25% quarter-over-quarter. SoFi Money members have increased nearly 53% year-over-year to 2.2 million in total. Given the quality of these members with 745 median FICO score, we see ample opportunity for cross-buy. This is a great segue into financial services more broadly, where net revenue nearly tripled year-over-year to $64 million and grew 32% from $49 million sequentially in Q3. Moreover, Financial Services annualized revenue is now approximately $260 million. Contribution loss of $44 million improved $9 million versus the third quarter, even as we invested $13 million more in marketing in the fourth quarter. We saw this as a worthwhile opportunity to attract more direct deposit members. Even with this spend, variable profit, including all marketing costs, improved quarter-over-quarter and was nearly breakeven. We still anticipate the Financial Services segment will be contribution profit positive in 2023 as we continue to scale and monetize the business. We finished Q4 with 6.6 million in Financial Services products, up 60% year-over-year, and 4.9 times total lending products of $1.3 million. The increased scale of Financial Services helps drive cross buy and marketing efficiencies over time. The scale of Financial Services not only drives cross buy and marketing efficiencies, it also is proving to be a large revenue contributor as we continue to drive monetization of these businesses. In fact, annualized revenue per product is up nearly 2x from $21 in Q4 of last year to $40 in this quarter. This is due to the increasing attractiveness of these products, growing brand awareness and network effects. As we've committed, we continue to iterate and invest aggressively in our product suite, and that investment continues to pay dividends as members embrace our launches. Since our last earnings call, we introduced an increase in our checking and savings APY of up to 3.75% as of January 4. We launched SoFi Plus, a premium member service, that bundles together are a wide variety of member benefits and provides incremental value and rewards. SoFi Plus is unlocked through enrolling in direct deposit. We will continue to add more value and benefits to this premium member service to not only highlight the breadth of our products and services, but to also increase the total value of having your direct deposit with SoFi. We expanded insurance coverage for our members to include cyber insurance, our invest team launched options trading, making good on our promise to our members to deliver this much anticipated service, and we introduced a new way to spend with SoFi with paying for there first product built on the combined Galileo and Technisys platform. This leads me to our Technology Platform segment which remains a critical element of SoFi's strategy. In the fourth quarter, full segment revenue of $86 million grew 61% year-over-year with a 20% margin at the segment level or 24% if you exclude Technisys. The SoFi Technology platform strategy includes growth in new verticals, new products and new geographies. In Q4, Galileo signed 11 new clients and made big strides in the strategy, with 36% of new deals in B2B and 27% of new deals outside the United States. Importantly, of these 11 new deals, nine have existing customer bases, reflecting the continued demand for our innovative services from more mature organizations. Technisys is also delivering strong growth in number of new clients signing an additional 16 new clients in Q4, including its first digital deal in Mexico. I'll finish here by saying that we've been in an all-out sprint over the last five years to build out our digital product suite to meet our members' needs for every major financial decision in their lives and all the days in between. The benefits of our strategy resulting in a uniquely diversified business, combined with a national bank license, not only positions SoFi to be the winner that takes most in the secular transition of the financial services to digital, but also to provide greater durability through a market cycle. I'm excited about where we are today and even more excited about where we can go from here. Thanks, Anthony, and good morning, everyone. We finished off a remarkable year while navigating a rapidly evolving macro backdrop even as our previously largest and most profitable business operated at 25% of Q4 2019 pre-COVID volumes. This proves once again that our diversified and differentiated business model drives SoFi's durability and long-term growth potential. I'm going to walk you through some key financial highlights and then share some color on our outlook. Unless otherwise stated, I'll be referring to adjusted results for the fourth quarter and full year of 2022 versus fourth quarter and full year of 2021. Our GAAP consolidated income statement and all reconciliations can be found in today's earnings release and the subsequent 10-K filing, which will be made available in the coming weeks. For the quarter, top line growth accelerated, and we delivered record adjusted net revenue of $443 million, up 58% year-over-year and 6% sequentially from the third quarter's record of $419 million and above the high end of the guidance provided during our last earnings call. Adjusted EBITDA was $70 million at a 16% margin, also above the high end of our most recent guidance. We saw 14 points of year-over-year and five points of sequential margin improvement, demonstrating the strong operating leverage of the business as it scales. Year-over-year margin improvement has been driven by significant operating leverage across our sales and marketing, G&A and Ops functional expense lines. Overall, this resulted in a 40% incremental adjusted EBITDA margin year-over-year. Our GAAP net losses were $40 million this quarter, a $71 million improvement year-over-year and $34 million improvement sequentially. Incremental GAAP net income margin was 42% year-over-year, a notable step in our path to GAAP profitability. In addition to our adjusted EBITDA margin expansion, we saw meaningful leverage against stock-based compensation as a percentage of revenue at 16% in Q4 2022, down from 27.5% in the same prior year period, putting us well on our path to longer-term goal of single-digit stock-based compensation margins as previously communicated. For the full year, we delivered $1.54 billion of adjusted net revenue, up 53% year-over-year from $1.01 billion in 2021. As a reminder, we revised our annual guidance in April of 2022 following the extension of the moratorium on federal student loan payments. Our updated guidance for the year included $1.47 billion in adjusted net revenue and $100 million in adjusted EBITDA. This guidance contemplated an ultimate extension in the moratorium until year-end, which implied a Q4 ramp in student loan refinancing activity ahead of the anticipated resumption of federal payments. From an adjusted EBITDA perspective, we delivered $143 million in profit, nearly 5 times that of 2021, and $63 million above the guidance we presented following the moratorium extension I just discussed. 2022 delivered a 9% adjusted EBITDA margin, 630 basis points of improvement from 2021. Even with the recent subsequent extension of the moratorium through June of 2023, which impeded the expected Q4 2022 ramp in student loan refi demand, we still exceeded that revenue guidance by $80 million and adjusted EBITDA by $43 million. We achieved these results by implementing new strategies and through nimble asset allocation, which speaks to our ability to leverage the diversity of our revenue streams. Now on to the segment level performance, where we saw strong growth across all three segments. In lending, fourth quarter adjusted net revenue grew 51% year-over-year to $315 million. Results were driven by 138% year-over-year growth in our net interest income, while noninterest income was relatively flat. Growth in net interest income was driven by a 109% year-over-year increase in average interest-earning assets and a 317-basis point year-over-year increase in average yield, slightly offset by 162 basis point increase in the cost of interest-bearing liabilities. This resulted in average net interest margin of 5.94% for the quarter, up 141 basis points year-over-year. Noninterest income was relatively flat year-over-year as increased personal loan originations at higher weighted average coupons were largely offset by lower student loan and home loan originations. Personal loan originations grew 50% year-over-year to $2.5 billion, while student loan originations were down 73% and home loan originations were down 84% year-over-year as a result of macro headwinds and a continued transition of home loan fulfillment partners. Overall, we achieved strong top line growth, while maintaining our stringent credit standards and disciplined focus on quality. Our personal loan borrowers weighted average income is $165,000, with a weighted average FICO score of 747. Our student loan borrowers weighted average income is $170,000, with a weighted average FICO of 773. This focus on quality has led to continued strong credit performance. In fact, our on-balance sheet delinquency rates and charge-off rates remain healthy and are still below pre-COVID levels. Our on-balance sheet 90-day personal loan delinquency rate was 34 basis points in Q4 '22, while our annualized personal loan charge-off rate was 2.47%. Our on-balance sheet 90-day student loan delinquency rate was 13 basis points in Q4 2022, while our annualized student loan charge-off rate was 0.37%. As we have expressed in the past, it is reasonable to expect credit metrics to revert over time to more normalized pre-pandemic levels, but we continue to expect very healthy performance relative to broader industry benchmarks. The lending business delivered $209 million of contribution profit at a 66% margin, up from $105 million a year ago and a 51% margin. This improvement was driven by a mix shift to higher-margin personal loans revenue, along with marketing and ops efficiencies as well as fixed cost leverage across the entire segment. For the full year, lending adjusted net revenue grew 45% to $1.11 billion, and the segment delivered $664 million of contribution profit at a 60% margin. Shifting to our tech platform, where we delivered net revenue of $86 million in the quarter, up 61% year-over-year, or up 13% excluding Technisys. Overall, annual revenue growth was driven by 31% year-over-year Galileo account growth to $131 million in total as well as sequential growth in transactions per active account. We also signed 11 new clients, four of which are in the B2B space and three of which are in Mexico, further diversifying our partner base. During the quarter, one of our clients migrated the majority of their processing volumes to a pure processor, which resulted in a $6 million to $7 million revenue headwind in period. Segment contribution profit of $17 million represented a 20% margin and 24%, if you were to exclude Technisys. For the full year, the Tech Platform segment grew revenue 62% to $315 million, and delivered $76 million of contribution profit at a 24% margin. Excluding Technisys, revenue growth was 24% year-over-year and contribution margin was 30%. Moving on to Financial Services, where net revenue of $65 million increased 195% year-over-year, with new all-time high revenue for SoFi Money and continued strong contributions from SoFi Credit Card, SoFi Invest and Lending as a service. Overall monetization continues to improve with annualized revenue per product increasing to $40, nearly 2 times the $21 in the same prior year quarter and up 25% sequentially from $34. We reached 6.6 million Financial Services products, up 60% year-over-year by adding 635,000 new products in the quarter. We now have 2.2 million products in SoFi Money, 2.2 million in SoFi Invest and 1.9 million in Relay. Contribution losses were $44 million for the quarter, which improved sequentially as a result of the growth in revenue as well as fixed cost leverage, but increased year-over-year, predominantly as a result of building our CECL reserves for the SoFi credit card business, which is expected as we continue to grow in scale. In addition, we saw a year-over-year reduction in higher-margin digital assets revenue. For the full year, the segment delivered $168 million of revenue, which is nearly 3 times the $58 million we delivered in 2021, and our contribution losses were $199 million. Notably, that's a 21% improvement in contribution loss per average product during 2022 versus 2021. Switching to our balance sheet, where we remain very well capitalized with ample cash, excess liquidity and strong regulatory capital and leverage ratios. This year's opening of SoFi Bank further reinforces our strength and provides more flexibility and access to a lower cost of capital relative to alternative sources of funding. In Q4, assets grew by $3.2 billion as a result of the strong growth we continue to see in personal loan originations. On the liability side, we saw tremendous growth in deposits to $7.3 billion, up $2.3 billion quarter-over-quarter. Because of this, we exited the quarter with $3.1 billion drawn on our $8.4 billion of warehouse facilities, which represents 36% of our total available capacity. Our current book value is $5.5 billion, and our tangible book value has grown for two consecutive quarters, with more than a $50 million increase sequentially in Q4. Let me finish up with guidance. Before going through the specific numbers, I want to hit on some of the larger macro assumptions that underpin our financial guidance. From an interest rate perspective, we are assuming an outlook consistent with the consensus forward curve, with a peak Fed funds rate reaching approximately 5% in Q2 2023, with two rate cuts in the back half of the year to get us to a 4.5% exit rate in 2023. We are assuming a 2.5% contraction in GDP and a normalization of unemployment to around 5%. And from a credit perspective, we are expecting a continuation of elevated credit spreads across capital markets and a continued normalization of consumer credit. For Q1, we expect to deliver adjusted net revenue of $430 million to $440 million and adjusted EBITDA of $40 million to $45 million. For the full year of 2023, we expect to deliver adjusted net revenue of $1.925 billion to $2.0 billion, representing 25% to 30% growth and adjusted EBITDA of $260 million to $280 million. Our outlook represents 30% incremental EBITDA margins for full year 2023 versus full year of 2022, and we expect to reach quarterly GAAP net income profitability by Q4 2023, with GAAP net income incremental margins for the full year of 20%. Finally, quickly hitting on a few key points for each segment. In our lending segment, we expect the Department of Education's moratorium on federal student loan payments to extend through June 30, 2023, at which point there are 60 days before repayments actually begin. Accordingly, our outlook assumes that we will be operating in our current run rate levels until September. After September, we do believe there will be a recovery to a higher levels of student loan refinancing revenue than the current trend, but we do not expect to return to pre-COVID levels in 2023. In our personal loans business, we expect to see modest growth as we balance taking advantage of ample headroom in this business given our current market share and differentiated product with a thoughtful and prudent approach to ensuring our credit remains very high quality. We remain committed to underwriting to an industry-leading life of loan loss profile. In our Tech Platform segment, one year of focus for us in 2023 is on quality of new clients, including size, durability and time to market over quantity, which means bigger wins that leverage the combined go-to-market value proposition of the Tech Platform, while still investing in focused new product areas to drive diversification. While we expect low double-digit organic revenue growth in 2023 due to this focus, and a variety of other factors, our longer-term strategy is already starting to pay off with greater diversification in our pipeline and significant margin expansion expected in 2023. After a three-year investment period in the Tech Platform, including moving to the cloud, a 2.5x increase in head count, the acquisition of Technisys and launching new product capabilities, we will increasingly focus on leveraging the value of our investments through the synergies between the two product lines, Technisys and Galileo, as well as through joint product offerings, all to drive meaningful contribution profit growth relative to revenue growth. In starting to operate as one unified technology platform, we have recognized opportunities to reduce our costs, including a small reduction in head count. In Financial Services, we expect continued strong growth in revenue, driven by growth in products as well as increased monetization per product as we scale deposits, spend and AUM. We Importantly, we will front-load investments in the year to take advantage of attractive opportunities to continue to scale our high-quality deposit base. In summary, we could not be more-proud of the results SoFi delivered in 2022. We exceeded $1.5 billion in annual revenue and grew adjusted EBITDA nearly 5 times to more than $140 million. We continue to be extremely well capitalized and are excited about the opportunities in front of us. We look forward to another strong year in 2023. And with that, let's open it up to questions. [Operator Instructions] Our first question comes from the line of Michael Ng of Goldman Sachs. Your line is open. Please go ahead. Hi, good morning and thank you very much for the question. I appreciate all the color around 2023. I was just wondering if you could go into a little bit more detail around the origination assumptions. You gave some good deal around student loan and personal loans, could you do that for homes as well? Thank you very much. Yes, sure. So, I can hit that one, and Anthony can chime in. So, in terms of our overall outlook on originations, going back to what I said in my prepared remarks, we are assuming modest growth in our personal loans business. We do see there being ample headroom for continued growth given where our market share is today. Currently, we're at about a 6% market share in our credit box. That's up from about 4.5% a year ago. So significant headroom ahead of us, but we are going to take a prudent approach to this and continue to monitor credit and make changes as necessary. In student loan refinancing, we're assuming that originations are at the current run rate levels at least through the end of August of 2023, and we do expect a bit of an uptick once the moratorium ends in June followed by a 60-day extension. And then in-home loan originations, we expect to continue at the current pace that we're at right now with a potential uptick in the back half of the year as we resolve all of our fulfillment issues. Great results. So I just wanted to talk about the deposit growth. I mean it's really been -- Anthony, it's been really astounding how much deposit growth you've gotten over the last year. And I'm just curious about how you think about an environment where you may need less deposits? And how you would go about, perhaps, trimming that growth rate in that environment, let's say, originations are down. Is it rate, or is it something else? Any color you can provide on that outlook would be excellent. Thank you so much. Yes. And thank you, Dominic. We're really pleased and proud of what we've been able to achieve on the deposit side getting to 7 -- over $7 billion of deposits, starting at less than $1 billion at the beginning of the year. And that trend really reflects the strategy that we've employed behind the bank to offer a very high interest rate on checking of over 2% and a high interest rate on savings at 3.75%, no fees and complete functionality on your phone to be able to pay bills, to be able to send money to your friends to be able to look at all of your transactions, to be able to really function all of your money movement right from our app. The combination of that plus the focus we've had on driving high-quality direct deposits has driven that deposit number. What I'd say is, we're nowhere close to the point in our total deposits that we would have trouble deploying them. The limit on our growth is really driven by how much resources that we have to go after it. Once people become aware of our product, the adoption is pretty strong behind that. And so the deposits that we have today could be deployed the way we have the last several quarters; one, to fund our own loans; two, to be opportunistic on opportunities related to our loans that are in the marketplace. There are several businesses we're not in today that would leverage deposits, including small and medium business loans and being in that entire sector would require deposits as well. And we can leverage obviously growing deposits from small and medium businesses also. So if we get to the point that our deposits are significantly higher than they are today, we can deploy them in many, many other ways to drive a great return for the company. Our next question comes from the line of Kevin Barker of Piper Sandler. Your line is now open, please go ahead. Good morning. And thanks for taking my questions. Your balance sheet has grown tremendously over the last year, partly due to the deposit growth. Could you talk about the differences between held for investment versus a held-for-sale strategy? In particular, we've seen several companies start to come back to the securitization market in the first quarter with spreads tightening relative to late '22 numbers. I'm just trying to see how you balance driving net interest income versus potentially some fee or gain on sale income? And how do you think about that for the rest of the year? Thank you. Yes. Thank you for the question. We noted in the press release and prepared remarks that we hit a couple of key inflection points in the year. One of the biggest inflection points is that our NIM, our lending net interest margin revenue is now greater than our noninterest revenue, and that's a pretty big milestone. It reflects a lot of initiatives over the last five years, one of which was getting the bank license and being able to use the deposits to fund our loans and not have to recycle that cash through quick sales, et cetera. So we have the luxury of being able to look in the marketplace, look at our balance sheet and make the best decisions for long-term returns. And as we've done that, we've been able to hold loans longer and generate that revenue stream that's more recurring from net interest margin. You should expect the NIM to continue to grow, both in absolute dollars and as a percentage of total revenue in the lending sector. The second big accomplishment was that, for the full year, we were able to -- sorry, in the fourth quarter, we were able to get the NIM revenue greater than the directly attributable fixed cost of the lending business, meaning the non-interest income lending revenue was it needed to get to profitability at the contribution basis in Q4, which is another big milestone but you should expect that to continue to grow. It is a revenue stream that's more visible, more consistent than gain on sale noninterest income. But we have the luxury of making the best choices based on the marketplace. Yes. In terms of the ABS market, we're seeing the exact same trends that you highlighted in your question. Back in November, we actually did a $600 million term securitization deal at an attractive cost relative to where we expect warehouse cost of funding to be in 2023, and things have continued to improve in the overall market in the first month of this year. So we expect to be able to access that market here in Q1 and for the rest of the year. Our next question comes from the line of Moshe Orenbuch of Credit Suisse. Your line is now open, please go ahead. So maybe as a follow-up to that, can you talk about what you actually sold during the quarter in personal and student? And did you actually buy any portfolios during the period as well? Yes, I can hit on that. So in terms of sales for the quarter, we ended up relying predominantly on deposit funding, warehouse funding and that term securitization. We did about $200 million worth of whole loan sales and the $600 million term securitization, so about $800 million in total. In terms of loan purchases, like I said during the last quarter, having the bank with a large and growing deposit base, provides us with much more flexibility and a new source of funding our loans, which allows us to grow the balance sheet and hold loans for a longer period of time. There are a few ways that we can bring loans on to the balance sheet. We can go out and pay an upfront marketing costs and originate them, or we can purchase the loans. So similar to Q3, we had the opportunity to buy some seasoned loans. This time, they were from -- they were in the student loan refinancing space, and these were all loans that we originally underwrote. Overall size was about half of what we did in Q3. And given the credit quality loss profile and return characteristics, we jumped on the opportunity as we knew the borrower best, and it's will set us up for really strong net interest income in the coming quarters given our overall cost of funding. And then we also had a few hundred million dollars of normal course cleanup calls on some of our consolidated securitizations that were several years seasoned. Our next question comes from the line of Eugene Simuni of [Towers] (ph). Your line is now open, please go ahead. Quick question from me back to the outlook for 2023, very helpful to have the color, Chris. But I was wondering on the swing factors, let's say, the factors that would allow you to go to the high end of your guide, What would be the top two or three things that you guys are looking for that could swing the results here in 2023? Eugene, thank you for the question. There's a -- Chris laid out in our prepared remarks some of the underlying assumptions, both macro and micro. On the macro side, GDP growth, that's not as a dower as we have in our forecast and our implications, so a stronger economy than what we have. And we have a, we think, a relatively conservative i.e. low number for GDP, decline of about 2.5%. Unemployment, we had at 5%. That's a factor if it comes in worse than that, that could be a negative, a tailwind would be if it sells in the 4s. And then on interest rates, we have them peaking up 5% and then coming back down to about 4.5%. If rates came back even more than 4.5% and sold than the 4% range, I think we could be at an optimal part of the curve as it relates to passing on coupons, profitability per loan as well as the NIM that we can make relative to our deposits would be a pretty good outcome. Separate from that, for the technology platform sector, we have a really robust pipeline. It's more diverse. But more importantly, there are many members -- sorry, clients in our pipeline that have large existing consumer bases or user bases. And to the extent that those become launched in 2023 before the second half of the year, we can benefit from upside in those large partners coming on board from the tech sector. As it relates to the financial services sector, I really believe we have a lot of upside in the invest category. We are quickly launching new products to make sure that we have some table stakes products, but also some more innovative differentiation selection. And I think that if we're able to launch those to a receptive member base and the user base, it could be a tailwind. Second thing that could be a tailwind to invest is if the IPO market opens back up, we can underwrite IPOs. We're the sole retail distribution channel for the Rivian IPO. We participated in the new bank. Our members want access to IPOs and IPO prices. We're uniquely providing Main Street with access to IPO prices at those -- IPOs and IPO prices. To the extent the calendar opens back up, we have a pipeline there as well, which helps both with adoption of the product by new users because they want that unique selection, but it also drives incremental assets under management, which allows us to drive more revenue and monetize more. So those are some of the underlying trends that could give us a tailwind when we pass over to Chris... Yes. The only other thing I would add to that, Anthony, is back to one of the comments that I made a few minutes ago around credit spreads. So implied in our guidance, and what I mentioned is that we're expecting to see continued elevated credit spreads throughout the year. Obviously, things are looking pretty good in January and spreads have tightened and the ABS market seems to be showing some signs of life. So if that continues throughout the year, there could be additional upside in the lending business as well. Our next question comes from the line of Mihir Bhatia Bank of America Merrill Lynch. Your line is now open, please go ahead. Good morning. And thank you for taking my questions. I just wanted to ask about the Technology Platform segment. Sounds like a little bit of, maybe not change but refinement in the strategy as you go after -- you're focusing on quality of clients and bigger clients with existing basis. What are some of the implications of that strategy? And I was also curious in terms of just new product introductions or cross-sell to existing clients in that segment, like as we think about your growth from here, how much of it is going to come from cross sell, cross biofuel in that segment versus some winning some of these new large partners? Thank you. Thank you for the question. And I think you characterized it appropriate in that it's a refinement of the strategy. Now that we're operating on one unified platform with both Technisys and Galileo, we can leverage the combined go-to-market and that does drive some synergy cost savings, which is why Chris mentioned small head count reduction. But there're also cost savings in different areas like marketing when you have that unified approach, especially in the United States. In addition to that, we've made really significant investments in the tech platform over the last three years. We've increased headcount by 2.5x. We moved to the cloud while maintaining on-prem capabilities. The on-prem will now go away this year. We've also done a great job at adding new partners. We've been adding 20-plus partners a year. As we look at the macroeconomic environment and where we sit, we think the right strategy for the year is to focus on durable companies with large installed bases, or well-capitalized companies that we know can make the transition and that we'll get a great return to leverage our platform capabilities. And so that's how we're approaching the year. For the first time, we're going to have meaningful margin expansion in the tech platform to start to leverage that investment we made, but we're still investing, and we're still growing. And let me give you an example of some of the areas that we've invested in that we expect to bear fruit this year, and we'll keep investing in. First and foremost, we wanted to diversify our products just out of a debit or interchange ACH type of product expanded in the B2B category. We have a number of new B2B partners that are generating revenue today. Some are doing small and medium business lending, some are simply using it for payments and for accounts receivable and accounts payable. But there's a good pipeline of other partners that have large fleets as well as big economy companies, et cetera. In addition to building out the B2B channel, we've also tried to add more products for consumer-facing clients. And so one of the products that we have that's been adopted as Secure Card. Another product that we've launched more recently is a fraud protection. As you think about fraud, and you think about the scale of some of the partners of Galileo, they may not have the scale to invest in fraud the way that we can, and they may not have the data that we have to actually drive those models. And so we've rolled out 1 piece of a fraud platform that we want to make available to all of our partners. If we can help them eliminate fraud, it not only saves losses, but it actually makes their service more reliable, reduces the overhead they have in the call centers and also allows them to hit better SLAs in servicing their customers when they do have issues that have to be solved. So it's a classic major footprint, bringing your foot type of product. In addition to that, we're focused on things that will help them drive engagement. So we've launched a direct deposit switching product, and you'll see us continue to do more to drive more engagement. Things like instant funding are another vehicle that makes the movement of money faster and better for our partners. And then last, we just launched our first product on both Galileo and Technisys SoFi, which is paying for. That product is now available for any of our partners. And if you think about the partners at Galileo, many of them are not playing the same segment that we are. We're at a very high-end customer with high FICO score and high income. Most of the scale in Galileo's partners is actually at the unbanked or underbanked. A Pay-in-4 product is much better for them than a secure card or unsecured loan or a credit card, and that product can be launched in a turnkey fashion with a much higher interchange of about 3% compared to what we're generating at 1% in debit. It does bring with it some risk and so we'll have to wait cautiously into that market with our partners. But it's another example of the innovation that we've driven that we now think we can get a return on revenue against. And the last thing I'll touch on is Connect. It's not something we've talked about on the call before, but we think it's a diamond in the rough, so to speak. It's an AI-driven customer service model that uses both voice and text. And that product is one that SoFi has now adopted, and that's after SoFi did a complete RFP of all the different choices and determined Connect to be the best choice for our company and we'll continue to invest in that product it's available to our partners as well. And the last thing where I'd say about our strategy relates to the technology platform is that the opportunity to expand geographically is bigger than you could imagine. We have to really pace our level of investment. And while we're not expanding geographically today, there's a lot of penetration within the LatAm market, which is our area of focus, especially with Technisys in more than 12 markets, helping, cross-sell Galileo's products. Great results. Thanks for squeezing me in. Can you maybe give us some quarterly trends on sort of particularly the three metrics, student loans, personal loans and mortgages, just kind of how things are trending through, say, the end of January? Thank you. Yes. So thanks, Dan, for the question. So we aren't providing specific views on how things are trending right now. But what I would say is, on the student loan front, through January, as mentioned in our guide, we expect it to be at the existing run rate levels that we saw in Q3 and Q4. In personal loans, things are progressing. As one would expect, there's a lot of headroom in that business, but we're being mindful with respect to credit. And then on the home loan side, we have made some really good progress over the course of the last two to three months in terms of some of those fulfillment issues that we've talked about previously and things are trending in the right direction. Anthony, I don't know if it's anything you'd add there? Yes. The only other thing I'd add, Dan, as I did say in my prepared remarks that we're seeing the strong trend in member and product growth continue to Q1. We've, throughout the year, constantly iterating on marketing channels, on marketing messages, on life cycle marketing and leveraging the most efficient channels. And I feel like, in the fourth quarter, we -- it was a culmination of a lot of work over the last two years, and we saw the benefit of that. And as we started the new year, we continue to see that. So we feel really great about not just the growth rate in members as well as products, but the quality of those members and product adoption in addition to the cost of acquisition. Thank you. Congratulations on the results. Questions on the process of transfer to new fulfillment partners. And you just mentioned the last two, three months have been good, Chris. But what should investors expect in terms of time line, financial impact? It's been a few quarters this has come up, and what's the main factors that seem to be, I guess, affecting a more timely transition? Yes. And just to give you a little bit of history here, we had a partner that was helping us drive great success on the back-end fulfillment side of the equation. We do the -- we do the marketing to drive the demand at the top of the funnel. We do the underwriting for the loans. And after that, loan is locked. We partner with a film partner to get through all the all the steps after that. That partner unfortunately got acquired. We were then required to make a technology platform switch with the new acquired company, which was costly and time-consuming. And ultimately, the economics that entity was seeing became quite onerous as rates increased, and we realized that the economic relationship that we had was changing, and we needed another partner. We started pursuing other partners, quite frankly, well before that acquisition happened just needing diversification. And so we fast-tracked the second partner that we needed to transition to. That transition didn't happen as quickly as we would hope. I will tell you, in the last two months, we've seen more progress there than we have in the last 18 months, and I'm encouraged by the progress the team has made, both in terms of the technology integration, the process flow, the ability to hit time-to-funding metrics and serve our members better. We're nowhere near perfect, but we're starting to move in the right direction for the first time in a while. In terms of the economic impact on the overall business, Chris was pretty clear in saying that it will ramp throughout the year. I would think about it as more second half of the year than the first half of the year. But the team is executing in a way that I think positions us really strongly to start stepping on the gas a little bit more as it relates to demand. We've had our foot off the gas, quite frankly, because we don't want to generate demand that we can't fulfill in a high-quality way. And we're starting to get to the point, I think, we'll be there by the second half of the year where we can step on the gas and start to see a much bigger market share gain there. We have such a small market share. Even with higher interest rates, I think there's a huge opportunity for us to drive revenue there as well as that revenue being profitable. In addition to that, we do, at some point, similar to the rest of our businesses, want to own end-to-end. We own lending from metal to glass, so to speak, and it gives us such advantages on iterating, on testing, on pricing, on credit, on user flow, on fraud, on risk. And we see the same thing now in SoFi Money, owning Galileo and having the benefit of Technisys as well. And so at some point, in home volumes, we'll own the back end also. We'll always partner. It's great to have two sources of capacity, especially given our aspirations and how big we think this could be. It is a huge financial transaction for our members. It is emotional transaction, and we need to be able to scale it and meet the needs of all of our members, and that's where we're focused on long term. Thanks for taking my question. Again also you talked about B2B estimates starting up. And you guys have [indiscernible] on live in the uses and members and change in terms of marketing and customers and members. And how do you think about any opportunities in 2023? John, it was really hard to hear your question. I don't want to guess what your question was. Maybe you could just dial back in with a better connection. I heard something about B2B and that it was pretty muted after that. Okay. I apologize as my headphones are bad. The question was just, Anthony, you mentioned B2B activity. You guys clearly still have very positive momentum with new members and new customers. I'm wondering, given your channels of customer acquisition, the cost of customer acquisition, has there anything changed from a characteristic perspective? And how do you look at opportunities from that regard in 2023? Yes. So the SMB opportunity, I think, is really an opportunity that's aligned with the type of member that we're acquiring in our core target. We don't have plans in 2023 to enter that market. We do believe it's an opportunity for us over the longer term to serve that market well. If you follow us on any social media, it's a constant requests that we get from people to launch small and medium business checking and savings, small medium business lending. When the pandemic first started back in 2020 March time period, we were inundated with tons of small medium businesses coming on to SoFi and trying to apply for PPP loans. We clearly don't have small, medium lending now that we have a banking license. That is an area that we could go into, but we did at that point in time. We stood up a website that allowed us to take the traffic that came to SoFi and leverage lantern to send the traffic to a marketplace of small, medium business lenders. And it was very -- people were very happy with it. The demand, as a result of that, led us to realize that many of our members are operating small medium businesses and that we could serve them on the commercial side as well. But as I mentioned, it's not something that we do in 2023. I would never say that would say the same. We'll review it every quarter. If the student loan market came back sooner than expected, and some of the other things went our way in the economy and so forth, it may be something that we could focus on in the second half of the year. But right now, it's not on the funding list, but it's a huge opportunity for us. The only reason I mentioned it earlier was, we had asked -- been asked the question earlier about deposits and what happened if they grow too big, and that would be a great problem to have. If they grow in excess of what we're willing to originate on the personal loan side and SLR side and home loan side and credit cards, we would offer more lending products to make sure we're capturing that great resource of deposits to deploy against high-returning assets. Our last question today comes from the line of Michael Perito of Stifel [ph]. Your line is open. Please go ahead. Good morning. Thanks for taking my question. Obviously, you guys have hit on a lot already this morning. I thought maybe I'd just ask Chris, just can you maybe give us some reminder or some context around how you guys are thinking of capital of the bank in your 2023 projections, obviously, very healthy still today. But imagine in the guide, there's a bit of balance sheet growth baked as you guys done in 2022. I'm just curious where you kind of have the capital ratios levering to and how that compares to kind of where you want to run the bank normalized going forward? Yes. Thanks, Mike, for the question. So I'm not going to be providing guidance on the balance sheet side within the bank, but I'll at least provide a little bit of insight on how we're thinking about it. So right now, we've capitalized the bank with about $1 billion of capital. You'll see that in the bank call report that comes out later today. We're currently operating at about a 15% leverage ratio, which is still significantly above our regulatory limits. So we do expect to see additional balance sheet growth as we continue to scale our lending business. We expect modest growth in our personal loans business and then relatively muted in the student loan refinancing and some growth in home loans. The only other thing I would add in terms of being able to grow the bank balance sheet is that we are sufficiently capitalized at the parent as well. We're coming off of a year in 2021 of raising over $3.5 billion of capital, and we've only deployed $1 billion of that to the bank. So we have sufficient excess liquidity that we could capitalize the bank and grow it further if we wanted to. And the only thing I would add on to that is something we were talking about as a team yesterday that doesn't get a lot of attention. But when you look at the asset side of our balance sheet and you look at the trend, and you look at our cash and cash equivalents, we finished the year at $1.4 billion of cash and cash approvals. What's not in that number is $424 million of restricted cash. And then there's some investment securities, which is a combination of treasuries and government securities as well as loans or what we said, of about $400 million. The trend in that line has been continuing to increase, which speaks not only to the liquidity that we have but the equity that we have that we can deploy either against funding loans or funding the bank. And it's one of the important measures that we'll continue to give you a -- somewhat of a level of confidence on being able to fund the bank to grow more if we need to put more equity there. Great. Thank you for dialing in, so I want to end with a couple of comments. February marks my five-year anniversary at SoFi, and it's just very humbling what we've achieved during such an unprecedented time period, growing from less than $500 million of revenue to $1.5 billion at the end of 2022, 600,000 members to 5.2 million members and negative adjusted EBITDA to $140 million of EBITDA, plus raising $3.6 billion in capital, becoming a public company and receiving a federal bank license. To have done all of that through two interest rate cycles, a recession, with the potential for another, a global pandemic, inflation at a 40-year high and in an incredibly competitive environment with significant access to near zero cost of capital is a remarkable five-year run. None of this, though, happens without the full faith of our Board and our shareholders, the persistent and unrelenting resolve of our people and a team that have done nothing short of extraordinary. Many can prognosticate about what lies ahead for the economy, interest rates, but in my view, the political background, the regulatory background remain very uncertain. And those exogenous factors are out of our control. But as it relates to what lies ahead, I will simply state my strongest belief that SoFi continues to be the best positioned company, to be the winner that takes most in the digital financial services sector of the future. Reaching the outcome is what we control, and what we remain steadfastly focused on to achieve. With that, thank you for calling in and listening to our fourth quarter results as well as our 2022 full year results. We'll talk to you next quarter. Thank you.
EarningCall_1064	Good day, and thank you for standing by. Welcome to the Q2 2023 Aspen Technology Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today to Brian Denyeau, ICR. Please go ahead. Thank you. Good afternoon, everyone. Thank you for joining us to discuss our financial results for the second quarter of fiscal 2023 ending December 31, 2022. With me on the call today are Antonio Pietri, AspenTech's President and CEO; Chantelle Breithaupt, AspenTech's CFO. Before we begin, I will make the safe harbor statement that during the course of this call, we may make projections or other forward-looking statements about the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from such projections or statements. Factors that might cause such differences include, but are not limited to, those discussed in today's call as well as those contained in our Form 10-Q, most recently filed with the SEC. Also please note that the following information relates to our current business conditions and our outlook as of today January 25, 2023. Consistent with our prior practice, we expressly disclaim any obligation to update this information. Please note that we have posted a financial update presentation on the Investor Relations portion of our website. The structure of today's call will be as follows: Antonio will discuss business highlights from the second quarter, and Chantelle will review our financial results and discuss our guidance for fiscal year 2023. Thanks, Brian, and thanks to all of you for joining us today. AspenTech delivered solid second quarter results as we continue to benefit from a positive demand environment in many of our core end markets. We're also seeing clear benefits from the combination of heritage AspenTech with the OSI and SSE businesses that were part of the Emerson Transaction in go-to-market activities, innovation and customer access. As I mentioned last quarter, our primary focus in the first half of the year was executing on the integration, transformation and change management plans to create unified consistent operating principles and a single business model across the entire organization. We have made substantial progress and believe our initial integration plans are largely complete. And the transformation phase of the OSI and SSE businesses is well underway. Our primary focus is in the second quarter was instituting and standardizing on best practices across our go-to-market organization, including transaction terms and conditions and the change management required to support these best practices. While we have already onboarded the OSI and SSE sales teams in the first quarter and implemented a standardized sales methodology, we're now focused on driving the execution required to deliver high-quality and long-term duration license agreements that support the financial predictability that investors are accustomed to from heritage AspenTech. This was a key area of reinforcement at our recent company-wide sales meeting in Boston from which I came away very pleased with the progress we have made towards establishing a common set of transaction best practices across all businesses and the enthusiasm and buying demonstrated by the OSI and SSE sales teams. There is still more work to do in this area, but I'm encouraged by the progress to date. In terms of synergies, we are confident on our ability to meet or exceed the synergies expected in fiscal year 2023 based on the increasing pipeline across the different growth synergy categories. The actual cost synergies achieved today, the alignment and execution between the Emerson and AspenTech teams and the completion of the key transformation requirements that capture growth in ACV in the OSI business. Overall, I'm pleased with our performance in the first half of the year and confident in our ability to execute to achieve our full year financial targets. The success we expect this year in integrating and transforming the business sets up -- and transforming the business sets up the new AspenTech well to deliver significant top and bottom line growth in the coming years. I'm highly optimistic about the opportunity ahead for AspenTech and our ability to generate significant value for our shareholders. Now looking at our financial results for the second quarter. Annual contract value or ACV was $833.7 million, up 8.7% year-over-year. Revenue was $242.8 million. GAAP loss per share was $1.02 and non-GAAP EPS was $0.35, and free cash flow was $53.1 million. I wish to provide further commentary on the quarter performance from OSI and SSE. The OSI business closed significant transactions in the quarter, in line with our expectations but because of the bundled nature of the commercial arrangements in the quarter, they did not contribute to ACV growth. In our last earnings call, we talked about the importance of achieving separability for the OSI services business as a key transformation milestone to the new agreements signed are able to be included in our ACV metric. We're excited to announce that, as expected, we recently achieved this key milestone which will allow us to begin including from OSI agreements, the DGM product term license component and the SMS component of perpetual license agreements in our ACV metric beginning this quarter. This aligns OSI with how ACV is calculated for heritage AspenTech. Chantelle will go into more detail in her prepared remarks. We also continue to be very encouraged by the prospects of the SSE business and its contribution to ACV growth as demonstrated through its contribution of the two largest ACV growth transactions in the quarter. We equally expect that as our execution in the OSI and SSE sales organizations evolves to be in line with heritage AspenTech, we will experience greater and more predictable ACV growth. Looking at the quarter in more detail, the demand environment remained positive and was similar to trends we have seen in recent quarters. We signed notable contracts in each of our key verticals and global markets and pipeline development continues to be robust. Our continued strong performance in the midst of uncertain and change in economic conditions is a testament to the relevance and resiliency of our customers' businesses and the mission criticality of new AspenTech solutions. AspenTech has an essential role to play in helping our customers meet the demand for their products that support greater global prosperity while achieving their sustainability goals and ambitions. Historically, these two areas have been viewed as being intentioned with one another and delivering on both goals is the core of our dual challenge mission. Our customers have validated its value proposition and recognize our unique position to help them meet the dual challenge. Refiners and chemical producers will need to meet the increasing demand for their products and significantly reduce their environmental impact volatilities will need to transform how electricity is generated and distributed to meet an unprecedented increase in demand. These are complicated challenges that will require elevated levels of investment for decades to come, and AspenTech is in a great position to benefit from these trends. I would now like to spend a moment providing details of what we're seeing in the market and our performance by vertical. Refining continues to perform well around the world. Refining margins are expected to remain solid through 2023, albeit down from historical highs. And overall, end market demand for refined products will continue to grow, especially for diesel and middle distillate products. The ongoing return of air travel, the upcoming import ban of refined products from Russia by the European Union and the increasing demand from the recent reopening in China are all expected to be ongoing catalyst for this market. We feel very good about the opportunity for AspenTech to drive consistently strong growth with refining customers. We had a very strong quarter and have great momentum in the power transmission and distribution or T&D market with the DGM solutions from our OSI business. We're very pleased with the sales performance of DGM in the first half of the year. The secular trends in this market are incredibly favorable given the expected vast increase in electricity demand and increasing number of energy sources that will power the grid in the future. The greater complexity from renewable power sources like wind and solar is creating more complex transmission and distribution networks, including commercial and industrial micro grids, which will require a wholesale rethinking of how to manage them. We expect this industry to have favorable investment trends for many years to come, considering the investment that will be required to transform the grid. CapEx spend in 2023 for power generation, transmission and distribution is expected to be about $1.2 trillion. One of our key growth synergy opportunities with DGM is to leverage AspenTech's global footprint starting in Europe. We have already had some exciting early wins with DGM in that market and continue to actively build out our sales capacity in that region. In December, we held the OSI user forum in Las Vegas. The event was highly successful, with 500 customer attendees, representing more than 150 utility companies from around the world. This was the first time since the pandemic started that OSI's customers gather in person. We felt great enthusiasm from customers about the future plans for the OSI business under AspenTech, especially on the establishment of an ecosystem of third-party implementers for the DGM solutions. The oil and gas industry upstream and midstream had a banner year in 2022, supported by high oil prices and strong execution discipline. Forecasts indicate oil prices will remain elevated through 2023 at an average of $80 to $90 per barrel for Brent crude for the year based on various current projections. The industry CapEx is expected to increase by 12% to $485 billion in calendar 2023, according to Energy Intelligence projections. With a significant portion of that increase coming from national oil companies. In our business, we had another strong quarter as the combination of heritage AspenTech Solutions and SSE's products has created an unmatched technology portfolio that can deliver far greater value for customers. We signed a number of quality wins with the upstream customers in the quarter, including a significant contract with one of the largest oil producers in South America, and we're also engaged with customers on the use of SSE capabilities for carbon capture and sequestration in various locations around the world. The E&C vertical did well in the second quarter and has been an important source of strength in the first half of the year. Customers in this market are benefiting from two important trends. First, in the traditional business, investment in upstream oil and gas projects has increased notably in recent quarters. The combination of strong oil prices and tight supply after several years of below average CapEx investment in the oil and gas market is supportive of E&C's backlog and headcount growth, which is positive for AspenTech. And second, E&Cs are aggressively investing in establishing engineering capabilities for sustainability investments that represent a new growth opportunity that is likely to be less cyclical than their traditional business. The CapEx investment required to meet sustainability targets in our core owner operator markets will be substantial, and we present E&Cs with sizable growth opportunities that haven't been present for several years. We're very optimistic on the outlook in this market in fiscal year 2023 and beyond. Finally, the chemicals industry had a good quarter, but does face some challenges globally and regionally in Europe. The ongoing situation in Europe and its impact on local energy supplies and consumer demand continue to weigh on chemical customers in the region. Globally, chemical customers are also experiencing a slowing demand and margin pressure as the global economy has slowed its growth. In conversations through the last quarter, many of our customers have told us they believe the current situation will recover in the second half of the calendar 2023 as economic activity picks up. We remain optimistic on the opportunity in the chemicals market, but would flag it as one of the area of our business that we are cautious on in the near term. I would now like to share some customer wins from the quarter demonstrate our success. First, an existing SSE in heritage AspenTech customer and one of the largest oil producers in South America is looking to shorten by 65%, the time it takes to get a new oilfield discovery to production. As part of this initiative, the customer evaluated multiple vendors on their knowledge automation and AI capabilities and elected to increase the spend of SSE products due to the combination of capabilities in the SSE suite. SSE has been and remains the largest incumbent in the exploration and production portfolio of software capabilities used by the customer. Second, an international utility company headquartered in the UK owns and maintains the high voltage electricity transmission network in England and Whale. This customer is investing heavily in its network of thousands of kilometers of overhead lines and underground cables and more than 300 substations to connect more and more low carbon electricity sources since that is a crucial factor to meeting net zero carbon emissions in the region. After a careful study to upgrade transmission management system and an extensive evaluation of multiple competitors, the customer selected the OSI solution because of its more mature, modern architecture and out of the box capabilities. This win opens up the opportunity to expand the use of OSI products into other operating areas and across other companies in the customers' group. And third and final, Emerson and AspenTech are having success in the market. Emerson recently announced its selection as the main automation contractor for the Ras Laffan Petrochemical Complex or RLP, a joint venture between QatarEnergy and Chevron Phillips Chemical. RLP will be the largest S&M plant in the region and one of the largest in the world. The scope of work covers automation, software and analytics capabilities, including various products from AspenTechâs engineering and MSC suites. Emersons see at the table in the very early phases of the competitive process for this major construction project accelerated AspenTech's visibility into this opportunity. While AspenTech's products and solutions contributed to Emersons overall bid quality to the customer. We expect this win will open many more opportunities for both companies in the future. This win is also a good demonstration that the commercial relationship between Emerson and AspenTech is already benefiting both companies and the alignment between both commercial organizations will undoubtedly continue to grow the pipeline of business. We expect the focus on targeted growth initiatives will result in increased long-term growth and profitability for both companies through a strengthened go-to-market presence and offering. Now turning to our innovation investments. In November, we launched our new software release as aspenONE version 14, which provides augmented intelligence, guiding users to improve decision-making abilities and increased operational excellence. Introducing over 100 sustainability models, this release will help customers accelerate progress in the areas of emission management, hydrogen economy, carbon capture, material, circularity, bio-based feedstocks and renewable energy. V14 is a great example of how AspenTech will leverage our historical strength in modeling and simulation with new technologies like artificial intelligence to deliver greater value to customers through better profitability and improve sustainability. A great example of collaborative innovation in product development is our recently announced strategic partnership and licensing agreement with Saudi Aramco. As part of this agreement, we partnered with Aramco to provide to the market a unique integrated modeling and optimization solution for the sourcing and utilization of CO2. Through this solution, we expect to provide customers the ability to rapidly evaluate sources of CO2 generation and potential opportunities for use or sequestration of the CO2 and hence, design new innovative solutions that can reduce their carbon footprint while ensuring profitability. M&A is another important part of our innovative strategy, and we continue to maintain a positive posture in this area. We got off to a strong start with Emerson, which has received fantastic early feedback from customers. It greatly accelerates our AIoT industrial data and connectivity product road map and will enable greater visibility and understanding of an asset operating environment. We're also proceeding on our integration planning with MicroMine (ph) as we work towards the completion of the transaction. We expect this acquisition to close as soon as we obtain the last remaining regulatory approval, which we are actively working to secure. We have become even more impressed with the MicroMine team and products as we have gotten to know them better as this process has played out and look forward to welcoming them to AspenTech. Let me finish by providing our latest thoughts on fiscal year 2023 guidance and the second half of fiscal 2023. We remain confident in our ability to deliver on the full year ACV growth target and are maintaining the guidance range of 10.5% to 13.5%, while also maintaining our free cash flow guidance of $347 million to $362 million. Our confidence is based on our pipeline of business, the momentum building from the integration and transformation activities undertaken, the 2023 CapEx spend projections and economic outlook in our core industries. Our success in achieving these outcomes will still depend in part on continuing to successfully execute on our integration and transformation initiatives across the company. As a reminder, we have always expected the second half of the year to be a stronger contributor to growth and free cash flow given the historical buying patterns of heritage AspenTech customers and the expected timing of DGM and SSE contributions, including for the anticipated synergies. We are pleased with the performance of DGM and SSE so far, and believe the operational progress we have made in the first half of the year and our growing sales pipeline puts us on track to deliver 4 points of ACV growth from those businesses. We also continue to be mindful of the macroeconomic environment, COVID developments in China and the challenges facing the chemicals market, which we have flagged as the key variables in how we performed within our ACV growth range for the year. Before I turn it over to Chantelle, I want to reiterate how much progress we have made in the first half of the year in bringing heritage AspenTech, OSI and SSE together as one company. We have created a world-class industrial software company that is poised to accelerate growth and generate significant profitability as we execute on our long-term strategy. The new AspenTech team has done an amazing job getting us to this point, and I want to recognize their efforts and commitment to our success. Thank you, Antonio. I will now review our financials for the second quarter of fiscal 2023. As a reminder, these results are being reported under Topic 606, which has a material impact on both the timing and method of our revenue recognition for our term license contracts. Our license revenue is heavily impacted by the timing of bookings, and more specifically, renewal bookings. A decrease or increase in bookings between fiscal periods resulting from a change in the amount of term license contracts up for renewal is not an indicator of the health or growth of our business. The timing of renewals is not linear between quarters or fiscal years and this non-linearity will have a significant impact on the timing of our revenue. As a reminder, we have transitioned from annual strength ACV, annual contract value as our primary growth metric. This define ACV as estimated of the annual value of our portfolio of term license and term and perpetual software maintenance and support or SMS agreements. ACV provides insight into the annual growth and retention of our recurring revenue base which is the majority of our overall revenue as well as recurring cash flow. Annual contract value was $833.7 million in the second quarter of fiscal 2023, up 8.7% year-over-year. As Antonio mentioned, we are pleased to have recently achieved separability for DGM software, which will allow us to prospectively recognize the growth of DGM term license and SMS businesses into our ACV metric on a stand-alone basis. Main contributors to this go-to-market change are the enablement of implementation service partners to operate autonomously and directly with our DGM customers. The change to OSI commercial contracts whereby the customers will be contracting for software licenses and professional services separately. And the streamlining of tools and processes for implementation services to significantly reduce complexity and interdependency with our software. We will begin to see the impact of this change at DGM beginning in this third quarter which will have a meaningful benefit to ACV in the second half of this fiscal year. It's important to note that achieving separability has multiple business benefits as well, including the general acceleration of revenue and free cash flow generation. Annual spend for [Technical Difficulty] which the company defines as the annualized value of all term license and maintenance contracts at the end of the quarter for the businesses other than OSI and SSE was approximately $697.5 million at the end of the second quarter of fiscal 2023, which increased 9% compared to the second quarter of fiscal year 2022 and 2.2% sequentially. As a reminder, we intend to provide this annual spend disclosure for Heritage AspenTech only for fiscal 2023 to provide investors comparability with our historical disclosures. Total bookings, which we define as the total value of customer term license and perpetual SMS contracts signed in the current period, that's the value of term license and perpetual SMS contracts signed in the current period where the initial license have not yet being delivered under Topic 606, plus term license in perpetual SMS contracts signed in the previous period for which the initial licenses are deemed delivered in the current period with $242.8 million, a 16.3% increase year-over-year. Total revenue was $242.8 million for the second quarter. As a reminder, as a result of the Emerson transaction, the subsidiary that included OSI and SSE businesses became the surviving entity. As a result, the year ago comparisons you see in our financial statements include OSI and SSE in the second quarter of fiscal 2022, and year-over-year comparisons are not meaningful. Now turning to profitability, beginning on a GAAP basis. Operating expenses for the quarter were $209.1 million. Total expenses, including cost of revenues were $302.2 million. Operating loss was $59.4 million and net loss for the quarter was $66.2 million or $1.02 per share. Please note that the net loss in the quarter reflected approximately [Technical Difficulty] of a non-cash gain related to the mark-to-market adjustment for the Australian dollar foreign currency derivatives related to the pending MicroMine acquisition. Since the inception of this foreign currency derivatives, the total net unrealized loss would we have incurred has been approximately $15.3 million. There will continue to be fluctuations until the closing of the Micromine transaction. Turning to non-GAAP results. Excluding the impact of stock-based compensation expense, the amortization of intangibles associated with acquisitions and acquisition and integration planning related fees. And excluding the impact of the unrealized gain on the foreign currency derivatives. We reported non-GAAP operating income for the second quarter of $86.6 million, representing a 35.7% non-GAAP operating margin. As a reminder, margins will fluctuate period to period due to the timing of customer renewals and for license revenue recognized during the quarter. Non-GAAP net income was $22.8 million or $0.35 per share based on 64.6 million shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with approximately $446.1 million of cash and cash equivalents and $264 million outstanding under our term loan agreement. On December 23, 2022, we entered into a credit agreement with Emerson for an aggregate term loan commitment of $630 million. We intend to use the proceeds from borrowings under the agreement to pay in part the cash consideration for funding the pending MicroMine acquisition. Also in January, we fully paid off our existing term loan balance. In the second quarter, we generated $49.5 million of cash from operations and $53.1 million of free cash flow after taking into consideration the net impact of capital expenditures, capitalized software and excluding acquisition and integration planning related payments. We had a solid cash generation quarter that was in line with our expectations. Our free cash flow cadence will be more back end loaded than prior years due in part to business mix, upfront integration expenses and the timing of the expected impact of our synergy initiatives. In terms of synergies, we've made additional progress in each of our four synergy buckets, growth, business transformation, cost and the commercial agreement with Emerson. The most notable milestone was the DGM separability that we discussed earlier. We believe we are well positioned for the long term from both a growth and profitability perspective and on our ability to realize the $110 million of adjusted EBITDA synergies by 2026. I would now like to close with guidance. We have performed well in the first half of 2023 and have delivered on the business integration and transformation initiatives needed to position the business for faster ACV growth in the second half of the year. We are encouraged by the overall demand trends across the business while also being mindful of an uncertain economic outlook. To account for this uncertainty, we continue to believe maintaining a wider guidance range is prudent. With respect to ACV, we are maintaining our target of 10.5% to 13.5% growth for the year, including 4 points of growth contribution from the DGM and SSE product portfolios. We are encouraged by the transformation and integration outcomes with DGM and SSE and the trends in heritage AspenTech. We are maintaining our bookings guidance in the range of $1.07 billion to $1.17 billion, which includes $547 million of contracts that are up for renewal in fiscal 2023. This includes approximately $133 million of contracts up for renewal in the third quarter. We continue to expect revenue in the range of $1.14 billion to $1.2 billion. We expect license and solutions revenue in the range of $765 million to $826 million and maintenance revenue and service and other revenue of approximately $312 million and $64 million, respectively. From an expense perspective, we expect total GAAP expenses of $1.207 billion to $1.217 billion. Taken together, we expect GAAP operating income in a range of loss of $67 million to a loss of $15 million for fiscal 2023, with GAAP net income in the range of negative $7.5 million to a positive $32.5 million. We expect GAAP net loss per share to be in the range of a loss of $0.11 to positive $0.49. A non-GAAP perspective, we expect operating income of $503 million to $555 million and non-GAAP income per share in the range of $6.83 to $7. From a free cash flow perspective, we continue to expect free cash flow of $347 million to $352 million. Our fiscal 2023 free cash flow guidance assumes cash tax payments in the range of $94 million to $101 million, which is unchanged. We would expect the third quarter to be the largest free cash flow quarter of the year, driven parts of the timing and cash collections for SSE's renewal portfolio. To wrap up, AspenTech is performing at a high level. We generated solid growth and profitability in the first half of the year and we believe we are well positioned to deliver on our full year financial targets. We are targeting a large and expanding market opportunity that we believe can support significant levels of growth and profitability over time. Thank you. [Operator Instructions] And I show our first question comes from the line of Rob Oliver from Baird. Please go ahead. Okay. Great. Hi, Chantelle. Just a couple of questions from me. Just first, Antonio, you talked about the phases or maybe Chantelle as you, you talked about the phases of the integration of OSI and SSE and how you've gotten through the first phase. Can you remind us of what the milestones are and what needs to be done as we enter Phase 2? Well, look, Rob, in a way a lot of the key transformation milestones have been achieved. Certainly, separability was a key one for the OSI business because now it allows us to account for the growth in ACV from these transactions that we signed with customers. The release of the SSE suite and tokens for Microsoft was also a key milestone that we achieved in the Q1 quarter. We are about to release the version for Linux. And then later in the year, in the fiscal year, we will be releasing the suite and tokens for the OSI, DGM suite. There are many other smaller milestones, if you will, that are accomplished almost on a weekly basis. But fundamentally, is also about the transformation of the commercial agreements between customers and the new AspenTech for SSE is a significant set of steps to transform those agreements into what looks like a heritage AspenTech, commercial terms and conditions. And for OSI, for the majority of it is and now introducing term licensing to these customers. We did a little bit of that in Q2. There will be a lot of that done in Q3 and Q4 and going forward. But then look at some of the things that we talked about, new self-methodology, standardizing on best practices, a lot of change management going on. But I would say that the major milestones that we had hoped to achieve are in place now. And that's what we have talked about Q3 and Q4 being the quarter where we expect the results from all this work we've done in the first six months of the year to show up. I don't know, if I've missed anything, Chantelle? Yeah. That's very helpful, Antonio. And I had one follow-up for you. Just around the ACV guide for the full year. Acknowledging that now having now reached severability you guys are going to be able to start to book some of the new Emerson properties into ACV, which is exciting. I think under heritage Aspen, you had traditionally given a fairly tight range and then you kind of broaden that out a little bit prior to the Emerson transaction to kind of a 3 point range. You're at the 3 point range right now. And I know earlier you had been talking about being comfortable with the high end of that range. And I didn't hear you say that on this call, so -- but at the same time, I heard you say you're really comfortable with back half of the year. So I just wanted to get a sense for as you look at the end markets that you gave a lot of detail about how you feel about where we are within that range? Thanks. Yeah, Rob. I appreciate the question. And look, the fact is that we're very comfortable with where we are at this point in the year on our growth in ACV trajectory. We felt that it was prudent and cautious to maintain our guidance, but I also feel a lot of confidence on the outlook for the year. And based on what I've seen so far and what we have accomplished and the outlook for our industries and customers, I feel comfortable thinking that we could come in, in the mid to upper part of our range. And the bottom part of the range is just a conservative cautious stance. Thank you. And I show our next question comes from the line of Andrew Obin from Bank of America. Please go ahead. Yeah. Just so looking at heritage AspenTech, I know expense (ph) showing as acceleration. Is this more on the engineering side or manufacturing and supply chain? Yeah. But look, certainly, the first half of the year has been a good year for engineering. We've seen an acceleration, and we're performing ahead of our plan in engineering. With MSC, I would say, we're tracking MSC deals tend to be -- to have a longer sales cycle, nine months to 12 months and really historically is in the Q3, Q4 quarters when we see that big wave of MSC deals. But overall, performing according to expectations. Got you. And just a follow-up question. I think it's more of a big picture question. Right now is sort of December, January and when we're getting really good view at the budgets of your customers for capital planning for '23. Now that you guys sort of have access to Emerson and their channels, et cetera, et cetera, how has the visibility for Aspen has changed through the relationship you have with Emerson? And what I'm referring to, like, do you guys get better visibility with the relationship now versus before? Thank you. Well, look, certainly, as the two companies are engaging in the market, we're getting increased visibility. I do think it behooves us as separate entities to develop our own point of view, but we do share what we hear in the market. Our point of view on the macro outlook and budgets is developed -- internally developed through multiple conversations and customers over a period of time, and that's what you have in our guidance. I would sayâ¦ [Multiple Speakers] Yeah, I think the only thing I would add, Andrew, if I can take that bigger picture down to more granular, so not macro, but I think where we do have more near-term visibility is probably more at an account segment level, working with Emerson. So we have probably more granular visibility into the customer accounts, but at the macro level, as Antonio articulated. Thank you. And I show our next question comes from the line of Matthew Pfau from William Blair. Please go ahead. Yeah. Hey, Antonio and Chantelle. Thanks for taking my question. Wanted to first follow-up on your chemicals commentary. And is this an area that, I believe, last quarter, you sort of also called out that performance was good, but you were maybe cautious on it and keeping a close eye and this quarter you had somewhat similar commentary. But just wondering if anything has changed versus last quarter either in terms of pipeline or ability to close deals in the chemicals vertical? No. Perhaps what I would say is with some customers in chemicals, we did see a little bit of longer conversations on deals. There was perhaps one or two deals that moved from Q2 into Q3 that we're now working to close. But in general, it's just a lot of conversations, a lot of meetings with chemical customers. I spent a lot of time meeting customers in the Q2 quarter. And they just express the reality of what they are facing, which is slowing demand and more pressure in margins. I think I think we all see that in the announcements that they're making with the results and guidance, forward-looking guidance we're giving, so -- but look, at the same time, as we've said, when the economic environment becomes more difficult for these customers, they also look for ways to drive efficiencies in their businesses and they turned to AspenTech historically for that as well. So just being cautious about it. I think especially this quarter as new budgets have to be executed, but we continue good engagement. We have good visibility into a pipeline of business in the quarter and into Q4 and we're just being cautious about it. Okay. Great. And then on the revenue in the quarter, it was down sequentially from first quarter and we don't have a lot of history of the combined business, but in heritage Aspen, you typically would see a sequential increase from first Q to second Q. Is that related to SSE and OSI? And is this sort of some sort of seasonality that we should think about modeling going forward? Thanks. Yeah. I definitely -- I would definitely take into account Matt, the portfolio business mix coming in, and happy to follow up with you on that, but it's definitely a seasonality based on the portfolio and actually take the business models coming of SSE historically having on your terms and their calendar year and you have the OSI milestone completion. So you're going to see a different mix definitely. And it depends on the renewal cycle as well. So there's quite a few -- there are quite a few dynamics. I think Matt, [indiscernible] just to emphasize the point -- that one of the points that Chantelle made, remember, the OSI revenue today is a percent of completion on projects and driven by dynamics of our projects. So it has nothing to do with software sales. Thank you. And I show our next question comes from the line of Jason Celino from KeyBanc Capital Markets. Please go ahead. Thanks. Hi, Antonio. Hi, Chantelle. One question on the unbundling or the separability for OSI. The price that customers pay is it -- is there any difference between when it gets separated or is it net equal from the total perspective? Yeah. Well, I think probably more to come in the sense of what's possible. I would say just the apples-to-apples answer, Jason, it's a separation of the pieces. Once it goes to third-party services that will be their conversation to have. But I would expect apples-to-apples to be fairly similar with opportunities there as we work through to demonstrate our value to see where we can take that to. Okay. Excellent. And then maybe just building off of or following up with Rob's guidance question. Can you just remind everyone what type of macro or business conditions were you kind of baking into the book ends of the range? Yeah. Well, I think at the high end, in a way is what we talked about, the good budget, solid budgets into 2023. Macroeconomic conditions that support the industries that we're in. Certainly, the continued investment in expansion and upgrade of grid into utilities and more CapEx spend in upstream and midstream. That operate also supports solid chemicals spending. The low end, think about it, the opposite on the macro environment and budget, but also throwing avid, throwing regional conflicts in Europe, so those are the bookends for those two. We see China reopening from COVID and while the conflict in Europe is created certainly difficult dynamics for chemical customers. We continue to see good business from customers in Europe in refining and EPCs. The EPC industry in general around the world is on the up and up because it's a global business or what they might be headquartered in Europe, they are doing global projects. So -- but those are the factors. And 10.5 is worst case scenario, 13.5 is a great outlook. Thank you. And I show our next question comes from the line of Mark Schappel from Loop Capital. Please go ahead. Hi, Antonio. Hi, Chantelle. Antonio, starting with you, in your prepared remarks, you mentioned some of the Emerson Aspen integration sales efforts and milestones. I was wondering if you could just speak to any early efforts with Emerson to sell your products into other markets that Aspen historically hasn't played in such as pulp and paper and in wastewater? Yes. Well, let me look at those efforts are ongoing. Of course, both Emerson and AspenTech had great familiarity with our core markets and there's big capital projects happening in oil and gas, chemicals, even in refining in the Middle East and Asia. So it's natural that some of the first wins you would see are in those four industries. At the same time, as you said, Emerson has the presence in other industries. We're enabling the sales people and teams in those industries. We're also working to determine the value proposition for some of these industries and some of the applications. And I would argue that's a longer term tail to business generation. But nonetheless, it's an ongoing effort, and it's part of our targeted initiatives especially with pharma, while AspenTech is been in pharma. Emerson has a first or second largest market share in that area and we see great opportunities for both companies with Emerson's leadership in that space. Thank you. And I show our next question comes from the line of Dustin (ph) Moskovitz from Wolfe Research. Please go ahead. Hi, Antonio. This is [indiscernible] on for Gal. Thanks for taking the question. So with [indiscernible] suite for Linux go on development. I was wondering whether when that comes when it becomes complete, whether there will be any incremental benefit from this because Linux operating systems generally tend to be used with larger corporations because of better safety and greater security parameters. Relative to Windows, which you guys released in fiscal Q1 and whether that could continue to drive large deals in SSE correspondingly strong contribution to ACV growth in the year. Thank you. And just one follow-up after that. Yes. No, Arsenio (ph), no doubt. What we've learned is that the leanest version of the operating -- our operating system is more common with higher workload applications, more sophisticated applications in the SSE suite. Perhaps applications that consume a lot more tokens as well, that suite will be released soon. And we do expect to sort of capture that incremental use. But the bulk of the SSE suite usage is with the Microsoft operating system. I do want to emphasize that. Got it. And then just to follow up on the guidance question. What has to happen, I guess, to improve relative to today to get towards that top end range of guidance? Is there any call-outs in particular sectors that you would need to see perform better than what you currently seen in the first half of fiscal '23? Thank you. Well, I mean, look, the reason we maintained 13.5% at the high end of our guidance is because we have visibility, we'll have a path into that number. And with that, the pipeline of business and supported by synergies and then benefits from the transformation of OSI and SSC. So what needs to happen. Look, it's execution and not being impacted by some of the things that I've mentioned, COVID and conflict in Europe, so prices around transformation, the transformation of a business is not linear per se. There's always surprises in and you can always be tripped in your execution. We found some things in the last six months that were not in our assumptions, but we've been able to overcome them and we don't know of anything that could trip us in the second half of the year, but we also want to be cautious because there's a lot of we're lifting a lot of rocks and assuming that we're going to find what we think we're going to find and in some cases, we may not. So we're just being cautious about that. But if we continue to execute on the transformation that we did in the first half, then that path to 13.5% is there. Thank you. And I show our last question comes from the line of Clarke Jeffries from Piper Sandler. Please go ahead. Antonio, your Emerson held its Analyst Day in November and an quoted two metrics that stood out to me on the Aspen business, one being, 1,000 plus salespeople actively selling AspenTech and the second being 70% of Emerson control systems do not have AspenTech software. The question is, how do you expect those metrics to change in the coming calendar year? And which metric would you expect us to see the most progress in soon and which is the most meaningful near-term AspenTech? Well, let me look, certainly, the -- look, I think it's a combination. The Emerson installed base is addressed by those thousands of sales people. Now they have to be trained, enabled, educated and so on. So the goal here is not to try to boil the ocean in one year because when you try to do that, you dilute yourself and you end up not being successful. I think we want to be very focused on the initiatives that we want to pursue to deliver the synergies that we've outlined for ourselves every year going forward. And that eventually will turn into many, many more salespeople selling an AspenTech into a much greater installed base. That installed base is a huge opportunity for Aspen. There are places where Emerson has tremendous market position, pharmaceuticals, China, oil and gas, midstream, LNG and some of these core industries where they're in. So we'll start focusing and working with them in each of these areas. And the fruits of our labor will show up over time. Those thousands of salespeople or the installed base that you refer to think of that as the total addressable market and we'll start eating into that TAM as time passes on. Perfect. Thank you very much. And just a follow-up, Chantelle. Maybe I missed it, but could you clarify what the raise is to the high end of net income? Is that primarily the fluctuation of the currency derivative or could you clarify what the changes there to the full year guidance on EPS? Yeah. I think it would be the items that come in on that sets of their â there is some stock-based compensation in there. There's the derivative. I think those are the two moving pieces that you would see in that change, the two main drivers. Thank you. That concludes our Q&A session for today. At this time, I would like to turn the conference back over to Antonio Pietri, CEO for closing remarks. Well, thank you, everyone, and I know it's already -- is January 25, but Happy New Year to everyone. I look forward to meet in-person some of you as we engage in conferences and other activities. So thank you, and have a good evening.
EarningCall_1065	Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal First Quarter Results. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded Thursday, February 02, 2023. I would now like to turn the conference call over to Maggie O'Donnell, Head of Investor Relations for Dolby Laboratories. Please go ahead, Maggie. Thank you. Good afternoon, and thank you everyone for joining. Welcome to Dolby's first quarter 2023 earnings conference call. Joining me today are Kevin Yeaman, our -- Dolby Laboratories' CEO; and Robert Park, our CFO. As a reminder, today's discussion will include forward-looking statements including our second quarter and fiscal 2023 outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including, among other things, the impact of current macroeconomic events, COVID-19, supply chain issues, inflation, changes in consumer spending and geopolitical instability on our business. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward-Looking Statements, as well as in the Risk Factors section of our most recent quarterly report on Form 10-Q. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today's call, we will discuss non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures is available on our earnings press release and in the new Interactive Analyst Center on the Investor Relations section of our website. So, last quarter, we spent some time covering 2022, what we were seeing as we were going into 2023 with a focus on the long-term growth. Now, we're one quarter into the year, so Kevin, let's get started in our conversation. Yes, of course. And thanks everybody for joining us today. So, I guess I'd start by saying it's nice to start the year with results coming in higher than what we expected when we came into the quarter. That's largely because we see some transactions landing earlier in the year than we originally expected. The underlying trends in our business are pretty consistent with what we thought coming into the year. There are, of course, some end markets that are a little higher, some that are lower. Robert will take us through all those details in just a moment. But like I said, when I net all that out, pretty consistent with what we saw coming into the year. So, it's early in the year. We continue to be operating in an uncertain environment. So, we're going to keep focusing on what we can control and what guides growth in the long-term. There is -- there continues to be strong demand from consumers for entertainment content, and demand for content to be more immersive and engaging. And that's what drives demand for Dolby experiences. So, this quarter, we continue to make progress on each of our key focus areas, movies and TV, music, user-generated content. And so, we continue to be confident that we can double our revenues from Dolby Atmos, Dolby Vision and imaging patents over the next three to five years, which means we continue to target annual growth of 15% to 25%. And of course, our foundational audio technologies are essential to the ecosystem for entertainment audio. They're delivered across a very broad range of consumer entertainment devices. And so, while that does make it sensitive to macro trends, it's a very strong position to be in. And when the market settles down, we expect this to be a contributor to growth. And then, of course, we continue to be focused on opportunity to bring the Dolby experience to an even wider range of use cases and that's what we're doing with Dolby.io. That's great to hear. So, just a few weeks ago, we were at CES in Las Vegas. What were some of the highlights for Dolby from your perspective? Well, there were two big stories for us at CES this year. Dolby Atmos Music and Movies & TV in the living room. Let me start with music. So, we kicked off CES with a concert by Imagine Dragons, which was live in Dolby Atmos. It took place at Dolby Live in Las Vegas. And Dolby Live is a venue where one of the things that is exciting about it is that we can engage with artists to create an experience that they want to deliver. And the result was that the energy and the excitement from the band and from the thousands of fans and partners who joined us was just fantastic. And so, this is important because this is where the ecosystem starts for us. It is all about our ability to inspire creators to want to create in Dolby. And artist passion for Dolby Atmos continues to grow. We now have 85% of Billboard's Top 100 artists in 2022 have one or more songs in Dolby Atmos. There's increasing availability of content on streaming services, so you can stream through Apple, Amazon, TIDAL, there's Melon in South Korea, Tencent in China. And it's this combination of content and availability that's what creates the value proposition for the playback experience and our device partners. And as I've shared before, the Car Experience is a big focus for us. And that's -- not just for us, that's the whole industry. It's often -- it's very quickly the first question from artists, from music labels, from streaming services, they want to know what the Car Experience is like and consumers care deeply about that. And so, over the past year, we've added more than half a dozen car manufacturers, including Mercedes, Volvo, Lucid. At CES, Mercedes was featuring their electric SUV with Dolby Atmos Music. We had Maybachs on hand at our booth. There were in-car entertainment partners like Bose. They were highlighting Dolby Atmos music in their proof-of-concept cars. And it's not just about automotive. You could experience Dolby Atmos Music in a number of form factors. So, across the show floor, there were partners who were demoing the Dolby Atmos experience on sound bars, on wireless speakers, on mobile devices. And so, when I step back, music today reminds me a lot of where we were with Dolby Vision in the movies and TV ecosystem, not that long ago. It started with a handful of Warner Brothers movies that started with -- they were available on Voodoo. You could experience them on LG and VIZIO TVs. And we quickly broadened adoption to include partners like Netflix and Sony. And if you scroll forward to today, we're deeply embedded across the movie and TV content ecosystem. Streaming is broadly available across all the major services and increasing number of services. And Dolby Vision and Dolby Atmos are widely available across the TV market and other devices. So, we've built these ecosystems many times over the years. And so, we have a pretty good sense of what signals to look for across content, delivery and devices that tell us we're building momentum. And that's what we're seeing with Dolby Atmos Music. And so, we continue to be confident in the opportunity there. Well, with Movies & TV, what was great about that was that our story was being told through the voice of our partners. This was across the show floor. So, as I talked about last quarter, a big focus of ours in that area is growing beyond the premium tier of televisions and expanding that deeper into their lineup. So, that's why it was so great to see announcements from partners like TCL. TCL announced that Dolby Vision and Dolby Atmos will now be included on all of their new 4K TV models in the U.S. Hisense is another great example. They announced several new TVs that are going to include Dolby Vision and Dolby Atmos. And it wasn't just TVs. So, Samsung and LG announced their new soundbar models with Dolby Atmos. And what was exciting about their announcements is that they're taking -- they're becoming a part of smaller form factors, Dolby Atmos is. And so, this creates the potential for a broader audience and to expand the reach of Dolby Atmos. And we continue to make progress on the content side as well. So, we have -- already have a very strong presence, and we also have added Peacock to the roster of streaming companies that are streaming in Dolby Vision. We talked about this last quarter, Maggie, but the World Cup was available in Dolby Vision and Dolby Atmos. So that was exciting. And excited to share that Comcast will be broadcasting the Super Bowl on Fox in Dolby Vision next week. And so, if anyone out there is throwing a Super Bowl party, it's not too late. And there is a Dolby page on Amazon store, which can point you toward all of our great partner products. Well, we haven't yet talked about mobile and Dolby Vision capture. And as we've talked about before, Dolby Vision capture on mobile devices enables people to capture and share life's moments in a more realistic way on the device that we carry with us daily, every hour of the day. So, we're focused on continuing to expand that value proposition. And so, we're excited that Vivo this quarter adopted Dolby Vision capture and playback on its flagship phone. They joined Apple and Xiaomi. And OPPO launched its first phone with Dolby Atmos and Dolby Vision playback. And so, we look forward to continuing to drive more momentum in mobile. We also haven't talked about Dolby.io, where we're focused on bringing Dolby to a far wider range of use cases. We're seeing more developers signing up for accounts. We are seeing strong growth in the number of active developers who are working with our APIs for the first time. And what we're enabling these developers to do is to make day-to-day interactions in the apps and services that, that we're all using every day more immersive and more lifelike in how they sound and how they feel. Great. So, before I hand it over to Robert to go through the numbers, is there anything else that you want to add and close on? Yes. Well, if I take a step back again, this quarter, I think further demonstrates that we continue to bring more Dolby experiences to more people around the world. There is an ever-increasing demand for content and for that content to be more engaging and immersive, and making that happen is what we do at Dolby. So, continues to be uncertain environment and that's not new. I mean in a lot of different ways it's been an uncertain environment for a number of years now. And what I'm most proud of is all that the team has been able to accomplish during this period, and they've done it by staying focused, focused on where Dolby can make a difference and focused on where the biggest opportunities are. And so, we're creating momentum across each of our ecosystems. We've launched entirely new ecosystems in the form of Dolby Atmos Music and we're just talking about user-generated content. And so, the long-term trends point to more opportunity. And we come at this from a position of strength. We have a very strong financial position with strong cash flows, a solid business model. I'm confident that our foundational technologies will continue to be central to the entertainment experience for many years to come. We continue to grow the adoption of Dolby Atmos and Dolby Vision, and we're reaching more use cases with Dolby.io. Great. Thanks so much, Kevin. So, Robert, before we get into all the details, I was thinking it would be helpful if you start out with some of the key things that investors and analysts should be focused on in our results. Yes. Thanks, Maggie. Yes, before we get into the details, I wanted to point out three main highlights. First, total revenue of $335 million was higher than the guidance that we provided last quarter, largely due to transactions closing earlier in the year than anticipated and higher products revenue. As it relates to trends in our underlying business, we are on track with where we thought we would be coming into the year overall. We came in a little higher than expected in broadcast and gaming, mostly driven by higher Q4 shipments than we had estimated, lower in PC, driven by further weakness in the market and lower box office proceeds, which negatively impacted Dolby Cinema revenues. Second, operating expenses of $175 million on a non-GAAP basis were lower than we had guided for the quarter, which is mostly due to timing of marketing and patent program spend and lower labor costs. We will continue to be deliberate about our hiring, evaluate our long-term priorities and opportunities and make spending adjustments accordingly. Third, I'm going to talk about guidance in detail in a few minutes. But based on where we're seeing today, our outlook for the full year is consistent with what we said last quarter. It's nice to start the year with a quarter that came in better than our expectations, but at the same time, it's still early in the year and we continue to operate in a very uncertain environment. With that as the backdrop, let's get into the Q1 details. Q1 revenue was down 5% year-over-year, primarily due to mobile, PC, broadcast and consumer electronics, consistent with the overall trends in the market. This was partially offset by adoption of Dolby Atmos and Dolby Vision and higher products and services revenue. Q1 was comprised of $308 million in licensing revenue and $27 million in products and services revenue. Now, let's talk about licensing revenue by end market. As a reminder, our licensing business is based on unit shipments. In general, we estimate revenues from unit shipments each quarter and trued up the following quarter based on actual reported unit shipments from our partners. We also have transactions that reflect revenue from units shipped in prior periods, which we call recoveries, and transactions where the customer will commit to minimum volumes for a given period where all or a portion of the revenue is recognized upfront. These transactions are all related to unit shipments. The only difference is the timing and amount of revenue in any given quarter. The timing of these transactions can vary depending on number of internal and external factors. Broadcast represented about 38% of total licensing in Q1 2023, down $4 million or 4% on a year-over-year basis, driven primarily by lower TV unit shipments and lower recoveries. This was partially offset by the Q4 true-up for TVs and higher revenue from Dolby Atmos and Dolby Vision. Mobile represented about 21% of total licensing in Q1 '23, down $11 million or 14% on a year-over-year basis, as the prior year benefited from timing of revenue from minimum volume transactions and also lower units. This was partially offset by increased adoption of Dolby Atmos and Dolby Vision. Consumer electronics represented about 18% of total licensing in Q1 of '23, down $2 million or 4% on a year-over-year basis as the prior year benefited from higher recoveries, which is partially offset by increased adoption of Dolby Atmos and Dolby Vision. PC represented about 8% of total licensing in Q1 '23, down $10 million or 30% on a year-over-year basis, driven by lower recoveries and lower PC unit shipments. Other markets represented about 15% of total licensing in Q1 of '23, up $4 million or 8% on a year-over year basis, driven by a favorable Q4 true-up in gaming. This was partially offset by lower box office proceeds from Dolby Cinema. Beyond licensing, our products and services revenue were $27 million in Q1 of '23, up 39% on a year-over-year basis, The year-over-year increase was driven primarily by higher cinema product sales. We also saw growth in Dolby.io. Let's turn to expenses and margins. Total non-GAAP gross margin in the first quarter was 90% compared to 91% in the first quarter of fiscal year '22. Gross margins came in lower driven by a higher mix of products revenue. Non-GAAP operating expenses in the first quarter were $175 million compared to $195 million in the first quarter of fiscal year '22. The decrease was driven by lower labor costs as we had an extra week last year, lower headcount and favorable FX. Program marketing spend was also lower due to timing of campaigns in the prior year compared to this year. And we benefited from lower bad debt expense compared to the prior year. Non-GAAP operating income for Q1 was $126 million or 38% of revenue compared to 36% of revenue in Q1 of last year. Net income on a non-GAAP basis in the first quarter was $107 million or $1.11 per diluted share compared to $104 million or $1.01 per diluted share in Q1 of '22. During the first quarter, we generated $56 million in cash from operations compared to $31 million generated in last year's first quarter. We ended the first quarter with approximately $900 million in cash and investments. During the quarter, we bought back about 700,000 shares for our common stock and ended the quarter with $311 million of stock repurchase authorization available going forward. We also announced today a cash dividend of $0.27 per share. The dividend will be payable on February 22, 2023 to shareholders of record on February 14, 2023. Now, let's move on to guidance. We continue to operate in a challenging and uncertain environment. For fiscal '23, we continue to expect that our foundational audio revenue will decline mid-single digits year-over-year, reflecting lower unit shipments, particularly in PC, TV, consumer electronics and mobile. We are still targeting 15% to 25% growth in Dolby Vision, Dolby Atmos and imaging patents, and we expect this to be driven by growth in broadcast, mobile and other markets. This could more than offset the declines in foundational audio that we are expecting. With these assumptions, we continue to project that total revenue for fiscal '23 will grow low-single digits year-over-year. Within this, we anticipate licensing revenue to be up low-single digits with growth in mobile, broadcast and other markets outpacing the decline in PC and consumer electronics. Products and services revenue expected to grow low-double digits. In terms of the full year split, given more transactions are expected to close earlier in the year than anticipated, we currently expect revenue in the first half to be higher than the second half, closer to last year's split. We still expect that non-GAAP operating expenses will increase roughly 2% compared to prior year, and expect operating margins of roughly 30% on a non-GAAP basis for the year. We will continue to be disciplined with our spend, review our resource envelope and allocations on a regular basis, and evaluate the need to make adjustments based on the economic realities of the business. We anticipate that non-GAAP earnings per share could grow at a slightly higher rate than revenue. So, now let's move on to guidance for the second quarter. Q2 revenue is expected to range from $340 million to $370 million. Within that, licensing revenue is estimated to range from $320 million to $345 million, while products and services revenue is projected to range from $20 million to $25 million. Compared to Q2 of last year, we expect growth in Dolby Atmos, Dolby Vision and imaging patents, particularly in broadcast and mobile to more than offset lower foundational revenue, driven by lower unit shipments estimates in consumer electronics, PC and TVs and lower recoveries. Non-GAAP gross margin is estimated to be 89% plus or minus. Operating expenses in Q2 on a non-GAAP basis are estimated to range from $193 million to $203 million, as we expect certain marketing and patent program expenses to shift from Q1 to Q2. Our effective tax rate for Q2 is projected to range from 19% to 21% on a non-GAAP basis. We estimate that non-GAAP Q2 diluted earnings per share could range from $0.90 to $1.05. In summary, it's a good start to the year as Kevin said. It is still early days and we continue to navigate through an uncertain environment. That said, we remain laser-focused on the things we can control and are excited about the progress we're making on the long-term growth opportunities ahead. While the economic realities around us continue to change, the fundamentals of Dolby's durable business model of high gross margins, healthy cash flows and a strong balance sheet, have not changed. Thank you. Kevin, congratulations on the Super Bowl. That's a long-time coming. That's a big win. Maybe start with what do you think finally tipped Comcast and Fox to do this? Well, I think as with all of our big wins, this has been a journey from the team. We start off with movies and TVs. For movies, you have three months to produce. And for TV shows, you have days to weeks to months. And then, we get started on live sport, obviously, you have a matter of seconds. So, it's a combination of engagement with community, it's working through all the [Technical Difficulty]. It's working. The mixers are the creators, and then, of course, it's always working through all of the business arrangements that go far beyond just Dolby. There's all the rights and all the other things that are going on. But we're just super pleased to have the Super Bowl coming right after World Cup, just not long ago. And this is the kind of thing that we think really broadens demand for the Dolby experience. Okay. And on the notion that you had some minimum paid contracts that were signed earlier in the year than you expected, was there any strategic reason for that to happen? Or was this just -- it's hard to tell when those are coming in and they just came in? Any kind of characterization you can give us? I think it's more the latter than the former, Steve. And remember that our transactions, we have two types. There's the minimum volume commitments like you just pointed to, there's also recoveries [per past] (ph) practice. Those are both types of transactions we have. And we do our best to predict when those are going to sign throughout the year, and we -- some of those were landed earlier this year, which is a -- it's a nice way to start, but I wouldn't -- I don't think at this point -- I think it would be too early for me to draw any particular trends from that information. Okay. And one -- I'll sneak one more in, and this probably is going to be difficult for you to answer, but let me try. Obviously, you have one large TV maker that -- you have one large TV maker that's yet to get the Vision religion. You have a lot of others that have. But in -- everybody outside the one, where do you think you are in your ultimate penetration? In 2023, are you 70% there? Are you not even that high yet? Well, I think, I mean, obviously, we're patient and persistent. So, one thing we do is we are always looking to continue to increase the value that we're providing. We just talked about Super Bowl coming after the World Cup, that's another example how we will be hard at work, increasing the value proposition to bring as many partners on board as we can. What we talked about coming into the year in terms of increasing the attach rate is we have a very strong presence at the premium end of our partner lineups, and we're really looking to drive that all the way through their 4K lineups. And so, that's why -- that's the significance of an announcement like TCLs where all of their 4K models going forward in the U.S. will be Dolby Vision and Dolby Atmos. We also feel like we have an opportunity to increase penetration as it relates to the big box retailers and some of the house white label brands that they have. So, we still think there's room to grow, Steve. And it was -- as you know, it was one of the biggest drivers of the strong growth in Dolby Vision and Dolby Atmos last year and we continue to see it to be a big growth driver this year. Hey, guys. Thanks for taking my questions. So, just talk about the -- I know you mentioned it briefly, but if you could talk about kind of the traction and momentum you saw at CES, particularly for Atmos in the car and for io? Have you seen some uptick in interest from other auto OEMs and app developers? And I guess, I know it's early days, but how do we think about sizing Atmos in the car in terms of both kind of a reasonable auto penetration rate and respective ASPs for car kind of in both the near-term and long-term? It sounds like a pretty interesting opportunity. Yes. So, as it relates to music, I think what was really fun about CES for us this year was the opportunity to really tangibly demonstrate the entire ecosystem, starting with the concert in Dolby Atmos, but having all of our partners there throughout the ecosystem, punctuated, of course, by the ability for people to actually experience Dolby Atmos Music in the Mercedes and at some of the partners Bose -- like what Bose had going on. So, that -- yes, there's a lot of great momentum there. And we had a lot of engagement going into CES and we have very strong engagement coming out of CES. The team is busy at work, working with major players from throughout the ecosystem, throughout the industry, and working with them on their plan. So, it was a good -- it was a very good show for Dolby Atmos Music. I think it was the highlight of our show really. We also were -- we did have an io presence. We were demonstrating -- in fact, our customers -- some of our customers and developers were demonstrating what they have built with Dolby.io. And so, that was a nice opportunity for us to, I guess, cross pollinate, if you will, some of our partners from the broad ecosystems that we serve and give them an opportunity to see what we're doing with Dolby.io. We had a lot of partners that were using both real-time streaming and our ability to have audio/video interactions with large audiences and sophisticated spatialization. And I think that what we continue to be excited about is we feel like we're still at the early stages with the companies that are looking to build the next-generation virtual experiences of the future. And to be clear that it's most immersive, that can be in a headset environment, but these are experiences that are largely going to be enjoyed on PCs and mobile devices. And with io, developers can build those experiences. And so, yes, we did have customers there that were demonstrating some of those experiences and it sparks ideas of what other partners might want to be able to do in the future. Got you. Thanks for that. And then, the OpEx guide was reiterated, up modestly for the year. Where do you kind of see some flexibility for additional cost execution, maybe on the SG&A line? And then, on R&D, where you kind of putting new investments to work? And how do we think about the spend related to Atmos, Vision, io? Are those kind of ongoing expenses or bulk of those costs are behind us and it's kind of new innovations that you're investing in for the most part? Well, the first thing I would say is that we endeavor to be and are very dynamic in our allocation of resources. So, we're regularly shifting resources between initiatives and it relates to Dolby Atmos and Dolby Vision that includes shifting resources between ecosystems that are getting more mature to newer ecosystems. And so, while the headline number is the increase of about 2%, underneath that, we are constantly moving people and resources to where the biggest opportunities are of the future. By the way, Paul, you asked so many questions the first time. I feel like -- I just remembered that I felt like I forgot part of it, which is to just say that our -- we've said our goal is for -- we would like Dolby Atmos Music to be the way everybody experiences music all the time everywhere and on every car. And we aim that -- we aim high and we stay focused on building these ecosystems. And we have a track record of being able to get to some pretty high adoption rates, but we set our sights on being relevant to all the ways people enjoy music. Yes. I thought the demo was excellent. So, on Cinema, where are you in terms of footprint today? And are there expectations to kind of expand after some pauses here maybe with other partners? And then, talk about the expectations for kind of contribution from this business on maybe an annual run rate business and margin profile would be very helpful. Thank you. Added five. The new screens coming online is still lower than pre-pandemic. That's still an industry, obviously, that is also subject to all of the uncertainties in the world and they're all in varying positions as it relates to their ability to invest right now. But I think the Avatar was a big win for the industry. A lot of that will be Q1 box office, but it was great to see that. And I do -- and we are still -- our partners are still engaged. They're still thinking about the future and we do see an opportunity to continue to expand. Because we think that what has held true throughout this period of time is that more a greater percentage of people who are going to the movies are wanting to go to -- are wanting to have the most immersive experience. And so, the premium experiences are getting a greater share of the box office. And so, we continue to have strong engagement as people are thinking about their future plans for how they grow their portfolio of high-end experiences. And today -- I guess the other part of your question, today, that's, as you know, the Dolby Cinema is a shared box office. We -- that's part of our other markets licensing revenue. And not breaking that up separately, yes, that's still in the other category. Good afternoon. Thanks for taking the question. Within products revenue, with the strong growth there, you called out io as contributing to that growth. And just curious if you could sort of give us a sense of the contribution there. I'm sure you don't want to break out the exact number, but just perhaps some relative contribution or growth rate or any sort of context you could add there would be great. Hey, Ralph. Most of that growth came from cinema products, if you will. There were some growth in io, but the majority of that growth came from cinema products through higher supply of services and stores that we have, but also increased demand for some of our audio processors and other equipment. Okay. And then, just kind of turning to the macro, it sounds like so far where we are early in January it's playing out as you expected, I guess, which is good in terms of the way you guided. But you obviously have a lot of global customers. But as you talk to them about the -- as you look through the year, maybe just give us some perspective and sort of what they're thinking on the macro? Is it sort of the same? Is it marginally worse, any better? Any pockets that may be have changed as you look forward since last call? Well, it very much depends on the partner, but I would say the one word that would come up consistently and that I probably already said it doesn't time is uncertainty. I mean, it is an uncertain environment. And I wouldn't go so far as saying there haven't been any changes, it's just that as far as our guidance goes, there have been some end markets and partners that have seen things a little -- that have been a little better than what we estimated coming into the year and some that have been a little to the downside, and net-net as a portfolio across all of these devices and ecosystems, we see the underlying business at about where we saw it coming into the year. I think Robert said at the outset, we did see -- specifically, we saw -- for the first quarter, we saw broadcast and gaming coming a little higher. Q4 shipments were a little higher than we'd estimated. I would say, PC, we already saw unit shipment weakness coming into the year, might be just slightly lower, then that continue to soften a bit. Box office for Q4 was light. Again, most of -- a lot of Avatar will benefit Q1. I think mobile unit shipments are down and we've seen a lot of news around that in this earnings cycle so far. And we saw units coming down to the year. And also, we -- as we've said before, minimum volume commitment arrangements are more prevalent in our mobile space, which maybe makes us a little less sensitive than it might otherwise be on a quarter-to-quarter basis. And of course, we have a pipeline that we're working for things like our user-generated content, value proposition and other use cases on the mobile phone. Okay, thanks. One question related to the Atmos for music. You mentioned the live event that involved Imagine Dragons. And I was wondering to the extent that Atmos is striving to recreate a live experience, what exactly did it add to the live event? Well, what it adds, Jim, is working with the -- and let me back up a minute. So, Dolby Live is that -- running all year round. It tends to have top artists who are doing residencies. They can be shorter or longer residencies, but they tend to be doing more than one performance, which is great for us, because they're investing that much time, it also creates the opportunity to invest more time in thinking about Dolby Atmos and what can be done with Dolby Atmos. And at that large scale, it's about creating that spatialization of -- and that Dolby Atmos experience where you are immersed in the performance. And that's what we do at Dolby Live. And depending on the performance, that could be a combination of the pre-recorded backtracks, but it is also the live. And that means working with the mixers so that they know what the artist wants and making that happen real time. The other thing that is spectacular about it is that you really do get that experience wherever you are in that arena. And that is something that people really notice compared to other environments. And so -- and for us, again, it's just -- it's this opportunity to engage with each of these top name artists who are coming through Dolby Live throughout the year. It's an opportunity to have 5,000 or so fans each night get exposed to Dolby Atmos Music. And yes, so it's a great showcase for Dolby Atmos. Okay. And if -- how are you thinking in terms of the primary monetization avenues for Atmos -- for music? Is it -- [will involve] (ph) the PCs or phones or what type of devices do you think you're going to get the greatest revenue generation from with this particular application? Well, let's start by saying yes and yes. We're looking to improve the experience on all the devices that people enjoy music on. But our -- I would say the focus that stands out today is the car. Because as I said earlier, the entire industry is passionate about that experience and automobile manufacturers are always looking to push the boundaries on that experience. We've got great engagement across the industry as you've seen from our wins over the last year, year and a half. So, automotive is a big focus of ours. But around the show floor and of course, at our booth, you could also experience Dolby Atmos on sound bars, phones. So, all the ways you listen to music, we would like to bring Dolby Atmos to that experience. Okay. And one other thing. To the extent that there are some TV price wars as they attempt to monetize their smart TV features, is there any impact you can talk about with Dolby including -- kind of include that features [indiscernible] generation from those types of devices? Well, what I will say I guess is that we are -- as I said, we are looking -- a big focus of ours is bringing Dolby Vision and Dolby Atmos deeper and deeper into lineups. And so, the fact that you can now get a Dolby Vision, Dolby Atmos experience for, I want to say, I think [$215] (ph) probably at the low end that, you can -- I don't know if I'm exactly precise on that, so you can check the Dolby page on Amazon on that, but that's good for us. The more we get -- obviously, the more we get into those lower price points, the broader the audience for Dolby Vision and Dolby Atmos and the more momentum that we can build because awareness of how great the experience is and word-of-mouth and more availability, all of that is what helps to build momentum in each of these ecosystems. Yes. Sorry, Jim. I didn't hear that fully, but I think you asked whether I thought that was going well. And yes, like you said, I mean, the Dolby Vision, Dolby Atmos in the living room, which TV being the primary device there is our largest driver for Dolby Atmos and Dolby Vision last year. And again, we see that as a big driver this year of our growth in those areas. And I'm sorry, if I missed a part of your question, you can repeat it. I just didn't -- that didn't come through clear. Thank you. There are no additional questions at this time. That concludes the Dolby Laboratories conference call discussing fiscal first quarter results. Thank you. You may now disconnect your lines.
EarningCall_1066	For opening remarks and introductions, I would like to turn the call over to Senior Director of Investor Relations, Korey Thomas. Thank you and welcome to our fourth quarter and full year 2022 conference call. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; and Jim Peters, our Chief Financial Officer. Our remarks today track with a presentation available on the Investors section of our website at wolffilcorp.com. Before we begin, I want to remind you that as we conduct this call, we'll be making forward-looking statements to assist you in better understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q and other periodic reports. We also want to remind you that today's presentation includes non-GAAP measures. We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations. We also think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the presentation and supplemental information package posted on the Investor Relations section of our website for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. At this time, all participants are in a listen-only mode. Following our prepared remarks, the call will be open for analyst questions. As a reminder, we ask that participants to ask no more than two questions. Turning to our agenda on Slide 4. I will preview what we will discuss today. Two weeks ago, we announced the conclusion of a strategic review of EMEA alongside preliminary 2022 results and a preview of our '23 expectations. This morning, we will provide additional context on each, starting with our '22 results. And during the second half of 2022, we were in the midst of an unfavorable macro cycle. A short-term consumer sentiment and demand continued to reflect recessionary concerns. At the same time, inflationary pressures remained stubbornly high. While the combination of demand down, cost up is historically rather unusual for it best temporary it did impact our results negatively during Q4. In addition, our supply chain execution was not where we expected it to be in the fourth quarter. This was due to a one-off supply issue that has since been resolved but negatively impacted a number of our North American factories. Jim will provide more information on 2022 later in the call. Looking ahead into 2023, we do expect the tail end of this negative macro cycle to be felt during the first few months of the year. We foresee macro headwinds to slowly turn into tailwinds as the year progresses. Needless to say that it is difficult to predict the exact timing of the shift in the macro cycle but we would expect this to happen towards late Q2 or early Q3. Given this volatility, we remain relentlessly focused on the business levers which we can control. And we are fully confident that the medium-term demand drivers of our business remain intact. Our operational priorities in 2023 will be flawless execution of our supply chain and the delivery of very significant cost targets. After 2 years of inflationary cost increases, we will deliver $800 million to $900 million of total cost takeout. We have a high degree of confidence in delivering this target. Looking back on our history, Whirlpool has a strong record of successfully managing for challenging cycles and delivering substantial cost reductions. In 2007, we expected $400 million of raw material inflation as we entered the year. We responded to this high level of cost inflation with early and decisive actions delivering record results. In 2011 and 2012, we reduced our fixed cost in North America by more than $400 million. More importantly, we're not just starting this new cost initiative in January 2023. As mentioned in our prior earnings calls, we have initiated this during the second half of 2022. As a result, the maturity of the underlying actions has advanced significantly, thus giving us a high degree of confidence in the delivery of cost targets. Now turning to Slide 5. I will provide an update on our strategic review of EMEA and our portfolio transformation. I am very happy with the EMEA transaction its value creation and how it fits into the broader context of Whirlpool's portfolio transformation that we have been discussing. In April of 2022, we outlined how we would continue our multiyear journey of transforming Wolford into a high-growth, high-margin business. Let me first remind you why we are transforming our portfolio. As we sit here today, we are operating in a very different world than we were just 10 or 20 years ago. It is a less global world. Global scale was significant in the past but we're now experiencing diminishing advantages of that. The benefits from regional and local scale have become even more apparent and compelling. At the same time, Whirlpool has raised the bar for long-term value creation. It is with this mindset that we critically assess ourselves and we are focused on transforming our portfolio into a high-margin, high-growth business. Recent actions include adding [indiscernible] to our already strong brand portfolio and agreeing to contribute our European major domestic appliance business into a newly formed entity with Arcelik. As you can see, the portfolio transformation is ongoing and we have made significant progress. I'm confident these actions have us well positioned to delivering growing shareholder value over time. As a reminder, as a result of our transactions we executed in 2022, we will see an increase in free cash flow of approximately $350 million in 2024. Now turning to Slide 6, I will share more about the strategic review of our EMEA business. We assessed a range of options with a goal of maximizing value for our shareholders, employees and consumers. We are pleased with the outcome of an agreement to contribute our European major domestic appliance business to a newly formed European appliance entity with Arcelik. Arcelik is a company where we know well, having executed a number of transactions with them. Our consumers will benefit from broad product and service offerings as we bring together the best of the best innovation, attractive brands and sustainable manufacturing. We will own approximately 25% of a new company and we expect the transaction to close during the second half of 2023, subject to regulatory approvals. The new company is expected to have over â¬6 billion of annual sales with over â¬200 million of cost, synergies. It is important to note that we are retaining our ownership of our EMEA KitchenAid business. Our global KitchenAid Small Appliance business is 1 of the 3 strong pillars of our value-creating business model with a structurally attractive margin profile. Turning to Slide 7, I will discuss our value creation expectations from the actions we have taken in the EMEA region. We expect to participate in the significant efficiency the new company will generate, including sustained productivity building upon already established purchasing capabilities and continued commitment to product design, innovation and sustainability. We have a potential to unlock long-term value creation for our ability to monetize our minority interest at an estimated net present value of $500 million. Even though we envision a long-term profitable relationship with Arcelik, a shareholder agreement includes a number of exit options at predetermined parameters after 5 years. Our 40-year Whirlpool brand licensing agreement will generate predictable cash flows of more than $20 million per year. Overall, we expect $750 million net present value of future cash flows. Separately, through the previously executed divestiture of our Russia business, we continue to expect up to $260 million of deferred payments. Thanks, Mark and good morning, everyone. Turning to Slide 9. Our fourth quarter performance was impacted by a one-off supply chain disruption in North America and elevated cost inflation. Despite this, I want to highlight that our previously initiated cost actions remain on track. Additionally, raw material costs remain elevated but we are beginning to see improvement. In the fourth quarter, we delivered ongoing EPS of $3.89 and ongoing margins of 3.5% as results benefited from a full year adjusted effective tax rate of 4%. Turning to Slide 10. I'll review results for our North America region. As expected, the inflationary environment and increasing interest rates continue to weigh on demand and cost-based pricing actions partially offset elevated cost inflation. Our production volumes were impacted by approximately 5% due to a one-off supply chain disruption as mentioned before. This disruption involves one critical supplier providing a common platform of parts for multiple manufacturing locations and products and was resolved in mid-January. This disruption also negatively impacted price mix as we had previously committed investments in anticipation of value-creating holiday promotions. Given the confidential nature of the ongoing discussions with the supplier we will not share any additional information about this situation. Even with the supply challenges faced in the quarter, we successfully maintained our recent sequential quarterly share gains. We are confident that the actions we put in place have us positioned to win and we remain confident in the structural strength of our North America business. Turning to Slide 11. I'll review our results for our Europe, Middle East and Africa region. Excluding the impact of foreign currency and the divested Whirlpool Russia business, fourth quarter revenue was down approximately 9%. The region delivered breakeven EBIT margins during the quarter as cost-based pricing actions offset lower volumes and cost inflation. And as Marc mentioned, we completed our strategic review of EMEA. Until the close of the transaction, EMEA's performance will continue to be included in our ongoing results. Turning to Slide 12. I'll review results for our Latin America region. The region saw demand declines that were moderate compared to the steep declines experienced during the third quarter. The region's cost-based pricing and strong cost actions resulted in flat revenue and solid EBIT margins for the quarter. Turning to Slide 13. I'll review results for our Asia region. On a full year basis, excluding the China business and the impact of foreign currency, revenue grew by approximately 5%. Cost-based pricing actions were more than offset by weaker demand and continued cost inflation resulting in an EBIT margin of 2.7%. Thanks, Jim. Turning to Slide 15. I will share how we expect the current operating environment marked by softer demand and still elevated but easing costs to impact 2023. As we enter the new year, we continue to expect consumer sentiment to negatively impact demand. This is expected to be more pronounced at the beginning of the year, the first half demand to be down by 5% to 10%. And we expect demand will improve each quarter and to exit 2023 with flat industry volumes. We strongly believe in the favorable mid- and long-term demand tailwinds in particular in North America. The undersupplied aging housing stock is the oldest it has ever been and we expect this will drive new construction demand in the mid- to long term. In the short term, the sharp increase in mortgage rates has suppressed existing home sales but consumer equity remains very strong. As a result, we do expect a sustained high level of remodeling activities in the home and the kitchen in particular. Putting it differently, in the short term, consumers may be reluctant to buy a new house but they will use the strong balance sheet to remodel their home. From a go-to-market perspective, we expect 2023 promotional activity to be at similar levels as the second half of 2022. Also looking to the second half of 2023, we continue to expect the promotional environment to remain below pre-pandemic levels. From a raw materials perspective, we see raw material costs easing throughout the year. Steel spot rates have come down significantly and we have started seeing the benefits of this in our annual contracts. We also see improvements in resins and ocean freight. At the same time, there are still a number of commodities such as nickel and strategic components where we are faced with persistent high cost levels. Turning to Slide 16. Our 2023 operational priorities are clear. First, we aim for flawless execution of our supply chain. And let me start out by stating a flawless execution is easier said than done. Our supply chain model has served us very well over many decades but it is a cost efficiency driven supply chain model characterized by long transportation lanes from low-cost countries, a high degree of parts complexity and high percentage of single sourcing. This historic supply chain model is cost efficient but has not been resilient enough to cope with the unprecedented COVID-related volatility and disruptions. Over the past 2 years, we have reduced our parts complexity from well over 110,000 active parts to slightly more than 70,000 active parts. In the midterm, we do see a path to drive this number to well below 50,000 parts. At the same time, we significantly expanded our dual sourcing from single sourcing. We put our priority on high-value strategic parts and components and have come a long way in derisking this part of our supply chain but we still have a tail end of lower-value parts that are single source. This will be our focus in the coming months and years. As mentioned before, our second operational priority is a cost reduction of $800 million to $900 million. We expect to deliver $500 million in net cost takeout actions by removing over $250 million of premium costs and inefficiencies from our supply chain operations and continuing to be disciplined in our discretionary spending and headcount management. Compared to the summer of 2022, our current global salaried workforce is already down by 4% and we will remain very disciplined throughout 2023. In addition to these net cost takeout actions, we do expect $300 million to $400 million in raw material cost reductions adding up to $800 million to $900 million total cost target. As you look at the seasonality of this cost reduction, you will note that it is more skewed towards the second half of 2023. There are 3 factors explaining the seasonality which specifically impacts Q1. First, it's important to remember where we have higher cost inventory as we enter 2023, creating a lagging effect of easing raw materials. Putting it differently, even though costs are coming down because of inventory, it normally takes about 2 months to see this fully reflected in our P&L. Second, we're lapping periods of lower year-over-year inflation as cost increases peaked in the third quarter of 2022. Third, as you may recall, we have a variety of material contract lanes with quarterly and annual durations which creates somewhat of a lack. Now with many of our annual contract negotiations now complete, we have line of sight to deliver $300 million to $400 million of raw material cost benefit in 2023. Thanks, Marc. I'll review our full year 2023 guidance. In 2023, we expect a revenue decline of 1% to 2%, given softer consumer demand and sentiment, most notably in North America and EMEA, especially as the first half of 2023 continues to reflect the current macro cycles. As we reset our cost structure, we expect to expand ongoing EBIT margins to approximately 7.5% and deliver approximately $800 million in free cash flow. Our free cash flow delivery could be significantly impacted by the timing of the close of the EMEA transaction alongside the seasonality of cash generation from the region. We expect our ongoing tax rate to be 14% to 16% and our interest cost to be approximately $325 million which reflects the incremental debt from the Insyncrator acquisition. This represents a full year ongoing EPS range of $16 to $18. Turning to Slide 18. We show the drivers of our full year ongoing EBIT margin guidance. We expect price/mix to be negatively impacted by 225 basis points. As our availability improves, we expect to participate in value-creating promotions partially offset by positive mix driven by a strong lineup of new product introductions. Next, as we execute $500 million of strong cost takeout actions throughout the year, alongside raw material benefits, we expect a positive 425 basis point impact to margins. Continued investments in marketing and technology alongside currency headwinds are expected to negatively impact margins by 125 basis points. As we navigate temporary demand declines, an easing inflationary environment and execute our decisive cost takeout actions, we expect to deliver approximately 35% to 40% of our earnings in the first half of the year. We are confident that we have the right actions in place to navigate this macro environment and deliver approximately 7.5% EBIT margins. Turning to Slide 19, we show our regional guidance for the year. Starting with industry demand, we expect most of our regions to continue to be impacted by a subdued demand environment, particularly during the first part of the year as consumer sentiment is still impacted by the macro environment. In North America and EMEA, we expect a contraction of 4% to 6%. And in Latin America, we expect a contraction of 1% to 3%. In Asia, we expect industry to accelerate by 2% to 4%. Despite the expected declines, we expect industry volumes, particularly in North America, to be approximately 6% above 2019 levels. We expect EBIT margin expansion across all regions, driven by our strong cost takeout actions as well as raw material inflation tailwinds. In North America, we expect to deliver full year margins of approximately 12%, with the region exiting the year with margins of approximately 14%. We expect EMEA to deliver approximately 2.5% margins. In Latin America, we expect to deliver EBIT margins of approximately 7% as cost takeout actions are partially offset by continued macroeconomic and geopolitical volatility impacting demand. Lastly, we expect EBIT margins of approximately 5.5% in Asia, driven by top line growth and strong cost takeout actions. Now turning to Slide 20. I'll discuss our capital allocation priorities which remain unchanged. We have invested over $5 billion in capital expenditures and research and development over the last 5 years, reflecting our commitment to deliver a high-growth, high-margin business. During that same time period, we have returned over $5 billion cash to shareholders, including $900 million of buybacks in 2022 and a 25% increase in our quarterly dividend, representing the tenth straight year of dividend increases and nearly the 70th consecutive year of paying dividends. The continued strength of our balance sheet with $2 billion of cash at the end of the year, has given us the flexibility and optionality to pursue value-creating opportunities like the acquisition of InSinkErator in 2022. In 2023, we are prioritizing debt repayment driving an optimal capital structure and maintaining our strong investment-grade credit rating. Thanks, Jim. Turning to Slide 21. Let me close with a few remarks. In our 111-year history, we have built a proven track record of successfully operating through challenging macro cycles and we're confident in our ability to deliver margin expansion in 2023. We will flawlessly execute on our supply chain initiatives, while our reset cost structure is expected to deliver $800 million to $900 million of benefit. In addition to these actions, the ongoing portfolio transformation will unlock value and enhance our financial profile. With the addition of incinerator and the MEA divestiture, we expect to deliver approximately $350 million of incremental free cash flow in 2024. The MEA transaction alone is expected to deliver a 200 basis point improvement to return on invested capital. along at a 150 basis point improvement in ongoing EBIT margin. These improvements, coupled with a healthy balance sheet of a foundation of our firm commitment to returning cash to shareholders. Let me remind you 2022 represents our tenth consecutive year of dividend increases with a 25% increase to our quarterly dividend. Additionally, we repurchased $900 million in shares, returning a total of $1.3 billion in cash to our shareholders. Also, in the future, we will continue to maintain a solid balance sheet while providing attractive returns to our shareholders. We are well positioned competitively, seeing favorable market share trends and will continue to benefit from long-term demand tailwinds to our industry. I guess sort of a 2-part question. On Slide 21, you talk about setting yourself after 2024. I'm just wondering, are you kind of providing kind of a high-level view that by 2024, you think you can get to 11% to 12% ongoing EBIT margins? And -- or is that just you feel like you can make progress towards that goal? Second part, really I just want you to comment on what happened in the fourth quarter promotionally. There are a lot of programs there. You've said in the past, you don't expect promotional activity to revert to pre-pandemic levels. You still feel this to be true? And if so, what are you seeing that gives you confidence in that view in your second half price/mix expectations? So David, let me first address the first question. Obviously, we're just giving guidance for '23. So it's a little bit too early to give a guidance for '24. Having said that, I think you're correct in the read that there's a lot of positive elements which will come through in '24. First of all, as you heard from my prepared remarks, there's a lot of reason to believe that consumer demand and particularly U.S. housing as it exits will head into much stronger years because, as you know, there's fundamentally structurally undersupplied housing market in North America but not only in North America which is at 1 point will materialize. So that's on the demand side. Also on the cost side, with a heavy lifting which we're doing now on the cost reduction, we will reset our cost base which will set us up very well for '24. In addition, we have other elements. You have the full contribution of integrator on the margins and cash flow. And assuming that we can close the European transaction, that on its own will give an additional lift on cash flow and by definition, on margins as you look at the total company. So with all of that in mind, yes, in '24, I would say, we're much more confident where we're heading towards these long-term shareholder value creation targets which we set out. So -- and I think '24 from that perspective will be a critical proof point and at this point, we're pretty confident towards that. And your second question related to promotion, I would say, David, as we absorbed the entire back half of '22, it was by and large pretty much as we anticipated, i.e., we expected and we always expected a higher level of promotion to essentially a previous period where which was completely absent promotion. But it's still important to note that even what we saw in the back half of '22, it was quite a bit less than pre-COVID. So I would call it right now, we were faced with a moderate promotional environment. And from what you heard from my prepared remarks, we expect a similar environment also as we look in '23. Two, I guess, themes to my questions. First would be around EMEA. I think normally, EMEA is much more profitable seasonally in the second half than it is the first half. I'm assuming that's going to occur in '23 also. And I think it looks like you're including EMEA throughout the entirety of the year. So what's the likelihood or what's the general quantification if the transaction does close as you expect for incremental dilution to EPS guidance from the absence of a profitable EMEA in the back half? And then Mark, if you could also talk about the terms of the options that Arcelik has after 5 years. I didn't see it in the filings. Just trying to get a sense to ascertain the likelihood of an $800 million transaction or a $500 million PV? Let me first address the first one on what is in the guidance and how the guidance might be impacted by the closure of the transaction. First of all, on a high level to keep it simple. The timing of the transaction will probably impact the EPS to a much less extent on the cash flow. There is more moving parts and that's just driven by more historically, we never show regional cash flows but European cash flow too this year is much more volatility than the other regions, i.e., pretty big cash drain and then cash build towards the back half. So depending on when we close it, that has more of an impact on cash flow and a much less impact on EPS. On the principal profit seasonality also keep here in mind, yes, Europe is a little bit more skewed towards Q3 and Q4. And but that is largely driven by the very profitable KitchenAid small domestic appliance business which similar to North America has a heavy share of Q3 and Q4 sales. So if a transaction closes, keep in mind that part of the business stays with us, that should not impact the EPS that much. So -- and that's probably also by depending on where you potentially close it Q3 or whatever, I don't expect a major impact on EPS from everything which we see today. To your second question as it relates to the terms of the transaction, particular shareholder agreement, I think you will understand what we will not reveal all the details of the transaction but let me assure you, as we discussed after 5 years, where multiple exit opportunities defined in the shareholder agreement, the terms, including a potential EBITDA multiple are defined. So it's pretty clear in terms of what the valuation could be. At the same time and that's why what you see behind this 500-millimeter by way is a discounted value up the 5-year. But I also want to underline what I said in the earnings or in my prepared remarks is -- we have a long-term potential profitable relationship in mines. But of course, as you would expect us, there are various terms of a potential exit predefined and predetermined. So there is no negotiation down the road. If I could sneak another question as it relates to the rows, the $300 million to $400 million tailwind that you've identified. Typically, the biggest variable intra-year is oil and resins and I'm sure that's another variable this year. But are there other variables such as steel that could play a role into the $300 million to $400 million being above or below that, i.e., are you having more of your steel off contract and on contract plus something along those lines? Sam successfully sneaked in a third question. But anyhow, let me try to address it. At this point of view, you always have a certain amount of uncertainty or volatility in your forecast. Having said that and you know that very well. Our biggest procured item is steel. Steel are on big regions on annual contracts. And today, as we're sitting here January 31, we pretty much have closed all contracts. Now there's 1 contract which technically expires in Q1 which has a little bit of a lag effect. So for contractual terms which, as you know, this is not a hedging contract but they are 1-year contract, well defined and that gives us a very high confidence that on the steel side, we shouldn't see major surprises. You always have a little bit a lagging item and the spot rates move. But again, that's a very smooth element in terms of a smooth impact on our overall P&L. Resins, as you rightly point out, is our typical quarterly contracts, annual contracts which ultimately is, I would say, loosely correlated with the oil price. So there's a little bit more moving parts on the resin side. But frankly, already, we saw largely some benefits. We see it also in Q1, some benefits that right now looks pretty stable. Having said that, there's -- as you also know, there is a number of commodities out there which still are subject to wide variation. I mean, right now, it's trying to buy glass. Glass is impacted by lithium, et cetera which has a higher spot price a couple of smaller items which impact us in total, not that much but they're still moving elements and that always drives a certain amount of uncertainty. If you completely zoom out, Sam and you've observed us for many years, of a total $800 million to $900 million, given where we are in the year, I would say we have right now a 70% to 80% fill rate of our actions which is actually pretty high compared to other years. So we feel, as we sit here today, with a high degree of confidence we will hit this $800 million to $900 million. Yes. Sam, maybe just to add a little bit to what Mark says is some of that confidence comes from many of these are due to actions we executed during 2022. And so we're already beginning to see that in our exit run rate. And then additionally, if you look at the material environment and as Mark said, this is our best estimate right now but over the last couple of years in a volatile environment, we've been pretty good at putting an estimate around what we think materials will do for the year. So we feel good about all of those numbers. First, I'd love to dive in a little bit to the assumptions you're making in 2023 for InSinkErator. I know that for sometimes in prior acquisitions, divestitures here, sometimes have been a little more hesitant to break out the impact of acquisitions. But given the $3 billion purchase price, I think it would be really helpful for investors to understand what the contribution is expected in 2023 on sales and margins and on a quarterly basis in the upcoming year to kind of give us a sense of how the acquisition is doing, I think, would be very, very helpful. Mike, this is Jim. And maybe I'd start with when we acquired InSinkErator, we talked about it having revenues above $600 million and we expect it to continue in that range and continue to grow it. We've said that the margins are above our average and very strong margins and we expect that. On a total basis, we think net of interest and everything but with the tax benefits, it gives us about $1 of additional EPS as we go into 2023. But it also gives us $100 million plus of free cash flow and that's the good thing about this business. And part of the reason why we bought it is a very consistent performer but also a very consistent generator of cash. And so that's what we expect right now headed into 2023 based on what we've seen in our first 2 months of ownership. And Michael, it's Marc. Just to add to this one. It's now 2 or 3 months where we have ownership of this one. I would say, first of all, from an environment, it's incinerator plays in the same kitchen as we have our major appliances. So the same external environment which we described earlier also applies to that segment. So the demand environment for the first half will be soft and we expect some pickup in the back half. Having said all that, the most important thing, the -- this is a high-margin business and we saw very impressive stability and sustainability of the margins, both in the first 2 months -- or last 2 months of '22 and the first month of '23. So March looked very good. And then more from an operational perspective, there is a major and is segment, you don't have product innovations every year but there's a major generation of product innovation coming in April, May. And honestly, from outside, I never thought you could be excited about garbage disposal but I did. So that is a very, very exciting product which comes out in April, May. It brings us not only high consumer benefits but also a further cost reduction this month. So we feel very strong about this business from a structural run rate from a product pipeline and particularly once the housing picks up which it will do at one point, we will really like this business. Okay, I appreciate it. I guess, secondly, you gave out guidance, I believe, saying that 35% to 40% of your earnings would be in the first half. When I look at Slide 16 and I see that you're not going to have the benefits really start until in 2Q in terms of the cost takeout and raw material benefits. But you do have first quarter being kind of flattish year-over-year. How should I think about first quarter EBIT or margins versus fourth quarter, if you're not having any incremental headwinds, should we expect to see any type of significant improvement on a margin basis sequentially? And then I think also, lastly, I just want to make sure I heard right. You talked about North America being at 14% by the end of the year. I'm just not sure if you're intending to say that all else equal, that could be a starting point for 2024. I know you're not talking about 2024 yet but just making sure I understand that 14% comment correctly. Yes, Michael, this is Jim and I'll get started, then I'll let Mark kind of add to it. But if you look at the seasonality and what you're referencing on Slide 16, what you have to remember in the first quarter of the year is, one, we have a higher cost layer of inventory right now. That's just in if you think about when we have close to 2 months of inventory on hand, that will work through our system through the first quarter and then we begin to realize the benefit of the lower material cost as you exit Q1 and into Q2. So your question on sequential margin improvement, yes, we expect to see that. Second is, as I mentioned, many of our cost reduction programs were put in place in 2022 but we continue to put more in place in early 2023. So you'll see a ramp-up of the additional cost savings beyond materials that will help the margin. So again, as we looked at it and said, we think about 35% to 40% of the earnings comes in the first half of the year. And then those are the big drivers that take it out later in the year. We also expect the demand environment to be a little bit more negative year-over-year in the first half of the year and then more stable on a year-over-year basis in the second half of the year. To your question on the NAR margins, too, if you think about the different things we've talked about, whether it's the material, that does have a significant impact on NAR, so we do expect those margins to ramp up throughout the year. Additionally, in the first quarter, you have a small tail of just dealing with some of the issues we had in Q4 that we now say are behind us but they were resolved in January. So that also will have an impact on the NAR margins in but then it began to improve throughout the year. So Michael, let me just specifically add on the North America margins. And of course, the North America margins may drive the company margins. As you rightfully pointed out, on a full year basis, last year, we had 11.5% margin in North America and we now guide towards 12%. So on a full year base, it doesn't look like a big move. But given the volatility we all experienced for the last couple of years, right now, it's probably more of a sequential view which makes sense as opposed to year-over-year. So on a sequential basis, we had in Q4, 5.8% which we always said are not representative of our structural run rate. The important thing is what Jim alluded to, we had 2 specific elements in our Q4 margin. One was still the tail end of a production reduction which we explained in the last earnings call. And two, was this one-off supply issue. Put a number behind these ones, that's roughly about $100 million profit impact. So by definition, you should have the absence of this 1 in Q1. So advise to the margin which we had and then you probably get to a margin of 8-plus percent. To be clear, this is not a guidance but that's what you should expect and that's what we would expect from our internal run rate. So you will see sequentially a significant margin expansion in Q1 and then throughout the year as the raw material benefits start kicking in, as we explained on Page 16, every quarter, we would see a sequential margin improvement with exit run rate which has been getting much closer again to our long-term value creation targets. I'm just curious what your relationships with your retail customers look like today just given the disruption in the fourth quarter and has world lost shelf space to other brands? And then how do you get that back? Are there built -- is there a built-in backlog? Like were there contracts with retailers that you can now fulfill those orders? Or how should we think about the market share regain in 2023 in your assumptions? So Liz, let me particle I guess this question relates particularly to North America, U.S., so let me respond in particular in the U.S. In Q4, we had a market share which was pretty much identical to the Q3 market share. As a reminder, in Q3, we picked up sequential market share, so we made a little bit of progress but we did not further expand by products in Q4 but basically how it's stable. Honestly, internally, we expected share gain. And again, we're coming back to the supply constraint which we had in Q4. So we do expect in Q1, I mean all subsequently, margin sequential, not only margin but also market share gains and that's what we kind of right now plan. And what we see right now is happening in January, particularly to the relationship with retail, first of all, for particular U.S., you always got differentiate between builder and traditional retail. The builder side, as you -- as we probably explained over the last years, not just last year, we made tremendous progress on expanding our market share and we're now well above 50% in that segment. By definition, that segment is right now suppressed because we have the kind of housing issues and the housing constraints in Q3 and Q4 but at one point, that will fully benefit us. On the traditional retail side, as of today, we have not lost floor space but it's also clear. We've got to provide our retailers with the products which we can sell. We have a lot of fantastic innovations launched and in the pipeline, be it the Mate PET program, the 2 and 1 top load of a dishwasher which is a brand-new architecture. So we know we can sell more. We know it's floored and we will fulfill that supply need. Mark, Jim, I appreciate all the color so far. If we look back at the last 6 months, I think it's thought everyone that visibility can be challenging. It's a quickly changing environment. When we look out at the housing landscape today, a single-family permit 40% year-on-year. Home sales are down in the mid-30s still home prices have started to soften these are all leading indicators, right? And so I guess I'm wondering, I understand your long-term views on housing. But I guess the question is why the conviction that all these headwinds will be behind you by the end of the first half of this year. Yes. So Michael, I can probably address in particular the U.S. housing sites. As we said before, U.S. housing, we don't expect a major uplift in the first 6 months of this year. However, the long term and even kind of probably post summer, I do expect and see some recovery. First of all, you've got to differentiate 2 elements. The existing home sales and the new home construction. The existing home sales, just if you look at the numbers the last couple of months kind of fell from a run rate of more than 6 million to now slightly below 4 million. That's slightly below â¬4 million. I mean, you've got to go back several decades to see such a low level which is below any sustainable run rate. And it's probably the effect of ultimately mortgage rate shocks coupled with high home prices. So what you earlier said as a leading indicator, home price started coming down, that is actually the long-term good news for existing home sales because at 1 point, it will improve home price affordability. Also, if you look at the mortgage rate, for those people who observed for over a longer time. Last year, we had the high spread between mortgage rates and 30-year treasury bonds. That is unusually high and most people would expect that spread to come down. So even though the Fed rates may not come down, there's reason to believe that the mortgage rates will stabilize and get back to long-term historic spreads. So we do expect that home housing affordability will improve as the year progresses and that will ultimately trigger existing home sales. On the new home construction, many for same factors apply. But the most important thing, I mean, right now, you can talk to multiple industry sources. If you look at the last 10, 15 years, most people would agree, there's about a 3 million unit undersupply of new homes. That is about a 2-year supply at normal run rate. So at one point, that supply will be triggered, okay? Will it all happen '23? No and it also will not happen entirely in '24. But -- it's been -- if you go back from history, probably ever since housing market has been reported which is probably the longest stretch of undersupply this market has experienced and will not last forever. Michael, I'd say the other thing to add in there is you have to remember that our industry is a large replacement industry and about 55% of our business is replacement. And if you go back to the industry in 2011 was declining in 2012, it was pretty much flat. But in 2013, you started to see some significant growth as it rebounded. And so when you look back 10 years, we're really now entering that period where you could have a very favorable replacement trends that are underlying. Additionally, if you look at what consumers are doing today, as many consumers may not be moving do they want to stay in their homes with their existing low mortgage rates, it does lead to more remodels. And many other times, the kitchen is 1 of the things they remodel. So there are other trends out there that we do see that can be and will be positive for us. Got it. Okay. And again, I appreciate that. I think some of those things are probably debate rather than absolute and timing still seems like a question from our standpoint. So the follow-up I think from my side would be it seems like by the second half of the year, you're assuming that industry volumes get closer to things like for your own volume assumptions, there's an assumption for a share gain, so potentially a little volume growth that will help drive some of the year-on-year capability in margin as the year progresses. So if the demand side doesn't come through as expected in the second half, how should we think about margin impacts or decrementals, given there's obviously a lot of moving pieces around the cost side as well. So if we're trying to isolate kind of the volume side and how that plays into it, how should we be thinking about that? So Michael, maybe it's just -- and again, we only talk about North America right now. We -- in -- on this Page 19 in our presentation, we guide -- or our assumption for our market is minus 6% to minus 4% on North America on a full year base. Keep in mind that comes on top of a 6.5% down in '22. So to Jim's earlier point, at one point, you just reach a floor of what is replacement market. Replacement markets are now already 55%. So the pieces which can move, i.e., the discretionary purchase. At 1 point, you're at such a low level that a further downside risk is realistically fairly small. I would say from today's perspective, if at all, I would more see upside risk, I wouldn't probably call it risk but right now is there's a lot of arguments to be made by it will start recovering. To your earlier point about, yes, we can all argue about the timing of a slow consumer recovery. It doesn't change the fact that the mid- and long-term fundamentals are strong ones. And just people want to bet against the U.S. housing market. So be it, we do believe that the long-term U.S. housing market is a very strong one and will fully recover. My first question is, given your background and experience operationally, with the business in various regions that have faced different challenges over time. How do you think about the North American operations today, the opportunities there and the opportunity to hit some of those initiatives that you outlined in your comments? Susan, I think that's obviously a very macro question with a pretty big time horizon. But I would actually come back all way to our decisions and what we plan with our portfolio transformation I am a firm believer in the long-term fundamentals of North and South America, coupled with an exceptionally strong market position which we have in both parts of the world. So will the North America market go for some cycles which are largely driven because we're still living a post cohort world in the interest rate shock, yes, it doesn't change my fundamental perspective about the long-term health of this market. The long-term health of our position in the market and our ability to deliver very strong margins in the market. And we will deliver it and we will demonstrate it. But again, it's -- I've been observing I was responsible for North America ever since 2008 or 2009. So I've seen the ups and downs of the housing market. I think I have pretty good access to 1 or 2 of the numbers of the housing market; you can't ignore the market that has been undersupplied for 15 years but at one point, it will recover because we won't think interest rates don't impact our demographics, okay? And the demographics in North America and household formation is solid and there's quite a bit of pent-up demand. So I know I'm repeating myself and met optimism but -- so that explains why I'm fundamentally bullish on the mid- and long-term prospects of North America. Yes. Okay, I appreciate that. And then one of the things that we've seen in some of the other product categories that are promotionally driven or can be exposed to more promotions is that the demand dynamics over the last 2 years, they're just not necessarily having the same effect on the consumer as they did pre COVID. Would you say that you're seeing something similar in your industry? And is that impacting how you think of the level and the range of promotions and incentives we could see this year relative to the pre-COVID norms? I think, Susan, you're raising a very good question or observation. And I'd just comment on the hindsight because as always, we don't comment too much on I mean, promotion plans or whatever going forward. But on hindsight, so kind of in particular as you look at '22, I think the traditional way how we would have looked at responsiveness to promotion or price elasticity has somewhat changed through COVID and also in this post-COVID world and in particular, in an environment where replacement market has such a big share because of the fact that discretionary part is much smaller, by definition, what you can tap into with promotions is smaller. Replacement market in its own historically is not very by definition, not very responsive to promotion because people replace the product and it needs to be replaced. So that probably explains what you described where traditional responsiveness in the market to promotions may be less than it was in a pre-COVID environment. And again, in our case, that's largely driven by a much higher share of replacement market. Two things. First of all, on the price/mix, you talked about the second half of '22, the promotions were as expected. There was a step down pretty meaningfully in price/mix from what you targeted in the second half. And so what I'm curious about, I see you've guided it down 200-some basis points in '23. I'm curious, within that, we're seeing retailers who accepted cost base price increases on the way up now asking for a return of that as costs come down. I know you're also assuming a favorable mix but it seems like there's some trade down going on with a bit more cautious consumer. And so the question is, with that context as you look at that negative 200 or so basis point price mix in 3 what are the moving pieces? And is there more upside or more downside to that with less some perspective on that? So Eric, first of all, as we look in '23, you've got to keep in mind that you're lapping now against 3 rounds of price increases. So by definition, at 1 point, the positive price mix will, by definition, just go down to 0 because you're comparing against prior year significant increases. What we have factored in is kind of promotional levels which are similar to the levels which we see in the back of '22, so that's fully incorporated. At the same time, we do strongly believe we in particular, have mixed opportunities. Also if you look at our Q4 and you guys know from your operational perspective, when our business is the lack of supply which we had in Q4 didn't help us on the mix side because products which we particularly couldn't deliver where we nonpromoted items and the high value mix items. So we do expect, in particular, as you come from Q4 into Q1, Q2, sequential improvement of mix and that's our opportunity to protect pricing also as we look in '22 -- '23 while, of course, taking into account that there will be a promotional environment similar to the back half of '22. So again, there are several factors playing into road. This is a highly competitive environment and I think we took the reasonable assumption in this. And then a second question for Jim. On Slide 7, pretty compelling from a value creation, the divestitures and the portfolio changes that add up to, I think, about $1 billion which is the present value of future cash flows. I'm curious what the math on that slide would be if you look at the current level of performance of the business is not the future anticipated improvement. What does that look like that we took a snapshot of it today? Yes. I mean, if you took a snapshot of today and maybe if I kind of roll back and say, as we went through this process, we looked at multiple alternatives and cases. And we looked at from if we keep the business and the improvements we would make and what investments that would require we had different types of potential buyers and then we looked at the strategic partnership. And what I would say is this had the highest return of any of those options that we had out there. And as I said, the reason for that, even on an internal type of option, is that would have required a significant amount of upfront cash investment from us. And while it would have allowed us to improve the margins that upfront cash investment would still give it a lower net present value. Now the other thing is by keeping a 25% stake in this business, it allows us to participate in that upside which we do believe can be significantly more than we could have generated on our own. And so that's really where when you look at this transaction, the value creation comes from. And Mark talked about this earlier in some of his remarks, is the opportunity that we have to participate and then potentially at some point in time, realize or monetize that part of the business. But we do believe in the long-term health of that business in this partnership. So given -- I think this was the last question which we covered today. So let me just close up and wrap up here. First of all, thanks for joining us here today. Obviously, there is a lot of moving parts but I still want to remind of 2 critical items. One is what you just alluded to is the transaction in Europe. We -- April last year, we said we will do a strategic review in Europe. I think as you heard from Jim, we looked at all the options. We strongly believe this is the most value-creating option of all which we looked at and our creative strongest business going forward. So we feel very good that we set we will be doing. And now we kind of signed a significant step, obviously, that still needs to be closed which we expect some time around Q3. On the underlying operating business outside Europe, you also heard before that in the particular second half of '22, yes, we had an unfavorable environment because it's very historically somewhat unusual to have demand down and cost up. Typically, these kind of situations don't last very long. And as you heard from us, we don't expect that to last for the entire '23. There still will be some carryover into Q1 but when we do expect improvement. But beyond hoping or betting on an extra environment, you saw we're taking strong actions. The $800 million to $900 million cost target is the one which you need to hold us accountable for because that is ultimately the feel of a driver behind our guidance which we've given for '23. So with that, looking forward to talk to you at the next earnings call or in respective conferences in between. So thanks again for joining us.
EarningCall_1067	Hello and welcome to the First Financial Bancorp Fourth Quarter 2022 Earnings Conference Call and Webcast. My name is Glenn and I'll be the operator for today's call. [Operator Instructions] Thank you, Glenn. Good morning everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorpâs fourth quarter and full year 2022 financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the fourth quarter 2022 earnings release as well as our SEC filings for a full discussion of the Company's risk factors. The information we will provide today is accurate as of December 31, 2022, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. Thank you, Scott. Good morning, everyone and thank you for joining us for today's call. Yesterday afternoon, we announced our financial results for the fourth quarter and full year of 2022. Before I turn the call over to Jamie, I would like to provide some highlights from the most recent quarters and recap this year's outstanding performance. I am extremely pleased with our fourth quarter which was exceptional on many levels. Earnings per diluted share were $0.73, return on assets was 1.63% and our adjusted efficiency ratio improved to 55%. Diluted earnings per common share increased 24% from the third quarter, and we achieved record operating revenue of $214 million driven by a 15% increase in net interest income and a 32% increase in fee income. Rate increases continued to positively impact our asset sensitive balance sheet, with our net interest margin expanding by 49 basis points to 4.47% as increasing asset yields outpaced deposit costs. The growth in noninterest income was due to record quarters from Bannockburn and Summit, which more than offset softness in mortgage, client derivative fees and service charge income. We were also very pleased with $502 million of broad-based loan growth in the quarter, which is a 20.3% increase on an annualized basis and included a $130 million increase at Summit. We expect loan growth to moderate in the first quarter of 2023 due to seasonality and economic uncertainty. During the quarter, we experienced modest outflows in personal interest-bearing transaction accounts; however, this was offset by seasonal inflows in our public fund and business deposits. The result was a stable core deposit base and a loan to deposit ratio of 81%. Loan quality remained strong across our portfolio, with nonperforming assets declining by 16% to 23 basis points of total assets and 1 basis point of net recoveries for the period. Our ACL to total loan coverage increased slightly during the fourth quarter due to slowing prepayments and the general outlook for the U.S. economy. 2022 was a great year for First Financial. Adjusted earnings per share of $2.36 was a record, and increased 3% compared to 2021, resulting in a 1.36% adjusted return on assets and an adjusted efficiency ratio of 60%. Revenue increased 14% compared to the prior year to $709 million, which was a record for our Company. Net interest income grew by 15% with short-term rate increases providing a catalyst, while record fee income increased by 11% for the year as our acquisition of Summit Funding drove new fees and Bannockburn revenue grew by 23% to a record $55 million. Our recent acquisitions have diversified our income sources as we intended, and we are very pleased that they effectively insulated the Company from much of the fee pressure that impacted the broader industry in 2022. Loan growth exceeded $1 billion for the year, representing an 11% increase from 2021. We were pleased that the growth was broad-based, and included strong contributions from Summit Funding, which we acquired at the end of 2021. Summit's originations exceeded $400 million for the year, which was an all-time high for them and surpassed our expectations, contributing to over 20% of the Company's overall loan growth. Asset Quality was very strong for the year. Net Charge-offs were 6 basis points of total loans, which was a 20 basis point decline compared to 26 basis points in 2021. And lastly, nonperforming assets declined $20 million, or 34%, to 23 basis points of total assets. With that, I'll now turn the call over to James to discuss these results in more detail. After Jamie's discussion I will wrap up with some additional forward-looking commentary. Jamie? Thank you Archie and good morning everyone. Slide 4, 5, and 6 provide a summary of our fourth quarter financial results. As Archie stated, fourth quarter financial performance was excellent, driven by outstanding net interest margin, strong loan growth, elevated fee income and stable asset quality. Our asset sensitive balance sheet continued to react positively to additional rate hikes with our net interest margin increasing 49 basis points. We anticipate stable to slight expense of the net interest margin in the near term due to zero rate hikes and expected deposit pricing pressures. We were once again pleased with strong loan growth during the quarter. Total loans grew 20% on an annualized basis with the growth widespread across the portfolio. Fee income was particularly robust in the fourth quarter with record results from multiple business lines. Bannockburn and Summit both posted the best quarter in their histories. When we acquired these two companies, the goal was to effectively diversify our fee income sources, so it was particularly satisfying to see that come to fruition during the fourth quarter. As expected, mortgage banking income continued to decline as higher interest rates impacted mortgage activity. Our wealth business had another solid quarter and overdraft income stabilized following program changes implemented earlier in the year. Non-interest expenses were slightly higher than our expectations due primarily to incentive compensation tied to elevated foreign exchange income and the company's overall performance. Additionally, we made a $2.5 million contribution to the First Financial Foundation during the period. We were pleased on the credit front with 1 basis point of net recoveries and non-performing assets declined to 23 basis points of total assets. While asset quality remained strong, we recorded $10 million of provision expense during the period, which was driven by loan growth and slower prepayment rates. As a result, our ACL coverage ratio increased by two basis points. From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets. Accumulated other comprehensive income was relatively stable during the period. Therefore, tangible book value increased $0.49 and our tangible common equity ratio improved by 16 basis points. Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighted items that we believe are important to understanding our quarterly performance. Adjusted net income was $68.9 million or $0.73 per share for the quarter. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.63%, a return on average tangible common equity of 30% and an efficiency ratio of 55%. Turning to Slides 9 and 10, net interest margin increased 49 basis points from the linked quarter to 4.47%. Once again, this increase was primarily driven by an increase in asset yields resulting from rising interest rates. The increase in asset yields was partially offset by higher funding costs. As a result of rising rates asset yields surged during the period with loan yields increasing 96 basis points. In addition, investment yields increased 57 basis points due to higher reinvestment rates and slower prepayments on mortgage backed securities. Our cost of deposits increased 31 basis points compared to the third quarter, and we expect these costs to increase further in reaction to competitive pressures from an increasing rate environment. Slide 11 details the asset sensitivity of our balance sheet. We remain well positioned for expected rate increases as approximately two thirds of our loan portfolio re-prices fairly quickly. Slide 12 details the betas utilized in our net interest income modeling. Although deposit costs increased with greater velocity in the fourth quarter, our modeling remains relatively unchanged over the full cycle. Slide 13 outlines our various sources of liquidity and borrowing capacity. We continue to believe we have the flexibility required to manage the balance sheet through the expected economic environment. Slide 14 illustrates our current loan mix and balance changes compared to the linked quarter. As I mentioned before, loan balances increased 20% on an annualized basis with every portfolio growing compared to the linked quarter except for franchise. The largest areas of growth were in the CNI, ICRE and Summit Portfolios, while Oak Street and Mortgage also increased. Slide 16 shows our deposit mix as well as the progression of average deposits in the linked quarter. In total, average deposit balances increased $261 million during the quarter, primarily driven by a $319 million increase in brokerage CDs. Outside of this increase, deposit balances were relatively stable, which we viewed positively given the competitive landscape. Slide 17 highlights our non-interest income for the quarter, which surpassed our expectations. Both Bannockburn and Summit had the best quarter in the history of those businesses and wealth management posted another solid quarter. Deposit service charge income was relatively flat compared to the third quarter, which reflected a bit of a normalization as the impact from program changes implemented early in the year have now fully materialized. Consistent with the third quarter mortgage demand was solved due to higher rates and we continue to expect further pressure on this business for 2023. Non-interest expense for the quarter is outlined on Slide 18. On an operating basis and excluding Summit, expenses increased $11.2 million compared to the linked quarter, due primarily to incentive compensation tied to the record quarterly performance from Bannockburn as well as the company's overall performance. In addition, we made a $2.5 million contribution to the first financial foundation in the fourth quarter. Operating adjustments include $6.4 million of tax credit investment write downs and $700,000 of other costs not expected to recur such as acquisitions, branch consolidations and severance costs. Turning now to Slide 19, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $151.4 million and $10 million in total provision expense during the period. This resulted in an ACL that was 1.29% of total loans at the end of the year, which was a 2 basis point increase from the third quarter. Similar to the third quarter, provision expense was driven by our strong loan growth and slower prepayment speeds, which increased the duration of the portfolio. Despite the increase in provision expense, asset quality remained stable. We had 1 basis point of net recoveries on an annualized basis, while non-performing assets declined to 23 basis points of total assets. We expect our ACL coverage to remain stable or increase slightly in the coming periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slide 21 and 22, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the fourth quarter tangible book value increased $0.49 and the TCE ratio increased 16 basis points due to our strong earnings. Accumulated other comprehensive income was relatively stable compared to the linked quarter, but remains a drag on our TCE ratio. Absent the impact from AOCI the TCE ratio would have been 8.2% year end compared to 6% as reported. Our total shareholder return remains robust with approximately 30% of our earnings returned to our shareholders during the period through the common dividend. We believe our dividend provides an attractive return to our shareholders, and do not anticipate any near-term changes. However, we will continue to evaluate various capital actions as the year progresses. Thank you, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance, which can be found on Slide 23. Our asset sensitive balance sheet continues to benefit from rising rates, and although there are many variables that impact magnitude and timing, we expect more moderated expansion in the first quarter to a range of 4.5% to 4.6% based upon anticipated remaining interest rate increases. The competition for deposits is increasing and we expect the margin to peak this quarter will continue to be dependent upon the Fed. Regarding credit, much uncertainty remains regarding inflation and the impact of rate hikes to the economy and our customers. Over the first quarter we expect continuous stability in our credit quality trends and ACL coverage to be slightly higher. We expect fee income to be between $45 million and $47 million in the first quarter with more normalized level of foreign exchange and leasing income after our exceptional fourth quarter. Specific to expenses, we expect to be between $109 million and $111 million with lower incentive expenses given fee income performance. As operating lease portfolio grows, we'll see corresponding depreciation expense growth, which is included in our range. Lastly, our capital ratios remain strong and we expect to maintain our dividend at current levels. The outstanding performance we achieved this year is a direct result of our associates executing at a very high level. I want to thank them for their commitment to our clients, our communities, and to each other. While we're proud of our 2022 financial results, we believe we have further opportunities to improve execution and we're committed to doing so. As we look forward to 2023, we remain focused on delivering consistent sustained industry leading results. Thank you. [Operator Instructions] We have out first question comes from Scott Siefers from Piper Sandler. Scott, your line is now open. Thanks for taking the question guys. So, I mean, the margin performance has just been extraordinary. It sounds like it will sort of peak out at a higher rate than you might have anticipated previously. I think you were saying 440 to 450 previously now 450 to 460, but then it will come down thereafter. I guess, Jamie, do you have a sense for maybe the trajectory after the first quarter, maybe a thought on like what a margin flow might look like given any actions you've taken, protracted and sort of how long it might take to get there? Yes, so yes, on the margin. So yes, definitely it is peaking a little higher than what we had originally anticipated. So, but I think we end up settling at a spot that we, where we kind of thought we would be in the beginning before, maybe before the fourth quarter, maybe even a little bit higher than that, Scott. So we are -- we have that outlook, the projection of the margin there really, and that would, I would say that's really the first quarter margin. Then as deposit costs start to catch up, we will see a little bit of deterioration in the margin as we move forward and then as we get, I think that really kind of stabilizes towards the back end of 2023 and we think that stabilizes somewhere in that 410 to 420 range. All right. That's perfect and thank you very much for that. That's great. And then separately, when we talk about Bannockburn returning to more historical levels, I guess what does that mean in your guys view anymore? It feels like I might have said somewhere around $10 million a quarter previously, but I mean that thing's just been just really, really strong. So is it too low. And if you feel like that's something that can still grow year-over-year, just given how strong 2022 was? Yes, Scott, this is Archie. It was such an incredible quarter for Bannockburn a record quarter and you know, their business can be a little bit lumpy. What they've done a nice job of is, is continuing to add new customers to their roll and that is helping sort of lift the base of clients in terms of revenue. So, yes, we would tell you Q1 is probably more in line of $12 million to $14 million. And if you think about that compared to the last two years that, that is stepping up in terms of kind of the base level of revenue. As far as the full year, I'm not sure that it's going to just be a straight trajectory up, but if they did what, 54, 55 in this year, we certainly would expect them to be at least in that range, maybe a hair more. Their business is probably more and I -- as we continue to get deeper into business and talk with Mark Immelt who runs it, their business has more of a stair step approach to it. So it will go through big growth spurts then it will level off a little bit for a period then it will grow again. And so it grew a lot faster last year than we were even thinking. We think we'll hold that this year maybe just a hair more. And Scott, this is Jamie. Just another thing to add on that. I mean that, so essentially when you look at that acquisition we acquired that back in the fall of 2019, so just a little bit more than three years ago. It has essentially doubled in revenue from the time that we bought it. They were doing in that roughly in that $28 million to $30 million range of revenue, so this past year, obviously in that the mid 50s in revenue. So it has essentially doubled. So we've been really happy with that acquisition. I just want to take a little bit deeper dive into the Bannockburn, if you don't mind. It -- just curious kind of you mentioned adding customers and obviously it was a strong quarter there, but just, I'm just curious how what might drive another strong quarter like this going forward an outsized quarter, if you will? I mean, is it carrying more than just adding new customers or is that the primary driver? I'm just curious how to think about what might create surprises on the upside going forward? Yes, Danny, this is Archie. What we're very pleased with is they continue to add net customers and grow what we call the core base that continues to move higher. And then they still have a number of transactions that will occur in a quarter that would be larger and they're just lumpy and it's just sort of hard to predict the timing. I think it is traditionally their fourth quarter has got a little more seasonality where they have a little more activity that happens in that quarter. You think about things that, you know, you're getting close to your end. There's a lot of companies wanting to get some things done and that leads to a little bit of a surge in activity and then you, you combine that with just the economic environment we're in. This is a little more volatile, you know inflation concerns, interest rate concerns and all that again is catalyst for activity for Bannockburn. So it's kind of a, just a perfect quarter for adding new clients, a lot of activity heading into their seasonal, best seasonal quarter combined with the economic activity or the interest rates and inflation issues, so all those things combined. They'll have, I think it was probably back in, I think it was Q2, they had one month of really in Q2 that was probably $7 million. So they have other months like that. It's just this quarter was spectacular. Okay, helpful. Thank you. And then the other major fee income business leasing was also very strong in the quarter as you touched on. Just curious if that kind of outstripped expectations in the fourth quarter and if there's any kind of what the outlook looks like maybe for 2023 in the leasing business? Yes I would, you know, we've, I think we talked about in our color that these will come back to more normalized levels in Q1 from Q4. Summit certainly has significant activity in the fourth quarter and which we were expecting it, they contributed a lot to our growth. Additionally, they wound down a customer relationship where there were some additional fees we got for those leases that wound out of the program. So that added a little bit to the quarter. So we won't have that going forward. So that's why we said it sort of normalizes, but as it normalizes, as their volume continues to grow, you're just going to see that line item move up fairly steady, a little more ramp up in the back half of the year that's when their volume is heaviest. Of course as we say, the depreciation costs will go up as well on the expense side. So it will be more normalized with seasonal lifts in the back half of the year. And again, we had just a little bit of extra fees because of winding down one customer in Q4. And Danny, this is Jamie. So in that, in the outlook that we presented with the fee income of $45 million to $47 million for the first quarter, those -- that takes into account the normalization of both Summit and Bannockburn in there. So that would have those coming back down to kind of what a more normalized trend level. Understood, yes. No, I appreciate it. So obviously a big normalization in FX and then somewhat more modest on the leasing side, is probably what we're looking for. Yes. And correspondingly for the Bannockburn piece, that also normalizes the expenses as well, because we have a lot of variable expenses related to Bannockburn. So, and that, and we included that as well obviously in the 109 to 1011 of expenses. Yes. Perfect. You got my last question there. Maybe just a little more detail, but just curious on the timing of the expenses in those two businesses, if there's any kind of lag. I appreciate you gave us the range expected in the first quarter, but is -- I guess the biggest question is, is there anything that's like an annual kind of comp that just because it was a fourth quarter played out for those businesses or do those really get recognized on a quarterly basis mostly? Yes, so we had, so it's a good question. For the foreign exchange piece of the business, we did have an annual expense that hit because of them reaching a certain revenue threshold, which kicked in a some additional incentive compensation, almost like a, like an earnout that you would have in an acquisition, so them hitting a certain bogey triggered an annual expense. And then so both the normalization of the ongoing revenue in the first quarter and the elimination of that annual piece is that's part of the reason you see the expenses coming back down in the first quarter in that call it 110 range. Hi, thanks. Good morning everyone. Maybe just to followup on that, hey, that last questions between the connection between revenue and expenses, when the leasing business income goes from 7 to 11, does that, how does that impact quarterly expenses or is all the volatility really related to FX? All of the volatility was really related to FX. Yes, those were the fees that we received on the leasing business from -- on in Summit was more end of term type leasing fees and really didn't have any variable cost related to it. There was a small amount, maybe $0.5 million, it was small, but it was not 400,000 or 500,000, but not really a lot in that number. So it was all, all of the variability really in the, on the expense side was related to, well, two things, Terry, it was related to, it was related to FX and the revenue that we received there. And then we also had some additional incentive compensation kind of at the corporate level related to just overall corporate bonuses and the strong performance that we had in the fourth quarter, but primarily Bannockburn. Yes. Okay, thanks. And then maybe any comments on office CRE, retail CRE and some of the portfolios that some feel are at risk given macro conditions and higher interest rates, et cetera? Yes, this is Bill. We've been monitoring the office portfolio, very diligently over the last year or so, making sure we're out ahead of lease expiries, et cetera. So we've established additional operating on that. We feel pretty good about where we're at today, but with some of the change in the landscape, we're being very, very mindful of getting ahead of the risk. A lot of our office portfolio is more suburban in nature as opposed to city center, business center type office properties, a lot of it is medical, so that will have less of an impact as folks reduce office space. But we are watching it very closely and getting through it. The retail side, on the real estate, we've really kept our portfolio into more grocery anchored or grocery near anchored centers, with smaller bays allowing for the have to go-to type of operations that have performed very well. They haven't added a lot to that book over the last couple years, just really sticking to the name and really the same thing on office. Since COVID really put a damp down on that. Hey, good morning. Hey Jamie, I wanted to start with the margin comments digging a little bit more. You talked about peak margins, which is pretty consistent with what most banks are saying. You're coming from a higher point. The 410 to 420 that you kind of reference where you would settle like, I guess number one when maybe I missed it, when would that be? And then can you remind us what your deposit beta assumptions and any steps you might be doing to lock in the higher rate with some derivatives? Yes, good. I won the pool on you asking about deposit beta, so but yes, I'll send it over. So yes, so we think that that 410 to 420 margin is in the back half of the year, really in the fourth quarter of 2023. And again, I would tell you that that is, maybe a little bit different from maybe 90 to 120 days ago, I would've said our margin was maybe going to stabilize in the back half of 2023 and a little bit lower than that, maybe in that 390 to 400 range. So it's a little bit higher than what we had originally anticipated in that 410 to 420. And then in terms of the deposit beta, we are still modeling in that, in the low 30s, so call it 30% to 33% deposit beta for the, again for the overall cycle. And when kind of look at what we have realized at this point, depending on if you're looking at the fourth quarter, you're looking at just maybe December, you're talking in that 10% to 15% type range. So there's obviously still more to come and then, but again, we look like right now, and then, there's a lot of variables involved in this obviously, but stabilizing somewhere in that 410 to 420 range. Okay. And if I could, anything you're doing to kind of preserve this if now the futures market's calling for potential cuts? Yes. I would say preserving is maybe a little bit, might be a little bit of a stretch. I mean, buying some insurance on the severe downside, I mean, that's really more what our strategy is at this point. And when you think about what happened to our margin, back in the beginning of the pandemic and call it March of 2020, when rates declined so rapidly, we saw our margin [indiscernible]. So we are building in some protection, I would say more on buying some floor, getting some floor protection, but it is more, I would say in the extreme case as LIBOR, SOFR would move in that maybe below 2. So it's more of that kind of, I don't know, call it catastrophic insurance, but more along those lines of what our strategy is at this point. Okay. And if I could just sneak one more in, you've got a ton of cash coming off the bond book, like $800 million plus for the next year. If you map to the mid-single-digit loan growth that you're talking about, that's 500. So it would feel like you could run in place with the earning assets from Q4 levels. Is that kind of the expectation? Correct, yes. So our plan is obviously, and everybody is seeing it, pressure on the deposit side, especially on the -- we're seeing some pressure on personal account balances on the consumer side. And so with that pressure, our plan is to let cash flows off of the securities portfolio fund at mid-single-digit growth. And so yes, we could definitely from our ending earning asset level be relatively flat from an earning asset base. So that, and so the other things though Chris that does is that also, if you think about it, that also helps the margin a little bit just because of that little richer mix, that rotation between securities and loans. Thank you, Chris. [Operator Instructions] Our next question comes from Jon Arfstrom from RBC Capital Markets. Jon, your line is now open. What are you guys seeing in the pipelines? You talked about a little bit of a seasonal slowdown, and I think we all understand that, but what do you think that that Slide 14 looks like throughout the year where you've seen the growth opportunities in lending? Yes, Jon. First, great, great quarter for the company, and as we said, it was broad based. We saw a nice rebound in the fourth quarter in ICRE that little slower growing in the first three quarters, and that really rebounded for them. We talked about Summit because of their back half of the year, especially Q4 was their strongest quarter of the year typically is. Commercial had a really solid quarter. Mortgage grew and some of that's a little bit more on sheet, on balance sheet mortgages we're holding in and just lower, much lower payoffs on the mortgage book as well. And then our Oak Street business did well. I don't -- we're fairly confident in that mid-single-digit, maybe even a little bit, a little bit stronger than that type of growth for the year. As I look in the, maybe the next quarter, it's still pretty balanced. It's just, it's smaller levels. Commercial will be part of the growth stored for the coming quarter. ICRE is probably where we're seeing some softness in the pipeline as we approach Q1, we see they may be flat to slightly down. Our Commercial Finance Group will continue to bring some growth. Mortgage will continue to provide some growth and Summit had a really strong end of the year that is carrying over into the first part of the year. Normally, that slows down a lot for them. It'll be slower, but they'll be contributing to that growth here in the first quarter. So our Commercial Finance Group, Mortgage, Summit being the drivers for Q1 with ICRE pulling back to being kind of more flattish for the quarter. Okay. This guy kind of touched on credit I guess, but Jamie, any thoughts on provisioning and just overall how you expect that to track through the year? Yes, so I mean I would, when we're looking at it, we did 10 million in the quarter. A lot of that was driven by the $500 million of loan growth that we saw. So in terms of a little bit more moderate loan growth if it's in that $100 million to $200 million, $250 million range a quarter, you could see the provision come down a little bit maybe in the short-term. But, obviously it's depending on -- we also had a basis point of net recoveries for the quarter as well which we normally would not see. So I think the way to look at it, if charge-offs come back a little bit, I mean, we're not seeing any real deterioration in the portfolio at this point, but if charge-offs come back to 10 or 15 basis points even, you would see and then, but kind of offset by a little bit of the growth, of the loan growth kind of normalizing, you could see what we really look at is the coverage ratio. We're at 129 now. We would like to see that as we, kind of head into the predicted recession to see that still start to, still continue to move up, not, I don't think it's going to move up a lot, but to continue to move up as we head into that, I think is what you'll see. So kind of back into the provision from that, from all of that and all of the E&P [ph] inputs, but in that kind of level that we saw here in the quarter or potentially maybe even a little bit lower if growth is lower. Yes, okay. Just two more. Archie you referenced some seasonal deposit flows, typical seasonal deposit flows, and I only ask that because people are a little more sensitive to deposit trends at this point, but what does the deposit flow number look like in the first quarter in terms of composition? Yes. So we see in the -- in Q4 we see a pretty big buildup of our public funds for tax payments that starts to bleed out mid-December, but it's not all finished by the end of the year. So there's a little more of that exits in Q1, the seasonal aspect of that does. And then we saw a nice buildup in business balance as I was looking at our and just our business transaction accounts. I mean, December was our highest month in average balances ever. All five of those months have come in 2022, so it's holding up really strong. But some of that we see a little bit of a surge in Q4 and then that starts to come back out in the first quarter. Those are probably the two bigger trend changes. The consumer is already been spending down their excess deposits. We just think that trend continues as we go into the quarter. Some of that and some of that's also been trading out into higher rate products. But I'd say the big difference is probably the business surge in Q4, that's somewhat seasonal starts to bleed back out along with the public funds, seasonal part bleeds back out. Okay, all right. And just one more on Bannockburn, you've answered a lot of questions on it, but why do you think they've been able to double under your ownership? What has allowed them to do that? Well, when they were independent, it is more difficult. It was more difficult when they were independent not having kind of the, if you will, just the wherewithal, the capacity of a bank behind them. And I think Mark Immelt who runs it always thought that to be able to get back with a bank in time and that's what we were able to do and that having the bank capability, we can provide other services to clients, lines of credit, things like that, that didn't give us opportunities to get into the FX. He didn't have those other ancillary things that he could offer as an independent. So I'd say that's probably the single biggest thing, just again we've got the size, we've got the balance sheet, we've got everything that allows him to grow and then offer more to clients that then gives him opportunities. Plus we've been able -- we've not done say a great job of penetrating our own middle market book yet. We've made some headway, but we have a couple bankers assigned and working with the Bannockburn clients around the country, and they've been able to uncover more opportunities as well and they're just really good at what they do. Yes. I mean, the other thing, Jon, this is Jamie, I mean, the acquisition also gives them the opportunity to focus primarily on sales as opposed to having to run an independent company. Thank you, Jon. [Operator Instructions] We have no more further question on the line. I will now hand the floor back to Archie to make closing remarks. Thank you, Glenn. I want to thank everyone for joining us on today's call and hearing more about our great Q4 in 2022. We look forward to talking to you again at the end of the first quarter. Have a great day. Bye now.
EarningCall_1068	Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2022 Hess Midstream Conference Call. My name is Twanda, and I will be your operator for today. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please be advised that todayâs conference is being recorded for replay purposes. Thank you. Good afternoon, everyone, and thank you for participating in our fourth quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hessmidstream.com. Today's conference call contains projections and other forward-looking statements, within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the Risk Factors section of Hess Midstream's filings with the SEC. Also, on today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures, and the most directly comparable GAAP financial measures can be found in the earnings release. Today, I'll review our 2022 operating performance and highlights, provide details regarding our 2023 plans and outlook for through 2025. And discuss Hess Corporationâs latest results and outlook for the Bakken. Jonathan will then review our financial results. Despite severe winter weather conditions, 2022 was a year of continued strong performance and execution for Hess Midstream, we delivered volume growth and expanded our compression capacity by more than 25%, further enhancing our gas capture capability. As discussed in our guidance release, we've established our 2025 minimum volume commitments. And we're confident in the implied volume growth which is underpinned by the following. First Hess plans to continue to operate a four-rig drilling program and expects to bring approximately 110 wells online per year in 2023 and 2024. This will grow Hess' production to an average of approximately 200,000 barrels of oil equivalent per day in 2025. Second, Hess has an approximate 15-year inventory of profitable drilling locations with a four-rig program at $60 WTI. And finally, Hess Midstreamâs focused capital program prioritizes the expansion of our gas gathering system to support gas throughput volumes increasing by more than 30% in 2025, relative to 2022, driven by Hess' planned development activity, and goal of achieving zero routine flaring by the end of 2025. We're also confident in the delivery of our financial guidance, and the potential to provide incremental shareholder returns above our targeted annual distribution growth, as our revenues are 80% to 90%, covered by MVCs through 2025. And the significant growth in gas volumes, which is supportive to Hess Midstream as approximately 75% of our revenues are generated from our gas business. Now, turning to Hess Upstream highlights, Hess announced Bakken net production averaged 158,000 barrels of oil equivalent per day in the fourth quarter, reflecting severe winter weather impacts in December, which limited bringing new wells online to 15 for the quarter. For full year 2022, Bakken net production averaged 154,000 barrels of oil equivalent per day. Now turning to Hess' production guidance. For full year 2023, Hess forecast Bakken net production will average between 165,000 and 170,000 barrels of oil equivalent per day, a 9% increase compared to 2022. First quarter net production is forecast to average between 155,000 and 160,000 barrels of oil equivalent per day, including weather contingencies, and carryover effects from December. Hess forecast Bakken net production to steadily grow over the course of 2023 and 2024. And average approximately 200,000 barrels of oil equivalent per day in 2025. Hess expects to hold this level of production for nearly a decade. Now focusing on Hess Midstreamâs fourth quarter 2022 results. Gas processing volumes average 312 million cubic feet per day, reflecting the impact of severe winter weather in December. Fourth quarter crude terminaling and water gathering volumes averaged 101,000 barrels of oil per day, and 77,000 barrels of water per day respectively, resulting in full year adjusted EBITDA of $983 million, representing an increase of 8% compared to 2021. Hess Midstreamâs guidance. For full year 2023, we expect gas processing volumes to average between 350 million and 360 million cubic feet per day, representing growth of approximately 11% compared to 2022, primarily driven by Hess' development activity and our focused gas capture efforts. For full year 2023, we anticipate crude terminaling volumes to average between 105,000 and 115,000 barrels of oil per day, and water gathering volumes to average between 85,000 and 95,000 barrels of water per day. We project adjusted EBITDA for 2023 in the range of $990 million to $1,030 million, an increase of approximately 3% at the midpoint compared to full year 2022. The adjusted EBITDA increase driven primarily by the transition from high MVC coverage to physical volume growth, which is underpinned by full impact of Hess' four rig development program. Turning to Hess Midstreamâs 2023 capital program. For full year 2023, capital expenditures are expected to total $225 million comprised of $210 million of expansion activity and $15 million of maintenance activity. Approximately $100 million of the 2023 expansion capital budget is allocated to gas compression, with activities focused on the completion of two Greenfield compressor stations and associated pipeline infrastructure, which are expected to provide in aggregate an additional 100 million cubic feet per day of gas compression capacity when brought online, further enhancing our gas capture capability. Approximately, $110 million is allocated to gathering system well connects to service Hess and third-party customers and optimization of our existing gathering system. In summary, we're continuing to execute our strategy of making focused low risk investments to meet basin demands, delivering reliable operating performance and strong financial results. Weâre well positioned for substantial growth, as implied by our guided 2025 MVCs, which are underpinned by Hess' planned development activity, and our continued focus on gas capture, which is expected result in sustainable excess cash flow generation and the potential to return additional capital to our shareholders. Thank you. Good afternoon, everyone. Today, I will summarize our financial highlights from 2022, discuss our recently completed nomination process with Hess and provide details on our 2023 guidance and outlook through 2025, including our continued prioritization of ongoing and incremental return of capital to shareholders. For 2022, we delivered strong results, with full year net income of $621 million and adjusted EBITDA of $983 million, an 8% increase compared to the prior year. Looking forward, we have line of sight to at least 10% annual growth in net income, adjusted EBITDA and adjusted free cash flow in 2024 and 2025, driven by Hess' growth in the Bakken, and underpinned by our 2025 MVCs that provide visibility to approximately 10% annualized growth in physical volumes across gas, oil and water systems from 2023. Return of capital to shareholders continues to be a key priority for our financial strategy. In 2022, we increased our distributions per share, consistent with our 5% annual target, and also completed incremental shareholder returns, including a $400 million repurchase of units of our sponsors, and an additional increase in our distribution level by 5%, following the repurchase. As a result, over the past two years, we have completed $1.15 billion of unit repurchases and grown our distributions by approximately 27% on a per share basis, these shareholder returns as a percent of market capitalization represent differentiated and peer leading metrics. Looking forward, we plan to continue this financial strategy that includes consistent and ongoing return of capital as a primary objective. We are targeting 5% annual distribution growth through 2025. And we expect greater than $1 billion in financial flexibility through 2025 for capital allocation, that includes prioritization of potential unit repurchases on an ongoing basis. Turning to our results. For the fourth quarter, net income was $150 million, compared to $159 million for the third quarter. Adjusted EBITDA for the fourth quarter was $245 million, compared to $254 million for the third quarter. The change in adjusted EBITDA relative to third quarter was primarily attributable to the following. Total revenues, excluding passthrough revenues decreased by approximately $15 million, primarily driven by lower throughput volumes from extreme winter weather as John Gatling described, partially offset by higher MVC shortfall fees, resulting in segment revenue changes as follows. A decrease in gathering revenue of approximately $13 million, a decrease in processing revenue of approximately $1 million and a decrease in export revenue of approximately $1 million. Total cost and expenses, excluding depreciation and amortization passthrough costs, and net of our proportional share of LM4 earning decreased by $6 million due to lower remediation expenses related to a produced water spill in our gathering segment during the third quarter, resulting in adjusted EBITDA for the fourth quarter of $245 million. Our gross adjusted EBITDA margin for the fourth quarter was maintained at approximately 80%, highlighting our continued strong operating leverage. Fourth quarter maintenance capital expenditures were approximately $4 million, and net interest excluding amortization of deferred finance costs were approximately $38 million. The result was that distributable cash flow was approximately $203 million for the fourth quarter, covering our distribution by 1.5x. Expansion capital expenditures in the fourth quarter were approximately $59 million, resulting in adjusted free cash flow of approximately $144 million. At yearend, debt was approximately $2.9 billion, representing leverage of approximately 3x adjusted EBITDA on a trailing 12-month basis, we had a drawn balance of $18 million on a revolving credit facility at yearend. Turning to our annual nomination process. Our contracts continued to provide a unique and differentiated level of downside protection through a combination of our annual rate redetermination process that maintains a contractual return on capital deployed, and MVCs that provide revenue flows, set at 80% of expected throughput three years in advance. We have commercial contracts with Hess with downside protection through 2033. At the end of 2022, we completed our nomination process with Hess and updated our tariff rates for 2023 and all forward years. As with prior cycles, the nomination process considered changes in actual and forecasted volumes and CapEx to maintain our contractual targeted return on capital deployed. 2023 tariff rates were generally slightly higher than 2022 reflect in the annual inflation escalator. As a reminder, 2023 is the final year of the annual rate redetermination process for the majority of our systems that represent approximately 85% of our revenue. At the end of 2023, the base rates for 2024 will be set based on the average of the tariff rate from the year 2021 to 2023 adjusted for inflation. Rates will then be increased each year, based on inflation escalator capped at 3%, resulting in steadily increasing rate through 2033. For our terminaling and water gathering systems that represent approximately 15% of our revenues, we will continue to reset our rates through our annual rate redetermination process through 2033. For all of our systems, MVCs will continue to be set at 80% of nominated volumes set three years in advance providing downside protection through 2033. In our guidance released this morning, we provide MVCs for the year 2023 through 2025, as part of the nomination process, MVCs in 2023 and 2024 were reviewed and where required increased, while MVCs in 2025 were nearly established based on 80% of the nominated volumes for each system in that year. For our oil revenues, our MVCs are expected to provide approximately 100% revenue coverage in 2023 and 90% revenue coverage in 2024. For our gas revenues, our MVCs are expected to provide approximately 85% revenue coverage in both 2023 and 2024. Our MVCs for 2025 provide line of sight to long term growth in system throughput. For example, looking at gas processing, Hessâ nomination for expected volumes for 2025 was 429 million cubic feet per day, resulting in an MVC of 343 million cubic feet per day set at 80% of the nomination level, implying more than 30% growth in physical natural gas volumes from 2022 levels. Turning to guidance for 2023. While physical volumes are expected to grow in 2023 as John described, we are transitioning from higher MVCs in 2022 to physical volumes that are at or above MVCs in 2023. As a result, our revenue growth in 2023 is expected to be driven by our rates that have been increased primarily as a result of the annual inflation adjustment as described earlier. For the full year 2023, we expect net income of $600 million to $640 million and adjusted EBITDA of $990 million to $1, 030 million, representing a 3% increase in adjusted EBITDA at the midpoint of our range. We continue to target a gross adjusted EBITDA margin of approximately 75% in 2023. For 2023, with total expected capital expenditures of $225 million, we expect at the midpoint to generate adjusted free cash flow of approximately $625 million. Highlighting our financial strength, we expect distribution coverage of approximately 1.45x and excess adjusted free cash flow of approximately $60 million after fully funding our targeted growing distribution. We also expect to repay the 2022 yearend balance of $18 million on our revolving credit facility in 2023. For the first quarter of 2023, we expect net income to be approximately $135 million to $145 million and adjusted EBITDA to be approximately $230 million to $240 million. First quarter maintenance capital expenditures and net interest excluding amortization of deferred finance costs are expected to be approximately $45 million, resulting in expected distributable cash flow of approximately $185 million to $195 million delivering distribution coverage at the midpoint of the range of approximately 1.4x. For the remainder of 2023, we expect growing adjusted EBITDA consistent with increasing volumes across oil, gas and water systems, with seasonally higher operating costs in the second and third quarters of the year. Looking beyond 2023, we have clear visibility to volume, adjusted EBITDA and adjusted free cash flow growth that supports our financial strategy. As described, our MVCs provide visibility to annualize growth of approximately 10% across our oil, gas and water volumes. With continued investments supporting increasing gas capture, our gas volumes have the highest expected physical growth rate and represent approximately 75% of our expected revenues. Driven by these growing volumes together with fees that are steadily increasing based on our annual inflation escalator and operating leverage based on a targeted growth adjusted EBITDA margin of approximately 75%. We expect growth and adjusted EBITDA of at least 10% per year in both 2024 and 2025. With growing adjusted EBITDA and capital expenditures are expected to remain stable for 2023 levels, we expect growth and adjusted free cash flow of greater than 10% on an annualized basis in both 2024 and 2025. Our financial strategy supported by the significant growth in our financial metrics includes a continued focus on financial strength, with a long-term leverage target of 3x adjusted EBITDA. In addition, we are continuing to prioritize shareholder returns with our return of capital framework. First, we're continuing to grow our base distribution by extending our targeted distribution growth of 5% annually on a per share basis through 2025 with annual distribution coverage of at least 1.4x. Second, we have financial flexibility for potential significant incremental shareholder returns beyond our growing base distribution, with expected adjusted EBITDA, and adjusted free cash flow growth of at least 10% annually in excess of our targeted annual distribution growth of 5%. We expect to generate excess adjusted free cash flow beyond our distributions. And leverage is expected to decline to below 2.5x adjusted EBITDA by the end of 2025, providing leverage capacity relative to our long term 3x adjusted EBITDA leverage target. As a result, with a growing cash balance, and significant leverage capacity, we expect to have greater than $1 billion in financial flexibility through 2025 for our capital allocation, that includes prioritization of unit repurchases on an ongoing basis. In summary, we are pleased to have delivered a strong 2022 and look forward to a visible trajectory of growth and operational financial metrics that underpin our unique and differentiated financial strategy, with a focus on consistent and ongoing return of capital to our shareholders. This concludes my remarks. We'll be happy to answer any questions. I'll now turn the call over to the operator. Hey, everyone, thanks for the question. Maybe just starting with capital allocation. Just want to ask how you're thinking about the cadence of the potential $1 billion in returns? Should we expect it to be pretty ratable over the next few years? Or do you plan to be a little more opportunistic? And to that point, I guess, would you be willing to kind of move above your three times leverage target to return capital kind of more near term if you have a pretty good line of sight to lower leverage moving forward? So great, thanks for the question. So let me provide a little bit more context on our return on capital program, which we're really excited about. So first, let's start with how do we get to a $1 billion. As we talked about, we have 10%, at least 10% EBITDA growth in both 2024 and 2025. And as I said, we expect leverage to be at 2.5x by the end of 2025. So with a half return of EBITDA based on that growing EBIDTA growth that gets you to at least $600 million there. We also noted that we're going to be free cash flow positive after distributions as our EBITDA is growing and our CapEx is stable. So we're growing cash flow, free cash flow in excess of our 5% target distribution growth. With that we expect to build approximately or at least $400 million of cash through 2025. So, when you put that together that gets you to the $1 billion, and again, that $1 billion is targeted, as a potential we target with just unit repurchases or share repurchases and does not include potential dividend step ups and dividend level increases as we've done after each of the share repurchases. In the past those are funded primarily through the fact that our share repurchases end up with lower share count. And then we're just bringing our distributed cash flow back to where it was before. So, a $1 billion with the potential to use that for share repurchases. So, in terms of the timing, second part of your question, we see the ability to do this really multiple opportunities over the period starting this year and then really on an ongoing basis through 2025. Just to utilize that $1 billion in really just multiple potential buybacks and then potential related distribution level increases that would come with that as well beyond our 5% distribution growth. Now, that brings us finally to our leverage, and as you note thereâs no change to our three times long term target. But if you look at what we've done in previous transactions, we have gone slightly above that three, let's say past three too, based on visibility of getting back to our long- term leverage target of three time. We expect that as we execute multiple opportunities over the next starting this year, and then through 2025, that we continue that same strategy, and particularly with the visibility that we have, through our 2025 MVCs driving our expected growing EBITDA, we feel confident that as we execute these multiple potential share buybacks over this period, that we could go slightly above that three times with visibility to getting back to our long term three times targeted leverage. Again, we're really excited about this program with a $1 billion in capacity. As we noted, we've really had peer leading metrics in terms of shareholder returns. And we look forward to the opportunity to continue that forward with this return on capital program. Great, that's helpful, and maybe a follow up just on kind of guidance. Could you maybe talk about how you're factoring third-party volume mix in the kind of your â23 volume guidance. And then as we kind of think about the 10% growth in both â24 and â25. Is that pretty much all driven by MVCs in the Hessâ outlook, or does that kind of assume some third-party volume index as well? Yes, so the third party, we've been staying consistent without third party assumption, which is about 10% for both oil and gas, with our strategic infrastructure and our position in the basin, we obviously can attract volumes into infrastructure. And we're going to continue to focus on that. But as we've seen over the last year or so, it's been in the kind of a 10% range. And that's essentially what we're planning for into the future. And so, as we talk about the growth and kind of transitioning above MVCs, heading into 2025. We kind of, we expect that to be about the same percentage of split between Hess and third-party volumes. Hey, everyone, thanks for the time. I wanted to pick up on Doug's first question, just on the $1 billion potential incremental cash returns? Can you talk a little bit about maybe just, it's a $1 billion of potential, maybe just some of the puts and takes on actual kind of willingness to deploy that. Because if we look at a $1 billion, that's 15% of your market cap or something right now, that's a pretty big number. Is that someone dependent on share price? Could it swing more towards a larger distribution increase? Just trying to think of the, again, the puts and takes on us actually kind of seeing that $1 billion come out over the next three years? Sure. So, in terms of capital allocation and in terms of our -- Iâll call it willingness or focus on that $1 billion and what it for, as we've said, really, the focus of our financial strategy is really on, of course, maintaining our financial strength, but in terms of our leverage target, but also prioritizing return on capital. We're very fortunate that, as we've talked about, with the investments we've made historically, we can really get this 10% per year EBITDA growth and volume growth, as we described, really under stable capital. So there's really, at least nothing, of course, it's always look at, we've talked about bolt-ons in the past, but absent anything like that. There's really nothing in our plan, or we certainly don't need any of that in order to be able to achieve the growth that we already have in our plan. So with that said, then that $1 billion is the prioritization of that would be for returning capital to shareholders. Of course, everything every transaction will be subject to market conditions and board approval at the time, but that is the priority in the financial strategy that we've laid out. In terms of share repurchases versus dividend increases. Of course, we'll make a decision at the time, but we do have gotten very positive feedback and we're very positive ourselves and the strategy we've executed so far, which has been share repurchases, and then with those shares repurchases, utilizing as I discussed, in that previous answer was utilizing the fact that we have now lower share count, to be able to just really increase the dividend. And really just getting us back to that distributed cash flow that we had before the repurchase. And that has allowed us to, as I mentioned in my comments, generate not only the 5% annual growth, but now over the past two years, 27% increase in our dividends just an amazing result, they're together with the $1.15 billion in repurchases. So I'd say that's going to be our focus, that's our priority. Of course, we'll make decisions each time on what the exact right optimization is in terms of capital structure. But certainly, the strategy that we've taken so far, it's certainly one that we like, and certainly that would be probably our base case going forward. And again multiple opportunities to do this going forward through now through 2025. All right, that's great. Maybe just turning to operations. I mean, like there's always going to be weather up in the Bakken. December was really bad. It was also really bad early on in â22. I guess this was a little more of a Hess question. But maybe, could you just talk a little bit around your comfort in kind of not getting pushed to the right again, when there's bad weather again, up there? I mean, you commented that your guide, and the Hess guide are, I guess, weather adjusted, or there's some give in there for weather, but maybe just how much kind of conservatism you have in there, and how you're thinking about that going forward? And whether it's maybe evolved over the last year or two? Yes, thanks. I mean, I think it's somewhat difficult to say, I mean, obviously, North Dakota, there's weather every year, it snows every year, starting sometime in October, November timeframe, and it kind of carries on through March, April timeframe. And sometimes in the May. 2022 was definitely challenging. It was abnormal weather two times, I mean, it kind of struck twice in one year, we had the freezing rain, earlier in the year in April, May timeframe, and that just totally took out power. And without the power, we obviously couldn't, we couldn't list the hydrocarbons, and couldn't get it to the infrastructure and ultimately, to be processed and shipped out via pipe or rail or to the export markets. So that was the challenge in, at the beginning of the year. And then in December, we just had abnormally high snowfall, and then very, very cold weather. And so as the team as the upstream team attack the snow with winds and very cold weather, the snow would just blow back. And it was a constant battle for them over that timeframe. I've been working in the in the Bakken for going on 12 years. And the weather in 2022 was abnormal. Having said that, the upstream team, and obviously that carries into some of our forecasts as well, they do build in weather contingencies in the first quarter and the fourth quarter of every year. They're really based more on historical weather contingencies, and not abnormal, I would say that based on what we saw in 2022, we're probably a little bit gun shy here, going into the first quarter of this year. But again, we're going to continue to monitor it. And I mean, the team is doing a great job trying to stabilize the system and really reinforce it for even abnormal weather. So we've got, we feel like we've got a good plan, we've got a very integrated team between the upstream and the midstream, we have good transparency and visibility into the forecast and understand kind of where the plan is and what we need to do to help them achieve it. So I would say that both Hess and Hess Midstream are confident in the delivery, in particular, as we march towards the average of 200,000 barrels of oil equivalent per day in 2025. And I think that's going to be the real anchor point to the growth over the next three years. So we see solid growth in â23, â 24 and into â25. And then there's a lot of opportunity there. So, again, I know it's a little bit of a long-winded response to your question, but the weather in â22 was abnormal and challenging for the team. Thank you. I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
EarningCall_1069	Welcome to Trelleborg Q4 Presentation 2023. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Peter Nilsson; and CFO, Fredrik Nilsson. Please go ahead. Welcome to all of you to this call where we are going to present our year end closing figures and then with particular focus on the Q4 performance. And as usual, I am going to kick off giving some overall intro and then also some comments on the business areas and then hand over to Fredrik to guide you through the more financial part of the report and then we are finishing off with some, letâs say, headlines on the running quarter and then also finishing off of course with the Q&A session. So as usual also, we are going use a slide deck which has been in our webpage for some time. We are going to use that slide deck to guide you through this presentation. So I am going to refer to that one. Starting with that on the first page, Trelleborg Interim Report for Q4 October-December 2022 and then turning to Page 2, agenda, which I already introduced. Starting with some highlights, talk about the business areas, Fredrik go through the financials and then do a summary with some comments also on the outlook for the running quarter and then finishing off with the Q&A. So quickly then moving Page #3. Heading, record year closed with a strong quarter. We are finishing off in a good way. Very good quarter for us, sales ending up at all-time high, quarterly sales at little bit north of SEK8 billion for continuing operations of course, that is something also that you are aware that this is kind of excluding Wheel Systems. I am going to comment a little bit about that specifically. But looking at continuing operations, we have a very strong increase of some 35%, organic then at 15%, currency still a big beneficiary adding 12% and then also M&A, which is then primarily driven to 2 months of Minnesota Rubber & Plastics, which we are also going to comment a little bit more specific about. EBIT growing with the same as the sales ending up at little bit north of SEK1.2 billion, which is then corresponding to a margin which is 15.3%, which is kind of equal to 15.4% we had a year ago. So, same margin in the quarter and already comment then this is the highest quarterly sales ever and also highest EBIT for Q4. Still some items affecting comparability ending up in the quarter as SEK115 million, which is well within the guidance we have for this for the full year, also finishing off the year with a very strong cash flow. I mean, we are happy of course with the overall performance, but kind of particularly on the cash flow with ending up very strong, which is in total then pushing us to have better operating cash flow for the full year than last year. So, very strong cash flow in the quarter. We also note I trust all of you know that we also in the quarter have had Minnesota Rubber & Plastics in the figures for 2 months consolidated from October 27. I am going to comment a little bit more about that also later on. There are also two minor acquisitions consolidated in quarter, MG Silikon, which is then adding some aerospace capabilities for the TSS and some other industrial applications and then also for IST, which is focusing on the aftermarket for pipe repair, pipe seals, which is also consolidated, but not really impacting the figures that much. Turning on Page 4, commenting on the organic sales. Fairly equal organic growth all over all three regions. Europe growing by 13%, Asia and other markets by 14% even though of course like everybody else, China has been some kind of subdued even though we managed it fairly well I must say, but overall Asia doing good. Americas then slightly stronger than Europe and Asia, but overall, as I already started on, as an average here we talk about 15% organic which is fairly equal all across the regions. Moving to Page 5, agenda slide and moving quickly over to comments on the business areas on Page 6, then talking about Industrial Solutions. We have heading strong sales and EBIT growth, which is actually the same heading as we have on this slide that we have on Sealing Solutions. A fairly good development all over, organic sales plus 18%, very strong in the quarter. We have particularly strong sales in Europe and North America and then we see solid development in Asia. So, overall good development in all geographic regions, continue to see, which we already commented in the last quarter, a slowdown in European residential construction which is hitting Industrial Solutions and also little bit slowdown also in order intake into the infrastructure part of it. But there we are not really reading in lower overall demand. Itâs more that we have very strong order book in that area and that is always a bit bumpy, but nevertheless, itâs a bit slower order intake also in that area in the quarter. EBIT and margin well managed here also. As everybody else I guess we are hit here by also inflation in a multiple of aspects, but thatâs been managed in good way and we managed then to grow EBIT in line with sales or slightly better, which is then putting the margin to 0.2 percentage points higher than last year. So well managed in the quarter and especially then managing these higher costs which is then fully offset by pricing and efficiency. Acquisition of IST being added here, very short in the quarter, but that is something we are going to see more benefits from going forward. Then moving to Page 7 and talk about Sealing Solutions, same heading as on Industrial Solutions, strong sales and EBIT growth. Organic sales up by 12% and of course M&A, especially Minnesota Rubber & Plastics, then adding sales in the quarter also fairly even from a geographical point, good growth in all major geographies and the major here is basically saying that China was little bit subdued, but that was compensated by good growth in other parts of Asia. We also note that especially sales to healthcare and medical and aerospace increased significantly, which is kind of a strong growth in sales and also strong order intake in these two segments. We also note little bit slight change in the quarter related to automotive, which has also we say have developed favorably, but we also see a pickup from some well-known issues earlier in the year. Solid demand in industrial in the quarter even though we note also with a much smaller dimension than if we look at the residential construction, but we see a little slowdown in industrial which we are reading maybe not, letâs say, that much down in underlying demand, but we do believe there is some letâs say inventory reductions hitting us and thatâs also going to hit us a little bit going into Q1. So, the underlying demand is still seen as fairly solid in most segments, but once again we see a little bit slowdown in the kind of demand for this running quarter and potentially also for Q4 and also for Q1, which we once again reading a little bit to be some inventory adjustments. EBIT growing slightly lower than the sales, but nevertheless good and we also note that the margin, which has already being commented as well, is somewhat impacted by the integration of MRP which is coming in then with a high PPA and also with a letâs say notch lower margin than overall Sealing Solutions. So that is kind of pushing down the margin. So if you look kind of outside of MRP, the underlying margin of Sealing Solutions was basically spot on compared to a year ago. We also note with satisfaction even though MRP is the biggest one, but also MG Silikon is a nice bolt-on acquisition for us, which is kind of strengthening some aerospace niches and also creating opportunities to leverage. The technology we are adding by acquiring MG Silikon is also something that we are going to benefit from in other parts of the world and Europe as MG Silikon has been primarily focused on Europe before. So overall a very solid quarter for Sealing Solutions, but of course can be influenced by the integration of Minnesota Rubber & Plastics. And with that topic, move to Page 8, a few comments on Minnesota Rubber & Plastics as I already commented. If we move to Page 8, coming here, Minnesota Rubber & Plastics, as I already said, consolidated from October 27 and we also note although minor, but we have here in the first 2 months, we have some extra acquisition integration costs in the quarter, which we estimate in the range of $1 million roughly, SEK10 million which is kind of extraordinary costs in the quarter hitting the underlying performance. We also more or less completed now the PPA allocation and we can now give a figure for that. So itâs roughly or we estimate it to be SEK225 million for full year â23, which means the running rate for these 2 months that they had in Q4 is SEK37 million. And then also, which I already commented, is Sealing Solutions kind of excluding MRP was spot on to Q4 a year ago. We also see here already now in the early integration we see, we have committed substantial synergies by integrating Rubber & Plastics and this is being confirmed here in the first few months of full ownership. Of course, we are going to take some time to get it fully into the books, but definitely we are not changing our view on this and we still believe firmly that this is going to be delivered in the next 2 to 3 years. So very happy for owning Minnesota Rubber & Plastics and we are eagerly looking forward to integrate this into Sealing Solutions in a good way. Moving over to Page 9 and talking then about Trelleborg Wheel Systems and as I already mentioned in the beginning, of course that is reported as assets held-for-sale, but we still own it. And if we then move to Page 10 to take the performance of Wheel Systems, very strong development in the quarter on the back of good demand and good, letâs say, price capitalization, organic sales up by 10% and especially we are kind of benefiting compared to the market that we have more exposure to the original equipment, which is then growing in basically all tire categories and most geographical markets. Also here most means that China is little bit impacted by the China situation, but for the rest of the world we see growing, we note also with satisfaction that North America is developing very nicely for us and that, letâs say, noticeable softening is in the aftermarket especially for agricultural tires, but also material handling tires. And that is something also which is in a way always happening when you people are starting to believe in lower raw material pricing and all of that and they start to speculate and they are not buying kind of in line with underlying demand since they are focusing on lowering the inventory and then try to buy the tires little bit later at lower prices. Nevertheless, well managed in total and we are also with satisfaction here growing the margin from 10% a year ago up to 12.6%, so good performance in Trelleborg Wheel Systems in Q4. Turning to Page 11 and some brief comments then on sustainability, this is kind of something that we now put on report and we are working on and we note good development in those areas. This is of course new KPIs and I trust you are aware that I mean they have always been a little bit higher in Q4 than Q3 due to the seasonality since we are mainly exposed to the Northern Hemisphere, then of course this colder climate is adding some CO2 in the quarter. But we look on a year-over-year performance, it has been a very good development for Trelleborg in the year and overall last year, itâs always down by some 10% year-on-year for the full year. So turning then to Page 12, which is one of the biggest drivers for this and that is the share of kind of renewable and fossil-free electricity in relation to total electricity, which you see here that also in Q4 have had a very strong growth. And this is something we continue to focus on and something we continue to believe or fully trust that we are going to continue to see improvements in this area as we move on. So, good development also in this main sustainability related KPIs. Thank you, Peter. Letâs then move to Page 14 and looking at the sales development. Organic sales increased by 15% in the quarter with organic growth in both business areas. Looking at the reported net sales increased by 35%, we have 8% growth from acquisition during the quarter, while currency added 12%. And then if we look at year-to-date, sales were up 27% with an organic growth at 14%. If we then move to Page 15 and looking at the historical organic growth, we can see that the fourth quarter was another good quarter with organic growth and as you can also see in the graph, we are now being on or above our sales growth target for the last eight quarters. Looking at Page 16 showing the quarter sales on rolling 12 months for continuing operations, sales in the quarter amounted to SEK8.1 billion, which was an all-time high for continuing operations. Moving on to Page 17, we had a record high EBIT and EBIT margin for fourth quarter, EBIT in the quarter increased by 34% to SEK1.2 billion with a strong profit growth in both Industrial Solutions and Sealing Solutions. In the result, there was also positive FX effect from translation of foreign subsidiaries of SEK75 million compared to the corresponding quarter last year. EBIT margin for continuing operations, excluding items affecting comparability, reached 15.3% compared to 15.4% for the corresponding quarter last year. In both Industrial Solutions and Sealing Solutions, there was a good sales growth supported by price adjustments to offset the higher costs. If we then move on to Page 18 and looking at EBIT and EBIT margin on rolling 12 months, we can see that EBIT continued to increase while the margin was flat in the quarter. If you look at full year EBIT of SEK5.066 billion with a margin of 16.8%, which was a very good improvement compared to prior year. Going to Page 19, profit and loss statement. Looking at some more details into income statement, we had some items affecting comparability in the quarter SEK115 million and that was entirely related to restructuring costs. Continue down in the P&L, the financial net increased from SEK34 million to SEK74 million in the quarter. This was mainly related to higher interest cost linked to the acquisition of Minnesota Rubber & Plastics. The acquisition is then financed with a short-term loan that of course will be repaid as soon as we receive the proceeds from the Wheel divestment. We have also continued to buy back shares in the quarter. And finally, we are seeing increased interest rate. The tax rate in the quarter amounted to 27%. I would just like to re-emphasize that the underlying tax rate and the guidance we have for continuing operations still is 26% for the full year. And then if we look for the net profit for discontinuing operation we see a good, as Peter mentioned, good improvement for Wheel Systems, but there is also support from this IFRS 5 where we stopped the depreciation due to its assets held for sale, which was impacted by SEK167 million in the quarter. Moving on to Page 20, earnings per share. For continuing operation, excluding items affecting comparability, earnings per share was up 49% from SEK2.28 to SEK3.40 in the quarter. And if we look at the total group, earnings per share increased by 68%. If weâre then moving on to Page 21 and looking at the cash flow. We have a strong cash flow in the quarter reaching SEK1.678 billion. Cash flow was positively impacted by the higher earnings generations and then also very efficient working capital management in the quarter. And then finally, this was slightly offset by little bit higher investment, which was in line with expectation. Moving on to Page 22 to cash flow conversion. Over the last 12 months we have a cash conversion of 74% and that just reflects the higher business activities which has required some additional working capital during 2022. Moving on to Page 23, gearing and leverage development. You can see an increase here up to 56%, which is entirely related to the acquisition of Minnesota Rubber & Plastics. Net debt was of course also impacted with our share buyback, which amounted to SEK384 million during the fourth quarter. And net debt in relation to EBITDA reached 2.4 by the end of the year. Moving on to Page 24, return on capital employed. You can see itâs reached 15.9% in the fourth quarter. And the capital employed increased due to the acquisitions, little bit higher working capital due to the higher sales, FX rates does also have an impact; but that was well offset by increased profitability up to the fourth quarter. And then I will finish off on Page 25 with some financial guidelines for 2023 and this is continuing operations. CapEx of around SEK1.5 billion, restructuring cost estimated to be around SEK250 million, amortization of intangible assets SEK500 million and then underlying tax rate of 26%. Yes. Great. And then moving to Page 26, agenda. Moving over to summary and some comments on the outlook for the running quarter, Page 27. Record year in many aspects for us. Good sales at little bit north of SEK8 billion, which is a strong increase of 35% which is then both organic sales primary driver, but also currency and then also some M&A; that once again primarily coming from Minnesota Rubber & Plastics. EBIT growing with the same roughly coming up with the margin as we had a year ago and this means that the highest quarterly fourth quarter sales and EBIT to-date for us. Items affecting comparability in line with guidance and a very strong cash flow in the quarter, which is then of course benefiting us with getting our balance sheet even stronger. And then already commented also Minnesota, important acquisition for us which is kind of changing a little bit game plan for Sealing Solutions, which is making us as strong in North America or in Americas as we are in Europe already with our sealing operations and on top of that also creating some further strengths in specific industrial initiatives. So a very nice acquisition for us, which is highly synergistic which is now we are working hard to get the synergies into the P&L. Also two smaller bolt-on acquisitions, both of them strategic and reinforcing us in interesting areas, but still bolt-on kind of acquisitions. Moving on to Page 28 with comments on the outlook. We changed the outlook a little bit. Demand is expected to be lower. We are running with a very high organic sales so we donât believe organic sales to be the same in running quarter. So there is no drama in this and we see the only kind of area where we see, letâs say, a firm underlying demand going down is still in the residential construction, but we also note that there is little bit small downtick also in industrial sales which we are reading not really linked to the underlying demand, but to more inventory focus and more cash flow focus from some of our customers, which is kind of lowering the sales here in the first few months of this year. But also to say that we see also continued very strong development both in aerospace, healthcare and medical, but also now automotive also benefits during the running quarter. Itâs a mixed bag. But overall we believe itâs going to be lower sales, lower demand in this running quarter. And then of course with this small add-on, we still live in a very uncertain world and of course there is this geopolitical situation in few dimensions, which needs to be also considered. So with that, leaving this and moving over to Page 29 and then quickly to Page 30. And maybe before opening up on Q&A, a few comments on the divestment here, we didnât comment that on Wheel Systems. This is running according to plan and we believe that the Wheel Systems divestiture will be executed in the next few months. We are waiting only for a few final approvals from a few jurisdictions in terms of getting the acquisition, lets say, approved. We still firmly believe that there is no issues in this. Itâs more a matter of timing and capacity for some of the authorities looking at this. We do have approval already in place for the raised amount of the approvals needed, but weâre still waiting for a few minor â not minor I shouldnât say, we are waiting for a few approvals from a few authorities. But once again no change in our view on this. So with these final comments, we are opening up for a Q&A session and invite everybody who wants to address questions to ask. So please go ahead. Thank you. Hi, [indiscernible] Klas at Citi. So, first on the outlook of lower demand into the first quarter, I get this to slight growth organically year-over-year and Iâm curious if you could help us with the price/mix within that, if you think this is still high single digit 8% to 10% into the first quarter? Yes, we get a sense for the volume development now into the first, whether this is trending down perhaps negative 5%. And if you could comment on how much this is? I think you alluded to destocking in the construction end of your end markets relative to any softness on the industrial side effects from earlier pre-ordering etcetera? Iâll stop there. Exactly. I heard from clients, that they couldnât hear you either. So it wasnât only me. And thank you. First on the â maybe you heard me then, so just to keep it short, the price/mix relative to the volume here into the first quarter. Iâll start there. And Iâll say the vast majority â I mean we expect the volumes to be relatively flat in Q1. Might be a slight positive, but we talk low single-digit volume growth. So that is kind of what we believe at the moment. Got it. Okay. So organic can be higher than the low single-digit class. Okay. And my second one is then thinking about the backlog and how this expands through the year. Coming back on potential pre-ordering, weâve seen several companies in the sector missing expectations on orders following early pre-ordering ahead of price increases. It seems sort of high single digit including pricing. What are you seeing on incoming orders, Peter, and how long does your backlog extend when you look at the current lead times? Honestly, to be very open about this. This is a bit tricky to evaluate at the moment. I mean, what we see the order intake kind of short-term orders is still very solid. What we are a little bit missing is the long-term orders, which we had; a year ago we had kind of 6 to 9 months pre-ordering and we donât have that anymore. So that is why we look at the order book, itâs actually on a year-on-year basis still higher than a year ago the order book. But what we are kind of missing is the long-term orders which we had a year ago and that was kind of more, as you say, pre-ordering, early ordering and that is why we see kind of the short-term demand. In the demand we donât estimate or believe that to be down, but people are little bit more careful buying just to put stock to feel safe. But still itâs early days and this is something, which has kind of changed in the last 30 days in a way. So that is something where we still have to wait and see really how it develops because we are not kind of concerned about the start of â23 really, but of course there is still some uncertainty if we look beyond the first few quarters. A year ago we had a longer order book if you understand what I mean, but in the short-term orders, there is not really any big change. Was that okay? Thatâs clear. Yes. I understand that itâs very tricky to know. I just wanted to make sure I got that right. We read that some of our customers, especially in the industrial area, is becoming more careful on pre-ordering and they are kind of lowering their inventory somewhat. Yes. My very final one is on the cost inflation. Iâm trying to think about the gap here versus pricing and yet again a solid drop-through and you still have a lot of cost running through the P&L, pricing is still solid. When you think about the cost development now into the first quarter, what areas do you think can start to improve? We know component costs, i.e., value-adds are still high, but youâre thinking of energy whether that will help you already in the first quarter? I mean ex-Wheel Systems, youâre not that intense on energy but still and then if any raw mats can also help you support? You could see little more margin expansion if you could hold on to the pricing there. The energy actually, as youâre aware, is not really a big thing for us. Itâs very small figures, honestly, for us outside of Wheel Systems and we are â okay, we are monitoring it, but itâs not really a big issue for us. So where we are working more is the raw materials where we see indications that the raw materials is going down, but itâs going to take a few months before itâs really coming into the accounts. We are also slightly high on inventory. Even though we have good cash flow in the quarter, we still have a â letsâ say, few tens of millions of euros that we want to lower our inventory and so we have also bought up a little bit raw materials to be safe. So I think itâs going to make these kind of lower inventory takes a little bit longer to get through the P&L, but we do see deflation overall in term of raw materials. We have still some raw material supply from Europe especially where they still are high on energy cost and they try to push that through to us. So that is a discussion we have. But if you see raw material supply outside of Europe, we already see a clear tendency that that is going down. But itâs still difficult really to read how much it will go down, but it will not continue up. And then of course we have the salary inflation that we are watching carefully. I mean, itâs already kind of been hitting us in North America and in Asia and then of course Europe where there is some uncertainty here in the next few months, exactly whatâs going to happen on that one. So that is an area where we need to watch, but I mean itâs not for us not as important as the raw material inflation. So we think that overall balance here is actually in a way maybe not for the very first few months of â23. But I mean if you look a little bit further into â23, we believe that we are going to see a positive mix from this kind of deflation in raw material even though we have a push up on some labor costs and salary inflation. So, that is the way we look at it. Thank you. A couple of follow-ups on the discussion on pricing here. Wheel Systems is obviously a business where you need to cut prices if raw materials comes down a bit. But what about the industrial and sealing now, do you think you will be able to hold on to all the increases you have done or any chance you would have to follow to the extent the costs start to come down materially at some point during the year? And then the second question, I appreciate the comments on demand trends here and in general industry. If you could perhaps give a bit more color to the specific segment where you see a bit more of this sort of destocking inventory, cash flow focus and also from a regional perspective what you are experiencing? Thank you. On the â letâs say the price capitalization, I mean generally excluding Wheel Systems as you already said, Erik, then we have â we are expecting â the switching costs are high. So, we believe that we will hold on to the raw material potential letâs say deflation in a fairly good way and then of course that needs to be balanced also with new orders. Itâs always a discussion with the customers so thatâs going to be individual cases. So, we might give something back, but we will only give back if that is a benefit for us. If we donât have a benefit, we donât feel that we need to give back. So, we firmly believe that we are in a good position generally in this situation. Going up raw material, going down raw material, we believe that we will be able to manage that in a good way both ways. And the second question, sorry, I am little bit shortâ¦ Regional, if we talk regions, then corporate demand. I mean U.S. fairly strong even though itâs some weakening and maybe not as strong as it was earlier, but it is still letâs say strong demand overall. Europe is of course soft with uncertainties. And Asia is actually quite good with the exception of China, but we are actually quite positive on China here. Now of course we have Chinese New Year, we have this COVID. But our kind of reading of the situation in China is that we at the moment believe that the second part of China actually going to be very strong. We see there is a good underlying demand and then whether thatâs benefit and itâs not going to see anything in Q1. I mean thatâs going to be a very soft Q1 in China both related to COVID and Chinese New Year and probably a combination thereof. And then going into Q2, we expect it to improve in China and then exactly how much is kicking in Q2 or Q3, Q4. But we expect China to be strong if you look at the full year 2023. So, generally positive in Asia, generally relatively positive in North America and then Europe is the kind of little bit question mark on overall kind of inflationary impact. So, that is the way we look at it. And looking at the segments, industrial segments then of course there is a lot of sub-segments. But if you can say some sub-segments where we see a weakening or destocking is something which is related to more consumer. We have a market in Trelleborg where we have coffee machines and electrical bikes and showers, letâs say high-end shower heads and stuff like that in very specific segments. This is more kind of segments, which is more consumer oriented, and there we see destocking taking place and people are becoming little more careful on that one. And then the overall big market for us in this area is more what we call fluid power, which is hydraulic and pneumatics, which is lot of construction equipment and hand tools and these kind of stuff. And thatâs also where we see destocking and that is where we see the underlying demand is actually quite good. I mean as you know the construction equipment, original equipment makers of that is still holding up fairly well. Mining is holding up fairly well. So, we donât really see the underlying segments there struggling at the moment. But that is also where we see destocking from some of our customers and that is something we are closely watching carefully, but once again. So, this is I think what we can comment. I donât know if Fredrik want to add anything or if you have a follow-up question on that, Erik, I will try to be... No, thatâs fine. Much appreciated. I have one question for Fredrik though. On the SEK1.5 billion in CapEx for this year, is that somewhere where you expect continuing operations to be in relative to sales or is it higher or lower? What kind of â what precedence does that CapEx guidance set for the next couple of years? No, itâs higher, because there will be some additional CapEx in 2023 linked to Minnesota Rubber & Plastics. And then we also in our internal plans have some further expansion in Asia. So, that hasâ¦ As you say, we are not really commenting in detail, but we have a few plans and new investments especially aiming at Asia to expand our capacity in Asia. I mean we are outgrowing our facilities in Asia and we need to expand the basic capacity. We have not yet announced it. But in the estimates we have put in we can say two, three new factories in Asia. And that is kind of extraordinary investment simply to upgrade the presence especially in Asia. Thank you. Good morning. Two questions, the first one on Minnesota and the SEK250 million in synergies, just to reiterate thatâs just the cost synergies that you are talking about here and not the kind of total potential synergy benefits from revenue, etcetera? And number two, the timeline of these synergies, when do you think they will start to actually have an impact if already in 2023? The majority of the synergy is actually linked to sales, so that is a misunderstanding and that is where we see strong synergies in the way that we are cross-selling. That Minnesota is very well represented in some of the kind of fully blue chip American customers where we are not that well represented. But we combining the offering of Trelleborg and Minnesota, we have a much wider offering. And previously we used the example of having kind of Akka or it can be in Europe where we sell some 1,000 products to them while there in the U.S. we only sell 300 at the moment together with Minnesota. So, we see substantial kind of cross-selling opportunities in that. And also especially Minnesota has been very focused on the North America. And they are very strong in certain segments especially letâs say potable water, drinking water and also very good in some food and beverage applications. And by kind of utilizing their skills in this, we believe that we can also globalize that offering in a completely different way. And the third kind of big sales synergy is actually following the American customers abroad where by having this very strong footprint and presence with them in North America, we are also going to cross-sell to them in Asia. I mean Minnesota has not really had a good presence in Europe or Asia while now together with Trelleborg, they will get letâs say more. As we always say when you have local presence, global reach what they have been doing. So, we firmly believe and of course very strong kind of actions already being implemented on that one. But thatâs going to take some time, so that is why we said 2 years or 3 years. While on the cost side of course we had some cost synergies as well, we have not given that, but there is also substantial cost synergies and these cost synergies is kind of already starting to be seen in the figures and that is something thatâs going to be implemented fairly soon. So, that is I mean â so the cost side of it is going to be fairly quick on that one even though we have not yet done the reorganization internally and done some cost savings here in some management levels and staff. But we are still waiting for announcing of some further synergistic kind of actions in terms of cutting the cost. So, that is the way. I mean we also want to again try to be fully transparent on this one and that is the way we look at it with Minnesota. Understood. Quick follow-up just on the comment you made on the orders there and the pre-ordering tendency before. Could you give some kind of guidance of the duration of your backlog now? I understand the differences between sealing and industrial. But are we talking kind of like normal time from order to delivery now in sealing for example? We are still tight in some areas, but we still have a good loading. And of course we have â once again, we have a bigger order book in total going into Q1 this year than we had a year ago. But we had very strong orders a year ago. But that once again was more longer term orders. So, we have a good visibility both in sealing solutions and industrial solutions at least for the next three months and then potentially a bit beyond that as well. And still even though I say that itâs kind of getting a bit easier and these component problems for us at least for raw materials and stuff like that, that has been going away, but they still do exist in a few areas. So, itâs not like the kind of back to â I donât know what normal is, but itâs not back to where we were a few years ago. So, we are still suffering from lack of capacity and lack of raw materials in few areas. But itâs definitely getting a lot softer compared to kind of six months back if you put it like that. But itâs still not kind of fully out of the woods in that respect, but is getting better. And I think the way we read it at least, that is also why the customers is little bit more reluctant to put pre-orders because they see that our delivery times is going down and they donât need to order six months in advance anymore. And of course beyond that, itâs also like ourselves of course, we are also kind of believing that the raw material is going to go down and then of course we want to wait a little bit and order as late as possible. So, itâs also some â itâs not only about kind of availability of components and products, itâs also a matter of kind of tactical actions in order to try to get slightly lower pricing going forward if you order a little bit later. So, that is the way we read it and the way we look at it. Thank you very much. My question is more related to Minnesota. Would it be possible for you guys to add some more flavor on the performance in Minnesota during the quarter like organic growth, sales and also EBIT margin during the quarter? And if you have some more visibility on the PPA just to have a sense for how the underlying performance is in sealing? Thatâs my only question. Thanks. Yes. I mean two months in and the first month was kind of messy, if I may say, Hampus. So, of course, it was a bad month in November, but also burdened by a lot of one-off costs and some cutoff costs and all of that. So, we cannot see really â letâs say really our November performance as a normal month. And then comes December will be this Christmas and also got â but if we look at performance in Minnesota alone compared to a year ago, in Minnesota independent is kind of roughly the same with the exception of that they are having problems in China, because China for them has been a bigger problem for Minnesota than itâs been for Trelleborg. But overall, how should I say, we donât really want to give any details here because we are still working through it and of course we will get more flavor on this. But of course from an EBIT point of view, they are fairly low due to that they have a very high PPA. So, of course I mean here we are looking at they are a few percentage points lower than overall sealing solutions, which was the case as we letâs say made acquisition. I donât really â I donât know, Fredrik, if you want to add anything on this one or, Christofer, if you want to letâs say put some more flavor on this one. No, I think itâs more if you are look at sealing solutions excluding MRP, the margin was flat compared to Q4 in 2021 and then you have the dilute impact in the quarter. There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments. Okay. Thanks all of you for listening in on this call when we talked about our Q4 performance. We are of course excited here in Trelleborg leaving a good quarter, but also with a lot of actions also going to happen here in next few months as we close Wheel Systems and of course we are going to get money and we are basically going to be debt free. I mean that is the money we are going to get for this is more than we have in net debt at the moment, so that is of course creating possibilities for us going forward, which of course looking at now and try to use that. We make sure that we use that wisely in a way. Of course, we are still tracking potential acquisitions, but we are only going to do good acquisitions of course. And if we cannot find it, then of course we need to find other ways of creating benefits for our shareholders. So, thatâs going to be a few exciting â itâs going to be an exciting year for Trelleborg because we are kind of into this stage where we have going to change the setting completely and open up new opportunities for us. So, we are eagerly looking forward to keep contact with you and getting back. If you donât hear, then of course we are going to get back at least after Q1. So, do take care. And if any follow-up questions then of course I am available, Fredrik is available and especially Christofer is available to support you in any way he can or we can. So, do take care and keep in touch. Thank you.
EarningCall_1070	Good afternoon. My name is Gretchen and I will be your conference operator today. At this time, I would like to welcome everyone to Canadian Pacific Fourth Quarter 2022 Conference Call. The slides accompanying todayâs call are available at investor.cpr.ca. [Operator Instructions] I would now like to introduce Maeghan Albiston, Vice President, Capital Markets to begin the conference. Thank you, Gretchen. Good afternoon, everyone and thank you for joining us today. Before we begin, I want to remind you that this presentation contains forward-looking information and actual results may differ materially. The risks uncertainties and other factors that could influence actual results are described on Slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures which are outlined on Slide 3. With me here today is Keith Creel, President and CEO; John Brooks, Chief Marketing Officer; and we are welcoming back Nadeem Velani, our Chief Financial Officer and CPâs newest Conductor. The formal remarks will be followed by Q&A. [Operator Instructions] Thanks, Maeghan. Let me start by thanking our 12,000 strong CP family. Their efforts have allowed us to produce these results in the fourth quarter and certainly over the course of 2022 and I can tell you what I am most proud of, which is I know is only enabled by their individual and collective efforts is the safety performance that the team produced in 2022, producing our lowest ever FRA accident frequency ratio in the companyâs history and our 17th consecutive year of being best-in-class, best in the industry as itâs related to reportable train derailments in the industry, something to be extremely proud of. And then to Maeghanâs point, our bench is only getting better. I am thinking of that, that we have got our CFO, Mr. Nadeem Velani, who adds another background into his title, Chief Financial Conductor Officer, CFC, CFO, whatever you want to call it. He has had a very rich experience. He is â obviously his business acumen from his time in Harvard has increased, but most importantly, his railroad acumen and ability to apply his business talent has increased with the railroad now as he has obtained the last 5 years, it seems like probably 5 years in this 25 below. The last 5 months specifically out on the railroad boots on the ground in the ballast, spending time not only getting connector qualified, but also riding trains, time in the mechanical department, time with the track department, time in the locomotive department, all the functions that truly make this company run day in and day out by degree professional railroaders, we have the men and women makes CP what it is. So with that said, again, welcome back, Nadeem glad to get you back in the seat. And I also want to commend Chris and Maeghan and Ian for the great work they did when we were going in your absence. They certainly made you proud. Now moving on to the results. In the fourth quarter, we produced revenues of $2.5 billion and operating ratio of 59.1% and core EPS of $1.14. For the year, total revenues were up 10%. We delivered an operating ratio of 61.4%, core EPS of $3.77, which was flat versus last year. But we knew from the beginning â22 would be a year of two halves, and particularly, we had high expectations for the fourth quarter, which we are ready and resource to meet. Unfortunately, there are some factors that impeded our fourth quarter to some degree. But with that said, I am very pleased with how we began the year, strong revenue and operating performance in January which carries â carry great momentum into the first quarter of this year and as we play out in 2023. We are in a great place from a network and resource perspective in spite of a historically tight labor market in â22. It was a record year of hiring at CP. We added more than 1,600 conductors over the course of last year and we made some significant progress with our labor agreements with the recent tentative collective agreements, both with the Unifor as well as the BLET. Both of those agreements are out for ratification. Specific to the BLET and this has to do with the consolidated territories, which are obviously contingent upon the STB approving our merger application. This agreement with the BLET which have the locomotive engineers and the earlier agreement that we signed with Smart, the conductors for the KCS in Kansas and Missouri, they are both progressively hourly agreements, which will improve our operational flexibility as well as predictability in our employeesâ quality of life. Again, itâs an agreement that gives us flexibility in turn enables our employees to realize higher pay, scheduled jobs and a better quality of life compared to a traditional labor agreement is in U.S. rail space. Parts of these agreements, of course, remain subject to the STBâs approval of the merger, but we certainly see additional opportunities down the road pending and assuming depending upon an approval to create a framework for the benefit of all employees when you combine CPKC and that work â and also obviously, the reliability benefits in service that this agreement will prove for a combined CPKC. Letâs say a couple of words about the transaction. On the CPKC front, both of our teams, both CP and KCS are hard at work preparing to seamlessly integrate these two iconic companies. I can tell you there has been a ton of tremendous work thatâs been accomplished by teams at both railways to ensure the smooth transition. I am extremely pleased last week also to note the release of the final environmental impact statement. Certainly, thatâs no small feat and a huge quantum of work by the STB to get that done in the meticulous thoughtful way that they handled not only just the environmental impact statement, but has been handling this entire file. So I commend the team for the work they did. Throughout the process, as Iâve said, the STB isnât very thorough. They have been meticulous and we continue to eagerly anticipate their decision on our merger applications, which we expect this quarter. On the environmental front, couple of words. CP continues also to make strong progress in this space, specifically on sustainability. I am pleased to see that the companyâs efforts continue to be recognized for the first time in our history, CP was named to the Dow Jones Sustainability World Index, which is a tremendous achievement for the entire CP family that we can be proud of. We were also named to the Dow Jones Sustainability North American Index for the third consecutive year and finally named to the CDP A list, which is an absolute reflection of our commitment to comprehensive comment disclosure at Canadian Pacific. We continue to demonstrate our leadership and commitment to a more sustainable future, also through our hydrogen locomotive project, which is unique in the industry. In late October, that project hit a significant milestone when the locomotive performed its second mainline test and first revenue move and are seen to experience the second hydrogen locomotive, which is the GP38, 4-axle DC locomotive over the next month, which will be making its debut so to speak as we get it out rolling and operating, so we can work the bugs out of it. So let me close by saying â23, we are poised and ready to roll. Itâs going to be a very special year for two-storey companies. We canât wait to get to work abiding these two great companies and creating value for our customers, our employees in the North American economy. We are focused on executing the plan and I am very pleased with the start that we have had to this year to what I expect will be a historic year. So with that said, I am going to hand it over to John to make some color on the markets and then Nadeem will wrap up elaborating on the numbers and then weâll open it up to Q&A. Alright. Thank you, Keith, and good afternoon, everyone. So as Keith mentioned, the fourth quarter wasnât without its challenges as certainly customer supply chains and the winter weather we faced impacted our volumes. We ultimately fell a little short of our RTM growth we expected to deliver for the year. However, I am pleased, as Keith said, to the start to 2023 and believe we are uniquely set up for the year. I will take a look at our fourth quarter results now. Total revenues were up 21% on the quarter. Volumes are up 8% on the quarter, while FX and fuel combined to be a 15% tailwind. The pricing environment continues to be strong. Now taking a closer look at the fourth quarter and the 2022 revenue performance, I will speak to the results on a currency-adjusted basis. Grain volumes were up 27% on the quarter, while revenues were up 42%. Working in concert with our grain supply chain partners, CP set new all-time monthly tonnage record for shipping grain and grain products in October and we delivered our second largest quarter ever for grain volumes. Our newest 8,500-foot high-efficient elevator, a Richardson greenfield facility in Saskatchewan, started receiving in December. And in 2023, we expect to be over 50 Origin elevators that will be 8,500 foot capable, enabling us to continue to move records amount of grain more efficiently. On the U.S. front, we saw strong demand in Q4 for both our export and domestic markets. I fully expect our grain franchise to continue to be an area of strength as we move through 2023. On the potash front, volumes were down 2% on the quarter, but we ended up 9% on the year. While we saw volumes for export potash impacted by weather challenges, the long-term outlook for potash remains strong and unchanged. I expect to see similar growth in 2023 as we saw last year in potash. And to close out the bulk business, coal volumes were down 25% on the quarter and declined 18% on the year. An outage at Teckâs Elkview mine in September impacted volumes through much of the fourth quarter and lasted longer than we anticipated. We lost over 100 trains in the fourth quarter due to these challenges. Looking ahead in coal, given the disruptions we faced in 2022, combined with a solid macro demand environment, we have a good setup from a compare standpoint as we move into 2023. So when I look at our bulk franchise, which makes up 40% of our book, it is an extremely well-positioned in 2023, whether itâs through strong demand fundamentals, favorable compares or both, we have a setup to deliver double-digit growth in this less macro sensitive portion of our book of business. Moving on to merchandise, the energy, chemicals, plastics portfolio saw volumes grow 4%. We saw increased volumes in our DRUbit during the quarter as well as plastics from our new IPL petrochemical facility single-served by CP in the Alberta, Heartland. Despite macro uncertainty, I expect ECP volumes to remain resilient as we start off 2023. Forest products were down 4%, while revenues were up 17%. Despite the Q4 decline in volume, this caps a record year for CP and forest products. While housing starts are expected to decline in 2023, CPâs demand is softer compared to our record 2022. Our lumber, panel and pulp volumes have stabilized and we are working with our customers to optimize new market opportunities. Automotive revenues were up 27%, while volumes were up 11% on the quarter. On our Q3 call, I talked about over 7,000 vehicles sitting at CP origins waiting for final components. I am pleased to see that we are seeing definite improvement in parts supply and more vehicles are moving towards shippable status. We have also began moving to new Ford business that started up January 1 and I am pleased with the startup of our new auto compounds at both Edmonton and Bensenville. Looking ahead, demand for finished vehicles remains fairly strong and we are working with our customers to replenish inventories at dealerships across our network. Those fundamentals, combined with the new business we brought on, have positioned our auto business well for 2023. Now finally, on the intermodal side of the business, quarterly volumes were up 17%, where revenues were up 29%. Despite demand coming off record levels that we have seen in the past few years, our unique market wins have differentiated us in international intermodal, with volumes up more than 3% in the quarter. With favorable compares with the first half of 2023, driven by new business that started out the back half of 2022 and the continued port expansion at the Port of St. John, we are well positioned to continue to outpace the industry in this space. Port of St. John continue to see tremendous growth, eclipsing 150,000 TEUs in 2022, more than a 70% increase year-over-year. Our partners at DP World are in the midst of deploying super new post-Panamax cranes, and this, coupled with the new birth and track at the port, will result in a doubling of the capacity by April 1. The Port of St. John remains on plan to grow its total capacity to 800,000 TEUs in 2024. On the domestic side although demand with our core retail customers, have come down from their recent highs, our temperature-controlled products continue to be strong. CP is a leader in the temp controlled space across Canada and we look forward to paving the way into new markets across North America, with CPKC should the SDP approve our merger. We are continuously working hard with a variety of customers on test moves on an interline basis, which are going very well. We recently completed a southbound test shipment from the U.S. Midwest markets, Laredo, carrying temp controlled products in about 3 days, which is competitive with a single-driver truck. Further, we have also been testing the northbound lane focused on those service sensitive products to markets across the upper Midwest, U.S. and into Canada. These markets are 100% served by trucks today and present a tremendous conversion opportunity for the combined CPKC to provide truck competitive single-line service pending the STB merger of our â approval of our merger. So, let me close by saying, as I look out at 2023, with the broader macro environment certainly remaining uncertain, CPâs strong bulk franchise, our self-help business wins and anticipated opportunities as part of CPKC have us in an advantageous position. My team is focused on staying close to our customers and selling the value of our service. Thanks, John and good afternoon. Itâs great to be back and speaking to the results of CP team period this quarter. Some of you are aware of being out of the office in the field in the last 5 months itâs been a very energizing time on the railroad. And I am thrilled to see the passion and pride from our people firsthand. I had a chance to spend a few months in our world class training center, getting conductor qualified along with a strong pipeline of new railroaders that will enable us to deliver on our growth agenda safely and efficiently. Let me take a moment just to thank four specific trainers that helped me, Jeff McClean, Nate Blunt, Mark Mariam and Joe [indiscernible] who shared their collective 140 years of rail experience with me, and Iâm very grateful. I too also want to thank Maeghan Albiston and Ian Gray for their support and backfilling for me and doing a wonderful job. So thank you to two of you. Now looking at the quarter, the adjusted operating ratio came in at 59.1%. Taking a closer look at a few items on the expense side, Iâll speak to the variances on FX-adjusted basis as usual. Comp and benefits expense was up $1 million versus last year. Increased volume and wage inflation were largely offset by lower accruals for incentive and share-based compensation. Fuel expense increased $153 million or 52%, primarily as a result of higher fuel prices, which were up 43% on the quarter versus last year and roughly flat sequentially. Materials expense was up 33% or $17 million as a result of cost inflation, largely in non-locomotive fuel. Equipment rents were up 43% or $13 million as a result of higher car hire payments resulting from stronger volumes in intermodal and automotive. Depreciation expense was in $219 million, an increase of $9 million as a result of a higher asset base. Purchased services came in at $310 million, an increase of $54 million or 21% when adjusted for acquisition costs. The main driver of the increase was higher pickup in delivery costs and other third-party services. Moving below the line. The equity pickup from KCS in the fourth quarter was $287 million when adjusted for KCSâ acquisition-related costs, purchase accounting and a gain KCS had from an interest rate hedge unwind. Other components of net periodic benefit recovery increased $6 million, reflecting higher discount rates compared to 2021. Net interest expense was up $32 million versus last year as a result of a higher debt balance related to the KCS acquisition in Q4 2021. Income tax expense decreased $49 million, excluding KCS related items and the reversal of a previous provision for an uncertain tax item, the effective tax rate was approximately 17.5% on the quarter. Looking ahead, I expect the CP stand-alone tax rate in 2023 to be approximately 24%. Rounding out the income statement, core adjusted EPS was $1.14 in the quarter. On the year, core EPS was $3.77, flat versus 2021. We continue to generate strong cash flow with cash provided by operating activities of $4.1 billion in 2022. We continue to reinvest in the railroad and finished the year with a capital spend of just under $1.6 billion. I anticipate a similar level of investment for CP stand-alone in 2023. In the fourth quarter, we received dividends from TCS totaling $415 million, which were utilized to pay down short-term debt. Over the course of 2022, we received a total of $880 million or approximately CAD1 billion in dividends from cash flow in excess of the capital KCS has invested in their railroad. Inclusive of the dividends, we generated CAD2.7 billion in free cash flow. Over the course of 2022, we repaid more than $1.6 billion in debt. Pro forma leverage ended the year at 3.8x, and we remain committed to returning to our target leverage. Looking at the year ahead, despite uncertainties with the macro environment, inflation and interest rates, I couldnât be more excited. We have a transformational merger with Kansas City Southern and a strong pipeline of opportunities for the team to deliver. Okay. Thank you for your comments to color both John and Nadeem. So operator, let me open up the line for questions. Thank you. Good afternoon. John, I know that you guys clearly didnât put out any guidance targets for all the obvious reasons. But when you hear you walk through all the different segments, bulk being 40%, double-digit volume growth, the tailwinds on auto, etcetera, etcetera. When you look to â23 on a CP stand-alone basis, understanding the macro headwinds, does it seem to you that you can have volume growth thatâs not just at or better than GDP, but substantially better, almost like a multiple of that, just given all your idiosyncratic tailwinds that you have on your own network? Well, Jon, look, I definitely see a path to growth. You know what? Weâre unique in that 40% of our book is our bulk franchise, and Iâm leaning heavy on that. As you said, certainly the macro environment is uncertain, and weâre not going to get too far over our SKIs and trying to predict what thatâs going to look like. But the Canadian grain franchise is set up well. Canpotex gets through their contract negotiations with China and India, we believe there is a path to a double-digit growth opportunity there. And as I said, we had a tough year between the weather and some of the mine challenges they had. There is, I think, a significant upside in a good market demand environment in the metallurgical coal area. So if you sort of build that out, Jon, and you can make your own predictions on sort of where those more industrial and consumer markets to go, it definitely leads to a path to some growth. Thanks. Good afternoon. Wanted to see â I think youâve given us quite a bit of color over time about the opportunities for growth when you get the approval on with KCS. Is anything changing? Or is there anything thatâs kind of new and developing as we wait for that STB decision? Or is it pretty stable and itâs kind of the same pipeline same opportunities that youâve been talking about? Tom, Iâll just say this in short. Number one, I canât get ahead of the STB. The STB is the authority here and all explain we need there, the stamp of approval. Now I do think that our facts are very strong and itâs a very compelling value creation for all stakeholders and enables growth and all the things that we have said all along remain to be true, but ultimately, they have to decide and when they do. Nothing has at all needed our optimism for the opportunities and all the discussions weâve had continued upon that approval, we have an opportunity, that weâre going to be able to execute that weâre looking forward to get to work on. Thanks. Good afternoon, guys. I think as well out into 2023 and thinking about sort of the combination of this business, I would guess maybe curious your thoughts on the ability to improve the OR from what was obviously a bit of a transition year or 2 halves, as you mentioned, Keith, in 2022. So I donât know, team, if you be willing to sort of think about on a CP-specific basis above the line, your thoughts around either EBIT growth or improvement from where we finished 2022. Let me size it up like this, Chris. Let me start by saying the 61.4% is not a CP standard. So that is an absolute fact or at least we look forward, there is a lot of parts. Obviously, we donât know what the economy is going to do, but we do know our story is unique. And we know weâre going to control what we can control, and I do see a path to our improvement. So let me leave it that. Yes. Thanks very much. Good afternoon, everyone. Nadeem, great to have you back. My question, I guess, is on St. John. And you mentioned going to 150 this year, obviously up from a less than 90 run rate and now youâre pretty much running at a 300 run rate, so probably double that again in â23. Youâre pointing to 824. Just curious, when you get to that level, how long do you think it will be that you could fill that 800 capacity in â24? And is L.A. Long Beach in the shorter queues and the less congestion over the West Coast. Does that hurt your ability to get up to $800,000 on a quick basis in â24 or beyond? Well, Walter, you know what, I donât think so. And the thesis all along, if we think back to when we bought the number one, it was â there was only one competitor in that marketplace. We identified a route that with our investment, with our partnership with and the NBSR, weâre able to create a service package that ultimately, long-term, we believe, is what is the enabler of the growth. We can get to Toronto, Montreal, Chicago on a 200 mile plus faster route. Thatâs not undeniable. And I think thatâs given us opportunities to talk to these steamship lens, maybe a little differently than we have in the past. And I think the other point is I think about timeline in â24, â25 and beyond is a CP network that reaches Gulf Coast across Canada. And with the STB, hopefully approving our transaction, being able to link in the Gulf and also potentially Lazaro down in Mexico, gives us a really nice menu to be able to work with our customers on. And as part of that, enabling customers to not only look at the West Coast, but grow that East Coast port of with us, but then also potentially further diversify themselves by potentially going down and utilizing the ton of capacity that weâre going to have available coming in through Mexico. Hi. Great. Nadeem, welcome back and good luck on the rest of this process as you go through here. Itâs an exciting time to follow it. Can you talk about the test runs? I think you talked some of the lanes youâre testing with KCS on a commercial basis. Is there anything you can kind of talk about in the interim, you mentioned selling was 100% served by trucks. Maybe can you quantify that specific opportunity or the potential Well, Ken, Iâll say this at this point. As I said, these are interline test moves that weâve put together to, I guess, somewhat replicate or begin to sort of proof of concept with these customers. As I said, there is a moving 100% truck today. So part of the sale is helping the customer understand what that process and what that opportunity could look like. Obviously, in the future, if weâre blessed with single-line service between Toronto and Chicago and Laredo and ultimately down to Mexico, we wanted to begin to prove that we can compete head-to-head with trucks and ultimately provide that the liability that those customers are going to require. I can tell you that the second part of the story thatâs kind of met around some of these opportunities is in these couple of examples I spoke to, weâve done some work with the customers to identify the greenhouse gas emission savings at about 60% to 75% clip versus their current mode on those specific moves. And itâs really become a unique and exciting sales tool that maybe far more than ever in the past, some of these customers have so to say that. Thatâs beyond the price and the savings and the reliability and the service, this is an important story for our companies. So I hope that helps, Ken. Hi, guys. So I understand 61 sort of not the CP standard. So do you think maybe is this a year where we can get back to that 57, 58 OR we had in â21. And then just in terms of like the consolidated results, and I know we canât give specific guidance yet. But last year, you gave us directional commentary, low single-digit kind of earnings growth. Anything you could say it was double-digit earnings, the Streetâs got high teens earnings growth? Any sort of directional color you can share? Thank you. Scott, I appreciate the question. Iâd just say if we want to give guidance, we wouldnât have given it. Itâs difficult in this environment. Weâre awaiting a decision from the STB. So out of respect for that, I think we should hold off on guidance for a consolidated entity. And in terms of the OR, I think Keith said it perfectly. I mean 61 is not something that we write about. There is opportunities, as John highlighted this year in terms of â on the volume side, but there is also uncertain on the macro front. So we think that â we think and we expect to see improvements. But to give you a quantum, I donât think itâs appropriate right now, Scott. We will update you as the year unfolds. And as we progress on our potential transaction and you can expect an Investor Day from us later this year, and I think there will be time â plenty of time to give you a more formal kind of guidance when the time is appropriate. Nadeem, welcome back. I wanted to touch on pricing a bit. I think you guys noted it continued to be strong. I was wondering if you could sort of compare it to where we were at in 3Q? And then does it need to actually get better from here given cost pressures? Jason, I would say we sustained and maybe even improved a little as we move through Q4. I would go as far as saying that high-single digit type pricing on renewals, certainly inflation plus. And just looking out so far, Q1, Q2 expectations in 2023, I would say pretty well lined up in that similar space. So, I remain optimistic on our pricing. And as we have always done in the past, certainly, we are very conscious of this inflationary environment, but a big part of our philosophy is pricing to the value of our service and capacity and whatever the inflation were â inflation environment is going to be, you can assure that we will continue to â the sales team will continue to price that way in the marketplace. As you talked about new progressive hourly agreements with the SMARTs and the BRAC unions, how important is that towards working â towards a quick integration and what advantages do these hourly contracts have versus maybe some of your competitors? Well, itâs critically important. Itâs a success enabler. I can tell you that â I donât know if we have a lot enough time to go through this on this call. But I think of one collective agreement, think of a conductor, think of an engineer, think of no complexities from yard rules and road rules, where we have two classes of employees. So, you have one class of conductors and engineers, they make more money, they have scheduled time off. And as a result of that, we have more predictability. And when you offer a better quality of life, especially in todayâs world, you pay more money and you let people know when they have to come to work. In the rail industry, thatâs a very unique and compelling value proposition. So, to be able to expand that, we benefited from that on the new properties at CP, we have had a unique outcome even through last year and the year before. So, thatâs been part of our recipe for success and to be able to leverage that and give something to our employees will be proud of, their families will be proud of. And I think itâs part of the being not only to succeed in realizing revenue synergies and the growth that we committed to as well as operational synergies. Most importantly I think itâs necessary to be the employer of choice. Employees in the rail industry had to work itâs not an easy job. They have a choice of where to work, all the railroads are hiring, CPKC, pending, of course, the STBâs approval of our transaction. I believe has the potential, again, for the employee to create a unique experience in this industry, and thatâs what I am most excited about. Good evening everyone. Welcome back Nadeem. Just wanted to ask on one of the comments you made on the largest hiring and CapEx programs you undertook in preparation of the opportunities ahead. How much harder in CapEx are we expecting to unleash months of transaction STB approved? Well. From a â I will tell you from a CP standalone, our CapEx is $1.6 billion. So, let me comment on Kansas City Southernâs CapEx, but they have had a number of initiatives, call it, whether itâs from a bridge point of view or from other land acquisition and so forth, they are hitting record CapEx levels as well. From a hiring point of view, we hired starting in the spring of 2022. We have had a strong pipeline in anticipation of the grain crop coming back. So, we saw our employee counts, I think get up to almost 13,000 people at the end of the year. And so we hired, I think close to 2,500 new people were hired and trained. So, that was certainly a significant expense in 2022 and it will be a significant expense this year as we prepare for growth. So, those RTMs that we expect to come along the GTMs, assuming a positive response from the STB, the synergies that one day will realize, will take some people. So, we are hiring a few thousand at a time, and we are spending CapEx at record levels on our property and KCS on their properties. So, just a bit of color, hopefully, that helps Konark. Good afternoon. I appreciate the time. You noted that KCS estimates on or headwinds in the past couple of quarters here, units differ then. At the CP core just you can comment at this juncture, just curious how addressable you think those headwinds are and how quickly they can be range in upon a successful STB decision? Yes. Itâs hard to put a number that, Steve. The thing I think about, obviously, I canât stick my hands of their business. John and Pat and the team are very competent and capable and talented railroaders, and they are managing those situations now. Pending STB approval and we have an ability to get our hands into it. Then obviously, when you put the combined network together as we tend to go as a team, we create and you take out handling, you do a lot of those things that whatever challenges they are dealing with is going to get better from a fluid an operational standpoint. And the other thing is as we win this business that we are talking about and we create these new markets, you take out some of the complexity of cars being handled back and forth with a single-line move versus an interchange move. Thatâs true for CP-KCS, thatâs true for a move perhaps giving ECB, NCN all of the above. Single line is part of the value of this for the customer. Itâs part of the efficiency. As far as the asset turn, you control the move cradle to value there, you charge a fair price for it, you create capacity. And as a result, you have a more efficient railway, which produces a lower operating ratio. Itâs just the way you effectively run the business. So, I canât put a number on it. I can tell you that you should expect improvement naturally because of all those reasons. And I can tell you this is going to be a team committed to driving that improvement. There is a change in basic time in Canada towards the end of last year, letâs call it $300 million headwind as it appear, just wanted to see how you are thinking about that at your home network year and the next year. And then maybe for John, if you can comment on just the price mix and I guess there was a 200 basis point headwind this quarter. Putting it together, it looks like you might be facing similar trends in the first half of next year just based on the comps and the wins that are coming on the network. But I wanted to see if you give some high-level color in terms of how to think about mix and how that impacts you next year? Thank you. I will say a few short words about these new orders [ph] in the sick days. I am not thinking in tens of millions of dollars, I am not thinking in hundreds. I am thinking about the practical application of this. Number one, those sick days have to be earned through â22 or â23. So, really, they donât come into play until â24 full year effect. Number two, our manpower models, and I donât care if itâs a mechanical group, the running trades group, locomotive group, the lines are very great. We model because employees obviously get sick days already in our manpower models. So, to suggest itâs going to go from zero to whatever to 10, a multiple of 10 would be to me are responsible on my part. Our employees, if I look at running trades, for instance, we have got average sick days in a year, I think the rough number is four or five. So, thatâs already kind of baked into the manpower model. Now, if I have got to payment for those four days or five days, there is some impact. But at the end of the day, itâs not going to be material. I donât know exactly what it will be, but we wonât have full effect in â23. I know that for a fact and when we do, I donât think itâs going to be material. Brian, you know what, you are right. I kind of see similar trends evolving as we move in the first half of 2023. Typically, our bulk franchise just by nature, a little lower on an average cents per RTM basis relative to the rest of our book, that will kind of maintain or keep some of the pressures relative to the mix that you described. Hey. Good afternoon. Thanks for taking the question. I just wanted to see if Nadeem or Keith, maybe you could talk about the expectations for the progression of the debt pay-down, kind of how are you seeing that play out over the course of 2023 and maybe into 2024? And what kind of impact might that have on your interest expense? Thanks. So, yes, we are generating a significant amount of free cash as well as dividend payments from Kansas City Southern. So, we are kind of on pace to continue to de-lever, get back to our 2.5x target leverage. So, we have gone from kind of a little bit above 4, 4.1, 4.2 down to 3.7, 3.8 levels as we speak. I would expect that to get in the high-2s by the end of the year. And so over the course of â24, we should be back in target leverage, keep it at that level. And as far as the interest payment, I just follow that â follow-up with Maeghan and Chris post call back in the office three days so far. So, you caught me on that one, and so itâs better to connect with them on the interest. Thanks operator. Hi everyone. I joined the call a little bit later, so apologies if these questions have been asked. But one, I was wondering if you could talk about non-fuel costs. Obviously, there is inflation, I assume you have some visibility, if you could help us kind of think about the OpEx this year. I guess, follow-up separately, with Kansas City, there used to be a time where they provided US OR and Mexico OR. And I assume that based on where they are today, it may be safe to assume that they are kind of in the 70s now in terms of the U.S. business. I donât know if you want to comment or talk about that, but just trying to understand gap in terms of where they are in the U.S. business and where CP is? Sure. Yes, thanks for those questions. You cut out a little bit, so forgive me if I didnât get â I donât get the full question and respond to you correctly. But I think you mentioned about inflation ex-fuel. We were running close to high-6%, almost 7% in Q4, so significant inflation that we havenât seen in some time or certainly havenât seen in my career. The good news is John has been â as he updated on the call, we have been pricing above inflation, and we fully expect that. In this uncertain macro environment, we will see what happens with inflation. Certainly, we have seen it kind of slowdown in some areas, some of the latest economic indicators have seen hopefully peak inflation, and we will see that come down through 2023. But irrespective, we are protected from an operating income point of view. In terms of OR, KCS versus KCSM, yes, not appropriate for me to comment, and I couldnât even tell you the answer, if I wanted to. So, if I knew it. So, more to come on that and not something that I am going to answer on this call. Thanks and good afternoon. I guess to follow-up on some of the questions about pricing. Can you talk about what percentage of your business is getting re-priced this year? And as you have started to pursue some of the new business opportunities as a result of the KCS merger, are you seeing any of the other rails respond to that with more competitive pricing? And if not, how are you thinking about that risk as you integrate the deal? So, Justin, we should see roughly 40% of our book rollover in 2023, and thatâs pretty typical for us. And the competitive response, I fully expect that they are going to do it. They need to do in areas where we are going to go head to head, again, assuming the STB approves our transaction. That being said, I would also say that a lot of the examples I have provided today, and I have spoken to in the past, are really non-rail moves today. Itâs about focusing on these opportunities, I think uniquely can be solved by CP-KCS and are really competing against truck. And as I think about even traffic that we are looking at potentially out of Mexico, up in some markets thatâs moving short or other alternatives that arenât head-to-head versus rail. So, look, we are going to compete where we compete, and I fully expect the U.S. rail competitors to do what they need to do on that front, and we will do the same. And again, we will try to focus on those growth opportunities that are more maybe non-competitive with those in moving via truck or other modes. That reached our allotted time for Q&A. I would now like to turn the call back over to Mr. Keith Creel. Okay. Thank you, operator and thank you for joining us again this afternoon. As you can sense, these are unique opportunities, its unique time in this companyâs history. Obviously, continue to find the STB approving our merger application, we are poised and ready for a historic year for a combined entity CPKC, historic for our customers, for our employees, for the communities we serve, for the North American economy in a very unique way. So, with that said, we look forward to waiting on that decision and pending that decision as positive as we hope that it will be, and we believe the support. We will be scheduling election note, a date to in the future sometime in June, late June, we will be in a position to be able to come together and share all these facts and answer a whole lot more questions and provide some color as to what the true opportunity lays ahead of us for 2023 and beyond. So, thank you for that, stay safe, and we look forward to talking again on our next call.
EarningCall_1071	Thank you for holding, and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. [Operator Instructions] At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead. Thank you, Julianne. Good morning and thank you for joining us for Rockwell Automation's first quarter fiscal 2023 earnings release conference call. With me today is Blake Moret, our Chairman and CEO; and Nick Gangestad, our CFO. Our results were released earlier this morning, and the press release and charts have been posted to our website. Both the press release and charts include and our call today will reference non-GAAP measures. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available on our website for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company, and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and details in all our SEC filings. Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Let's turn to our first quarter results on Slide 3. I'm pleased with our team's exceptional focus and execution as we delivered another quarter of strong growth and profitability. Organic sales and earnings were both up year-over-year and better than we expected this quarter. Rockwell's continued investments in resiliency and agility, along with a gradually improving supply chain environment, helped more than offset many of the headwinds we faced heading into Q1. Orders and backlog were up sequentially in the quarter. Order cancellation rates were flat to prior quarter and remain in the low single digits through January. We are encouraged by the continued strength of our end user demand across all business segments and regions. Total sales grew almost 7% versus prior year. Organic sales were up 10% year-over-year, better than our expectations despite a very dynamic supply chain environment. Currency translation reduced sales by 4% and acquisitions contributed about a point of growth this quarter. Consistent with our prior assumptions, the split of sales by business segment, region and industry was impacted by access to specific electronic components and the composition of our backlog. In the Intelligent Devices business segment, organic sales increased about 7% versus prior year with growth in all regions and product lines. We had another quarter of remarkable order growth in our independent cart technology business, driven by large multi-year deals across many industries including EV, material handling and semiconductor. I'll cover some of these strategic wins in a few minutes. Software and Control organic sales grew almost 16% versus prior year. Better than expected growth was driven by our team's ability to quickly redesign and requalify certain Logix products to secure additional components supply with the support from key suppliers. We also continue to see a gradual improvement in electronic component supply. Lifecycle Services organic sales were up 10% year-over-year. Book-to-bill in this segment was a healthy 1.21 and was consistent across solutions, services and Sensia businesses. Information Solutions and Connected Services sales had another quarter of double-digit year-over-year growth. We are seeing a significant uptick here in large multisite and multiyear deals, both in software and services. One of our Information Solutions wins this quarter was with a leading potato processing company, where a combination of our Kalypso digital consulting and enterprise analytics capabilities helped the customer increase throughput and reduce energy costs across multiple production lines. We're proud to be an important digital partner to this global company as they focus on doubling their revenue over the next five years. Our recent software acquisitions continue to land us new logos across various industries and regions. These include Plex wins in metals, food and beverage and automotive and numerous enterprise asset management wins Fiix's cloud-native offering in Asia, where we are leveraging the distribution network to amplify our sales with local customers. On the Connected Services side, we continue to build momentum with enterprise cybersecurity wins with customers across food and beverage, life sciences and consumer packaged goods, prioritizing their investments and resiliency of their operations. One of our key cyber wins this quarter was with one of the world's largest global consumer goods companies, who chose Rockwell's differentiated portfolio of hardware, software and services along with the capabilities of our partner Claroty to manage OT security at hundreds of their sites globally. This multiyear deal will also contribute to our double-digit growth in annual recurring revenue. Q1 ARR grew 14%. Segment margin of 20% was up over 100 basis points year-over-year and was better than expected. Adjusted EPS grew 15% year-over-year. Let's now turn to Slide 4 to review key highlights of our Q1 end market performance. All three industry segments saw strong year-over-year growth and were above expectations, consistent with the continued gradual improvement in electronic component availability. In our discrete industries, sales were up low teens. Within discrete, automotive sales were up 25% versus prior year. We continue to win new and follow-on orders with both the brand owners and the supporting EV ecosystem, including vehicle and battery OEMs and system integrators. A good example of Rockwell's strong position in EV this quarter is our win with a leading battery supplier. Our independent cart technology was selected for the battery cell assembly and formation process to support Ford's BlueOval greenfield plants in Kentucky and Tennessee. We talked about our strategic partnership with Ford at our Investor Day last November, and we are excited about the progress we are making together. Semiconductor sales grew over 20% versus prior year. This is another vertical where we are able to expand our offerings to new applications, including independent cart for wafer transport and Logix-based automation for silicon carbide wafer manufacturing. In eCommerce and warehouse automation, our sales were down low teens versus prior year. Some of our largest eCommerce customers are in the process of shifting their investment from greenfield to brownfield, and we expect continued investments in upgrading existing facilities, including next-gen sortation systems over the course of this fiscal year. One of our large multiyear wins in eCommerce this quarter was with CMC, a leader in smart solutions for sustainable packaging. Rockwell's smart machine architecture, which includes our full portfolio of hardware and software, will help CMC produce its innovative on-demand packaging at scale. Another important win in the quarter was with Phononic, a technology company focused on unique heating and cooling systems. This customer is working with our Kalypso team to create the cloud and IoT infrastructure necessary to support Phononic's disruptive design for cold chain solutions and warehouse applications. Moving to our Hybrid industry segment. Sales in this segment grew low teens year-over-year, led by strong growth in food and beverage. Food and beverage sales were up over 15% versus prior year. As I mentioned earlier, we saw a number of large cybersecurity wins in this vertical, underscoring customers' focus on resiliency and security in their operations. Life Sciences sales grew mid-single digits in the quarter. In addition to software, we saw a high number of cybersecurity wins in this end market this quarter with several important wins coming from Europe. Tire was also up mid-single digits in the quarter. Let's turn to Process. This segment grew mid-single digits versus prior year, led by growth in metals and oil and gas. We rarely talk about our metals vertical, but we had an important sustainability win with Cornish Lithium, a pioneering mineral exploration and development company, who chose Rockwell's PlantPAx process control system for its demo plant to convert lithium concentrate into high-grade refined lithium used for battery production. We are excited to partner with Cornish Lithium on this energy transition journey. Turning now to Slide 5 in our Q1 organic regional sales. Similar to last fiscal year, our performance here is a reflection of electronic component availability rather than the underlying customer demand. North America organic sales grew 8% year-over-year, Latin America sales were up 6%, EMEA sales increased by over 13% and Asia Pacific was up 16%. Let's now move to Slide 6, fiscal 2023 outlook. Given our Q1 performance, our record backlog and a gradually improving supply chain we are increasing our top line and bottom line outlook for fiscal 2023. While we are encouraged by the improving electronic component landscape, the macroeconomic environment is still very dynamic and we continue to take a conservative approach in our operations. Our fiscal 2023 guidance projects total reported sales growth of 12%. Organic sales growth of 13% at the midpoint assumes continued supply chain improvement. The majority of our fiscal 2023 shipments are already in backlog. We continue to expect acquisitions to contribute a point of profitable growth and currency to be a headwind of about 2 points. Nick will touch more on this later. ARR is still expected to grow 15%. Segment margin is expected to increase by over 100 basis points year-over-year. Adjusted EPS is expected to grow 17% versus prior year and we continue to target 95% free cash flow conversion. Let me turn it over to Nick to provide more detail on our Q1 performance and financial outlook for fiscal 2023. Nick? Thank you, Blake, and good morning, everyone. I'll start on Slide 8, first quarter key financial information. First quarter reported sales were up 6.7% over last year, Q1 organic sales were up 9.9% and acquisitions contributed 80 basis points to total growth. Currency translation decreased sales by 4 points. About 7 points of our organic growth came from price. Segment operating margin expanded to 20.2% and was significantly higher than our expectations. The majority of our margin improvement versus our expectations was driven by the higher revenue from the redesign activity and improved electronic component availability that Blake discussed earlier. The 110 basis point year-over-year increase in margin was driven by positive price cost and higher sales volume, partially offset by higher investment spend. Corporate and other expense was $27 million, in line with our expectations. Adjusted EPS of $2.46 was ahead of our expectations and grew 15% versus prior year. I'll cover a year-over-year adjusted EPS bridge on the later slide. The adjusted effective tax rate for the first quarter was 17.1%. This was in line with our expectations and aligned with our full year estimate of an 18% adjusted effective tax rate. Free cash flow of $42 million was $91 million higher compared to last year, driven by higher pre-tax income. As in recent quarters, working capital continued to grow sequentially. We expect one more quarter of working capital increases this year. We expect working capital balances to decline slightly in the second half of the year as our supply chain gradually improves. One additional item not shown on the slide, we repurchased approximately 600,000 shares in the quarter at a cost of $156 million. On December 31st, $1.1 billion remained available under our repurchase authorization. Slide 9 provides the sales and margin performance overview of our three operating segments. Organic sales grew double digits in Software and Control and Lifecycle Services, with Intelligent Devices growing 7% year-over-year. As Blake mentioned earlier, orders grew sequentially in Q1 as we saw a healthy demand driven by continued strong project activity with our customers. We continue to see customer ordering patterns consistent with the longer lead times we have for portions of our portfolio. We expect further normalization of ordering patterns as lead times and different products improve. Turning to margins. Intelligent Devices margin declined by 130 basis points year-over-year due to higher resiliency spend and an unfavorable currency impact, partially offset by positive impact from higher price cost. Segment margin for software and control increased 630 basis points compared to last year on positive price cost, the favorable year-over-year impact of Plex and higher sales. Lifecycle Services margin was roughly flat year-over-year. Similar to Q2 fiscal year 2022, we expect Lifecycle Services margin to expand through the balance of the year. The next Slide 10 provides the adjusted EPS walk from Q1 fiscal 2022 to Q1 fiscal 2023. Core performance was up $0.55 on a 9.9% organic sales increase. The impact of currency was a $0.15 reduction in earnings per share. This was slightly better than our expectations. The year-over-year impact was due to a stronger U.S. dollar. Incentive compensation was a $0.10 headwind, slightly more than our original plan and driven by our increased growth and earnings expectations for the year. Our higher adjusted effective tax rate was a $0.05 headwind and our reduction in outstanding shares added about $0.05. Let's move on to the next Slide, 11, guidance for fiscal 2023. We are increasing our reported sales guidance to about $8.7 billion in fiscal 2023 or 12% growth at the midpoint. We expect organic sales growth to be in a range of 11% to 15% or 13% at the midpoint of our range. We expect volume to be 9 points of growth and price to be 4 points of growth. This guidance takes into account our Q1 outperformance and is based on our current view of electronic component availability and the rate at which we can deliver on our backlog. By quarter, we expect organic growth rates in Q2 and Q3 to be the highest of the year with each up in the mid to high teens year-over-year, while Q4 revenue is expected to grow organically single digits. While we expect sales to be up sequentially in Q2, we expect margins to be similar to Q1 levels due to higher sequential spend on new product development, resiliency and the timing of our annual merit increase. We now expect a full year currency headwind of 200 basis points, which is 50 basis points better than our previous guidance. This updated outlook primarily reflects the strengthening of the euro against the U.S. dollar. We expect full year segment operating margin to be about 21%, up from prior guidance of about 20.5%. We continue to expect positive price/cost for the full year, with most of the favorability coming from the price actions we took in fiscal 2022. As expected, the majority of our year-over-year price/cost benefit this year is coming in the first half of the year. Our updated guidance now assumes full year core earnings conversion of around 35%. We are increasing our adjusted earnings per share guidance to $10.70 to $11.50. At the midpoint of this range, this represents 17% adjusted EPS growth, up from the prior guidance of approximately 12% at the midpoint. A few additional comments on fiscal 2023 guidance. Corporate and other expense is still expected to be around $120 million. Net interest expense for fiscal 2023 is now expected to be about $130 million. We're assuming average diluted shares outstanding of 115.4 million shares. We've also included on Slide 12 an adjusted EPS walk from our previous guidance to our current guidance at the midpoint for your reference. Thanks Nick. In this dynamic environment, we are positioning ourselves and our customers for a more resilient, agile and sustainable future. Automation has never been more important in solving our customers' biggest challenges. A large percentage of these global investments are being made in the U.S., where we have the strongest market share, the best channel and decades-long relationships. Shoring is real for many of our most important verticals, and we see these investments, along with the early benefits of the Inflation Reduction Act, reflected in our continued, strong order rates. We are accelerating the pace of our innovation, including new product introductions across all key product platforms and our recent acquisitions. These were showcased at our very successful automation fair in Chicago, where we welcomed over 18,000 customers, partners and employees to an amazing demonstration of the value provided by Rockwell and our friends. I was also able to meet our new CUBIC team in Denmark a few weeks ago, and I am excited about the new opportunities to expand our sustainability portfolio with an increased presence in renewables, CUBIC's largest customer segment. Importantly, I'm happy with how our culture is both embraced and enriched by our recent additions. And I'm excited to see how we deliver strong growth and new customer value together in the years to come. You guys mentioned a couple of times electronics availability as being still a gating factor. Maybe a little bit more color on that in context kind of how that compares perhaps even just the last quarter and prior quarters and also maybe just some context around the product categories or the geographies where it's particularly still acute? Sure. Thanks, Scott. So we characterize the general landscape as generally improving. And I think that's still the case. We use a lot of chips across our product lines. And I think most notable for the quarter's results was our ability to mitigate the specific issue that we were concerned about affecting software and control when we talked last. We were able to move quick we had good relationships with the involved supplier that helped us mitigate that risk. But in general, we're seeing chips improve across a broad landscape, but it's not going to happen overnight. And so we continue to work with those suppliers to improve the remaining constrained chips and some of those are in software and control, some of them are in intelligent devices. And then, of course, because Lifecycle Services uses products from both of those business segments, there's some secondary effects there as well. But the view is optimistic, but all it takes is one chip and a product to keep from being able to ship it. And so it's not all clear yet. Blake, is that impacting kind of customer order patterns still? I mean is there still so much fear that lead times are too long that folks are potentially holding on to a little extra inventory here and there? Or is that not an issue because they were never able to hold on to inventory because they couldn't get any product to begin with? Yes, it's going to be uneven by different product lines. So, we do have product lines in our portfolio that have pretty much returned to pre-shortage, pre-pandemic levels in terms of lead times. The majority of our product offering is still at elevated lead times. We still see OEMs placing big orders for more months of coverage for their machine needs than they would like to, than they will when we return to more normal lead times there. So it's still a factor, but it's improving, and we expect it to improve through the year. Blake, as you started calendar 2023, have you noticed any change in customer conversations around their CapEx plans in any of your end markets that concerns you? And then you talk about how you're thinking about your backlog moving forward? Obviously, it continues to be unusually high. Given the current demand environment, does it seem likely at this point that you end FY2023 with still relatively high backlog that sets you up for a pretty strong 2024? Yes, let me start with that one first, Andy. We're going to have far higher backlog at the end of fiscal 2023 than traditional levels. That's clear. We saw sequential growth in backlog from Q4 to Q1. And with the demand that we're seeing, then we expect backlog to continue to be high as we head into fiscal year 2024. Now in terms of customers' CapEx behavior, the industries that we've highlighted as needing to make, let's say, once in a generation changes in their capacity, that's continuing. And we do track announced CapEx investments across the verticals that are important to us, and we continue to see high levels of investment in EV and battery. Semiconductor isn't on quite the same ramp up of quarter-over-quarter growth of new announcements but it's at a very high level even as that moderates. And as we've talked about, we're seeing increasing share of wallet in those fabs. So that's good news. Food and beverage, we talked about some of the areas, particularly of new value that they are investing in, probably a split of both CapEx and OpEx when they are looking at cybersecurity and some of the information solutions that we're adding. And energy continues to be a positive area where we expect for the full year, oil and gas is going to be double-digit growth for us. Very helpful, Blake. And then Nick, maybe I could just ask you for more color on how you are thinking about price versus cost. You mentioned the 7% price in Q1. I think last quarter; you said price cost would be 100 basis points positive tailwind for the year. Has that expanded at on, how are you thinking about the stickiness of your pricing as supply chain-related headwinds begin to subside? Yes, the guidance I gave last â three months ago that we expect about 100 basis points of margin expansion through price cost, that holds. It's more or less almost exactly what we said then. The way we see it progressing through the year, we see the majority of, in fact, the vast majority of that year-over-year change improvement happening in the first half of the year. We expected and we continue to expect approximately or a little under 200 basis points of margin expansion in the first half of the year, year-over-year on price cost and that moving down to about 50 basis points of expansion from price cost in the second half of the year. That's not a deterioration as it goes on, that's more a statement of the comps we're going against in fiscal year 2022. Going beyond that, in terms of price cost, now we're getting into 2024, and I'm just not ready to be giving any guidance on how we're seeing price cost beyond that. Hey, good morning. Just a couple for me. First, just on supply chain and kind of the whole redesign dynamic, Blake. Does this actually create some permanent cost advantage, or actually is the redesign work kind of a negative makeshift thing that needs to kind of be corrected further down the road when the supply chain improves more? Yes, this is going to make us stronger for the future. The additional redundancy, the qualification of additional components, the work to design basically new bills and material with less constrained components with better suppliers to ensure that that flow is more resilient, long term, that's going to be a net benefit to our overall supply chain. There is some overhead in terms of additional cost that's being directed towards those resiliency efforts, and that will wane over time. But currently, that does contribute to some of the additional costs that we're seeing. But we're already seeing the benefits. And I think mid and long term, that will also continue to be a real strength as we, like all our customers, are looking to increase their resiliency. And then maybe just another kind of a two-parter for me. First on IRA, I was a little surprised to hear you say you're seeing some benefits there. I know like in wind and some other areas things are kind of gummed up waiting on rule promulgation. So I wonder if you could comment on what you're actually seeing there. And then secondly, on semi, I think, your historical strength has been on the material handling side of the house. And I would think independent cart is a better version of material handling in many respects. But could you maybe size in percentage terms or however you could frame it, how your potential share of wallet is changing in semi with your newer offerings? Sure. So Jeff, you asked about the IRA and what specifically are we seeing there. A couple of thoughts come to mind with that. One, we've showcased the work that we're doing with First Solar, including some of their greenfields, which they've stated were helped along by IRA funding for renewable energy. And so we're proud of the relationship we've had for many years with First Solar. We're doing the controls and now the digital twins in their facilities. They would not have introduced as many greenfield projects without IRA funding. And so that's an example where it helped them, which helps us because they are a good partner. The second is some of the provisions in the IRA on U.S. manufacturing. When an automobile manufacturer builds a plant in the U.S., there is a higher probability that we're going to get large content because of our strong position here. And so that's also what's helping us as well. And again, it's the increased investment in the U.S. by the brand owners. But then when it comes to the U.S., for the reasons I talked about earlier and that you're well aware of we have an unmatched position. So for the second part of your question, semiconductor and what are we doing there? For a long time, our core strength has been in areas of facilities management and control systems. So that's controlling the temperature, the humidity, the cleanliness of the clean room environment. We've done that for a long time in Asia. And as more fabs are being built in the U.S., again, we're extending that capability and share of wallet here. It's also in clean room process tools. And with some of the tooling suppliers, we've enjoyed a good relationship for a very long time. And that's a combination of hardware as well as our project management and engineer-to-order expertise. More recently, cybersecurity has been a factor and has added millions of dollars of new business as we're helping harden these facilities to make them more resilient against cyber-attacks. And the wafer transport that we've talked about a couple of times, that independent cart technology that we talk a lot about in EV and other industries, is really valuable here as well. And we're starting to win big, multimillion dollar projects in several of the largest semiconductor companies in the world. And then the final one that I mentioned was a silicon carbide becomes a scale technology. We're starting to use it in our own products. We're seeing some logic-based automation there, and that's exciting because they are using a standard architecture rather than a lot of the custom PC-based control systems that have characterized that industry for a long time. So hopefully, that gets at the heart of those questions, Jeff. Blake, just trying to balance out here some of what you're seeing out there versus what we're seeing in the macro, I guess the Fed is trying to create some more employment flag deliberately, and you would think that productivity and automation are sort of a foil for that, but it doesn't really seem to be showing up in orders. And I know some of the markets you mentioned in the prepared remarks where things like food and beverage and life science and EV, and maybe there's just not as much demand variability there. But how do you see kind of this cyclical versus secular balance? And are customers making these investments kind of with the expectation that demand will slow down and these are imperatives anyway? Yes, I think, there is a blend of things going on. First of all, there is the investment in new technologies that all of the players in the industry, like EV, have a real fear of missing out on. Weâve got the idea that they're going to take a pause based on the macroeconomic concerns and let their competitors build out their fleets and be far ahead of them in terms of their ability to turn out hundreds of thousands of vehicles a year, they just can't wait. And so they are having to power through a still dynamic economic environment. And of course, that's EV and battery. I would say it's also semiconductor as well, where they have to build this capacity. In general, we're seeing across a broader spectrum of verticals the idea that automation is going to help them be more resilient and is going to enable greater productivity from their workforce. So it's not so much about the direct substitution of automation for labor, it's making that labor more productive. And I think that's a general trend that we're seeing across other of our verticals, food and beverage, pharma, and so on. So we're seeing that. We're not tone-deaf to the concerns about the economy. And in terms of our own operations, when I talk about taking a conservative approach, we're watching that. We're prudently adding resources as needed to fuel new growth, but we're very aware of the macro. It's just not going to have as much of an effect on us in the current fiscal year because of a huge backlog that we have, and we're building backlog that's going to go well into 2024 and beyond. Got you. That's helpful. And then just a follow-up on maybe putting some of these announcements we see out there in context. I think the White House put out something fairly recently, talking about across different verticals like ones you mentioned, some $350 billion [ph] or $400 billion [ph] worth of projects over the next several years. What's sort of the automation exposure within that for some of these bigger announcements? Is it 2% of the spend? 10% of the spend? Just trying to maybe kind of dimensionalize that versus kind of the bigger numbers that we see? Yes. Josh, I wish I could construct an equation that would give you the percentages by vertical and give us our guide for us. But unfortunately, there's a huge amount of variability between the different industries. And of course, between greenfield, brownfield and so on, a lot of the brownfield-type investments are going to carry with it a higher percentage. So some of those are dedicated to the things that we offer in terms of automation and information management and the related services. The percentage spend for a new fab or a major new EV complex, it's going to be a small percentage of the total. And our job is to maximize the wins in our traditional value, but work really hard as we're doing in areas like semi and EV to add share of wallet, like we're doing with independent cart really in both of those as we're doing in software on the EV side and so on. So I hope that while that percentage of the total CapEx remains fairly low, it's high value, it's profitable and it's growing each year. Hi. Good morning. I just wanted to circle back to the margins, as that was the main area of surprise, I guess in the quarter. So I think Nick, you talked about a 20% segment margin in the first half and sort of 22% in the second half. Is it life cycle services that's seeing that biggest kind of half-on-half ramp? And then also, any help you could give us on thinking about the Software & Control operating leverage? I think that averaged about 70% in the last three quarters, so exceptionally high performance. How should we think about that on a sort of run rate ahead? Yes. Julian thanks for the question there. In terms of moving from roughly 20% margin in the first half of the year to 22% margin in the second half of the year, yes, lifecycle services is one of the bigger contributors to that step up as we see lifecycle services going up through the year. But we're expecting margin expansion in all of our segments year-over-year in fiscal year 2023. And lifecycle services just a little bit over the total average for margin expansion that we're expecting. So that's how we're seeing it. In terms of Software & Control, like Julian, just one of the things I just want to point out, as you look at some of the leverage that we're getting, if you're looking at the base, that was including what I was calling out a year ago of some of our incremental expenses related to Plex. So as an example, in our a little over 600 basis points of margin expansion year-over-year in the first quarter in Software & Control, there's about 200 basis points of that, that came from the year-over-year change in what we're experiencing in Plex as we're largely driven by some of those onetime expenses that we had in 2022. In terms of the overall leverage and conversion that we expect in Software & Control, we don't really give it down to that â at a segment level like that. We â you've often hear me talk about our 30% to 35% core conversion. That's more inclusive of everything. But as we grow Software & Control, we continue to expect that that's going to create margin enhancement. That's one of the things that we expect that will enhance our margin. It is also a business that is attracting more of our incremental growth investments as well as we put more investment in that. That's very helpful. Thanks Nick. And then maybe one just for Blake, on the sort of process industry vertical. So I think you talked about mid-single-digit growth there in the first quarter, and you'll pick up steam as the year goes on. Is that just a function of kind of sort of faster backlog recognition in Process Industries as the year goes on? Is there any sort of particular vertical within process that you think will drive that pickup over the balance of the year versus what you saw in the first quarter? Yes. Julian, oil and gas is where we expect a particularly strong ramp from mid-single digit to double-digit. We also see a little bit of that in related chemical industries, particularly the fine chemical applications that are really our sweet spot. Orders continued strong for oil and gas and other verticals in process. They continue, as I mentioned before to see some supply chain shortages that put a little bit of pressure on the shipments in the quarter. But we're comfortable and confident with the continued orders and with the really strong backlog that we'll see the double-digit growth for the full year. I should mention â I should just mention, since we're talking about process if you were at Automation Fair, you saw the new high availability Process IO. So it's not just the traditional value that we're providing, but the strength of some of our recent acquisitions and new product introduction. And as we release over the coming months that high availability IO, that's a major step change in our capabilities in our PlantPAx system. So that's something that had been a gap for a period of time, and we're very happy with the way that the IO has turned out and the endorsement by process customers. Just on the orders, maybe just a little bit more color. I mean it looks like the lifecycle services orders were up sequentially. You said that total orders were up sequentially. I mean any kind of frame of rough magnitude? I mean should we assume kind of modest sequential growth? Maybe just give us color on total book-to-bill. Was it in around that kind of 1.1 type of area? Maybe just a little bit more high-level color on where the orders landed? Yes, the orders were strong. We continue to give the book-to-bill specifically for lifecycle services, which was at 1.21. And overall, for the company, as we talked about orders and backlog being sequentially up, meaning, obviously, orders were in excess of the shipments for the quarter, it's across the segments and it's across the regions as we see that continued demand. And we will see continued high backlog levels even with the strong shipments and the increased guide, we'll see very strong backlog at the end of 2023 as we go into 2024. Yes. We haven't talked about it other than to say itâs healthy sequential orders because we think the sequential information and the cancellation rates, which we also talked about being flat and remaining in low-single-digits, we think those are the most important factors going forward. Right. And the price embedded in those orders, I mean, to get from up â I think you said 7% this quarter to up 4% in the year, it looks like that prices obviously decelerating. I mean the comps on price get tougher. Is the price in the orders somewhat similar to the price you're booking in revenues today? And are you pretty much booked when it comes to future price increases at this stage? Yes, Steve, as far as the pricing, what the pricing that we're going to experience for the balance of fiscal year 2023 is all or virtually all of it already baked into our backlog based on the orders that we have and the pricing we put in that. And that will be showing sequential price improvement from what we're seeing right now, just based on how that backlog is playing out. In terms of the guide I'm giving for the full year that is not representing an aspect of price starting to come down from the pricing level we're seeing in the first half. It's just a recognition of â we had virtually no price growth in the first half of fiscal year 2022, and then we had more significant price growth in the second half of fiscal year 2022. So that change from the â it's all based on comp, not on any kind of deceleration there. And if I could just add to that, yes, we did have an additional price increase in December, so in this fiscal year. And apart from the announcements of specific price increases, we've talked over the last year of being more agile in terms of getting the recognition of the prices by changing our methodology with customers and with the channel. And I would just say that's proceeding smoothly and with our expectations in terms of being able to be more agile as future price increases are introduced. Sorry, one more quick one, because you guys mentioned it at the Investor Day, any feedback from the channel on how â on the behavior around this January cancellation policy change? Yes. As we talked about the new cancellation policy on orders, that's more of a hygiene type of issue. We didn't expect it to affect order patterns, and that's exactly our experience is that it did not have a significant impact on order patterns. But we got it in, and I think it's a healthy part of our processes. So question, as you look through this current cycle for CapEx, how are you thinking about recurring revenues on the back of your expanded installed base? Yes. So we've had a big focus on adding ARR. We've talked much more formally about it here in the last couple of years. And while it's still a relatively small part of our total business, I like starting each year with that recurring revenue. It gives you a reason for being constantly intimate with our customers and the whole land and expand motion is well understood to be a good source of ongoing value. We like our position in terms of having that, growing double-digits, and being able to complement it with the physical goods that we're shipping that are still being sold on a perpetual basis, a one-time PO. But over time, we expect to add additional software and services to our annual recurring revenue streams as well as hardware where that makes sense. One of the phenomenon is as we're in our second year of double-digit growth, because our overall business is growing so fast, the ARR as a percentage of the total is not increasing a huge amount, but it is more than keeping pace. And so we're happy with it. We're retooling our internal business processes to be able to take orders with a mix of hardware, software and services to make it easier and easier for customers and channel to be able to restack and expand the content in those subscriptions and so on. So we're happy with the progress there. Thanks so much. So I just want to clarify a couple of quick questions. Number one, you mentioned that after implementing the cancellation policy, it didn't really appear to impact order patterns. So just to clarify, you've seen orders trending still healthy here so far in 2Q? You've not seen any pull forward? We see some pull forward that was in Q1 that was more a factor from the price increase. But even without that, we had orders that would have contributed to strong sequential growth. So any pull forward would not have had much to do with the cancellation policy, but there would have been some pull forward in Q1 that would have been a factor of the price increase that we introduced then. We are also seeing, as I mentioned in Q1, strong project activity with multi-site and multiyear deals, and that was significant in Q1. Right. And then a lot of talk positively around IRA and its long-term impacts; do you get any sense that, that some of the customer base is still waiting on treasury guidance for some of these credits and the like to make some decisions around investment? Any sort of sense of what that forthcoming guidance could mean in terms of opening up orders? Yes, I know I think that's a fair assumption. Like we clearly have seen some activity of what we think of increased activity as a result, but there still is some portions waiting to be clarified. And I think it's a very fair assumption to think that some of our customers are waiting to see what that clarity is. I know, in our own case we're doing more evaluation and waiting to what some of the provisions means to us. So I think it's fair to assume our customers are doing the same thing. We are out of time for questions today. I would like to turn the call back over to Ms. Zellner to close out the call.
EarningCall_1072	Welcome to the Cambridge Bancorp Fourth Quarter Earnings Conference Call. We will be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures may be found in our SEC filings and in our earnings release. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Denis Sheahan, Chairman, President and Chief Executive Officer. Please go ahead, sir. Thank you, and thank you everyone for joining our earnings conference call today. I'm joined by our Chief Financial Officer, Michael Carotenuto, who will provide a review of the fourth quarter and an outlook for 2023. For your reference, 2023 estimates are included on Page 23 of an Investor Presentation we posted along with the earnings released this morning. I'm pleased to report another solid year at Cambridge Bancorp. Loan growth was robust, asset quality remains excellent, capital grew very nicely and the net interest margin expanded during the year. All of this balanced against a challenging period for deposit growth and wealth revenue as a result of market volatility and interest rates. Organic loan growth, excluding merger balances continued into the fourth quarter in both commercial and residential lending with 3.6% linked quarter growth and year-over-year growth of 13.3%. Core deposits, excluding merger balances, decreased by 5.2% during the year as a result of increased market competition, attractive yields within the fixed income markets and clients using funds for other opportunistic investments. Wealth management assets decreased primarily due to market volatility during the year. Client assets under management and administration totaled $4 billion as of year-end '22. The tangible common equity ratio rose to 8.12% as of year-end, and the company delivered a return on average assets of 1.1% and a return on tangible common equity of 14.18%, both on an operating basis. Another highlight was the completion of our merger with Northmark Bank, adding three new markets and approximately $430 million in banking assets. And we are on track for system integration in the second quarter of this year. We also announced a $0.03 per share increase to the quarterly common stock dividend to $0.67 per share, a 5% increase for the first quarter of 2023. Importantly, asset quality remains superb with nonperforming assets are just 12 basis points of total assets. I thought I'd take an opportunity to provide insight into a segment of the bank's loan portfolio that gets questions from investors. That's the office lending portfolio and it's understandable why we get and other institutions get those questions post-pandemic. Our office lending portfolio represents 8% of the total loan portfolio, or $319 million. The average loan to value at origination was 48%. In particular, questions seem to focus on the urban areas in the cities and our exposure there. The city of Boston office lending market for us represents 2% of the total loan portfolio with a weighted average loan-to-value at origination of 40%. The City of Cambridge represents 1% of the total loan portfolio with a weighted average loan to value at origination of 41%. There are no delinquencies in the office lending portfolio and all loans are pass rated. Before I bring Michael in to make a few comments, I will make a general comment regarding our outlook for 2023. While we expect this year may bring a recession and a year of slower balance sheet growth in both loans and deposits, we are prepared for the worst. Capital and reserve levels are very adequate. And based on our emphasis of conservative loan underwriting, we believe we are well prepared for whatever environment we are presented with. In addition to these areas, our focus will be on controlling the cost of funds and evaluating opportunities to reduce operating expenses were feasible. Overall, I continue to be immensely proud of my team support of clients of one another and our communities throughout 2022. Thanks, Denis. Good morning, everyone. To highlight a few items within the quarter, diluted operating earnings per share were $1.92 for the fourth quarter and $7.80 for the full year. The adjusted net interest margin, which excludes the impact of merger related loan accretion, increased by 8 basis points to 3.01%. Loan accretion during the fourth quarter was approximately 915,000 or 7 basis points on a GAAP basis. The cost of deposits, excluding wholesale deposits, increased by 21 basis points to 45 basis points for the quarter as a result of client requests for increased rates. Provision for credit loss in the fourth quarter consisted of two primary items, the first being the nonrecurring Day 2 CECL reserve build associated with the Northmark merger of $2.2 million pre-tax and the remainder or $1.4 million pre-tax associated with proactive reserve build. Within non-interest income for the quarter, wealth management revenue decreased from the third quarter due to approximately 450,000 in revenue associated with seasonal tax preparation fees. Our noninterest expenses for the quarter; professional services were increased from the third quarter, primarily as a result of consulting expenses associated with a renegotiation of our core data service provider contract and other various contract reviews. This provided a material benefit to the run rate of technology costs in 2023 and beyond, and an important factor in managing increases to non-interest expenses. I will now turn my attention to the outlook for 2023, which again is included on page '23 of an Investor Presentation we filed along with the earnings released this morning. The interest rate environment assumption for these expectations assumes that the Fed reaches 5% in the first quarter of 2023 and hold rates at 5% for the balance of the year. With an expectation of continued increased short-term rates, loan growth is expected to be lower than prior years. And given the expectation of slowing economic activity, we are currently assuming loan growth of 0% to 5%. Core deposit growth is expected to be between 2% and 5% for 2023. Growing and retaining deposits continues to be a priority for us during 2023. However, we understand this will be a challenge -- this will be challenging given competitive pressures and the current rates on fixed income securities. To that end, during 2023, we will look to use investment cash flow and net new client growth to reduce the approximate $487 million borrowing and wholesale CD position that existed at the end of 2022. To the extent possible, if achieved this will create a situation where total assets would remain fairly consistent to year-end 2022. Investment securities are expected to be reduced between $100 million and $150 million based upon current cash flow expectations. The adjusted margin is expected to be within 2.85% to 3% for the full year of 2023. Moving to non-interest income. The largest component of this category is wealth management revenue. Our assumption of a reduction within non-interest income of between 0% and 5% is derived from two key items; lower BOLI income and the lower starting point of assets under management. Within non-interest expense, we expect an increase in operating expenses of between 0% and 3% for 2023. This is off a base level of operating expenses of 107 point 3 million in 2022. The allowance for credit loss range of 90 to 100 basis points, expects the continued strong asset quality that you've seen historically from Cambridge Bancorp and we assume current unemployment forecasts remain consistent throughout 2023. which has an ending unemployment rate in the fourth quarter of 4.23%. Finally, and importantly, capital; given the company's earnings profile, we would expect the tangible common equity ratio to continue to build throughout 2023 approaching 9% given the various ranges included within our guidance MJ now we will open the line for questions. Get us in the slide in the earnings release rather, you said that you see evidence of a slowdown. What kind of evidence you're seeing out there with borrowers? Well, I think, Mark, obviously, the obvious one is in the residential space, given the increase in rates, it's really slow down activity in that area. But that also extends into the commercial side at least at least for us. We, in talking with our clients, there's sort of this broad uncertainty among business clients. I think we'd all like some clarity as to when the Fed will end its campaign on raising interest rates. There's a slowdown in commercial real estate transaction volume, I think the best way I can describe it for you Mark is there is -- in terms of transactions for investors, there's today. This, of course, may change. There's a large bid ask spread, sellers are not adjusting their exit cap rates to reflect today's interest rate environment. And then buyers a challenge to make deals work due to the higher rate environment. So that's a segment of our business that we think will be slower doesn't mean there's not going to be any transactions, but we think it'll be slower. I think construction, which isn't a huge, huge emphasis for us. Construction costs are high, finding skilled labor is tough, still in our market. So I think those in particular would be areas and I've commented on the -- in the past, on the innovation economy in Massachusetts, which is such an important, fundamental strength of our economy, I would characterize it as experiencing a modest downturn. There are layoffs, evident in some companies to sort of to preserve cash and to extend the runway. But there still is a an optimistic, long view of the innovation economy in the state, the larger companies are still expanding. But there certainly is, I would characterize it as a modest downturn. So I think it's reasonably widespread across the business community. And then the consumer section as well. As I mentioned in my first comment, Okay, that's helpful. And then Mike a couple of modeling related questions. First, so your margin guidance of 285 to 3% excludes loan accretion. So if we were to kind of add that back, it's sort of be an additional 5 to 7 basis points, roughly. Is that fair? On the reported margin, okay. And do you have a feel for the trajectory of the margins throughout the year? How are you modeling it? I think you're going to see lower in the first half and then recover in the second half, just because we'll have greater time to for new asset cash flows to come on at higher yields. Okay, great. And then I heard your guidance about sort of expenses is sort of $27.5-ish million a reasonable run rate in the first quarter, do you think? So if you take the full year, I think you're just dividing it by four. I think that's reasonable. I mean, the first quarter always has a little bit higher expenses just because of payroll taxes and the like, right, But on average, that's about right. Okay. And then, I guess I was curious, sort of a more strategic question. You've had a fair number of senior executives retire recently. I'm curious, does that signal any changes in strategy or incremental focus on any particular lines of business? No, no, I mean, retirements happened, and we're prepared for that we're very pleased with the succession plan and succession planning we had in place in the commercial banking division with two of our teams step up into the Chief Commercial Banking Officer role and the Chief Credit Officer role, so that's really terrific the succession planning there. We are initiating a search process for a new head of wealth management. So that will be an important, position for us to fill here in the first half of this year. And we feel optimistic about our ability to do so. But it doesn't signal anything other than people retire every so often. Hey, guys. This is Thomas Reid, Steve's RA. Can you offer us some insight on where new loan yields are today? Yes, I can give you a little bit there. So on the residential side of the house for 30 year, we're in the sixes, seven one arms or around five and an eighth today. On the commercial side the house for fixed rate, it's in the high fives, low sixes. Okay, great. I'm also wondering, can you give us an update on sort of, how you're feeling about deposit pricing and beta going into 2023? Sure. So through the cycle thus far, our cumulative beta, our cost of deposits, excluding wholesale is about 7%. When you look at the last cycle, our beta was around 26%. This cycle, we expect it to be a little bit higher. So we're assuming about a 30% through the cycle beta. Yes, just wanted to follow-up on the prior question as far as the betas, Do you see, like, yes good organic deposit growth this past quarter, looking for net growth over 2023 as well. Do you think that beta ramps up in the first quarter and then slows? Or do you think it's going to be fairly consistent throughout 2023? Yes, I mean, Chris, it's certainly hard to tell when it's difficult to predict consumer and business behavior in this environment. But if you look at what's happened, you've seen an increase in deposit costs since Q4 of last year. We expect deposit costs that continue to increase consistent with that guidance I talked about in terms of beta, but the timing of it, it's difficult to tell. Yes, Chris. So when you look at deposits, just when you exclude the impact of the merger, we actually had a slight decline in core deposits during the fourth quarter. Okay, got it. Okay. So when you look at deposits, just when you exclude the impact of the merger, we actually had a slight decline in core deposits during the fourth quarter. Okay, got it. Okay. And then, as far as the securities run off, the 150 million I think you mentioned for 2023. Is the material schedule for that fairly consistent over the course of the year? Or is there any big chunks come in at one point or the other? Okay. And then as far as the wealth management AUM, for the fourth quarter, how much was the kind of gross inflows versus the market impact? So during the fourth quarter, we had net client flows -- net client loss of about $17 million. Market impact during the fourth quarter was $230 million. Okay, great. And are you guys targeting or do you have any specific targets as to net client flows or kind of organic growth, ex market activity on the Wealth Management segment for 2023? Okay, got it. And for the loan derivative income, obviously, kind of a low point this quarter, do you see any signs of that kind of improving in the near-term? Or is it really kind of a remain a little bit of a debt environment for the foreseeable future? So we're very interested in continuing to do derivatives with our clients, something that we're pushing on to the extent that we're successful. You'll see an increase in derivative income. But clients are intelligent in I mean, they may be looking for fixed rate right now that may change as we go throughout the course of the year. It's always been something that that's moved up and down dependent upon client preference. We're assuming, Chris, that '23 will not be a robust year of loan growth per sort of my earlier comments in terms of what's happening in the marketplace. Should that change, I think the derivative revenue would also change. Good morning. Two quick questions. The first is on loan. Your loan expectations on growth is like 0% to 5%. And I'm just curious if you have any -- you had pretty good organic loan growth last year, I think it was about 13%, excluding the Northmark merger. I'm just wondering if you can, are there any scheduled repayments on the loan portfolio that would kind of need -- therefore you need to have higher growth. It's offset that or is it just your expectation that the economy is going to be able to softer. It's the latter, Bernie, that just softness, the borrowers are generally on the sidelines building cash. And I think waiting to see what the new environment where we end up. We're hearing of projects sort of being mothballed. Just people -- the uncertainty is we understand why this is happening. But the uncertainty is not welcomed by a lot of commercial borrowers. Sure. Makes sense. And then on your payoff, did you have anything material in 2021? That would have been higher, had to not had the pay offs? And then on the that's fine. On the deposit side, it looks like you've got a tick up in, like wholesale deposits? Is that something you have look to increase in the prior year and the upcoming year? Or is it just things that came your way? Because people are looking for yield? No, Bernie it's really -- it's an alternative to Federal Home Loan Bank basically. This is accounting for the robust loan growth we had and some deposit outflows for those clients who are searching for yield. So it's either Federal Home Loan Bank or brokered CDs. It's not other than that. It's -- we put them basically in the same category with about $480 million of wholesale funds. Yes, okay. Thatâs -- that was my follow on question. How does it compare to the FHLB borrowings? Great. Thanks. That's all I had. Good quarter. This concludes our question-and-answer session. I would like to turn the conference back over to Denis Sheahan for any closing remarks. Thank you, everybody, for your participation. We look forward to speaking to you again at our next earnings release conference call.
EarningCall_1073	Good morning. This is Kasey Jenkins, Chief Strategy Officer and Senior Vice President, Investor Relations. Thank you for joining todayâs fourth quarter earnings call. To accompany this call, we have posted a set of slides at ir.mccormick.com. With me this morning are Lawrence Kurzius, Chairman and CEO; Brendan Foley, President and COO; and Mike Smith, Executive Vice President and CFO. During this call, we will refer to certain non-GAAP financial measures. The nature of those non-GAAP financial measures and the related reconciliations to the GAAP results are included in this morningâs press release and slides. In our comments, certain percentages are rounded. Please refer to our presentation for complete information. Todayâs presentation contains projections and other forward-looking statements. Actual results could differ materially from those projected. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Please refer to our forward-looking statements on Slide 2 for more information. Good morning, everyone. Thanks for joining us. Our fourth quarter concluded a challenging and volatile year that impacted our ability to deliver on our expectations and our financial performance. At the same time, we ended the year with positive momentum with consumer consumption trends and flavor solutions demand, stabilized service levels and supply and meaningful progress in starting to reshape our cost structure. While more work remains to be done, our confidence in our outlook for 2023 and beyond is strong. Our organization is focused squarely on executing on the priorities I just mentioned. All of which are important drivers in the successful execution of our strategies and the delivery of stronger results. Turning to Slide 5, at our fourth quarter results, our sales declined 2% from the year ago period, including a 4% unfavorable impact from currency. In constant currency, sales grew 2% within our implied fourth quarter guidance range, but below our expectations. Greater-than-expected COVID-related disruptions in China unfavorably impacted our expected sales growth for both total McCormick and the Consumer segment by approximately 2%. Fourth quarter sales would have grown in the range of 4% in constant currency, excluding the impact of China on our results. We had anticipated even higher growth with fourth quarter restocking comparisons in the Americas Consumer segment further tempered our growth. As compared to last year, our fourth quarter constant currency sales growth of 2% reflected a 9% contribution from pricing actions partially offset by a 4% decline in underlying volume and product mix, an expected 2% volume decline from the Kitchen Basics divestiture and the exit of low-margin business in India and the consumer business in Russia and a 1% year-over-year volume decline from the China COVID-related disruption. Despite tempered fourth quarter sales performance, our underlying sales strength positions us well to accelerate sales growth in 2023. In our Consumer segment, excluding China, consumption trends strengthened, particularly in the U.S., where our fourth quarter total branded consumption grew 6%. In our Flavor Solutions segment, our sales growth was outstanding, continued momentum across all regions. Consumers increasing demand for flavor, whether through our products or our customersâ product is those reflected in this performance and in our most recent proprietary consumer insights research. Our alignment with the long-term consumer trends of cooking at home, clean and flavorful eating and valuing trusted brands continues to deliver results. This alignment, combined with our broad and advantaged portfolio, plus the fundamental strength of our category continues to underscore McCormickâs positioning for long-term differentiated growth in flavor. Moving to profit, our adjusted operating income decline of 10% or 9% in constant currency and adjusted earnings per share decline of 13% fell short of our expectations. Let me spend a moment on the differences to our expectation. Unfavorable product mix was a driving factor, particularly in our Consumer segment. This was primarily due to lower U.S. bites and seasoning sales stemming from fourth quarter inventory restocking comparison in both 2021 and 2022, which I will discuss in a moment. Our results also reflected lower-than-anticipated sales in China and an unfavorable product mix related to the sales mix between segments. In addition, with two COVID-related plant shutdowns in China, we realized lower operating leverage. During the quarter, we made meaningful progress to lower our run-rate cost in flavor solutions with the reduction of elevated costs that we have been incurring to meet high demand in parts of our business. The impact of that progress was offset in the fourth quarter by unexpected discrete one-time issues. However, we expect to see positive benefits in our results going forward. Turning to Slide 7, we are committed to increasing our profit realization in 2023. In our last earnings call, we discussed normalizing our supply chain costs and increasing efficiencies while also strengthening our ability to service customers. To that end, we have targeted the elimination of $100 million of supply chain costs over the next 2 years. We are also now taking streamlining actions across our entire organization targeting an incremental $25 million of cost savings. The combination of these actions, which is our global operating effectiveness program, is incremental to our comprehensive continuous improvement or CCI savings. Our CCI program has a well-established track record of success and we are leveraging its proven program discipline to drive results. We expect our global operating effectiveness program to drive annual cost savings of approximately $125 million, of which we expect to realize $75 million through the P&L in 2023, enabling increased profit realization. We can see the results coming through and we expect the impact to scale up as the year progresses. Now, let me share more details on our actions. During last year, we transitioned to our global operating model allowing us to more effectively leverage our scale and drive cost reductions. As we further advance that model and streamline our processes, strengthen our collaboration and align our structure to work more efficiently, we are taking corresponding actions to streamline our workforce across the entire organization. We are making considerable progress on the streamlining actions we have underway. A large component of our streamlining actions is a U.S. voluntary retirement program, which is very far along with a targeted separation date of February 1. This will be followed by other actions, some of which will be involuntary. As always, we will care for employees in keeping with our shared value. Moving to the supply chain. Our top supply chain priority remains keeping our customers in supply and supporting their growth. And while we expect continued volatility in global supply chain, we have strengthened our resiliency over the past few years to achieve this priority. As we responded to demand volatility over the past several years, we incurred additional costs above inflation, service our customers and have seen inefficiencies to develop in our supply chain. Some of these costs for investments and decisions made to support continued growth for both our customers and McCormick and some are the result of a buildup that can occur in periods of disruption. In 2022, with the service levels of focus the normalization of our supply chain costs and inventory levels has taken longer than expected. As we stated on our third quarter call, during the fourth quarter, we began to implement initiatives to optimize our cost structure, increase our capacity and reduce inventory levels while strengthening our supply chain resiliency and ability to service our customers. Now for some details on these initiatives. First and foremost, while we continue to resolve some outliers, we have rebuilt and stabilized our service back to strong levels and at a high level of finished goods inventory on hand. Operating from this position enables us to maximize our performance, reduce our labor costs and pare back excessive use of co-packers within our operations. Starting with labor as we expect it to be the most significant driver of our cost reductions, during the fourth quarter, we reinstated more normal shift schedule with most locations now operating on a 24/5 pattern. This allows us to eliminate inefficient and unpopular difficult to staff shifts. Additionally, as we move away from the industry-wide labor issues seen during the pandemic, we have stabilized absenteeism and turnover rates in our workforce and returned to more standard staffing by line. During the quarter, we optimized our leadership structure throughout our facilities and upgraded the talented key roles. Simultaneously, we are increasing the capability levels of our team. We are also accelerating automation, bringing for individual pieces of equipment to a completely automated line for a high-volume packaging format. We expect through these initiatives to reduce 10% of our Americas supply chain workforce. And over the past 3 months, we have already achieved half of the planned reduction. Next, turning to our capacity. We are supporting future growth and enabling better customer service by investing to increase both manufacturing capacity and reliability in constrained areas. These investments also enable the repatriation of the production we scaled up at co-packers while continuing to meet the elevated demand. In our Flavor Solutions segment, our flavors volume, including seasonings and flavor encapsulation, has been growing at a mid single-digit rate for each of the past 3 years and demand remains strong. Our investments in additional seasoning capacity as well as spring dry capacity with the expansion of bonus footprint are on track to be online during the second quarter. Meanwhile, in our Consumer segment, we have been using co-packers for targeted high-demand packaging format such as some of our large value sized items. Now given the efficiencies gained and the investments already in flight, we have started to repatriate some of these formats. Overall, we are on track for co-pack spending in 2023 to be the lowest in the past 5 years. From an inventory perspective, we are executing on initiatives to return to historical safety stock levels which has been disrupted and raised by the supply chain issues of the last few years. We reduced both raw material and finished good inventory during the fourth quarter. While we are aware we have further progress to make, we are confident and encouraged by the results our initiatives are delivering so far. As we progress to a more normalized environment, we will realize additional benefits from these changes. For example, we expect to see reductions in expedited freight and less than truckload shipping costs and will streamline other transportation inefficiencies. With the recent opening of our new Maryland logistics center, we are able to eliminate expensive external warehouse costs before even fully realizing the inventory reduction, accelerating the expense savings. With more efficient manufacturing and lower inventory levels, we expect low material losses. We have managed through various supply chain challenges over the last several years. I am confident in our disciplined approach to resolving the increased cost within our supply chain while prioritizing meeting our customersâ needs. The impact of our actions is expected to normalize our supply chain cost, enhance our efficiency and ability to meet demand, reduce inventory levels and ultimately increase our profit realization as reflected in our 2023 outlook. Our global operating effectiveness program has considerable momentum and we look forward to sharing more on our progress with you after our first quarter of 2023. Now moving to fourth quarter business updates for each of our segments. Turning to our Consumer segment on Slide 8, sales performance in the quarter was impacted by factors mentioned previously, the Kitchen Basics divestiture, exits of businesses and COVID-related disruptions in China as well as trade inventory dynamics between years. These factors as well as lapping high COVID-related demand early in the year also impacted the full year performance. Importantly, on a 3-year basis, we have grown annual sales at a 5% CAGR, driven by the Americas region, but we are ending the year with positive momentum in our consumption trend. Now for some regional highlights on sales and consumption. Starting with the Americas, during the fourth quarter of 2021 because we were restocking, shipments were higher than consumption and we are lapping that this quarter, which impacts our sales growth. As we entered the holiday season this year and having shifted fairly in line with consumption for the first three quarters of the year, customers did not need to replenish their inventory as much despite strong consumer consumption during the holiday season. We estimate our fourth quarter sales growth rate was unfavorably impacted 6% related to these restocking comparisons. We did not fully appreciate the level of fourth quarter restocking in 2021, especially of high-margin holiday herbs and spices and the resulting impact on our year-over-year growth and as such, had expected stronger sales growth this year. That said excluding this impact, our underlying volume performance in the fourth quarter was better than in the second and third quarters. We have confidence that as we move out of the first quarter, the holiday season fluctuations this year between consumption and inventory levels as well as retailer restocking resulting from pandemic-driven dynamics will have normalized and we have an increased level of confidence in our visibility. Our total U.S. branded portfolio consumption growth was 6% this quarter, as indicated by our IRI consumption data combined with unmeasured channel was the strongest of the year. Our investments in brand marketing and stronger holiday merchandising proved to be effective. And with the stabilization of supply disruptions, restoration of our service levels continued and our fourth quarter service level was the best of the year, just shy of our pre-pandemic standards. Our consumption dollar sales, unit and volume all accelerated sequentially and our total distribution points or TDPs have stabilized. In spices and seasoning, our fourth quarter performance was the strongest of the year. Consumers are responding to our value messaging, trading up to larger sizes and according to our consumer insights are learning to navigate the current environment. We are continuing to build distribution on the Lawryâs everyday spice range we launched last quarter and early results are positive. We are seeing incremental sales and profit to the category as consumers are trading up to this line for private label. In recipe mixes, we gained share for the fifth consecutive quarter and with improved packaging supply, we also gained share in hot sauce and mustard during the quarter. Across the portfolio, our trends are continuing to strengthen in the first quarter of 2023. In EMEA, we ended the year with our strongest sales growth in the fourth quarter. Our effective pricing and new product growth accelerated versus the first three quarters with our fourth quarter price realization, the highest of the year and our volume decline, the lowest. Our strong consumption momentum continued and accelerated sequentially. In the fourth quarter and for the full year, we gained share versus last year and 2019 in the UK and Eastern Europe herbs, spices and seasoning. Those gains were somewhat offset by softer performance in France. In the UK, we are driving the hot sauce category with Frankâs RedHot continuing to gain share again in the quarter and for the full year versus last year as well as compared to 2019. Additionally, in the UK, we advanced our recipe mix leadership during 2022 to the number one share position. As we entered 2023, we are confident in our continued momentum in the EMEA region. In the Asia-Pacific region, growth for the quarter and the year was impacted by the exit of low margin business in India, which we will lap after the first quarter of 2023 as well as the COVID-related disruption in China. Reflected in our outlook, we are expecting continued disruption into the first quarter of 2023 with an expected recovery after the Chinese New Year. While we are currently experiencing the short-term pressure, we continue to believe in the long-term growth trajectory of our business in China. Our brand marketing, new products and category management initiatives are driving positive momentum with more to come from 2023 and we look forward to sharing this and our growth plans at CAGNY in a few weeks. Turning to Flavor Solutions on Slide 9, sales growth reflected pricing actions as well as higher base volume growth in new products. Our sales performance has been outstanding all year, led by double-digit growth every quarter in the Americas and EMEA regions, resulting in 12% growth for the full year. On a 3-year basis, we have grown annual sales at an 8% CAGR with strong growth in all three regions. Now for some regional highlights. Our Americas fourth quarter sales growth was the strongest of the year. Growth in flavors, including snack seasonings and flavors for performance nutrition and health end market applications, as well as branded foodservice products drove our fourth quarter performance as well as our strong broad-based growth for the year. We continue to realize the benefits from the combined capabilities of FONA and McCormick with new products contributing approximately 30% more growth in Flavors in 2022 than last year. Demand continues to strengthen with branded foodservice restaurant and institutional foodservice customers and we are also expanding distribution and gaining share in both spices and seasonings and hot sauce. In EMEA, our strong fourth quarter performance in all product categories capped an outstanding year of 17% growth, including significant volume growth of 9% as well as pricing. We are winning in all markets and channels. Growth remains strong across our customer base led by the momentum with our quick-service restaurant or QSR customers, partially driven by expanded distribution and their promotional activities. In APV, we are driving further menu penetration with our QSR customers, realizing growth from strong performance of core menu item sweet flavor. We delivered solid growth in the APC region for the year despite the COVID-related disruptions in China. Across markets outside of China, we drove double-digit growth with contributions from both volume and pricing. Overall, Flavor Solutions demand has remained strong. And for certain parts of our business in the Americas and EMEA regions, our supply chain continues to be pressured to meet this high demand, driving extraordinary costs to service our customers. We appreciate our customers working with us and are encouraged by the results our collaboration is already beginning to yield. While our Flavor Solutions sales growth has been outstanding, we are not delivering profit growth in this segment. We are committed to restoring Flavor Solutions profitability, recovering margin while ensuring we keep our customers in supply and driving growth for both McCormick and our customers. We are confident we will achieve margin recovery through three actions, effective price realization. Our price increases are only now catching up to the pace of inflation and we are beginning to recover the cost inflation or pricing live last year. The successful execution of the global operating effectiveness program I just mentioned, in particular, we expect the elimination of supply chain inefficiencies and the investments in capacity to have a significant impact in the Flavor Solutions segment. And finally, continued focus on driving growth in high-margin parts of our portfolio. The strength of our Flavor Solutions portfolio and capabilities, including our customer engagement approach and culinary inspired innovation are driving our outstanding flavor solution momentum. We look to sharing more about our growth plan and margin recovery at CAGNY in a few weeks. Now some summary comments before turning it over to Mike. Turning to Slide 10, global demand for Flavor remains the foundation of our sales growth and we have intentionally focused on great fast-growing categories that will continue to differentiate our performance. We continue to capitalize on the long-term consumer trends that accelerated during the pandemic, healthy and flavorful cooking, increased digital engagement, trusted brands and purpose-minded practices. These long-term trends and the rise in global demand for great taste are more relevant today than ever, but the younger generation stealing them at a greater rate. McCormick is uniquely positioned to capitalize on this demand for great taste with the breadth and reach of our strong global flavor portfolio we are delivering flavor experiences for every meal occasion through our products and our customersâ products and are driving growth. We are end-to-end flavor. We remain focused on the long-term goals, strategies and values that have made us so successful. We have grown and compounded that growth over the years, including through the pandemic and other periods of volatility. The strength of our business model, the value of our products and capabilities and the execution of our proven strategies by our experienced leaders while adapting to changes accordingly, give us confidence in our growth momentum and in our ability to navigate the dynamic global environment. As we look ahead to 2023, we will focus on capitalizing on strong demand optimizing our cost structure and positioning McCormick to deliver sustainable growth and long-term shareholder value. The fundamentals that drove our industry leading historical financial performance remains strong and we are confident we are well positioned to drive profitable growth in 2023. I want to recognize McCormick employees around the world for their contributions in 2022 and the momentum they are driving in 2023. Thanks, Lawrence and good morning everyone. Starting on Slide 13, our top line constant currency sales grew 2% compared to the fourth quarter of last year. This growth was tempered by a 1% unfavorable impact from the Kitchen Basics divestiture, a 1% impact from the exits of low-margin business in India and the customer business in Russia and a 1% impact from China consumption disruption related to COVID restrictions. In our Consumer segment, constant currency sales declined 4% with the divestiture of Kitchen Basics contributing 1% to the decline and the combined impact of exiting the businesses in India and Russia as well as the China consumption disruption, contributing 3% to the decline. On Slide 14, consumer sales in the Americas declined 4% in constant currency. Pricing actions in the region were more than offset by a volume decline, including a 2% impact from the Kitchen Basics divestiture as well as a 6% impact from lapping the restocking and retail inventory in the fourth quarter of last year and a higher level of retail inventories entering this yearâs holiday season. Additionally, returning to pre-pandemic promotional levels also tempered our sales comparison to the fourth quarter of last year. In EMEA, constant currency consumer sales grew 2%. Pricing actions across all markets were partially offset by lower volume and product mix, including a 4% unfavorable impact from lower sales in Russia. Constant currency consumer sales in the Asia-Pacific region declined 22%, including a 23% unfavorable impact from the consumption disruption in China as well as the exit of low margin business in India. Pricing actions in all markets across the region partially offset this unfavorable impact. Turning to our Flavor Solutions segment on Slide 17, we grew fourth quarter constant currency sales 14% primarily due to pricing actions with higher volume and product mix also contributing to growth in all regions. In the Americas, Flavor Solutions constant currency sales grew 13%, with pricing actions and higher volume contributing to the increase. Higher sales of packaged food and beverage companies with strength in snack seasonings, led the growth. Higher demand for branded foodservice customers also contributed to growth. In EMEA, we drove 16% constant currency sales growth, with 10% related to pricing actions and 6% behind the mix. EMEAâs Flavor Solutions growth was broad-based across this portfolio, led by strong growth with QSR and packaged food and beverage company customers. In the Asia-Pacific region, Flavor Solutions sales grew 11% in constant currency with pricing actions and higher volume contributing to the increase. Growth was driven by higher sales to QSR customers, driven by strength in their core menu items. As seen on Slide 21, adjusted gross margin declined 410 basis points in the fourth quarter versus the year ago period. I will spend a moment on the significant drivers, highlighting the ones that drove more compression than we had expected. First, approximately 60% of this decline or 250 basis points is due to the dilutive impact of pricing to offset our dollar cost increases. Next, product mix was unfavorable as compared to the fourth quarter of last year, as well as compared to our expectations for the quarter. First, in our Consumer segment. As mentioned earlier, lower U.S. spices and seasoning sales stemming from fourth quarter inventory restocking comparisons in both 2021 and 2022, as well as lower sales of higher-margin products in China due to the COVID restrictions negatively impacted mix. Sales shift between our Consumer and Flavor Solutions segments also contributed to the unfavorable product mix as compared to the fourth quarter of last year. The impact of the unfavorable product mix was higher than we expected due to the shortfall in consumer sales from what we had anticipated driven by both lower U.S. and China sales. Now for the impact of supply chain challenges on gross margins. In our Consumer segment, we experienced lower operating leverage because of the sales comparisons already discussed. The impact, though, was greater than expected due to the China COVID-related plant shutdowns. In our Flavor Solutions segment, as we transition production to our new UK Peterborough manufacturing facility, we continue to incur dual running costs. We expect the unfavorable year-over-year impact of these costs to continue in the first quarter of 2023. And then for the balance of the year, expect them to be comparable to 2022. Additionally, we are still incurring elevated costs to meet high demand in certain parts of our business. While painful short-term, we know these investments to support our customers during periods of disruption are the right approach to drive long-term growth. That said, we did make progress on reducing the level of these costs in the fourth quarter. However, the impact of that progress was offset by the unfavorable transactional impact of foreign currency exchange rates and some discrete issues we experienced in our Flavor Solutions operations during the quarter. While we recovered quickly from these issues, they still contributed significant unexpected costs to the quarter. Finally, partially offsetting the unfavorable drivers I just mentioned were our CCI cost savings. And of note, our price increases continue to catch up with cost inflation during the quarter for both segments. This was in line with our expectations and consistent with our performance. In 2023, we plan to fully recover the inflation or pricing has lagged over the last 2 years. Now moving to Slide 22. Selling, general and administration expenses for SG&A declined from the fourth quarter of last year with lower incentive compensation expenses, partially offset by higher distribution costs and brand marketing investments. As a percentage of net sales, SG&A declined 270 basis points. The net impact of the factors I just mentioned resulted in a constant currency decline in adjusted operating income, which excludes special charges and transaction and integration costs of 9% and compared to the fourth quarter of 2021. In constant currency, the Consumer segmentâs adjusted operating income declined 5%. And in the Flavor Solutions segment, it declined 26%. Turning to interest expense and income taxes on Slide 23, our interest expense increased significantly over the fourth quarter 2021 as well as over our third quarter of this year, both driven by the higher rate environment. Our fourth quarter adjusted effective tax rate was 23.1% compared to 21.3% in the year-ago period. Both periods were favorably impacted by discrete tax items with a more significant impact last year. At the bottom line, as shown on Slide 24, fourth quarter 2022 adjusted earnings per share was $0.73 as compared to $0.84 for the year ago period. The decrease was driven primarily by lower adjusted operating income with higher interest expense and a higher fourth quarter adjusted effective tax rate also contributing to the decrease. On Slide 25, weâve summarized highlights for cash flow and the year-end balance sheet. Our cash flow from operations for the year was $652 million, which is lower than the same period last year. This decrease was primarily driven by lower net income and higher inventory levels. We returned $397 million of cash to our shareholders through dividends and used $262 million for capital expenditures in 2022. Our capital expenditures included growth investments and optimization projects across the globe. In 2023, we expect our capital expenditures to be comparable to 2022 as we continue to spend on the initiatives we have in progress as well as to support our investments to fuel future growth. We expect 2023 to be a year of strong cash flow driven by our profit and working capital initiatives. Our priority is to continue to have a balanced use of cash, funding investments to drive growth returning a significant portion to our shareholders through dividends and paying down debt. We remain committed to a strong investment grade rating and we have a history of strong cash generation and profit realization. With improving our gross margin, through our plan to normalize our supply chain costs and inventory levels, we will be better positioned to continue paying down debt and expect to de-lever to approximately 3x by the end of fiscal 2024. Now turning to our 2023 financial outlook on Slide 26, our 2023 outlook reflects our positive top line growth momentum and with the optimization of our cost structure, increased profit realization. We expect to drive margin expansion with strong sales and adjusted operating income growth that reflects the health of our underlying business performance as well as the net favorable impact from several discrete drivers. We expect our adjusted operating profit growth will be partially offset below operating profit by significantly higher interest expense and a higher projected effective tax rate. We also expect there will be minimal impact from currency rates. At the top line, we expect to grow sales 5% to 7%, driven primarily by the wrap of last yearâs pricing actions combined with new pricing actions we are taking in 2023. We expect several factors to impact our volume and product mix over the course of the year, including price elasticities, which we expect to be consistent with 2022 at low levels that we have historically experienced, but in line with the current environment. A 1% estimated benefit from lapping last yearâs impact of COVID-related disruptions in China. Although we expect the impact will vary from quarter-to-quarter given 2022âs level of demand volatility. The divestiture of our Kitchen Basics business in August of last year and the exit of our consumer business in Russia during last yearâs second quarter. And finally, the continued pruning of lower margin business from our portfolio. As always, we plan to drive growth through the strength of our brands as well as our category management, brand marketing, new products and customer engagement plans. Our 2023 adjusted gross margin is projected to range between 25 to 75 basis points higher than 2022. This adjusted gross margin expansion reflects a favorable impact from pricing, cost savings from our CCI-led and global operating effectiveness programs, partially offset by the anticipated impact of a low to mid-teens increase in cost inflation. We expect cost pressures to be more than offset by pricing during the year as we recover the cost inflation or pricing lag last year. Moving to adjusted operating income. First, let me walk through some discrete items and their expected impact to our 2023 adjusted operating profit growth. First, the cost savings from our global operating effectiveness program are expected to have an 800 basis point impact. The savings from this program are expected to scale up as the year progresses. Next, the benefit of lapping the impact of COVID-related disruptions in China is expected to have a 300 basis point favorable impact. The Kitchen Basics divestiture is expected to have an unfavorable 100 basis point impact. And finally, an 800 basis point unfavorable impact is expected as we build back incentive compensation. The net impact of these discrete items is a favorable 200 basis points. This favorable impact, combined with expected 7% to 9% underlying business growth, which is driven by our improved operating momentum results in our adjusted operating income projection of 9% to 11%. In addition to the adjusted gross margin impacts I just mentioned, this projection also includes a low single-digit increase in brand marketing investments, and our CCI-led cost savings target of approximately $85 million. Based on the anticipated timing of certain items, we expect our adjusted operating profit growth to be pressured in the first quarter, accelerated in the second quarter and returned to normalized cadence of delivery for the remainder of the year. The impact of cost inflation will be weighted toward the first half of 2023, with peak inflation in the first quarter. Also, in the first quarter, we expect continued pressure to sales and profit from COVID-related disruptions in China and then the benefit beginning in the second quarter from lapping last yearâs impact. Additionally, the exit of our consumer business in Russia will impact the first quarter. As a reminder, we began exiting it during the second quarter of last year. Finally, related to profit timing, while we expect a minimal impact from currency rates, we project an unfavorable impact in the first half of the year and expected 3% unfavorable in the first quarter and a favorable impact in the second half of the year. We are anticipating a meaningful step-up in interest expense driven by the higher interest rate environment, which will impact our floating debt. We estimate that our interest expense will range from $200 million to $210 million in 2023 and spread evenly throughout the year. As a reminder, in 2022, we realized an $18 million favorable impact from optimizing our debt portfolio, which we will lap in 2023. The net impact of these interest-related items is expected to be an 800 basis point headwind to our 2023 adjusted earnings per share growth. Our 2023 adjusted effective income tax rate is projected to be approximately 22% and based on our estimated mix of earnings by geography as well as factoring in a level of discrete impacts. Versus our 2022 adjusted effective tax rate, we expect this outlook to be a 100 basis point headwind to our 2020 earnings growth. We expect our rate to be higher in the first half of the year compared to the second half. To summarize, our 2023 adjusted earnings per share expectations reflect strong underlying business growth of 8% to 10%, a 2% net favorable impact from the discrete items I just mentioned impacting profit, the global operating effectiveness program, the China recovery, the Kitchen Basics divestiture and the incentive compensation rebuild, partially offset by the combined interest and tax headwind of 9%. This results in an expected increase of 1% to 3% or a projected guidance range for adjusted earnings per share in 2023 of $2.56 to $2.61. We are projecting strong operating performance in 2023 with continued top line momentum, significant optimization of our cost structure and strong adjusted operating profit growth as well as margin expansion. While this performance is expected to be tempered by interest and tax headwinds, we remain confident in the underlying strength of our business and that with the execution of our proven strategies, we will drive profitable growth in 2023. Thank you, Mike. Now that Mike has shared our financial results and outlook in more detail, I would like to recap the key takeaways as seen on Slide 28. Our fourth quarter sales performance despite challenges from the COVID-related disruptions in China reflects the underlying strength of our global portfolio and the continued execution of our long-term strategies. With the stabilization of service and our supply chain in addition to positive momentum and consumption trends, we expect an acceleration in consumer segment sales dollars and volume in 2023 and continued strong flavor solutions performance as the strength of our portfolio is net with outstanding demand across our customer base. We have strong growth programs, and we look forward to sharing them at CAGNY. We are committed to increasing our profit realization. The actions we have underway to normalize our supply chain costs and increase our organizational effectiveness and efficiency are already yielding results. Our global operating effectiveness program is expected to deliver $125 million of cost savings. We expect the benefits of the program to scale up through each quarter of 2023 and continue to be accretive into 2024. While actively responding to the macroeconomic challenges we are facing, we continue to operate with the same discipline and commitment to execution as we have in any other operating environment. The fundamentals that have driven our historical performance remain in place, and we are as diligent as ever in driving value for our employees, consumers, customers and shareholders in both 2023 and beyond. The compelling benefits of our relentless focus on growth, performance and people continues to position McCormick to drive sales growth. This, coupled with our focus on recovering cost inflation and lowering costs to expand margins will allow us to realize long-term sustainable earnings growth. Before turning to your questions, I want to reiterate my confidence and driving the profitable growth reflected in our 2023 outlook. And now for your questions. Thank you. [Operator Instructions] Our first question is from the line of Andrew Lazar with Barclays. Please proceed with your question. Hello. I guess the question Iâm getting, I think, most from investors this morning really has to do with the fiscal â23 operating profit guidance of 9% to 11%. I understand youâve got incremental cost savings that are set to offset the incentive comp rebuild and you have some of the China recovery built in as well. But I guess, in whatâs still clearly a dynamic operating environment, it still seems, I guess, aggressive to a bunch of folks weâve spoken to this morning, especially given itâs expected to be a somewhat back-end loaded year from a profitability standpoint. So I was hoping, Lawrence maybe you could comment a bit on that and add some more color on the level of confidence around this. And then Iâve just got a follow-up. Thank you. Sure. This almost comes off of my final comments on the prepared remarks. We really believe that this is balanced guidance. It is certainly not aggressive. We have a due degree of humility after last year and have a balanced outlook considering risk. And we have a high degree of confidence in this guidance, including the operating profit guidance. Itâs underscored by our strong consumer demand and the underlying demand from the consumer is quite strong coming out of fourth quarter is actually the strongest demand, consumer demand, that weâve seen. And we continue to have tremendous demand from our Flavor Solutions customer. We have very strong programs that we did not talk about on this call, particularly on herbs and spices and we will be sharing those growth programs at CAGNY. And so that is a foundation, underlying the performance on operating profit. We have very strong confidence in our ability to realize the cost savings that we described. These programs are being managed programmatically through the same team that manages our CCI program. And I believe that they are very much in our control and weâre quite confident about them. And I think that they more than offset the build of incentive comp. And maybe what some of the people youâre talking about havenât fully considered is that we expect to cover not only this yearâs cost inflation, but also recover all of the costs that we have lagged over the last 2 years our pricing actions early in the year. And as you know, pricing actions take time to sell in. So you would be correct in assuming that many of these conversations are either completed or well underway at this time. Great. Thatâs helpful. And thatâs a good segue into my follow-up, which is with low to mid-teens inflation still to come and as youâve talked about likely further pricing actions still ahead, Iâm just trying to get a sense how that jives with the price gap issue that youâve talked about previously in your core spice and seasonings category and the fact that pricing decelerated sequentially in fiscal 4Q in consumer versus 3Q? And I thought it was supposed to build and maybe that was mix versus actual price? Thanks. I am going to say a couple of words about that and Iâm going to let Brendan follow me. First of all, on that pricing, I would not forget that the significant portion of it is going to be on the Flavor Solutions side of the business. Itâs sort of confident when those have come up and allowed us to make some moves there. And so that is certainly a big part of the pricing equation. Our inflation outlook is higher actually on the Flavor Solutions inputs than on consumer input for the year. And so the pricing is similarly skewed more towards the Flavor Solutions side of it. Iâm going to let Brendan talk about the price gaps and take it from here please. Yes, itâs still â Andrew, just to build on and Lawrence has replied. Iâll just jump back to maybe, I think one of the points you brought up regarding private label. We are seeing price gaps narrow right now. And we certainly saw that in the fourth quarter, even leading into the first quarter. And we started to see that trade down moderate honestly, through the quarter. So thatâs kind of an insight. And maybe thatâs also a reaction just sort of the macro inflationary factors have seem to moderate also out there in the economy overall. Consumers are looking for brands, but they are also looking for value. And so itâs not necessarily the lowest price. Parts of our portfolio, weâre seeing really start to drive a lot of growth just on large sizes as we see consumers kind of look for that value. We also â you should have called out, launched this Lawryâs everyday line of spices and we are starting to continue to build distribution on this, but the early results are really good, in fact, maybe better than what we expected. Weâre seeing a lot of incremental category sales and profit coming from this line, those because consumers are trading up from private label. Thatâs kind of the source of volume that weâre seeing coming from this and itâs bringing in new consumers into the McCormick portfolio. So we are â we like the results so far that this is providing. But thatâs certainly a good outcome, and it factors into how we think about next year. On pricing, just sort of comparing quarter-to-quarter, to your point, I think thatâs probably more a function of the fact that weâve been reinstating promotional activity thatâs been, I think, called out previously. Weâre also lapping last yearâs increases, which were higher on a relative basis. But also our volume is in the fourth quarter had an impact on that overall level of pricing, too. So weâve covered that with regard to the restocking comparison, and thatâs factored into that quarter-to-quarter view. Hi. Thank you. I wasnât sure if I heard you correctly, and maybe you said this, maybe you didnât. But you said that sales growth will be driven primarily by pricing. Does this mean you expect volumes for the year in â23 to be positive? And I guess, along those lines, I think you mentioned that you expect elasticity to not necessarily worsen in â23 versus â22? I think if I heard you right, you said it will remain kind of at todayâs level, just curious why that is given that the consumer environment does seem to be eroding a small amount? Start with the last part of it, Ken. Weâve seen some moderation of elasticity as weâve gone through the year. It looks like peak elasticity was around the time when gas prices were at $5 a gallon and above for most of the country and was really not so much a reaction to our price increase, but to the general level of inflation that consumers were experiencing and the high pressure on their wallet. So our outlook for 2023 seems that the similar environment carries forward and that weâre seeing elasticity in that range. Weâve also adjusted â weâve looked at â weâve seen where weâve had greater elasticity and where weâve got less elasticity, and weâve reflected that in our future pricing actions. So I think that weâve really been thoughtful around the question of elasticity. We do expect the consumer to be under pressure in 2023. I donât care whether you call it a recession or a soft landing. Consumers on the lower end of the income spectrum, not even â Iâm not talking about the bottom, Iâm talking about the lower half. Iâm certainly going to have less money and are going to be careful with their budgets. We are reflecting that in our marketing programs already, and with some of the innovation that weâve launched. Itâs not all about buying the cheapest product that consumers are looking for value, and thatâs really come through clear on our proprietary research and value has many components. It is true that our sales growth is driven primarily by pricing in 2023. And at the total company level, we expect volumes to be pretty much flat. And so that would be an improvement in the trend line, but thatâs going to vary tremendously by region and a good bit of the overall volume growth is going to come from recovery in China following this we expect following this quarter where we have that tremendous COVID impact right now during Chinese New Year. Just a quick follow-up and thank you for that. On the restocking, you mentioned that perhaps you hadnât quite recognized at the time, how large the impact was the last couple of years, totally understandable given the volatility that everyone is going through. Iâm just curious if the company is doing anything to maybe slightly improve its ability to quantify those dynamics maybe in a more real-time way. So that going forward, there is just fewer surprises from year-end. Yes. Thanks, Ken, for the question. Definitely, this environment, certainly volatile, made it tougher to read. But as we think about just moving forward, itâs definitely going through, I think this period of time has allowed us to kind of refine how we look at your restocking and just the fluctuations particularly coming out of the season between consumption and shipments. This has allowed us, I think, to kind of refine our view. Overall, we definitely had a pretty disciplined approach to it is even prior to the pandemic, but I think this is refine how we look at it in the tools that we use, the analytics that we apply. So we have a lot of confidence going into this next year, particularly as we exit the first quarter that just the fluctuations that we typically would see during the holiday season between consumption and shipments. And then on top of that, this restocking comparison, things begin to normalize. I think is our view as we come out of Q1 providing just a little bit more stability in that read. Some of that is internal to me. Our supply chain is really operating at a much higher level now than it has an investment service perspective and stability. Thatâs another thing that gives us better insight into our sales. Hi, thanks. I was hoping you could break down â I was hoping to break down your volume forecast by Consumer versus Flavor Solutions. Because I think one of the strange dynamics of 2022 is that at a time when consumers are trying to save money, volumes were weak in Consumer, but your bonds pretty strong in Flavor Solutions. So I am wondering how you think of â23 and is there a risk that because the consumer environment is so volatile that it might be very tough to determine what the trade down between like foodservice and retail might be? Well, I donât think that we are giving or providing a split between the growth rates on consumer and flavor solutions. And I will say that we would expect higher growth on flavor solutions in 2023. We have â if nothing else, a higher level of pricing expected in the Flavor Solutions segment, and that alone is going to drive a higher increase year-on-year. Flavor Solutions is a bit of a portfolio itself. It includes branded foodservice, where we believe that we have gained significant share in North America, in particular, in our branded foodservice business with the number of wins as we have gone through the year. We have had tremendous growth on flavors and flavor seasonings, for our flavor solutions customers in the area of snacks, performance nutrition. The health end market, we have had a very strong unit growth through the entire pandemic and continuing through â22, and we have seen no end of sight on that. We have been slightly capacity constraint in that area. And we have some significant new capacity that for longer term investments that are finally coming on line in the second quarter that opens up additional capacity for us thatâs both for flavor with some expansion that we have done. And at bona or spray drying capability, and in snack seasonings, where we have been in the process of converting one of our plants from some low-margin products, the ability to run a snack seasonings and that conversion is effectively coming online. We are in the trial stages right now, should be online in second quarter. So, a bit of a longish answer there, but I hope that covered it. Okay. Can I ask a follow-up? You talked about the new plant thatâs opening in the UK and the double costs, I guess that are involved in it. Why is it taking so long to get past these double costs? Hey Rob, itâs Mike. I will answer that. I mean I would say this, I mean we are taking â we have a very large actually footprint in one part of the UK and then the Petersburg plant, which we talked about is a massive facility. So, we are kind of doing this in a two-step process to make sure we service our customers properly. So, itâs different than when you are just building new capacity like we have talked about, where you are kind of adding on to a plant. We are actually closing a plant in a very difficult environment to close plants for a lot of reasons, moving it to a brand-new facility. So, that does take more time. The good news is we are kind of almost out of that after the first quarter. You think about the incremental costs we have talked about is in the first quarter after it levels out. And as that production â the remaining production transfers over the rest of this year, â24 will be a really clean year. But when you are closing big plants and opening a big plant, they donât take one quarter, it will take about a year, if you think about it, thatâs what this one is taking around that much time. Hi there. Can we focus in on the flavor solutions business? You gave us the three reasons why margins should improve this year. I am kind of curious about timing on that. How quickly will the pricing kick in and the elimination of the capacity expansion costs, just a little bit on the timing. Thank you. And I have a follow-up. Yes. I mean I wasnât really being specific on the dual running costs when I was describing the improvement in flavor solutions. In terms of the pricing, I donât want to get overly specific on this because we are in customer conversations right now. And there is a certain amount of commercial tension in all of those conversations. But we fully expect, as I have said about pricing generally on the flavor solutions side of the business as well that we will recover all of the inflation that we are not only incurring into the New Year, but also the cumulative inflation that we collected â that we have experienced the last two. And I would say that our lag in getting that getting caught up is greater in flavor solutions than it has been on the consumer side. So, itâs going to be â itâs pretty meaningful and thatâs an important element. We would fully expect to have that work complete early in the year. I think the other point, too, Alexia, a couple of things. We talked about inflation being weighted to the front of the year. First quarter is the highest inflation that impacts labor solutions as well as consumer. The other thing is our global operating effectiveness program. I mean there has been a lot of positive activity. The reality though is the first quarter is going to have the least impact and itâs going to ramp up really rapidly in the second quarter, third quarter and fourth quarter. So, the second quarter is going to be a big impact. The flavor solutions because a lot of the inefficiencies we have talked about over the last year have been in the supply chain area for flavor solutions. So, we do see more of that savings going to that segment, which will help. Great. And then as a follow-up, the â I have to come back to it, but the share dynamics in the U.S. herbs and spices that we are seeing in the Nielsen data. It looks as though you are still losing market share. It doesnât look like itâs private label anymore. I presume itâs smaller brands. When do you expect that to turn the corner? And what â can you give us any more color about what the dynamics are there? Thanks and I will pass it on. Thanks Lawrence. Alexia, I just â as we look at our business, I think just first, remarking on the fourth quarter. I think what we were really feeling pretty â feel pretty good about in terms of the momentum we have talked about before is that we have seen sequential improvement not only across the total McCormick portfolio and consumer in the U.S., but also in herbs and spices. Fourth quarter is probably our best quarter of the year. We saw sequential improvement on not only sales, but also unit and also volume as we went through the second quarter all the way to the fourth quarter. So, thatâs pretty good momentum going into the next year. Having said that, though, certainly, we saw a stabilization of where our share is right now and expect to improve that over the course of â22. But we donât never really get into the habit of sort of projecting what share will be in the future. So, we are not going to do that on this call necessarily, but we do expect to have improved performance in â23. And I think related to what those plans will be, we will talk a lot more about that at CAGNY. And so I think there will be a lot of great opportunity to kind of go deeper on what those plans and opportunities look like. We actually would have loved to have done that on this call and Kasey has insisted that we see some higher power. I know your question, Alexia, was about U.S. herbal and spices specifically. But if I could just step back, if I look at the fourth quarter, we gained share in hot sauce. We have gained substantial share in mustard what we finally are back in full supply. We had our, I think our fifth consecutive quarter in a row of strong share growth in recipe mixes, which â and everyone forgets those, but their profitability is right there with herbs and spices. And then in many of our international markets, we had share gains in urban spices specifically. So, when you look at the full picture, we have got â generally, as it has been the case all along, where we have had good supply, we have had the ability to grow our market share. A lot of the share loss that you are seeing is due to TDP losses early in the year that are still being left. And I expect we have won some of those TDPs back and I expect us to continue to do so as we go through â23. Good morning. Hi. So, I wanted to maybe hone in a little bit on the kind of net operating income growth guidance and where you shake out for 2023, because I am just trying to square the thought relative to where profit was in 2020 and 2021. Especially â21, you are still at the high end of the guidance range, $80 million, $90 million lower than you were last year, which there shouldnât be an incentive comp kind of comparison issue in there and you talk about fully recovering pricing â cost inflation. Currency has been a little bit of a headwind. Divestitures kind of net sold a few things and volumes are lower. But I guess I am just trying to reconcile kind of where on an absolute dollar basis, we shake out for 2023, inclusive of the incremental restructuring and the cumulative effect of pricing relative to where the profit dollars were 2 years ago, or 3 years ago and how we should think about that at the company level moving forward? I mean if we rebase somewhat through as we come through COVID, or is there an acceleration beyond 2024 and 2023 in profit growth to kind of get the long-term kind of EBIT CAGR back into that kind of mid to high-single digit range? Adam, this is Mike. Good question. I mean we put together the slide in the earnings deck to really walk you from the current guidance. And from a percentage basis, realizing itâs not dollars, but from a percentage basis, constant currency guidance to the underlying base growth. And if you think about it, you look at that underlying base for, once you take out all the kind of I hate to say one-timers, but things are really discrete items year-over-year, and some of which will continue into next year, like the global operating effectiveness program, as you talked about rebuilding there are profit getting back to our long-term profit algorithm by taking out these costs that have really come through during the pandemic. So, I think there is a case for acceleration into the future. We are not talking about â24 or â25 right now. We need to nail â23. But if you look at that underlying base growth 4% to 6% net sales growth, which actually went out bolt-on M&A is at the high end of our guidance. So, really good underlying performance. We get back to the 7% to 9% operating profit growth. If you really if you think about the recovery of the pricing that we talked about, that allows us to really drive that 3 percentage point increase will get to that 7% to 9%. So, we feel good about that, along with our noble things like our normal CCI program and things like that, investing a bit more in advertising to grow the brand. So, that virtuous cycle we talk about is to get the operating profit and 1% leverage below there, we would love to pay down more debt. Thatâs why we are driving hard on our working capital programs this year to get our inventories back down to where they need to be. So, we feel good about like Lawrence said before, itâs a prudent call. We feel really confident about it. And so I think hopefully that helps you understand the moving parts other than the discrete items, some of which the positives will continue into next year, even the net recovery in China, hopefully â24 is better than the â23. But we feel good about on base. I will add to that, that the guidance that we are giving is balanced and all we have been saying prudent. And just from â thatâs our opinion. And as you have heard from some of the other questions, that there is somebody think that this actually might even be aggressive. But we have tried to give a balanced guidance here, but our teams are used to winning and have â we have very aggressive business plans, and we will do everything we can to not just recover, but exceed. We are used to starting every year-end earnings call with record â with the phrase record results. We were not able to do that this year, and we would like to get back on track with that low record of historic performance. Okay. I appreciate all that color. If I can just ask a follow-up on flavor solutions and just â I mean there is a meaningful portion of that business thatâs selling into other food companies. And just want to get a sense if you saw or have experience or worried about any destocking amongst some of your food company customers who either have taken similar working capital kind of reduction actions as you are taking yourselves, or are kind of have counseled you to think about that potential moving forward in the context of a still fairly sluggish underlying consumption environment? I would say at this point, no. The fact is that our supply chain recovery, I believe and the feedback we get from our customers is generally ahead of the peers. And so many of them are still fairly hand to mouth right now and have a different set of dynamics. Many of them are still rebuilding inventory â sorry, rebuilding inventories in the store at the shelf and correctly getting items reinstated. And those in the area of snacking are just experiencing explosive growth. If I could build on that, Lawrence. Adam, the other thing to consider regarding our flavor solutions business is a good part of that sales growth algorithm is a lot of new product and innovation activity for our customers as well as winning new customers and winning share in the market. And so that factors into how we think about our growth. Hi. I had a question coming back to kind of the U.S. business overall, and Brendan had talked about kind of moderating and trade down in the U.S. I wanted to understand, do you attribute that to your promotional spending? Was that one of the factors that helped drive that? And would you expect promotional spending to be up in fiscal â23, because I am trying to square that with the need for more pricing. And can you accomplish the price points you need and also see kind of the value it seems like consumers are seeking here? Yes. I will say that the promotional activity isnât all about discounting. And so a lot of the promotional activity that we have been able to reinstate is around merchandising activity, which includes displays and digital partnerships and all â and these things have very good ROI, and we are quite positive about it. I am going to give the floor here to Brendan though. Yes. I mean Chris, I think as we go into â23 and how we look at it, just to build off of where Lawrence is going, a lot of that promotional spending is getting back into driving the categories with our customers. And the feedback we are getting from them is welcome, frankly, in that regard because we want to keep driving up better overall growth. Can you just remind me the front end of your question, though, was in regards to what? Just that there is â you have seen a moderating and trade down and you have had an increase in promotional spending. So, I was trying to understand, is that driving that moderating and trade down? And then can you accomplish that if you are trying to get prices higher? I think you are seeing a confluence of a number of things happening in the quarter where some of those macro factors that we may have spoken about before, like the price of gas, etcetera, those seem to have moderated. So therefore, broadly, we think that has an impact. So, also the reinstatement of promotions probably during, obviously, a very important season like the holiday would have also a year-over-year impact there, too. But I think there is a couple of things we would like to add is we got more aggressive in Q4 for a reason. We called that out in the third quarter. And part of that includes also a lot of focus and an increased A&P around value messaging. And we have seen a lot of great response from that. And so I think there is a number of things playing in here, Chris, that lead us to believe that we have got good momentum going into â23. I will also say that our proprietary consumer survey shows that between May and December, when we have talked with â we ask consumers about their mechanisms for coping with higher pricing. Trading down to private label and store brands was the item that had the biggest decline in terms of the consumers who certainly were doing that. And so I think that matches up well with what we are seeing through the scanner and our other data. Okay. Thatâs helpful. Thanks for all of that color there. Just one other quick follow-on or question will be that inventory was kind of a moving factor year-over-year and you had a big increase last year in inventory. Did you build less inventory, I guess overall or should I say that maybe better that did inventory move lower in the fourth quarter than you expected? Is that the unique factor around the inventory move in the quarter? We did start making progress on our inventory in the fourth quarter, as you mentioned both in the raw material and finished goods side, which was really a focus with our global operating excellence for efficiency program. One of the outputs of that is reduced inventory too as you stabilize your supply chain. And we have very aggressive targets for this year. And again, it goes back to creating more cash to help drive our debt down. No, Chris. I would say thatâs not really the relationship we are trying to describe here. We feel like inventories simply retailers had done a lot of restocking in the fourth quarter just 1.1 [ph]. And they just happen to have more on hand as we are going to the holiday season. But I donât believe we are trying to say that they are executing the holiday season differently than they have as normal. Yes. And just in the normal ebb and flow of things. Remember, our fiscal year end stands in the middle of the holiday season. So, coming in the first quarter, retailer inventories are always high. We always ship below consumption in the first quarter. Thatâs like a normal seasonal pattern. And I think that we are well set up for that. Just given the rapid amount of change, we are just being cautious about that. And in our remarks, we have said we expect normalization after Q1. On the call, you gave some helpful details on the puts and takes to consider with regard to the cadence of your EPS in FY â23. If I have it right, it sounds like the first quarter will be pressured as a result of peak inflation, cost savings ramping up throughout the year, a continued impact from COVID-related disruptions in China and a higher tax rate among other impacts. Can you help give us a sense for how dramatically these factors could hold back your first quarter EPS? Yes. I mean I think on top of that, the highest commodity cost increases in the first quarter. I think the first quarter is always our smallest quarter. If you think about the cadence of, Max, in our history, fourth quarter are the most sales and most profit comes through because of the holiday season. Except for China, which is actually inversed. Chinaâs first quarter is their biggest quarter because of the Chinese New Year. So, thatâs another factor thatâs going to put pressure on our first quarter this year because of the COVID issues. But I would hesitate to say we get round number is what itâs going to be, but itâs going to be a difficult first quarter. For all the factors, you named four or five of the factors right on our list. I added the China impact also into that. So, as well as FX. FX is flat for the year, Max, but in the first quarter, itâs about a 3% negative year-on-year. So, thatâs another reason that the first quarter is going to be the most challenging, but for all the reasons you mentioned with the global operating effectiveness, the recoveries and it will be strong for the rest of the year. Thank you. Our final question today comes from the line of Peter Galbo with Bank of America. Please proceed with your question. Hey guys. Good morning. Thanks for taking the question. I will keep it pretty quick. I guess just as I think about the operating income bridge, the incentive comp piece of that, thatâs kind of an 800 basis point headwind as you rebuild that function. Like how flexible is that, or how discretionary is that? And the reason for the question is, letâs say, if something in the plan that you have, the year goes wrong outside of your factors, right, China take longer to reopen or destocking take longer or restock gets stronger in the U.S. Like can you pull that piece of the puzzle back more as a means to kind of still hit the operating income target, or is that pretty much you have to â you are committed to spending that at this point? Well, Peter, our incentive comp pays for growth. And we fell short of growth in 2022. And so thatâs reflected in a very low incentive comp that we didnât take back and confidence to the P&L. As we went through 2022, in 2023, it starts a New Year. And so we are starting with the expectation that we are going to hit our goals. And of course, as we over or under achieve, we will adjust incentive comp as we go through the year. Yes, itâs very formulaic. The majority of our incentive competence based on McCormick profit, which is basically our operating profit less a capital charge we call kind of light EVA model to make sure all of us are held accountable for capital improvement. So, itâs really focused a lot on operating profit and a bit on EPS, too, very formulaic. We pay for growth. Great. Thank you. McCormick is aligned with consumer trends and the rising demand for flavor in combination with the breadth and reach of our global portfolio and our strategic investments provide a strong foundation for sustainable growth. We are disciplined in our focus on the right opportunities and investing in our business. We are continuing to drive further growth as we successfully execute on our long-term strategy actively respond to changing consumer behavior and capitalize on opportunities from our relative strength. We continue to be well positioned for continued success and remain committed to driving long-term value for our shareholders. Thank you, Laurence and thank you to everybody for joining todayâs call. If you have any questions regarding the information, please feel free to contact me. This concludes the call for today.
EarningCall_1074	Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2022 Fourth Quarter Earnings Call. [Operator Instructions]. I would now like to turn the call over to Alaska Air Group's Vice President of Finance, Emily Halverson. Thank you, operator, and good morning. Thank you for joining us for our fourth quarter 2022 earnings call. This morning, we issued our earnings release, which is available at investor.alaskaair.com. On today's call, you'll hear updates from Ben, Andrew and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported fourth quarter GAAP net income of $22 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported adjusted net income of $118 million. As a reminder, our comments today will include forward-looking statements about future performance, which may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Thanks, Emily, and good morning, everyone. Despite another volatile year, we closed out 2022 with solid results. With our continued focus and the incredible dedication of our employees, we are well positioned to build on this success as we move into 2023 and beyond. This year, we generated full year revenue 10% above 2019 levels, doing so on 9% less capacity. Our 7.6% full year adjusted pretax margin led the industry, proving that our business model is resilient. Air Group's pretax margins have now ranked #1 in the industry for 11 of the last 13 years. Additionally, our employees earned the largest performance bonus payout in our company's history on average, adding 10.5% on top of our employee salaries or nearly 6 weeks' worth of pay. Our people did a fantastic job delivering care. I want to thank all of them for the work they do to ensure Air Group outperforms even during turbulent times. Earlier this year, we identified 3 key priorities to strengthen our competitive advantage and prepare for future growth. Our teams delivered on each of these priorities, including: one, completing our labor deals. We signed 5 labor contracts in 2022, all of which include significant improvements for our people and creates stability and clarity for our company and employees. With these in place, we are well positioned to fully focus on our future; two, fortifying our operational reliability. Despite challenges throughout the year, we finished 2022 with one of the industry's best completion and on-time performance rates. Operational Integrity is the foundation of a healthy airline, and we remain focused on balancing our growth aspirations with consistent delivery of the operational excellence Alaska is known for; and three, executing our single fleet transitions at both Alaska and Horizon. On January 8, we flew our last A320 revenue service flight, and today marks the final Q400 flight leaving only 10 A321s in the fleet through year-end. We have retired over 60 aircraft in the last few months, paving the way to more cost-efficient and productive operations in both our regional and mainline business. As we take off 2023, we're taking with us many lessons learned. We closed out a solid year, and we are committed to make 2023 even better. Our leadership team has a clear set of strategic initiatives that will support our growth aspirations, expand margins and improve operational excellence. For the full year, we expect to achieve adjusted pretax margins of between 9% and 12%. This morning, we introduced an earnings guide of $5.50 to $7.50 per share, which implies restoration to 2019 EPS levels at the midpoint. Delivering on these targets will be challenging and will require us to leverage our competitive strengths. Undoubtedly, there have been structural shifts within the industry, but history has proven time and again that cost discipline and a strong balance sheet are required to win in the airline business. This is the heart of Air Group's DNA, and we continue to believe low cost and high productivity matter and that pursuing both benefits all stakeholders. Productivity is not where it used to be in this post-pandemic era, and it can be debated what is structural and what is temporary, but our leadership team is dedicated to driving down unit cost in 2023 as we restore flying and begin to close the productivity gap. This strategy is largely enabled by our single fleet transition and the upgauge benefits that come with our new MAX fleet. Two critical factors to successful capacity growth in 2023 will continue to be staffing and aircraft availability. We had success in hiring nearly 8,000 people in 2022, and are confident in our plans to hire 3,500 more in 2023. And as it relates to aircraft, we remain in close communication with Boeing and have a high degree of confidence in our fleet planning assumptions as well. Having factored in the appropriate buffer in both these areas, we are confident in our 2023 plans to grow 8% to 10% versus prior year, so long as demand and the economic environment continue to support it. Lastly, the revenue road map we outlined at our March Investor Day will provide valuable contributions in 2023 and continue to build to our $400 million target. Through focus on cost discipline and growing revenue opportunities, we have a tangible path to expand margins, and our team is excited to deliver on these in 2023. To wrap up, our goal throughout the pandemic has been to emerge a stronger, more competitive airline and the steps we've taken to date ensure we're on that path. We have the people, the resources, the knowledge, and the discipline to drive performance. I am proud of the results we achieved in 2022, but even more so, I'm looking forward to the opportunities ahead of us as we deliver on our financial and strategic initiatives in 2023 and beyond. Thanks, Ben, and good morning, everyone. My comments today will focus on our fourth quarter and full year results, along with first quarter guidance. Fourth quarter revenues totaled $2.5 billion. That's up 11.3% versus the fourth quarter of 2019, notwithstanding our capacity was down nearly 10%. These strong results included the impact of severe winter conditions that we experienced over the peak holiday travel period in December. The storm reduced revenue by approximately $45 million. Notwithstanding this, we achieved unit revenue increases of 23% for the quarter with robust loads, which exceeded 2019 levels and came in at 85.5%. More impressively, as Ben mentioned, our full year revenues came in at $9.6 billion, and that's up 10% versus 2019 on 9% less capacity. This resulted in industry-leading full year unit revenues, which were up 21% versus 2019, capping off a strong year of outperformance and demonstrating the leverage of our commercial initiatives, power of our network and a constructive pricing environment. Turning to product and loyalty. As has been the case all year, we continued to benefit from strong demand in our premium products. First class was up 19% and premium class up 14% versus the fourth quarter of 2019, with paid load factors up 6 points and 2 points, respectively. As we reflect on the full year of 2022, we were able to drive an increase in premium revenues of nearly $0.5 billion or 20% above 2019. Our loyalty program has also been significant revenue driver given our renewed credit card deal with Bank of America. Cash remuneration from the bank was up 42% versus the fourth quarter of '19 and 39% for the full year. As a reminder, product and loyalty represented roughly half of our $400 million commercial initiatives, and we expect to achieve product and loyalty's full run rate in 2023. Regarding network and alliances, we are encouraged by the results we've seen through our partnerships in oneworld. Through increased opportunities that we simply did not have before the pandemic, including joint contracting with American and working with MX GBT. We have meaningfully improved our corporate share gap and continue to experience higher traffic volumes facilitated by our alliance partnerships. And we are stepping up our airline partners selling capability in 2023, which will help us offering full partner inventory for 10 global carriers on alaskaair.com by year-end. These partners include American Airlines, IAG, Japan Airlines, Qatar and Qantas, an expanded global network that we can sell and market as our own is compelling for our guests, and we expect our airline partner revenue to reach 8% to 10% of total Air Group revenues by 2025. Turning to corporate travel. We experienced a softening in bookings during the fourth quarter from those in the late summer peaks, exiting 2022 at approximately 75% recovered on a volume basis and 85% recovered on a revenue basis. West Coast business remains less recovered, which is not surprising given the significant workforce reductions happening across large technology companies located up and down the coast, where we primarily operate. Despite the choppiness we've seen in this segment, business. Travel has trended in a positive direction in the last few weeks. While we don't expect continued recovery to be linear, over time, we do still expect to fully restore our business revenue based on our improved opportunity set. Looking ahead to guidance for the first quarter. We expect total revenue to be up 29% to 32% year-over-year on capacity that is up 11% to 14% as we lap weak comps when Omicron reached its peak in the first quarter of '22. Q1 is always our weakest quarter of the year, but leisure travel remains healthy and yields are holding steady. For the full year, we expect revenue to be up 8% to 10% on flat unit revenue. Our 8% to 10% growth in 2023 will continue to focus on deepening the connections of our network while growing the Pacific Northwest and restoring California. Approximately 2/3 of our growth will be focused in the Pacific Northwest and 1/3 in California and will not be overly dilutive to our yields as much of it will be added to our strongest markets where demand exceeded supply in 2022. Importantly, 85% of growth comes from increased gauge and stage. This is the most efficient capacity growth of any year that I can recall at Alaska Airlines. In closing, my team and I are squarely focused on 2022 as our baseline year, which represented industry-leading unit revenue and profitability. And from that base, we look forward to building an even stronger result for 2023. The economics of our renewed credit card will continue to build this year. Our alliances and partnerships are set to gain further momentum as we improve our corporate share and international travel continues to unlock. Our premium seat mix and upgauging opportunities will also grow as we take 37 MAX deliveries where 22% of seats are premium. This combination drives further unit revenue momentum that we believe will be a differentiator for us going forward. I'm excited for what our commercial team is set to deliver in 2023. Thanks, Andrew, and good morning, everyone. As you heard from Ben, our full year 7.6% adjusted pretax margin led the industry and is a great result for us given how the year started and the challenges we experienced rescaling our company in the face of incredible demand for travel. We are especially proud that all of our people will receive significant performance-based bonuses in February given their achievements this year. We are looking forward to further building towards our long-term financial goals in 2023 by remaining focused on running a reliable operation, driving unit cost and productivity improvements and delivering on our commercial road map. Turning to Q4 results and an update on our balance sheet. We ended the year with debt to cap of 49%, within our target range of 40% to 50% and still among the strongest in the industry. Debt payments during the fourth quarter were approximately $50 million. For full year 2023, debt repayments are modest, totaling approximately $280 million with $100 million in the first quarter. Cash flow from operations totaled $1.4 billion for full year 2022 and total liquidity inclusive of on-hand cash and undrawn lines of credit ended the year at $2.8 billion, a great result, given that we continue to pay cash for our CapEx in 2022, which was one of the highest CapEx years in our history. In addition to top of industry margins and our balance sheet strength, our trailing 12-month return on invested capital reached 9% in 2022, above our cost of capital and approaching our long-term target range. Our balance sheet strength, our cash position and our margin and return on capital results allowed us to take 2 other important steps towards the end of 2022. First, we announced in December our plan to restart share repurchases in the first quarter of 2023, initially focused on offsetting dilution. And second, we secured an expanded order book with Boeing now having firm and option aircraft positions through the rest of this decade, given overall aircraft and engine demand and ongoing supply chain challenges, having access to positions for the next 7-plus years will, we believe, prove to be beneficial strategically as it provides us maximum fleet flexibility on great terms. Turning to costs. In Q4, CASMex increased 24% versus 2019, approximately 1 point above our guide driven entirely by lost capacity and incremental costs as a result of the severe winter weather in November and December. Absent this impact, our Q4 CASMex would have slightly beat our guide. Our full year CASMex in capacity ended the year within our guided ranges at up 20% and down 9%, respectively, versus 2019. And as a reminder, we do continue to include the cost of our performance-based bonus and incentive pay programs in our unit costs. For the full year, this represented approximately 2 points of unit cost pressure versus 2019 and was materially more impactful on our unit costs than other airlines. Our beliefs about what will drive long-term success and value in the airline industry remain largely intact and consistent with what we believed pre-pandemic. We firmly believe a strong balance sheet and low relative costs will be the ultimate drivers of business stability and success. We remain focused on and confident in both of these areas. Our balance sheet is strong and based on 2023 guides, Alaska is positioned to achieve the best unit cost result within the industry this year, helping us maintain or improve our pre-pandemic relative cost position. Looking ahead to 2023, our current schedule has us returning to pre-pandemic levels of capacity during the first half of the year. Maintaining operational safety and reliability remains our top priority, and we will have continued modest cost headwinds as we complete the transition training related to our fleet transitions. However, we are planning for solid improvements to our overall fleet utilization and levels of productivity during 2023, and are focused on reducing unit costs on a year-over-year basis. For the first quarter, we expect capacity to be up 11% to 14% with CASMex down 0% to 2% year-over-year. And for the full year, we continue to expect capacity to be up 8% to 10% with CASMex down 1% to 3% on a year-over-year basis. Touching on fuel. Oil prices have moderated from 2022 levels but remain elevated. Refining spreads also remain volatile. We currently expect fuel price per gallon to be $3.15 to $3.35 for the first quarter and $3.10 to $3.30 for the full year. Our significant 2022 benefit from hedging, which was approximately $170 million will likely turn to a net cost in 2023. As a reminder, our hedging program uses 20% out of the money call options only, and our strike prices are above what we anticipate oil prices will be during the year. Taken all together, as Ben mentioned, we expect margins to improve this year with our full year adjusted pretax margin guide of 9% to 12%. This incorporates the full structural impact of our ratified labor contracts, contributing approximately 3 points to our full year CASMex. And while we are optimistic about demand for travel this year, we are also cognizant of the uncertain economic backdrop we are operating in, and we'll adjust capacity accordingly this year if we need to. One of our primary strengths over the years has been to execute our plans. In 2022, we certainly experienced volatility and some setbacks. But overall, we executed on the major components of our recovery plan and have a strong foundation to work from in 2023. We have most of our labor deals completed. We are through the majority of our fleet transition. We were one of the most reliable airlines in the industry. We've got a solid balance sheet and a great aircraft order book. And we are now focused on improving utilization, productivity and delivering on more of our commercial road map as we attempt to lead the industry again in financial performance in 2023. You got the RASM premium last year even with kind of the West Coast corporate tech travel not showing as much growth as other areas. Based on guys out of other airlines and your guidance this morning, doesn't seem like you're assuming much of a further RASM growth premium here. Just curious, what are you baking into your guide in terms of corporate travel recovery here in 2023? And do you think there's the opportunity for that RASM premium to kind of maintain throughout this year? Yes. Thanks, Andrew. So a couple of things. I think firstly, and to your point, we did have the higher benchmark last year. If you look at the industry's guide for this year, I think we're all saying unit revenue is about flat. So we're in line with that. I do think, as I shared in my prepared remarks that we may have more upside in the corporate side than perhaps others on a relative basis. So I do see that there is opportunity there. And of course, as you're well aware, we really peak in the second and certainly, the third quarter. And again, industry capacity is not back to where it was -- in '19. So again, there could be upside here. But right now, we're in a pretty good place. Got it. And then a question for Shane, just in regards to that kind of peaking in 2Q and 3Q. When we think about capacity in CASM for the rest of the year, do you expect these to be fairly consistent across the quarters going forward here? Or is there like any lumpiness that we should build into our models? Andrew, thanks. From a capacity perspective, it's pretty sequentially modest Q4, Q1, Q1 to Q2, Q2 to Q3, there is a step-up in the second half of the year, but it's very reasonable, I think. In terms of unit cost, I think flattish for the first half of the year, consistent with our Q1 guide, obviously, and then a little bit of momentum in the back half of the year. It's not exaggerated. It's sort of flattish first half of the year and then single-digit-ish in the second half of the year. So I don't think there's a big swing quarter-to-quarter that you guys need to expect from us this year. I know your pilot contract has a snap up or a me-too clause. But as I recall, it's a little complex. Can you remind us of the mechanics of that mechanism? When do look backs occur? What's the group of airlines that you comp against? And I can obviously do my own analysis, but if you have Alaska estimate based on Delta becoming the market, I'm all ears, but we can do that work on our end. Yes, Jamie, I'll give you the very -- feedback. I'll give you. The complicated formula and then you guys can do the math. It's the simple average of the for larger airlines than us and JetBlue, and we look at it on September 1. So you can make sort of estimates about what you think the industry would have ratified by that point in time and pretty easily back into what you think the impact might be relative to the scheduled 4% downline raise. So -- we're happy that we have this, by the way, in the contract. We don't want our pilots to fall behind. And we knew going first that we had to have some mechanism to make sure that we kept up with the market if it went to a different place than we were expecting. Okay. Perfect. I appreciate the color. And then on oneworld, you said reaching 10% of group revenue by 2025. That's the goal you gave, right? 8% to 10%, okay. So I've always assumed that connecting revenue or alliance revenue is less profitable than local revenue Obviously, if the connecting revenue is entirely incremental, it's highly accretive. I know -- and maybe my assumption is flawed. I know you've been really bulled up on your one rolled membership. But on a margin basis, how does that 8% to 10% compared to your core flying. Well, I think -- so a couple of things. And again, just what we've seen this year, especially with American Airlines and not just international but domestically, connecting over their hubs and even some local market code share we have. We participated in American strong revenue environment as well where their corporate travelers or leisure travelers or connecting beyond need to utilize our network to help make for a better, shorter trip. So overall, I've been very happy with the yields that are being produced. And again, as we go into this year with international travel and the proration of the strong international fares, again, from what we had last year, I think these are all positive momentum for us. So in December, you guys have some really unusual weather that drove the operational issues you saw not being that preparing for an ice storm on Christmas should be the operational base case, but some of your peers are talking about the need to have permanently higher buffers to protect the operation. Do you believe that you already had the appropriate buffers in place for 8% to 10% capacity guide for 2023 and December didn't really to change anything. Some color there would be great Maybe I'll just speak to '23, and you can speak to the December event. By the way, welcome back, Catie, it's good to hear from you. I think we do have sufficient buffers in our capacity plan and our staffing plan to ensure that we're not overstressing the network. If you look at the second half of the year, once we sorted out our April issues with pilot training, we were amongst the best in the industry on both on time and completion rate. Yes, this was a -- although it's becoming the norm because it happened last year as well. This was a pretty unique event that lasted multiple days and did ice over our aircraft here in Seattle and in Portland and actually in other parts of the Pacific Northwest. So it was a pretty unique event. And I think it's probably not -- we're not going to assume that it happens to us every single year, but we do have to build some more resilient irregular ops for sure. Yes, Catie, it's Ben. Having done operations in my whole career, I mean you can look at it a couple of ways. You can create a massive amount of buffer for an event that might not happen or you can go in with the appropriate level of staffing with some additional cushion to deal with winter events. But things like ice storms are massive events that cripple a city, and there's not a lot you can do no matter how much buffer you put in, there's nothing you can do to operate in an ice storm. So what our mindset is create a robust schedule that we can operate in the peak periods or peak periods where there's -- where we're susceptible to weather, create additional buffers but it's got to be managed appropriately. So we were good. This was just a big event, and I'm pretty proud of the team and how we dug out of it and got back on track. Totally understandable. I mean just seeing some of the scenes in Seattle, it definitely seems like a unique event. So maybe just one then. Great to have most of the fleet transition behind you. Can you just help us think about some of the moving pieces on the P&L for this year, underlying your full year CASMex guidance I know you mentioned some elevated training in your prepared remarks, Shane, but anything else we should be thinking about that as go-forward might roll off, that's unique to the fleet transition Alaska. Yes. I don't think there's anything sort of major -- a lot of the expenses related to returning the lease aircraft we took through special last year. So we don't expect a lot of noise this year in the P&L related to the fleet transition. The biggest cost piece is that we're completing the transition training of pilots by and large in the first quarter, slipping a tiny bit into the second quarter. But that's really it in terms of fleet transition-related specific costs in the P&L. I don't think anything else is different than what you've seen across most of the industry. We have airport costs that remain an area of growth in terms of the P&L. I think that's consistent with the entire industry. And then certainly, labor costs have gone up structurally. And as we grow, they're going to continue to go up as we hire more people to fund that growth. But everything else looks pretty normal, I would say, in terms of trend, nothing to really point out. Just one quick clarification on that last point, Shane. The $120 million in the fourth quarter, then is that the end of the transition costs? Is that the way we think about that? Helane, this is Emily. So the $120 million that you saw in special charges in Q4 should be most of the remainder because we've put all of our estimates in for returning all the A320s. We've done all the accelerated depreciation and other charges that we're going to take on both the Q4 and the A320s. Those aircraft actually leave our property over the next 12 to 18 months. So there could be some minor true-ups that come through there. the last remaining thing that you're going to see coming through special charges in 2023 is going to be whatever we end up doing with the A321s, which are still on our books. So there will be some dollars there, but there should not be much more for A320. Okay. That's very helpful. And then just on the mileage plan. I think there was an announcement that there are new benefits that are accruing to your members beginning like I want to say around now. Maybe, Andrew, can you talk about that and how that should benefit your revenue line? Yes. Thanks, Helane. So 2 things. Certainly, for our loyalty guest members, there is some really cool incremental benefits as it relates to bonus miles for subscriptions, boarding priorities. And even if you hold Bank of America accounts, you'll get bonuses there. So there's a lot of good things there. I think specifically for Air Group, a couple of things for new cardholders, there's going to be some minimum spend thresholds, which we've never had before. So I think that will add to some of the quality. And then the other thing we did have a fee increase this year, which we haven't done forever, and we're still one of, if not the lowest card membership fee. But again, that's [Technical Difficulty]. That went from $75 to $95. So we will [Technical Difficulty]. We get a lot of value from our card and the spend on the card is very, very healthy. So we think this is well within the industry. In fact, it's probably low versus the industry, but we don't have any concerns about it. In terms of the pacing benefits, the pacing of benefits of moving to a single fleet, what are we seeing in the first quarter here, if any, and can you just remind us what are the hurdles you need to clear to realize further benefits? Really, it's just getting through the pilot training and getting the Dash 9s that replace the A320s here on property. We are at low 40s of Dash 9s relative to the 60-ish A319s and A320s we had. So the planes are coming. We've got a bunch more coming this year. We'll have full restoration of the fleet size as we get through the year. We'll be through all of the transition training on Horizon here in the first half of the year, mostly in the first quarter. Similar on mainline, although we'll have these 10 A321s, I think we can pretty easily get those into 1 hub, 1 base and manage that. So I think the way the unlock is basically going to start in the second quarter and ramp through the rest of the year, and we should be at close to full run rate as we get through the fourth quarter, dependent upon what we do with the A321 transition because we still have pilots, you've got to transition off of that equipment ultimately. Great answer. And then Ben, you were a -- or at least our recollection, you were a process guy historically. Historically, Alaska was very good at identifying variability, measuring variability and driving it out of your processes. Certainly, this is a different and more difficult operating environment. But do you think you still have those opportunities to drive out variability? What are the 1, 2, 3 kind of productivity initiatives you can go attack this year? Or is that just outdated thinking from a bygone era? Duane, thanks for the question. It's a great question. And we talk about that a lot. Like what I'm going to tell you is that type of thinking is in our DNA. It's been in our DNA for -- I've been here for 20 years. I mean that's how we think, and that's how we wired. In terms of has it structurally changed, and that's -- it could be debated. But my view is that the airline industry isn't even back to 2019 levels of capacity. So if you talk about aerospace itself, now of course, you've got to have ATC staffing in place. We're not flying the same amount we're flying in 2019. So if you look at block times, if you look at departures, we're still less than we were in 2019. So the aerospace is essentially the same. It's got to work from an FAA perspective. And how we look at it internally is we can still have improvements in asset utilization and people productivity. And we have already the processes and the mechanism in place to get to a better place. So is it -- has it changed a little bit? Yes. Are we going to bring it back to the left? Absolutely. Shane, congrats on getting the ROIC, I guess, congrats to you and the whole team of getting your return on invested capital trailing 12 months on better than your cost. You're one of the few out there who can actually have achieved that objective. You did highlight the return of share repurchase program. Again, this is to offset just the dilution. And then the amping up the part of the deliveries of some MAXs. Where is your thinking on bringing back the dividend? Is that something that we see in 2023? Is that later this year? Is that a next year phenomenon? Mike, thanks for picking up the ROIC comment in the script. That's nice that you did. We are -- that question on dividend is the 2023 conversation item with the Board. We decided last year to prioritize offsetting dilution first. As you know, I mean, I think a dividend is something that you do when you have a lot of confidence in the outlook for a multi-year period. We're really optimistic, but we want to see how this year shapes up, especially with the economic backdrop. So we're actively discussing it with the Board, still in our long-term sort of thought process in terms of capital allocation and shareholder returns, but nothing to say right now on it. Okay. Great. Fair enough. And then just second, my question on loyalty to Andrew. To see the $1.5 billion of remuneration. And I think just a few years back, it was $1 billion, $1.1 billion. I think you had mentioned something like 39% going back to 2019. And maybe we're looking at a 10% or 12% type CAGR here. Is that the right rate going forward? I mean -- or do we see -- maybe you talked about a step-up in fee, but do we see a step up in maybe rate? Are there any sort of milestones that we hit over the next year or 2 where that could say, jump to 2? How should we think about the growth of that program? Yes, I think -- well, a couple of things. And again, you've seen a significant step change from the new contract. And that as you heard this morning, there will be more goodness there. And there is also changes over time. But I think what we're really excited about now is we've got this behind us -- is growing the program, growing the portfolio, growing the spend top of wallet, and that's what my team is squarely focused on now. And so I do personally see continued momentum, and it's going to be a very big focus for us as we continue to move forward. Thanks, Mike. I did want to mention as well. That was a great answer, Andrew, because it is Andrew's birthday today, which I forgot to mention at the start. And I just want to ask the analysts not to be too hard on Andrew during the -- I'm kidding. You can be as hard on the him as you like. Happy Birthday Andrew. And I guess as a follow-up on Andrew's question and it's probably a question to Andrew, so I apologize if this is mean. But I was kind of curious if you could give a little bit more color on the kind of the business recovery in terms of -- you mentioned maybe getting eventually kind of getting back to 2019 levels, but because you have some of these other initiatives that should help you get there. Do you get there this year? And particularly, I guess what I'm focused on is you have a lot of headlines about kind of job cuts and kind of the West Coast-based tech companies and -- is that having any incremental impact on the tech business demand? Or is that -- is it just more -- you're not seeing the recovery yet? Yes. Savi, thanks for that. And I think it's a great question because the first thing I will say is that even though the headlines are recent on these job cuts, we've been experiencing especially some really large tech companies, their corporate travel has already been severely depressed for some time now. So the corporate numbers that you see from us already include a lot of high-tech companies with that already, in some cases, nearly turned off their travel, but have severely depressed. So as we move forward, I don't think these cuts personally impact the technology side because I think we've already seen them. And the question is, will they come back? I'm more bullish and confident certainly on the non-tech side of corporate travel and continue to share there. I will say the jury is a little bit out on where tech does go. But I think overall, portfolio-wise, business is somewhat stable that the 85%, 75%, 85% range. But again, I hope with our share movement and continued strength over time that we do get back there. And Savi, I might just add, the one thing not to lose sight of is these tech companies while they haven't been traveling for quite a while, these are like the most valuable companies on earth. And at some point, they are going to expand again and they're going to get traveling again. So it's probably future goodness for us. We just don't know when it's going to really come back. It could be a year away or more. Makes sense. And I just thought of the -- getting back to the utilization and productivity -- trying to understand, again, then you talked about the aerospace is what it is, and we're still below and yet you're seeing everybody struggling with and then questioning if we get back to kind of the previous productivity, what's kind of controllable on Alaska side and the timing around that versus what -- what's kind of out of your control? No, Savi. Just let me start with a couple of things. I think for us, well, coming back from a pandemic and getting the inertia up for the operation, I think that's where not just Alaska, but the entire industry struggled getting back up to a certain level of capacity. So there was some -- there was a lot of issues there. Like as I look forward now into 2023, when I look at the benefits of single fleet and having the majority of your fleet Boeing and the majority of your fleet Embraer 175, that just drives massive efficiency in terms of crews, in terms of swapping airplanes and getting reserve crews. So just there alone for us is a major improvement. Secondly, again, getting through a little bit of the volatility with staffing and training, that goes away. So that volatility goes out. So our folks is pure in every part of the operation where we see volatility in staffing, where we see volatility and performance is to go in in on those issues and snuff them out. And I mean that's what good airlines do and operational reliability is just critical in doing that right. Now there will be things that will never go back to the way they were in 2019, but I think a lot of this is in our control. And we just don't give up on those type of things. It's savings that you can go after, and we're going to go after them. Just to clarify, but just on the staffing side, taking and trading. The training is related to the fleet transition, right? Are you fairly caught up in just being able to source the pilots for the capacity. Right. Yes. We're going through a lot of the A320 Airbus pilot transition right now. So we'll be through it by the end of the first [Technical Difficulty] quarter And so that's going through all our school house right now. Same thing with the Q400s and the Embraer 175. So we'll be largely done that big by wave. I just want to go back to the revenue guide. So it looks like RASM decelerating from when I look versus '19, decelerating from fourth quarter to first quarter and then reaccelerating the rest of the year. Just help us understand that. Is that a market view? Is that something specific to you guys? Just any color there? Yes, Scott. So a couple of things, and we've talked about this before, obviously, but our first quarter is always the weakest. And a little bit business travels certainly in January has been highly choppy and did not return as much as we had hoped. But I think if you take a step back and look at our revenue in general, and you even go back to 2019, our unit revenue guide for the first quarter are right in line with the industry's unit guides. And they also have very big international travel coming back, which I think will be a big tailwind for them. And again, for the year, we're about right where our industry is -- but again, for us, we've got work to do again on January and February on the network side. We do need to make sure that we construct our network to handle these lulls in our demand. But again, March and forward is very solid. Okay. And then, Shane, I think you said that there's a fuel hedging loss embedded in the guide for this year. Just -- how much is that -- maybe just bigger picture, like the issue has been crack spreads not so much crude. Like any thoughts on revisiting how you guys hedge? I know it's more complicated, but it seems like it would be a much more effective way to hedge if you want to hedge it all. Scott, it's Nat Pieper. Thanks for the question on fuel. I think first on just our hedging program. We started this 20% out of the money calls, very straightforward, formulaic back in 2015, broke even basically 2015 to 2021. And then as you cited, and as we said in the script, 2022 it turned out to be a profitable thing. But as you know, we're not hedging to make money. We're hedging just to eliminate volatility -- we think it's a good way to use our strong balance sheet and it just gives us some better insights in our planning as we move forward. We have spent a considerable amount of time with investment banking friends back on the East Coast about ways to potentially to hedge the crack spread, you're right, and that that's been the main source of frustration, volatility, et cetera. And something we're looking at. But I'd underscore, we're only going to do it if -- again, it's consistent with our core values as a company, use our strong financial foundation and just keep it on autopilot. We're looking at about $10 million in the first quarter. And then as you can imagine, it snaps to something different every day, the forward curve moves. The question is the state of California was pretty slow to come out of the pandemic, and I guess my question is, what percent of the revenue growth this year is just simply getting markets back to 2019 levels of revenue? And then related to this, what percent of Alaska's revenue touches the state of California? Yes. So just on the big picture, Dan, our growth, 2/3 of it is going to be Pacific Northwest and 1/3 of it is going to be California. Just as it relates to recovery, if you look at our growth in 2023, the Pacific Northwest is now in the double-digit territory higher than 2019. But California was still down 23% last year, and it will be close, it will be 10 points better than that. So our California network will still be down about 10 to 12 points this year versus '19, but recovering. And I would say, again, very high level, 1/3 of our revenues is somewhat tied to California. Wow, that's big. On the prior comment that Alaska has more upside on corporate revenue versus peers. So I guess on premium revenue, I believe the stat was to have 62% more premium seats this year versus 2019. And I guess I'm wondering if that stat is still correct or if that's right. And I'm not sure if you can share what the mix is today or -- but what it is today versus where you might expect to exit the year, but if you can, that's helpful. And then related to this, just the corporate travel budgets, are they coming in a little higher than last year, a lot higher or lower just given the tech exposure. Yes. So I think a couple of things. And you maybe saw in my prepared remarks that we were able to increase our premium revenues by nearly $0.5 billion. And as Shane has shared, we're sort of trading out 12 first-class seat 320s for 16 first-class seat MAXs. So there's real upside there. I think overall, I think first class revenues were up about 21%. And -- so there is a significant opportunity there. The other opportunity we're working on then is our regional fleet, and we actually we're all 175 now, which have first and premium, and we're really happy with the progress we've made on filling those seats at good fares, and we continue to work that. And then on the last question you had was on corporate. Could you repeat that one again, sorry? Yes. I think -- some of the budgets when I last spoke to my team was still being finalized for this year. I think budgets or no budgets, I think what we're really seeing a little bit here, Dan, in some cases, is the on-off switch. You've got to go to your Vice President to ask for travel, and so people are not going. So we either see very deep cuts in travel or more to the average means. So I think the real question is, will high-tech start to give permission for their people to start traveling again. And as you know, it's not just it's hotels, it's cars, it's air fares. So anyway, that's where we're at. Just on the capacity outlook, this would be an easy one. Just can you provide some context on what's new versus core utilization stage gauge. It just feels like a lot of the growth is going to be utilization engage base this year within your core markets, but if you could just clarify that, that would be great. Yes, I mean, you're exactly right. At the end of the day, very, very few new cities. This is essentially all core restoration and 85% of all of our growth is stage engaged. So it's a very efficient growth. All right. And then I hate to ask a cost question because I know you got a bunch, but it seems like there's some confusion. Just prior to the 1Q CASMex guide, I would have thought first half versus second half would just look a lot different than it kind of seems like it's shaping up to be. And when I think about high level, second half benefiting from just easier comps, fleet transition, improved productivity, all that stuff, maybe -- maybe the offset is more on like profit share accruals and then another increase in pilot. I'm just struggling with the idea, like are you being ultraconservative? Or is it just -- there's just a lot of uncertainty right now on the second half cost side? Thanks, Conor. I think if you're implying that you might have thought it would be down more in the second half. I'm not sure if that's what your sort of question was. But... There is not -- Okay. Got you. Yes. There's not a lot of noise, as I think Catie asked earlier, sequentially throughout the quarter. I will say like with respect to our profit sharing accruals, we had a very significant results in Q4 2022 because of our first place performance on the margin side. And while we are still anticipating to lead the industry next year, I think you'll see those accruals come in differently this year. And it's significant enough to create a little bit of noise. But no, I think, look, we need to get through the first quarter, all the transition training, make sure the planes come and we've got to make some decisions about the A321. And I think what we've shared is something we're highly confident we can get to. We tend to target internally to do a little bit better, and that's what we're going to drive towards. But there's a lot of year ahead of us, a lot of execution to do. And I think the last couple of years, we've been ambitious in our plans and had a lot of setbacks. We don't anticipate those this year, but -- but I think some of that's informing some conservatism in our capacity and other guides. Sorry, just 1 clarification. I mean you did have like the lease return expense in the first quarter of last year is maybe that I'm sorry, I'll take it offline. I'll ask. Yes, yes, we're happy to -- I mean we're not going to obviously get into like a lot of the specific details, but we're happy to give you more color for sure, on the progression. So another follow-up on corporate, I'm afraid, I think you said that you were -- the tech customers of yours are giant corporations and they're eventually going to come back, which I guess it's true, but then we can't be 100% sure of that kind of given the way to do business. So are you happy to wait for them to kind of come back on the corporate side? Or -- are you looking to maybe expand your corporate customer footprint? Maybe chase some more SMB customers? And is there anything you need to do from either a marketing or a network standpoint differently if your corporate customer base is likely to change going forward? Andrew can speak quickly to the sort of composition. I just Ravi, one thing I'd say, tech tends to have some of the best discounts. It's sort of lower-yielding business traffic. And I think the point we were trying to make is they haven't been traveling much all of last year. So there's not even though you have these headlines of layoffs, it doesn't really mean that there's like another downward step in terms of their travel. And I do think that at historically low travel volumes, they may never go back to where they were pre-pandemic. I think they're going to be above where they are today. I'm very confident about that. I just don't know when. Yes. I think we'll obviously adjust. We obviously would love high tech to get back to the -- where they were. But at the end of the day, this is about using your channels and the timing and when we sell and when we don't sell. And I think there's just a lot of opportunity to relook about who we're selling our seats to and when and where, and we will manage through this. Got it. And maybe as a quick follow-up. I mean, obviously, you guys have come a long way kind of in the last couple of years and kind of where your balance sheet is right now. and with kind of the biggest boxes checked on the cost side and the fleet transition side and everything else. How are you thinking of the pace of shareholder returns or cash returns through the year maybe as your confidence in your own numbers and the cycle maybe kind of build through the year? Yes. Ravi, I think -- so we announced the sort of dilution offset program. I think we've ranged it from $75 million to $100 million. We'll put a grid in place assuming the stock sort of price is somewhat consistent throughout the year, it should be ratable throughout the year. But we'll buy more if the stock goes down and obviously a little bit less if the stock goes up. But we'll get through the entire $100 million by the end of the year, my guess is it's fairly ratable across the quarters. And that's sort of our plan at this point. All right. Thanks, everybody. Thank you, Ravi. Thanks, everyone. Thanks for joining us for our first quarter call. Look forward to following up with anybody out there, and we'll talk to you on the second quarter. Everyone, have a nice day. Thanks.
EarningCall_1075	All lines have been placed on mute to prevent any background noise. After the speakersâ remarks, there will be a question-and-answer session. If you would like to ask a question at that time, please press star, one on your telephone keypad. If you should need operator assistance, please press star, zero. Thank you. Thank you. Good morning and thank you everyone for joining us today for Li-Cycleâs review of our fourth quarter and year 2022 results ended October 31. We will start today with formal remarks from Ajay Kochar, co-Founder, President and Chief Executive Officer; Debbie Simpson, Chief Financial Officer, and Tim Johnston, co-Founder and Executive Chairman. We will then follow with a Q&A session. Ahead of this call, Li-Cycle issued a press release and a presentation which can be found on the Investor Relations section of our website at investors.li-cycle.com. On this call, management will be making statements based on current expectations, plans, estimates and assumptions which are subject to significant risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect, including because of factors discussed in todayâs press release, during this conference call, and in our past reports and filings with the U.S. Securities and Exchange Commission and the Ontario Securities Commission in Canada. These documents can be found on our website at investors.li-cycle.com. We do not undertake any duty to update any forward-looking statements, whether written or oral, made during this call or from time to time to reflect new information, future events or otherwise, except as required. Thank you, Nahla, and good morning, everyone. It has been a phenomenal year for Li-Cycle and our team. We continue to be very excited by the growth opportunities we see ahead and remain laser focused on the execution of our spoke and hub network. Beginning on Slide 3, covering key achievements from the past year that position Li-Cycle as a preferred global battery recycling partner, in North America with four spokes in operation, we grew our total processing capacity by nearly three times versus the prior year. In Europe, we made strategic strides, having advanced development at key commercial sites. At our Rochester hub, we made significant progress on engineering, procurement and construction, keeping us in line with our targeted budget and schedule. We are reiterating that we expect commissioning to commence in late calendar 2023, beginning to expand and diversify our customer base within the battery material supply chain, including notable multi-year commercial arrangements with strategic global participants LG and Glencore, and we further strengthened our balance sheet with the receipt of $250 million from strategic partners and have significantly progressed meaningful debt financing alternatives in support of our future network growth. Moving to Slide 4 for our fourth quarter highlights, we continue to enhance the companyâs foundation on the financial, commercial and operational fronts. Financially, we ended the quarter with approximately $578 million of cash on hand. We continue to time our capital investing needs with advancing the development of key projects. Importantly, weâve made significant progress towards securing meaningful debt financing and expect to provide more details in the first calendar quarter. Commercially, we continue to expand our sources of battery materials through meaningful multi-year commercial relationships with key global customers, including a global strategic recycling partnership with VinES, a leading Vietnamese battery manufacturer, and more recently we entered into multi-year agreements with top tier global EV and battery OEMs to recycle battery materials in Europe and North America. Operationally, our fourth quarter black mass production exceeded 1,600 tons, reflecting a sequential increase of more than 70%. Arizona and Alabama are ramping to target throughput. Importantly, we have advanced construction at the Rochester hub on key engineering, procurement and construction milestones. Turning to Slide 5 for a review of our strategy to be the preferred global recycling partner with a leading domestic supply position in North America and Europe with strong commercial connectivity to Asia. We continue to align our network expansion plans with the highest growing demand centers nearing customer timing. We remain highly disciplined on capital allocation with our investment in each project underpinned by multi-year and diverse commercial contracting, and we maintained a strong project pipeline providing us the flexibility to shift with market and customer demand. Turning to Slide 6 for a look at our total addressable market, or TAM for lithium-ion batteries available for recycling in our focus regions, as well as Li-Cycleâs progress in capturing this growth. As mentioned earlier, we continue to add to our portfolio of customers across the entire battery supply chain, including battery, EV, energy storage OEMs, as well as traditional recyclers. As weâve noted on previous calls, we are battery chemistry and form factor agnostic. This advantage combined with growing operational capacity in North America has enabled us to meet customer demand for recycling needs, which has driven both volume and mix of supply. Specifically, as illustrated on the left, in fiscal 2022 we saw an increase in recycling needs for energy storage batteries from retooling and EV battery packs from recalls. Depicted on the right are the TAM trends for our current focus regions for 2025 and 2030, which reflect accelerating growth potential for manufacturing scrap and end-of-life EV batteries. Thank you, Ajay. I will provide a more detailed discussion of our quarterly and full year results, specifically regarding black mass production, revenues, adjusted EBITDA, and cash flow. Additionally, I will provide an overview of future reporting and timing on outlook. Turning to Slide 7 for black mass production, we continued to generate higher product sales volumes due to the ramp-up of operations in our spoke facilities, with the Arizona spoke coming online in the latter half of the year and the Alabama spoke right at the end of the year. As a result, production of black mass was 1,640 tons in the fourth quarter and a total of 4,023 tons for the year, which came in higher than the top end of the revised 12-month guidance. Having completed scheduled maintenance and processing upgrades, which Tim will discuss later, weâre estimating a range of 850 tons to 900 tons of black mass production for the two months, November and December of â22 stub periods. Turning to Slide 8, our revenues are impacted by market prices of metal contained in our products, notably cobalt and nickel, and with no value attributed to lithium content at this time as we continue to sell black mass as an intermediate product. As a reminder, aligning with our contracts and IFRS reporting requirements, we recognize revenues on product sales at the point of delivery to our customers based on product sales volume and prevailing market metal prices. Our customers take title to the materials and we retain pricing exposure until the related receivable is fully settled. As a result, fair market value adjustments are booked to revenue until fully settled. For the quarter, we sold 1,302 tons of black mass, an increase of 210 tons from the corresponding period in 2021. Revenue was $3 million compared to $4.4 million for the same period last year. The primary driver of the decline in revenue and the change in fair market value pricing adjustment was a decrease in commodity prices for cobalt, offset by a small increase in nickel prices. For the full year, we sold 3,679 tons, which was more than double the 2021 level of 1,824 tons. Total revenue was $13.4 million compared to $7.3 million in the prior year. The increase in product revenue was primarily attributable to increased production of black mass due to ramp-up of our operations at the companyâs spoke facilities, with both the Arizona Spoke and the Alabama Spoke coming online. Revenue was negatively impacted by a cumulative non-cash fair market value adjustment of $2.2 million as compared to fair market value gain of $800,000 in the comparable period last year. Turning to Slide 9. For the quarter, adjusted EBITDA loss was $32.6 million compared to $11.7 million in the same period in 2021. This was largely related to growing volumes offset partially by lower metal prices and increases in raw material costs. Additionally, production costs inclusive of raw materials and conversion costs exceeded the net realizable value of black mass, leading to inventory write-downs of $3.8 million. The net realizable value of black mass inventory is based on cobalt and nickel content with no value assigned to lithium. Finally, as we continue to support the expansion of our global network, particularly the Rochester hub, we incurred higher employee compensation for operational, corporate, commercial and engineering resources. For the full year, adjusted EBITDA loss was $100.7 million versus $26.2 million last year. Similar to our fourth quarter results, this was largely attributable to higher costs associated with the ongoing expansion of our operations in North America, as well as the impact of net realizable value inventory write-downs of $4.8 million. Turning to Slide 10, Iâd like to cover our planning and strategy for our growing black mass production. As we have discussed on prior calls, black mass sales, our near-term bridge, are an intermediate sales product in the lead-up to the commencement of operations at our Rochester hub. It will then serve as a feed source to the hub. Over the course of 2023, we will strategically start to build a black mass inventory for processing at the hub. Turning to Slide 11, another important rationale related to black mass inventory build is to monetize the significant lithium value embedded in black mass. Currently black mass has no lithium payable under our current sales contracts. Here, we show the opportunity cost or value upside, assuming current end-of-period market prices for lithium, which is meaningful. Turning to Slide 12 for a review of the strength of our balance sheet and liquidity, Li-Cycle ended the year with approximately $578 million of cash on hand. As Ajay mentioned, we enhanced our balance sheet during the year with $250 million in combined investment proceeds from LG and Glencore. During the fourth quarter, cash uses included capital spend of approximately $60 million with the majority allocated to securing equipment for the continued construction of our Rochester hub. Our operating expenditures also rose by about $9 million in support of the global network expansion. Looking ahead, future major change drivers of cash include capital investment and operating expenditures to support network growth, our black mass inventory optimization strategy, and finally and importantly, meaningful debt financing for future growth capital. We plan to provide an update in the first calendar quarter of 2023 on financing alternatives. Moving to Slide 13 to review our future reporting timelines and plans for providing additional guidance, as we announced in late December, Li-Cycle will change its fiscal year from end of October to a calendar year end. As a result, in late March we will file a transition report that will provide financial statements for the two month stub period covering November and December 2022. With this earnings report, we plan to provide guidance on key metrics for calendar â23. In mid-May of this year, we will report our first quarter results for the period ended March 31. Thanks Debbie. Turning to Slide 14, the driver of the significant TAM is the increasing demand by battery and electric vehicle manufacturers in North America and Europe for worthwhile supply. As shown on the right side, the TAM potential is driven by planned mega-factory investment with capacity expected to grow by nearly 5 and 10 times by 2025 and 2030, respectively. This dynamic is driving many global supply chain participants to lock in commercial recycling arrangements, which we expect to continue to benefit Li-Cycle as we expand our network capacity. We are strategically growing our global commercial position and network reach by locating our facilities near high regional demand centers and mirroring customer timing. Li-Cycleâs sustainable and scalable technology enables us to move flexibly and quickly to meet our customer needs. Turning to Slide 15 for a discussion of the planned total processing capacity of our spoke network, today I would like to provide an update on the continued innovation of our spoke processing technology which has evolved over three generations of design. With each subsequent spoke roll-out, we are incorporating design upgrades to match our customersâ growing volumes and mix of battery materials. By way of background, our initial capacity was focused on our patent-protected submerged shredding technology, which is referred to here as the main line capacity. This is specifically for battery materials that contain electrolyte and have a risk of thermal runaway. More recently, we have added ancillary processing lines that include dry shredding, processing materials that donât contain electrolyte and therefore are at less risk of thermal runaway, such as electrode foils. Powder processing processes electrode powders to minimize dusting in downstream processes, and baling processes electrode foils into form queues for optimizing logistics and downstream processing. In summary, the existing and planned development, we expect total processing capacity to be more than 95,000 tons per year. As we continue to build upon the first mover advantage, you should expect that we will focus capital allocation to projects that enable us to adapt and grow with commercial demand. Turning to Slide 16, our North American operational spoke capacity totals more than 50,000 tons per year and is distributed across North America in key strategic growth regions. Starting with an update on Ohio which was originally planned for 2023, we are deferring this site capacity as we look for operational efficiencies to consolidate our processing capacity with growing multiple customer needs. Our Ontario spoke is a generation one spoke that was constructed in 2020. We are now working on plans to develop a new generation three spoke and warehouse facility in Kingston, Ontario to replace the existing site, with the initial site work expected to commence in 2023. At our generation two New York spoke, weâve recently completed improvements which included upgrading the main line and the addition of baling to supplement the ancillary capacity, which now provides up to 18,000 tons of processing capacity per year. In 2022, we operationalized the Arizona and Alabama spokes. Both are generation three spokes incorporating multi-stage shredding with full pack shredding capabilities. These plants have their optionality for [indiscernible] main lines and flex capacity with ancillary processes. Our Arizona spoke is up and running as expected and benefiting from our recent optimization projects, underpinning a significant increase in our fourth quarter production. Moving to Slide 17 for Alabama, the warehouse seen here was designed with significant capacity to safely handle and store all types of battery materials, particularly the increasing demand for the processing of full electric vehicle battery packs. As discussed earlier, we are seeing significantly growing volumes and an increased mix of battery materials from OEMs and battery producers. Turning to Slide 18 for a look at the Alabama spokeâs processing activity, this site became fully operational in late October following the implementation of learnings from the Arizona spoke. This facility is operational with high quality talent from the automotive and battery industry and is ramping to target throughput processing all types of lithium-ion batteries. Turning to Slide 19 for an update on the construction of our Germany and Norway spokes, Germany represents the largest market for both battery manufacturing scrap and the expected supply of end-of-life lithium-ion batteries in Europe. The countryâs battery ecosystem continues to grow with leading players in the electric vehicle industry establishing operations throughout the country, providing a high density of battery and electric vehicle manufacturing facilities. On our last earnings call, we noted that we would take a staggered approach to the start-up of our spokes in Germany and Norway. While this remains the plan, in the near term we are re-directing the equipment from Norway to double up the mainline capacity in Germany. This German spoke will also have an additional 10,000 tons in ancillary processing for total capacity of 30,000 tons per year. Our decision to expand total capacity at our German spoke is driven by the recent increase in successful contracting with global top tier battery and electric vehicles OEMs in the region. In line with this, we are re-timing our Norway spoke from 2023 to 2024. In the interim, we will continue to develop the Norway location initially as a battery consolidation facility. Turning to Slide 20, the Rochester hub is expected to be the first commercial hydrometallurgical battery resource recovery facility in North America and positions Li-Cycle as a leading domestic supplier of battery-grade materials. As a reminder, as a key input for the definitive feasibility study that was completed in December of 2021, Li-Cycle constructed and operated a large pilot plant in Kingston, Ontario for approximately one year, providing a strong technical basis for the plantâs future operations. This includes testing and qualifying battery-grade materials such as lithium carbonate, nickel sulfate and cobalt sulfate for key customers in the global battery supply chain. Turning to Slide 21 for an aerial view of the Rochester hub as of mid-January, as you can see, significant construction progress has been made since our last update. Turning to Slide 22 for more details on the key engineering, procurement and construction milestones. To reiterate, a key part of our strategy was to accelerate the procurement of long lead equipment and construction materials. This has proven to be a strategically significant advantage to maintain the projectâs schedule. Specifically, key milestones include achieving nearly 75% completion of the warehouse and associated administration center for the storage of black mass and finished battery-grade materials; progress with the construction of the cobalt, nickel and manganese processing buildings; largely completing civil works as well as underground utilities and electrical infrastructure; more than 90% of equipment has now been procured and weâre nearing 65% completion on detailed engineering for the project. We are on track with our project budget and schedule. We are reiterating that we expect to commence commissioning in late 2023. Turning to Slide 23, I would like to close with recap. We are incredibly proud of what the Li-Cycle team has accomplished in 2022, building strong momentum for our spoke and hub business for 2023 and beyond. We continue to competitively position Li-Cycle to be a preferred recycler and domestic supplier of critical battery-grade materials. We are growing and diversifying our portfolio of commercial partnerships, capturing the benefit of a robust battery supply chain and positive regulatory support, and we look forward to providing a progress update and details on debt financing in our 2023 outlook in the first calendar quarter. Going over to Europe, obviously youâre prioritizing Germany there with your very large spoke. How much of the current input is contracted, and also the same question about the output? Hey PJ, good morning, itâs Ajay. Thatâs a good one for Tim to answer, so Iâll turn it over to him. We typically donât provide plant-by-plant details in terms of utilization. I think the message is clear, however, that we were going to be short capacity with a single line, and so we saw the need to accelerate the second line, and we expect to have that installed and commissioned this year. In terms of your hub operations that youâre building in New York, has there been any changes to the design or flow process as compared to what you had in Canada? Then there are some new companies popping up in recycling, battery recycling. Obviously, you guys have the first mover advantage, but is there any other types of chemistries or processes that we should be aware of to keep an eye on? Yes, so PJ, in essence the process design hasnât changed since we had developed the process in Kingston. If you think back to what was our objective, our objective was to utilize metallurgical principles that have existed in the primary industry and bringing them together in a novel way. From our perspective, the flow sheet that weâve designed is both robust from a technical perspective but also very well suited from an economical perspective to process black mass from lithium-ion batteries. And competitively, to your question, PJ, yes, broadly speaking--I know a lot of you folks are well aware, the divide thatâs based into pre-processing and post-processing, so pre meaning battery materials to black mass or an equivalent, and then post from black mass or equivalent to end product. When you look within those sectors of the landscape, if you will, on the pre-processing side, yes, we continue to see growth there. We continue to see also at the same time that weâre very differentiated, and today you would have seen we added even more color on the ways that weâve continued to keep the network flexible and optimize all types of lithium-ion feeds. That continues to keep us ahead. Then on the post-processing side, and that of course is the real financial strategic driver here for Li-Cycle in addition to pre-processing, it continues to be, Iâd say, pretty stark in the sense of weâre ahead on permits, weâre ahead on construction, weâre ahead on procurement - you would have seen that in the update today from Tim. You do see a lot of announcements from companies, but I think the reality of the lead time for permits and long lead equipment and also doing the base piloting work means that we have several years of head start. It doesnât mean that we can sit here and be happy about that, it means we have to continue to keep the pace. Tim can add a little bit to that as well. Yes, and I think one final point on this, PJ, and that is that youâve been around the chemical industry for a long time, and one of the things that people are always cautious of is introducing new processes and technologies to any flow sheet, and so I would say when youâre looking at different things that are coming through, think about it from a total risk perspective in the sense that, coming to my point earlier, that we deliberately designed this flow sheet with robustness in mind, with proven principles, and so I think every time you think about it from the perspective of introducing new principles to processing, etc., you really need to make sure that itâs been properly risk-assessed from that perspective. We feel very confident in our process. Tim, just a quick one. On Slide 15 you provided on the spoke pipeline, processing capacity, I was just wondering if there are any incremental revenue or costs associated with the ancillary tonnage that you provided. Yes, good morning, Jeff. When it comes to the ancillary processes, what you can expect is that these have lower processing costs relative to the traditional mainline processes, simply because theyâre simpler processes in themselves, typically single unit operation steps so less operators to run those operations. In terms of revenue, it depends. If you have a look at Slide 26, what weâve tried to explain here is that as you produce lithium-ion batteries, you actually generate all different sorts of materials from this process, and depending on what that material is depends on how we process it, where itâs most optimal to process it. If you think about it from the perspective that each of these different feed streams have different metal content, the higher the metal content, the higher potential revenue for that material, so in essence itâs quite a good business for us today. It provides us flexibility and overall provides high quality returns on those operations. Okay, thanks. And then Debbie, I believe you mentioned that in 2023, over the course of 2023, youâll begin to build some black mass inventory for the hub. I just wanted to see if you could elaborate, if there is -- you know, how that cadence might be over 2023, and is there a certain tonnage that you would be gunning for relative to the 35,000 tons of black mass input capacity that the hub will have? Hi Jeff. Yes, there is two parts to it. So, I think I also said by the time we get to our March release, weâll be in a position to give you some more color around our 2023 outlook, so Iâd expect to hear more in that space [indiscernible]. You do actually -- youâre new in the pond here. This is exactly us planning ahead for having sufficient tons of black mass on hand, not just for running the hub but in the early stages where weâre commissioning and ramping up. So yes, that is the plan, and we should probably be able to share some more information with you when we get to March. Okay, great. One more quick one, if I could squeeze one in. I think on Slide 7, you gave kind of an indication for November and December production, which seems to be at a little bit of a lower monthly run rate than Q4. I was wondering, are you taking the first Ontario Spoke offline, or is that at a later point? Yes, I can take that one, Jeff. So, the November-December was partially impacted by we had a planned maintenance and upgrade process in Alabama, and so what youâre going to see is that our generation 3 plants, being Arizona and Alabama today and then coming up Magdeburg in Germany, and then thereafter Ontario, which is your final point, they have the biggest influence on our overall production for the quarter. And so having that downtime planned in December did impact that slightly. The other aspect is because we are still ramping up the facility, weâve only just now at the start of January in Alabama gone to 24/7 operations with the addition of a fourth shift, so what you should expect to see is continued ramping up of the production over the course of the year. Good morning, guys. In regards to the 1,600 tons of black mass produced in the fourth quarter, can you give any color on what the lithium input was to yield that 1.6, and what kind of differences are you seeing in the yield between each facility? Thanks. Yes, so I think broadly speaking, thereâs two answers here. One is the range of the roughly 35% to 65% content of black mass, depending on the feed. I think hopefully today, with the view of the different streams for manufacturing scrap, you get a bit of a sense of how that can range, right? Obviously if youâre a cathode material or an electrode stack, as per the page in the appendix, then youâll have a very high content of black mass. If youâre full pack, thereâs other stuff in there, right, so youâre going to have a lower content of black mass, so thatâs what we see. Roughly speaking, second, just take a rule of thumb, like half as a factor. It does vary, but take feed in and then take half of that, thatâs probably a good general rule of thumb, if you will, for black mass output. Yes, and then maybe just to build upon that front, because I think you were asking about the lithium content perspective, is that you can consider that one of the key constitutes of the black mass obviously is the cathode materials. And so, if you consider that the lithium content is relatively consistent across the cathode materials, our lithium content is relatively consistent across our black mass. Today, we donât get any value for lithium within the black mass because we sell it to traditional nickel and cobalt refineries. However, thatâs one of the key benefits of the Rochester hub coming online, is that ability to extract and recover that lithium value. Thatâs helpful, thank you. One follow-up. It was nice to see on Slide 22 whatâs been done for Rochester and basically back into whatâs remaining. What kind of lead time do you have on CapEx spend, so we can kind of get a sense -- obviously youâre not providing â23 numbers, but trying to get a sense of where the capital outflows are going to be during â23. Thanks. Yes, Evan. This is a big build year for us, so I think you can expect to see an acceleration this year in our capital spend as we get pretty serious about this construction, and also supporting getting to what we said, which is starting our commissioning towards the end of 2023. Thanks very much for taking my questions. I understand your additional focus on Germany. You mentioned multi-year agreements with top-tier OEMs and battery makers in North America and Europe. As it pertains to Europe, are you partnering with a battery OEM or an auto OEM, and how do you see that partnership kind of benefiting both parties, and when can we expect to learn more about it? As a general comment before Tim elaborates on Europe, I mean, look - take it back to the fundamentals here of why weâre building this spoke. Itâs ultimately there to feed the hub. Right at the end of the day, itâs to really secure the resource. So, the whole point here from our perspective is to get great customer diversification, and weâve seen a lot of diversification over the last year and a lot of growth. Yes, good morning. Just in terms of why weâre doing this, and if you think about it, I talked about it a little bit in the presentation this morning, and that is that Germany has really become the ecosystem, as you know, for not just vehicle OEMs but battery manufacturing in Europe as they begin to scale and ramp up. Coming back to our business plan and strategy is that we have a combination of what we call merchant sites and co-located facilities. This of course is a merchant facility that benefits from supporting multiple customers, and this is really important in this stage of the development of the industry. As our customers begin to scale and grow their businesses, their volumes will also grow over time; but in the meantime, we can support them from these centralized facilities within the regions in which they are operating. What we donât provide, typically we do not provide guidance in relation to individual customers, as we respect the confidentiality of the customers and the groups that we work with. I think what you can expect is this site will continue to support not just one customer within the region but multiple customers, and weâll continue to evaluate additional options within Europe as our customers continue to build up and bring that scale to market that will require additional recycling capacity. Then could you expand a little bit on your partnership with VinES in Vietnam, how you expect that to position you in the region? Yes, for sure. Vin Group is the largest private company in Vietnam, and folks may be aware that VinFast is a relatively newer EV brand, car brand that has launched, actually, in the U.S., in North America. Theyâre in great things and theyâre one of our great customers and partners. VinES is the battery group within Vin Group that is actually making battery cells, so they have plans and are already currently making battery cells in Vietnam. Then within North America, VinFast is also on track to be making vehicles and they do plan to also assemble packs, so thatâs a classic example of a multi-pronged partner with numerous types of feed. They saw us as a strategic partner, and thatâs what we announced back in October. Excellent. Finally, if I can sneak in just one more, as you stockpile black mass ahead of the Rochester opening, do you anticipate that that stockpiling with interfere with any of your deliveries to current partners? Should we expect to see those decline as you hoard this after the opening? Yes, so in summary, no, it wonât conflict with any of our commitments. I think at the end of the day here, weâre taking an economic decision, as Debbie talked about, to get the best intrinsic unlocked value. As youâve seen and whatâs been interesting, with lithium prices staying relatively high and sustained, even though there might be some short term [indiscernible], that has shifted the value equation significantly, as you saw on Page 11, 70% of that roughly intrinsic value being lithium, so this is really the inflection point that our Rochester hub will drive. Thatâs the best decision mostly likely in most cases for us to retain that value but still keep some flow as needed for some black mass to be sold. Thereâs two strands to it, Brian. As Ajay says, itâs the value. Itâs [indiscernible] the industry to access the embedded value in the future, which is a very good economic decision, and then the second part is just operational planning and making sure that we build sufficient inventory to help with this new start to the hub. Hi Ajay and Tim, I understand that you donât get any value for lithium today because you started with cobalt and manganese smelters, but what happens to that lithium that is there? Who gets that value? Nobody, PJ. In short, basically it goes into a high temperature smelter style arrangement, and the lithium is effectively converted to waste, whether or not thatâs in the form of slag or simply burnt off as part of the off-gas from the smelter, so itâs lost. That was one of the key drivers why we started Li-Cycle in the first place, is that that traditional way of processing black mass in lithium-ion batteries doesnât attribute the value to where the value is. Clearly. When your hub starts in Rochester, how much of the revenues would be lithium? Given where prices are and how valuable it is and itâs lost today, how much would that be as part of your revenues there? Yes, if you look at Page 11, PJ, with the breakdown, essentially, that bar chart that weâve given for the black mass, the bar on the right of Page 11 shows 70% of rough value attributable to lithium and then 30% to nickel and cobalt. That gives you a rough indication, and obviously as prices move around, that may shift, but just roughly that gives you a bit of an idea. Yes, and if you think about it today, keep in mind we donât extract 100% of the nickel and cobalt value when we sell the black mass today. Weâre only extracting a proportion of that, so the whole stack grows proportionately. Thank you, and at this time it appears we have no further questions in queue. Iâll turn it back to Ajay for any additional or closing remarks. Thank you. To reiterate our earlier remarks, this past year was foundational for Li-Cycle and we continue to be excited by our growth prospects. We continue with the implementation of our spoke and hub strategy, keeping the Rochester hub on budget and schedule and advancing our spoke technology and processing capacity. We continue to mirror customer demand and expect continued execution of long-term arrangements with key global battery market participants. We also expect to drive further network growth with meaningful debt financing, and we look forward to updating you with more details in the first calendar quarter.
EarningCall_1076	Good afternoon, and welcome to KONE's Fourth Quarter Earnings Call. My name is Natalia Valtasaari. I'm KONE's Head of Investor Relations. And as usual, Iâm joined here today by our President and CEO, Henrik Ehrnrooth; and our CFO, Ilkka Hara. As in previous presentations, Henrik will start by running through the key highlights of the quarter and the full year, both in terms of our business performance, financial performance and also what we are seeing in the markets. Ilkka will then follow-up with a bit of in-depth review about the financials, and Henrik will end the presentation speaking about our outlook for this year. We will go into Q&A then and I would ask you all to limit yourselves to one question, one follow-up, so that as many as people as possible have the opportunity to ask their question. Thank you, Natalia, and a warm welcome to our fourth quarter presentation. Today, weâve again lot of interesting and exciting news to share with you. So going straight into the highlights of Q4. So Q4, we had a solid sales development now, particularly, if we look at the market conditions. So clearly, sales was at better level than it was in Q2 and Q3. Our service business continued to perform very strongly. That is something we put a lot of focus on during the past year. And we have continued to drive very nice growth in both maintenance and modernization. The Chinese market was clearly very challenging in Q4. And that had an impact on both orders and cash flow. It's clear that a lot has happened in China since end of Q4, and I would say that signs are much more encouraging now than they were just going back to November, for example. We continue to successfully increase our prices in all of our businesses, which have been driving continued margin recovery both year-over-year and sequentially. And our Board of Directors have today announced that they will propose to annual general meeting a dividend over â¬0.75 per B share, the same level as the prior year. So what about Q4? I would say Q4 performance was very much in line with our expectations. And we did see an improvement in profitability. Orders received at â¬1.9 billion, down about 11% in comparable currencies. It's clear that Chinese market weakness had a big impact in this. Order book remains at very solid level of more than â¬9 billion, and if we look year-over-year up 5%. As I mentioned, sales return to growth now in this quarter, just over â¬2.9 billion and 2.9% growth here. Clearly services business was the key driver here and regionally was Americas. What I'm most happy about is now our operating income increased 4.3% year-over-year to â¬367 million and adjusted EBIT improved from â¬359 million to â¬365 million. So a slight improvement here, even though margin was still down 0.5 percentage point from 13 to 12.5. Cash flow was â¬33 million in the quarter, clearly not something we are happy with. So that is perhaps what was a disappointment in this quarter. And earnings per share the same as previous year. As we always say, one quarter is a very short period of time and now we have a full year to look back to on our performance. And it's clear that 2022 had many different phases. Q1 started reasonably normally. In Q2, we clearly faced the COVID lockdowns in China, which meant that our sales suffered a lot because we almost lost a month of sales because the closure of our factory. And Q3 continued to be challenging now somewhat better Q4 if we look at profitability wise. Orders received in that year â¬9.1 billion, down 2.5% in comparable currencies, which I would say is actually an okay result in an environment like this. Sales â¬10.9 billion, down 1.8%, of course varied a lot quarter by quarter and now returned to growth. Operating income down 20% to â¬1.31 billion and adjusted EBIT down from â¬1.3 billion to â¬1,077 million. This is clearly something we're not happy about. And that's why we have such a strong focus on profitability improvement, which we of course could see partly already in Q4. And cash flow â¬754 million, down from an exceptionally strong â¬1.8 billion before and EPS â¬50. Now, what I will talk about a lot today is what -- where we put our focus last year. And we can see that we made great progress in the focus areas we set for us, that again shows that KONE's team when we set our mind to something we can drive good improvement that was again a sign of that last year. So I think the team retrospectively did a great job again. As I mentioned, Board of Directors made a proposal of dividend of â¬75, same level as last year, which means of course we paying out now a bit over our EPS and provides a good dividend yield of 3.6%, but continued strong dividend a bit over â¬900 million that we will pay out again for last year's result. Now, we know that markets have changed a lot over the last years. It's been about capturing opportunities where they have emerged. And therefore in a very changing environment, we set our focus on three specific thing during 2022. It was clearly about improving pricing. We've been talking about that a lot. Then, of course, by driving productivity, absolutely critical in an inflationary environment, an environment where costs are going up. And then service business growth, because service markets have provided good growth opportunities, and that's what we have really pushed for growth in that business. So how do we do? Well, price increases, did go well last year. And it meant that our margins of our orders received improved compared to sequentially and end of 2021. So when we look at outside of China, we had set our self a target of getting our margins of our new orders to similar level where we were towards the end of 2020 and that is what we achieved. So great progress there. China, clearly more challenging. Also in our offering development and in our operations development, we focus a lot on productivity, and product cost, both we had clearly better improvement than in prior years. So again, great results there. And I think which is very clear that we continued throughout last year, to have market leading services growth, both in maintenance and modernization. In maintenance, for example, we can see that our service base grew by 5.4%, whereas our revenue grew by 8%. So clearly, successful pricing 24/7 connected services, all of them contributed to having a sales growth that was 1.5x higher than unit growth. So overall, that was our focus during last year, and clearly we're setting a very tight focus for this year to continue our positive development in these areas. Most of what I think is familiar to everyone that the way we measure our longer term success is through our strategic targets. That's a balanced way of looking at how we are developing all the areas that are important to us. In a great place to work, our employee engagement continued to be clearly above global norms. In a changing environment, absolutely critical to have motivated driven workforce. Most loyal customers, we could see that our customer loyalty based on customer survey, continued the upward trend in both of our businesses, both services and new equipment and very broadly geographically. So what we're doing clearly is delivering positive results from our customers perspective. Our third target is to grow faster in our markets. We continue throughout last year to have market leading growth in services. And that is, of course, where we really put our focus. In new equipment, we really said that the first and most important thing for us is improving our margins. So pricing increases that we did. Now in terms of market share, we were about in line with markets very little bit, region to region, but more or less in line with the markets for last year. Then our fourth target is to have best financial performance. It's clear that this we are not happy with. Our current profitability is not something that is okay for us, something we want to improve and we are driving improvement there. And in sustainability, we continued our strong performance in environmental sustainability, in our diversity metrics and safety. In environment, we continue to get a lot of external recognitions for the work we are doing there. So continued good progress for us, and of course, a lot to do going forward. But I would say many good developments, but still on profitability a fair bit to be done. Now, the other thing that we announced today, is that we are planning to renew our operating model. This is of course to improve our competitiveness, and be able to react even faster to market changes. So what are we doing? We are simplifying our operating model. As you know, KONE has always had a culture of strong local accountability. Now we're driving even further accountability to our area organizations and our front clients. And at the same time, we want to continue benefiting from the global scale we have through our global product platforms, services platforms as well as our supply chain. So why did we decide we want to do this. When we look at the past years, we can clearly see that the market environment has changed very rapidly. And situations have changed in a different way in different regions. Going forward, we believe that that will continue to be the situation. That markets will change and the development in North America were different from Europe or from Asia. And therefore, we want to drive even more accountability to our area organizations to be able to quicker make decisions to capture the opportunities as they emerge in order to drive better growth. Also, as part of this, we are going from five geographic areas to four geographic areas. So two areas in Europe will be combined to one called Europe. And that's part of this change. Now, as I mentioned already, what we're really targeting with this is to better capture regional growth opportunities. It's of course, about improving our competitiveness and our profitability. With better growth, we can drive also better profitable growth. At the same time, also in an environment that we are, we also want to reduce our costs. So the target of this program is to reduce costs by â¬100 million, also to support our profitability development So those are some highlights of our financial performance, and how we performed and worked last year, and also the change in operating model. Let's next talk about our markets, how they developed in Q4. New equipment markets in Q4 globally declined. We can see that markets declined in each geographic area. So it's clear that we could start to see the impact of increasing interest rates and lower consumer confidence that had an impact on, for example, market for apartments and housing. North America, which has been perhaps the best performing market now declined clearly in Q4. Same with Europe, there, perhaps a bright spot continues to be Middle East. China declined by around 20% in Q4, and rest of Asia Pacific slightly, although there bright spot has clearly been India. Now on the other hand, services market, we can see a much more positive development. That is why we've been putting so much effort in our services business. We can see that the maintenance market continue to grow as we've seen before. And with best growth in Asia Pacific and China, and modernization market now slightly lower growth than prior quarters, but still positive growth, which created again opportunities, which we captured quite nicely. Now, let's dive a little bit deeper into the China market in Q4. It is clear that Q4 was one of the tougher environments in China and pricing competition was very tough. We did see a lot of changes towards the end of Q4 with the abolishment of all COVID-19 restrictions, which had a lot of impact during the quarter. Now, if we look at all the statistics for Q4, we can see that most of them actually were worse in Q4 than the rest of 2022, except for completions. So we could start to see the focus on completing semi finished buildings, how important that is. So if I -- if we look at China, and how I see that the moment. It's clear that Q4 was a challenging quarter. At the same time, towards the end of the quarter, first, we saw an abolishment of all COVID restrictions and opening with a market which we believe will have a positive impact now as the country goes through that current infection wave, which very far has done so already. At the same time, we have seen a lot of policy announcements, to improve the situation for developers, to enable them to refinance themselves, to get financing to be able to drive the whole property sector forward. So those have clearly created much more optimism. And therefore there are encouraging signs for the market. Before the market really starts to now recover, we still need to see an improvement in consumer sentiment, which would then be a result of markets opening up and starting going better now that COVID restrictions have been abolished. That's what we will say also, you will see in our outlook, we are saying that we expect Chinese markets, yes, to decline for the full year 2023, but to start recovering towards the end of the first half as a result of all of these measures that already have been taken, but I will come back to that. So clearly, if I compare situation now, compared to, for example, November, outlook is -- has clearly improved. So that is about the market. So it was more about China. And with that, I'll hand it over to Ilkka. Thank you, Henrik, and also warm welcome on my behalf to this fourth quarter result announcement webcast. I'll go through our financials as normal and start with orders received development for the quarter. For the quarter, orders received was â¬1,944 million, down on a reported basis 9.8%, and on a constant currency basis 11.2%. This development was driven by China and the property sector, continuing to see difficult environment that Henrik already described. And as a result, Asia Pacific declined significantly in orders received. Also Americas declined as well as we saw a slight decline in Europe, Middle East, Africa as well contributing to this development. At the same time, as we've talked about earlier, pricing has been at the center of our focus in this inflammatory environment. And also in fourth quarter, we continued to see our order margins improving, compared to last quarter, but as well as compared to last year. In China, pricing continued to be challenging, but lower commodity costs contributed to this development. At the same time, in other areas, we continue to see good momentum with pricing. And as Henrik already highlighted, now, with the pricing actions we've taken, we've been able to see our orders margin recovering back to the level of where it was at the end of 2020. So very good development there. We've already highlighted the strength in modernization, pricing earlier, and we've continued to now see good development also in new equipment outside of China. So very pleased to see this continuing in a positive manner. Then to sales. Sales for the quarter were â¬2.9 billion. On a reported basis, 5.2% growth and on a comparable basis 2.9%. From geographical perspective, strong development in Americas over 14% growth; Europe and Middle East, Africa growing at 4.8% and Asia Pacific down 3.9%, mainly driven by the development in China there. Also, China impact the new equipment, which declined 2.4%. But as highlighted already earlier, our services business continued. It's very strong performance and as a result, maintenance grew 7.6% and modernization 11.4%. So very good performance on our services business. Our adjusted EBIT for the quarter was â¬365 million. And the margin for adjusted EBIT was 12.5. We continued to see positive development here, it's been a focus to be able to recover our margins. Now, towards the end of the year, absolute basis were slightly up and margin wise, we continue to narrow the gap compared to last year. The initial results or the pricing actions that we've taken on orders are now visible in the orders we deliver in this quarter. That contributes positively. We continue to see the widespread inflation, creating cost headwinds having a negative impact in our profits and profitability. And also, the mix impact from declining China sales is impacting negatively our profitability. Then cash flow which for the quarter was â¬33 million. And clearly we saw our working capital having a negative impact to our cash flow, down from last year's exceptionally high-level of â¬525 million. As I highlighted earlier, both at the end of last year, but also in conjunction with third quarter results, timing of the accounts payable had a negative impact to our cash flow and working capital and also overall the liquidity situation in China is impacting our customers and accounts receivable were up in the quarter. Also, I would say that orders received development in China, which was negative naturally contributes to the -- our advances and therefore negatively on working capital development. But clearly, this cash flow is not something we're happy about, and are expecting that in the coming quarters, we would then start to return to a more normalized development in our cash generation for the business. Thanks, Ilkka. So how are we seeing 2023? First of all, let's start with the important China market. We expect that the Chinese market will declined by somewhat over 10% in 2023. Now, as I mentioned already, we expect that recovery will start towards the end of the first half of the year, as a result of the stimulus measures that have already been announced. So we're not expecting anything new, we expect just these will start taking effect. And also when the economy improves, see better consumer confidence. Rest of the World market grow clearly in Asia Pacific ex China, of course, driven by India, more stable in Europe, Middle East and Africa, of course, their Middle East, better than Europe, and decline slightly North America, of course, a good level in North America. Modernization markets, expected continuously growth in all regions and maintenance markets, good development that we've seen so far. Trend to continue with slight growth in mature markets and of course, good growth in Asia Pacific. KONE's business outlook for 2023, we expect our sales in comparable currencies to be at a similar level to the previous year. And we expect our adjusted EBIT margin to start to recover due to the better margins of orders received that Ilkka talked about in our orders, and also the continued solid development in our maintenance business. Now, this whole outlook does assume that construction activity in China starts to recover towards second -- towards the end of the first half of the year, as a result of the measures that have already been introduced in the property sector. Now, there are a number of things that are supporting our performance is, of course, the positive outlook for our services. The good development we have there. We have a strong order book. And we are having gradually better margins that we deliver from that order book. And of course, the easing commodity headwinds in Asia, particularly China, I would say. What is burning the result, the rotation, the order book continues to be slower throughout the world. Because of more uncertain outlook and many developers slowing down their projects, or in some markets, still some material shortages. Then, of course, the anticipated decline in China's new equipment market, we know that China is by far our biggest market and a very good market for KONE, Then also, wage inflation will be higher this year than the prior years, and component costs are still going up. So, we always have for the components that we buy, there's raw material part and the value added part, the value added part because of labor costs and other inflationary trends are driving up those costs still. But I think many good things and of course, overall expectation is that we will start recovering our EBIT margins. Now to summarize. It continues to be good opportunities in services that we are focused on to continue to drive the good performance we have had and we are seeing positive results from profitability actions. But equally when it comes to pricing and productivity. We have a competitive offering. And our focus is to continue to drive long-term growth. And then we also take an action to further improve our competitiveness with a plant operating model renewal. Thank you. Hi, Henrik. Hi, Ilkka. If I can start maybe underscoring their guidance, we have four years history of giving earnings. Now you don't I appreciate there are variable within China. But it's all in the [indiscernible] on components, trying to understand how to think about raw material on [indiscernible]. It's the mix here that European supply chain and wage inflation and that continues [indiscernible] business in China [indiscernible]. Just to frame that, we talked about â¬400 million headwind over the last 2 years and that should start to reverse this year. I wonder from a sort of total raw mat and logistics and components cost standpoint, can you help us a little bit on what that number might look like in the 2023 bridge? Thank you. Thanks. Thanks, Lars. First of all, I don't know if it was elsewhere, but the line on our end was a bit a little bad, so slightly difficult to hear your question. Our guidance, I think we are being quite specific on our sales guidance, and also that we will start to see a recovery in our EBIT margin. Clearly there is some uncertainty still in the market that how will China market which we all know is very important to us to good and profitable market for KONE. How that will start taking off, but I still believe that we have quite a specific outlook there. So I hope that's helpful to everyone the guidance we've given. Maybe I'll then continue on the cost of raw material/component cost question. And as you said, so we are seeing raw materials, especially in China, having a positive impact. And that is something that we expect for year '23. At the same time, as Henrik was highlighting that even though the raw material part of the component cost is coming down, then we're seeing the inflation, in general, having a negative impact to this, value added parts of the processing cost to the components. And as a result, raw mats are a tailwind. But then due to this overall inflation, so the component costs are a slight headwind. So it's not a huge headwind. So some tens of millions, but clearly a headwind still on an overall level. Well, thank you, Ilkka. That's helpful. Would it be fair to assume that the â¬400 million headwind over the last couple of years would reverse the over the next three years, which you could get a â¬100 million this year, just to help us a bit for our EBIT bridge for 2023. So first, I guess if I would know where the raw material prices for the next 3 years would go, I think there's other opportunities that just elevate the business. But â¦ Yes, yes. That's sort of a more of a joke. But so, all in all, in your bridge for '23, as a result the components purchases that we're making are a slight headwind. So even though the raw material comes down, then still the cost is a slight headwind for us as a result. So that's the situation in '23. Now, if it continues to go down the raw material part, then you need to take a view on the inflation. But obviously, if it continues to go down and inflation starts to come down as well, then it will start to be a tailwind as a result. And then, of course, we're taking a lot of action to reduce our own product cost to the offering. And that's, of course, something that is also supporting. So a lot of moving parts here. We're looking at component cost, and then of course offering where we are driving some quite positive change. And maybe to add to that, as we talked about earlier, in conjunction with the earlier results, clearly in this cost environment also, the focus on scrutiny on product costs, for example, has been on a different level and we've been able to see quite a good development there. So it is something that will contribute positively going forward, being able to then counter some of the inflation that we see overall. Briefly secondly, if I can. And finally, just on the market outlook, Henrik, I was quite encouraged to see new equipment in EMEA led this year and modernization clear growth. I think we were all breaking ourselves maybe something that was bit a worth. Maybe help us understand a bit better what you see in that part of your business? And secondly, within market outlook negative 10% for China, feels a bit conservative if we get a completion backlog [indiscernible] in that part of your business. Could you help us understand or frame how much of, shall we say, completion backlog is already on the books today versus an order opportunity in 2023 potentially? Thank you. That is order backlog, I would say, magnitude wise and thatâs always going to be a backlog, but let's say thatâs probably close to a year of volumes in deliveries and half year of volumes in orders. But how quickly that come through, so thatâs uncertain as always going to be a backlog, but if we get a better financing situation that could be [indiscernible] tailwind. But it's clear it's going to take some time before that starts improving therefore the first half of the year is likely to be more challenging. When it comes to Europe, it's clear that varies quite a lot bit, quite strong markets in the Middle East, in particular, of course with high commodity costs, they have a good situation there. Then within â¬, it varies between segments quite a lot of infra building. So it varies a lot market to market, but the good thing is that it continues to be opportunities to be taken. Hi. Good afternoon, everyone. Thank you so much for taking my questions. What is a follow-up actually on the margin question, and the second one is on the cash flow from operations. But maybe starting by the one a follow-up, maybe I didnât fully grasp your answer there, but so youâre guiding for your margins to be slightly up. Your volumes are flat. Raw mats minus components seem like it's not a big driver. So what is -- is it some of the â¬100 million of savings already in that bridge? Is it mix? Is it sort of what do you assume for China margins? If you can re-explain -- sorry to ask again about what drives that margin up? Because originally, I guess, I thought at least it would be raw materials, but it doesn't seem to be the case. And then I'll ask the second one afterwards. Thank you for piece mealing the questions, it's much easier for us. So, yes, so as you said, volume-wise, we are quite flat with this guidance. Mix wise, it's neutral in a sense that we continue to see good opportunities in services at the same time with the orders development that we've seen particularly in China, that has other side of the coin. Then it's good to note that we've seen increasing orders, margins in the last quarters since third quarter of last year. So that's obviously something that we will now deliver. And as we go through the order book to new and new orders, it will have a positive impact to our results this year, and some of that will carry over to '24 as well with the order book rotation is slower. Then negative side on that bridge is overall cost inflation. So for example, salary costs are continue to be on a higher-than-normal level headwind. And then, yes, there will be some cost benefits from the new operating model, but the â¬100 million we set as a target, the full impact of that is only expected in '24, but there are some tens of millions that will help also in '23 as we go through the program and implement the new structure. Okay. That's very clear. Thank you very much. My second question is regarding the cash flow from operations, and you talked about the key makeup. But looking at the amount of advances, as a group, it doesn't look -- it doesn't look like a huge difference. So I guess it's really the receivables -- and can you talk about what's going on in China? Is -- was this a one-off in Q4? Do you expect to receive a big inflow from these receivables into the beginning of the year? If you could give us some clarity, I guess, sort of what's the visibility you have of getting paid in China? Thank you. Well, first, if I think about item by item, the net working capital development. So clearly, our payables are coming down quite a bit compared to end of last year -- sorry, end of '21 as well as in the quarter. And that's then normalizing, as I talked about the timing difference of the payables. Then on advances, normally, if we have a growing business in -- they are actually contributing positively to networking capital, meaning that it is further negative. And now we don't see that and orders growth in China is the key driver there. Elsewhere, we've seen a better development there. And I think on a quarterly basis, as we always say, cash flow will fluctuate. But if you look at the situation. So overall, we've seen a more difficult quarters in China, starting from lockdowns in Q2 and the tightness in liquidity overall, that is impacting and also having the impact on receivables being the key driver there. Hi. Good afternoon, Henrik and Ilkka. Thanks for taking my questions. I'll take them one at a time. First of all, is around the China market and apologies because I already asked this in the third quarter. But if I look at that slide, you show that you have slightly underperformed the market. So I just want to understand if that's driven by you not going after every single project or what's been the driver? Do you think you're losing market share? Or do you just think it's a conscious decision not to take orders at bad margins? So if I look at -- for the full year in China last year, we are in line with the market or even perhaps slightly above and it varied quarter-to-quarter, as it usually does. In second half of the year, we had quite a lot of focus on pricing, and that contributed positively in Q3. In Q4, we continued to be very focused on making sure that we take orders that are high quality, i.e., payment terms are in place and also margins make sense. So that's perhaps the biggest reason I would say it's quarter-to-quarter fluctuation. We continue to have a very strong position there. In end of the last year, particularly second half, the liquidity situation of many of the developers is most challenged. And yes, one is to be very focused on making sure you take orders where you're going to get paid. And that's one of the things we kept high focus on. That's helpful. Thank you. And it's probably a little bit of a follow-up on some of the previous questions around raw materials. But if you could confirm what the raw material headwind was in 4Q? Is the -- sorry, that â¬200 million sort of guidance for the full year and that you provided in sort of the number where you ended up? I'm just trying to understand how much of the run rate in 4Q for margin should we assume heading into 2023? So the actual number for the full year is quite close to the â¬200 million that I've quoted already earlier. And as a result, it was a slight, I guess, headwind in fourth quarter, but not big enough to be called out individually. And your question on the run rate on fourth quarter, I think it's also good to note, if you look at the seasonality that we tend to have quite a good margin always in the fourth quarter. And then given the timing of, for example, Chinese New Year and market development in China first quarter is a bit different. So you need to also take into account the seasonality in margins. Thank you. Hi. And Henry, [indiscernible]. So my first one is coming back on the cost side when looking at the China impact from lower raw mats. You don't have much hedges here versus rest of the world. So you see the impact already now. So let's ignore the component inflation for a moment and just zoom in on the romance. And if you look at the current spot level, Ilkka, I guess this is around â¬80 million annual potential tailwind. And I guess that component cost electronics likely elevated, but the raw mat impact in China, I think is 60% of our total headwind, which is now reversing already showed in the quarter. Is that a number you would agree with around â¬80 million, and then you add the tens of millions headwind from component costs on top. I'll stop there. Thanks. I guess your net-net impact is a different than mine. So meaning that raw materials plus the inflation is a headwind rather than tailwind. If I understood correctly, you are proposing it to be a tailwind for us. Particularly in China, the raw materials are developing more favorably and maybe also the inflation in overall is a lower impact there. But then in China, we've seen also pricing be more challenging. So I'm not going to comment area by area this, but dynamic wise, it's a bit different dynamic in rest of the world versus China. Yes. No, I was commenting on gross impact rather than net of pricing, but you might have a little bit of net of pricing then [indiscernible]. Yes, fine. Yes, I might circle back on that. In terms of -- my second one is on the orders margin where you say that now back to levels before end of 2020. That's around 14%. When you look at the total backlog conversion now with China typically quicker versus EMEA, maybe 12-month Americas, maybe 18 months or more, that 14%. How quickly do you think you can convert that Henrik, [indiscernible] end of 2023 start of 2021? I'm just trying to think about the total conversion. Well, we haven't quoted any specific numbers on what that margin was. And I think it was pretty clear in his presentation that when we talk about recovering margin, we talk about outside of China. In China, pricing has been more challenging, but at the same time, costs -- the cost picture is clearly better in China than rest of the world. So from a margin perspective, it doesn't differ that much, but clearly, recovery has been better in other parts of the world. Then we also have to remember, mix that China is -- continues to be a very profitable new equipment market. So when that share comes down, that's from a mix perspective, a little bit is it negative for us. But with this current rotation, we are going to start gradually more and more this year, get the good pricing coming through, but that's going to flow into 2024 as well, particularly larger projects in Europe and particularly in North America. And it's good to remember that North America has been one of the markets where we've seen pricing developing most positively. So that gives us a good tailwind into '24 from that respect. Hi. Good afternoon, everyone. Two questions for me. The first one, just on your market environment guidance for North America and Europe, just wanted to dig a little bit deeper on that and your expectations. You said North America slightly down, flat in Europe. Can you just comment on your exposure in each market, I guess, in the U.S. is mostly non-resi, which is typically more resilient. So I was just wondering why you expect the market to be down. And in Europe, obviously, the resi market is quite weak. So also a bit surprised you think it's going to be flat. So I'm just wondering what you're seeing on the ground for each of the Western market. Okay. So North America, clearly, there is a lower share of residential, but residential is an important part of the market, but also, we are seeing a slowdown in the office market there as well. It's clear that many companies are now thinking about their situation also developers with higher financing costs, there's clearly less speculative construction right now. So that is what is impacting, but I would say it continues to be at a good level of the market there. In Europe, it varies a lot. If you look at housing, yes, we can see that housing starts and approvals are coming down in most places, but there's still a partner shortage in most of Europe. But what are the sectors that are improving. So when we look at Europe, we say Europe, Middle East and Africa. So it's clear that Middle East, there are some very strong markets that are actually growing very nicely with a lot of opportunities. So Middle East is clearly the bright spot. Then you can see quite a lot of continued infrastructure construction. And actually, some office continues to be pretty okay in many parts of Europe. So it varies a lot. And I would say, really, the strength comes from Middle East -- is the big strong part. And maybe to add just to make clear that we are talking about the same thing. So when we talk about market outlook, we look at the total market for elevators and escalators there with a comment and mainly it means elevators given the volumes, then we don't guide ourselves, our orders received. We only comment on sales. So that's also good to note. Thank you. And then in services, can you give us a bit more color on pricing for 2023? I appreciate the color on Slide 6, where you grew your maintenance base by 5% volume, which leaves pricing roughly at 3% in 2022. I suppose if you update pricing by, let's say, last year's inflation, so how much are we talking about for 2023? And how easy is it to enforce these price increases? And then lastly, how--where do you stand on the connected units? Thank you very much. Thank you. So first of all, it's not that 3% is how much we increase prices because if you think about our portfolio, where we are growing the fastest. It's in Asia, particularly China and India, where average monetary value per unit is clearly lower what it's in Europe or North America. So that's, of course, making the value lower per unit, but then through successful pricing, 24/7 connected services and so forth is actually making it higher. So I think the gap is actually quite positive there. If you look at prior to 2018, it was always -- almost the opposite, the average value per unit. Now we are not going to comment so much on pricing yet because pricing for maintenance is happening right now for the year. So we can talk about in the first quarter more results. Only thing I can say it's higher than prior year because of the trends. But then let's see, we are always very cautious that we don't comment on pricing going forward, but we are just negotiating with customers. So let's see what the outcome is when it comes, but I would say I'm quite encouraged there. On connected units, we are now over 20% of all KONE units connected and roughly 15% of our total base is connected. So continuous good growth, and that also contributed more than a percentage point to our growth last year. And in the markets where we have maintenance contracts, which are tied to some kind of inflation index, naturally that index last year did not fully reflect yet the inflation we've seen because inflation was just picking up. So in those markets, the inflation now has been a bigger part and then gives a good environment for escalations. But as I said, we will come back on pricing when we look at both the fact what we've been able to accomplish. Hi. Good afternoon and thanks for taking my questions. I have two questions. And the first one is on pricing. Firstly, for China, in the presentation, you mentioned like-for-like new equipment prices declined slightly and pricing environment continues to be intense. And I'm wondering if you have observed any sequential signs of improvement or at least stabilization on China pricing. And now with China commodity prices now roughly reverse all the inflation we saw over 2021 and '22. I wonder what's your expectation on pricing environment in China going forward? And on the same topic more broadly for other regions, would you say like low teens is a set estimate of the price increase in North America and Europe on new equipment. And now with raw materials turning to with raw material, almost into a tailwind. But on the other hand, will the industry has been lagging its larger peers in building space in terms of pricing action. So net-net, I'm curious how you see the price environment developed in2023 in North America and Europe as well? I would say, first of all, we don't get a comment on pricing environment going forward. That we don't do because that is something between us and our customers. And then in hindsight, we're going to look at what commercial strategies we deployed. In China, where we can say that, yes, pricing environment was challenging. Perhaps we started to see some signs of stabilization because it's clear that with the environment for everyone has been very challenging even though, as you said, that steel prices have declined clearly there. So that is a helpful thing for China market, but pricing has been very tough there. So we expect -- we have seen some stabilization now what we are going to see going forward. Let's see. Thank you. It's very helpful. And my second question is on maintenance conversion rate in China. If I remember correctly, you previously mentioned about 60% for co-owned brands. So I'm wondering what is the road map for conversion rate be developed and catch up with other reasons going forward in the mid-term. Thank you. So pretty much the same level last year as previously it's clear that we are taking a lot of action to improve conversions and retentions. We know that the market there is very competitive and a lot of independent players. So through value-added services, through connected services, those are, for example, ways how we can improve both conversion and retention. And also, we are seeing that where they're starting to deploy condition-based maintenance, where you can use more connectivity, and you can therefore reduce your visits that there is a better situation but it's still only a few cities that have this. And we're going to start to see a gradual increase in that, but that's going to take some time. So there are sort of these actions that are on the table to be able to improve conversion. So I think regulatory environment also is an important factor there. Hi. Good afternoon. Thanks for the opportunity. I was wondering if we could pivot back to China for a second. Some color or context on the following ideas or topics, when you think about broad based stimulus, are there specific programs or initiatives perhaps we should focus on. I'd also be interested to hear about kind of adoption of the newer lower ASP product that I think you had mentioned in the Q3 call, do you find that the market is evolving to a lower ASP? And how should we think about that when we think about the market on perhaps a 2 or 3-year view? Thanks so much. Thank you. So when you think about the China market that what has been important, if you look at last year, the biggest challenge in the market was clearly the liquidity for developers. Three red lines policy was a very strict rule. And therefore, developers that had a weaker situation just didn't get financing and they were unable to refinance or even restructure themselves. That has changed. That is perhaps the most important thing that developers, both private and the ones with state backing are able to refinance themselves and get financing. They will, of course, first need to get their bonds refinanced and all that, and then we think the market will start to flow better. But that is perhaps the most important thing. And it was really in November, the 16 point plan that was announced by the government that had many of these elements in there. And we can also see the importance of three red lines policy has been declining. It's clear that the developers, many of them need to strengthen their balance sheet. But as I said, the most important thing that now they are able to do it. They weren't able to do it during last year. Before we start to see an upturn, the other thing we will need is consumer confidence for consumers again to have confidence to buy apartments. And that probably is going to take some time when the economy starts to pick up now when COVID policy have been loosened. So there seems to be some encouraging signs now already during Chinese New Year of consumers' propensity to spend and be out there. So I think those are the important things we need to see. So also, that has been a feature in China over the past years is that perhaps the market that has done better has been the more affordable end of the sector. There are some opportunities also in more valuable products, but that has been perhaps where the highest volumes have been. So yes, we have renewed our offering for lower end and make sure that cost is at the right level. So we start to see good demand for that, of course, in the market context that we have right now. Hi, Henrik. Tomi Railo here from DNB. Two follow-ups, actually. Did I hear correctly that you said the price increases will be higher this year compared to last year? I said very clearly that we are not commenting on price increases for this year. I'm saying -- what I did say a little bit for is that on maintenance side, when it comes to annual price escalations that they are encouraging signs. Got it. Thank you. It was actually you commented that. Secondly, in China, do you see any risk that the customers are starting to ask for lower prices because steel prices are moving down. I know that the market has always been practically challenging, but any risk that the prices are going down. Well, I can say, first of all, that, of course, it's a very competitive market, and it's where market pricing will set. And of course, everyone need to look after their profitability. So again, I would say what has been encouraging is how costs have improved, and that has helped margins sequentially in China. And now what the price is going to be going forward, I think, let's see, to be successful there one is to continue to have a very competitive offering, great field operations and service, I believe we are very strong in those points. So those are things you need to have in place to capture the opportunities. But again, I'm not going to comment on pricing how we think that's going to go this year. That's -- that we had to see it then in hindsight. Thanks for taking my question. I just wanted to ask about EBIT margins in China and rest of the world. Are you able to kind of directionally comment on where China profitability was compared to the rest of the group in Q4 and in the full year of '22? Yes. China for fourth quarter as well as the full year was accretive to earnings. So its margin was above group level slightly. Both Q4 and full year? Okay. Can I just ask us what about the sales mix? Is it still like 85 new equipment, 15 services as you commented in the past. Yes, thanks gentlemen for taking my question. I'd like to come back on the raw material price issue. Now if we could talk a little bit about steel prices in the various regions in 2022, so backward looking I understand that what you said about the China development for steel prices. What did you see in Europe and in the States? And what is it that makes you hesitant to fully answer I think the first question of this call, which was at current spot prices, what would this imply in terms of head or tailwind to you on in terms of raw material costs? Thatâs my first question. So I guess if you're asking about '23, then, as I said already earlier, so yes, overall raw materials and obviously steel in different formats is by far the biggest one. It is coming down and it's contributing positively. At the same time, then the processing cost because we don't really buy that much pure raw materials, but rather components made out of those. So the inflation has driven the processing cost to value added part up. And as a result, the component cost is a slight headwind. It's not a huge one, but a slight headwind in '23. Okay, got it. Thanks. And then the other one is also a clarification question. Regarding 24/7 Connected Services, if I understood you correctly, because the line wasn't always clear. The contract penetration rate is above 20% now. Is that correct? And I also heard another number like 15%. If you could clarify that, please, sorry. Sure. Sure, Martin. So we are saying over 20% for KONE equipment. And if we take the whole portfolio, we are roughly 15%. Yes, good afternoon all. Thank you for taking my questions. I have two, if I may. First, a follow-up question on the working capital. When do you believe you will come back to a more normalized level in working capital? Is it in the course of 2023? And the second question I have is on your reorganization plan. You mentioned 1,000 job reduction. Can we have some granularity maybe by region and by segment? Maybe I will start with the working capital and maybe Henrik you want to talk a bit more broadly on the operative model changes. So working capital, well, it depends how you look at normality. We are now round about in working capital on 2019 level. So it is quite negative. It just was a lot more negative and now came down. And naturally, we don't guide working capital as such. But what I do expect is that as we said there is measures that we expect to be impacting China market. They will also have a positive impact to liquidity available to property developers. So I expect those to continue to then help to recover the China market from a liquidity perspective and then having a positive impact also to our working capital, but after the beginning of the year, I expect more normalized development thereafter in working capital. When we look at our renewal of our operating model, as you said, it impacts about roughly 1,000 jobs globally. That will be -- we haven't given a breakdown of that regionally, but it will impact all parts of the world when we are simplifying the organization. So therefore, yes, it will be a global program for us. And maybe good to note that due to the legislation, we just gave a number for Finland, which we had to give out. So that's why there's one specific data, but not the others. Hi, Henrik, Ilkka. Thanks for the time. Just the first one is a clarification really. So if you just talk on a gross impact. So you said [indiscernible] you said component cost is tens of millions of headwinds. Are you able to quantify the easing cost headwinds in China, please? And also the wage inflation, is that still 1 percentage point faster than normal wage inflation for [indiscernible]. â¦ so to speak. So the cost headwind, we haven't broken down that to a more granular level. Obviously, China is a big part of the overall manufacturing and as well as deliveries but we haven't commented that in more detail. Then remind me about your second question, sorry. Of course, it's good. So yes, we are expecting wage inflation to continue to be higher than normal level. and also higher than what we saw in '22. So we are roughly speaking over â¬100 million in wage inflation as an extra cost as a result. So instead of 1%, maybe 2% plus. The second one is, historically, the growth in your order book at the beginning of the year, has historically correlated quite well with the organic revenue or organic, so the growth in local currencies that you're able to achieve. In this case, you're entering 2023 with 5% growth in the order book. and yet you're guiding for flat revenue development. I understand that there is some delays in construction sites on both sides of the Atlantic. There's some sort of component issues that refrains you from that, but how can we sort of explain this discrepancy between the way you guide revenues versus your order book growth, please. Yes, the main contributor there, if you just look at the headline number, I agree with you. But as Henrik described, both the tailwinds and headwinds -- so on the tailwind side, we are seeing order book rotation somewhat slower in '23. And it has resulted -- so if you think about the mix where we've seen the growth fastest rotation in the order book has -- and is in China. And there, we've actually seen a decline in orders received. And then the growth has been --especially in North America, where weâve the slowest order book rotation. So that's impacting overall then the order book conversion to sales, especially in the new equipment and in larger major projects. Hello, Henrik. Okay everyone. There are lots of moving parts behind the EBIT margin this year. And I'm afraid I'm going back to some of them because I had a bad line, maybe just me, but I couldn't [technical difficulty]. So currently, have you mentioned that it was [technical difficulty] or so positive last year? I'd expect the â¬50 million, â¬60 million negative impact to EBIT in FY'23. [Technical difficulty] firstly? And also, remember that now this time, we've normally given maybe more specific guidance. Now what we are saying is that related to first revenue that is on last year's level and as well as then on profitability that it improves -- expected to improve in '23 and the currencies are not having a big impact to profitability. So that's why we're not guiding also currencies as such. But it's clear with weaker dollar and RMB compared to euro, that's a bit of a headwind from a translational perspective. That's clear, yes. Okay. And the second one is on savings. Could you help me with the timing? I get the message a bit this year, more next year, but is it â¬30 million this year, â¬70 million? Or is it â¬10 million this year, then â¬60 million then a spill of â¬30 million into FY '25? I'm just thinking from a bridge perspective, if you could help us with the â¬100 billion. The idea is that this renewal will be completed during this year, which means it should be fully in place from '24 onwards. So you would or you would not expect any impact in the FY '25 bridge because there's a difference between a running rate at the end of '24 and all achieved a bridge in '24? Okay. So nothing in the bridge in '25. That's great. Thanks. And just lastly, I get the message on raw material and components together when you've talked about raw material in the past, have you always talked about raw material and components together? I know you able to say what the pure raw material gross positive would be this year? In the past, we spoke really focused on raw materials. And it was -- because the value added part was more stable, and it didn't really have a meaningful impact. Right now, it actually has a very meaningful impact. So therefore, we are now guiding a bit differently because purely just looking at the raw material doesn't really tell what the impact is to our profits and profitability. So that's why we are now commenting it slightly differently. But going back to class and others, and I had â¬80 million, that sort of number if one was to look at the raw material on a standalone pure raw material basis with a sort of high double-digit number being an appropriate positive, but that is you buy a slightly bigger negative on the componentry side. I guess what I was saying was that we have some tens of millions of positive from raw materials and then a opposite inflation item. And as a result, net-net, it's a slight negative, but not big enough to be called out. And then lastly, if I could. I think it was mentioned about the adjective flight when it came to margin expansion for FY '23. Is that an adjective you used or is that something that somebody injected into their question. I just wondered if you is any way you can quantify the consensus is 110 basis points. Is that broadly in line with your thinking? We are saying very clearly that -- we are saying it EBIT margins are put it in front of us here that the EBIT margin is expected to start to recover as a result of the margins of orders received and the good performance of our maintenance business. That's what we are seeing right now. Thank you. Thanks everyone for dialing in. Thank you for the questions. I hope you found the call informative, useful. I hope you got the answers that you were looking for. If you do have any follow-ups, please feel free to reach out to the team or to me. We are here to answer them. And otherwise, I would like to wish you a great rest of the day.
EarningCall_1077	Welcome everyone to Telia Company's Q4 2022 Results Presentation and Strategy Progress Update. And with that, I will hand over to Telia Company's Head of Investor Relations, Erik Strandin Pers. Please go ahead. The floor is yours. Thank you, Sam. Welcome everyone to the Q4 call and the strategy progress update. We will start with Allison Kirkby, our President and CEO; and Per Christian Morland, our CFO, taking us through the Q4 results. Thereafter, they will be joined by our COO, Rainer Deutschmann, to take us through the annual strategy update. I expect this call to take about â the presentation to take about [45 minutes] [ph], and then we will go to Q&A. So, no time to waste. Allison, please go ahead. Good morning, everyone. So, as you have seen this morning, our full-year financials show that we continue to make good progress on our plan to make Telia a better company for all its stakeholders, but at the same time, it's clear that it has been a challenging year with significant macro headwinds and a few disappointments that means we did end the year with what I would say is a mixed set of results. So, let's start with a run-through of the quarter, which did contain some of those macro-driven challenges that we saw last quarter as well. Service revenue growth continued, but at a slower rate of 0.7%. Most markets did continue to grow, and we were positive in both the consumer and enterprise segments. Mobile was again strong with a 3.1% growth for the group and growth in all our markets for mobile, but core 3 in B2C and TV media were sold. Transformation efficiencies continue to materialize, and in the quarter, we managed to reduce OpEx, excluding energy, just shy of 1%. EBITDA declined 2%, driven by higher energy costs and softer trends in the aforementioned TV/Media and Swedish units. Operational free cash flow was weak coming in at SEK 400 million and materially below last year's level, explained mainly by a lower contribution from working capital, which PC will get back to. The structural part of cash flow was high however rather unchanged versus last year as EBITDA was flattish, and we remained at peak levels of CapEx investments in the quarter. The stricter cash generation, combined with the second tranche of the dividend and the end of the share buyback program, leverage increased to 2.35x. The majority of the weaker cash generation in the quarter is, however, due to macro impacts that will subside or be mitigated over time. And in addition, we had some phasing of inventory and investments across the year-end. And so, because of that and because we still remain on track with our strategy, our financial framework for substantial value creation remains even if it's a bit delayed, and the Board, therefore, intends to vote a dividend of SEK 2 per share, in-line with the flow of our dividend policy. Now, let's look at the market now and start with [indiscernible]. As you can see here, revenue remained some turn slightly negative as growth in mobile, TV, and broadband was not enough this quarter to offset the continued legacy fixed telephony pressure and also there was a temporary weakening in business solutions in the enterprise space. TV as to some extent, also broadband this quarter included a negative impact from the black screen situation with Viaplay, a situation that was resolved during December. Despite legacy headwinds continued an uncured pace and the Viaplay situation, we still saw underlying service revenue growth of around 1%, but EBITDA was down quarter driven by the softer revenues, higher energy costs, and a lower pension refund that we were expecting. These unfortunately offset another good quarter of cost transformation and OpEx reduction. Moving to the KPIs for Sweden, you see here a continued growth in mobile ARPU, supported by pricing initiatives, but there's less roaming and insurance upside this quarter and a slightly smaller subscriber base, mainly driven by the loss of some seasonal mobile broadband subscribers. The broadband subscriber base increased on the back of very strong growth in fiber, especially in our own network, and more than compensated for the decline in DSL. And by the end of the quarter, we will only have â we only had 100,000 subscribers left on this network, keeping us well on track for the shutdown by the end of 2026. In TV, we continue to see a solid subscriber base development, but the ARPU declined from the already mentioned black screen situation Viaplay. With that dispute now behind us, we now have a broader set of content for our aggregator position and the support from SEK 150 price increase on our sports package introduced during this quarter, we should see an improved ARPU development going forward. Moving to Finland. We Had another quarter of improved service revenue development with mobile growing 3.8%. This marks the sixth consecutive quarter of improvement in our Finnish mobile business. In addition to its mobile development, we also had an improved situation on the fixed side in the quarter. EBITDA, however, continued to be negative as higher energy resulted in a SEK 90 million headwind in the quarter. Underlying EBITDA growth was slightly positive, which is an improvement from a to what we've seen for the past few quarters and increased proof point that the turnaround in segment is having an impact by spend. The mobile subscriber base declined slightly as we continue to focus less on the low end of the market and ARPU continued to improve the quarter by our chosen value focus strategy. And finally, enterprise also improved for the fourth consecutive quarter and even [indiscernible] for slight growth. Moving to Norway. Norway with another quarter, solid service revenue development, increasing 3.2% with mobile fixating at similar weeks, and enterprise is another impressive quarter, growing by 7.4%. EBITDA increased supported by the top line momentum, which more than compensated for a higher cost level of attributable to energy. So, continued good service revenue and financial momentum in Norway that will be further supported in 2023 from the recently announced transaction with Pure Craft under, which there are 143,000 mobile customers who move to our network during the second quarter. The LED market had another excellent quarter with top and bottom line groups across all three units. In Lithuania, mobile grew double-digits and fixed grew almost 5%, and the flow-through to EBITDA was excellent moving more than 13%, despite continued headwinds from higher energy. In Estonia, performance was also strong, with service revenues growing 5% and like with Lithuania it was broad-based with mobile growing almost 8% and fixed growing almost 4%. And as you can see, EBITDA growth similar to Lithuania exceeded the service revenue growth, despite inflationary and energy cost headwinds. Ending with Denmark, you keep a flat service revenue development, but suitable mobile growth and significant cost takeout, resulting in an impressive EBITDA growth of 21% for the quarter, and we were particularly pleased with [indiscernible] recognizing Telia's mobile network as the best in Denmark's Top 4 cities. Finally, to the TV and Media unit, where service revenues decreased by 2.7%, advertising was slightly down, despite double-digit growth rate in digital advertising, but we do continue to have a challenging development in paid, declining almost 9% from a challenging competitive environment. EBITDA declined by 103 million, reflecting mainly the decline in revenues and to some extent, a somewhat higher content cost level, compared to the same quarter last year, but this was all in the paid segment and in fact, TV4 had its most profitable year ever in 2022. Our full focus for this business unit now going forward is to consolidate C More into TV4 Sweden and NCD in Finland in the coming 12 to 18 months, so that we, in the end, have fewer TV assets with a lower-cost content site that is focused on leveraging the growth potential in the digital ad space where we continue to grow at a double-digit rate. Thank you, Allison. Let me quickly take you through the Q4 and I'll come back on the outlook later in the presentation. Starting with gross revenue, as Alison has gone through, we had service revenue growth of 0.7% from all units except Sweden and TV media in this quarter. Core Telco service revenue growth is 1.2%, driven by growth both in the consumer segment, but also in the enterprise segment. TV and Media [Technical Difficulty] 2.7% from lower paid revenues, taking total growth down to the mentioned 0.7% for the quarter. Total sales revenue growth for 2022 ended at 2.1%, well in-line with our outlook of low single-digit growth. Moving to OpEx, OpEx is reduced by 0.9%, as mentioned, or SEK 58 million in the quarter. If we exclude the effect from pension refund, OpEx decline is minus 2.5% or 155 million in the quarter. The reduction is driven by lower resource costs from 700 fewer resources since the fourth quarter last year. Despite inflationary pressure, we have two years into a transformation journey, reduced our net OpEx by 1.1 billion. Total EBITDA is negative 2% in the quarter, driven by a decline in Sweden, Finland and TV/Media, partly [offset] [ph] by growth in Norway, Denmark and the Baltics. Core telco EBITDA is minus 0.6%, but if we exclude the 280 million increased energy cost in the quarter, Core Telco growth is actually 3.1%. TV/Media EBITDA is negative 105 million in the quarter for service revenue pressure driving down total EBITDA last quarter group to minus 2.0%. Total EBITDA for 2022 ended flat versus last year, in-line with the outlook given in Q3. If we exclude the increased energy costs, EBITDA growth would have been plus 2.5% well in-line with the low single-digit outlook. Total cash CapEx in Q4 is 5.3 billion, in-line with Q4 last year. Elevated CapEx in Q4 is due to spacing of around 0.5 billion of investments from 2023 into 2022. This relates mainly to mobile network modernization and 5G rollout, transformation, and security investments. Despite a continued challenging global supply chain situation, we have been able to stay on track and actually now slightly ahead of our investment program to modernize our mobile network, dismantle our legacy infrastructure and to transform Telia into a much more digital company. Cash CapEx on a rolling basis has increased slightly to 15.4 million or 16.9% of net sales. Cash CapEx, excluding a 0.4 billion impact from FX ended at the high-end of the range at 15.0 billion. Moving to cash flow. Operational free cash flow ended at 0.4 billion in Q4, down from 1.4 billion in Q4 last year. Reported EBITDA minus CapEx is flat versus last year. Cash is lower due to spacing with interest costs being quite stable. Other in the graph is as expected impacted by lower pension contribution versus the very high level recorded in Q4 last year. Working capital was slightly positive in the quarter, but less than what we expected. This is mainly driven by two factors. Inventory levels are unfortunately still at elevated levels due to lower sales than expected, combined with some higher income and inventory. The global supply situation has made inventory planning and pairing much more challenged. The second factor is vendor financing. Our vendor financing balance ended slightly lower than expected due to longer time to onboard new suppliers. Both of these effects are phasing between 2022 and 2023 Total cash flow from 2022 million ended at 5.7 billion with the structural partial cash flow at 6.5 billion. Total cash flow has been on a declining trend due to increased CapEx elevated inventory levels and lower contribution from vendor financing. As guided in Q3, we were not able to generate total cash flow to cover the minimum dividend commitment of 7.9 billion. This is driven by macro implications with the biggest item being the 0.8 billion increase in energy costs. This is combined with more than a billion of phasing of investments in working capital, as mentioned, between 2022 and 2023. On leverage, total net debt increased 8.9 billion in the quarter. This is a result of our limited cash flow contribution in the quarter combined that we completed the final part of the share buyback of 1.8 billion. We executed on the second tranche of the dividend payment of 4.2 billion. We have reduced our hybrid capacities impacting net debt by 1.2 billion in addition to leasing and FX effect on our debt. Due to these factors, net debt ratio has increased to 2.35x well within the target range of 2.0x to 2.5x. Thanks, PC, and let's now move directly into our annual strategy progress update as we now enter the third year of our Better Telia strategy and Rainer will follow me and then PC on outlook at the end. As a reminder, two years ago, almost to the day, we launched our new purpose and strategy in order that Telia will become consistently and sustainably better for all our stakeholders, customers, employees, owners, and ultimately, the societies in the Nordics and the Baltics. We believe then, and even more so now, that as the market leader in one of the world's most digitalized regions, the demand for safe, reliable high-speed networks would remain high, and that going forward, Telia would play a fundamental role in the digitalization of society in a space and secure way. Our strategy, therefore, set out to build a more agile and more resilient Telia that would reinforce our position as the most trusted and secure digital infrastructure and service provider in the region. Back then, we shared a set of growth levers and a resulting financial framework that would lead to substantial value creation. And coming from a situation with multi-year decline in revenues in all our Nordic markets, we share the [levers] [ph] that would return us to a low single-digit revenue growth. We also share how our bold digital transformation, will simplify, digitalize, and automate our operations and deliver 2 billion of OpEx reduction in the first phase. And how we were going to modernize our network and our technology platforms, and combine with the other levers after a period of investment lead us to a growing EBITDA, and later on, a growing structural and operational cash flow. So, how are we doing two years into the journey? Well, despite a multitude of headwinds that we could not predict at the time and unfortunately hitting us in the peak investment year of 2022, we do believe that our strategy is delivering. I'll get back to the headwinds in a minute, but let's first look at what our strategy has delivered so far. The ambition of the inspiring our customer pillar of our strategy was about returning Telia to growth, and we have. We've returned all our Nordic markets to growth after a multiyear decline. Mobile growth have accelerated to 4%, with Finland contributing to that growth after years of decline. Our fiber revenue base growing at a double-digit rate per annum is now 25% higher than it was 2 years ago. And [convergence] [ph] is progressing, especially in our home market with triple player households up almost 20% in 2 years, and we are now the aggregator of choice to more than a million TV subscribers. And rare [indiscernible] telco enterprise is now growing across the group with Sweden enterprise posting its first full year of revenue growth in two decades. Rainer will talk you through what we're doing within our infrastructure and our transformation under the connect and transform pillars, but I want to mention that we're ahead of our 5G rollout plan, our fiber and coax will pass keep growing. The legacy network from betting has accelerated in enterprise mobile networks, one route to monetizing 5G, where we're the clear market leader. And as you know, we've set up the leading Nordic Telia platform in partnership with [indiscernible]. On transformation, I'll let Rainer share the progress, but we remain on track towards our 2 billion OpEx take out by 2023, with 1.1 billion already realized, and that's despite inflationary headwinds that we didn't predict at the time. And finally, we're delivering sustainably. We now have a group-wide approach to making pricing work in a high inflation environment. We've reduced OpEx not least by workforce reductions that are [at 2,000] [ph] or 10% of our workforce. And sustainability is fully integrated into our strategy, and we've made substantial progress. For example, our CDP score at A minus is up from D in 2018. 35% of our supply chain emissions are covered by science-based targets. We've exceeded our target for digital inclusion one year early and received an EcoVadis platinum medal. But more important, we are the leading digitalization partner, the energy sector, the defense sector, and the many civil contingency agencies, proving that Telia is increasingly the most trusted and secure digital infrastructure provider in the region in an era for sustainability, security and digitalization are the key societal needs. However, while we're happy with that progress we have, as you know, also faced some significant challenges, which I do want to touch on. The Pay TV landscape has been very difficult, and we have also scored some own goals, sorry about the pun, by feeling to fully monetize our rather expensive champions in price. We've been challenged by rising inflation across our cost and CapEx base setting us back around 1 billion in energy cost of loans. Supply chain disruptions have caused difficulties in planning, executing customer projects, investments earned on inventories. And rising interest rate means both higher financing costs and short-term fluctuations in our vendor financing program, which has been a significant tailwind to cash flow in an earlier year at Telia. It's also been a barrier to completing some of the infrastructure deals we're working on, but I have no doubt those deals will come back on the table again. And let's just reflect, all of this hit in a period where we were at our peak investment of the modernization and transformation area. So, we didn't have a lot of wiggle room. So looking forward, what are we doing to now mitigate the challenges? Well, in October, we announced that we are merging our loss-making streaming business C More into TV4, our ever-stronger market here in Sweden and into MTV in Finland. This will save significant content costs and restore profitability in TV and media starting in 2024, and make it very clear that our Core Telco business is only an aggregator going forward. We are accelerating our pricing initiatives and our transformation to offset inflation, both in our revenue base and in our cost base. And just so you know, our pricing, we've already announced increases across mobile broadband and TV, both here in Sweden and Norway, which are kicking in already during the quarter. And to gain actual momentum, we've also before initiated the next round of workforce reductions of 1,000 FTEs and STCs, and for the full year, we're therefore targeting a total reduction of 1,500, which is a 50% increase on the last two years. On supply chain, more bottlenecks and these times are still an issue. We are taking actions, and we expect to drive down the inventory that has built up. And on financing, we've already done all of our near-term refinancing needs and secured most of our vendor financing volume for next year. So, all-in-all, despite the 2022 did not become the year we took for, our strategy remains. We're continuing to execute on our plan. And I know Rainer will now share as we've done before how we're progressing on the underlying operational KPIs and lead you through our progress that's transforming Telia towards a more lean and efficient digital telco. Thank you, Allison. Let me lead you to the progress in our transformation. As in the past two updates, I've always shared with you transparently also the underlying drivers, you can see where we are heading and where we are. We are ahead in our network modernization. Recall in late 2020, we have embarked on a major renovation concurrently modernizing our 4G network and deploying 5G coverage in a single flight business approach and with standard configurations across our footprint for best CapEx efficiency. We are proud that we have been able to safeguard the modernization, overcoming COVID and supply chain-related challenges. In fact, we have frontloaded our rollout, and thus we have in 2022, crossed the peak rollout as you can see on the left-hand side of the chart. In the further years, we will reduce the intensity and focus on Sweden we saw, as you know, a late 5G auction and hence a later start on the [year] [ph]. As a result, we are actually happy, very happy with our network quality, providing across the group's 70% 5G coverage and even ahead of plan. In Sweden, we have crossed 50%; in Norway and Finland and Lithuania, we even crossed the 80% population coverage mark. We are the clear network leader in our region with Number 1 positions in Sweden, Lithuania, Estonia, and further improving positions in our [telco] [ph] markets. In Norway, we are the clear 5G leader. And as Allison said earlier, in Denmark, we very recently gained network leadership in the most important four cities. So, as you can see, we have still a strong network foundation to monetize based on our capacity, and the leading 5G spectrum position that we have gained in the region. [Finnish networks] [ph] are only as useful as they are used and monetized, and we actively drive key productivity products and we leverage our digital sales and service capabilities. As you can see on the left, we have increased the 5G devices on our network to now 30%. And with about 80% of all new devices being sold and our markets being 5G, we see significant potential in the next year. Likewise, our strategy to complement our fixed broadband network with fixed wireless offerings paid-off, demonstrated by a 59% increase of fixed wireless users to now almost 400,000. And we built on our digital connectivity foundation. We have seen, as Allison also mentioned, that pioneered since early days in enterprise mobile networks combining high throughput, low latency, with utmost reliability, and security. We have to date commercially contracted more than 55 sites, and we do serve critical customers with critical applications such as in mining, public transportation and so on. Likewise, we have also doubled our connected devices on IoT. We see steady growth in value-added IoT services beyond connectivity, and we continue to grow our leading position in smart public transport. Our transformation delivered steady improvements in our digital sales and service capabilities, as you can see on the right-hand side, essential to monetize our products at lower cost to serve. For example, based on our tenure-wise customer value management platform that we have launched, we have tripled our targeted and auto-based campaigns, which is essential to stabilize and increase the ARPU with our products and services. Our program to reduce reasons to call and to improve agent efficiency call center agent efficiency, they show material effect now, for example, in Sweden, which is obviously the most important we see in the consumer segment, a 20% reduced customer core volume, directly translating to cost savings. Now reducing technical debt is a key driver for efficiency and quality, as you know. I've shown exactly the same chart over the past two years, and you can see we have made steady progress in all our key programs, which we have updated you consistently on. Copper in Sweden is down to 1,500 central offices and we keep driving out the long tail until 2023. Likewise, we are now down to 5G â sorry, to 5% of 3G voice traffic share on the total voice. And we've already shut down our 3G networks in Norway and Lithuania, and all our 3G networks will be shut down by 2024, unlocking not only the cost efficiencies, but especially also enabling us to reaffirm the value of the 5G spectrum â the 3G spectrum to 5G. And on the right side, you see that we have now retired about 70% of our legacy network systems, and our program will complete by the end of 2024, resulting in a fully virtualized and future-proof network infrastructure. On the transformation itself, we have updated you last year, transformed among our 5Ps: products, processes, platforms, people, and partners. The direction is straightforward, to simplify, automate and scale. We consistently measure and report our progress through KPIs, which drives efficiency and quality. Simplifying scale products, legacy out, target in. To date, we have reduced the number of legacy products by 42%, and we are underway towards our 100% reduction target. At the same time, we already have more than 50% of our target products deployed on common platforms. This enables efficient real across the group note that already now more than two-third of our common products are being reused in more than 1 market. We improve and automate our processes to enable zero touch journey with better quality and efficiency. Through our group-wide operational excellence program, the systematic drive continuous improvement, which has now materially improved our incidents by 18%. So, reduced incidents by 18%. At the same time, to our automation initiative, we have increased the number of our sales through automation and [indiscernible] by 65%, and this is only the start. Our platform, same as in products, we drive legacy out and target in. We've kept our patent legacy drive-out with 47% reduction now, while at the same time, we've increased the share of target platforms to 32%. The most evident success is in the launch of our transformed B2B operations in Sweden, which enables us to reduce the order profit in time from weeks to minutes. In 2023, we can now scale those products, processes, and platforms for full realization. Key to our transformation success are our people and partners. Upskill and empower our people, we invested to tools and training, and we give tires access to analytics for data-driven decisioning, covering more than one-fourth of all our people, an increase of 55%. And at the same time, we increased our near insurance workforce by 47%, and we took ownership of critical software skills, which previously had been outsourced into our own workforce, especially on the nearshore locations, which obviously much increases the efficiency. We have delivered on our plan to drastically reduce the number of different system integrators now down 70% to reduce fragmentation and increased scale. We have realized to date SEK 200 million gross savings. And as we have updated earlier, we're ramping up to the earlier committed SEK 750 million by 2025 cost savings in that area. At the same time, our strengthened strategic partnerships support our transformation and value realization even enjoying go-to-market activities. This is hard work. I can definitely confirm our statements that we have embarked on one of the industry's most ambitious transformations here. But we have built a solid foundation, which will carry us forward to scale revenues and efficiencies sustainably. With this, I hand over to my dear colleague, PC, who will show us how our revenue and efficiency drivers support our financial plan. Thank you, Rainer. Let me quickly take you through how all of this both Allison and Rainer has talked about come together from a financial perspective. Starting with our growth agenda and a quick update on the key growth levers that Allison touched on. COVID rebound on roaming and media that we talked about three years ago, it's mostly behind us now and less of a growth lever going forward. Legacy burden is still a drag, but it is expected to ease going forward, especially beyond 2023. Our core growth levers that we have talked about remains unchanged, including driving our efforts by improving mobile experience and monetizing 5G, reducing churn and improve upsell from conversion and gradually build more momentum from new revenue streams like IoT and EMM. In addition, we have, as we have discussed before, significantly stepped up and structured our approach to pricing in the new high inflationary environment. Our clear ambition is to be able to assess inflationary pressure for pricing measures for all our units. This includes building in CPI linkages at intra-B2B contracts, combined with bigger and more recent price increases, both front and back books across our entire product portfolio. Service revenue growth has gradually improved and ended at 2.1% in 2022. Our outlook for 2023 is to grow further service revenue by low single digits, enabled by maintaining and strengthening our current commercial momentum, gradually build more strength from pricing initiatives, and get more impact on new revenue streams like IoT and EMM. Moving to the cost agenda. The key drivers, the ongoing digital transformation of our business is on track as we have mentioned. The key drivers in forming our cost base remains the same. Two years into our transformation journey, we have seen the biggest impact on the total cost from a selective driver. Let me mention a few. Reducing and digitalizing our customer interaction, removing legacy and building common technology platform, moving to fewer strategic partners, as Rainer mentioned. Reduction in overhead costs, both on group level, but also in the business unit. If we look going forward, we expect continued impact from these drivers and gradually gain more impact from cleaning up our legacy product portfolio and consolidate into a few common products across all our markets, but also by gradually removing more manual work through simplifying, standardizing and digitizing our processes. These drivers have despite inflationary pressure, named a net OpEx reduction by 1.1 billion, resource costs over the two years is now reduced by 0.7 billion, enabled by 2,000 peer resources. In addition, IT cost has been reduced following the initiatives that Rainer had totaled about 0.4 billion. Our ambition remains to deliver 2 billion net OpEx reduction by end of 2023 enabled by further reduction in number of resources by 1,500 in 2023 with 1,000 already being executed now during the first quarter, combined with further cost reductions in IT and also in marketing. On CapEx, the investment agenda that we presented 2 years ago are intact with some updated phasing as we have discussed earlier today. Key components as Rainer has talked about, has been to modernize our mobile network and roll out 5G, negative reduction, and transformed agenda to a more digital company. CapEx in 2023 is expected to reduce between SEK 13 billion to SEK 14 billion. This is enabled by a reduced pace of network modernization after having achieved 70% to 80% population coverage from 5G in many of our key markets. Lower investments in product and IT, following the high level that we booked in 2022. Our aim is to be at the mid or the low end of this targeted range. On cash flow, structural cash flow is expected to grow from 6.5 billion in 2022 to between 7 billion to 9 billion in 2023. Our ambition is to generate low to mid-single-digit EBITDA growth on a yearly basis, but given the volatile and uncertain macroeconomic landscape, we choose to be a bit conservative and have 2023 outlook at plus to low single-digit growth. CapEx is expected to come down from the peak level in 2022 â interest costs are expected to end around 1 billion higher following the higher interest rates that we saw and expect for 2023. If we still remain on working capital, our ambition and our aim is clearly to keep it stable for the year. Inventory is expected to come down significantly from the elevated levels in 2022. And on vendor financing, our ambition is to maintain the balance on level with 2022. We have already secured three quarters of this with the remaining one quarter being work in progress and targeted to be secured in the coming months. Due to pacing, we will see a quite negative impact from vendor financing in Q1 2023 before the mitigation started at full effect. To summarize our outlook, service revenue to grow low single digits. EBITDA to be flat to grow low single digits, CapEx in the range of 13 billion to 14 billion and the structural part of cash flow to be between 7 billion and 9 billion. On balance sheet and dividend, management and the board are fully committed to maintain a strong balance sheet and maintain the targeted leverage range and rating targets. Further, the board stay committed to the dividend policy and propose to the AGM to distribute an ordinary dividend of SEK 2.00 paid in 4 tranches. Thanks, PC. So, I will try to summarize our progress and way forward without repeating myself. Basically, we are a large complex business in what has become a challenging market environment. We've known from the start that achieving our ambitious goals with demand correct, determination, focus and perseverance, and today is a reminder of that. However, having returned Telia to growth, expanded our digital infrastructure and especially 5G faster than the others, past our investment fee, and build the foundations for improved operational momentum, and cash conversion going forward. I remain absolutely confident that we're on the right track with the right plan to create substantial value for our owners in the coming years. Yeah, good morning everyone. I had a couple of questions. One, just on Sweden and your outlook for that market, you see yourselves in that market? And then secondly, on the free cash flow drags below structural free cash flow. Just on Sweden, just service revenue growth, as you highlighted, was impacted by the Viaplay outage in the fourth quarter. What's your outlook for growth in Sweden for your business in 2023, specifically taking into account competition? Do you still expect to be able to put through more meaningful price rises this year to offset cost inflation and drive growth? That's the Sweden question. And then on the free cash flow drags centering around vendor financing and hybrid cattle refinancing, you went some way to doing this PC in the last couple of slides, but how can you or give us confidence that we donât see free cash flow drag some of these 2023? Thank you. Thanks Andrew, Iâll take the Sweden question and leave the free cash flow question to RC. To the outlook for Sweden, [indiscernible] did cause some disruption to our underlying momentum in the quarter and some of that will still be an impact in Q1, but outside of Q1, we expect to get that to low single digit revenue development in Sweden again like [indiscernible], you know there is very continued underlying momentum in the broadband business as you see, another [indiscernible] pricing increased going out now, which starts to play and [indiscernible] during March and into April. The TV momentum weâve got more content now in our [indiscernible] platform, but taking 150, 200 pricing in the quarter, so that will benefit us coming out of this quarter as well. Looking at the opportunity to bet our monetized mobile as we get some pricing moves going on in mobile as well. So, I expect that Q1 would still be a bit soft, but weâll build momentum in Q2 onwards as all the pricing kicks in as we start to really monetize 5G because we are well above 50% top coverage now and we can continue the great momentum that we have in the enterprise business where we are sailing in a broader range of digitization services and I said, [indiscernible] is the more the energy in the defense sector, where we're seeing great demand. So, low single-digit development, but it will be from Q2 onwards. Yes. So, then I can take the working capital question. Just to be very clear, our ambition and our aim is to keep this flat in 2023. So, it doesn't become a drag. But if you note on the slide, we say equal or potentially down. The reason for having that is, we just want to be very open and transparent that we haven't fully secured everything at this point in time. That doesn't say that we are not working to close the remaining uncertainty and deliver working capital that doesn't become a drag on the total cash flow. And the fact to be able to be confident that data is, number one, the inventory. I think we have quite good control. It just takes some time to get the effects out, and we'll be working with that systematically throughout the year. So that should be a positive development. There are no other elements of the working capital that we expect any big movements on so you can enjoin to the vendor financing and development on that. As you know, when the interest rates peaked up during 2022, it gave us a challenge that we've done a shortening of our payment terms. And we have been mitigating this for two things. One is, of course, to go back and renegotiate the discounts on existing to private. This is going quite well. We have progress on that, but it takes some time to get through all of those contracts. The second part is, of course, to onboard new supplies to the program, and we also have good traction on that. So, if you combine those two, we ended a balance of 11.4 billion in 2022, slightly higher than 2021. And we actually expect now to maintain that balance, and we have already secured three quarters of that balance when we exit 2023. And now we have, sort of a clear portfolio initiatives to close the remaining one quarter. If we do that, we don't expect any drag on working capital, and we can keep you updated during the year on this. But also, as I said, there will be a phasing in the year in 2023, but there will be a negative development in the first quarter and then gradually see the litigation go back to full effect and end at the end of the year on the balance similar to this year. We're much in control of this situation now, much more visibility. We are ahead of where we were this time last year, instituting the balance. And so, our aim is for a neutral effect over the course of the year, that's our aim. That's much appreciated. Can I just ask a quick follow-up? So, just one on the hybrid capital refinancing, how should we think about any kind of process of that in 2023 because that was also a drag on net debt. And then, PC, you mentioned that the vendor financing was being managed by a mixture of renegotiations and adding more vendor financing. What's the kind of mix in terms of the support to the vendor financing balance? Is it more renegotiations and less additional vendor financing, or the other way around? How can we think about that? Thanks. On the biggest portion on the financing is to renegotiation of the existing vendors and contract and then we are able to secure some new vendors coming into the program. On the hybrid, you should not look at that in 2023. So, the leverage effect is already done. There's no further changes planned on our hybrid capacity. We just adjusted it down to make sure we get full credit from the rating agencies on our hybrid capacity after some of the structural changes that we have done in the past few years. So, no changes going forward. Good morning everyone and thanks a lot for detailed communication and for taking my question. Just maybe following up very quickly on the operational free cash flow outlook, and I definitely understand that the current macro situation is quite challenging to really guide on some elements that still feels like the range relative to [ride] [ph]. And maybe could you talk a bit on where you would expect the largest fluctuation between the different elements? And then maybe also on the EBITDA guidance for the next year, and again, this is quite difficult to really assess all the impacts that, could you maybe give us an updated outlook of what energy impact you see in 2023? I don't think, you kind of updated that as part of the presentation. And on the wage side, how are negotiations going with the unions and what's in place maybe to expect? Okay, why don't I kick-off and then once we get to know structural cash flow, I'm going to give you to PC. So, yes, we've given a wide range on structural cash flow guidance for the year, and that is very much driven by, you know we are still in uncertain times. Our ambition is clear. Our ambition is to grow service revenue low-single-digit, EBITDA low-single-digit, we're coming off with peak investment levels, and that's why you get a range of 7 to 9 on structural cash flow. Why are we being cautious? Well, if you look at EBITDA, our outlook is flat to low single digits. As whilst we have an ambition to grow single and very much low single in Core Telco, we have to recognize that it's still not â we're still in an environment where there could be a major recession. We don't know yet, and that could particularly impact our advertising business. And that and if there is an impact on consumer, we need to recognize that in our guidance, and we need to plan for a scenario that the consumer environment might be [tough] [ph]. And so, we need to plan for flat EBITDA, even although our ambition is clearly to grow it and our underlying plans are to clearly grow it. At the same time, now that we're all of our reinvestment levels, we are â we will now be [indiscernible] down CapEx because we're ahead of plan on our 5G rollout and a number of the transformation initiatives are now kicking in. So, the big benefit in our cash flow generation next year is really coming off of those peak levels of CapEx. From an energy point of view, the outlook is better than it was three months ago, and we have assumed in our plan that it will be higher than this year over the course of the full-year to the tune of 300 million. If you recall, three months ago, it was 600 million, but it's still volatile. We still don't know what the winter will look like, we still don't know what the war in Ukraine might do next. And again, that's all factored in to this full 7 billion to 9 billion range. And then on the wage side, what you're seeing in the Nordic market is a much more reasonable set of expectations from the [unions] [ph]. We are seeing in the range of 3% to 4.5% is the starting point of a negotiation. Baltics clearly higher because they're living with higher inflationary rates, but no worse than last year, high single digits. Those negotiations kick in, in the spring. And we are well covered for those ranges in our plan going forward. And PC, I don't know whether you want to pick up on other elements of operating cash flow. No, I think you covered it. And if you combine with my answer to Andrew, I think we have covered it. I can just add on the salaries. We've been guiding earlier that we in 2022 have around 400 million pressure on the salaries, and we expect in 2023 to have around 600 million, and that is still like you kind of estimate of where we end up, even if we don't have all the answers at this point in time. Okay, very, very clear. Thanks a lot for that. Maybe a very, very brief follow-up just on the CapEx guidance. How should we think about cash CapEx where it's reported one? Because I think now you guide on reported one, compared to the cash you guided for in 2022. Yes, so maybe I can take that. You're right, we are changing now the guidance. But we have also introduced an outlook statement on structural cash flow, which, of course, includes the cash CapEx component of it. So, I think in a way, the cash CapEx is still a part of our outlook set as such. We have a few hundred million difference on â between the cash and 2022, and we don't expect any material difference for 2023. So, we just want to align with the industry and make sure that we have a CapEx outflow which is in-line with the activities in the year. And since we annually capture the CapEx component in our structural cash, we felt it was more easier to move to book CapEx going forward. Thank you very much and good morning guys. Alison, just a question. Your comments on â you're making some fairly strong comments on your failure to monetize the Champions League rights in particular and [indiscernible] to focus on being a content aggregator going forward. Could you elaborate a bit on why do you think you have failed to monetize these rights? Is it simply not possible or is it an internal sort of a failure by Telia? And what are the broader consequences of this? And your comment Alison, sounds like you will not bid for the rights the next time now for renewal, but does this have any broader implications for your TV and content strategy? And then can I just ask a follow-up, a short question on the cash flow for next year to the CFO. The pension fund contribution, what should we expect going forward here? Thank you very much. Thanks, Peter. Thanks for the questions. Yes, since the very beginning, I was clear that I wanted to understand whether we could monetize the TV/media asset and its investment in Champions League. And why have we failed to monetize Champions League, it is a very expensive right in the beginning. And I am not sure that Telia is best at monetizing content, if I'm really honest. Our TV/media unit is good at monetizing content, but monetizing content at an investment level that they can get a return on. And that's why we have made the decision to consolidate C More into the very in success of TV4 and MTV business going forward to expand TV4 and MTV into offering HVOD, AVOD and SVOD services, but with the right content costs going forward so that we can return that business to the level of profitability it was going off before it go into some of these rights. And by making that strategy very clear, I can focus Telia on being a great aggregator. What does it mean for, what's the broader implications? I think it's no different from what you've seen in other markets. You see us focus more and more on building the right long-term partnerships with distributors and owners of content and making that content easily available on our platform so that customers can pick and choose the content that they want to watch on whatever streaming service or whatever AVOD server or whatever linear server at any point that they want to, and that is our priority and the trend that you've seen in other markets, that's what we will continue to do. And we'll focus TV4 and MTV on having the right content for their domestic champion, national champion data. As you will have seen, sorry, just I want to add, in the final agreement we made with Viaplay, we're now offering some of our champions that matches to Viaplay. So, we're starting to move away from that exclusivity that Telia tried to monetize [indiscernible]. And that's also showing that we want to build a broader relationship and a better long-term relationship with these content owners. And PC on cash flow. Yes. Hi Peter. We you should expect and we expect to have vendor contributions of 900 million, in-line with what we saw in 2022. Yes, hello. I would like to stick with the TV media business, which are reporting very weak numbers. I mean, you had â or this business had 1.5 billion in EBITDA before Telia acquired this business and now ends with an EBITDA below 300 million. Still the TV4 business is doing better than ever, so the problem is clearly on the Pay TV side, which you also alluded to. So, a little bit on, first of all, is it clear that owning the TV and Media business is beneficial for the overall Core Telia business? Secondly, what savings will you see from consolidating the Pay TV business into the linear TV business? And then can you also explain what you mean with just a content aggregation focus? Does that mean you will not really invest in owning content going forward. Good question. Thank you, Stefan, and good questions. Is it clear that Telia is beneficial for Telia to own a few TV/media units? I think, first of all, we just need to get that business back to the, kind of EBITDA it was going off before it made an investment in very expensive content rights that has not been able to monetize. And that is what is driving the big shift in the EBITDA development because as you rightly said, TV4 is better than ever. And that's why our strategy now is a future-proof TV4 for the future by giving it the right level of content to put on to AVOD, HVOD, and SVOD proposition so it continue to capture some of that digital growth and get more recurring revenue from customers going forward. I think once we've done that consolidation and got the EBITDA and cash generation outlook improving again, then time will tell whether I can extract more value by owning the TV media business or reconnect the TV media business. In terms of the savings, because the savings don't really come in until 2024, Stefan, I don't want to overpromise at this stage, but clearly, we will â the end of the very expensive rights that we have in the spring of 2024, and let's see how we evolve our content slate between now and then. But that will be the big benefit of the savings along by some OpEx developments that will come in the latter part of this year and going into next year. Because this year, it's a leader transition. We're investing in retail platforms. We still have the C More brand support until it is fully merged into the TV4 and MTV business. So, it's a 2024 benefit, not 2023. And what I mean by constant aggregation, I said that it's like all other markets system, and will be no different from other incumbent telcos that have the biggest reach and the biggest distribution and the best play for all of these streamers to actually be able to reach customers through. Hi, thank you for taking my questions. First one is on Finland. I'm just trying to understand how market dynamics are evolving. We have seen an acceleration in service revenues, mainly driven by mobile and specifically by ARPU. Just trying to understand how you saw the quarter in terms of market dynamics. And now that we are one month into Q1, what you have seen and your expectations into 2023? And the second one is, just trying to understand earlier your decision on cutting the dividend at all. I mean, that is basically 2.5%, which is basically material. And just, I'm just willing to understand what drove your decision on making the move? Thanks. Let me take this. I think the market dynamics haven't really changed so much in the last quarter. I guess, we've just had particular softening in TV/media and as mentioned, the Viaplay dispute in Sweden. I think as we look into next year, we will continue to take the action that we've been taking this year to drive ARPU development across mobile broadband and TV. We'll continue to push convergence and growth of new services, particularly in the enterprise space with security and IoT. And so, over the course of the year, we expect to be low single-digit similar service revenue development to what we've seen this year. We do, however, expect it to improve during the course of the year because we've annualized some pricing, and as I said, we ended the year with a soft Sweden consumer that probably we will start to see recovering until March onwards because of the pricing action that we've taken. Just very quickly across our markets we have not yet seen any consumer impact from rising accretion. We monitor it very closely. Q4, there's always less roaming, so we didn't see the roaming uplift that we had in Q3. And we have clearly seen a little bit less VAS services like insurance coming through in the quarter. But our underlying strategy and considering no yet significant change in consumer spending power in markets says that we expect very similar market dynamics for this year. And then what you will see during the course of the year is obviously our inflation related contracts will start to benefit our enterprise segment where we've already got contracts rolled out on a material basis, and that's particularly in the Norway Enterprise segment. In terms of the dividend, our policy is clear. It's a slow to and an aim to grow in line with underlying earnings development because our earnings did not grow and our cash flow clearly went down this year because of peak investments and some of the, kind of supply chain phasing that we mentioned earlier. And the decision was taken that it was right to go with the flow of our dividends rather than to show growth in the dividend because clearly, we want to like the dividend to underlying cash generation going forward. Now the CapEx outlook may be for the medium-term. If I recall at the time of the strategy that you giveâ¦ No worries, it's a regular problem for me. So, if we think about CapEx into the medium term, not just 2023. If I recall, you talked about 15% CapEx to sales once we were through the peak of the transformation investment. And now you're talking about 13 billion to 14 billion, maybe even the lower end of that. And it seems there's still some transformation assets still going on. I mean, how should we think about like the medium-term CapEx level, is 13 to 14 in the sort of the right number for the next few years? I can't imagine it's any dramatic new products and services coming out a bit early for 6G and the replacement of fiber. So, how do we think about CapEx over the next few years? That would be helpful. Hi Maurice, I can answer that. I think you basically answered your question. I think the 13 to 14 is a good range to also have beyond 2023 even if you donât have the same level of details for those years. And that's kind of been part of our plan already. We are now because we spend a bit more than we thought we will be able to do in 2022. We are able to take down 2023 a bit more than what we have been guiding on before. And as you then go below the kind of 15% of sales that we have been guiding you towards. And then we expect to stay on that level also in 2024. And just a very quick one for Rainer, if I may. You talked about a 7x capacity increase of 5G versus 4G, is that a special efficiency or is that just total capacity? Yes, thanks Maurice for the question. Remember the network capacity increase is actually not only coming from the 5G but also we have modernized the 4G into a much more state-of-the-art network. So, it's a combination. But clearly, clearly, the spectrum efficiency is the key driver for the capacity increase. And I think they have even more room because the spectrum acquisition that we have done, obviously, is even larger than what we have now deployed. So, going forward, if we need more capacity, there is still room to even further increase. But the 7x capacity increase is available. We see to the point of fixed wireless, that's a bit of a link because the fixed wireless business is growing actually fairly nicely with â the update also we have given in Norway new propositions. We launched the itself is also that capacity will be also required to complement the fixed network into using the mobile. But yes, it's specifically the spectrum efficiency that's helping us with. Hi, and thanks for the presentation. I've got two clarifications on one question, please. In terms of the clarifications I wanted to ask in terms of the content renewal. So, you mentioned that you will have more clarity on these in 2024. So, I was just wondering because the wafer concern, the champion, you acquired exactly years ago for 3 years, so I was wondering that the auction must be very imminent. So, if you could confirm that, please? And then what would the content renewals in 2024 exactly be related to it? The second clarification just on CapEx, so you mentioned 13 billion, 14 billion is roughly the outlook beyond 2023. I was just wondering if that the absolute number that you're targeting or is the implied, kind of stay 14% of sales as the level because of this we have a medium-term ambition of growing service revenue. So, just a clarity in terms of the absolute versus relative would be helpful. And then my question really on Sweden Consumer. So, you basically spoke about inflation really yet having an impact as far as you can see on the consumer in Sweden, if you just understand as the softness that you've seen in the fourth quarter, especially, I guess, in terms of mobile really more to the competitive environment, I know for example, you were talking about good traction with the unlimited tariffs. So, it is more of a competitive situation that you think you'll be able to correct with 5G, you mentioned it being a big driver in price increases or what exactly is a source of that softness in Sweden in particular? Thank you. Okay, thanks Ondrej. I'll try to take with clarification questions [indiscernible] on CapEx, I'll pass it back to PC. Just content â the big one is Champions League in spring of 2024 for us. I imagine the auctions for that next round of Champions League, I guess will happen at some point during this year, but the timetable is varying by market. And I'm sure they will want to pick a moment where they think they can extract the most value. So, yes, it will be soon, but let's see how itâs going. The CapEx at this point in time, we're aiming for an absolute 13 billion to 14 billion range outside of â we made that clear for 2023. And based on the outer years, we see it has already clarified that is a good level for us to assume looking forward at this point in time. And I'll let him finish off on CapEx after I've answered your last question on Sweden B2B. Yes, what really happened to us in the fourth quarter is there was a distortion in our underlying broadband and TV trends because of the Viaplay dispute. If you look at mobile, we didn't really see a lot of change in the quarter versus prior quarters. And not surprised that Telia is seeing good traction on unlimited. Unlimited in the popular tariff for us as well, but our focus continues to be much more a convergent focus. And the big opportunity for us is to continue to cross-sell mobile into our fixed base and continue to get more services by household and by individual. So yes, 5G unlimited plays a role in our mobile strategy as pricing, but convergence plays a very important role because of the best network status we have on both mobile and on our fixed infrastructure, and also with having a broader range of content aggregation. And yet, no sign of â living between Sweden and the U.K. gives me a very good insight into the consumer sentiment between the two countries. It's a very different environment here in Sweden. There is much less dialogue about consumer squeeze, recessionary pressure. It seems to be a population just get on with it, which is very, very different from the U.K. population. So, but that being said, we were super sensitive to the macro environment around us, and that's why we're being quite cautious on our guidance for next year. And PC, do you want to follow up on the CapEx? Maybe just to give some flavor and connected also to the question from Maurice, why do we believe that the 13 to 14 is a feasible range even beyond 2023? If you build on what Rainer has been talking about, by the end of 2023, we have most of the network modernization of the mobile and the tile rollout behind us, meaning that we don't have â we have done a massive modernization and a front loading of the mobile network investment in these three years that we have been talking about for a long time. And that we also added a lot of capacity in our network. That means that we can continue to reduce our investment into the mobile network until there, at some point, becomes a technology shift, and â but that was just further up. The second thing is, Rainier also talked about our progress of building â reducing the legacy and building common products and platforms will enable us to be more CapEx efficient going forward than what we have been in the past. But keep in mind, what we are doing now, we are actually also investing to remove that legacy and to build those common platforms. So, that will help us over time. And then as before, there are no big footprint expansion in our plan. If there is any opportunities, we would then pursue that together with partners or more kind of other structured vehicles and not to put investments on our own. So, a combination of those, we still think that, that's a good run rate beyond 2023. Yes. Good morning and thanks for taking the questions. Three if I may. On interest cost, PC, can you â I think you said that interest costs would be up SEK 1 billion year-on-year in 2023, can you just clarify that? And also remind us what proportion of your debt is exposed to floating and kind of what the interest rate assumptions are behind that SEK 1 billion is in 2023. And then a couple on working capital. First, I'm still a little bit unclear just looking at Slide 32 of the guidance is to be the same as 2022, which looks like on Slide 32, I think what you said is that you expect the league will be neutral or slightly down. So, maybe just clarify that. And then within working capital, I'm kind of curious on the vendor financing picture. Maybe you could help me a little bit here. If you keep vendor financing flat in 2023, given that your CapEx is coming down [2 billion] [ph], obviously means that you're going to be steady allocating more of your CapEx and your OpEx going down towards vendor financing. So, is that correct? And then interesting about the cost of vendor financing, historically, it's cost you nothing because suppliers have basically taken a very small haircut to be paid early. Is that still what you're seeing? Is it still costing you practically nothing? I know you are reminding your suppliers to take bigger discounts in a rising interest rate environment that is paid early? Is that the future? Are you having to share some of the costs that would be super helpful? Thanks. Yes. So, I'll take those, Allison. On the interest rate, yes, you are correct. The expectation is around [1 billion] [ph] higher cost following the interest rates that we saw increasing in 2022 and the expectations that we have in the market 2023 and beyond. We can â I think we are in that outlook, reasonably conservative. There could be upside if the interest rates start to come down, but it's way too early to speculate on that. The balance between fixed and closing is at the moment and in-line with our policy to be 50/50 fixed and closing. [Technical Difficulty] total cash flow. And the biggest component of that is to make sure that vendor financing doesn't become a drag, because as you talk about and I fully [indiscernible], there is with a high interest, there is an exposure that we need to mitigate. And then we are very well on track on that mitigation as I talked about before. And if we're going to keep that balance, you're also right that if we are ramping down CapEx as we are now guiding on, that means that we need to add some more, let's say, spend of vendors on our CapEx. So that is a component of it, but we don't â it's not that massive. There are some elements of it here and there. And you're also right that our â we don't want â we don't think we should and we don't think we need to pay for vendor financing. We are at the kind of a dialogue between the suppliers and the banks and the discounts that they are willing to give to get the page in 7 days. So that is our and then there might be [one odd] [ph] case, whether it's discussions on how to deal with it. In any case, we would definitely not have a downside that is higher than our alternative cost of borrowing. So that is the strong, kind of guideline that we are using. Okay. So PC, just to be clear you're assuming that your suppliers will â instead of taking maybe a 50 basis point or 100 basis point discount to be paid early, they're now going to take maybe a 3% discount given more rates have moved in the last 12 months? Yes, because I mean, the discount is quite small when the interest rates are very low. When the interest is high now, it has a bigger value. And many of our suppliers are willing to give a bigger discount to get paid early. And we also in this uncertain environment, have money in the bank has a bigger value than the board. Yes, but that's on their side, right? It depends on how they look at it. If you're looking from a complete financial perspective, but when we have some vendors that are really interested and active looking for it, and we have some lenders that see the concerns that you have as they don't want to hurt their margin. And in those cases, we go into that or going to find a solution. Thank you. Two questions, please. So, firstly, I wanted to just go back on the dividend. You mentioned that natural deleveraging is a priority, but equally the 2022 BPS is still a full payout of free cash flow for 2023 at the midpoint, on around the Swedish spectrum auction on top. So, what will drive the leverage reduction in 2023? And can the Board consider any merits of a lower dividend from which it would be easier to go from? And secondly, I think you suggested rising interest rates have also been about concluding InfraDeals, but can you elaborate a bit more on this, we've still seen pretty healthy multiples for deals over the past few months? But it's a bit more pressure on the multiple for your potential rooftop transaction? Thank you. Hi, Keval. I'll try and take those questions and [indiscernible] if there's anything outstanding I'll pass to PC. Deleveraging is a priority, absolutely, but we decided with the Board to support that whilst we were still able to stay within the 2 to 2.5 range, out with maybe the old quarter going out of that, we should stick with our current dividend policy because that supports the strategy. And we would not impact our dividend in this period when we have a plan to mitigate all of the structural macro headwinds that we saw during the last year, and they all take us during peak investment period. So, the plan is to de-lever over time. You're right, the dividend might not be fully covered in 2023, but we believe we have the flexibility within our 2 to 2.5 range to manage that, albeit we might be at the higher end of that or slightly out of it in any one quarter, but we have built in what the speed of spectrum auction might be during the course of this year. So, we factored that in. So, I wouldn't â it's a priority for us to de-lever. I think the reality in 2023 might be that we'll be in the upper end of the 2 to 2.5 range rather than seeing any movement downwards. But clearly, moving out of 2023 and with a lower CapEx investment, with some of the macro headwinds. And as I mentioned, some of the pay TV pressure subsiding as well, we'll be in good shape for â in 2024 for us to start to see a de-levering, and that's why the Board did not want to impact the dividend. In terms of multiples, we've just seen them drift down a bit, and we decided that we want to wait until they drift back up again for our rooftop transaction. That's not to say that we're not continuing dialogue. We will, but we're not going to do deals when we don't believe that it makes financial sense. And it was â it just came a little bit too marginal for us at that point in time, but I do expect that once there's more stability in the market, once we gathered actually a little bit more information on the value of those, that it will be an asset that will be available to consolidate into our current platform at a future date. But we're not going to do deals if we don't believe it to be economical to. [Indiscernible] I had a couple of questions, please, Allison. Firstly, one in Norway and on cable, please. Your subs look pretty solid, your broadband subs, but could you give us an update on how much of the network has been overbuilt by fiber providers in the Norwegian market? And from your comments on CapEx, it doesn't seem like you've got any plans to overlay with fiber, but could you correct me if that's wrong, if you're thinking it may do doing some on the network technology here? And then second, just to come back to Kevalâs point on the dividend in that last question. If you're out of that range, the 2x to 2.5x range at the end of the year, is that sort of the â that's the sort of red light for the dividend, the sort of warning sign for the board? Or would you be given sort of credit that changes becoming potentially in TV and media as you see? But is that the sort of a be all end all, the range of full-year, that's the end of the dividend policy to? Thanks very much. Thanks Nick. On Norway, we have no intention to roll-out fiber. I think there's enough fiber being rolled-out. And our broadband business from a cable point of view, holding up pretty well. And Rainer picked on the growth that we're seeing in fixed access as well. So, no intention to get into any fiber, sort of investment in Norway, and happy with our fixed wireless access is now complementing our cable business. And what we're doing a very good job is building the number of partners that we sell our full range of connectivity services into in Norway. In terms of the dividend, clearly, I can't comment on what the board might want to consider this time next year, but we made the decision at the world meeting yesterday, looking at how our leverage will evolve over the course of the next year and into next year with the range of sensitivities around that. And they got comfortable that SEK 2 was still the right level and that we will be moving into 2024 in a stronger position from a cash generation point of view. Thank you very much to everyone. I have two quick questions on the transformation program, please. As we've outlined, [indiscernible], ambitions, I was wondering if you have any details on benchmarking versus competitors, where you are now and where you think you'll end up again at the end of next year, I suppose [indiscernible]? And then your second question was on workforce engagement and whether or not you've had any business surveys internally and there's something you can say about the moving of the staff. So, let me take the workforce engagement. I'll pass the first question to Rainer. Workforce engagement, we have a highly engaged workforce. Weâd score at the â in the upper end of any companies that we compete against. We were at an engagement level of 78% before we went into the transformation. We've gone down to 77%. So, engagement remains really, really high. And we've actually â that's not to say that there's no impact from the ongoing transformation and workforce reduction. And we monitor that very closely. But overall, engagement is good. We're actually going through a big refresh of our values and our culture at the moment. We're doing it from the ground up. So, we've got our organization, telling us how we could better bring our values and our culture to life. So, overall, I'm super proud of how engaged and passionate our people are despite the many headwinds and it's our role to keep those high levels of engagement. And now, I'm passing to PC on the first question. Yes. But maybe just [start] [ph], as mentioned to your question, if you take it from a cost and efficiency perspective, we did a very comprehensive benchmark two years ago that we also set the scene and identify the areas that we really need to address with our transformation program. And this goes because across the cost agenda, but also the investment agenda, where there was clearly inefficiencies in the group as a whole and a lot in Sweden and a lot in our kind of product tech area and path forward where we are now, we start to see the efficiencies that we take out for [indiscernible] is, sort of closing in on those gaps. So, but both the good and the bad thing is that we still have a lot of more work to do, but I see that as more opportunities becoming even more efficient than we do to our cost and our investments going forward. So, maybe, Rainer, you can elaborate a little bit from your perspective. Yes, just to complement. So, the benchmarking is obviously the driver for looking at the right areas. If I look at the transformation from an approach and a vision perspective, a bit more comparing other telcos from an own experience, as well as what we hear from some of our partners and peers. We are fairly, I would say on the forefront of the ambition, especially also looking at the structural change we have made when we started to consolidate [indiscernible] into a common team that gives us that leverage of creating synergy and scale. So that's clearly we see coming through. So, the common technology cost [indiscernible] which represents a fair share of the OpEx and CapEx agenda has delivered meaningful and net savings both on OpEx and CapEx. So, typically when we see that we take in, added a platform of product [indiscernible] into a common delivery, we realized [indiscernible] and a 20% on that particular area and one of the examples that we have for visiting here in Telia is that we have a common single operations team, where we're operating all our networks which already are harmonized and run, as well as down to the core network. And that has proven exactly that method that we have separate teams before. We are consolidating and realize those 10% to 20% savings. But as PC said, this is part from done. So, we have those elements and the foundation that we outlined earlier yet to scale to put the pressure. That is exactly now what we are doing in 2023, 2024 and 2025, which is our horizon of the transformation. Thank you. So, I think on that final comment from Rainer, we should probably end the call. And I just want to say, clearly, 2022 was not the year we expected. We did make the strategic progress, but we were thrown a few extra challenges along the way. We've taken steps to strengthen our strategy to mitigate those headwinds and we're now stepping up the pace of our transformation agenda so that as we look forward, we'll get back to our original value creation plan and get back to the top, bottom line, and cash flow growth that we always imagined and still believed in. So, thank you all for your questions today. Look forward to seeing many of you in the coming days and weeks and thank you.
EarningCall_1078	On this call, we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin, and I am Anders Trapp, VP, Investor Relations. During today's earnings call, Mikael and Fredrik will, among other things, provide an overview of the strong sales and margin development in the fourth quarter, give an update on the price negotiations, outline the expected sequential margin improvement in 2023 and the journey towards our medium-term targets, as well as provide an update on our general business and market conditions. We will then remain available to respond to your questions, and as usual, the slides are available on autoliv.com. Turning to the next slide. We have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release available on autoliv.com and in the 10-K that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 03:00 PM Central European Time. So, please follow a limit of two questions per person. Looking on the next slide. I'd like to recognize the entire team for delivering another strong quarter, which I believe reflects our strong execution culture. The fourth quarter and the full year 2022 were important steps towards our medium-term targets, as we, through price adjustments, managed to gradually offset the highest raw material cost inflation that our industry has seen in a decade. In the fourth quarter, our organic sales growth outperformed light vehicle production significantly, as a result of price increases, product launches, and higher safety content per vehicle. Our sales in the quarter were well over $2.3 billion, despite a 7% currency headwind. We also achieved a strong profit recovery, increased the adjusted operating margin to 10% for the fourth quarter and to 6. 8% for the full year, in line with our full year guidance. Our strong performance in the fourth quarter is especially encouraging considering that market conditions continued to be challenging with significant inflationary pressure and continued high level of customer call-off volatility. We generated a strong operating cash flow, meeting our full year indication. This combined with improved EBITDA lowered our leverage ratio to 1.4 times from 1.6 times last quarter. In the quarter, we paid $0.66 per share in dividend, an increase of around 3% from third quarter, and repurchased and retired 650,000 shares. Additionally, we retired 10 million of our treasury shares from previous stock repurchase programs. The second half year development in 2022 strengthens our confidence in our mid-term targets. In addition, we expect that our balance sheet and positive cash flow trend will allow for higher shareholder returns. Looking now on an update of the 2022 margin progression on the next slide. During 2022, we reduced our cost base in a challenging market environment. We implemented hundreds of cost efficiency projects, especially in production and supply chain. As illustrated by this chart, we started the year at a very low adjusted operating margin level, mainly from severe inflation in raw material, but also due to inflation in other cost categories, such as labor and freight. We then managed to gradually improve the adjusted operating margin from 3.2% in the first quarter to 10% in the fourth quarter as a result of successful negotiations with our customers regarding cost compensation. This sequential improvement reflects our high volumes and our strong focus on continuous improvement throughout the organization and our strategic roadmap initiatives. We managed to offset this raw material-related cost shock successfully by year-end 2022. For 2023, the main challenge is to tackle the inflation in the non-raw material cost base without neglecting the raw material cost risks. Looking on the next slide. To support a sustainable business model in an inflationary environment, we continue to work closely with our customers to secure price increases to compensate for inflation, volatile LVP and supply chain disruptions. During 2022, we reached agreements with almost all OEMs on non-raw material -- on raw material related price adjustments as well as, to a limited extent, also for other cost category, such as labor and freight. At the end of the year, product pricing largely reflected the cost level for raw materials. We have initiated discussions with our customers on non-raw material cost inflation, such as labor, logistics and energy. We believe price adjustments will offset the non-raw material cost inflation with small positive effects in the first quarter of 2023 and gradually larger positive effects as the year progresses. Looking now on the order intake on the next slide. Our order intake for the full year continued to develop well, supporting long-term growth in a rapidly changing technology environment with many new OEMs and fast-growing in the number of EV platforms. The lifetime value of the 2022 order intake was in line with last year despite currency headwinds and a more negative LVP outlook. The strong order intake over the past year is an evidence that our company is the leading company in the passive safety automotive industry. One of our key performance indicators, customer satisfaction, has continued to improve and is at the high level. However, this does not mean that we can relax. We always strive for improving products, services, processes and costs. Our strong order intake and current customer satisfaction support our confidence regarding our mid-term sales targets. Looking on the order intake in more details on the next slide. In 2022, order win rates for new EV platforms were higher, both with new EV makers and traditional OEMs. We estimate that around 45% of our order intake in 2022 was for future battery electric vehicles. We are proud that we were successful in winning many contracts with new automakers. New automakers, mainly in North America and China, accounted for over 30% of our order intake, up from 12% last year. We won multiple awards supporting new markets and industry trends like knee airbag, side airbags in India, integrated child seats, seatbelts specifically designed for electrical vehicles, as well as seatbelts for zero-gravity style seats for self-driving vehicles. As a result of strong order intake over the past years, we expect an increase in overall product launches in 2023. This development contributes to building an even stronger platform for our long-term success. Looking now on the financial overview on the next slide. Our consolidated net sales of $2.3 billion was 10% higher than a year earlier despite 7 percentage points currency headwinds. Adjusted operating income, excluding costs for capacity alignment increased from $177 million to $233 million. The adjusted operating margin was 10% in the quarter, 1.7 percentage points higher than the same period last year. The higher operating margin was mainly a result of higher prices, operational leverage on higher volumes as well as costs saving activities. Operating cash flow was $462 million, which was $146 million higher than the same period last year, mainly due to improved working capital and higher net income. Looking now on sales growth in more detail on the next slide. Despite the currency headwind, the fourth quarter consolidated net sales increased by more than $200 million to $2.3 billion. Organic sales grew by 18% in the fourth quarter compared to last year; retroactive pricing contributed with approximately $8 million, and price volume mix contributed with almost $350 million in the quarter. Looking on the regional sales split, Asia accounted for 42%; North America for 32%; and Europe for 26%. We outlined our organic sales growth compared to LVP on the next slide. I am very pleased that our organic sales growth outperformed global light vehicle production growth in the fourth quarter. This was achieved as we continued to execute on our strong order books. According to S&P Global, light vehicle production increased by around 2% year-over-year in the quarter. This was slightly lower than expected in the beginning of the quarter, as production in North America, Japan and China were lower than expected. Based on latest light vehicle production numbers, we outperformed global light vehicle production by around 15 percentage points in the quarter and by around 7 percentage points for the full year. In the quarter, we outperformed in Europe by 23 percentage points; by 14 percentage points in both China and Japan; and by 9 percentage points in America. Supported by new launches, market share gains and CPV growth, as well as further price increases, we expect sales to outperform light vehicle production by around 12 percentage points in 2023. On the next slide, we see some key model launches from the fourth quarter. In the quarter, we had a high number of launches, especially in China and Japan. The models shown on this slide have an Autoliv content per vehicle from approximately $200 to close to $500. These models reflect the changes seen in the automotive industry in recent years, with several relatively new OEMs represented, and that's four out of nine are available as pure electrical vehicles. In terms of Autoliv sales potential, the entirely redesigned Honda Pilot and Honda Accord launches are the most important. The long-term trend to higher content per vehicle is supported by front center airbags, knee airbags, more advanced seatbelts and active pedestrian protection systems. Looking to our sustainability approach on the next slide. Guided by our vision of saving more lives, our mission is to provide world-class life-saving solutions for mobility and society. Sustainability is an integral part of our business strategy and fundamental driver for market differentiation and stakeholder value creation, helping to ensure that our business will continue to thrive and contribute to sustainable development in the long term. Our sustainability approach is based on four focus areas: saving more lives; safe and inclusive workplace; climate; and responsible business, each consisting of broad ambitions and more specific short-term targets. Our sustainability approach is anchored in well-established international frameworks such as the UN Global Compact of which we have been a signatory for several years. We aim to be carbon neutral in our own operations by 2030 and furthermore aim for net zero emissions across our supply chain for 2040. These commitments place Autoliv among the front runners in the broader group of automotive suppliers. As a part of this commitment, our reduction targets were approved by the Science Based Targets initiative in February of 2022. We cooperate with international organizations, suppliers and customers to ensure maximum positive impact. A few examples of such partnerships includes the UN Road Safety Fund, the green steel collaboration with SSAB, and Piaggio and POC to push the boundaries of safety to include vulnerable road users. Now looking at the sustainability progress in 2022 on the next slide. During 2022, we initiated and concluded a number of activities to ensure our commitments and contribution to the UN Sustainable Development Goals and our own sustainability targets. For example, we took steps to reach our ambition of saving 100,000 lives per year by expanding our activities in the vulnerable road user area. We conducted sustainability audits and carried out climate surveys covering 98% of our direct material suppliers. We substantially increased our use of renewable electricity. We trained all senior management members in the main areas of our climate program, including decarbonization levers. Autoliv is committed to provide safe working conditions for our employees. As a result of our continuous improvement activities, the incident rate reduced by over 20 percentage points in 2022. We will provide more information on our progress in our coming annual sustainability report. I will now hand over to our CFO, Fredrik Westin, who will talk you through the financials on the next slides. 2022 was again the turbulent year with both lower and more volatile light vehicle production than expected at the beginning of the year, mainly due to supply chain disruptions. Our net sales were $8.8 billion, with sales increasing organically by close to 14%, twice the increase in the underlying light vehicle production. The adjusted operating income decreased by 12% to $598 million. The adjusted operating margin was 6.8% compared to our latest guidance of reaching the upper range of between 6% and 7%. The operating cash flow was $713 million compared to the guidance of between $700 million and $750 million. Earnings per share was $4.85. Dividends of $2.58 per share were paid, and we repurchased and retired 1.44 million shares for $115 million. Looking now at the full year adjusted operating income bridge on the next slide. For the full year of 2022, our adjusted operating income was $598 million. This was $85 million lower than the previous year, which was a result of higher costs for raw materials and FX combined of approximately $460 million. Costs for call-off volatility such as premium freight and labor and material inefficiency increased substantially as well. This was partly offset by positive effects from actions including price increases and cost saving activities as well as higher volumes. SG&A and RD&E net combined was virtually unchanged despite 14% organic growth. Looking on the quarterly performance on the next slide. This slide highlights our key figures for the fourth quarter of 2022 compared to the fourth quarter of 2021. Our net sales were $2.3 billion. This was 10% higher than Q4 2021. Gross profit increased by 8% to $399 million, while the gross margin declined slightly to 17.1%. The gross margin decrease was primarily driven by cost inflation and the volatile light vehicle production and has largely been compensated by price increases and cost savings. In the quarter, we made $3 million in provisions for capacity alignment activities. The adjusted operating income increased from $177 million to $233 million. The adjusted operating margin increased from 8.3% to 10.0%. The operating cash flow was $462 million, and I will provide further comment on our cash flow later in the presentation. Earnings per share diluted increased by $0.49, where the main drivers were $0.43 from higher adjusted operating income and $0.04 from lower tax costs. Our adjusted return on capital employed and return on equity both increased to 25%, up from 19% and 18%, respectively. We paid a dividend of $0.66 per share in the quarter, an increase of $0.02 from last year and repurchased and retired 650,000 shares for $55 million under our stock repurchase program. Looking now on the adjusted operating income bridge on the next slide. In the fourth quarter of 2022, our adjusted operating income of $233 million was $56 million higher than the same quarter last year. The impact of raw material price changes was negative $83 million in the quarter. Foreign exchange impacted the operating profit positively by $9 million. This was mainly a result of positive revaluation effects, partly offset by negative translation effects. SG&A and RD&E net combined was $22 million lower, mainly due to timing of engineering income and positive currency translation effects. Our operations were positively impacted by improved pricing, higher volumes, as well as our strategic initiatives, partly offset by the significant headwinds from call-off volatility and general cost inflation. As a result, the leverage on the higher sales, excluding currency effects, was in the upper end of our typical 20% to 30% operational leverage range, despite the substantial headwinds from raw materials. Looking at our cash flow overview on the next slide. For the fourth quarter of 2022, operating cash flow increased by $146 million to $462 million, mainly due to stronger performance in working capital and higher net income. During the quarter, trade working capital decreased by $132 million as a result of improved payables in part due to our capital efficiency program, partly offset by higher inventories. The continued inefficiencies in inventories is a result of the volatile light vehicle production and logistics challenges. Our ambition is to eliminate these inefficiencies as soon as possible, which requires the stabilization of the supply chain and call-off patterns from our customers. For the fourth quarter, capital expenditures net increased by 8% to $165 million. In relation to sales, it was 7.1%, virtually the same as a year ago. The high level is related to the ongoing footprint activities and capacity expansion for growth especially in China. For the fourth quarter of 2022, free cash flow was $297 million, $133 million higher than a year earlier. For the full year of 2022, operating cash flow declined somewhat from the prior year to $730 million, mainly due to inventory inefficiencies. Cash flow -- free cash flow amounted to $228 million, down $72 million from 2021. CapEx in relation to sales was 5.5%, in line with our full year indication and the cash conversion was around 54%. In 2023, we expect positive cash flow development from higher net income and a gradually more stable light vehicle production. Now looking on our leverage ratio developments on the next slide. The leverage ratio at the end of December 2022 was 1.4 times. This was an improvement from the 1.6 times in the previous quarter, as our 12-months trailing adjusted EBITDA increased by $49 million and our net debt decreased by $99 million. Now looking at the liquidity position onto the next slide. At the end of the quarter, we had a significant liquidity cushion of approximately $1.7 billion in cash and unutilized committed credit facility. To minimize refinancing risks, we have diversified our long-term funding sources and we also have a maturity profile that is well spread over the coming years. None of the credit facilities are subject to financial covenants. Large part of the auto industry continues to operate at or near recessionary levels, mainly due to supply chain constraints. Despite concerns surrounding the ongoing volatility of the supply chain and recessionary fears, global production is projected to increase by 3.5% to 82 million vehicles in 2023, according to S&P Global January 2023. For first quarter, global light vehicle production is expected to improve by 2.6% compared to last year, but decline by 6%, more than 1 million units, compared to the fourth quarter. This decline versus fourth quarter is mainly an effect of supply chain issues from the recent wave of COVID-19 in China. With the relaxing of the COVID policy in China, LVP as well as short-term demand have been negatively impacted. As a result, first quarter production in China has been lowered by close to 0.5 million units, with volume losses expected to be recovered in subsequent quarters. In North America and Europe, the near-term production forecast continue to be limited by automakers' ability to produce not by demand. Now looking on the next slide. We expect 2023 to be a challenging year. As inflation impacts our non-raw material cost base, which is almost twice as large as our raw material cost base. In 2022, the main cost challenge was related to raw materials affecting our costs for purchased components. Although many commodity indices are down since their peaks in 2022, we currently assume raw material costs unchanged in 2023. The reason being that the prices of specific raw materials used in our products such as automotive grade steel has not declined as much as the generic steel indices would indicate. Additionally, we see higher cost for some material such as yarn and resin. For 2023, the main cost challenge is related to labor and energy inflation, which impacts us directly as well as through suppliers' value-added costs. Already during 2022, the tight labor market, mainly in North America, resulted in significantly higher-than-normal labor inflation. For 2023, we foresee further headwinds from wage increases, especially in Europe. We also predict cost increases from suppliers due to labor inflation and higher energy costs. Additionally, we expect higher costs for logistics and utilities in our operations, mainly in Europe. We have initiated new discussions with our customers aimed at offsetting this broader inflation. We believe it will be challenging, but nevertheless we expect the price adjustments will gradually, throughout the year, offset non-raw material cost inflation. Looking at the 2023 business outlook on the next slide. We expect a significant improvement in adjusted operating margin in 2023 compared to 2022, supported mainly by 15% organic sales growth, cost control and product price adjustment. We expect continued high sales outperformance versus light vehicle production in 2023, supported by launches, higher prices, content per vehicle increases and regional mix. We expect the adjusted operating margin in the first quarter to be around 5% due to lower LVP, and cost inflation is expected to increase faster than our cost compensations in the beginning of the year. We anticipate price adjustments will gradually, throughout the year, offset non-raw material costs inflation and the pattern will be similar to the quarterly pattern seen in 2022, with limited positive effects in the first quarter and gradually more as the year progresses. This trajectory will be further supported by improvements from strict cost control, footprint optimization as well as expected gradual improvements of the supply chain and light vehicle production stability. Looking at our 2023 financial indications on the next slide. Our full year 2023 indication excludes costs and gains from capacity alignment, anti-trust related matters and other discrete items. Our full year indication is based on a light vehicle production growth assumption of around 3%, in line with S&P Global outlook. We expect sales to increase organically by around 15%. Currency translation effects are assumed to be around negative 1%. We expect an adjusted operating margin of around 8.5% to 9%. Operating cash flow is expected to be around $900 million. Our positive cash flow trend should allow for increasing shareholder returns. Turning the slide to look at progress towards our mid-term targets. In the medium term, we are expecting to continue to grow our core business, airbags, seatbelts and steering wheels, through execution on the current strong order books. The other important growth driver is safety content per vehicle, driven by continuous updates of government regulations and crash test ratings. Based on our order book and expected CPV increases, our growth targets for the medium term is to grow organically by around 4 percentage points more than light vehicle production growth per year on average. This excludes any price compensation for raw materials and other inflationary costs. In 2022, our outperformance was 7 percentage points, including price adjustments. And for 2023, we expect to outperform light vehicle production by around 12 percentage points. This is substantially above our growth target. Even if we disregard the effect of price increases on the outperformance, we are still on track to deliver on the growth target of 4 percentage points outperformance on average. To maintain the growth momentum beyond the market share-driven growth, we are pursuing an ambitious innovation program. Now, looking on the multiple levers for margin improvements on the next slide. In the past two years, Autoliv has significantly reduced its cost base in a challenging market environment. We have implemented hundreds of cost efficiency projects, especially in production and supply chain. Our medium-term adjusted operating margin target of around 12% is based on the previously communicated framework. This relies on the continued implementation of our strategic initiatives, including optimization, digitalization and footprint optimization together with the following conditions: a business environment with a stable global light vehicle production of at least 85 million; and that headwinds from inflation do not have a greater net negative impact on our operating margin that we had in 2021, offset through price compensation or declining raw material prices. We remain confident that if these conditions are met for the full year 2024, which we see as possible if the political and macroeconomic situation improves, we should reach the 12% adjusted operating margin target in 2024. Now looking on the next slide. I look forward to sharing more about our journey with you at our Investor Day on June 12, 2023, where the main focus will be on product, strategic roadmap, as well as automation and operational efficiency. The event will be held at our technology center in Auburn Hill, Michigan USA. I'm looking forward to seeing many of you there. Turning to the next slide. In closing, to summarize our 2023 outlook, we expect continued strong sales outperformance versus light vehicle production; a challenging first quarter in terms of operating margin, which should gradually improve throughout the year; a significant full year adjusted operating margin improvement compared to 2022. We remain mindful of the risk of deteriorating economic conditions and supply chain disruptions, but I am confident that our leading position, the work we have done to become more resilient and our experience and agility will enable us to manage further challenging conditions -- the future challenging conditions. Thank you, Mikael. Turning to the next slide, this concludes our formal comments for today's earnings call and we would like to open the line for questions. I now turn it back to you, Raf. Thank you, sir. [Operator Instructions] We are now going to proceed with our first question. The questions come from the line of Rod Lache from Wolfe Research. Please ask your question. Your line is open. Hi, everybody. Thanks for taking my questions. Just firstly, in 2021, you announced digitization and automation program that should save about $160 million, I think, over two years, and it was $60 million from footprint changes, and there was also an expectation that R&D would decline by 100 basis points. Can you just provide a little bit more color on what you've achieved so far on those, and what you see as achievable in front of you in 2023? Thank you, Rod. No, I think when it comes to those activities that we laid out there in 2021 and originally actually in 2019 as a part of our journey here and I would say, it was a number of strategic roadmaps initiatives that should strongly support our journey here. I would say that we are performing well on those. And I think we have been consistent throughout the last couple of challenging years here to hold on to the majority of these initiatives to secure that. The underlying improvements were still on track despite that we have this challenging environment, of course, disturbing the overall net result here. But I would say thanks to those initiatives, we are feeling comfortable on the way forward here. And of course, they have also contributed for us to deliver results that we are delivering here in this quarter as well. So, long story short, I would say, we are on track when it comes to those strategic roadmap initiatives that you referred to. Can you maybe provide some quantification of what is still in front of you from those? And the reason I'm asking maybe just -- I'm looking at the fourth quarter strong margin, and I know that there's typically a seasonal lift of about 120 basis points from engineering recoveries, but it would look like you would -- even adjusted for that, you'd be in the mid to high 9% range off of that. Presumably there's some positive from these restructurings and digitization and automation, but your target margin for the full year 2023 is only 8.5% to 9%. So, could you help me reconcile that maybe with a little bit of a bridge? Yes. I think, let me start and I will hand over to Fredrik here to take you through different steps there. But coming back to the strategic initiatives here, as I said, they are on track. But with that said, we also see that we have still a lot of opportunities in that area. I mean, some of them have longer lead times and we are in progress here of securing many of the footprint initiatives that we have launched, for example, as [part of our] (ph) strategic initiatives. And, specifically, when it comes to automation here, it's, of course, a gradual journey as we are implementing it also when we have new program launches. So, they have a sequential development that will take some calendar time. So, good progress, but still great opportunities as we move forward here. And, of course, the bridge from where we are in '20 -- I expect us to be here in relation to the midterm targets. There are a number of components as we always went through, but I'll let Fredrik take you through the details there. Yes. I mean, for '23, I mean, the main contributors will be the carryover effect and then the incremental additional pricing versus what would you compare what the pricing point was going into last year, and then, of course, the organic growth that we see excluding pricing. And also, the two main components that are the positive drivers. But then, don't neglect that we're also laying out here that we do see quite significant inflationary headwinds, and the largest part of that is actually on the value-add components that we see from our supply base, and then followed by our labor cost inflation that we expect, and then, to a smaller extent, on logistics and utilities. If you then look at going beyond that, it is the continued volume growth that we expect and also delivering on the market share expansion, so the launch activities that will drive up the margin further, further improvement from the strategic initiatives that you do see that are starting to bite and have effects. And then, the variable component is, of course, what is the incremental inflation effect that we then need to offset either through further costs reduction activities or through negotiations with our customers, and also the main building blocks both for '23, but then also beyond. Okay. Maybe just lastly, can you quantify the labor energy and logistics inflation that you need to offset? And are you saying that you will set it for the full year or by the end of the year? We would offset it by the end of the year, hence also the somewhat lower margin that we're indicating in the first quarter and that's also due to the -- there is a calendar year effect of how some of these inflationary components come in, not the least on the labor cost side. What I can indicate is that, I mean, as I said, the highest headwind we're facing or what we're expecting is in -- on the value-add component of our suppliers, the components that we procure, and then followed by labor, and then the smallest component being, as I said, logistics and utilities. Overall, it is less than what we had in terms of raw material headwinds in 2022. We are now going to proceed with our next question. The questions come from the line of Mattias Holmberg from DNB Markets. Please ask your question. Hello, and thank you. I wonder if you could break down the outperformance of 12% versus light vehicle production in 2023 a bit. So, is the delta versus the 4% outperformance target all the price increases or are there any other moving parts that you can quantify? And if you don't want to quantify, perhaps you could just rank the different drivers in order of importance that adds up to 12%, please? Sure. So, it is -- I mean, the largest component will be price. And as I said, it's both the carryover effect from 2022, but then also the incremental pricing that we're expecting, that's the largest contributor, then followed by pretty much an even levels CPV growth and the underlying LVP growth, and then you also have market share gains that we expect to be larger in 2023 than they were in 2022. So -- and to be clear, not only LVP, but also then the third component is that -- the launches that we have here. Perfect. Second question for me. On the buyback program, could you just remind us on how much is left of the program? And given that you've been quite conservative in utilizing the mandate so far, do you believe that you're in a better position to become a bit more aggressive with the buybacks now? First of all, we are committed to our program that is $1.5 billion program. We have two remaining years, '23 and '24, in that program. And as we have said before, I mean, we'll let you know regularly here when we have made purchases here. And of course, what we have said here is also that the timing and the volumes et cetera is, of course, judged from time to time. But I feel confident on our way forward here with the track we have laid out here that we will be able to provide good shareholder returns there over time through the buyback program as well as the dividend. So, I can't give you more details on the breakdown there, because that will [indiscernible]. We are now going to proceed with our next question. And the questions come from the line of Vijay Rakesh from Mizuho Group. Please ask your question. Your line is open. Hi, Mikael and Fredrik. Just a quick question. First, great -- good quarter and a great guide for 2023. But on the '23 guide, specifically on the 15% top-line, I know you've talked about market share and pricing and units, is there a way to parse what would be the approximate magnitudes of all those in that 15% -- embedded in that 15%? Well, as I said, the order of magnitude is pricing first, then launches, market share number two and CPV number three. And CPV, we see around 3%, and then, light vehicle production, of course, around 3% as well. So that gives you the 15%. And then, I'll leave it to you how you distribute the rest in between pricing and market share gains. Okay. Sounds good. And then, on the -- as you look at 2023 LVP, obviously, we had two years of benefiting from a pretty nice mix shift to premium vehicles. How do you see '23? Do you see any mix -- any mean reversion in that shift mix moving back to mid-end? I also saw you kind of showed much higher design win rate into EVs, but just trying to see how that changes as you look at 2023. Thanks. Thank you. No, we don't expect any dramatic shifts in the distribution there between premium and low-end, as I said there. I think what we feel very positively about is how we continue to be a part of the transition over to electrical vehicles. I mean, we are, of course, working very closely with the pure EV makers here and also, let's call it, the traditional OEMs that are getting more and more electrical EV platforms. So, we are well positioned in our order book here for the transition of the EVs, and we see that as a very positive momentum. And also, as you know, content in electrical vehicles is positive and it requires also, in many cases, more sophisticated products over time. So... We are now going to proceed with our next question. The questions come from the line of Giulio Pescatore from Exane BNP Paribas. Please ask your question. Hi, thanks for taking my question. I have a couple of ones on China first. So, first one, you registered a large number of other launches in China in the last few quarters with Chinese car makers: Geely, [indiscernible], NIO and XPeng. What percentage of your business in China at the moment is with local players as compared to international brands? And then, the second question, again, on China. How do you expect to continue to outgrow the market there? Is it content per vehicle as China approaches Europe and North America or is it more market share gain? Yes, thank you. Yes, I think, I mean, on the Chinese OEMs, as we define them, we are roughly 25%, I would say, of our sales in China is towards them. As you're correctly stating here, I mean, we work very closely with many of them and also many of the upcoming OEMs here also. And we are, of course, providing the opportunity also for them to be a robust supplier outside China as they continue to grow outside. But I think we have a lot of very interesting development agreements and programs with the Chinese OEMs for further growing that part of the portfolio. So, I look very positively on our collaboration with our Chinese customers for the future in both inside China but also outside China. Yes. And maybe to build on that, I mean, for 2023, we'd actually see the largest outperformance in terms of markets is in China and Asia. We are now going to proceed with our next question. The questions come from the line of Hampus Engellau from Handelsbanken. Please ask your question. Thank you. Two questions from me. [I know you won't] (ph) disclose, but if [indiscernible], I mean, would it be interesting to hear what type of wage increases we're looking at. That's the first question. Second question is, on this price increases that you've been compensated for contracts that have already been delivered, if you have any [indiscernible] number for what type of contribution you have that [indiscernible] for fourth quarter, if there were any? Those are my two questions. Thanks. Okay. No, I was asking if you had a number on how much wage increases you have seen for the year in the organization in average, if it's like 5% or 10%? Okay. Yes, it's a single-digit percent number above what we would normally have. It's mid-single digit percent number increase versus what we would normally have. So, above normal wage inflation. We're now going to proceed with our next question. And the questions come from the line of Colin Langan from Wells Fargo. Please ask your question. Great. Thanks for taking my questions. Just following up on the earlier question, looking at the second half rate, the margin that you're guiding to for 2023 is actually almost in line with the second half rate, yet sales, if you annualize the second half, are up a lot. So, why the low conversion on those higher sales? What are the offsets there? I don't think we're guiding for the second half. And what we're indicating is the margin for the first quarter, but we're not giving any guidance top-line or anything on the quarterly levels. So, I'm not sure... Yes, sorry. If I average your margin in the second half of '22, it was around 8.8%, and your guidance at the midpoint for this year is around 8.8%, and yet sales are supposed to be up into next year. So, what are the offsets relative to where we stood in the second half? I think a lot of investors are kind of using that as a jumping off point. Okay. Well, then -- the major issue are the headwinds that we're seeing on inflation in general. So, not raw material. Cost development that we expect to be more or less flat year-over-year. But then as we indicated here several times, it's the inflation we're expecting on the value add from our suppliers. So -- and that is mainly energy and labor, but then also the labor cost inflation that I described before and logistics costs and, to very limited extent, utilities in our own operations. And those headwinds are significant. But as I indicated, they're not as high as a headwind as we had from raw materials last year, but that is the main challenge that we're facing in this year. Got it. Very helpful. Actually, it relates to my second question. So, the net impact in guidance of the expected increase in inflationary costs and what you're expecting in terms of price recoveries is still a net negative for the year. You're not expecting to get the full recovery within the full year. Maybe by the Q4, you get full recoveries. Is that what's baked in there? Yes, for the full year, it would be a net negative, and then -- but with a different phasing that we have not fully recovered it in the first quarter, and then you would see a gradual improvement like in 2022 throughout the year, and then we would be at compensated levels coming out of the year. We are now going to proceed with our next question. And the questions come from the line of Agnieszka Vilela from Nordea. Please ask your question. Perfect. Thank you. If we can get back to outperformance and actually revisit what you expected for 2022, with your first guidance, you expected about 11%, 12% even outperformance against car production. And the outcome in the end was 7 percentage point outperformance. So -- and you also mentioned in the beginning that you will have product launches and so on and we obviously saw quite good price momentum in H2 2022. So, can you just explain what went wrong when it comes to your actual outperformance in 2022? Yes, the main difference when we compare to the beginning of last year was the regional mix. So, Europe was expected to be up, I think it was 17%, 18% on a year-over-year basis and it actually ended up being down 1% or 2%. And that, as it has been one of our highest content per vehicle markets that created a very large negative regional mix, which is the main explanation of that difference. Perfect. Thank you. And then, the second question on your expected price trajectory for 2023. You mentioned somewhat lower price compensations in Q1, if I understood that correctly. So, if you could just tell us what you really expect? And also, with the spot prices coming down for raw materials, if you could tell us if your customers will not expect price decreases in mid-2023? Yes, I mean, we don't put out the specific price target here in all of these. But what we're saying here is that we are working with our customers full compensation one way or another. And of course, we are in parallel to that also working with our own cost base, especially now when we're talking about the other inflationary costs outside the raw material bucket, so to speak. So that is what Fredrik had talked about here, the gradually, compensation here for throughout the year. And I mean, of course, as raw material potentially here is gradually coming down. And as you have seen on the index side here, it is coming down. But in our case here, we have many products that is not really correlating with the indices, so we don't see the same reduction. But on a conceptual note, of course, when we see raw material starting to come back eventually, there is a mechanism here and discussion with our customers to give back on that. But at the same time, we are going to get compensation from our supplier base. So, it's throughout the whole value chain. Of course, that needs to be regulated as the way it was on the way up, it will be on the way down eventually there. We're now going to proceed with our next question. And the questions come from the line of Itay Michaeli from Citi. Please ask your question. Great. Thanks, everybody. Just wanted to, as you pursue the commercial recoveries for the labor and other inflation, hope you could give us a bit of insight as to how the initial conversations are going? Is it pretty consistent across regions and various automakers? And just kind of how to think about when you think you'll be kind of largely complete or have real good line of sight into the targets that you provided today on those negotiations? I think first of all, we have now been spending a better part of the last 12 to 15 months here in discussions with our customer around the increased cost base, starting out with the raw material as we have said here. This is a new territory for our customers. It's a new territory for the supply base. So, of course, it has been a lot of discussion. It's very detailed discussion. And we have made good progress here as we can report here. And of course, well, we now move into a territory where it's outside the raw material that at least has been, to some extent, in the scope historically because this is more challenging. But I think we all recognizing here as an industry that we need to find a way to work in a potentially higher inflationary environment, and that calls for more regular discussion around price adjustments. So, that is ongoing. It is constructive dialogues with our customers here. But the nature, of course, have a timeline, because we are not discussing price adjustment anything else than what has been already impacted us. So, the discussion is around already agreed agreements that needs to be updated. So, therefore, it's on a product and plant level going through the cost impact from these different cost drivers as we have mentioned here. So, it's far from one size fits all in the discussions here. It is on the product and plant level. So, it's a lot of work and therefore some time delays in it. We have no further questions at this time. I would now like to hand the conference back to Mr. Mikael Bratt for closing remarks. Please go ahead. Before we end today's call, I would like to say that we are continuing to build resilience and strength in turbulent times, relying on our strong company culture. Our actions are creating both short-term and long-term initiative improvements and we believe these actions will enable us to build an even stronger position despite the challenging macro environment. We remain agile and prepared for a more adverse market development should that be necessary. Autoliv continues to focus on our vision of saving more lives, which is our most important direct contribution to sustainable society. Our first quarter earnings call is scheduled for Friday, April 21, 2023. And thank you everyone for participating in today's call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe.
EarningCall_1079	Good morning and thank you for standing by. Welcome to Abbottâs Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participantsâ questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbottâs expressed written permission. Good morning and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions. Before we get started, some statements made today maybe forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2023. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbottâs operations are discussed in Item 1A, Risk Factors to our annual report on Form 10-K for the year ended December 31, 2021. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On todayâs conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbottâs ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth, excluding COVID testing sales. On a forward-looking basis, because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. Thanks, Scott. Good morning, everyone and thank you for joining us. Today, I will discuss our 2022 results as well as our outlook for this year. For the full year 2022, we achieved ongoing earnings per share of $5.34, which is well above the original EPS guidance we set at the beginning of the year. As you know, macro business conditions have been highly dynamic and challenging over the last few years, particularly for U.S. based multinational companies. COVID-19 pandemic played a big role in this of course. We saw the U.S. dollar strengthened significantly and inflation reached new heights last year. Supply chains continue to face challenges and our healthcare customers have been navigating staffing challenges that are negatively impacting certain medical device procedure trends and routine diagnostic testing volumes. As we start the new year, however, while all these factors remain headwinds, I am cautiously optimistic that we are starting to see them peak and in some cases, ease a bit. Over the past few months, the impact of COVID-19 on society has lessened and economies around the world are increasingly reopening. In the U.S., the U.S. dollar weakened a bit and inflation has eased somewhat and hospital-based procedures and routine testing trends continue to steadily improve in many areas. As you know, COVID testing has been a big part of our story these past couple of years and I am proud of what our team has built, a full suite of tests across several platforms and the intentionality and how we established a leading role in the worldâs response to the pandemic. In total, we have delivered nearly 3 billion COVID tests globally since the start of the pandemic. Going forward, we expect COVID-19 to transition to more of an endemic seasonal type of respiratory virus. And with that, COVID testing, while still important, is expected to decline significantly. We expect variance will continue to emerge, and therefore, our tests will remain an important part of our leading respiratory testing portfolio, along with flu, RSV and Strep, which we offer across multiple testing platforms, including lab-based systems and hospitals, small desktop devices in urgent care centers and physician offices as well as at-home tests. As we reflect back on the impact of COVID testing efforts over the last few years, itâs clear that our success in this area will have a positive, long-lasting impact for the company. It strengthened our strategic position in diagnostics through the expansion of our installed base of instruments, including ID NOW, our wrap point-of-care molecular testing platform and through the opening of new testing channels, such as physician offices and at-home testing. It enabled us to increase investments in priority growth areas across the company, including R&D and commercial initiatives in support of several recent and upcoming new product launches, while at the same time, increasing returns to our shareholders in the forms of dividend growth and share repurchases. And lastly, it further strengthened our overall financial health and balance sheet, which will provide significant strategic flexibility as we look to build and grow the company even further. I am proud of the role we played in fighting COVID the last few years. It reinforced our purpose, had a meaningful impact on society and enhanced our long-term strategic position going forward. Turning now to our outlook for 2023, as we announced this morning, we forecast ongoing earnings per share of $4.30 to $4.50. We forecast organic sales growth, excluding COVID testing sales in the high single-digits and we forecast around $2 billion of COVID testing sales for the full year 2023. I will now provide more details on our results by business area before turning the call over to Bob. And I will start with Nutrition, where sales declined around 6% in both the fourth quarter and full year as a result of manufacturing disruptions at one of our U.S. infant formula facilities last year. Production at the facility is up and running. And as we have mentioned previously, our initial supply priority was to the WIC, Women, Infants and Children federal food assistance program to ensure underserved participants have access to infant formula. As our manufacturing capacity has continued to recover, we have been able to increase production of our non-WIC brands with a focus on serving the broader infant formula market and building back inventory levels on retail shelves. Turning to Diagnostics, where as expected, sales growth in the fourth quarter was negatively impacted by a year-over-year decline in COVID-19 test sales. COVID testing sales were $1.1 billion in the fourth quarter with rapid testing platforms, including BinaxNOW in the U.S., Panbio internationally, and ID NOW globally compromising approximately 95% of these sales. Excluding COVID testing sales, worldwide diagnostics grew over 11% in the fourth quarter. Growth in the quarter was led by rapid diagnostics, where excluding COVID-19 tests, sales increased 30% compared to the prior year. As I mentioned earlier, during the pandemic, we significantly expanded the installed base of ID NOW and open new testing channels. This expanded footprint drove strong growth and supported testing needs when flu and other respiratory infection surged late last year. During this past year, we continued the rollout of Alinity, our innovative suite of diagnostic instruments and expand test menus across our platforms for immunoassay, clinical chemistry and molecular testing. Moving to Established Pharmaceuticals or EPD where sales increased 8% in the fourth quarter and over 10% for the full year. EPD continues to perform at a high level, having carved out an attractive growth space in the global pharmaceutical market, specifically our geographic focus on fast growing emerging markets with a broad portfolio targeting attractive therapeutic areas. Strong performance in the quarter was led by double-digit growth across several geographies, including India, China, Brazil and Mexico. And I will wrap up with medical devices, where sales grew 7.5% in the fourth quarter and 8% for the full year. Growth in both the quarter and full year was led by double-digit growth in electrophysiology, structural heart and diabetes care in the U.S. Internationally, sales growth was negatively impacted by COVID surges in China during the fourth quarter as well as lingering supply challenges in a couple of areas. In diabetes care, fourth quarter sales of FreeStyle Libre, our market leading continuous glucose monitoring system grew over 40% in the U.S. and global Libre sales reached $4.3 billion for the full year 2022. We continue to strengthen our medical device portfolio with numerous pipeline advancements and launches, including recent U.S. regulatory approvals of Aveir, our highly innovative leadless pacemaker used to treating people with slow heart rhythms, Eterna, the smallest implantable rechargeable spinal cord stimulation system currently available in the market for the treatment of chronic pain. FreeStyle Libre 3, which provides continuous glucose readings in the worldâs smallest and most accurate wearable sensor. Libre was recently named the best medical technology of the last 50 years by Galen Foundation. And finally, Navitor our latest generation transcatheter aortic heart valve replacement system. So in summary, 2022 was another highly successful year for Abbott. We are optimistic about the early signs we are seeing of an improving operating environment and excited about the growth opportunities that lie ahead for all of our businesses and we continue to strengthen our overall strategic position with a steady cadence of innovative technologies that are either in the early stages of launching or expected to launch over the course of this year. Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results, sales decreased 6.1% on an organic basis in the quarter. COVID testing-related sales were $1.1 billion in the quarter, which while stronger than the forecast we provided back in October, reflect a year-over-year decline versus sales in the fourth quarter of the prior year. Excluding both COVID testing-related sales and U.S. infant formula sales that were impacted by manufacturing disruptions last year in our Nutrition business, total Abbott sales increased 7.1% on an organic basis in the fourth quarter and 7.4% for the full year 2022. Foreign exchange had an unfavorable year-over-year impact of 5.9% on fourth quarter sales, which resulted in a somewhat favorable impact on sales compared to exchange rates at the time of our earnings call in October as we saw the dollar weaken a bit late last year. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 55.6% of sales, which reflects the impact of the nutrition manufacturing disruptions and inflation we have experienced on certain manufacturing and distribution costs across our businesses. Adjusted R&D investment was 6.5% of sales and adjusted SG&A expense was 28% of sales in the fourth quarter. Turning to our outlook for the full year 2023, today, we issued guidance for full year ongoing earnings per share of $4.30 to $4.50. For the year, we forecast organic sales growth excluding the impact of COVID testing-related sales to be in the high single-digits. We forecast COVID testing-related sales of around $2 billion with around $750 million forecasted in the first quarter. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 1% on our reported full year sales, which includes an expected unfavorable impact of approximately 3% on our first quarter reported sales. We forecast an adjusted gross margin ratio for the full year of approximately 56% of sales. Also for the year, we forecast R&D investment of around $2.5 billion and SG&A investment of around $11 billion, which reflects investments to support several ongoing and upcoming new product launches and strategic growth initiatives. We forecast net interest expense of around $300 million, non-operating income of around $450 million, and a full year adjusted tax rate of approximately 14% for the year. As Robert mentioned, the strength and resiliency of our business, particularly since the start of the pandemic has allowed us to concurrently invest in our strategic priorities, provides strong return to our shareholders and further strengthen our financial health, which provides a strong base on which to grow the company going forward. Great. Thanks. Good morning, everyone. Robert, maybe to kick it off, I appreciate the guidance, but there is a lot of moving parts through the different business lines with macro involved with a lot of new product launches involved. Maybe you could just build up how we should be thinking about how you came up with the guidance range on both the top and bottom lines given all the moving parts? Sure. I mean, there is obviously a macro environment here thatâs been complex and you have mentioned it. And as I said â and as I said in my remarks and I think they have gotten significantly better versus where we were in October, on our last earnings call. So I think that we have factored some of that improvement and some of that stabilization in there. I mean, I donât necessarily think that we have got too many moving parts here. I mean, obviously, we run a â the company has got a lot of business and business segments. But I mean, if you look at really the two areas I would say, Robbie, that kind of have had this effect of maybe sometimes distorting the results a little bit is our COVID testing business and the impact of the recall products last year, right. So from a COVID perspective in 2022, we actually sold more tests than we sold in 2021 and then obviously, the impact of recall products that was a negative. Both of those split next year. So if you take those out of the equation, you kind of go back to what we were growing pre-pandemic, right, which was top tier, high single-digits, 7% to 8% growth. Thatâs what we grew in 2022, again excluding COVID and the impact of the recall products. And then if you take that comp out on the recall product side this year as we return to market and look at the base business, obviously, without the COVID testings, we are going to be growing high single-digits, probably at a higher end of that pre-pandemic range probably 8% plus. So I think it starts with the top line. And thatâs probably the number one part of our guidance is obviously making sure that we feel that our top line is taking advantage of all the good parts, all the good product launches, etcetera that we have. And from that perspective, I think a lot of what we are doing kind of supports that ongoing high single-digit growth rate. If you look at our device portfolio, we will be looking at high single-digit growth rate, low double-digit growth rate, combination of both kind of recovery, the steady recovery procedures that we are seeing combined with all these product launches that we have got lined up that will ultimately have a full year impact, whether itâs Libre 3, Amulet, Aveir, Navitor, CardioMEMS, Eterna on the neuromodulation side, our mapping system in EP, we are going to launch a new ablation catheter. So, the device portfolio is well set up to be able to drive those high single â sorry, high single-digit, low double-digit growth rate. I mean, I think we are going to continue to see strong performance in EPD. I think as the world continues to reopen, those emerging markets continue to be a great opportunity for us. We have strengthened our position in diagnostics throughout these years and we will see continued successful rollout of Alinity in our core molecular diagnostics and recovery in infant formula too. So I think you put all that in place, our core business, Abbott that we knew pre-pandemic is actually stronger than we were pre-pandemic with the investments that we made. And I think thatâs the other part of, I guess, in the P&L, if you look at what we have been able to do this year is because of COVID and the investments that we made during COVID in these growth areas, we are able to drive this high single-digit growth across the company with a fairly flat investment line, whether itâs R&D and SG&A, so really getting the leverage across the businesses. So I mean, I think it really starts with our top line and the confidence we have and the products weâre launching, the pipeline that we have. And then COVID, we forecast about $2 billion next year, and I think thatâs the right number right now. Obviously, we see kind of society transitioning here. Weâve got a strong installed base. Weâve got manufacturing capacity. We havenât factored in any kind of real surge but if that happens, we do have the capacity to be able to do that. So Iâd say those are some of the moving pieces there. But fundamentally, weâre in a real strong position in terms of our long-term growth opportunities. Leading positions in these attractive growth areas, strong pipeline, which Iâm sure we will get into some of them and a strong balance sheet. So thatâs how this has been constructed, and I think that weâre in a good position here. Great. Thanks, Robert. Really helpful. Maybe one for Bob, you gave us the full year guide and you gave some commentary down the P&L, which is really helpful. But how should we be thinking about some of the quarterly cadence here? How FX flows, what is FX on the bottom line? And how did that compare to â22? And any just things we should be thinking about first half versus second half on the P&L? Thanks a lot. Yes. So if you think about the kind of the cadence of our business for 2023, it really starts with the top line and some of the things that Robert kind of talked about. First, we have a lot of the new product launch activity, especially in our medical device businesses. You got products that either launched last year, we will be launching this year. Iâm sure we will talk about some of those on the call today. So youâll see the impact of those launches kind of grow over the course of the year, kind of feather into that top line. Secondly, we are seeing a steady improvement in procedure trends in the U.S. and Europe. Weâve been seeing that and we expect to continue to see kind of a steady improvement there on procedure trends over the of the year. In our Nutrition business, we will see improvement as we continue to supply the market, in particular, the non-WIC segment of the infant formula market in the U.S. And so will recover share there. And so we will have the impact of that over the course of the year. For China, Robbie, Iâd say weâve assumed a softer start in Q1 given some of the dynamics there at the start of this year, but we anticipate that will improve over the course of the year. And so all those changes â all those impacts on the top line as that builds over the course of the year will flow through to earnings as Rob about weâre going to get leverage in the middle here. And so for the first quarter, weâre â we think earnings will be approximately $1, and then we will build from there. On your question on foreign exchange, rates have improved a bit recently, but exchange is still a headwind, particularly on earnings. At current rates, as I said in my opening exchange is approximately a 1% headwind on sales. EPS, itâs a little bit more than $0.30 headwind for us in 2023. The fall-through impact when currencies move like we have seen over the last year is always complex. Translation is just a piece of the impact. And while that has improved from where we were a few months ago, it still remains a headwind. One of the biggest drivers that weâre seeing is the impact from our hedging program. We realized pretty significant hedging gains last year that wonât repeat this year. And you can really see the impact of those hedging gains on our 2022 results. Last year, there was a pretty significant exchange headwind on sales, a little over 5% or $2.1 billion, but a fairly modest impact on earnings as it was less than dime. And that was really the benefit we realized last year on those hedging gains that wonât repeat in 2023. Thatâs not a unique dynamic that weâre seeing. Weâre seeing that from some other multinationals as well. Good morning. Thanks for taking the question. Robert, I feel compelled to ask about Libre again, just given how important it is. So maybe Iâd like to hear from you the outlook for 2023. How should we think about worldwide growth? Can it exceed 20% this year? And can you talk about international, where youâve been negatively impacted by the supply issues and the transition to Libre 3 in Germany, when do you expect those issues to be resolved? And just the growth drivers like Basel and the vitamin C, resolution, what are some of the growth drivers to look forward to this year for Libre? And I had one follow-up. Thank you. Sure, Larry. Well, I think Libre had not a great year, full year growth of over 21% strong growth in the U.S. over 42%. And international kind of grew in those mid-teens number. We were impacted a little bit by back orders, as you said, on the international side. And Iâd say probably a little bit more on our early generation products so kind of Libre 1 was that. We had a significant improvement in that situation in Q4. I expect 1 or 2 more months of until we can completely resolve that, but a significant improvement over there on our international performance. I think one of the key things on the international side is it was a little bit of this supply chain on chips that we had, like that I said, is mostly behind us. The other part of it is the upgrade cycle, right? And when you go with an accelerated upgrade cycle versus with Libre 3 that we did from Libre 2 in some of our key markets, when we went from Libre 1 to Libre 2, we let that upgrade kind of somewhat happen naturally. And that takes about 1.5 years, 2 years to a complete. For Libre 3, we wanted to go more aggressively in some of these markets. So that takes our sales force away from new demand generation to making sure that we can get the scripts and do all the behind-the-scenes work for those upgrades. So thatâs â I would say thatâs still ongoing, but Iâd call it about 80% to 85% complete. So then that allows us starting now in 2023 on the international side to start kind of driving new additions here. So Iâd say, I expect continued growth in the U.S. in terms of market expansion, Basel opportunity, I think, is a great opportunity, and I think it will start in the U.S. But I think weâre seeing that also internationally. And now that weâve got the supply chain issue largely behind us, and the upgrade cycle, again, largely behind us, we can forecast our demand generation activities on new users. So I think that, thatâs one key driver of growth for us â can we see a path for another 20% growth in 2023. Yes, I can. And I think there is a lot of opportunities of growth. I think one of them that you mentioned being the Basel expansion is a significant opportunity. I think weâve been leading the charge over here, Larry, in terms of generating the clinical data thatâs required to be able to support reimbursement. It will start, I think, in the U.S., but I donât think it will be a U.S.-only phenomenon. But in the U.S., we will probably start first. Youâve got about 4 million Type 2 Basel patients in the U.S., about third of them are Medicare. And even if you assume a reasonable market penetration, you also have to assume difference in annual utilization rates versus Type 1 an MDI or a pumper. But even if you take all that into consideration, the opportunity starts with a $1 billion and it can range depending on the speed and the uptake of that. So I think this is a great growth opportunity. And like I said, I donât think itâs a U.S.-only situation. I think this is going to is going to start to expand across the world, given the clinical data that you see with Libre and the impact that it has. So I think this is another great opportunity for us. The vitamin C issue that you asked, weâve submitted our response. Weâre working with the FDA on this, and Iâm not going to try and forecast that approval. But what I would say is that as soon as that gets approved, then we will start to see the product with a couple of quarters connect to ID pump systems. We have already launched a connected ID system, AID system in Europe, initial results of the receptivity of that product combined product in Europe has been very favorable. So I think thatâs another key growth driver for us in 2023. And then finally, I would say on the pipeline perspective, I donât think itâs a 2023 milestone for sales, but I think itâs an important development activity for us is going to be the running our trial for the compline glucose ketone sensor with the FDA and generating the data to support a dual sensor because I think, again, as Iâve mentioned, it seems to be the go-to sensor for pumpers will be this ability to measure glucose and ketones and factoring that into the algorithms. So thatâs going to be â thatâs obviously having a lot of focus of us in terms of running that trial. And then finally, I would say, outside of Libre, the Lingo platform is another kind of key growth driver for us. Iâve talked about expanding Libre, the Libre platform outside of diabetes and using this more broadly for a much more broader target. We have a separate team thatâs been working on that development, Larry. We will be launching two Lingo products this year. In Europe, Iâd say the first one will probably be in the first half of this year and the second one in the second half. So Iâve talked about Libre being a $10 billion product by 2028 that implies a 15% annual growth rate. We will do better than that this year. And I think the opportunities we have to be able to drive to that kind of revenue for this product are very real. And I think weâve been executing very strongly on all these areas. Thatâs super helpful. Just one brief follow-up, you talked about being excited about the TriClip opportunity at JPMorgan. I think it was just a month. I know itâs limited in what you can say because you are presenting the TRILUMINATE data at ACC. But how are you thinking about that opportunity relative to mitral? Do you still expect to do you still expect approval in the U.S. by year-end â23? Thanks for taking the questions. I think itâs a great opportunity for us. And I think that weâve shown that weâre definitely here one of the leaders when it comes clip-based heart valve repair market. And I think itâs â I think itâs â it could be bigger than mitral. Iâm not sure I would go that far yet. But I would say that the uptake of the tricuspid repair market, I think, will be faster than the uptake for the mitral just because I think when mitral was launched, it was the first repair system and now you have a large group of implanting physicians that are familiar with the clip technology are familiar with mapping that clip technology and the procedure. We did make some changes to the delivery device for the clip, itâs a little different anatomy, a little bit more challenging to get there with the clip the tricuspid area. But I think that itâs a great opportunity. I mean, I think there is 3 million people today that suffer from tricuspid regurgitation. There is not a lot of really good options available for treatment which is why we invested in the trial here in the U.S. to bring products to the trial. Like you said, weâre going to be presenting that in a couple of months. And I think itâs a great opportunity for us. Weâve already seen real nice traction of that in Europe. We launched that in 2021. The team wanted to launch it right in COVID. And I must say at the beginning, I was somewhat against that but they proved me wrong and the productâs done really well in Europe. So I think this is another great opportunity for us here in the U.S., too. So weâre not ignoring MitraClip, itâs part of our entire portfolio. And I think the combination of those two products in the implanting position will be very powerful for Abbott. Hi, thanks for taking the questions. Good morning. Robert, I was hoping just to follow-up on Larryâs question just on Libre, just thinking more kind of in the out years and this $10 billion target that youâve set. I think maybe just â I think you outlined everything for 2023, probably holds true for over the next 5 years. But just if you could reiterate your confidence weâre not in that $10 billion out-year target? And just you expect consolidation between pump and CGM companies. And maybe it would be just great to hear strategic rationale of whether a combined pump CGM offering under one roof would be advantageous for either Abbott or another company? And then the second question is just on Navitor and the launch here in the United States. What would represent a win for Abbott from a U.S. share gain perspective? And what segment is the low-hanging fruit considering the current label? Is it the elderly patients that donât have a long life expectancy that are high risk or even intermediate risk how do you expect a Navitor launch to play out and add to the macro device growth in 2023? Thanks for taking the question. Sure. Well, I mean, I guess on Libre, to your question on how to get to $10 billion by 2028, I mean, the math will say 15%, right. How do you get 15%. I mean there are real three key areas, and I talked a little bit about them. But Iâd say, first of all, itâs to continue to have a dominant share heavy insulin user segment. We have that today with the non-pumpers with the MDI both in the U.S. and globally, internationally. So the real focus there becomes, okay, how do we focus now on the pumper segment and the connectivity over there. And like I said, I think we will do that with a little bit of catch-up with Libre 2 in terms of what is currently offered in the market. But then to leapfrog that, I think the combined sensor glucose ketone sensor is ultimately the way we will play. And we will see what pump company is going to want to line up to be first on that connectivity if and once we get that approval because again, I continue to hear from KOLs the importance of that product for the pumper segment. So the second part is the Basel expansion. And like I said, you can look at the Basel population globally, assume a certain rate globally, a certain utilization rate, and that adds a significant amount of growth to that number. And then the third piece of that is really expanding Libre beyond just diabetes and looking at the lingo platform. So the adding up and the execution of those strategies are what ultimately gives us confidence that we can get there and we can sustain that 15% growth rate over the next kind of 5 years. Regarding your questions on pumps, listen, I think that itâs an important segment. Itâs one that benefits quite significantly from a combined system. Weâre now â weâre focusing more aggressively on that. As it relates to an all in one, I think the market has spoken in terms of the pumpers want choice. They want to be able to choose what is the best sensor pump combination. And so I think right now, my view on that is the consumers have spoken, the market has spoken, the regulators spoken, they want that interchangeability. And I think that our focus will be on providing the best sensor for the pump systems that are out there. So thatâs â I think I covered your Libre questions. I think you had a question on Navitor. Listen, weâre excited about this. Itâs a large market. Itâs a large segment here in the U.S., itâs about $3 billion. Our label is about 50% â sorry, itâs about 50% of the market because weâre only approved right now for the high-risk patients. But itâs got a strong clinical profile. I mean we will be sharing data at CRP specifically to this, but I mean weâve already released some data on it last year comparing it to other valve systems. So I think that weâve been very intentional about wanting to enter this market and to do it in a way that is sustainable. Expectations, I mean, I talked a little bit about this. There is obviously two pretty well entrenched players in the U.S. market. do I think that we can be a leader in 3, 4, 5 years, I think that might be difficult. But I think that we can come into this market and offer another choice, another opportunity that provides additional benefits differentiated benefits versus other systems that allow us to pick up share. If I look at where we are in Europe, we launched this in Europe, and we have high single-digit share in Europe. And weâre not in all centers weâre in about half of the market, in the centers that we are implanted and available, our shares in the mid-teens. So you put that together, weâre high single, but where weâre competing, weâre in the mid-teens. So I think this will be a ramp. I think weâve got the sales force in place. We want to roll this out in a way that allows us to sustainable in that strategy of being able to be a double-digit share gain over the next couple of years. Good morning. And thank you for taking the questions. I have two. The first one has to do with Nutrition. And if you could outline where the company is in terms of the recovery and when do you think it will return to growth? And then the second question has to do with the use of cash, what are your thoughts on it and where you are on share repurchases? Thank you. Sure. Well, on Nutrition, as I said in the opening statements, production at Sturgis is up and running. The team is working around the clock, nonstop, very hard. Number one focus here, as I said, was to serve the customers, get product back on shelves. We started with WIC with the inventory levels on our WIC contracts are very good as we entered into Q4, and we then started to focus on our non-WIC brands, and thatâs progressed very well in the fourth quarter and as we go into this year, looking very good. So I would say, if you look at our growth rate, obviously, youâve got this year-over-year comp. Youâre going to see the growth already in Q1, Joanne, right, because we were impacted last year in February. But I guess the right way to look at this is, okay, strip away the comp, strip away where this year-over-year effect of coming back on the market, etcetera, I expect our business â our overall nutrition business to be growing at that pre-pandemic level between 4% and 6%. Our market shares in WIC have largely recovered and we are seeing a nice cadence of recovery in the non-WIC share here in the U.S. So, I think you will start to see that growth rate already on the print in Q1, obviously, in Q2 and Q3. But the important thing here is we are looking at our share and the share recovery is very much in line with our forecast that we have set for the full year. I would like to see our market share get back to pre-pandemic levels by the end of the year. I am sorry, what was your other question? Sure. While use of cash, talked about this. We have taken this balanced approach. I would say if I were to kind of rank it in terms of use of cash, we are committed to growing a dividend, a strong and growing dividend. So, thatâs probably number one use of cash. We announced that increase of about 9% in our dividend last year. So, thatâs I will say is priority number one. Number two is obviously ensuring that all of these new products that we have got launching are appropriately resourced in terms of manufacturing and a lot of our CapEx investments. On the buybacks, we did throughout the first nine months of last year we had about $3 billion of buybacks. And I would say, we probably did a little bit of catch-up there, Joanne, in terms of catching up to some of the dilution as we were focusing on getting our leverage down post acquisitions. So, we do a little bit of catch-up there. And I would say in terms of buybacks going forward, we will be contemplating them and they will be largely focused on offsetting any kind of dilution that we had this year. I would say the other kind of key use here for us this year is going to be debt. We have some debt towers coming up and we are not going to be renegotiating those just given interest rates. We want to move those off. So, thatâs probably where you see the use of cash. On the M&A side, which I know is always a question, so I will preempt anybody over there who has got that on their list. I have talked about it where â on several calls, we are interested. We are actively assessing the opportunities, whether itâs tuck-in on up. Clearly, the valuations here have come down somehow and I think they need to stabilize a little bit. But we cast a pretty wide net. Diagnostics devices are the areas where we have most interest. And again, if it financially makes sense for our shareholders, and it fits strategically, then we will â we have got that strategic flexibility in our balance sheet to do that. And we are going to be looking at businesses where we can bring value, whether itâs â whether we can accelerate sales, whether we can enhance an R&D program or enhance its probably success, a growth area that we can build and have a path to building a position or even if itâs just to augment our own existing pipeline. I think when we have taken that approach, our track record shows that when we have taken that approach, itâs largely been very successful for our shareholders. Hey guys. Thanks for taking my questions. Good morning to you Robert. Maybe my first question on your organic growth assumptions here. I think I heard 8 plus is a reasonable number for F â23. What is that assuming for any impact from China supply chain, any VBP impact? If you could just give us some assumptions around those macro factors that would be helpful. Well, I will let Bob talk a little bit about some of the potentially other macro factors. But the ones you just mentioned here. I mean China, itâs an important market for us, Vijay. Itâs an important growth market and itâs good that itâs moved to a more kind of reopening play. I think that has not only a big impact for us in China, where we have got a strong position. I mean we are not overly reliant, I would say, itâs about less than 5% of our total sales. But nonetheless, itâs an important kind of growth market for us. And I think that reopening in China is going to have a real positive spillover effect in other areas of the world. And I would say, predominantly in Asia, Southeast Asia, where we have got strong position in our EPD and in our nutrition business and some device areas, too. So, I think the overall opening of China is good. Like Bob said, there is going to be some choppiness in the first quarter because seeing a lot of cases, hospitalizations, etcetera. But I think as that moves â starts to move down, I think we will see a pretty strong rebound in our growth prospects over there. So, the VBP that you mentioned, yes, I mean that does have an impact. Itâs more restricted for 2023 in our electrophysiology business. So, we will feel a little bit of an impact there, but I think that the market opens up for us because of the strategy we took on VBP side. So, I think itâs net-net, itâs going to be positive for us in the long-term here, medium, long-term in terms of that being an opportunity for us. We have seen this, Vijay. I mean this happened to us â this happened in the market with stents in 2019 in our vascular business. That business is back to what I would call pre-VBP levels this year. So, there is an impact. In that case, we didnât necessarily win some of the contracts. In the case of VBP, we did win a contract, so â or a portion of the contract. So, I would say macro, yes, we have got some of these headwinds that we have talked about. FX, I think Bob has already talked about it, inflation, but all those seem to be easing off a little bit and the recovery of the procedures and the pipeline and the product launch is a key growth driver for us. Understood. And then Bob, one for you on that gross margins, you are at 56%. Thatâs a step down year-on-year. When I look at pre-pandemic, you guys were at 59%. Is there a simple bridge Bob on how much of this has been inflation, you did spoke for hedging impact. Is that all hitting your gross margin line? And why shouldnât inflationary pressures improve? And when can we start seeing gross margins creep back up to pre-pandemic levels? Yes. So, the â as I have said in my opening remarks around 56% for the year, thatâs a modest step-up kind of from where we exited last year. As you would expect, Vijay, in this environment, there is a lot of different dynamics that multinationals are facing. We have got some headwinds. We have talked about those inflationary impact, how that flows through, including the inventory we built last year that will be sold this year. We talked about currency, where we are going to â we are not going to see a repeat of those hedging gains that we had in â22. So, thatâs a â thatâs a bit of a headwind there. On the positive side, I would say the recovery we are forecasting in the U.S. infant nutrition business will contribute positively. And as that recovery occurs over the course of the year that will have a more positive impact. We also have gross margin improvement programs across all of our businesses that will help to offset some of those headwinds. And we are taking price where we can, I would say, in our more consumer-facing businesses. And then finally, I would say just kind of from a mix standpoint, as we continue to see an acceleration in our medical device business with some of these new product launches, those are higher gross margins than the overall company, and that will positively contribute to our gross margin. If you â to your question about kind of where we pre-pandemic in what we are guiding to this year kind of I would say the biggest impact on a cumulative basis has really been inflation. And thatâs really the â I would say the big difference here in terms of where we are guiding right now, and where we were pre-pandemic. But as we continue to see an acceleration from a mix standpoint and continue to work at some of our costs, we would expect over time to see that gross margin to continue to improve. Thank you. [Operator Instructions] And our next question will come from Travis Steed from Bank of America. Your line is open. Hi. Good morning. Thanks for taking the question. Just a follow-up to Vijayâs question. On the inflation piece, is that still $1 billion baked into the 4.40 guidance? I just want to make sure I understand whatâs baked in on the gross margin line. And then anything to call out on the 2023 operating margin expansion kind of the moving parts to get the op margin expansion there. It looks like 22% is kind of whatâs implied by the guide? Yes. So, yes, on the gross â on the operating margin, yes, we are around 22% kind of where we were pre-pandemic. We are getting the high-single digit growth on the top line kind of in the â excluding the COVID testing. We are getting leverage down the P&L, which Robert talked about where we were able forward invest over the last couple of years. So, we are going to get leverage in the expense area and that gets you to about around 22% op margin. In terms of inflation, we are going to see a carryover impact from last year, still pretty meaningful. But we have been able to mitigate a good portion of that through both our gross margin improvement programs that we have across our businesses as well as taking some price where we can. Okay. Thatâs helpful. And a couple of product questions on EP. I think you mentioned the new EP catheter mapping system. I know that was new, maybe I missed that in the past. I am curious how you are thinking about ablation and the impact on your EP business. And then the other product question was on Libre. The vitamin C, is that on Libre 2 or Libre 3, just want to understand the pathway to get vitamin C on Libre 3 and the timing there? Sure. On the Libre 3, Vit C, I mean itâs going to start off with Libre 2. So, we want to get that done first, and then we will progress on to Libre 3. So, focus right now is on Libre 2. And then we will move to Libre 3. On your question on EP, yes, I mean I think the new catheter that we have launched in Japan and started to launch in Europe towards the end of last year is our TactiFlex, which is really using contact force together with the flexible tip that we had in our flex catheter. So, the feedback we have got in that is really, really positive. So, I think the combination here of our enhanced new mapping system together with our market-leading mapping catheter in HD grid and now bringing TactiFlex. That combination is very powerful. Regarding PSA, itâs definitely an area of interest. We have been investing in it. We actually had two internal programs, had a bake off and saw the one that we felt stronger about taking some of the learnings that we are seeing from the current on-market products. And there is obviously some trialing thatâs ongoing right now, but I would say itâs a growth opportunity. Itâs an interesting area. I think itâs still too early to say in terms of will the market move completely over to this technology or not. I think itâs important to have it and hence, why we are investing in our program and incorporating into our R&D program, all of sort of the deficiencies that we have heard from some of the current on-market products are the ones that are being put in development right now. So, important area, important investment area for us in EP definitely benefited from kind of the investments that we made during COVID. And I think itâs an important product to have. Itâs ability to convert I think it will convert a portion of the market. My sense is Cryo was probably the first one, but how much of Cryo, still up to see, but definitely an interesting area for investment. Hey. Thanks for getting me in. I figure maybe just if we could wrap it up with an update on a couple of the pipeline products, the five products, Robert, that you have highlighted in the past, Amulet and CardioMEMS, maybe if you could just talk a little bit about where you are with these launches in terms of size, scale, momentum and maybe what kinds of catalysts we can look for or metrics we can see for these two products this year? Thanks. Sure. I mean I think those five products that I have discussed on the last call, and we talked about them exiting at an annual run rate of 500. They actually exited at a run rate of 550 and they grew around â they grew around 100%. So, I expect those five products to kind of have maybe not 100%, but pretty high growth rate in next â in this year. Regarding Amulet, listen, I think itâs â like I said, itâs a great space. We have been rolling out the product last year, building the sales force. Key focus here is obviously ensuring good implanting technique with the physicians. We are in about 225 accounts right now. I expect that in terms of growth catalysts, getting more share of those existing accounts as the physicians become more and more accustomed to using our product and see the benefits of using our product versus other systems. I think that will be a growth catalyst and then expanding. We do want to start to expand more as our sales force has increased, the competency of our sales team has increased and our clinical team has increased, we feel more confident now to be able to kind of expand to more accounts. And thatâs what we will be focused on. Another key catalyst of growth here is obviously the trial that we have been investing on in catalysts, which is to compare Amulet to novel oral anticoagulant. So, thatâs another opportunity. Itâs not one in 2023, but continuing that enrollment in that trial is an important driver for kind of the long-term growth strategy here of Amulet. CardioMEMS has done very good. We saw an indication expansion last year in the U.S., seen a nice step-up in sales. I think itâs a great long-term opportunity. I think itâs part of those five products that are driving a lot of growth. And I would say probably the next kind of big area, I mean we have been investing in sales force and rolling this out. Next big area here is working on that NCD. I think that will remove some of maybe some regional hang-ups in terms of reimbursement. So, the NCD is something that we are going to be working on this year with the data that we have collected as part of all of our trials. So, I think they look very strong as part of that group of five products. I would like to close up the call here. Just a few remarks. The operating environment still remains challenging, right. But itâs not as challenging as we saw back in Q3 of 2022 in October. There are definitely signs here of stability. There are signs of improvement, whether itâs in the macroeconomic side or whether itâs specifically in the segments that we are competing in. And Abbott is well positioned. We are well positioned to both capitalize on this improving environment or to navigate if there is any unforeseen volatility over here. Thatâs what our portfolio has been built for. Thatâs what our balance sheet is set up for. Itâs set up for these kind of situations and these kind of scenarios. We always knew that pandemic level testing was not a base case. We knew that eventually this would move down to an endemic like testing. And we are â our view here is that in 2023, we will start this process of moving to that. And so as a result of that, we did do this forward investing into our growth areas, whether itâs devices, diagnostics, certain areas in EPD or nutrition. And thatâs allowed us to grow at the pre-pandemic level, this high-single digit top-tier growth without having to make the OpEx investment that you would expect to be able to sustain that growth. So, we are getting that flow through on the P&L and net leverage on our investments. I do recognize the cost pressures. The company recognized those cost pressures. We talked about this now to Vijayâs question, we are going to be working relentlessly on getting our gross margin back to that pre-pandemic level, and itâs a combination of working in our cost profiles and our GMI programs, but also as we accelerate the growth in our device business, that mix shift contributes to that. And finally, our balance sheet is strong and provides us the strategic flexibility we need to navigate. And we take this balanced approach where we can provide returns to our shareholders, while at the same time, investing for the long-term. So, thank you for being on the call overall. I think Abbott is very well positioned as we kind of exit this kind of pandemic state and move into more of an endemic state. I think we are well positioned and now itâs all about execution. Thank you, operator and thank you for all of your questions. This now concludes Abbottâs conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbottâs Investor Relations website at abbottinvestor.com. Thank you for joining us today. Thank you. This concludes todayâs conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
EarningCall_1080	Good afternoon. My name is Nadia, and I'll be your conference call operator today. At this time, I would like to welcome everyone to the H&M Conference Call Full Year Report for 2022. For the first part of this call, all participants will be in a listen-only mode during the speaker presentation, and afterwards there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Today, I'm pleased to present Nils Vinge, Head of Investor Relations. And I will now hand you over to our speakers. Please begin. Hi, everyone. Thank you all for joining us today, and welcome to this telephone in connection with H&M Group's full year report 2023 (sic) 2022. With me today is our CEO, Helena Helmersson; and our CFO, Adam Karlsson. We will now start with a short summary of the fourth quarter and full year, after that, we will be happy to answer your questions. You'll find the full year report at hmgroup.com Investor Relations. So we started the year having left the worst of the negative effects of the pandemic behind us. Then war broke out in Ukraine and we quickly decided to post sales in the countries effect. And later on also decided to wind down our business in Russia and Belarus. Russia was an important and profitable market for us, so our decision to wind down the business there has had a significant negative impact on our results. The hikes in raw materials and freight costs combined with the historically strong U.S. dollar led to substantial cost increases for purchases of goods. We have increased prices but rather than passing on the full increase to our customers, we chose to strengthen our market position further. On top of this, there were increased energy costs, as well as a one-time charge for the cost and efficiency program. That was initiated at the end of the year. The combined effect of these factors amounted to a negative impact on profit in the fourth quarter totaling around SEK5 billion compared with the same quarter last year. Although 2022 was a turbulent and characterized by negative external factors, our sales increased by 6% during the year. Customers are showing that they appreciate our offering and customer preference is increasing among women. The external factors that have had a negative impact on our purchasing costs are gradually reversing and are expected to become positive for our results in the second half of 2023. Purchasing costs are already lower for the orders being placed now compared with the same time last year. In addition, the second half will also see the positive effect of the cost and efficiency program that will drive growth and is expected to provide SEK2 billion on an annual basis. Our long term 2030 goals remain in place, including a double digit operating margin for full year 2024. To achieve these goals, we are focusing on three growth areas. First and foremost, H&M, which is one of the world's largest fashion destinations with several billions of visits yearly in store and online across the world. We are further improving the assortment and the customer experience both in store and online. In order to meet our customers ever evolving expectations, we are continuing to strengthen, develop and broaden our offering with more products and services. By engaging our customers in various ways, we are strengthening the existing relationships with our customers, but also attracting new ones globally by offering them unbeatable value with affordable fashion in a more sustainable way. The new financial year has started well with strong sales development during the holidays. Sales development between the 1st of December and 25 of January increased by 5% in local currencies compared with the same period last year. Excluding Russia, Belarus and Ukraine, the increase was 9%. This was mostly driven by H&M women's wear and costs which continue to perform well. We are focusing our expansion on increasing sales across all our channels. We have made large long term investments with a focus on digital. Online sales continue to develop well and around 30% of sales are online, which is at the same level as last year. With our digital expansion, we are attracting both existing customers to more channels, as well as new customers who can meet us, when, where, and how they want. At the same time, the physical store remains much appreciated by our customers. And we are continuously optimizing the store portfolio to make sure that we have the right store with the right format in the right place. We see clearly that customers want to shop both online and in store and we are continuing to grow with omni-channel sales. This once again shows the value of having both physical and digital channels, which strengthen and complement each other. We are therefore continuing the integration of our sales channels to offer customers a convenience and inspiring experience. In 2022, H&M opened its first stores in Ecuador, Kosovo, North Macedonia and via franchise in Cambodia, Costa Rica and Guatemala. We are also accelerating expansion in India, as well as in the North and South America region with a focus on Latin America, which continues to perform well. H&M is also scheduled to open its first store in Albania during the first half of 2023 and Ecuador will be a new online market for H&M from the start of 2023. Over the past year, we have made several investments in H&M s lifestyle brands, which covers sports, beauty and home. H&M Move, a broadened sports assortment is our latest addition and have been very well received by our customers worldwide since its launch in August. We are also growing our beauty and home offerings. In 2022, we continued to develop H&M beauty with good results both in store and online. In 2023, we will launch the first flagship stores for H&M beauty into European markets. H&M HOME also continues to perform well. In 2022, we opened seven standalone home stores and six additional markets will have H&M HOME concept stores in 2023. In parallel, we continue to develop all our portfolio brands and business ventures. This is our second growth area. And during the fourth quarter, we saw strong sales development for our portfolio brands such as COS and ARKET with an increase of 22%. Our third growth area is investments and innovative partnerships. We continue to invest through our investment on CO:LAB and in a short time, these investments have created significant value, both financially and in the existing operations. Sellpy, which we are the majority owner of is a good example of how we continuously work on developing new circular business models. And how investments and sustainability also provide H&M Group with long term business opportunities. Sellpy continues to grow rapidly with sales expecting to pass SEK1 billion during 2023 and is already one of the biggest players in secondhand fashion in Europe. We also continue to invest in other areas, particularly within tech AI and a supply chain. An important part of our supply chain is our logistics systems. We currently have several global initiatives involving new highly automated logistics centers with a focus on innovation. Two examples of this are our new logistics centers in Canada scheduled for completion in the first half of 2023 and also one in the Czech Republic, which is scheduled to open at the end of 2025. This will create additional capacity, flexibility and speed between sales channels, as well as improved availability. Looking ahead, the external factors are still challenging, which we are humbled by. But things are moving in the right direction. Despite the tough situation in the world around us, the H&M Group stands strong with a robust financial position, healthy cash flow and a well-balanced inventory. Sales in the new financial year have started well. Combined with our investments and efficiency improvements there are very good prerequisites for 2023 to be a year of increased sales and improved profitability. Therefore, our previously communicated goal of achieving a double digit operating margin for full year 2024 remains in place. Thank you. [Operator Instructions] And our first question today goes to Richard Chamberlain of RBC. Richard, please go ahead. Your line is open. Thank you, afternoon, everybody. So I've got two questions, please. Well first of all, I just wondered if you can talk about your plans for sourcing more product in the Americas region, how you're getting on with that, and the sort of timeframe we could be talking about for sourcing more product from the Americas, more toward nearshoring and so on in that region? Thank you. Sure, and when looking at the sourcing map, as you, you know, we are continuously reviewing our reworking that the bigger shift that we're working on right now is more nearshoring. Concretely, that means that we are increasing the sourcing mainly from Europe. But also we're exploring production also in the Americas primarily than in Latin America. But the bigger shift that is happening right now is the increase in Europe. So let's see where the exploration work in Latin America leads us. Okay, thank you. And then the other one is, on Page 9, I see you state that sales on the second-hand platform Sellpy, obviously up very strongly last year expected to exceed SEK1 billion in this year and you're planning to consolidate that business as from Q1? Can you give us a sense of how much profit that company makes at the moment and so -- help us with the modeling for this year? I think when modeling it you can consider that as profit neutral for the group for the year, right now. We will consolidate it, but it will not have a material effect on profitability for the year. Thank you. And the next question, it goes to Georgina Johanan of JPMorgan Chase. Georgina, please go ahead. Your line is open. Thank you. I've got a couple of questions as well, please. Just the first one on the gross margin, appreciate that your common factors will be -- external factors will be very negative in Q1 as well. Just to clarify understanding, should we expect a similar rate of decline year-on-year in the first quarter, as we saw in Q4, 2022, please? As we comment in the report, the sum of all external factors are peaking now and on 2022 and into 2023. But on top of that, we also have some year an effect in fourth quarter that will not be comparable into first quarter. So we believe that some of the fundamental external factors will remain very negative, but potentially not to the full extent as this reported right now for the fourth quarter. No, no, no, not right now. We don't quantify those effects, but if you think of it as - think of it as a safe way, most likely, it's the bottom now with a peak hopefully. And things are going in -- the direction is going in the right way as we said, but of course the inventory right now. Most of the products are bought when the dollar peak, so to speak for - at historical heights. But going forward, the products we buy now as we state actually have a lower purchasing cost compared to last year at this time for comparable products. So that's why we dare to be brave and point out that we will improve during the year and stay with a target of the profitability target for next year as we've talked about more later progress. That's helpful, thank you. And my second question, which was a follow on, I guess. Was appreciate what you said on the gross margin, but obviously with Q1 tending to be a sort of somewhat smaller quarter in absolute terms, but yet you're seeing some gross margin pressure. I mean should we be expecting sort of a meaning - a profit in Q1 or is close to breakeven sort of a more sensible assumption at this stage? As you know, we don't provide guidance and forecast like that. So we just give you the background and the external factors so to speak and the shape. But then we can't be so granular to say exactly how much. And so I leave it to you to make to your best assumptions, but it's definitely, as we said before, a very challenging external factors also for Q1 definitely. Then we do see -- as you saw in the report, the start of sales in this first quarter, we do see that it looks good, especially if we look at H&M ladies cost just to give a few examples. So that is a pretty good signal, of course. Correct. Also just to add also - be cautious I'm always cautious because Q1 will be the last quarter and we have Russia in the basis for comparison last year before we forced and winded down the operations in Russia. So that's still in the basis for comparison from last year. Yes, hi. So on the December and January trend, plus 5% or plus 9% underlying. Is that similar for both months or is there - or was there a change of -- for the growth rates from December into Jan? And secondly, what is the price ASP contribution to that growth? Well, looking at some of the December effects were driven by positive trading days and calendar effect. So we saw a relative to January, a slightly stronger December. But all in all, it has been a fairly sort of - given that it has been consistently strong throughout the period. And we don't give a complete guidance on the price increase and how much that has - sort of driven the selling. But we have over the autumn increased prices and still maintained our position to ensure that the value proposition is still complete for us compared to competitors. Thank you. Hi, good afternoon. Thank you for taking my questions. I have two, please. Firstly, could you give a sense of the elements relating to Russia in the fourth quarter income statement? I guess - to sales, gross profit and SGA, fiscal would get a flavor there please? And how does - how or does that interplay with the elements of the SEK2.1 billion exceptional in the third quarter, please? That's the first one. Thank you. Well, as we mentioned, there are two components to the effect of the wind down of operations in Russia. And one is a one-time closure cost related provision we did in the third quarter amounting to SEK1.7 billion, SEK1.8 billion. The rest that we mentioned in the report is about a SEK2 billion sort of drag on the operational profit for the year than with the negative delta year-on-year based on less trading and having the stores in Russia closed. And for fourth quarter specifically, that amounted then to close to SEK600 million, also stated in the report. So that's pretty much the picture we can give at this time. But it looked like you sold pretty - quite a lot in the fourth quarter. You cleared down quite a lot. So you've obviously had a decent amount of sales and just - interesting how that flowed down the income statement, if that's possible, please? We saw that we had a strong reopening end of August and into September. But then we gradually started to close stores. And with that gradual closure of course, we needed to take more discounts over the month in order to clear out the stock and time that's with the closure of the stores by 30th of November. So not material impact on the profitability from a positive perspective during fourth quarter. Okay. Thank you. And then secondly, would it be possible to talk a little more around your targets or ambitions to near sourcing on a global basis, please? And are there any milestones we should have in mind? Thank you. Right. To repeat a little bit, but we are driving a bit of a shift of course, still working hard with our sourcing in Asia, but shifting some also to do more near shoring. And then the biggest step is to increase it in Europe. And the reason for why we do that is first of all, that we do see a need to even though lead times have been reduced to do it further especially on the parts of the assortment that is more high fashion. So simply to be even quicker to react to upcoming trends and customer demand. We do see that benefits of being even faster and also using tech data and AI to, for example, quantify to be more precise. Then of course, it's also a benefit looking at the exposure of currencies to also spread the risk benefit. Yes. That's very helpful. And should we - in five years' time, should we think that you'll have a 50/50 split between near and far sourcing or how far do you think the shift will go? No. We don't have any goals like that. I mean, this is an enabler for us to be even more responsive to customer trends. So we are now implementing those plans that we have set and we will evaluate them as we go. Thank you. And the next question goes to Adam Cochrane of Deutsche Bank. Adam, please go ahead. Your line is open. Good afternoon, guys. A couple of questions please. In terms of your proposition to customers, you talked about not fully passing through the input cost inflation to the consumer. Do you think that the consumer takes a while to notice the fact that your price position is improving compared to other companies, and then that the sales growth that maybe you saw in the first bit of the current financial year, is customers starting to reflect that? I mean, difficult to say, we do our best to look at customer feedback and the sales analysis. But so far, it seems like we've taken the right decision when it comes to working quite dynamically with this. And with that, I mean to raise prices a little bit differently on different markets to secure our competitive advantage and that we can truly keep our promise to deliver the best value. And knowing the customer sentiments and looking at the collections and how they are received, we could say that overall, it seems that we are competitive. But I mean, this is something we have to follow through out definitely and work with it as we go, again, the most important part is also that we see that some of the external effects looks much better in the end of the year, so that we look upon this more and more long term. Thanks. And the second question is one that I suppose, Neil is asking me to ask about your double digit margin. How do you view the moving parts from where we are here to a double digit margin over the next 18 to 24 months. How would you try and help us classify what's the most important part, sales, gross margin, recovery, operating costs reduction, how would you think about those bit? Right, I can start and then Adam, feel free to fill in. But this is really about pulling the brake an accelerating at the same time. So of course, it's about implementing the cost and efficiency program that we have spoken about, so that we become more efficient, but also faster and more flexible. And then it's also about having discipline when it comes to our focus areas because we do see that those give us results, both when it comes to sales, but also profitability. And with that, I mean, how we work with assortment, how we also keep on digitizing our supply chain and integrate it when we work with assortment so that we can become more precise and accurate to meet customer demand. And of course, also when it comes to the customer experience, both digitally, but also how we continuously improve and update and optimize our store portfolio. And exiting 2021 and into 2022, we were on a rolling 12 basis close to 8.5% EBIT margin. So we believe that we should be sooner than later be able to get back on that track with more stable sales and trading environment. But the key of course enabler will be the normalized gross margin and that is what now without giving a forecast, but some of the external factors are pointing at that we could see towards the end of the year. So Helena mentioned that we need to be disciplined in all of our cost actions, follow through on the selling, but also of course having a normalized gross margin to ensure that we can continue that path. We were on a year ago. I'll just squeeze one last one in on sustainability. It's important part of your business. There's, been a few issues with the marketing and the advertising of sustainability over the last 12 months. Given it is one of your key strengths. How - are you going about telling your customers now about your better sustainability credentials given some of the challenges that we've got in the market? Yes, that's of course really important. So with the transparency, to our customers, but also to create even more awareness and make sure that it's really one of our competitive-edge in the customer offer. And right now, there's a lot of legislation going on. We have been in the lead for a very long time in this question in the industry and also collaborated with many others. There has, not been any legal frameworks in the past. And we decided to not wait for it, but to come together with other academia, competitors and others in the industry to start and be more transparent to our customers. Now as more legislation is being shaped, of course, that is scrutinized. So we need to come together to share our learnings with those also creating the new legislation, but also of course for us to come together and see how we can adapt and improve. So we truly think it's great with more frameworks and more legislation around this, because that also means that we will have an even clearer competitive edge. Thank you and good afternoon all. I had two quick questions. I guess the first one, just a matter of specifics for Q4. Can you just ask what you did with your marketing budget in the past Q4 year-on-year? How that shifted to set some of the one-off dynamics that you talk to in terms of that base of delivery? And the second one, is around, I guess, continuing on Adam's question, there's, about 600 basis points of margin rebuild over the next two years that you're pointing to from the clean base of [DV folio] you just reported. Would it be fair to assume given what you're saying that about 400 basis points of that comes from gross margin and the balance is really coming from sales per square meter and OpEx efficiencies? Starting with the last question, we are given then the external factors seeing opportunities to come back to more normalized gross margin levels. And if you look back a couple of years that is approximately the delta you're seeing in at least in fourth quarter. So that is the answer to the second question. And the other parts will come from the cost and efficiency program then in combination with the operating efficiencies throughout the sales structures. I think we'll not go exactly into the details, but the majority of it will come from a more normalized gross margin as we're in an extreme situation right now. So that's a fair assessment absolutely. It is still slightly elevated compared to the year before, but not to the extent as previous in the year. We had big launches of new concepts move and other things throughout the year, so that drove marketing early in the year - and still on a slightly elevated level, but not to the extent of previous quarters. Thank you. And the next question goes to Hannah Boland of Telegraph Media Group Limited. Hannah, please go ahead. Your line is open. Hi there. Thanks for doing this. Just it would be good to get a bit more color on what you're seeing among customers at the moment. And whether you are seeing people kind of choose cheaper items and whether kind of people are trading down at all. And then just be good to get a bit more detail on pricing as well. I think you kind of mentioned that you might have raised prices further. What could that look like for customers and - when should they expect potential further increases? Thank you. Well, we're of course trying to follow customer sentiments as close as we can. As usual, we see that fashion is, I mean, also now when we bring in new and more high fashion spring garments that is very well received. But of course, doing that for great value of money is really, really important. So that's why we try to be even clearer also with the customer offer and the customer proposition also from a price point of view. We follow competition very closely to secure that we are competitive. And moreover, we also see an increased awareness of course when it comes to sustainability. So we do believe we have a great position when it comes to value for money and also offering products that are more sustainable. And of course, this is something we have been following really closely since we have also increased prices on certain product types. A little bit differently on different markets. And since we also see that the external effect will gradually improve. We don't want to raise too much prices to then lower them again, because we have a promise that we've made to the customers that we should deliver the best value for money. So we do think that we have managed this in a wise way and we follow continuously the customer feedback on that. Just to add on what Helena said also what we see again, it's not just the price. It's always the value proposition and I think the success of cost and market also shows that which are in higher price levels than the H&M brand. Thank you. And the next question goes to Simon Irwin of Credit Suisse. Simon, please go ahead. Your line is open. Hi there, a couple of questions for you. Could you just talk about the - going back to external factors? If you ex out the FX, can you just talk through the moving parts that you're seeing in terms of raw materials, labor and freight as to kind of when - are you seeing local dollar costs coming down on a landed basis ex FX and kind of which parts of that equation you're seeing the movement in? And then I can just ask a question on the 2020 10-year ambition to double sales. Where is that going to come from? I mean sales have been - sorry, store numbers have been falling for the last three years or so. So are you basically kind of going to achieve this ambition by doubling the share of e-com or will you get back to growing store numbers at some point in the not too distant future? And if we start with the sort of moving parts and excluding FX. And we have been seeing a raw material price increase over the last couple of years and on the backdrop of COVID with high demand and disturbances in the supply chain. Since sort of mid-autumn or late autumn, we've seen that the raw material prices and particularly and the corporate prices have started come down on a year-on-year basis, which is kind of, of course, mostly favorable going forward. From a sequential point of view, this will affect and the orders we will place during the spring. And as Helena mentioned, we already start to see the year-on-year effects coming down. Other than that, we also see that international freight and transport costs are likely to come down. That has also somewhat a delayed effect. So we expect, if these spot rates are consistent with the current levels to be positively affecting us from end of second quarter and into third quarter. And then of course, we do see some solid cost inflation in some markets, but we believe that that is a lesser negative effect seeing and the positive other effects that we've been thinking about the raw material costs coming down and the international trade costs also potentially coming down on cost. Okay. So I was just going to comment on the 2030 growth targets. And you're correct we are keeping that even though of course it was set in a different concept, before the war. But we do think that it's possible and that's what we're going for. And we are driving growth plans within three areas and first one and the most important is the H&M and the second one, portfolio brands and business ventures. And the third one is growing through investments and partnerships for some of them. We have our investment on CO:LAB that has been investing very strategically with creating a lot of value. But of course, the biggest part is from H&M. So I will talk more around that. The growth will come from our focus areas linked to improving customer offer, customer experience and also - digitizing the supply chain. And this will help us also to grow in comparable stores and also of course digitally because that will of course help us also to be more accurate, more precise. And meet customer demands to an even greater extent. So there's a lot of improvements going on in store portfolio and within the assortment stress, it is also linked to tech and supply chain. Other than that, we're also broadening our offering. And you have probably also seen that even though it's in [Kirkland] during 2022, we've been able to invest in broadening our offer. We've done it both, and some for ladies, but also in lifestyle brands such as H&M Move the sports assortment. And also beauty, we're broadening and also H&M HOME. And then we have other businesses such as Sellpy that we spoke about before, which is another example. And besides that, we also see, of course, the opportunity to grow geographically. First of all, we focus on region America's especially Latin America. There's, also great potentials in India, for example. And as you saw in the report, we will have a net closure of 100 stores, that's the best estimate for 2023. So gradually, that is coming down. So, of course, we will - we also see great opportunities to grow in number of those areas. Thank you. And the next question goes to Anne Critchlow of Societe Generale. Anne, please go ahead. Your line is open. Thank you. Hello, I've got three questions, please. The first one is about the trial you've been running for online returns and charging for those. Are you considering rolling that out? Yes, we have decided to roll that out. So we had good results on that tests, so if I remember correctly, it's roughly 10 to 15 markets in the next step, and then we will take it from there. Thank you. And the second question is about and the marketplace sales that you have on H&M. please, could you give an update about the number of brands and countries and how that's going? Right, and so we have that now on six markets and we are collaborating with around 70 external brands and of course, we also have our own portfolio brands in there. So really interesting to see the cross shopping since many customers want to mix and match from different brands. So we are partnering up with other brands that are also strength the pure offer from an H&M perspective. So it's still in trials, I would say, and we're assessing it as we go, but positive response from customers, I would say. Thank you. And then finally, just a reminder please on the H&M incentive program and whether we need to budget for it 10% of the PDP increase being awarded to staff in the fourth quarter? Good afternoon. Thank you for taking my questions. Well, actually some of them have already been asked, but I have few more. So first of all, there's if I have quicker and follow-up on Sellpy. The turnover target you're giving us for Sellpy, is that net or gross meaning before or after returns SEK 1 billion? Okay. It's doesn't me. It's the gross merchandise value, but it's of the return. So it's the - in that sense, then the net effect on selling of the returns. Okay, okay all right. The second one would be, how happy are you with the development of your biggest market, Germany? Well, overall, we have seen in Germany also from customer sentiments that to some extent it's been challenging. However, we see when looking at our performance, it's according to the market as a whole or slightly above. Okay, okay all right. Next one would be China, which was a big thing during the last telephone conference. We had - how is everything going there at the moment? Yes, roughly same answer as last quarter. So still challenging, but slowly it's going in the right direction. So we keep on working hard with making sure that the customer of brand experience is really relevant. And of course, we're still in dialogue with multiple stakeholders. So slowly, we're taking steps in the right direction. All stores are open. There's, some restrictions to opening hours due to COVID. But other than that, it's open and you can also find the offer on Tmall. Thank you. [Operator Instructions] And our next question today goes to [Chloe Mills] of William Reed Business Media. Chloe, please go ahead. Your line is open. Okay. And I just wondered if you could give any more detail on the performance in the U.K. or did you see more return to stores in the U.K. over Christmas and last year? We have seen a strong development in many markets and particularly in Northern Europe over the last quarter. And U.K. is one of them where we have had strong trading. Don't have the specific numbers for the last month here, but it's been a generally strong trend. Yes, good afternoon. Thanks for taking my questions. I have two. The first one is you plan to close down a further net 100 stores this year? When do you expect to resume a net positive store opening program and also - when do you expect to complete the rationalization of your store network? And the second question is, would you consider that you are currently growing market shares in the different markets, I mean, based on recent performances compared to some of the listed competitors. It tend, to suggest that you underperform some of these listed players, but perhaps you have more accurate data to share with us. So which are the markets where you are performing and are you considering you are getting market share? Thank you. Okay. So first question then and number of stores and when start to increase again. We don't have that kind of dates because we kind of continuously assess when it comes to consolidations and also opportunities to open new stores, but as you have seen throughout the past few years, minus or net minus of 100 stores is much less than the past few years. So we're coming to a place when our store portfolio becomes more and more optimized. So of course, our aim is to start to grow with opening new stores also again and come to a plus. But we don't have a date for that yet. And perhaps in which markets do you plan - sorry, in which market do you plan to close down more stores, I would say, and which market do you plan to open new stores this year? Yes, I would say mostly then on the mature market. So looking region wise, it's more in Europe than other places in the world where we still have some closures to do and again important then to look at the integration of physical stores and digital channels. Then we have the question on market share. And when it comes to market share it always difficult to - how you define the markets and so on. And of course, it varies from market-to-market because they're different competitors and so on. But overall, we see that we are performing according to the market or above in most markets, especially the most important markets for us like in U.S. and Germany. Thank you. And we have a follow-up question from Georgina Johanan of JPMorgan Chase. Georgina, please go ahead. Your line is open. Yes, thank you. Two follow-ups actually please and the first one, I think you just touched on it, but I just wanted to ask about your overall performance in the U.S. more recently given I know you've made some meaningful changes in that market. But also the backdrop has been a little bit more mixed there than in Europe. So any color would be helpful? Yes, so we continue to do well in the U.S. and the U.S. is now the most - the biggest market for us, which is interesting of course, driven also by the strong U.S. dollar. But I just spoke to our country manager yesterday. He was quite pleased about the performance. But there is still a lot do - a lot of potential and very positive sign as we get in the customer service that more and more especially women who prefer H&M more compared to other competitors. Thank you very much. And my second question was just a follow-up to what's been asked around the nearshoring. Just to understand, because my understanding had always been of course sourcing from Europe on a kind of like-for-like basis was more expensive than sourcing from Asia and particularly now that freight rates have normalized somewhat? I mean should we be building in kind of an incremental cost for that as you bring more sourcing sort of profile or would you expect that to be offset by a better markdown trend, for example? The last bit of your question is referring sort of to the potential we see. Helena, I mentioned the higher relevance, the short the decision lead times and the more accuracy in our buying will offset the potential higher purchase cost. And then in a year like this, of course, with the fluctuations of the currencies and also transport cost being very, very high. The negative impact is very, very limited. But in a more normal sort of external environment, we believe the closeness to the customer and the shorter decision lead times will clearly lead to higher selling more relevance lower markdown trends. Thank you. [Operator Instructions] And we have a follow-up question from Simon Irwin of Credit Suisse. Simon, please go ahead. Your line is open. Yes, could I just ask about the dividend? You have a stated policy of a 50% payout. Obviously, the payout for 2022 is well above earnings. And from what you're guiding, it doesn't sound as though you're going to deliver SEK6 of EPS in the current year? Can you just kind of talk us through the decision to keep paying the dividend despite your - supported policy of paying out 50%? Well we have during the last year been very, very consistent and disciplined regarding our capital allocations strategy. And when making this assessment, we always consider that. We always consider the capital structure targets. That we then communicate as less that in relationship to EBITDA where we have a sort of a ceiling level that we are well below. We also consider, of course, the investment needs and we are now guiding for investment levels on similar levels to pre-pandemic levels. And it also needs to be considered that we don't have the store expansion as we did pre-pandemic. So we believe that we have sufficient funds to invest. And then last but not least, of course, we have a responsibility to ensure that we manage the owners' money in a responsible way and then dividend is a natural part of that. So we believe we have a strong capital allocation strategy that we follow and then - sort of stand behind the recommendations from the Board.
EarningCall_1081	Please note that certain information discussed during this call including information contained in the slide presentation posted in the connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the fourth quarter, and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the company's determination as it finalizes its financial results for the fourth quarter, and its financial results differ from the current preliminary unaudited numbers set forth in the press release issued today -- yesterday. Other factors that the company may have currently identified or quantified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and the company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. In addition, there are non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measures can be found in the company's earnings press release or in the investor presentation for the call on the company's website at www.bbinsurance.com by clicking on the Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Powell Brown, President, and Chief Executive Officer. You may begin sir. Before we get into the details, I wanted to make a few comments regarding our performance in 2022. The fourth quarter capped off another exceptional year as we delivered strong organic growth while substantially maintaining our margins even with increased variable operating expenses and the financial impact of Hurricane Ian. 2022 was also a milestone for acquisition activity as we significantly increased our international capabilities with the additions of GRP and BdB in the U.K. Our consistently strong results are only made possible through the hard work and dedication of our nearly 15,000 teammates. Now let's transition to the results for the quarter, I'm on Slide number 4. We delivered $900 million of revenue growing 22% in total and 7.8% organically. Our adjusted EBITDAC margin increased by nearly 300 basis points to 31.4% for the quarter. Adjusted net income per share was $0.50, growing by 28%. We also completed nine acquisitions during the quarter with annual revenues of approximately $17 million. Overall, we're pleased with the results for the quarter. I'm on Slide 5. We achieved another milestone this year by delivering over $3.5 billion of revenue, growing 17% in total and 8% organically. Our adjusted EBITDAC margin remained strong for the year at 32.8%. On an adjusted basis, our net income per share increased nearly 7% to $2.28. Lastly, we had a record year for M&A activity completing 30 acquisitions with approximately $435 million of annual revenue. Our acquisitions both large and small are performing well. As a result of our disciplined strategy to acquire top-quality businesses that fit culturally and make sense financially. We have a proven track record of being able to successfully acquire, integrate, and grow companies of all sizes to join the Brown & Brown team. Later in the presentation, Andy will discuss our financial results in more detail. I'm on Slide 6. Let's start with the economy. We continue to see the expansion of many businesses that are still hiring albeit at a slower pace than in previous quarters. There's been a general reduction in the number of open positions that companies are looking to fill. While interest rates have increased materially over the past year we're not seeing a broad-based impact on our customers in the economy yet. From an insurance standpoint, certain markets have been and remain in significant turmoil. Pricing for CAT property both commercial and residential was under pressure through the third quarter. Then Ian slammed into Florida. This caused 1/1 reinsurance treaties to be bound at higher attachment points and materially higher rates. As a result, we saw incremental price increases and lower limits being offered for placements in late Q4 of last year and early this year. The placement of CAT property in Q4 last year and January of this year with some of the most difficult placements we've experienced in decades with rates increasing 20% to 40% or more. However, properties of lesser construction quality or that have experienced losses could be much higher and I mean much higher than this range. As a result, we had customers unable to buy or afford full limits and therefore ended up increasing their deductibles or purchasing loss limit in order to manage our cost of insurance. In certain cases, this was not possible as lending institutions or condo associations would not allow lower limits or significantly higher deductibles. Admitted market rate increases were similar to prior quarters and were up 3% to 7% across most lines with the outlier being workers' compensation rates which remained down 1% to 3%. The placement of professional liability and excess liability remain competitive with rates down 5% to up 5%, with public company D&O rates down 5% to down 20% or more. Regarding cyber, the story is similar to the last few quarters with rates and deductibles continuing to increase but we did see some slight moderation during the quarter. Late in Q4, there were reforms impacting the legal and regulatory environment for insurance in the State of Florida, which included the elimination of one-way attorney's fees and assignment of benefits. The establishment of a reinsurance backstop for certain carriers and the requirement of arbitration prior to litigation. These changes should be positive for buyers of insurance, but it will take time. From an M&A standpoint, we're pleased with the nine transactions we completed. We continue to acquire companies that fit culturally and make sense financially. Specifically, the integration of GRP is going very well and we're acquiring a number of businesses and the financial performance is in line with our expectations. From an overall industry perspective, the number of transactions slowed materially compared to previous quarters. Like last quarter, if a business is considered to be a platform or a must-have, the market is still aggressive on pricing. Now I'm on Slide 5. Let's transition -- I'm sorry, Slide 7. Let's transition and discuss our performance of the four segments. For the quarter, our Retail segment delivered organic growth of 2.7% with good growth experienced in most lines of business. Our organic growth was impacted by the slowdown in specialty lines due to lower auto and RV sales as well as slower growth in a couple of our employee benefits businesses due to an extremely tough comparable versus the fourth quarter in the prior year. Our Retail segment delivered another strong year of organic revenue growth of 6.5%. We're very pleased with how our business is positioned and the capabilities we have to serve our customers of any size and believe 2023 should be another good year. Once again, our National Programs segment delivered excellent results, growing 22% organically for the quarter. This performance was driven by good new business and retention across most of our programs, as well as exposure unit expansion and rate increases. The National Programs team is performing at a high level by offering a diverse range of products and delivering best-in-class solutions for our customers driving nearly 16% organic growth for the full year. Our Wholesale Brokerage segment delivered another good quarter, growing 8% organically driven by rate increases and new business even with personal lines, which has been a challenge for most of the year. Our Wholesale Brokerage segment grew 7.6% organically for 2022 and is well positioned to continue their success into '23. For the quarter, our Services segment delivered modest organic revenue growth as a result of winning new customers and increased storms claims with this expansion, substantially offset by lower claims for certain businesses. Overall, we feel good about our capabilities and the value we deliver for our customers. We're over on Slide number 8. Like previous quarters we'll discuss our GAAP results and then certain non-GAAP financial highlights. For the fourth quarter, we delivered 22.1% total revenue growth, organic revenue growth of 7.8%, and our EBITDAC margin increased by 220 basis points. Our net income grew 43% and diluted net income per share increased by 42% to $0.51. Both were impacted by the change in estimated acquisition earn-out payables, which was a credit of $5.8 million in 2022, and the charge of $19.8 million in the prior year. The effective tax rate decreased to 25.2% for the fourth quarter of this year as compared to 27.8% in the fourth quarter of last year, primarily driven by lower statutory rates for our international businesses and the impact of deductibility for acquisition earn-out payable adjustments. Our weighted average number of shares was substantially flat compared to the prior year, and our dividends per share for the quarter increased to $11.5 or 11.7% compared to the fourth quarter of 2021. We're over on Slide number 9. This slide presents our results on an adjusted basis, which excludes the impact of movements in foreign currencies on both revenues and expenses. The net gain or loss on disposals, the one-time acquisition integration costs associated with GRP, Orchid, and BdB, and the change in earn-out payables. We've included on Slides 18 through 26, reconciliations to the most comparable GAAP measures. On an adjusted basis, our EBITDAC margin grew by 290 basis points versus the prior year. EBITDAC increased by 34.9% and income before income taxes increased by 22.6%. This margin expansion was due to another solid quarter of revenue growth, increased contingent incentive commissions, and leveraging our expense base even while having a higher year-over-year variable operating cost. The incremental growth rate of adjusted EBITDAC as compared to adjusted income before income taxes was driven by a higher year-over-year interest cost of $29 million and higher amortization of $7 million with both largely driven by the GRP, Orchid, and BdB acquisitions. Our adjusted net income for the quarter increased by 26.9% and adjusted diluted net income per share was $0.50, increasing 28.2%. We're on Slide number 10. Our Retail segment delivered adjusted total revenue growth of 19.8% driven primarily by acquisition activity and organic revenue growth of 2.7% for the quarter. Adjusted EBITDAC grew 25.1%, with our adjusted EBITDAC margin increasing by 120 basis points for the quarter, primarily driven by lower year-over-year performance incentives, but was partially offset by higher variable operating cost. We're on Slide number 11. Our National Programs segment delivered adjusted total revenue growth of 34.1% driven by organic revenue growth of 21.9%, acquisition activity, and higher contingent commissions. Organic growth was positively impacted by approximately $7 million due to the finalization of a growth bonus for one of our programs, which we do not anticipate recurring in 2023. As it relates to flood claims processing revenues associated with Hurricane Ian, we still expect revenues in the range of $12 million to $15 million. In the fourth quarter, we recognized approximately $8 million. Our contingent commissions were higher due to premium growth and profitable underwriting in our CAT programs, as well as the loss development for Hurricane Ian being lower than originally expected. Adjusted EBITDAC grew by 53% over the prior year and our adjusted margin increased by 540 basis points to 44.1% primarily due to total revenue growth and leveraging our expense base as well as higher contingent commissions and the previously mentioned growth bonus. We're on Slide number 12. Our Wholesale Brokerage segment delivered adjusted total revenue growth of 17.1% driven by recent acquisitions, good organic revenue growth of 8.1%, and an increase in contingent commissions. Adjusted EBITDAC increased by 19.9%, with the associated margin growing by 70 basis points, which is primarily impacted by increased contingent commissions and good organic growth, but was partially offset by higher variable operating expenses. We're on Slide number 13. Adjusted total revenues and organic revenue growth in our Services segment were substantially in line with the prior year. For the quarter, adjusted EBITDAC increased $1.6 million or 23.9% driven by continued management of our expenses. We're on Slide number 14. This slide represents our GAAP results for both years. In 2022, we delivered revenues of over $3.5 billion growing 17.1%, and earnings per share of $2.37 growing 14.5%. EBITDAC increased by 14% to approximately $1.2 billion. For the year, our share count was substantially flat and our dividends paid during 2022 increased by 11.3%. We're on Slide number 15. This slide presents our results for both years on an adjusted basis. Our income before income taxes grew 6.6%, and net income per share was $2.28 growing by 6.5% as compared to total revenue growth of 17.3%. This difference was driven by higher interest and amortization associated with GRP, Orchid, and BdB. Our adjusted EBITDAC margin remained strong at 32.8% but declined slightly by 40 basis points from the prior year due to higher variable cost. Overall, we are very pleased with the results for 2022. We're on Slide number 16. It's part of evaluating the performance for the year and the fact that are captives are newer, we wanted to provide some additional color. We participate in two CAT property captives with the goals to increase capacity, drive additional organic growth, participate in strong underwriting results, like we do with contingent commissions, and deliver good returns on our invested capital. One captive participates on a quota-share basis for certain of our wind and quake programs, and the second participates on an excess of loss or reinsurance layer for a personal lines wind program. Overall, we are very pleased with the top and bottom-line performance, knowing that certain quarters can have volatility when they're CAT events. It's important to keep in mind that performance cannot be evaluated on one quarter but it's better viewed on a full-year basis. In 2022, we recognized approximately $25 million of incremental revenue with about $5 million driven by the acquisition of Orchid. For 2023, we anticipate revenues of approximately $30 million to $35 million. From a risk standpoint for both captives, we can have up to $13 million of exposure in any one occurrence and $25 million in the aggregate. As we always do, we've used a disciplined approach to balance upside potential and downside risk versus deployed capital and believe we have structured the programs well to deliver on our objectives. Few comments regarding liquidity and cash conversion. For 2022, we delivered cash flow from operations of $881 million. Our ratio of cash flow from operations as a percentage of total revenues was 24.7% as compared to 26.5% last year. This lower ratio is due to the payment of earn-outs as certain acquisitions have overperformed our original expectations, incremental interest expense, and paying higher incentive bonuses to our teammates for their outstanding performance in 2021. Overall we are in a strong cash generation and capital position, finishing the year with $650 million of available cash. We also repaid the remaining outstanding balance of $150 million on our revolver that was drawn in connection with our acquisition of GRP, BdB, and Orchid. We expect to continue to delever over the coming quarters as we have done in the past post larger deployments of capital. We finished the year in a strong liquidity position. With this capital, the cash we will generate in 2023 as well as capacity on our revolver we are well-positioned to fund continued investments in our company. We have a few comments regarding the outlook for 2023. First, for contingent commissions, we anticipate them to be relatively flat year-over-year, but this will be ultimately driven by loss experience. As it pertains to taxes, we expect our effective tax rate to be in the range of 24% to 25%, a slight increase compared to 2022 due to a higher estimated tax rate in the U.K., the lower year-over-year tax benefit from the vesting of stock grants and limitations on the deductibility of certain compensation benefits. We anticipate our interest expense will be in the range of $185 million to $195 million. Regarding interest income, we're seeing some nice improvement and are projecting income of approximately $14 million to $17 million subject to how the Fed changes interest rates. As it relates to amortization expense, we're projecting approximately $162 million to $166 million. This does not include amortization associated with acquisitions that we may complete during 2023. As it relates to margins, we do not see any major headwinds or tailwinds heading into 2023, that shouldn't materially impact our margins. As we close out '22 and look forward to '23, we have a couple of observations. First, last year was another very successful year for Brown & Brown. We delivered over $3.5 billion of revenues growing 17% had our largest year of acquisitions while expanding our footprint and capabilities in the U.K. market. We invested in technology to help improve the experience for our customers and teammates, grew organically at over 8%, delivered strong margins, again, even with higher variable costs and the impacts of Hurricane Ian, as well as generated over $880 million of cash flow from operations. We're also in a strong position from a capital standpoint and we'll continue to invest in our capabilities in order to best serve the needs of our customers. Regarding the economic outlook of 2023, well, there's a lot of uncertainty regarding inflation and labor shortages, we expect further economic moderation as the impact of higher interest rates take effect. From an insurance standpoint, we're anticipating admitted market rate increases to be relatively consistent with last year, we expect CAT property rates to be up 10% to 40% or more for at least the first half of the year, as well as capacity to potentially be constrained. It's not potentially, it will be constrained as the market needs to fully digest an impact. The impact of Hurricane Ian, as well as other insured losses. In addition, professional liability rates should continue to moderate downward. Regarding recent acquisitions they're performing well and we are expecting good profitable growth in the coming year. On an M&A front, we have a good pipeline and we'll continue our disciplined approach to finding great companies that fit culturally and makes sense financially. In summary, we feel great about our business, the diversity of our capabilities and our ability to help customers with risk management solutions that best fit their needs. Our team of almost 15,000 has good momentum, and we're looking forward to another strong year. Great. Good morning, everyone. I know you don't like to forecast organic revenue growth, but there are two items, one you called out in your commentary about catastrophe pricing. And secondly, in your retail segment, you talked about some employee benefit headwinds or a difficult comparisons. So, when I think about '23, Powell and Andy, how will those variables -- like the June first renewals on property CAT and what's going on employee benefits, how will that affect your organic results for this year -- this upcoming year? Okay. Let's start with the second part first. Let's talk about employee benefits. Employee benefits overall performed really well for the year and we're very pleased with those businesses. And as we said in our prepared remarks, that was actually really only in one or two businesses that had a setback. Having said that, I think that EV will continue to perform well in the system. We don't give organic guidance on that and we don't break out lines of business, but from an employee benefits standpoint, feel really good. As it relates to the CAT property pricing, the variable there, Greg, as you know is not as much our -- I mean, it is there are certain limitations on ability to present limits in some instances. But it's more of -- in my opinion, it's more of an affordability issue. And so, if you think about if you've been giving rate increases, let's just say to yourself on your own personal lines homeowners, if you've got an increase of let's say 10% a year for four or five years in a row and then all of a sudden we came on the fifth year and gave you a 25% increase, there is a -- the buyers are tiring of that. And so, having said that, availability of capacity in this market is unlike anything I've ever seen, I've only been in the insurance industry for 33 years now. So, there's a lot more to go, but I've not ever seen anything like this and we will continue to provide solutions to our customers. But sometimes the example I think we used last time and I would use it again is, if you have an entity, and they're paying $800,000 for their property and the renewal is a $1.8 million, and they say, what can we buy for $1 million, which can't buy anymore insurance, we can't afford it. So, we're seeing that more and more, Greg. So, the CAT pricing that is going to -- is it more of a wildcard. The other thing that we're seeing is in the CAT capacity and accessing it in some instances, there is commission pressure downward on some of those placements now. So, a lot of people just think, well, as the rate goes up X, then you're going to -- your commission goes up X if you're on commission as opposed to a fee and that is true sometimes, but in this case, they might cut your commission one or two points, and so we're seeing that as well. So that's a harder one to answer, Greg. Okay. I understand that. It's a moving target, especially in the Southeast. I guess for my second question just pivot, Andy, in your comments you talked about -- you gave some guidance, and then on adjusted EBITDAC margins you said no tailwinds or headwinds for '23. So, maybe you can provide some context about -- is that -- in terms of laying out expectations for Street, is it one where we just expect margins to be flat year-over-year, or maybe give us some color to help us frame what your comments really mean. Sure. Well, I think what we're trying to say on that one, Greg, is we don't see any major headwinds or tailwinds going into the year. We do have like most everybody else unknowns around what will happen with inflation and T&E, but we'll work our way through those pieces. I don't see any major incremental investments that we're making in the business that we need to call out externally, we're always making investments in our business, but we do that each year through everything. We do anticipate that T&E will be up year-over-year, just not to the extent that what we saw '22 versus 2021 right now. So, and that was really why we gave guidance going into 2022 because that was a big variable, but right now, we're not seeing anything specifically that would impact the margins in 2023 versus 2022. And just a point follow-up on that. When you think about organic for '23, is there some sort of rule-of-thumb I know some of your peers offer rules from that, if the organic, a certain amount we can expand margins, if organic not, I mean, do you have any sort of metrics that you're thinking about in terms of organic as its impact on margins? Thank you. One moment for our next question. And our next question comes from Rob Cox with Goldman Sachs. Your line is now open. Hi, thanks for taking my question. Just with respect to Retail, you called out a couple of headwinds. I was wondering, specifically on group benefits if the toughest comp was created by a true-up of exposure expectations in the prior year quarter or more so by a deceleration in growth this quarter. No, Robert, maybe the way to think about it, is we had a few businesses last year that just had absolutely outsized performance in the fourth quarter. One of them was a newer business that was starting. So, it was in growth mode. So, that's what makes the year-over-year comparison in the fourth quarter difficult. But as Powell mentioned in his comments, we feel really good about how our businesses are positioned and how they performed for 2022, don't read more into that in the fourth quarter there's no reason to. Got it. Thank you. That's helpful. And maybe just moving onto some of the Florida legislative changes. Any comments on what you think the impact of those might be for Brown & Brown in the near term and then perhaps longer term? So, Rob, first of all, we think that based upon everything we see they are positive for the operating environment for risk bearers and for insurance in the State of Florida. I'd like to point out that we anticipate that the trial bar will challenge those. So, I don't think those go in place easily. So, I don't know what that means relative to timing and adoption, relative to the marketplace what our governor and the State of Florida is trying to do fundamentally is create; one, viable; two, competitive; three, sustainable marketplace. And the State of Florida is not really want to be so-called in the insurance business. But with this disruption, they will have to be bigger in the insurance business for the next several years. So, I believe -- we believe that this is a multi-year transition to bring the Florida marketplace specifically personal lines in Florida back to that kind of environment. So, it will probably take three to five years to have some additional participation by the State of Florida, i.e., what they're proposing in this and it may need more going forward. But it is not the intent of the Governor to expand their participation, i.e., as being a state risk bearer. So, it's hard to tell because you got challenges ahead, you got other things. But what we really want and need in the State of Florida is relatively affordable homeowners' prices for all-sized homes. With the coverage A home of $200,000 versus one that's over $1 million, and everything in between. And so, there's a lot of disruption across those -- all those sizes. Got it. Thanks. And maybe just lastly could you quantify the annual growth bonus in National Programs and maybe specifically to programs, where you see contingents going in 2023? So, I think -- I think, Rob there's two pieces inside there. So, one of the things we talked about on the growth bonus that was about $7 million, and as of right now, we don't see that recurring into 2023. And again that is inside of the organic calculation, not in contingent commissions. And then, we didn't give guidance on contingents by the individual segments. My comment was just overall for the company that at least as of right now we see relatively flat in 2023, but again all depends upon loss experienced during the year and overall growth and profitability. Thank you. One moment for our next question. Our next question comes from Weston Bloomer with UBS. Your line is now open. Thanks for taking my questions. First, one is just a follow-up on the employee benefits comment. Can you just remind us of the seasonality of that business? And do you expect there to be any material headwinds in the first quarter as well? Hi, good morning, Weston. Yes. The EB business does have some seasonality to it, and it's generally a little bit -- if you look across the quarters first, normally it's a little bit more weighted to Q1 and that's just because of the way in which revenue is recognized in that business. And then you normally see it, the fourth quarter is normally one of the lower that your kind of just naturally how that business participates. From at least the -- some of the headwinds and what we've talked about in the fourth quarter, some of those may carry over into Q1, but don't see any issues on a full-year basis similar to our comments about how we thought about the business for 2022. Got it. Thank you. And then kind of a similar type of question within professional lines. I know you highlighted the slowdown in D&O pricing. Is there any seasonality or how should we think about the impact of lower rates in that business both in retail and then in wholesale? So, the way I would just look at it is if you think about an environment which has had rate pressure up for the last several years, and in some cases dramatically more in the public markets, they're coming down substantially because it's a very competitive environment and one might speculate, Weston, that people that are reducing their catastrophic property exposure would want to write business elsewhere and where might they do it and they might say in casualty or professional lines. So, I think it's important to think of that as a headwind, slight, but a headwind on that segment of our businesses, because I think it will be down. And in some instances down a good bit. Great. Thank you. And then last one, just on the margin I know you highlighted no material headwinds or tailwinds, and maybe you don't gain too granular here, but it is the March '22 M&A that came in at a higher overall margin. Is that business still running higher overall relative to kind of the core Brown & Brown? For the three -- combined. Yes. All the businesses are performing in line with our expectations. We talked a little bit about some of the seasonality during the earnings call last quarter, but no, they're all kind of right in line with what we expected. Thank you. One moment for our next question. And our next question comes from Elyse Greenspan with Wells Fargo. Your line is now open. Hi, thanks. Good morning. My first question, on the contingent commissions, Andy, I know you guys had those lender-placed contingents that you didn't -- you weren't sure that they would recur next year. Does that assume that they come back or what are you assuming for the lender-placed program? So, one of the items that we saw in the third -- during the fourth quarter, is we did recognize about $3 million or $4 million that we had anticipated we would not recognize in the fourth quarter. If you remember back to the call, we said we had backed out to the third quarter call. We had backed up $15 million year-to-date and said, we probably would -- therefore, not record in the fourth quarter. Development was not at the extent that we anticipated at that stage, which is that positive. And so we recognize those three to four, and then as we look to 2023, we would anticipate earnings some in '23, not back to kind of normal levels because there is some still carry-over in the calculation. But we've taken that into consideration when we have given guidance at a total level for the company, substantially flat. Okay. And then the interest income, right? I know in the past you guys had said maybe fiduciary income wouldn't be that big, but it sounds like you're seeing a little bit of a pickup there. Right? You guys said $14 million to $17 million, wouldn't that be accretive to your margins in '23? So, I guess theoretically, maybe the interest income is a tailwind. And that's getting offset by something else because it sounds like you're saying no headwinds, tailwinds, may be flat margins overall. But it does feel like that number in isolation would be a tailwind to the coming year. Yes. I think isolation, I think that's probably fair at least. But there's -- within our business, like most businesses, but at least we'll talk to ours specifically, there's always a lot of moving parts, and you've always got things kind of moving back and forth. And that was really why we're trying to give guidance about any major tailwinds or headwinds that are out there. And then one last one, the employee benefit you guys said is concentrated in the first part of the year, but it does sound like what happened in the fourth quarter was maybe just -- and just a really tough comp with last year, so when we think about retail and I know you don't like to give guidance, but is there anything that stands out to start the year that would make the first part of '23 have tougher comps in the back part of the year. Nothing at a top-level until Weston's earlier question is, will there be potentially a little bit of headwind in the first quarter from what we saw in the fourth quarter a little bit, but we feel really good about our business and how it's positioned and the capabilities that we have served customers of all sizes in that business and feel like we will perform well during 2023. Thank you. One moment for our next question. And our next question comes from Michael Zaremski with BMO Capital Markets. Your line is now open. Hi, good morning. Maybe focusing back on the dislocation in the parts of the property market. I'm just curious at a high level if your view has changed and whether this is -- whether the environment is kind of net benefit or to growth or margins or net neutral or maybe even that negative because there's a lot of moving parts clearly you came out and talk a little bit about commission pressures, but rates are moving materially higher, so just kind of curious if you see that all the moving parts net-net, as a wash potentially or if your view has changed. Yes. No. I would say, Michael, it's probably a net positive but slight net-net positive, and the reason I say a hedge with a slight is because of changes that we can't see in the market yet i.e., limits for -- limits being reduced by carriers or some potential for any commission pressures or anything of that nature, but -- and basically also clients just basically raising their hand and saying look uncalled. And I know that's tough, but it's true because we are the deliverer of bad news when it comes like this. So, it will be -- I think it will be slightly positive that is how I would want you to think about that. Okay. That's helpful. Maybe switching gears to inflationary impacts on the income statement of Brown. I think there was a comment made about some unknowns on inflation and T&E. When I think about the Brown's commission model I think of it kind of being somewhat more insulated from wage pressures due to the kind of how the front-line salespeople are paid. But maybe I'm wrong and maybe you can just kind of elaborate on what do you mean by kind of where the T&E and inflation are. So, let's talk about your comment around wage pressure. We're not immune to wage pressure and I think that's a very important thing. And one of the things that we find just like anybody else out there in our space is the war on talent is very competitive and people are looking for people not just salespeople, but there could be service people, or marketing people, or administrative people that administer claims or things like that. So, it's a very competitive marketplace. So I don't want you to think that we're immune to that because we are far from that. That's number one. Number two, when we say T&E pressure, it's not as though we think there's going to be so much -- that much more travel and entertainment. We think that the -- if you do the same, there's just significant pressure on, let's just say an airplane ticket or a hotel depending on where you're going. And so, that's where we're seeing that pressure. And so, our business is not unlike many of the other businesses that you know, or follow, or all of the above, it isn't an inflationary environment. The pressure here although it is high is not as high as it is in England,, and in Ireland that wage pressure seems to be higher there. But we're working through that as well. So, that's kind of what we mean by that, Michael. That's helpful. And just maybe sneak in one quick one. Any impact from the flooding in California to -- that the flood program that you administer, that could be material. No. We haven't seen anything interestingly enough in California. As you know, they don't get a lot of rain to begin with. And so, when they do get a lot of rain, they get significant flooding, and there are not a lot of people that buy flood insurance in the State of California. So, it's no. We don't see that. Thank you. One moment for our next question. And our next question comes from Yaron Kinar with Jefferies. Your line is now open. Hi, good morning, everybody, and thanks for [all] my questions. I guess my first question and I think it may be tied back to a couple of other questions you have already received. As you think about the property CAT rate environment, where do you see maybe the -- which segments do you think would benefit most and which ones would you see maybe facing greater pressure from the various components you talked about kind of reduced commissions, maybe more difficult placing business. I want to make sure I understand that, Yaron, can you just repeat the question or elaborate a little bit? You're saying what do you think becomes more difficult, and then what becomes easier? Did I hear that correctly? I'm asking of the four segments that you have or I guess really three Retail National Programs and Wholesale which do you think would benefit more and which would maybe face greater pressure? Okay. So, first off, I would say the -- I look at it a little differently than benefit more or not. You didn't use this term or suffer more maybe the and things for that. Let's look at retail for a moment. Retail has the good fortune. We deal directly with the customer. So, you're going to have a lot of heavy lifting relative to delivering those particular increases and you may have, as I said, you might have commissioned reductions in some instances. But rates going to go up, and I'd say that it's mildly positive relative to organic growth in that business. In wholesale, it makes their jobs, property brokers significantly more difficult, and trying to fill out lines of business. So, if you had a $100 million line and it was handled by one or two markets, and then now that market, it took 80% of it is pulling back or cutting their participation you got to put six or seven markets in to get your $100 million. That said, there will continue to be pressure there as well. And I think that there is more -- the most conflict if you want to call it that in placements will be in retail and wholesale. In National Programs, it's a matter of capacity availability. So, as you know, there are a number of carriers out there who have allowed their capacity underwritten by a number of different type of MGAs and MGUs, and a number of those were not profitable, not just last year, but over many years before. And so, there is -- what we consider a flight to quality. And in the sense of our underwriting facilities, we're very pleased with the results that we've delivered prior to -- excuse me -- last year and including last year with the losses and Ian and Nicole. So, I'd say that in programs it's a different thing, their growth potential is limited by availability. It's not a conflict of, in the other two, there is the hand-to-hand combat of getting people to actually put limits up and do it in the underwriting facilities, we have that authority and we can do what we can do, but we're limited by the capacity. So if in fact, a market or markets decides to cut back on their capacity they give to us that will impact our ability to grow. And conversely, if they decide to change their commission level and that would impact our ability to grow. The one thing that I do want to mention, I think it's important for everybody to think about this. Things are never as good as they seem or as bad as they seem. And what I mean by that is, even though the CAT market is very challenged right now, there will be a time in the future where it improves. Now I'm not foreshadowing something, because we don't have a crystal ball. That doesn't mean 12 months from now, we're going to have X or Y or Z, that's not what I'm saying. But there are certain markets that are approaching it in a way that they are looking very opportunistically at it. And then there are other markets that are looking at it like a long-term partnership. Obviously, we would prefer the latter as opposed to the former. But we're out looking for capacity globally. So, I just want everybody to kind of know that this pressure too will pass at some point. Thank you. That's helpful color. If I could switch gears to M&A for a second. So, I think you had said that the pipeline remains robust. That said, you are seeing M&A activity slowing. Is that just a function of a bid-ask spread that is too wide? Or are there other drivers there? No, no. I think when you say the M&A activity is slowing, remember, we're talking about the industry. So, as you know, private equity has been a very big participant, and the number of private equity announced transactions in Q4 was down substantially over the prior quarter, and or Q4 of the prior year. I think that there is an interesting sort of -- we're kind of at this unusual clash point if you want to call it that, which is the market with increased interest rates and buyers would like to see a slight decrease in multiples paid. And yes, there are businesses, some of which are owned by private equity that we'd like to monetize their businesses at what were historic levels or multiples in anticipation of other opportunities for them. Or maybe better said, maybe they think there'll be pressure on multiples going forward. So they want to get out at a higher multiple, if possible, then they might think of in a year from now. I'm just using that as an example. So, I think we're going to see a lot of activity in the next 12 months. The good part about our business is we're focused on the long-term and long term to us is not one year or three years, it's a very long-time. And so, we're looking for businesses that fit culturally make sense financially, and we believe there will be those businesses out there, but in the interim period, as Andy said, we're aggressively paying down our debt. We're investing in teammates and focusing on growing our business organically. Thank you. One moment for our next question. And our next question comes from Mark Hughes with Truist. Your line is now open. Powell, you had talked a good amount about your quest for capacity. Did you find any restrictions? Have you seen any with the harder reinsurance markets, any cut-back on your programs and you're thinking about a flood or a quake for instance? Anything that is noteworthy could perhaps impact organic growth. Yes. So, thanks for the question. That is somewhat of a moving target, but at the present time, we think a good outcome is flat in terms of no reduction in capacity. We may have certain of entities or businesses where they would maybe be trading some capacity or debt -- net down on a net basis, just slightly, but right now, we think it's pretty neutral. And from our vantage point, we view that as a win. So, I'm not aware of something and you specifically asked about a flood or a quake, but that could involve our wind facilities as well. But the thing that we talked about last year, and we've talked about in prior years, but it's even more magnified this year. Our growth opportunities and National Programs will be directly -- not exclusively, but directly linked to the amount of new capacity that we're able to secure. And so, if in fact, we are not able to procure any new capacity that's going to be a slight limitation on the organic growth that does not mean that we can't grow organically, it just means that we will grow more organically if we are able to secure more capacity, which we're looking at globally. Understood. And then on the captive. You mentioned some of the economics there, $30 million to $35 million in revenue, but you've got loss retention of $13 million per event. One would think you would need a pretty high margin on that revenue in order to feel good about generating a return over multiple years if you've got the kind of retention. Am I thinking about that properly? Well, I'm going to answer your question two-fold. Number one, I want you to think about what a captive is. There's really three parts to the captive. There is the loss, the retention amount that you retain on any one loss that's just losses. There's number two, which is the reinstatement premium, which means you put the program back in place for a subsequent event. And the third would be if you had any profit in that period of time in that captive prior to them being distributed. And so, what I would tell you is that we are very mindful of the way we invest our capital, and we are looking for returns that help us grow the business. So, what I would tell you is, if we did not think that those were reasonable long-term investments, we would not make them. And in the event that the economics turn against us, meaning cost, inputs, or things make them not viable then we just won't do them. Hi, Mark, just a question for you, if you can expand on -- when you said -- you talked about providing adequate returns, how do you -- walk us through how you mean that because I guess I think we're maybe not seeing it the same way you are, but if you seeing.... Yes. If you're generating $30 million in revenue. And so you have a 50% margin, and $15 million. But if your retention per event is just $13 million. And maybe a Hurricane hit Florida one out of three years then that influences the view of the economics. That was a -- just real simple math I was thinking about. Okay. So, that there -- and probably lies the opportunity to clarify on these some more. Here's the way we want everybody to trying to think about these, is what we're doing is we're participating in the underwriting profits on these captives. What do we do on contingent commissions, we participate in the underwriting profits. So, this is not where they're coming in and we're paying commissions and everything else on the business. So, I think that's part of just the piece that maybe you're thinking about it's a traditional call it operating profit, it's coming through as -- assume it's normal operating profit versus underwriting profit in there. So, we're very, very pleased with the performance this year and to Powell's point, we want to put our capital into these if we didn't think that we can get an appropriate return. And the $13 million, Mark, is up to -- that doesn't mean it would be $13 million. And so, there is a very important distinction, it can be less than that or substantially less than that. Thank you. One moment for our next question. Our next question comes from Michael Ward with Citi. Your line is now open. Thank you, guys, good morning. One last one, maybe I was wondering if you could share any color on the profit commissions in programs and if any of that was related to maybe hurt Hurricane Ian true-ups. Good morning, Mike. Andy here. It's the -- wouldn't say anything that was related to Hurricane Ian true-ups, right? What we did at the end of the third quarter is we had backed off to $15 million as we've mentioned earlier, and we had also, at that point said based upon what we thought the losses were going to be, we would not record $3 million to $4 million in one of our programs that development did not come in at the anticipated level, which is, again, that's a positive thing. Therefore, we did go ahead and record that $3 million or $4 million in the fourth quarter. All over the other contingents that we recorded in the fourth quarter, that was all based upon the profitable growth that we delivered for our carrier partners, and just we do year-end calculations and sometimes -- you make it sometimes you don't -- that's where we see generally the most volatility in our National Programs, they just -- they move back in force. Super helpful. Thank you. Maybe one last quick one, just on the pressure and specialty. Is that -- I think you called out, auto -- lower auto and RV sales. Is there anything else there that we should be thinking about? No, I don't think so. I mean, remember, if you think out a little bit sort of speculate on that the outlook on that industry, I think probably inventory levels will probably lift a little in the third quarter and beyond in the year. Also in light of the economic environment that will probably be some more incentives, I don't know that, but incentives put-in-place to move units. So, if the inventory is there, and I use the most important thing, is we can't fully predict that. We think you're going to see some uptick in that, but slight. Good morning, thank you. I just had a question on the Programs business. Andy, I think you previously talked about your expectation for the Program's organic growth to kind of moderate, but even excluding that $7 million that you called out organic growth was really strong and actually accelerated sequentially. So, can you just give us some more color on what kind of drove that outperformance relative to your internal expectations? Yes. So, one of the other items in there we talked about it was we said we delivered $25 million of revenue from the captives and about $5 million of that came through the Orchid acquisition. So, the remainder of that being on the organic side. We're going to see continued growth in '23, but not at that same level, Derek. Got it. Okay, that's helpful. And then just one quick one. I know that the GRP and BdB integration is going well. Can you just give us some color on your European economic outlook and the anticipated impact on the organic growth for those businesses? Sure. So, remember GRP is England and Ireland, both Republic of Ireland and we have businesses already in the Republic of Ireland and Northern Ireland. And BdB, we do business in -- excuse me, Italy, meaning we are the largest producer of Italian business into Lloyd's. That's over 50% of that business and then we do business in France and in Belgium. And we also do business obviously in England into the London marketplace. So, what I would tell you is that in England it's not dissimilar to hear, which you see a lot of pressure on wages and cost of living, i.e., fuel oil and things like that. And so but from a comp -- from a customer standpoint, we have not yet seen a significant down draft on their buying habits. So, what I would tell you is, we think that the economy seems to be moving along in a fine way there as it relates to our exposure although it would be -- it's much smaller in Western Europe, we're not seeing any other unusual trends either remember Lloyd's is a big market globally. I think about 50% of their premium writings are in the United States. But the other 50 are worldwide. And so, we are continuing to have nice growth inside of our business -- our Lloyd's brokers, which we have now three. And so, we're very pleased that decades-long Meyer and BBB. Thank you. I'm showing no further questions, I'd like to hand the conference back to Mr Powell for any closing remarks. Thanks, Norma. Thank you all very much. We appreciate your time and energy. We thought last year was a really good year and we're excited about the future. I think my final comment would be this. As it relates to trends we don't think that trend is one quarter and we don't measure the outcomes of business over a quarter. We look at years and multiple years and so as it relates to each of our three largest segments, we feel good about going into next year. There are some limitations, i.e. because of market constraints and economic constraints, but we're going to work our way through those.
EarningCall_1082	Good morning and welcome to the AGNC Investment Corp. Fourth Quarter 2022 Shareholder Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Wisecarver, Investor Relations. Please go ahead. Before I begin, Iâd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNCâs periodic reports filed with the Securities and Exchange Commission. Copies are available on the SECâs website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, Director, President and Chief Executive Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President and Chief Investment Officer; Aaron Pas, Senior Vice President, Non-Agency Portfolio Management; and Sean Reid, Executive Vice President, Strategy and Corporate Development. Thank you, Katie. Throughout our 15-year history, we have noted that rapid and sizable interest rate changes are the most challenging environments for levered fixed income investors. Importantly, however, these transitions have generally preceded our most favorable investment environments. As I will discuss in greater detail, the investment opportunity ahead could be one of the most favorable and durable in AGNCâs history. For the fixed income markets, 2022 was among the worst years ever experienced. Interest rates across the yield curve moved materially higher as the Fed increased the federal funds rate 425 basis points in just 9 months, the yield on the 10-year treasury increased by close to 250 basis points. To put that move in historical context, the total return on the 10-year treasury in 2022 was the worst annual performance in over 100 years. The sharp increase in treasury rates pushed mortgage rates to their highest level in more than two decades. Agency MBS often underperformed other fixed income asset classes during significant market downturns. This was indeed the case last year as spreads across the mortgage coupon stack widened to levels rarely seen before. Similar to the 10-year treasury, the total return on the Agency MBS index in 2022 at negative 12% was the worst year on record dating back to 1980. These challenging conditions peaked in September and October when monetary policy and macroeconomic uncertainty was at its highest point. On our third quarter earnings call, we highlighted the tension between extraordinarily attractive investment returns and highly uncertain financial market conditions. We also noted our expectation that a uniquely favorable investment environment would eventually emerge. Since that time, bond market sentiment has improved materially. This positive shift coincided with investors recognizing the unique investment opportunity available in Agency MBS on both a levered and unlevered basis. At the same time, weaker inflation data allowed the Fed to slow the pace of monetary policy tightening, which in turn led to a decline in interest rate volatility. These positive developments attracted investors back to the fixed income markets. The key question for investors today, of course, is not what happened, but rather where do we go from here? Will the Agency MBS market revert back to the challenging conditions to characterize 2022 or is the outlook for 2023 more favorable? We strongly believe it is the latter. We believe the positive shift in bond market sentiment that occurred in November likely marks the beginning of the recovery for Agency MBS. Market shifts like this evolve over time and are not linear. But that said we do believe the recovery is underway. This favorable outlook for Agency MBS is supported by several positive dynamics. First, even though Agency MBS spreads tightened in the fourth quarter, they remain wide by historical standards and continue to represent a compelling investment opportunity. This is especially true for levered investors such as AGNC given the significant improvement in funding that has occurred over the last several years. Moreover, while biased tighter, we believe spreads will remain wider than previous historical averages. This would be a welcome development for AGNC and supportive of our ability to generate attractive returns for shareholders over time. Second, the demand for Agency MBS will likely outpace the supply even without Fed purchases. Ongoing affordability challenges and a slower housing market will limit the organic supply of Agency MBS this year. In addition, runoff on the Fedâs portfolio will be extremely slow given minimal refinance activity. Third, interest rate volatility is poised to decline. The Fed has already slowed the pace of rate increases and is nearing the inflection point in monetary policy. If inflation data continues to moderate and the Fed pauses, interest rate volatility should fall materially. Greater interest rate stability and a more stable economic outlook could reignite bank demand for Agency MBS and increase the demand for fixed income securities more broadly from a wider range of investors. So to summarize, we believe strong investor demand, manageable supply and improving interest rate stability together strengthen the outlook for Agency MBS. Importantly, with the Fed expected to gradually unwind its mortgage portfolio over the next several years, this environment could also prove to be more durable than previous episodes. With spreads above historical norms and funding conditions favorable, AGNC is well positioned to generate attractive returns for shareholders without compromising our long-standing risk management discipline. Thank you, Peter. For the fourth quarter, AGNC had total comprehensive income of $1.17 per share. Economic return on tangible common equity was 12.3% for the quarter comprised of $0.36 of dividends declared per common share and an increase in our tangible net book value of $0.76 per share. The strong increase in our tangible net book value of 8.4% for the quarter was driven by a tightening of spreads between our mortgage assets in swap and treasury-based hedges. As of last Friday, tangible net book value was up approximately 10% for January. Leverage at year-end was 7.4x tangible equity, down from 8.7x as of the third quarter, primarily due to the improvement in our tangible net book value and a lower asset balance. Average leverage for the quarter was 7.8x tangible equity compared to 8.1x for the third quarter. During the fourth quarter, we also opportunistically issued approximately $187 million of common equity through our at-the-market offering program. As of quarter end, we had cash and unencumbered Agency MBS totaling $4.3 billion or 59% of our tangible equity and $100 million of unencumbered credit securities. Net spread and dollar roll income, excluding catch-up amortization, was $0.74 per share for the quarter. The decline from $0.84 per share for the third quarter was primarily a function of our smaller asset base, higher repo funding cost and lower dollar roll income, which offset higher asset yields and higher interest rate swap income for the quarter. Lastly, our average projected life CPRs as of the end of the quarter increased modestly to 7.4%, while actual CPRs continue to slow meaningfully averaging 6.8% for the quarter. Thanks, Bernie. As Peter discussed, Q4 marked a decisive turn for fixed income markets. Interest rates peaked in October with 5-year treasury yields reaching nearly 4.5% before retracing the move as the outlook for Fed policy solidified on evidence that inflation is beginning to slow. The par coupon agency spread to a blend of 5 and 10-year treasury hedges widened to 180 basis points in October before GAAP being tighter as sentiment turned and investors took advantage of the highest yield levels and wider spreads on production coupon Agency MBS in more than 10 years. Early in the quarter, lower coupon MBS materially underperformed higher coupons. However, as index-based fixed income bond fund flows improved, lower coupons made up for much of the early underperformance to end the quarter only marginally behind production coupons with the entire coupon stack outperforming treasury and swap-based hedges. During the fourth quarter, we continued to optimize our holdings with a bias towards 30-year production coupon MBS. As of December 30, our asset portfolio totaled $59.5 billion. Our hedging activity during the quarter was relatively minimal, although we did opportunistically move a portion of our hedges to points further out the curve. At quarter end, the hedge portfolio totaled $67.6 billion and our duration gap was 0.4 years. Over time, as the Fed reaches its desired short-term rate level, our hedge ratio will gradually decline and our hedge composition will likely shift towards a greater share of longer term hedges. As Peter mentioned, the outlook for returns this year is favorable. Despite the outperformance in the fourth quarter, spreads on production coupon MBS are still materially wider than the average levels during 2018 and 2019 when the Fed was last reducing its balance sheet. From current levels, we are not expecting significant tightening, but we do expect to extract the economic value from wider spreads for strong earnings over time. The combination of wide spreads, low prepayment risk, and robust funding markets for Agency MBS has created an attractive in what we believe will be a durable investment environment. Thanks, Chris. Credit spreads in the fourth quarter tightened for most sectors and across the capital structure as inflation data eased and the economic outlook improved. In response to the strong performance, we opportunistically sold about $300 million in non-agency securities over the quarter, ending the year with a total portfolio of $1.4 billion. While we did reduce our portfolio allocation and credit, we remain very comfortable from a credit perspective with our current composition of our non-agency portfolio and our specific holdings. The majority of our residential credit holdings are backed by or reference seasoned loans and as such, now benefit from a significant amount of house price appreciation. On the commercial side, the vast majority of our securities are supported by significant levels of credit enhancement. Looking forward, issuance in both residential and commercial mortgage sectors is expected to remain relatively low. The supply dynamic has contributed to spread tightening year-to-date, particularly against the backdrop of inflows into fixed income. As a result, we expect most spread product to trade directionally with rates barring a material repricing associated with a more severe recession than currently anticipated. Should bond fund inflows accelerate, we expect this would be favorable for spreads against the lower supply backdrop. Excuse me. I apologize for the inconvenience. [Operator Instructions] The first question comes from Vilas Abraham with UBS. Please go ahead. Hi, everybody. Thanks for the question. Can you guys talk a little bit more about the hedge book at this stage in the tightening cycle? And what are the different scenarios youâre thinking about there? And then just also, I know just the net duration did drop a bit quarter-over-quarter. So if you could touch on that, too. Thanks. Sure, good morning, Vilas. And again, we apologize for the technical difficulties this morning. But with respect to the hedge portfolio, Vilas, I think youâre sort of alluding to it correctly at a high level. What youâve seen us do with our hedge portfolio is shift our hedge portfolio to the sort of monetary policy and economic environment that weâre in. In an environment, for example, where the Fed is tightening aggressively like it has been, the yield curve tends to invert. And so what you saw us do is operate with a very high hedge ratio to give us a lot of protection against for our short-term debt repricing and then also front-end load our hedges more to the 1 to sort of 5-year part of the curve because thatâs the part of the curve that tends to underperform. And that has certainly been the case as the Fed has aggressively tightened monetary policy over time. In fact, Chris alluded a little bit to this. As the monetary policy position from the Fed evolves and ultimately, they are getting close to the point where they are going to pause and then looking further down the road, there will eventually be a point where the market will repricing and even more aggressive easing than the market is currently pricing in. You could expect us to evolve our hedge position again to that environment. And in that scenario, if you look back in history, what we tend to do is operate with a less than 100% hedge ratio over time and fewer shorter-term hedges because obviously, the front end of the curve is going to be the part of the curve that will ultimately outperform. And ultimately, with the yield curve being as inverted as itâs now, I think itâs unsustainably obviously, inverted, thereâll be a time when the yield curve will be more positively. So we would benefit from having a hedge position that has a greater share of longer-term hedges in a smaller portion of shorter-term hedges. On the duration gap, Chris can talk a little bit about that. But youâre right, we are operating with a slightly smaller duration gap in this environment. Iâll just add. I mean, our duration gap shortened about 0.8 of a year during the quarter, and the majority of that was driven by repositioning into higher coupons within the 30-year MBS portfolio. The par coupon mortgage rate also declined about 30 basis points during the quarter. And so that, too, had the effect of shortening the duration of our asset portfolio. And as Peter mentioned, we shifted a portion of our treasury based hedges to longer key rate buckets and our activity there shortened the duration of the aggregate hedge portfolio by about 0.2 of a year. I just â there is a great obvious curve rate or duration trade. The best trade is only mortgages without making a lot of bets on rates, which is why we donât have much of a duration gap. And just to echo Peterâs comments, given the correlation between spreads, rates and Fed policy, weâve maintained a relatively high hedge ratio on the front end of the curve as thatâs the biggest risk to spreads as aggressive Fed policy. Yes. And just to add to that last point, Chris, is right, with the 10-year now at around 350. Weâre obviously a little less worried about the interest rate rally risk in the market. I think the 10-year it seems to be probably closer to the lower end of the range than the higher end of the range. So weâre more comfortable with a smaller duration gap for the time being anyhow. And can you also just briefly talk through demand dynamics who the incremental buyers are that youâre seeing just how you see that playing out this year? Yes. Well, itâs really â you have to look at the demand dynamic versus the supply dynamic. And as I mentioned, I think the supply dynamic is still really going to be reasonably favorable given the fact that organic supply will be positive, a couple of hundred billion. But obviously, there is lots of headwinds from an organic supply perspective. But what weâve seen and this really was the shift in the momentum that I alluded to there came a point in the fourth quarter where fixed income became much more attractive, just broadly speaking, to a much wider group of investors. And so we saw significant bond fund inflows for the first time in 2022. In fact, if you look at bond fund flows for all of â22, I think the number is something like $250 billion of negative outflows in the year. But if you look at the flows in November and December, they were decidedly positive. And in fact, I think year-to-date, they are already probably close to $50 billion of inflows. So that rotation, out of other asset classes into fixed income and into Agency MBS, I think, is going to continue particularly against the outlook from the equity markets is obviously, from a portfolio perspective, I think investors are favoring a much greater share of fixed income securities. So I think that demand could continue. Obviously, as rates stabilize and the market gets more comfortable that weâve seen the high-end rates, which at some point that will become clearer to the market. There is â and the economic outlook improves or at least stabilizes, I think there is a chance that banks reemerge as a source of demand. So I think those two things together could lead to demand outpacing supply. And thatâs why over the short-term, our view is that spreads are likely to buy a bias to be somewhat tighter not dramatically, but I think the trend could stay in place for some period of time, particularly because the seasonals from a supply perspective are also really good over the next several months. Can you talk about your appetite to â good morning, can you talk about your appetite to raise capital? It looks like you were active with the ATM kind of early in the fourth quarter but then less so, just kind of how youâre thinking about that opportunity to put new money to work, given the return environment you highlighted? Sure. I appreciate the question. We did raise a little bit of capital in the fourth quarter. Bernie alluded to it. It was about 3% of our common capital base. But I think the key message from an issuance perspective is that we will continue to look at our capital markets activities and stock issuance activities from the perspective of our existing shareholders. I think weâve always done that. We will continue to do that. And what that means is that, for example, weâre not going to issue capital for the sake of getting larger, given AGNC size and scale today, I donât think that is a relevant benefit, if you will, of issuing capital. But we approach it from the perspective of our existing shareholders saying, is that capital transaction accretive to our existing shareholders. Obviously, one of the key inputs in that equation is where the book value is versus the stock price at the time that we do the issuance. I know itâs difficult from the markets perspective to know what that is. We look at that on a sort of real-time contemporaneous basis. We did that in the fourth quarter. And when we issue stock from that perspective, weâre issuing it when we believe it is accretive from a book value perspective to our existing shareholders. But there are other considerations that also go into it, and we will continue to emphasize these, for example, leverage is an important consideration from an existing shareholder perspective. From my perspective, we always try to prioritize our leverage decision in the context of our existing shareholders, meaning we want to be operating from an existing shareholder perspective at our desired leverage level. Once we are at that desired leverage level, we can then think about adding more capital if itâs accretive from a book value and then that leads us to the sort of second question is, can that capital be deployed quickly at the same desired leverage level such that it begins to generate earnings and accrue the same benefits as our existing shareholdersâ capital? So thatâs important from that perspective. And then the last consideration that I think is really important is the cost of the capital transaction. Obviously, youâve seen us over the course of 2022, used the ATM program as a source of capital, about, I think, about $500 million â $475 million in total over the course of the year. Thatâs a very cost-effective way. So when weâre looking at that transaction from a price-to-book ratio and from a book value accretion that is very low-cost capital versus some of the other transactions that are possible. So those are the considerations that we look at. We believe the capital transaction that we did in the fourth quarter was accretive from that perspective. We were able to put those proceeds to work during the fourth quarter. And you can tell from the price of the stock that we raised and if you went back and look at AGNC stock price, you can essentially tell that, that capital was raised around a 3 or 4-week period in October also coincides with where I gave the book value update at the time late in October. So I think when you look at it from a contemporaneous perspective, I think you can conclude that, that was accretive from a book value perspective. But we are always putting the existing shareholders first. Weâre not trying to raise capital for the sake of raising capital or the sake of getting larger. When we raise capital, itâs because we think itâs accretive to our existing shareholders, and we think we can put those proceeds to work quickly at the same desired leverage level as our existing shareholders. So I hope that helps you. Absolutely. And just on â to clarify or to drill down on one of the points. I guess, how would you characterize your leverage today kind of in that versus what is kind of your target? Yes. Well, itâs a moving target right now. And I guess thatâs a good problem to have because our book value, as, for example, as Bernie mentioned, up almost 10% or up 10% as of the end of last week. Obviously, as our book value is changing our leverage level is going down, consistent with the increase in our book value. But sort of broadly speaking, if you look back at our portfolio, and this is hard to do because we donât give you the interperiod numbers, but sort of the low point for our portfolio was right around the end of October in terms of our asset balance, and thatâs consistent with the environment that weâre in because that was when the risk was at its highest point from a market perspective. But since that time, we have systematically added to our asset portfolio from the â from the end of October to now, weâve added about $8 billion worth of securities. We added about $4 billion in the fourth quarter. And quarter-to-date, weâve added about another $4 billion. So â what thatâs telling you is that weâre sort of systematically increasing our leverage from the 7.4% where we were that we reported at the end of last year, but itâs also consistent with our much more constructive outlook for Agency MBS. An interesting observation, if we look at the Q4 â19 presentation and the market update there versus the Q4 â22 market update. In Q4 2019, you showed four coupons spreading 150 basis points, today in the agency market you are showing 9 coupons and a 4-point spread. You are now â you now have the opportunity, but the challenge of working off a much, much broader palette than you have probably at any point in your history. And sort of getting back to Vilasâ question to start the conversation, how much of where youâre playing within that spectrum is dictated by what is available and whatâs attractive in the hedging market? Are you choosing assets? Or are you finding financing that you think is attractive and then solving for what the right asset is based upon duration? Sure. Let me make a couple of high-level statements and then â and Chris can talk about it and heâll talk specifically about the difference in the coupons stack. But the answer, generally speaking, is no with respect to the funding. Now obviously, the exception to that is when TBA specialness is really high then obviously, we are going to shift a greater share of our assets to TBA. So, in a sense, the funding advantage outweighs the difference in the convexity profile or the delivery option. And so in an environment where issuance is really high and the Fed is really active, that specialness tends to be very, very beneficial. We are obviously shifting out of that environment. So, as that specialness goes away, itâs been really just a question of where is the best value across the coupon stack. And Chris can talk about the fact that we now have essentially 10 active coupons. You might have to make sort of a judgment as to where the return is going to come from, total return versus earnings. Chris can talk about how we think about that. Yes. So, I mean just to reiterate Peterâs point, rolls are not a driving factor at this point. They are currently trading around flat to 10 basis points or so through repo depending on the coupon. But relative value across the coupon stack is still very much upward sloping with higher coupons trading at the wider spreads. But we will likely continue to maintain some exposure to the lowest coupons for diversification and liquidity and total return potential. To the extent that bond fund flows continue to accelerate, lower coupons, which are at tighter spreads can certainly gap much tighter from current levels as passive index-based funds need to add them. And most of the float is held by the Fed and tied up in bank HCM [ph] portfolios. And moving up the stack, the belly coupons or the middle of the stack is also interesting. I mean it trades at marginally tighter spreads than production coupons, but it has a great convexity profile and very solid technical since they are out of the production window. And so we will likely continue to have exposure across the coupon stack, but with the distinct bias towards higher coupons. Got it. And with that in mind, when you look at the distribution of the coupon stack, if we move from a hawkish environment to either neutral or at some point, a more dovish environment, you are going to see significant divergence in terms of prepayment speeds. And again, this might â this isnât tomorrow, this isnât next month, but you are building a portfolio thatâs got substantial durations, but how much are you thinking about the potential divergence and speeds as you look at some securities trading at significant discounts versus paying a premium up in the stack? Yes. Itâs â just for a perspective, as of year-end, the weighted average coupon on our 30-year holdings was 4.2%. So, if you assume a note rate spread of, letâs just say, 80 basis points for round numbers, thatâs a 5% note rate in a 6% primary rate market. And so from a prepaid risk perspective, it would take on our portfolio, on average, 150 basis point rally in primary rates from here for the portfolio to even have a 50 basis point incentive to refinance on average. Now, we do have holdings in 5.5s and 6s and a few 6.5s as well. And those positions, obviously, are more exposed and cuspy certainly to a 50 basis point rally from here, but they are priced for it. Higher coupons are trading at historically wide nominal spreads and we like that risk return trade-off. In terms of prepayments, I think it is going to be interesting to see how some of these higher coupons perform over the next few months if we stay at these rate levels. I do think that itâs likely that we will see somewhat shifted refinancing response, flatter S-curve than what we experienced in 2020, in 2021. If house prices are down even modestly, call it, 3% to 5% over the next 12 months, that will have the effect of shifting the required incentive further out the curve for loans that were originated with high-70s LTVs that now find themselves in the low-80s and in need of mortgage insurance and also fall into higher costing buckets on the GSE LPA grids. And property inspection waivers are another factor that I think will be very different going forward into a more â a weaker housing outlook. And then of course, the media effect is very different today than it was in 2020 and 2021. So, I think there are a number of factors that will likely mute the prepayment response to some degree or at least shifted a little bit further out going forward. But then on the other hand, there is a lot of capacity in the system and a desperate need to feed the origination machine. And so I do think that lenders will be aggressive and willing to work for better margins just to capture what little volume there is. So, itâs something thatâs going to be very interesting to see how it evolves over the next few months. And Rick, if I could just add to that, to build on Chrisâ point because I think it informs our outlook a lot when we think about the supply of mortgages this year and 2023 to the private sector, which is obviously a key in the Fedâs portfolio as part of that. But when you think about â Chris mentioned the refinance ability of our portfolio for a 50 basis point move, assuming a 6% mortgage rate today, only 15% of the universe would have a 50 basis point incentive for a 200 basis point rally in mortgage rates, only 15%. It would take a 300 basis point rally in mortgage rates to have 45% of the mortgage universe refinanceable. So, I think that, that informs us a lot about the amount of refinance activity that we are going to see over the near-term, which is one of the reasons why we are more optimistic about the supply of mortgages. Look, itâs totally fair. And to circle back to actually where I started, if you compare the bottom of the stack in â19 and the top of the stack in 2022, as of December 31st, the premium at the top and the bottom is exactly the same. So, I mean the market is behaving in a very different way. So, the risks are even at the high end of the stack, a lot different than they were a few years ago. And the point that Chris made about the lower coupons, obviously, because they are such a huge part of the universe and to the extent that we see bond fund inflows, they are going to be potentially a really good total return trade, not great carry, but could have some total return potential. Sure. You can look at them in a bunch of different ways from a spread perspective, I think one of the sort of simplest ones that I keep coming back to. I always like to look at the 10-year just more for long-term guidance. But when you think about, for example, current coupon spreads, itâs really probably better to look at it on a blended basis. Itâs easy to look at them, and I think very informative to look at like current coupon spreads to a blend of 5-year and 10-year hedges, which is more consistent with the way we would hedge our portfolio. And further, you want to look at that as a blend between treasury-based hedges and for us, SOFR-based swap hedges. But if you look at current coupon to 5-year and 10-year treasury spreads, thatâs probably around 130 basis points. If you look at the SOFR, itâs probably around 150-ish basis points, a 50-50 blend, maybe something in the neighborhood of 140 basis points today, which is why those returns are still really compelling. 140 basis points with sort of average leverage position as a starting point for this analysis of around 8x, plus you add back the current coupon yield of close to 5%. And for us, we are only subtracting 1% given our cost structure, I think you can reasonably get expected returns around 15% in the current environment, which we believe is very attractive. So, thatâs sort of what we are seeing now on a mark-to-market basis for our portfolio and for marginal return opportunities. Again, thatâs on higher coupons and the conversation we just had sort of informs you about different coupons, but thatâs a good starting point. And then just a broader macro question. Just the whole debt feeling debate, just curious what your thoughts are and how that kind of informs your positioning? Well, itâs a really good question. And obviously, itâs a big unknown that we are going to have to contend with as the year goes on. Unfortunately, itâs probably coming in a time when we thought we would actually have a lot more rate stability in our outlook given the fact that I think the Fed is going to be pretty much done with what it needs to do in the next couple â two or three meetings. So, as we go later in the year, and the middle of the year we will obviously have to deal with a lot of uncertainty. The challenge with the debt ceiling is itâs not clear at all, which direction that may drive interest rates if at all. You can make a case that convened to higher treasury rates because of the credit outlook or the potential of the default you could look at it from the other perspective. And I think in the last episode led to a rally in rates. So generally, what that means for us is when there is more interest rate uncertainty or just financial market uncertainly more broadly, you will see us tend to reduce our risk profile, particularly as it relates to our interest rate exposure. And as we get closer to that, we might likely operate with very close to a zero duration gap, just to give us a bit more protection against the uncertainty of the environment. Ultimately, I think the issue will be resolved, but itâs unclear as to how long thatâs going to take to get resolved and what conditions may occur first before it gets resolved, but we will have to deal with that as we go through the year. Hey. Good morning. Just a couple of follow-ups on how you are managing the portfolio and the structure there. Just what kind of value do you think you are getting? And do you see at this point in the higher coupon specified pools? Are there any scenarios away from just the level of mortgage rates, which could maybe support premiums strengthening in that portfolio? And then on the hedging side, what kind of value do you think you are getting for the short duration hedges at this point? I mean are there any â are there any scenarios where you could add short duration hedges on top of what you are already carrying? Thanks. Yes, sure. So, with respect to specified pools, I would say itâs likely that over time, our weighting versus TBA will gradually increase. As Peter mentioned, we added about $4 billion so far this quarter, and the majority of that was in specified pools given some good opportunities thatâs after on a net basis, our spec pool position shrinking a bit during the fourth quarter. I would say, generally speaking, sourcing convexity through pools is cheaper than purchasing optional protection in the rates markets. But our convexity position is quite low across a pretty wide range of rate scenarios. And so we will continue to be opportunistic and patient with adding pools. We have done a lot of repositioning over the last few quarters, and we think the portfolio is very well positioned today and provides a great combination of carry, total return potential and liquidity. And with respect to your question on the short-term hedges, I guess I would say that our expectation is that we would likely not need to increase those hedges, although there is certainly a scenario where we may change that view. And I would say initially, my gut is that we wouldnât need to is because I think the Fed is really close to being done. If itâs not this meeting, my expectation, itâs the next. But we could obviously prove to be wrong on that. Inflation could prove to be much more stubborn and the moderation that we have seen reverse. And in that scenario, there is a scenario that the Fed goes much more than we currently anticipate. And if that environment starts to evolve, then we would think about adding more short-term rate protection. But for right now, I think our position is fairly well placed. Eric, and I think you had also asked a question about what could expand coupon swaps and higher coupons or drive valuations tighter there. I think the short answer is lower rate volatility, lower implied volatility. Option costs on production coupon mortgages is still at record levels. And so a decline in implied volatility certainly has the potential to bring option costs materially lower, which would likely result in nominal spreads coming in. And just to add to that last point because that I think is a key part of, again, why our outlook is improving and the decline in volatility. If you look at sort of implied volatility back in September, at the end of September, at least this is â if you look at where the options market was pricing volatility, it was pricing at around 9.5 basis points per day on the 10 year. To put that in perspective, the 10-year average is more around 4.5 basis points or 5 basis points a day. And itâs been gradually coming down. Today, we are at probably an applied level of around 7.5 basis points a day. So, to Chrisâ point, eventually the market implied volatility is going to come back to the historical norm, and thatâs meaningfully lower, 25%, at least lower, and that could be easily 25 more basis points of tightening on production coupons. My apologies to everyone for the inconvenience. We have now completed the question-and-answer session. I would like to turn the call back over to Peter Federico for concluding remarks. Well, again, we appreciate everybodyâs time today and interest in AGNC. And again, just to sort of reiterate, we believe the outlook for agency MBS is improving. The recovery is underway. And ultimately, I think we are entering a period that could be a very durable and attractive environment for AGNC. So, we look forward to speaking to you again next quarter and thank you for participating today.
EarningCall_1083	I would now like to turn the conference over to Kelly Whitley, Vice President, Investor Relations and Communications. Please go ahead. Good morning, everyone, and thank you for joining us on our fourth quarter earnings call today. Joining me is Roger Jenkins, President and Chief Executive Officer; along with Tom Mireles, Executive Vice President and Chief Financial Officer; and Eric Hambly, Executive Vice President of Operations. Please refer to the informational slides we have placed on the Investor Relations section of our website as you follow along with our webcast today. Throughout today's call, production numbers, reserves and financial amounts are adjusted to exclude noncontrolling interest in the Gulf of Mexico. Slide 1; please keep in mind that some of the comments made during this call will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, no assurances can be given that these events will occur or that projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussions of risk factors, see Murphy's 2001 annual report on Form 10-K on file with the SEC. Murphy takes no duty to publicly update or revise any forward-looking statements. On Slide 2, Murphy continues to deliver a strong value proposition, our ongoing execution excepts, especially in our oil-weighted assets, ensures that we remain a long-term sustainable company. We operate safely with a focus on continual improvement in our carbon emissions intensity. Our offshore competitive advantage is reinforced with our significant recent project success at our Khaleesi, Mormont, Samurai fields in the Gulf of Mexico. Murphy has an ongoing exploration portfolio, and we're in the process of a 3-well operated program in 2023. We continue to generate strong cash flow and we've been able to more than double our long-standing dividend from 2021, all while significantly reducing debt. As a result of this success, we're progressing our capital allocation framework, where we will support increasing returns to shareholders as various debt targets are reached. Slide 3; we -- as we continue focusing on our 4 priorities to delever, execute, explore and return; I'm very pleased at the progress we have made as a company. In 2022, Murphy achieved our $650 million debt reduction goal resulted in a 40% or $1.2 billion reduction since the end of 2020, and our current debt level is $1.8 billion. This has positioned us to begin Murphy 2.0 of our capital allocation framework, where we will allocate 75% of our adjusted free cash flow to debt reduction and 25% of our adjusted free cash flow to shareholder returns beyond our dividend. Our team has done an incredible job executing our Samurai project, where we initiated production ahead of schedule, and we continue to reduce above expectations. Additionally, the Kingâs Key facility maintains an industry-leading uptime average of 97%. Then, I'm sure we executed a well delivery program well with 40 operated wells and 15 gross non-op wells during 2022. We maintained a total reserve base of 697 million barrels of oil equivalent at year-end. We've continued our excellent environmental performance with the second consecutive year of no IOGP recordable spills in our business, all while reducing emission intensity. Murphy closed out our 2022 exploration program by spudding the OSO 1 well as operator in the Gulf of Mexico during the fourth quarter and drilling is ongoing today. After this well, we look to spud 2 more operated exploration wells in the Gulf of Mexico early this year. On Slide 4. In the fourth quarter, we produced 173, 600,000 barrels of oil equivalent per day at 62% liquids due to the significant impact from our Khaleesi, Mormont, Samurai field development, we achieved nearly 30% growth in our oil volumes to $97,000 per day of oil since the first quarter of 2022. Our realized oil price was 82.57% while our realized NGL price was $27 per barrel and nat gas was $364 per 1,000 cubic feet. So, turning to Slide 5. For the full year, our company produced 167,000 barrels of oil equivalent per day with nearly 90,000 barrels of oil or 54%. This represents a 6% increase in total production from full year '21. Our accrued CapEx for the year totaled $1.016 billion, excluding noncontrolling interest, acquisitions and acquisition-related CapEx. For the year, our realized oil price was slightly above the WTI benchmark at nearly $95 per barrel, while NGL was $36 per barrel and nat gas at $364,000 for the year. I'll now turn the call over to our CFO, Tom Mireles for an update on our reserves, financials and our sustainability efforts. Tom? Slide 6; our proved reserves totaled 697 million barrels of oil equivalent at year-end 2022, reflecting a 98% total reserve replacement effectively remaining flat from year-end 2021 proved reserves of 699 million barrels of oil billings. With average annual CapEx of approximately $880 million, excluding noncontrolling interest and including acquisitions, Murphy has been able to maintain its proved reserves at around the same level since 2020. Compared to the prior year, Murphy increased has proved developed reserves to 60% from 58% of total crew while our liquids weighting improved to 47% from 45%. Overall, across our entire portfolio, we preserved our reserve life at an average of more than 11 years. Slide 7; we closed out the year with outstanding financial results as our fourth quarter 2022 net income totaled $199 million or $1.26 per diluted share and the full year 2022 net income was $965 million or $6.13 per diluted share, which is the highest Murphy has had since 2019 and second highest in the last 10 years. Including certain after-tax adjustments, we reported adjusted net income of $173 million or $1.10 per diluted share for fourth quarter 2022. With advantaged oil price realizations, we generated significant cash from operations, including noncontrolling interest for the quarter and full year. After accounting for net property additions and acquisitions, we achieved positive adjusted cash flow of $321 million and $1.07 billion for the fourth quarter 2022 and full year 2022, respectively. Now that 2022 has ended, I'm pleased to say that through our continued capital discipline, we generated sufficient cash flow to fund CapEx, require higher returning working interest in Gulf of Mexico properties, double our dividend and reduce debt by $650 million. Slide 8; as of December 31, 2022, Murphy had $492 million of cash and equivalents on hand, resulting in net debt of just $1.3 billion. Additionally, in November, we entered into a new $800 million senior unsecured credit facility maturing in November 2027, which was undrawn at year-end 2022. Slide 9; in conjunction with our focus on operational execution, we continue to reduce our impact on the environment through lower greenhouse gas emissions intensity. In 2022, the team reduced our emissions intensity by 5%, and we recorded lower flared volumes onshore, both to the lowest level on company record. I'm proud to say that we have now achieved 2 consecutive years of zero IOGP spills. We also recorded our highest water recycling ratio in company history with 3 million barrels of water recycled representing 28% of our total onshore water use, which is up from 18% in 2021. With that, I will turn it over to Eric Hambly, our Executive Vice President of Operations, to discuss our asset success. Slide 11; our Eagle Ford Shale wells produced an average 32,000 barrels of oil equivalent per day in the fourth quarter with 85% liquids. For the year, production was slightly above at 34,000 barrels of oil equivalent per day as we brought 27 operated wells and 15 gross non-operated wells online. We carried our new completions design through our well program in 2022, which achieved results above expectations, including some of the highest per foot IP30 rates in Murphy's history. Overall, in 2022, Murphy achieved industry-leading well results, which was validated in a recent sell-side report on the Eagle Ford Shale. Our team also worked to improve our downtime, which achieved a company record low of 2.8%. Additionally, our base production management efforts continue with base declines averaging 12% for wells online prior to 2022. Slide 12; the -- our Tupper Montney business produced 288 million cubic feet per day for the fourth quarter, which included a 17% royalty rate for the quarter as anticipated. For full year 2022, we produced an average 296 million cubic feet per day and brought online 20 wells during the year. While the majority of our production is protected with fixed price forward sales contracts, we also employ a price diversification strategy for a portion of our volumes. For fourth quarter 2022, we sold approximately 18% of our volumes at Malin, Chicago, Ventura and Dawn pricing with the remaining 17 million cubic feet per day exposed to AECO prices. Slide 13; in the Kaybob Duvernay, Murphy produced 5,000 barrels of oil equivalent per day for the fourth quarter was 72% liquids weighting. For full year 2022, we produced 6,000 barrels of oil equivalent per day with 74% liquids and brought on line 3 operated wells. Slide 15; our Gulf of Mexico assets produced 84,000 barrels of oil equivalent per day in the fourth quarter with 81% oil volumes. For 2022, we produced 72,000 barrels of oil equivalent per day and maintain 80% oil weighting. Our Gulf of Mexico production was up 10% for the year. I'm pleased that the progress made with our short-term tieback projects during the year as we drilled a successful well at Dalmatian, which is scheduled to come online in 2023. Additionally, 2 non-operated Lucius wells were brought online in the fourth quarter of 2022 and the first quarter of 2023, while the non-operating waterflood [ph] project is progressing towards completion in early 2024. Slide 16; I'm tremendously pleased with the success of the Khaleesi, Mormont, Samurai development project and the Murphy-operated King's Key floating production system as production continues to exceed expectations. We recently drilled a successful well at Samurai #5 after previously discovering additional pay zones in the Samurai field during the initial phase of development and the well is scheduled to come online in the second quarter of 2023. We forecast production to plateau across the 3 fields for the next several years without additional development. I'm also excited to say that we are forecasting full cycle payout in the second quarter of 2023 for Khaleesi and Mormont, which is approximately 5 years ahead of our original sanction case. Slide 18; during the fourth quarter, we spud the OSO exploration well in the Gulf of Mexico and drilling is ongoing. We anticipate that we will reach TD in March. We estimate a mean to upward gross resource potential of 155 million to 320 million barrels of oil equivalent from OSO which is forecast to cost approximately $26 million net to Murphy. Thank you, Eric. On Slide 20. Our 2023 capital plan has a range of spending of $875 million to $1.025 billion. More than 2/3 of our spending is scheduled to occur in the first half of the year, with approximately 70% of our development capital going towards operated projects. Overall, this front-end loading of our spending ultimately generates more free cash flow over the year. I decide to say that our cash flow supports our 10% increase in our quarterly dividend that was announced today and allows us to set a $500 million debt reduction goal for 2023 using $75 oil pricing -- WTI oil pricing, all with a low reinvestment rate of only 45% of our operating cash flow. Onto Slide 21; our first quarter 23 production guidance of 161,000 to 169,000 equivalents per day includes approximately 92,000 barrels of oil or 56%, with 62% of our volumes being liquids. Additionally, this range includes planned downtime of just over 7,000 barrels equivalent per day across all of our assets. I'd like to note that while this production range is lower in the fourth quarter, it reflects our natural production decline due to the first tax weighted CapEx that we use yearly as we haven't brought on and operated well in our Eagle Ford jail since September and in the Tupper Montney since July. For the full year '23, forecast production range of $175.5 million to 183,500 barrels equivalent per day with 99,000 barrels of oil per day or 5% and Overall, with lower forecast CapEx for '23, this guidance represents a 10% oil growth for the year and a 7% in total production growth. Moving now to Slide 22. Our total onshore budget for '23 is $455 million, which we forecast will generate an average production of 90,000 equivalents per day with 35% liquids. In our Eagle Ford Shale business, we plan to spend $325 million to bring online 35 operated and 17 gross non-operated wells with the majority coming online in the second and third quarter. As part of our well delivery plan, we look forward to taking the learnings from our adjusted completions design and apply it to our new Tilden wells. For 2023, we forecast production of 32,000 barrels equivalent per day with 72% oil volumes or 86% liquid volumes. And our Tupper Montney asset or 23 plans $125 million, is forecasting to bring online 16 operated wells and produced approximately 313 million cubic feet per day, assuming a C4 per 1,000 AECO price for the year, we forecast that to equal a 14% royalty rate for 2023. For our Kaybob Duvernay asset, we plan to spend $5 million on field development and estimate production of approximately 5,000 equivalents per day, 57% oil and 69% liquids in that asset. Turning to our offshore business on Slide 23. Our plan here calls for $365 million budget, which is forecast to generate 89,000 barrels equivalent oil per day, representing a 20% increase from full year 2022. In the Gulf of Mexico, we're planning to spend $335 million on operated subsea tieback wells at Samurai, Dalmatian and Marmalard as well as 2 non-operated Lucius wells and a non-operated development in the St. Malo field. The non-operated Satale waterflood project continues to plan. We'll be progressing this year. For full year '23, we estimate production will be 82,000 equivalents per day in the offshore business in the Gulf with 79% oil volumes and 72,000 equivalents per day and 2022 was produced. We plan to spend $30 million for our non-operated offshore Canada assets in 2023 to generate production of approximately 7,000 barrels of oil equivalent per day. Plans include development drilling in Hibernia and field development work at Terranova in advance of returning to production in the second quarter of 2023. For our exploration plans on Slide 24, the plan calls for $100 million to be spent to target nearly 200 million barrels equivalent, mean, mean unrisked resources in the Gulf of Mexico. As previously mentioned, we are currently drilling the operated OSO well, which was spud in the fourth quarter of '22. Next, we plan to spud the operated long call well late in the first quarter before moving to a spud of a third operator Gulf of Mexico well towards the middle of '23. We're still working a third well location with our partner group at this time. On Slide 26, this is a reminder slide of our previously disclosed capital allocation framework, which is a multi-tier capital framework that allows for additional shareholder returns beyond the quarterly base dividend while advancing toward a long-term debt target of $1 billion. We're pleased by achieving into Murphy 2.0 at this time, allowing us to allocate 25% of our adjusted free cash flow towards shareholders. We maintain a Board authorized initial $300 million share repurchase program along Murphy repurchasers to a variety of methods with no time living. As of today, we've not executed any repurchases under this authorization. As we move to Slide 27, we continued our disciplined strategy to delever, execute, explore and return. Our near-term plan for 23 through 25 is to reduce is to follow our capital allocation framework with approximately 40% of our operating cash flow reinvested through 2025 with an average $900 million annual CapEx. We forecast that this will maintain an average of 55% oil weighting in our business and have 195,000 equivalents per day of average production, representing a combined annual growth rate of 8% through 2025 while also supporting our targeted exploration program. Additionally, we plan to maintain offshore production at an average of 90,000 to 100,000 barrels equivalent per day in this period with excess cash flow, we will continue to execute our plan of enhancing payouts to shareholders through dividend increases and share buybacks as laid out in our capital allocation framework. Longer term in '26 and '27, we see Murphy maintaining a sustainable business and targeting investment-grade metrics and we forecast average annual production of approximately 210,000 barrels equivalent per day with 53% oil weighting, further our ongoing reinvestment of approximately 40% of operating cash flow forecast ample free cash flow to fund additional debt reductions in our capital allocation framework and enhanced shareholder returns as well as fund high-returning investment opportunities. On Slide 28, to support our long-term sustainability, Murphy maintains a sizable North American onshore portfolio with more than 2,800 total locations across the 3 producing areas as of year-end '22. And this multi-basin approach provides ample optionality in various price environments. -- the oil-weighted Eagle Ford Shale and Kaybob assets, Murphy maintains more than 20 years of inventory with a breakeven price of $40 per barrel or less. The Eagle Ford Shale stand alone with approximately 12 years of inventory are 360 wells with a breakeven of $40 per barrel or less, assuming an annual 30 well delivery program across these 2 basins, we hold more than 60 years of inventory in Murphy Oil today. In Tupper Montney, Murphy Hells more than 50 years of inventory, assuming a 20-well program. Overall, we have more than 200 Montney locations with a breakeven price of less than US$1.45 per 1,000 cubic feet. Our offshore development opportunities on Slide 29; our very successful offshore business will also be maintained at an average of 90,000 to 100,000 barrels equivalent per day with an average annual CapEx of approximately $325 million a year through 2027. This plan is supported by a multitude of offshore inventory with 26 projects combined of 125 million barrels equivalent in total resources at a breakeven oil price of $35 or less an additional 5 projects representing $45 million equivalent, have a breakeven price of $35 to $50. Progressing our priorities on Slide 30. Today, we outlined our 2023 program and operating plan as well as moving us along in the Murphy 2.0 and allow us to share 25% of our adjusted free cash flow with our investors. Further, we've continued to delever with a debt reduction goal of $500 million in '23 at $75 WTI. Our 3 producing areas maintain a strong base for the company, and the Gulf of Mexico will have a full year of production at Khaleesi / Mormont Samurai, flowing to King's Key, which we will further be supported by production from our successful Samurai 5 well recently drilled. Also in '23, we'll be completing a previously drilled well at Dalmatian in addition to a new development well at Marmalard and offshore Canada will be bringing on substantial production at the non-operated Terra Nova field in the second quarter. A it solid year plan in our North America onshore assets, we're drilling more of our award-winning Eagle Ford Shale locations as well as rebound well activity in the Tupper Montney now that permitting delays are behind us. Lastly, we're drilling 3 operated exploration wells in the Gulf. As for the future, we on the strong onshore locations with thousands of high-quality low-breakeven wells remain to be drilled in support of our steady long-term production as well as sustainable long-term offshore business and ongoing cash returns to shareholders. Murphy remains a long-term stable company with low investments rates, slight production growth and a growing offshore competitive advantage and coupled with our keen eye on protecting the environment, we are positioned for long-term success. In close, I'd like to thank all our dedicated employees for the solid year. We had in accomplishing our key priorities, led by oil-weighted assets in the Gulf and Eagle Ford Shale. We had a great year and look forward to what we've been able to accomplish in 2023. Roger, I want to start with Slide 21. You highlight your expected exit rate for '23. So 12% oil growth, 14% BOEs that will put you, call it, in the upper 180s for BOEs and I think 103 for oil. I was wondering if you could help us think about kind of the trajectory from 1Q. In particular, I wanted to get your thoughts on what kind of uplift do you expect from the Terra Nova project. And then you did highlight just over 7,000 BOEs a day of downtime. How do you expect that downtime to play into the volumes? And then maybe you could just maybe follow with the -- an update on the St. Malo project in early '24. Is a mixture of me and Eric and on that for you, Arun. Thank you for that question by production. From a 50,000-foot level, I was looking at it early this morning, it's quite common for us over '21, '22 and now 23 to have a lower production in the first quarter due to our front-end loaded CapEx where we start drilling like today, we have 4 drilling rigs in North America drilling and only 1 frac crew and we're not a company that carries a lot of DUCs on our books. So we're looking at pretty significant growth throughout the year. We're looking going to the mid-170s into the high 180s to finish out the year. But we really have much more oil production than we've had in the past. I'll get into the downtime, I have Eric can let in a minute. We have Terranova coming on. We have to estimate what we feel turnover will be, and we have that in the second quarter. That will probably be 4,000 to 5,000 our way minimum there. We're looking at that whole business being around for the year, and that's what that trajectory is. And I'll just let Eric address the downtime issues we have this quarter, we'll wrap back up and make sure I handle all of your questions. Okay. Thanks, Roger. We did highlight in our release that we have some planned downtime in the first quarter, both operated and non-operated Gulf of Mexico for maintenance projects and also in onshore, as we begin our fracture stimulation program, we have some planned shut-ins related to offset frac impact. Those are sort of typical for our business. For the rest of the year, from a downtime perspective, we do forecast a number of planned downtimes in our Gulf of Mexico business, ongoing offset frac impact through the second quarter in onshore and also a provision for a storm downtime, which is typical for us. For the full year, our storm downtime is on the order of 2,200 barrels per day, which is calculated by assuming that from July to October, we have a total of 8 days of 0 production from the Gulf of Mexico. Just a few more points in terms of production growth. For our onshore offshore business, rather, we have some new volumes coming online from Samurai V, which we expect in the second quarter, Dalmatian DC 90 well in the second half of the year, and of course, TERANOVA, which you highlighted. So if you think about rough production rates, Samurai 5 is in the 3,000 to 4,000 net BOE range when it comes online [indiscernible] around 5,000 barrels per day and TERANOVO should get to about 6,000 barrels per day net to us when it comes online. And that's really how we come up with our offshore forecast. As Roger highlighted, for onshore, with our new volumes, we have quite a bit of growth of Tupper Montney volume from first to fourth quarter with our wells coming online through the year and being fully online in the third quarter. We ought to see a pretty substantial increase there, and that's how we -- to model our business. Further to that, I think there was a question you had room and I appreciate these questions because we really have a big growth year. We're proud of our oil growth and ever-increasing oil production. Same Malo's a great field, one of the best probably margin fuels in the world. We're very fortunate to be an owner that it's a solid 10,000, 11,000, 12,000 barrels a day business. The waterflood project does come and go with CapEx. We're working with a super major here who changes the phasing of the CapEx on occasion. But this is going to be really about stopping decline and maintaining pressure in the reservoir as we start injecting this in about a year, and there'll be an inflection from that to add significant reserves there for us. So that project continues to go well. But they face CapEx in and out on the year on occasion as they execute it, and there's a production well that's coming on at the end of this year and also the injector wells are being completed. So Chevron continues to progress that, have a great relationship with them and moving that forward. It's a very nice asset for us. Great. And just my follow-up, Roger, is on Murphy 2.0. I think you mentioned you're soon to reach that $1.8 billion threshold. So how should we think about kind of cash returns in '23? I mean I was thinking out loud is it just basically we take your free cash flow forecast and multiplied by $0.25, and that will be the cash return to the higher dividend and buybacks. Is that the way to think about it this year? Arun, thanks for that, and I'm proud of that framework. That's not iWork. We have adjusted free cash flow that we described in the slide, and we would be removing from our -- so we take the CapEx or take the operating cash flow less the capital spending on the cash flow statement, then you have to remove dividends and where we have to pay contingent payments, you remember the focus on contingent payments last year. So we'd be removing our NCI payments, our quarterly dividend and our -- not NCI, our distributions to pension, abandonments, quarterly dividends and things of that nature, we get to adjusted free cash flow. This is outlined on Slide 26. This year, we probably have 200 and something, the high 200s of abandonment and contingent payments are the biggest factors in that. Of course, our dividend is well calculatable at around $170 million. So it would have to be pulled out and we'll share 25% of the rest. And it's asked for the formula every quarter and trying to get to executing as fast as we can. Roger to you and your whole team there; I have a lot of questions I'd like to ask, but I'm just start with -- well, I'll just do the 2, I wanted to follow up. But the first is on the Tupper Montney. 2 things I'm wondering about there. One, you guys cited that well performance up there as one of the reasons that you're towards the low end of your production guidance on the quarter. And so my question is, was that a onetime thing, something you just saw in 4Q? Or is that something that's going to carry forward more central to your view of the asset? And then second, you referenced $4 an Mcf in your plan, but we're a good, call it, 20%, 30% below that as you sit here this morning. So is there any flexibility in what you're going to do in the Tupper in '23? Okay. First, let me address the well performance issue that we experienced in the fourth quarter. We were able to pretty successfully execute our planned program in 2022. As we highlighted, we brought online 20 new wells. One consequence of permitting restrictions that were experienced last year is about half of those wells were producing into a facility-constrained system. So the wells were producing at a near -- basically a flat rate because we were not able to construct debottlenecking pipeline. And we expected that those wells that were producing at a flat rate because of a facility constraint would remain effectively flat through the fourth quarter. As we progressed late into the fourth quarter, we saw that the wells through natural decline came down below that facility constraint. And it was a little bit challenging for us to model exactly when that would happen based on the data we have through constrained wells. So I would characterize that as a onetime and our forecast going forward reflects the performance of the wells, and that's reflected in our guidance here today. From a gas price perspective, we did model 2023 at an average of CAD4 ACO as you noted. What I would try to provide some color around sensitivity because it is quite sensitive. For every roughly CAD0.50 ACO, you might see something in the 1,500 to 2,000 BOE net impact on annual average. So you can use that as a go by if you have a different perspective on gas price, you can kind of get a sensitivity for how much production might go up or down based on a $0.50 increase or decrease on the AECO price. Hopefully, that addresses your question. One more bit of color on that, Charles. While there's a lot of talk about royalty in the Montney, new wells now under their regime for the first year only pay a 5% royalty. And even at this elevated price, as you stated this morning were about 14%. Well, every day in the Haynesville and the Marcellus is 25%. So a lot of talk, but it's always below the United States. Just one last comment while we're talking about Tupper, -- you may have noted that on January 18 of this year, the Bluebird River Nations entered into an agreement with the province of British Colombia regarding the infringement of treaty rights. And while that agreement is significant and impactful to those E&P companies that are affected on public lands, Murphy's acreage is on private lands. And we do not expect any go-forward limitations on our ability to execute our program because we're on private lands and based on our understanding of the agreement that was just reached. Got it. That's all helpful detail. And then Roger, you guys had that dry hole down in Mexico that you already disclosed, but you've got a big block down there, and you've got a lot of other prospects down there. So can you tell us what you've found what you learned with this first well? And kind of give us kind of what -- how it's going to inform your future activities down there? Thanks for that question, Charles. Yes, it's a disappointing well. It was a well that we have in the system. If you really look at the wells in my review, which is still ongoing. We've had some trouble getting the data out of the equipment there that we have. It's a little bit slowed in our review at this time. But it's really just not enough reservoir there was the issue and where would the reservoir be -- there's a key well being drilled by another operator to our north here this year. We also have our Cholula acreage that we can go back to our review at a later time. And so we'll be watching that key well to the north and going through our learnings, not ready to move that off, but we have significant acreage. We have many prospects in our company. We have that same acreage block 5 in the Gulf, the same acreage in Brazil, the same acreage in PortoGra Basin. So we have 4 areas of the same acreage that we have net across our business. We're really only spending about $100 million a year on exploration, which includes seismic, the people that work on it and the drilling, and we'll continue to do this. And these wells are really about seeking opportunities with better returns than what we have in our business. But as we disclosed today, multitude of opportunities to keep our offshore business flat well into '27 and beyond, all documented, all known thousands of wells in our onshore business. So we can stay sustainable. And all the things I mentioned today about our future does not include one drop of oil from exploration success. So it's something we do unique that puts us well positioned in a differentiation to others. We'll have plenty of stuff to do on our own outside of that as well. I wanted to start off and just address the Eagle Ford a little bit here. I think if I was reading the slides right, I think you guys are forecasting that production is down maybe around 7% year-over-year. It looks like it's also down a fair bit in the first quarter of 23% versus 4Q, but I know you guys disclosed some downtime there and just kind of some information about the timing of the wells. And then I guess if I'm reading this right, it looks like you are to have maybe a few more operated wells in '23 versus 2022. So could you maybe just kind of talk through Eagle Forward in terms of why you're seeing a decline there? I was kind of thought the plan was to try to hold that flat over the next handful of years. Actually, Leo, the plan -- I appreciate that question. Actually, it plans to be 30,000 to 35,000 to maximize free cash flow in the Montney, same thing, trying to grow that asset to fill the plants while producing free cash flow. So free cash flow generation is the number 1 goal. But Eric's going to address all your questions here right now. Yes, okay. Thanks, Leo. There are 2 primary factors that are driving lower production with sort of similar well counts relative to 2022. First of all, our new 2023 wells come online a bit later in the year on average than our '22 program, so when you do the average for the year. It's a little bit lower. Second and probably most significantly, our operated 2023 program is almost evenly split between Karnes, Catarina and Tilden locations. And as we've highlighted on our recent calls, we delivered significantly improved Karnes and Catarina results in '21 and '22 by applying our enhanced completion design. We have not drilled and operated Tilden well since 2019. So, we're hopeful that our 2023 Tilden wells will see the same level of performance improvement as our recent Karnes and Catarina wells. However, our guidance for '23 for Tilden is based on type curves that are aligned with pre-2020 wells. So, a combination of the mix and our expectations for an area we haven't been to sort of driving our average production per well down a bit from what we actually experienced in 2022. And as Roger noted, we've been targeting production from the Eagle Ford in the 30,000 to 35,000 barrel a day range. We have, in the last 2 years, exceeded our expectations from the capital we're deploying there, getting higher realized production than we expected. We would love for that to happen in '23, but we are not assuming that it will. Okay. That's -- very helpful on the color there on the Eagle Ford. I just wanted to follow up and ask a little bit about CapEx here. As I look at the plan for 2023, very, very front-end loaded, 70% in the first half, 30% in the second half. I know you guys also were front-end loaded as well in 2022. However, as kind of the year progressed, you guys did kind of make the decision to raise CapEx? I know there were some extra projects to get in there. I'm just trying to get a sense here. You've got a pretty wide range of CapEx in terms of what you have there in 2023. I guess I'm just trying to understand if there's a caught a little bit between kind of the bottom end and the high end of the range? And is there potential for other activity to come on late in the year, if you guys decide to do more in the Gulf, if partners are proposing wells? Maybe just kind of talk through that dynamic a little bit. Thanks for that question. I appreciate that, Leo, this morning. The way we think about it is, we -- it's quite common to have a wider range for many of our other peers. So I would be dumb not to have one for myself. We don't -- I don't see as many -- like last year, we're drilling Khaleesi, Mormont, Samurai. We had incredible success there. And we were seeing additional zones to complete. We found some additional pay. This year's program, we're completing a non-well that we -- others very successful well at Dalmatian. So, we know what that is. We're drilling a well at Mamelodi, development well up in the middle of several other wells to accelerate that production. So, I anticipate like another Mamelodi coming out of it. The risk we have on CapEx is phasing by super majors in and out of Oxy and Chevron involving Lucius in St. Malo. There's a lot of activity. Eric just talked about the Tilden area, longer laterals are coming to the Tilden area by many big players, meaning that you cover a lot of activity there with longer laterals and new completion techniques coming in Tilden. Could we be AFE for some non-op wells on the border of our acreage, probably yes, not large amounts of CapEx at all. We, across a wide array of businesses, we have very successful assets. They could be things to come our way. I don't see it the same as last year because a lot of that was driven by Samurai 5 and some things we were doing that were very, very positive for us and greatly positive for us now. And so that's how I see that, Leo. And I think it's appropriate to have a range today so that -- so you don't write about it every morning when I have to spend a nickel more. Yes. Understood on that. For sure, Roger. Okay. I appreciate that. And then maybe just lastly for me, just to follow up on capital returns here this year. Just on the way it's sort of laid out, should we expect that the buyback is going to kick in relatively soon. You obviously raised the dividend here, which is nice to see. But in order to kind of hit those numbers, are we going to start to see the buyback kick in here in the first half? It would be not that great in the first half, but we're trying to -- back to your CapEx question, and Jeff there, it was poking at the end. We really want to keep our CapEx like to the midpoint of our guidance. We really want to execute this plan and get to buying back this undervalued stock. And it would be -- it's going to be like a lot of things, it's more back-end loaded Leo, honestly, on that. And we're focused on it carrying 3 spreadsheets with me every day of how I can buy back the stock. So, trying to get to it fast I can. Several questions, real quick. In Tupper Montney, when do you think you will reach the 500 million cubic feet per day growth now? Paul, we expect that that will happen in our 2024 program [Cross Talk]Well, typically, for our Tupper Montney asset, we have a first half of the year weighted capital program. So when we bring online our 2024 wells, we ought to be -- we expect to be a plant full capacity. And at that time, that what will be met to you, so should we just assume 500 and take 14% royalty out and that would become net ? Yes. Obviously, Paul, it's quite sensitive to your assumption on the price when we are in AECO prices in the, let's say, CAD2.5 to CAD450 range, the royalty is extremely sensitive. So based on your view of what the price will be, you can see something from as low as, say, 5% royalty to as high as 20% royalty. We expect gas prices will come down and our net will improve beyond 2023, but that's kind of up to you to make your own assumption. I think... Okay. And second question, a, in your longer-term trend, you're saying that by 2026, '27, you are targeting about 210, I think it's the range of $200 million, $220 that you talk about for the next several years that you're talking by 195%. So what -- what will cause the increase? Where is the area of the increase that lead you to a higher production in the outer years? Thanks, Paul for that question. I appreciate you probably didn't have it a couple of questions. The room was ahead of you, you got to get more. As you look across our production from '23 onwards, as I look at our onshore business, as you just mentioned and Eric greatly answered about our increase in the Montney -- so when you look across our onshore business today, this year, as we just disclosed this morning, 89,000 barrels a day, that's creeping up 90, 110, 112, primarily around the Montney and maintaining the Montney and toward the end of the program, increased close to 40 in the Eagle Ford at this time. So that -- so the onshore is growing. Our offshore business is a very solid business as we disclosed today. We look to maintain this business between $90,000 and $100,000 through -- from now through '27. But in 2024, '25 and '26 as we put on all these projects that we mentioned this morning and have the success of Terranova coming back on, which is an incredible project for us, but really get close to 100 in that business through '25 and '26, leading to this 180,190 210, 21000, 210 type business. Real proud of it. It makes enormous free cash flow, Paul. And the final one, I want to go back to the earlier question on Eagle Ford. And I think Eric is saying that the reason why the production is lower because we are drilling the well in the Titan right? And if that's the case, that I mean, why go back and drill the Titan, -- why not concentrate on Kings and [indiscernible]? I mean -- that means that -- we already finished most of the best well over there or I mean what's the reason behind? This is Eric, so excited to answer your question, Paul. I'm -- I'll let him do it. He's right in notes. He's going to Craig. Paul, we have under our lease agreements with the owners of acreage there in the Tilden area. Some of our leases have some ongoing drilling commitments that every year or 2 or 3, you have to drill another well or 4. And our program in 2023 is oriented toward fulfilling those obligations. But also, as we highlighted earlier, we really would like to see how well they perform with our enhanced completion design. So we might be able to see a larger amount of top-tier performing wells there, but it's primarily around fulfilling our obligations and maintaining our leases. Well, on top of that, Paul, if you look at many companies you cover, there's a lot of rigs moving into Tilden, -- there's a lot of activity because that's through the Permian, and we've been doing a long time in the Montney, 10,000-foot laterals are becoming very common. And then companies are working together more in the Tilden area because it's an underdrilled area in the Eagle Ford to add these longer laterals, which the industry believes will be higher production. Our corns in Catarina can't be extended in that way. And if there's a game plan, very sophisticated, planned out plan to have offset frac impacts and how we move from Karnes to Catarina and now Tilden, and it's a game plan that allows us to maintain this 30 to 35 for a very long time and grow it to any level we want to make a lot of money in the business. So just a year, we're going back to Tilden, I personally believe that our -- all the great work we did on technology around fracking will succeed there as well. And it's clear to me by the rig count and what's going on that others believe that as well. Right. Great. Eric, I just want to -- one follow-up on the obligation. For the next several years, do you also have a 3 large obligation that you have to drill in Q2? I'd have to look at that to get into the details, but I wouldn't view it as a large obligation. It's been relatively minor, and we've been able to manage it within our optimal capital allocation framework. So yes, I don't have a very clear answer for you right now. I wouldn't expect it to be significant. Paul, every company you cover has drilling obligations in the Eagle Ford. Understand. I just want to see that whether we're going to see the next several years that you're also going to drill a fair bit in item because of the obligation or not? Well, as Eric said, we don't see that as that as an issue to hit the volumes for the CapEx we have. But I can see and understand your question on that, we appreciate it. Thank you, Paul. You got to get through 4 compete. Roger, my question has obviously done a fantastic job on the list made the more months summarize fuel development. Could you just remind us, I assume the plans are there just to try to keep that production relatively flat on Kings K? And if so, does that -- will that entail just what a well, 1 or 2 wells a year? Or how should we sort of think about over the next 1 to 2 to 3 years, how do you want us to think about that play? Thank you, Neal. Thanks for that question on our great asset now the largest asset in our company, an incredible asset. The way to think about it is Samurai 5 is a great deal for us. We now think that Sari could be near 100 million barrel discovery from exploration out there, very proud of it. We'll have 3 wells there. Of course, we already have 2 there and then we have the other wells in the other field at Clesormont. Each of these have recompletion uphole and different ways to add perforations and deferring things around technology to add additional zones. There's a lot of zones in these wells through all those efforts, which would be just through OpEx and some de minimis CapEx will allow it to be added. To keep this slide, there's not a plan today of an additional well in the next 3-year period that we're advertising to remain flat. There is some in wellbore things to be done that are de minimis capital to keep it flat with the same resource base. Great to hear. And then just a follow-up. You did a good job on looking again on Slide 28, where you show remarkable 60-plus years in the Eagle Ford and Duvernay inventory. I'm just wondering, would you all consider -- I mean, again, just I don't know, maybe pay debt down quicker or even include pop that shareholder return quicker. Would you all consider divesting any of the assets given obviously, there's a high need by many of your peers for inventory and what appears to be the market not giving you, I don't think, full credit for that position. Well, I appreciate that, Neal, and we have been very active in M&A, both buying and selling $8 billion of deals in 8 years However, this is part of our business to be a sustainable business, and I've rattled off to Paul a few minutes ago, 210,000 for a long time without exploration success without M&A and delivering billions of dollars to our shareholders. And it's going to -- it's just a lot to unravel that. It gives stability to our offshore business. It's all weighted, it's unique. And people make the price to buy it may keep going up Neil because it's probably not going down. So we're happy with what we have. We have a solid business, long haul here about doing anything and going to need to execute into that and start returning to shareholders before we consider that type of opportunity right now. Roger, first question is around bolt-on M&A. You've done some really good stuff, particularly in the Gulf of Mexico. Just what do you think the prospects are there, especially given the -- all that's going on in Brazil right now, but curious your views on the opportunity set. Thank you, Neil, for that question. It's been a real key for us as people has followed us like Goldman for a long time, came out of Malaysia, pain extensive cash taxes, got our money repatriated, bought things at very good prices in the Gulf produced way more than we originally planned and paid -- and another advantage to Murphy is that we pay no cash taxes. -- all the way into early '25. So incredibly well positioned with that transaction. We look at this. We consider ourselves the leader in M&A and execution in the Gulf. Everything is brought to Murphy to review. We have incredible database and knowledge and experience around Gulf of Mexico deals. We know every deal. We know every field. And these things continue to come. We, though, are very particular and we have a particular process around focusing on the resource first and what we will pay, oftentimes, people ask about the bid ask. It doesn't matter to Murphy because we get a price we're going to pay, and we don't care about the word bid asked. So we look at them closely, look at them with our framework what will it do to the framework, how can it be financed and still try like heck to keep the framework because we really want to get into that as soon as we possibly can. So all those factors come to bear. And if we have a certain type of return and a certain type of EBITDA multiple that we look for. And when those come up, we will execute on those, but not looking at any big deals that require altering our -- significantly altering our capital structure. But look at a lot of things, a lot of people come to us to partner with them, a lot of situations coming our way due to our outstanding operatorship. As a matter of fact, we're being promoted into drilling a well for the first time due to our operating ability. So a lot of things coming our way due to our unique operational skill set that we're very proud of. So we're looking at them, and we'll look at all of them, but have a really tight criteria that we don't share around that deal, but looking at that, and I appreciate your question on it. All right. Great. And the quick follow-up is just you talked about it in the comments around CapEx, but we're seeing signs of offshore inflation and things like rig rates and service commentary. How are you guys mitigating it? And what do you see in firsthand? Thanks for that question, Neil. Of course, your company covers all these drillers and everything our friends. We -- when you're in the business like we have been, today, we have 2 drillships in the Gulf. We recently had 3 floating rigs in Mexico in the Gulf. We're an active player, and we have a program when you're an active player, you'll have the lower or middle part of the market and a bit of the high end. If you're constantly in the business, you very rarely pick up all on the high end. So I'd say that high-fare program today is at the lower end of rates in the 300 Max -- and we have some at the 400 level, which is the market today. It's kind of possible not to have something at the market unless you really contract for a long time. So we feel well positioned. Other inflationary things are really around people costs, and we've talked about this before. There's really not a big increase in rig count in the Gulf of Mexico, which keeps the inflation at bay a little bit on other services. Of course, in the onshore post-COVID, it went up from all the way to 700-something rigs. So the rig count is increasing and the DUCs are increasing the frac pressures more than we see offshore. But really, in our business, Neil, it's about days on location and executing because you'll have every kind of rate there is if you're in this business for a long time. Just real quick for me. So in the Eagle Ford, I was just wondering how the case of activity is going to play out for the year. Obviously, you guys were rough numbers around 2 rigs pretty much every quarter last year with the third rig in the fourth quarter. Given how the CapEx is going to tail in 2023, I was just kind of wondering what you suspect what you thought your cases and activity would look like for the rest of the year in the Eagle Ford. Yes. We have a slide number 22, which shows the cadence of our onshore program. We detailed the Eagle Ford program as well as our Tupper Montney program there, both operated and non-operated. So you can see that it's 10 Karnes wells come online in the first quarter. And then the second quarter is our biggest quarter from Eagle Ford activity with the third quarter contributing kind of similar level of the first quarter. Okay. But I mean -- so I guess my question really is, are you going to sustain a 3-rig program for the remainder of the year in Eagle Ford? Or will that drop down to 2 at some point? Or sort of how you see that program flexing. Yes. So in terms of drilling activity, we have 4 rigs working right now, 2 in Tupper and 2 in the Eagle Ford, and they will all be out of work on the third quarter. And there are no further questions from our form lines. I would now like to turn the call back over to Roger Jenkins for any closing remarks. Appreciate everyone focusing on our call today and asking good questions. We appreciate that way to talk about our company in a great year ahead. Any questions you have, please get with our IR team here. And we look forward to seeing you in our next quarter, and I appreciate all the help. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
EarningCall_1084	Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to the General Manager of Investor Relations of Chevron Corporation, Mr. Roderick Green. Please, go ahead. Thank you, Katie. Welcome to Chevron's fourth quarter 2022 earnings conference call and webcast. I'm Roderick Green, General Manager of Investor Relations. Our Chairman and CEO, Mike Wirth; and CFO, Pierre Breber, are on the call with me. Also listening in today is Jake Spiering, the incoming General Manager of Investor Relations, who will assume this position effective March 1. Jake and I will be transitioning together over the next couple of months. It's been my sincere pleasure working with each of you over the last two years. Thank you for your questions, feedback and investment in Chevron. We will refer to the slides and prepared remarks that are available on Chevron's website. Before we begin, please be reminded that this presentation contains estimates, projections and other forward-looking statements. Please review the cautionary statement on slide two. Thank you, Roderick, and thanks, everyone, for joining us today. Chevron had an outstanding year in 2022, delivering record financial performance, producing more traditional energy and advancing lower carbon businesses. Free cash flow set a record, beating our previous high in 2021 by more than $15 billion, enabling a strong dividend increase and the buyback of almost 4% of our shares. US production was also our highest ever, led by double-digit growth in the Permian. Growth matters when it's profitable. Return on capital employed over 20% shows that our focus on capital efficiency is delivering results. And we took important steps in building new energy businesses. We successfully integrated REG's people and assets into Chevron, combining the best of both companies' technical and commercial capabilities. And we acquired rights to pore space for potential carbon capture and storage projects in Texas and Australia. We had many other highlights last year, to name just a few, at TCO, project construction is largely complete, and we're starting up the fuel gas system. Focus is on commissioning and start-up of the Wellhead Pressure Management Project by the end of this year, to begin transition of the field from high to low pressure. We announced a significant new gas discovery offshore Egypt, which could build on our growing natural gas position in the Eastern Med. And our affiliate CPChem reached FID for two world-scale ethylene and derivative projects in Texas and Qatar. 2022 was a dynamic year, with unique macroeconomic and geopolitical forces disrupting economies and industries around the globe. These events remind us of the importance of affordable and reliable energy with a lower carbon intensity over time. We don't know what's ahead in 2023. I do know that Chevron's approach will be clear and consistent, focused on capital, cost and operational discipline, with the objective to safely deliver higher returns and lower carbon. Thanks, Mike. We reported fourth quarter earnings of $6.4 billion or $3.33 per share. Adjusted earnings were $7.9 billion or $4.09 per share. Included in the quarter were $1.1 billion in write-offs and impairments in our international upstream segment, and negative foreign currency effects over $400 million. A reconciliation of non-GAAP measures can be found in the appendix to this presentation. Record operating cash flows in combination with continued capital efficiency, resulted in over $37 billion of free cash flow in 2022. The only other year Chevron's operating cash flow exceeded $40 billion was 2011. Free cash flow in that year was less than 40% and of this year's record. In 2022, Chevron delivered outstanding results on all four of its financial priorities. Announcing earlier this week another 6% increase in our dividend per share, positioning 2023 to be the 36th consecutive year with annual dividend payout increases, investing within its organic budget despite cost inflation. Inorganic CapEx totaled $1.3 billion nearly 80% for new energy investments. Paying down debt in every quarter and ending the year with a 3% net debt ratio, returning record annual cash to shareholders through buybacks and exiting the year with an annual repurchase rate of $15 billion. Two days ago, Chevron's Board of Directors authorized a new $75 billion share repurchase program. Now is a good time to look back on our execution of the prior programs. Over the past nearly two decades, we bought back shares in more than three out of every four years, returning more than $65 billion to shareholders. And we've done it below the market average price during the whole time period. Going forward with the new program, our intent is the same, be a steady buyer of our shares across commodity cycles. With a breakeven Brent price around $50 per barrel to cover our CapEx and dividend and with excess balance sheet capacity, we're positioned to return more cash to shareholders in any reasonable oil price scenario. Turning to the quarter. Adjusted earnings were down nearly $3 billion compared with last quarter. Adjusted upstream earnings decreased primarily on lower realizations and liftings as well as higher exploration expense, partially offset by favorable timing effects. Adjusted downstream earnings decreased primarily on lower refining and chemicals margins and negative timing effects partially offset with higher sales volumes following third quarter turnarounds. The Other segment charges increased mainly due to accruals for stock-based compensation. For the full year, adjusted earnings increased more than $20 billion compared to the prior year. Adjusted upstream earnings were up primarily due to increased realizations. Other items include higher exploration expenses, higher incremental royalties and production taxes due to higher prices, partially offset by favorable tax benefits and other items. Downstream adjusted earnings increased primarily due to higher refining margins, partially offset by lower chemical earnings and higher maintenance and turnaround costs. 2022 production was in line with guidance after adjusting for higher prices. As a reminder, Chevron's share of production is lower under certain international contracts when actual prices are higher than assumed in our guidance. Reserves replacement ratio was nearly 100% with the largest net additions in the Permian, Israel, Canada and the Gulf of Mexico. Higher prices lowered our share of proved reserves by over 100 million barrels of oil equivalent. 2023 production is expected to be flat to up 3% at $80 Brent. After adjusting for lower prices and portfolio changes, primarily the sale of our Eagle Ford asset and the expiration of a contract in Thailand, we expect production to grow led by the Permian and other shale and tight assets. We remain confident in exceeding our long-term production guidance. Looking ahead to 2023, I'll call out a few items. Earnings estimates from first quarter refinery turnarounds are mostly driven by El Segundo. Based on the current outlook, we expect higher natural gas costs for our California refineries. Full year guidance for all other segment losses is lower this year due to higher expected interest income and again excludes special items such as pension settlement costs. The All Other segment can vary quarter-to-quarter and year-to-year. We estimate annual affiliate dividends between $5 billion and $6 billion, depending primarily on commodity prices and margins. The difference between affiliate earnings and dividends is expected to be less than $2 billion. We do not expect a dividend from TCO in the first quarter. We updated our earnings sensitivities. About 20% of the Brent sensitivity relates to oil-linked LNG sales. Also, we expect to maintain share buybacks at the top end of our guidance range during the first quarter. Finally, as a reminder in Venezuela, we use cost affiliate accounting, which means we will only record earnings, if we receive cash. We do not record production or reserves. 2022 was a record year for Chevron in many ways. We look forward to the future, confident in our strategy with a consistent objective to safely deliver higher returns and lower carbon. We'll share more during our Investor Day next month. That concludes our prepared remarks. We are now ready to take your questions. Please try to limit yourself to one question and one follow-up. We'll do our best to get all your questions answered. Katie, please open the lines. Before we get started â hi, good morning, Mike. We'd like to wish Roderick well in his new position, and we really appreciate all your time and help over the past two years. So thank you very much. Our first question, maybe just heading towards the buyback authorization topic. This week, the Board authorized the buyback authorization up to $75 billion, no expiration date, which is pretty large versus the prior authorization that had a four-year expiration date. We heard your comments on wanting to be a steady buyer of your shares across cycles and that you're positioned to return more cash to shareholders. Can you comment on the decision-making process for getting to that $75 billion and maybe the choice to leave the authorization open in timing versus the prior authorization did have an expiration date? Yeah, Jeanine, let me start, and then I'll have Pierre add a little bit of color. We included a little information on this call looking back at our past programs. And as you saw on the slide 15 of the last 19 years, we've bought shares back lower than the market volume weighted average over that period of time. We look at the decision going forward in the context of the cash-generating potential of the portfolio, the outlook for the market environment, the strength of the balance sheet. And we don't want to be authorizing a program every year. So, we talk to the Board about a multiyear outlook. So, the fact that there's not an end date on it is only significant if you're trying to do some sort of math and annualize this. We think our track record speaks for ourselves and the steady, consistent way that we've done this. And so, we increased the rate three times last year as we saw the situation evolve, and we're now at an all-time high with the rate of repurchases. So, the last thing you said it, but I'll repeat it, is sized to maintain our program through the commodity cycle. We aren't pro-cyclical. We're not countercyclical. We're steady through the cycle, and that is the intention. Pierre, do you want to add anything? Yes, Jeanine. So, the authorization from 2019 was going to be consumed in the second quarter. It was also open. So, it did not have a defined time period. We just -- will have consumed it. So, instead of having an authorization in the middle of the quarter, we'll complete this quarter's buybacks under the 2019 authorization, which again had an open time period, and then we'll start the new on April 1st. So, it is similar the way it was done in the prior time. Thank you for that clarification. We appreciate that. Maybe our second question, it's that time of year again, reserve replacement ratio, your ratio for 2022 was 97%. And we believe that compared to 112% last year, and then I think it was around 99% on average for the five years before that. So, our question for you is just -- how do you see this ratio trending over time? And I guess the over or under bogey is probably 100%. Thank you. Yes. So, it can move in any given year, Jeanine for a whole host of reasons, right? Prices, FID decisions, portfolio actions that we take to either sell or buy. And so, the one-year number is one that will move around. The longer cycle numbers, the one that you ought to pay attention to. Remember also, as we have this large position in the Permian we continue to develop. We can only book five years forward. And so, each year, we'll produce out of the unconventional assets, and we'll add another year's worth of reserves on the back end of that. And so, if you were to look at the Permian unconstrained by that, you'd have a very different view. This year, we had some additions in the Permian and Israel and Canada and the Gulf of Mexico, as Pierre mentioned, the largest net reduction this year were Kazakhstan due to the contract terms and the effect of higher prices. If you were to actually adjust that out, so we mentioned 100 million barrels where the price effect this year would be -- think of it as 107% ex the price effect. And so, I do think over time, we intend to be in this business for quite a while and 100% is a number that you ought to expect to see that or greater over time. But in any given year or any short number of years, you might see something looks a little bit different. Hey good morning. Thanks for taking my question. First of all, Roderick, I wanted to echo Jeanineâs congrats on the new role and thank you for all the help over the years and great working with you. So I wanted to focus in on upstream. And it's good to see the continued progress on TCO and exciting to be getting close to the finish line on the expansion project there. You noted that WPMP is on track for commissioning and start-up later this year. I just wanted to first confirm that the second part of that expansion, FGP is still on track for '24. And then just stepping back, could you just walk us through your latest expectations to the impacts on both TCO production, CapEx and then also affiliate dividends as these projects come online. Trying to get a sense of the changes in '24 versus '23? And then also, how you think about the run rate on both volumes and spending for that affiliate post FGP. Yes. Devin, I'll talk to the project and let Pierre talk a little bit to the financials. First of all, no change to cost or schedule guidance. WPMP is trending toward a beginning start-up by the end of this year. We've got a lot of work done. We've got a new power grid up and running and this was a power grid built back in the Soviet days. The control room is up and running, where everything comes into one central control room. All the production on gas injection wells are done, the gas injection facility is now in early commissioning. In just the next few days, we'll tie in the fuel gas system to the first gas turbine generator, which is really an important milestone to test the first of the three GTGs, begin the process of powering up electrical generation capacity and commissioning boilers, steam and other utilities. So, that all happens sequentially here over the next period of time, which leads to commissioning the pressure boost compressors in the third quarter and then converting the field from beginning the conversion from high to low pressure by the end of the year. A couple of things that will bear on production. We've got two planned turnarounds of the old processing trains. They're called the KTL. There's five of them. We had two turnarounds this year that are planned in the third quarter. So those will be down for a period of time. And then as those come back up, production may not fully recover on those two as some of the wells won't resume flowing until we get to the low-pressure system. So, back half of the year, you'll see a little bit of that impact. And then as we move into '24, we've got more of these high pressure to low-pressure conversions in the field and we've got FGP start-up first half of '24. So you don't see the full effect of FGP roll through, you get partial effect in ramping in '24, and then the full effect will show in '25. Cash will kind of follow that pattern. So Pierre, maybe you can talk about the pattern on CapEx and dividends. Yes. For 2023, the TCO dividends are included in the guidance we provided, $5 billion, $6 billion, which is up from what our total dividends that we received last year. We did indicate that TCO has held a little excess cash during the course of last year just due to uncertainties that are going on right now. The CapEx was included in our December release. So it's nearly half of the $3 billion of -- affiliate CapEx, so thatâs $1.5 billion. Again, you would expect that to continue to roll off next year. And then if you go back to our Investor Day, we showed that at $60 Brent post start-up in a full year of FGP production, that the free cash flow coming out of TCO on 100% basis would be $10 billion. And again, that's a $60 Brent. We'll provide further updates as we normally do on Investor Day. But the takeaway, as we've said for a long time, now we've been investing in this project for six plus years through COVID, through the ups and downs, when it starts up, it will generate a lot of free cash flow. We'll see that in the form of dividends, and we'll see that in the form of paying back some of the loans that we co-lend into TCO. Devin, just to kind of put a final punctuation on that. In our Investor Day last year, we showed in 2026, so once we get fully on the other side of all this stuff I just described, a 5x expansion in free cash flow out of TCO versus 2021. So it's meaningful. Okay. Great. Thank you very much for the helpful answer there. And thinking about this year, 2023 in more detail. You talked about 0% to 3% total production growth for the year, led by sale in the Permian. And last year, you had another strong one for the Permian unit volumes were up 16%. I was wondering if you could just talk through your expectations for that asset in 2023, whether or not you're adding rigs there, overall activity trends? And then more broadly within that 2% to 3% range, what are some of the drivers that can move to the upper or lower end as we move through the year. Yes. Maybe I'll finish on -- I think the second question is about overall production, and the first was about Permian. So our outlook for 2023 at $80 is flat to up 3%, so that post between 3 million and 3.1 million barrels a day. There's a modest adjustment that relative to our Investor Day guidance. A couple of things driving that, some project deferrals like Mad Dog 2, which we thought would start up in 2022 and now looks like a 2023 startup. We've got some downtime, plans downtime that shifted from 2022 to 2023. And then our Permian growth would be a little bit lower in 2023. A couple of things. One, in 2022, we had the benefit of a lot of prior DUCs that had been sitting that came online and it boost early production in 2022, a little bit more. And then we also are re-optimizing some of our development plans to factor in some of the things we continue to learn relative to interactions between wells and benches, how we space laterals and do single or multi-bench development. So our revised plan will have some deeper targets, a few more rig moves and a few more single bench developments, all of which brings that pace down a little bit. So that's kind of at the highest level, what is behind the production numbers. We'll talk about that more when we see you guys in a month here. And maybe I'll stop there, because I did cover the Permian as part of that. Yes. Good morning team and congrats here on a good year. Hey, Mike, I guess the first question I have for you is around global gas. And maybe you can talk about how you're seeing the market. There's obviously been a tremendous amount of volatility and remind us again how you're positioned from a contracted versus spot position? And then I have a follow-up on gas as well in the Eastern Med. Okay. Well, high level, we certainly have seen a very unusual and volatile year in 2022, which has settled out here as we've come into the winter, primarily as we've seen a bit milder winter in the northern hemisphere than is typical. And as in Europe, the successful build of inventories for this year and the reduction of industrial demand have both resulted in an outlook that is less dire for the European economies, than it may have looked like several months ago. And so I think the market reflects all of that. You also have the fact that China has been -- the economy has been slow throughout the year, which is -- looks to be turning around. And so I think it's good that markets have calmed. I mean the high prices really were creating a lot of stresses out there that are not good. And I hope we see these prices stay in a more moderate range as we enter 2023. Our posture is largely as we've described it before, we're primarily contracted on oil index pricing, biggest piece, obviously, out of Australia. We do have -- we ran really well in Australia last year, a record number of cargoes and so there were some spot cargoes in the mix out of Australia, out of West Africa, we've got a little more spot exposure in Angola and now with Equatorial Guinea as well. But think of us as primarily oil-linked. And we've got some sensitivities, I think that Pierre has put out there, and we've reiterated some of those in the guidance today that should help you model these things based on your assumptions on gas prices. Thanks, Mike. And that's the follow-up. You have a large gas position in the Eastern Mediterranean, following the noble acquisition with Leviathan and Tamar and some discoveries out there as well. So how do you think about prosecuting that asset? Where does it fall in terms of prioritization? And how big can it be? Yes. It's a high priority. We took FID at the end of last year on a project to expand Tamar from -- on a 100% basis, 1.1 to 1.6 Bcf per day. The first gas on that should come online in early 2025. We are working on development options to expand Leviathan. Those are still being worked and we should narrow the concepts on that later this year and reach some decisions in terms of how we intend to do that. The Nargis discovery, it's just one well at this point, but it encountered a significant section of high-quality gas-bearing sandstone. So very attractive. We're talking to our partner there about appraisal and development concepts that will follow. So that region -- and of course, we've got a number of additional exploration blocks further to the west in the Mediterranean that we've not yet put any wells into but we've got seismic and we're developing our exploration plans and you'll hear more about that as we go forward. So it's a high priority. The region needs gas, both regionally in the Middle East, but also then obviously options to try to get that gas into Europe. And so the noble acquisition was really advantageous from that standpoint, and we're optimistic about the prospectivity of some of these additional exploration blocks. Well, thanks, everyone. Roderick, I'd like to also pass on my thanks. You've transformed Chevron does Investor Relations. Thank you for all your help. Guys, I wonder if I could go back to the buyback. I just want to try and understand a little bit about the comment around really just how you think about the purpose of the buyback. Is this really about dividend management at this point? Because it seems to us that, if you take your Brent sensitivity into account, the run rate at the high end of the range puts you about a $90 breakeven on your oil price. And I'm just wondering if this is about value or about managing confidence in future dividend growth. Well, let me try to be clear on this, Doug. We do not do buybacks to manage dividends. Dividend -- absolute dividend load is an outcome. It's not a reason that you would do buybacks. Our dividend growth expresses confidence in the ability to grow free cash flow at mid-cycle prices, and it is a long-term decision, a long, long, long-term decision. We haven't cut the dividend since the great depression. Pierre mentioned, we've increased the payout 36 years in a row now. Buybacks are different. They signal confidence that we're going to generate excess free cash flow, where we've got excess balance sheet capacity, which we have significant capacity in the current commodity cycle. And as we satisfy our commitments on the dividend, our reinvestment plans in a disciplined manner to grow free cash flows and maintain that strong balance sheet, we've got the capacity then to buy shares back through the cycle. An outcome of buybacks is a lower absolute dividend, but it's not the driver. And so, I don't want -- there should be no confusion about that. We've got confidence in our dividend increases, whether we're buying shares back or not. We wouldn't increase the dividend if we didn't have that confidence. And so the two are not linked in that manner. That's very clear. Thanks, Mike. My follow-up is a bit unfair, given your Analyst Day is a month away, but I'm going to give this a go anyway. But -- so if you made the point in -- your balance sheet is in terrific shape, obviously. You've got a lot of capacity there. But also, if I go back to that sort of $90 breakeven, all I'm doing is taking that $15 billion run rate, $400 million a year and adding it to the $50 breakeven, $90. What does that say about your outlook for maybe stepping up growth capital? That would seem to imply that the growth capital of the $17 billion for the CapEx number is probably what we should expect going forward. Is that the right way to think about it, or should we wait until the end of the month, at the end of February? Yes. I mean, we'll talk about it more in February. I'm not sure I followed all your math there, but we're growing. We had a 3% compound annual growth rate at $15 billion to $17 billion of CapEx in a market that's not growing that fast. We're growing well better than the overall demand for oil or for gas, which is growing faster than oil is. And so, we are growing production, but what we're really focused on is growing returns and cash flow. And if we can grow returns and cash flow, the equation works. And so, I -- we'll be happy to talk about this more when we're together at the end of the month, but -- or at the end of next month. But we can grow cash flow; we can improve returns at the rate that we're spending at. And so, I don't know why there would be a question about our ability to do that and the production numbers and outcome of those decisions. It's not the goal. Good morning. And thanks for taking my question. So maybe just kind of a spin on Doug's question. So with the balance sheet at 3%, is there a point where you think of yourself is actually underlevered and I realize that's a good problem to have. But if you ever got to that point with the mechanism be to get leverage higher by increasing the buyback, or how do you think about that generally is the 3% where you want to be? This is Pierre. I'll take that. Our guidance is for the net debt ratio to be between 20% and 25% and mid-cycle conditions. And as you said, we're at 3%, so we're much stronger than that. And that's what happens in the short-term. So Mike has talked about our financial priorities. They're simple. We've been consistent with them for a very long time. And three of the four are pegged. We just increased our dividend 6%. We have a 2023 CapEx budget of $14 billion. We've given guidance that keeps that CapEx flat over the next several years. And we have the buybacks at the top end of the guidance range of $15 billion. So swings in cash flow in the short-term will go to the balance sheet. And that's because commodity prices and margins, we just were talking about natural gas prices and refining margins and things are moving up and down. But over the long-term, those cash flows will be returned to shareholders. And so we want to do it in a way that is steady across the cycle. As Mike said, we don't want to be pro-cyclical. And by the way, we haven't, right? Our track record shows that over the past nearly two decades that we've been able to buy actually below what the market average price has been. So the intent is to, yeah, we'll be a little strong balance sheet depending on commodity prices and margins and how strong our operations have been. But then over time, the cycle will correct and then we'll continue buying back shares. We've said we could have a higher buyback rate right now. We're sizing it at a level to maintain it for multiple years across the cycle. That means there'll be a time period where we'll be buying back shares off the balance sheet, and we'll lever back up closer to that 20% to 25% guidance. Thanks, John. Very clear. Thank you, Pierre. And just a follow-up on the TCO project. I was hoping you could give an update on the CPC terminal operationally and where that stands. And then what type of discounts are you seeing at that terminal right now? I think you called out a few quarters ago or maybe two quarters ago that it was $6 or $7 per barrel. I imagine that's come in a bit. So where is that discount today? And how is that terminal operating? Yeah. So last year, there was probably more news than there was impact on a variety of issues relative to the pipeline and the terminal. There was work going on in the late third and into the fourth quarter on the two of the three single point mornings. All that work is done. All three SPMs are operational today. There are no constraints on loading. There are no constraints on throughput on the pipe. Despite a lot of the things that people heard and worried about last year, the pipeline was very reliable. Our production was impacted less than 10,000 barrels a day over the course of the year. It was all a few weeks in March and April. And so everything there is running very smoothly now, and we don't see any constraints. Discounts have come in a little bit on CPC. In the immediate aftermath of some of the sanctions and changes related to Ukraine. We saw a trading range that was like $4 to $10 below dated Brent. And before the conflict began, it was plus or minus $1. We're seeing kind of $1 to $3 discounts now. So maybe not quite at pre-invasion levels, but not as deep as they were immediately afterwards. And given the overall flat price environment and the way it has strengthened the impact to CCO is relatively muted. Hey, good morning, guys. Just looking at, let's call it, refined product demand. You talked about gas demand earlier. I'm just curious, as you look around the world, we've got positives moving away from COVID on a year-over-year comparison and then everybody's got high expectations for the China reopening. I was just curious, as you look across your operating base, what you're seeing there? Yeah. Overall, Roger, gasoline demand, I'll start there. Still just a touch below pre-pandemic levels, fourth quarter of 2022 maybe 2% or 3% below fourth quarter of 2019. If you look at diesel, demand is pretty flat versus pre-pandemic. Jet recovering, but still below and so at the highest level, we're kind of still flattish to recovering from pre-COVID. I think that's why there is concern that as China's economy really does come through and return to a more normal level, that we could see increased demand start to pull on these markets again. You've seen announcements out of China about their intention. We see international flights and air travel now being scheduled at much higher levels than we've seen before long. And if you see the kind of rebound spending and activity in that economy that we've seen in other economies around the world, that's one of the things that could buoy the global economy and firm up demand for products. So, there's still some variables in the equation. We're not past the risk of recession and clearly, central banks are still tightening to slow things in certain parts of the world. So there's some puts and takes. But net-net, this continues to trend in a recovering direction with the two biggest questions probably related to the two biggest economies, China and the US. Always the big guys, right? A follow-up question to come back to the Permian, and I recognize the Investor Day coming. But Pierre, when we were at the sell-side dinner end of November, there was a lot of discussion over kind of the changing in the range and how that was really just a function of messaging more so than â overall change in the way you're developing the Permian, kind of following from that to the comments about things a little different in the bench and the DUC comparisons year-over-year. You look at it as any different from the messaging at the end of November, or is this â is there something else here with. No, nothing different. We'll show that at our Investor Day. Again, we were in the middle of the range. You can see the fourth quarter number was 738. So that was strong. We had some learning's, as Mike said, in 2022, and we've adjusted our plans to go to deeper targets and more single bench developments and that results in a little longer drilling times and a few more rig moves and we'll update all that. And all that is obviously included in our production guidance. So we'll continue to learn and adapt in the Permian. It's a large royalty advantage position. It's an asset that delivers higher returns and lower carbon. It's a big source of free cash flow. Our free cash flow growth over the next five years is really driven by Permian, [indiscernible], Gulf of Mexico, a few other assets. And it's remarkable to have an asset that can grow at that rate and do it free cash flow positive the whole time and free cash flow growing the whole time. So, it will ebb and flow a little bit as we learn more, but what you'll see at our Investor Day, something very consistent with what we're saying today and what we said in the past. And Roger, just to emphasize the point I made earlier to another one of the questions, we remain focused on returns and value, not on production. And so that is the -- that's what drives all of this. Thanks. Thank you very much for taking my questions which are both related. So, I will ask both at the same time. So, firstly, thinking about balance sheet strength, of course, the other use it can be put to is M&A. You've been very disciplined with your M&A timings, both with Noble and Regi [ph]. How do you see the current market in these two, let's say, POTS [ph] legacy oil and gas versus low carbon? And then secondly, has the IRA Act perhaps changed your appetite for faster expansion in low carbon businesses, please? Thank you. Thank you, Irene. So, we do have the capacity to do M&A. We don't need to do M&A. And so, we'll only do deals that are value-creating deals. You interestingly contrast the traditional oil and gas market with the new energies market. What I would observe is given commodity price strength in oil and gas, we've seen companies that previously might have been languishing from a value standpoint, strengthen. And I think there's some optimism in the eyes of other companies about the future. And so, the bid/ask spread on oil and gas companies is maybe a little wider right now given the strength versus when we did our deal a couple of years ago. In lower carbon, with interest rates rising and spacs kind of receiving and the like. A little bit of the kind of froth may have come out of that market, but they're still some optimism in valuations there as well. And so, we'll be very thoughtful and careful as we evaluate those. And there are a lot of companies out there that have got business models in this space. So, we watch them all. We will be back to talk to you if we have anything that's interesting. Let me touch on IRA and then ask Pierre to add a little more color. The IRA will probably accelerate some activity in the US. There's no doubt. Hopefully, what that does is it allows technologies to be de-risked. The cost of technologies to be reduced and the attractiveness of these investments to improve. A bill like that with kind of a grab bag of different policy incentives doesn't necessarily change our long-term view on how we want to build businesses. It does perhaps change the trajectory at which some of those businesses become more economically viable. And if that's the case, that could feed through into our similar investment decision. But it's kind of a second order effect rather than a first order effect. And just to add some of the other important effects, permitting really critical for traditional energy, super critical for new energy, new technology developments, you've seen us make some investments on technology to reduce the cost of capture of CO2 and then scale, getting cost down. So it's helpful, but it's just one element, as Mike said. Thanks. Maybe if I could ask a couple on the downstream side. First, there's been a lot of noise earlier this year about refinery maintenance activity looking to be well above average in the US, particularly in the first half of the year, especially amongst independent refiners. Your first quarter guidance seems to suggest turnaround activity in 1Q that's reasonably light or at least not terribly heavy. Any thoughts on whether 2020 -- year 2023 outlook as a whole for Chevron looks normal or heavy in terms of refining and maintenance. And then maybe more broadly, how you see general tightness in global refining markets this year over the course of 2023? Yes. I would say it's a pretty typical year for turnaround activity. We've got the FCC at El Segundo in the first quarter of this year, which Pierre mentioned in his comments. But there's nothing unusual in our turnaround plan for this year. What you do see across the US and I think in some of the other markets are two things that are really kind of still echoes of COVID. One is you're just seeing capacity go out of the system. And two, you see maintenance that was deferred during COVID is -- had to be rescheduled and replanned. And so there's probably still a bit of a bow wave of pushing through the system in some places of activity that needs to get done for safety and reliability and regulatory reasons. And so that could be driving some of the speculation. I can't really comment on other companies' plans. I'll let you talk to them about that. Okay. And then maybe on the other side of your downstream business on the chemical side, it's clearly been weeks for the last little while. Looking forward from here, is the combination of lower natural gas prices and the reopening of China having any impact on how you see margins moving throughout 2023, or do you anticipate that oversupply keep things weaker throughout the year? These tend to be long period cycles for the most part, Ryan. And so, at the margin, I think that's economic growth and development in China is a positive. But you don't slide into the lower part of the cycle quickly or easily, and you generally don't come out of it quickly or easily. So these things track over a longer period of time. And so, I do think we're -- it feels like we're kind of bumping along near the bottom here, but I don't know that there's a steep climb out as opposed to a gradual climb over time. Good morning. Thanks for taking my questions. I wanted to first follow up on the affiliate distribution guidance because it is taking a step higher year-over-year, and it sounds like that was due to TCO having excess cash. Is that kind of $5 billion to $6 billion, something you can maintain assuming oil price stays stable until the project actually starts up until TCO FGP starts up or would you expect that to fall off after this year? And then my second question is on a different topic, Venezuela. I believe you have now boots on the ground there again. Can you just discuss what you're seeing in terms of the health of the infrastructure there, the ability to ramp production and the desire from Chevron's standpoint to participate in that? Thanks. On affiliate dividends, there are two main factors why the guidance this year is higher than last year. You hit one of them on TCO, not held excess cash last year. The second big one is Angola LNG. You recall, a lot of their cash distributions were actually return to capital. It's an accounting concept tied to whether you have book equity or positive book equity or not now, they're in that space. So we expect most, if not all, of the cash coming from Angola LNG in 2023 to be characterized as dividends. It was cash either way. It's just one shows up in cash from ops, the other one shows up in a different part of the cash flow statement, but that's the second driver. And in terms of the direction, I mean, this guidance is kind of notionally at the current -- futures curve around $80. So it depends on commodity prices and margins. There are some downstream affiliates in there, the chemicals, obviously, in there. But we talked about TCO. I mean, TCO's heading up, right. As CapEx comes down and production comes up, we expect more dividends out of TCO going forward. And then again, we have the loan that we also expect TCO to pay back during the next several years. Yes, Jason, on Venezuela, we always did have boots on the ground. We just were very limited in where those boots could go and what they could do. The shift in the sanctions policy has opened up a little more room. It's allowed us to work with PDVSA to put some of our people into different roles in these mixed companies there. So we do have a little more ability to have influence and involvement in some of the decision making. Your question about the state of the infrastructure, there's been a lack of investments there for a number of years in the infrastructure reflects that, and it will take time for things to turn around. We have seen some positive production response already in the entities that we're involved in. They're producing about 90,000 barrels a day now, which is up about 40,000 barrels a day since we saw the change in these license terms. So that's been a good short-term effect. I'm not going to say you can extrapolate that, but it's where we are today. We are continuing to work on the ground to expand production, but it's too early to guide to anything. We're also lifting oil and bringing it to the US. We've got a couple of cargoes coming into our Pascagoula Refinery. We're going to be delivering cargoes to other customers on the Gulf Coast. And then the revenues go into a series of structured channels to pay expenses and other obligations. On the accounting standpoint, we're using cost affiliate accounting. So we'll record earnings only if we receive cash. And at this point, I would say the cash flows are expected to be modest. So this is a step-wise change in the environment there. We're going to go into it thoughtfully. It's a six-month license, and it's a dynamic environment. So we'll continue to advise you as we learn more and as things evolve. I'll ask about the Rockies. The Rockies is interesting. It's a place where you could maybe add a little bit of activity to face your aggregate Lower 48 activity levels, but without some of the inflationary pressures and just infrastructure tightness in the Permian and inventory depth there is good. Is the Rockies a place where there may be a little bit of extra focus. And I ask that in the context of sort of the broader theme around your overall resource depth and production and all these topics that are sort of flowing into the broader conversation today. Yes, absolutely, Sam. We got over 320,000 net acres there. Last year, we started out with one rig and one frac crew. We ended the year with three rigs and two frac crews working and the plan for this year is activity in that level. So it's been a positive movement in terms of activity and production expectations there. It's a really nice resource. It's a low carbon resource. It's a -- we got a lot of this is powered off the grid. There's been some permitting questions about this in the past. There's been large areas done under development plans, and we've got permits well out into the future and continue to work that closely with the authorities there. So -- it's one we can talk about a little bit more at Investor Day. It's a really positive part of addition to our portfolio out of Noble and the Eastern Med gets a lot of attention, but we're very excited about the DJ. Okay. And yes, just a follow-up. I mean, because obviously, between -- I think you can surmise the reserve numbers getting some attention to the overall pace of activity and production trends over the long-term are getting attention. But we'll get to this at the Analyst Day, I'm sure. But is there a way right now where you can kind of add it all up and size the Gulf of Mexico, other shale and tight, Eastern Med gas and just kind of frame that aggregate resource number against maybe what you see in the portfolio today as tail resource and just speak to a final answer around your organic portfolio and how it extends. Yes. I might have Roderick work with you. So we're clear on the question when we get to the Investor Day on how to compare and size things relative to the portfolio. But we said today in our press release that we're very confident we're going to exceed our 3% compound annual growth rate over the next five years. You can't do that unless you get depth in the portfolio, which we have. And you got quality projects they're moving along on a good pace. And so I'll assure you that, that is the case. We will talk about this more at Investor Day, and you'll have a chance to kind of go deeper into it with our folks. Hi. Good morning, everyone and Roderick, congratulations, all the best. Mike, I was a bit surprised by the major buyback announcement. Obviously, the $75 billion is very splashy. But within that, it seems that your guidance has remained that you'll be in the $5 billion to $15 billion a year range based on the Q1 guidance. Is there -- are you expecting to step that up, or is this a five-year authorization? And were you conscious that it would probably cause a lot of political backlash? Thanks. Yes. So, Pierre answered the question earlier, it's not a five-year authorization. It's an open-ended authorization. It is -- it's our intent to maintain it across the cycle. I'll just say that again. It's actually aligned with our upside in our downside cases from the 2022 Investor Day and consistent with our track record of being in the market steadily buying $2 below the market over nearly the past two decades. And we could increase our guidance range, Paul. We need to be confident we could maintain that higher rate for multiple years across the cycle. And I think that you should read it as a signal of confidence and we'll continue to talk more. We raised our buyback rate three times last year. So we're not averse to doing that. And I would just say stay tuned. In terms of the reaction to it, I think it's perhaps been a touch overblown given that it's an open-ended program, and we could have sized a smaller one and just been prepared to do another one sooner. Pierre said, we're closing one out. We just looked at something that would last over a number of years, and we were trying to be splashy when we're trying to create any reaction out there. We're just trying to indicate the confidence we have in our cash generation. Understood. And offset to that, Mike, you're spending more on exploration. Could you just talk about the highlights that you see coming up in 2023. Obviously, we're aware of East Med, but there's other stuff out there and the spending has stepped up quite a lot, hasn't it? Yes. I don't know if I describe the spending as being up quite a lot. We've got a nice portfolio that we like. And I'll just touch on -- you mentioned Eastern Med. We still have a lot of blocks in the deepwater Gulf of Mexico. We've got block in Suriname that we're still working on and that are on trend with some of the things in that region. We've picked up acreage in Namibia that's on trend with explorations in that part of the world as well. And so we got stuff in Brazil, we had stuff in Mexico that we acquired a few years prior to that. So we've got a nice portfolio of opportunities that we continue to work on. And we don't go out and drill the wells until we're ready to drill them. But it's spread across a number of basins where there's good working oil and gas systems. And the Nargis discovery is a recent example of what happens when you focus in those areas, and I'm optimistic that we're going to see more of that in the future. Hey, guys. Thanks for taking my questions. So the first one is on the share count. Just going back to early 2022 of the period where you're stepping up the buyback program, but the dilution from the employee options are offsetting that rule. So I'm just trying to understand, I know you took a charge today in the corporate line. Do you expect 2023 dilution to be a similar level to 2022, or should it be lower? Just any sense on that would be helpful. We expect fewer employee and retiree exercises of stock options. That was extraordinary unusual in the first quarter. And it's a zero-sum game. In other words, if employees and retirees do it early, there's fewer to do going forward. But that will be up to them and the stock price performance. And the share buybacks, I mean, you just divide it, depends on what our stock price is. We give guidance quarterly, and I think you can do the math. It is confusing the difference between average annual share count and where we end, right? So we are clearly taking our share count down. But when you look at average annuals, that's exactly what it implies. It's an annual each day, but the trend is going down. Our buybacks exceed the issuances and we expect that to continue. That's very clear. And then second question is just thinking about asset sales. Looking at your guidance, 2023 plans are fairly muted. And I appreciate that you're basically at close to zero debt, so you don't actually need to do anything but in a high commodity price environment, maybe counter-cyclically, you might want to accelerate something. So is this a function of just the limited cleanup needed in the portfolio or a view on bid-ask spread or anything else, just to get your view on the asset sale market at the moment? Thank you. Yeah. So Biraj, we are a little lower than what our typical level of guidance has been a level of activity. Over the last decade, we've generated about $35 billion in asset sales. So that's, say, 3.5%. There was some portfolio cleanup underway there that was needed to be done, and we get good value as we sold those. You're always looking at your tail. There's always -- when you sell things off, there's a new part of your portfolio and say, okay, this sits at the margin. And so you're always challenging that. If we were to find interested buyers and some of the things that might fit better for others than they do for us, we could transact on that. This is -- the guidance that we've got right now and the things that are underway and in process is what we've put out there, and we'll update you if there's any changes to that. And the only add, Biraj, we don't do asset sales to raise cash or to manage the balance sheet. We do it based on what Mike just said, high grading of the portfolio where we can get the best returns for capital projects that can compete for capital, some of the impairments that we took in the fourth quarter are a result and outcome of projects that are good projects. They're just not good enough to clear the bar. So it does ebb and flow a little bit as Mike has said, but I just want to be clear, we do it as part of our capital discipline and having driving higher returns and lower carbon. It's an outcome of that. It ebbs and flows. It's a little low this year. We set it to go back higher in future years. Thanks Biraj. I would like to thank everyone for your time today. We appreciate your interest in Chevron and everyone's participation on today's call. Please stay safe and healthy. Katie, back to you.
EarningCall_1085	Thank you for standing by. and welcome to the Gold Road Resources December 2022 Quarter Results Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Mr. Duncan Hughes, Manager, Corporate Development and Investor Relations. Please go ahead. Thank you, Darcy. Welcome, everyone, to our December quarterly analyst call. Despite a few processing interruptions, the December quarter saw us deliver to annual guidance for 2022 with production again increasing in 2023. The last few months have seen quite a turnaround in gold sentiment with the Aussie gold price now sitting comfortably above $2,700 an ounce. This is not a bad time for a company to be unhedged and selling gold on the spot market. The quarter saw us continue to support our strategic investments with a placement and SPP in De Grey Mining to maintain a 19.73% interest. As of today, our listed investments are valued at AUD 475 million on the ASX. On the presentation today, we will be referring to the quarterly results slides that can be viewed on the live webcast, our website or the ASX. Those on the webcast and on the phone are able to submit a question for us to address at the end of this call. On the call today, we have Duncan Gibbs, Managing Director and CEO; John Mullumby, Chief Financial Officer; Andrew Tyrrell, General Manager, Discovery; and Keely Woodward, Company Secretary. Thank you, Duncan. And thank you for joining us today. December quarter saw production from Gruyere of 74,201 ounces produced as pre-reported earlier in the month. The all-in sustaining costs were AUD 1,622 ounce for the quarter, up from AUD 1,426 in the last quarter. The quarterly results saw us deliver to guidance with annual production of 314,647 ounces produced at Gruyere. Production was delivered in an attributable all-in sustaining cost of AUD 1,447 per ounce for the year. The cash and equivalents closed the quarter AUD 81 million, up to AUD 26.5 million in investments and Gold Road continues to carry no debt. As Duncan mentioned, we supported our strategic investments through the quarter where the value of this investment portfolio has grown further since the stated value on this slide. Pleasingly, we continue to operate safely and reported no lost time injuries over the quarter. At Gruyere, in fact, our lost time injury frequency rate for the company fell to zero. Gruyere is now over 650 days LTI free, a very pleasing performance. Our annual resource and reserve statement was also released today. It saw Gold Road's attributed provable resources lift slightly to 4.79 million ounces and our attributable ore reserves fall slightly to 2 million ounces after depletion through the year. We continue to actively explore across the recently expanded exploration portfolio in Australia. Pleasingly, the drilling results has delivered more encouraging results from the Golden Highway and the 100% Khan prospect, which is to the immediate north and outside of the joint venture area. Looking at the quarter in a little more detail, production costs were a little soft due to lower plant throughput as a consequence of some delayed ore â higher grade ore getting into the plant that was scheduled to be late in the quarter. Mining continued to advance through the Gruyere stage two and stage three pits and average mine grade of 1.8 grams for the quarter was largely unchanged quarter-on-quarter. Waste mining slightly lower quarter-on-quarter. Processing rates and head grades were both lower this quarter. That's partly due to slightly higher ore. However, the main contributing issue was lower plant utilization. We completed a partial reline at the ball mill and had a few unscheduled maintenance issues. However, most of the throughput or availability issues related to the SAG mill. We've been working on basically improvements to the design of the SAG mill liners. Unfortunately, the generation design that we've put in in the previous reline didn't meet our anticipated life expectations or actually optimize the mill grinding performance. As a result of that, we needed to do bring forward a reline on into December rather than as it was planned to be done early in January. And we took that as a proactive measure to avoid sort of premature failures over the Christmas/New Year period when reline contractors are basically on holiday, and that's the last time you want to schedule that kind of work. But looking forward, we're looking to a new line of design which is really optimized for grinding and milling rate. We anticipate that will have a shorter maintenance life. But we're also looking at changing the maintenance scheduling strategy. So overall, we'll reach a better plant availability than what we've been achieving in current levels, and that will come through the course of 2023. Lower mill tons in December contributed to delay in processing of higher grade ore blocks scheduled from the stage three pit. These ounces were delivered to the stockpiles rather to the plant. But nevertheless, that contributed a slightly softer ounces than we planned for the quarter. The plant head grade did, however, remain in line with expectations for 2022, delivering an average grade of 1.2 grams for the year. Processing recoveries in the quarter were good. That in part reflected the lower throughput in the SAG mill, finer grinding in the ball mill and slightly higher CLL resonance time which contributed to the better recovery. As I mentioned, the all-in sustaining costs for the quarter, AUD 1,622 per ounce, obviously up quite significantly from AUD 1,426 in the previous quarter. The dip in the gold production is clearly the main contributor to the increased cost per ounce. And we also saw slightly higher processing costs or more specifically maintenance costs, in part costs related to the SAG mill reline. D&A and sustaining capital were also up slightly, contributing overall to the higher all-in sustaining cost per ounce. Ounces sold were lower quarter-on-quarter at 37,295 ounces. The average price for gold sales increased to $2,476 per ounce, reflecting, of course, the higher spot price and the close out of our hedge positions in November. Our gold held as dorÃ© and bullion at the end of the quarter fell slightly and is valued at around AUD 6 million. As stated previously, Gruyere has delivered to 2022 guidance, with approximately 315,000 ounces. And that, of course, represents a significant improvement from 2021 where we produced 246,000 ounces. Now, looking ahead to 2023. We've also released our guidance to 2023. Again, that's up quite significantly from 2022, reflecting largely an increasing head grade. So guidance range of 340,00 ounces to 370,000 ounces for 2023. The increase in operational performance, as I said, largely driven by grade, we're not banking a lot in terms of increases in throughput really until the pebble crusher and stuff comes in late in the year. All-in sustaining guidance, we're guiding at AUD 1,540 to AUD 1,660 per ounce. Key reasons for that, increases in cost guidance. Really, we've modeled in the higher cost, high inflationary environment that the whole sector is seeing. The costs include sustaining capital for pebble crusher, which we've provided details on previously, but that equates to approximately AUD 100 per ounce, unlike some of our peers who probably treat that as one-off growth capital. So, I ask you that you consider the way we're treating that and providing full transparency in our all-in sustaining costs. Other major capital items for the year [indiscernible], which is likely to commence around about the middle of the year. I guess it's important to note, outside of that, we have no other growth capital outside of the all-in sustaining cost for Gruyere. Okay. Turning so the next slide, just looking at some of their exploration activities and focusing, start with on the Golden Highway within the joint venture. So, Gold Road here have been managing the RC and diamond drill programs. We did a little bit of extra drilling late through the quarter. Of course, all this area is located out to about 25 kilometers to the east of the processing plant. Results continue to show prospects increasing resources and the reserve at Golden Highway and will be an ongoing focus of drilling within the joint venture in 2023. And I guess if you look at the edge of the slide here, you can see prospect which is on Gold Road 100% ground, immediately outside of the joint venture area, and suggests that there's a continuation of the mineralization into that current prospect area. I guess just turning to resources and reserves, which has also been updated today. Really not substantive changes. It's really just the routine reporting cycle that we're in. I guess firstly, the ore reserves are constraint at a AUD 1,750 gold price. For the Gruyere joint venture, mineral resources are constrained at AUD 2,000 per ounce. I guess both of those are considered as quite conservative, with the gold price which is north of AUD 2,700 an ounce. What that means in practical terms is Gold Road reporting robust high margin ounces. Gold Road's attributable mineral resources of 4.79 million ounces have increased slightly by 0.08 million ounces, or 2%, really as a result of the further extensions to the underground resource. That's really related to drilling completed in late 2021, offset, of course, by depletion from mining in the Gruyere pit and some minor changes to the Golden Highway, mainly reflecting changes in cost assumptions, with no change to our gold price. And obviously, if you have a higher gold price, that will offset each other. Our 100% Yamarna resources remain unchanged at 0.5 million ounces. Gold Road's attributable ore reserves have decreased by 0.21 million ounces to 2.02 million ounces. And really that just reflects mining completion through the year. This slide provides basically an update of the seven stages that sit within the mine life and the type of access they form at Gruyere. And that extends the mine life as we're seeing now, out to 2023. Slide shows the progress of where we are with mining and where we are within the stage two, three and four pits, which are all active mining areas at the moment. The colors of the grades here talk to my points, earlier on grade increasing at Gruyere through the year. And if you compare back to historic slides, you'd have seen a lot more greens [indiscernible]. So we're now really starting to into the sweet spot of the ore body where we're consistently seeing grades at the 1.2 to 1.3 on a grand range within the active areas of the operation. Turning to the slide. Next year, if you look at the detail of how we're grading resources and reserves, we've done that by two tentative methods. I guess more conventional approach are companies that apply constraining shelves to resources on the left and on the right is really looking at if you mined everything below the final pit design by underground methods. I guess really in a nutshell, it doesn't matter really how you do it. Outside of the reserve is in excess of 3 million ounces below the current ore reserve and we've got to work out the best way to look at extracting that future value. Just turning to exploration now and I guess the sort of overview. Of course, partly as a result of the DGO acquisition last year and, of course, our own tenement beginning in Northeast Queensland, at Galloway in Greenvale, and we now really hold a nationwide land package. Some of this, we're looking at bringing in joint venture partners, particularly Stuart Shelf and Yerrida-Bryah. Really, that's partly around their commodity focus here. Copper and other base metals are not necessarily our core technical expertise. So, we're really looking at partners that can bring that to the table. And we've got a number of interested and, I guess, some of the global majors really looking at those opportunities for the joint venture. So, really, if you look at the more gold focused exploration activities, obviously, continuing focus on Yamarna, Mallina, which is obviously next to the De Grey's ground up in the Pilbara [indiscernible] Galloway and Greenvale up in northeast Queensland. Really, our strategy, of course, remains unchanged. We're trying to find mine two out of our exploration activities and budget levels similar to previous years of around AUD 30 million. In fact, it's probably slightly lower than we've had in the last couple of years. Thanks, Duncan. So, a solid quarter. And I think just those key themes and drivers Duncan has talked you through over the last few minutes resulted in another AUD 47 million of operating cash flow for the quarter. And that in turn translated to AUD 16.5 million of free cash flow. And we have on hand at the end of December over AUD 6 million in unsold bullion and dorÃ©. One key point I'd like to just call out is ounces sold in the December quarter were lower than the September quarter, but we didn't receive, obviously, a better price environment as a result of two key things. One, obviously, is the gold spot price over the quarter. And also the fact that we closed out our hedge book in November. And December, for the first time in a while, our sales were 100% exposed to the spot environment. Looking at the usual cash flow waterfall here on the screen. Again, Duncan has talked through most of those. I would just point out that, in the quarter, we did invest almost AUD 27 million in investments in De Grey and Yandell [ph]. And as at the end of December, our listed investments were valued at over AUD 400 million, which is a great uptick from that purchase price back in August in 2022. So, if I looked at closing out 2022 and starting 2023, financially, our position is very, very strong, with AUD 80 million in cash and equivalents on hand. We had AUD 400 million in December in investments, now valued at close to AUD 0.5 billion. We have no debt and a revolver Tranche B of AUD 160 million is sitting there untapped and ready to go whenever we decide to call on them. So, a great position to start 2023. Thanks, John. That brings our results presentation to a close. We're now very happy to answer any questions you may have. So I'll hand the call back to Darcy to see whether we have any questions on the phone. You called out there's going to be a new SAG liner designed in 2023. Confirming if that was what you just put in in December with the reline. And I think you mentioned earlier, it's got a shorter maintenance life. So, should we be expecting a few more shuts through the year, but otherwise better milling rates? Is that sort of what 2023 looks like? I guess to change the design of the liner, lead time on these things is typically five to six months. So the design that's gone back in is basically the previous design. Obviously, we've learned a bit about how that performs, so we won't get any kind of surprises as to where we do those change outs. I guess what we're doing is typically what you have to do with any mill. Your metallurgical team is always looking to [indiscernible] line of designs and get to better performance outcomes. It's always a trade-off between sort of service life, if you like, and performance. So we're certainly still on that journey and there's still plenty kind of untapped potential, I guess is the best way I can see, in the sag mill. Part of that will come through ultimately when we get the pebble crusher we're scrambling to get commissioned late in the second half of the year. So those are kind of all the moving parts. Broadly, where we're working to on a maintenance strategy is somewhere around about a 17-week change-out cycle, which is not down significantly from where we have been. But we are looking at trying to move all of the maintenance basically into that reline downtime period, which is why I made the comment that, overall, we expect the total mill availability, there's still opportunities to improve on where we are. I guess, broadly, what we're factoring in for 2023 is similar performance in terms of throughput and utilization as we achieved in 2022. So we're confident on that kind of thing. And the main driver being on the uptick in gold production is really driven by the grade coming through from the mine. Just one more from me on the resource update. Wasn't much movement, I guess, on your 100% owned Yamarna tenements. Is that a little disappointing? And how does that influence your thinking around the budget going forward versus that opportunity? Look, Yamarna has got still some legs, I guess is the way we see it. One thing I guess we put in the quarterly is we've signed a new heritage agreement, which basically covers all of the Yilka claimant area. Historically, we had numerous agreements in some areas that lacked agreements. We've now put all of them together into a consistent basis. They're in line, I guess, in commercial terms with what we've had historically. But the big thing for us is it gives us access to some new areas, including some fairly high priority targets fairly close to Gruyere, probably south of Gruyere [indiscernible]. So, still stuff for us to shake down at Yamarna. And I think GOs [ph] (20:29) are still quite excited about some of the opportunities that are there. But I guess, overall, we're still holding an exploration budget around the AUD 30 million mark. As I said, slightly lower than the AUD 22 million budget. But within that, of course, we're taking some of the funds and putting them into Mallina and Greenvale. Mallina, of course, very little exploration up in that part of the world from the ground holdings that we've got. So, it's early days there. Of course, everybody's aware of the discovery over the fence. And Greenvale, interestingly, up there, we've picked up a number of new tenements. Some of it have just been granted with the historical kind of economic intersections. So there's some fairly obvious sort of drill ready targets once we've worked through all ground access considerations, which we expect to get through this year. A couple of questions place. Around Golden Highway and the drilling there, there's already some resources and reserves to find there. But what's your thinking about how those might increase and extend mine life and things like that? Obviously, you can see our published resources and reserves there at the moment. I see the opportunity as more for what I would see incremental growth. And that's pretty much what we're doing. And the drilling is quite targeted around tracing up where we can see growth ounces within sort of economically constrained pit shelves. We've got at least another year to kind of get things out to reserves. And we're in the throes of starting to put together the parameters around feasibility study work, permitting and the like for Golden Highway. And part of the driver of doing all this work now is really there's an opportunity within the Gruyere life of mine plan to blend in Golden Highway. And we want to make sure that we've got everything done there to hit the optimal time for blending in those reserves. Just thinking about the grade for Gruyere going forward. Looking at sort of stages three and four, obviously, have that high grade, like you had mentioned this morning. Six and seven seem to be of a similar average grade. Stage five is a little bit lower. What's your expectation going forward? Will 1.3 be a new sort of average floor grade or will it still vary up and down a little bit? We've provided a reasonable level of disclosure there. So, typically, of course, we're mining ore from two stages at any point in time. We may be mining â it's normally, you need to think of it â we're stripping waste from a stage that [indiscernible] ore supply. Before that's depleted, we've stripped the next cut back. So we may have two or three waste mining areas. And typically, we've got two ore mining areas operating concurrently. Obviously, that's where we're at at the moment. So obviously, stage five a bit lower grade. But I think just need to think of modeling that as being blended with stages four and six. Just one final question, please. Probably a while ago, now, you revised the pit wall angles on the final pit when you updated yours [indiscernible]? What's been the observation of pit wall conditions in the last sort of year? And are there any sort of walls at that final angle and how the pit walls performing in general? I think we've got confidence in those decisions. We did two things. If you read that announcement in detail, we flattened out the offside slopes where we've had some small scale failures. And we steepened up the fresh rock stopes. Those slopes have been adopted within the stages that we're mining at the moment. And I guess the results at the moment indicate that they're performing to expectations. So I don't really see there's likely to be any kind of change to those overall slope angles moving forward. Just on guidance, specifically cost guidance there, just trying to get a sense of the input and metrics and how you've accounted for the current inflationary environment. Let's just say, for example, diesel and gas costs, have you just taken spot prices and dragged that out a year? And is this going to change compared to say Gold Fields' guidance that they've put out? I can't comment, I guess, on detail on Gold Fields' guidance and how they do their maths on ore stockpiles and stuff. Always leads to some differences in how the two companies report. I think how we do it is in line with Aussie kind of peers. In terms of cost assumptions, clearly, we've pegged things to known prices in the market. We have allowed for some areas in an inflationary creep continuing on. Everybody's got transparency, of course, on diesel prices. They've come off a bit in recent months. But I think everybody's seeing â and in fact, I've seen commentary from other gold CEOs, which I think is in line with what we're seeing where other areas such as explosives and labor and stuff are still sticking up. So, I think we're probably past the peak in kind of rampant inflation in the mining sector, but everybody can see it, the economic â recent RBA numbers coming out. Now, we're sitting in the high 7s in terms of inflation rate at the moment. There's a few come through on the webcast. I'll start with one from Andrew Bowler from Macquarie. And he says you mentioned throughput improvement over CY 2023. Can you update us on your thinking on the ultimate throughput rate? Is 10 million tonnes per annum achievable with the third pebble crusher in place? Look, I think it's still a reasonable target because we've always expressed it as a target rather than kind of a concrete guarantee, but it certainly what we see as scuttling towards. Clearly, we've learned just from the viability and serviceability of the pebble crusher. We needed to put another one in. So, we've made that commitment. That's now in construction. Should have been in place late in the year. And there's a bit of tuning up of SAG mill that will be required related for that. So, really, I see the benefit of that really coming in, perhaps late in the year, but more into 2024. And that's probably the main bit that we need to kind of unlock the capacity of the comminution circuit associated. And I guess, as I've talked to before, there's still incremental improvements to get around the SAG liner and, call it, maintenance strategies that we've got deployed at Gruyere. And follow-up from Andrew was essentially around the alternate underground resource. Is there a chance of a trade-off study in the next couple of years? Or will this be something you'll be looking at a little further down the track? Look, I think we're going to have to start evaluating underground versus open pit potential. The big macro way I look at Gruyere is the inventory is about 10,000 ounces per vertical meter. And if you start to think of mining depths that you're seeing in WA, you're getting potentially a kilometer below where our pit could land. There's a lot of gold sitting down there. We've got to be smarter than the average peer to work out how to get it out and make money out of it. So, irrespective, I think of where the ultimate pit lands up, there's always going to be an opportunity for large scale resource at depths of Gruyere. In terms of pit [indiscernible], obviously, we're working through the final designs we've got now. Potentially or conceptually, at least, there's an opportunity for the cutbacks beyond that. Or perhaps incrementally, slightly larger cutbacks than where we are to evaluate any of those â we've got to have line of sight on all the cost structure. And we'd need to do some more drilling at depth to bring it up to a reserve level of [indiscernible]. I think, in total, it's around AUD 20 million. And I guess the detail is the exact split of where that lands up between this year and next year. We don't need to get it completed until middle of 2024. Obviously, we're going out with tenders and stuff like that early. Because there's a bit of squeeze in contractor availability in kind of anything to do with mining at the moment. So a way of getting reasonable pricing is not to leave it till the last minute. Tyson's next question was, is CY 2023 guidance in any way weighted towards the first or second half with respect to production and all-in sustaining costs? Look, I don't think there's anything in particular to really call out and, certainly, we haven't given any color on a profile in the quarterly report in our guidance statement. There are just a few other questions on here, but I think they've been answered previously by questions that were posed to us. So I'll just hand back to Darcy to see if there's anything else on the phone. Well, that brings a close to our quarterly results call. Thank you, everyone, for your continued interest and support. I'll just close out on the last slide that I think sums up the quarter. We met our 2022 guidance and 2023 sees production increasing towards that sustainable 350,000 ounces. In terms of growth, we've got a pretty exciting investment portfolio that's currently valued, as John said, at almost AUD 0.5 billion. Balance sheet is strong. We're debt free. We're a dividend payer. Cash and equivalents at strong position, and we're currently unhedged.
EarningCall_1086	Hello, everyone. My name is Kyokawa from Public Relations Department of Shionogi. Thank you very much for joining us today. This is the briefing for the Financial Result of the Q3 of Fiscal Year 2023. From Shionogi today we have Dr. John Keller, Senior Executive Officer, Senior Vice President, Supervisory Unit and then we have Dr. Iwasaki, Senior Executive Officer, Senior Vice President, Healthcare Business Supervisory Unit and Pharmaceuticals Commercial Division; and then, Dr. Ryuichi Kiyama, Senior Executive Officer, Senior Vice President, Corporate Strategy; and then Dr. Uehara, Corporate Officer, Senior Vice President; and then we have Masako Kudou, Vice President, Finance and Accounting Department. Today, Kudou is going to brief you on the financial results for the Q3 and then Mr. Kiyama is going to explain our undertaking for the future growth, then we will have Q&A session. We are planning to end the session at 04:00. Now let me explain simultaneous translation. Simultaneous translation is available for this session today. If you wish to use simultaneous translation, please click the globe icon at the bottom of your screen. And choose either Japanese or English. My name is Kudou, I'll give you the briefing of the financial result of Q3 and the amendment of the forecast. Now page four. This is the actual JPY338 billion for revenue, operating profit of JPY146 and then the net profit JPY198 billion. [indiscernible] Xocova we booked JPY100 billion for the of Xocova. And for base business, it's been going very well. So as you can see at the right, as I can see, the revenue and other profit categories are achieving higher figures as compared to the previous year. This time, we are indicating how many times we've increased our revenue and profit. And the progress as of Q3 is going very well. We've achieved -- we've already achieved the forecast at the time of the Q3. So we are going to revise our forecast upward again, and also the corporate operating profit and profit before tax and profit attributable to owners of parent have already achieved the record high. Page five. It's a statement of profit and loss. As to revenue, purchased by the Japanese government was booked for the third quarter. And as to other products, the tendency or the trend is same as Q2. In addition to the Xocova, HIV royalty has increased as well because of the good sales and also the favorable exchange rate. And also, cefiderocol is serving very well in western countries. As to cost, it's very difficult to forecast the cost of COVID-19 products. So the progress rate is 55.7%% for this. And this has been factored into the revision of the forecast. The cost of sales and SGA, as we have invested heavily, but the overall expense has been well controlled. So the operating profit is JPY146 billion and it's already exceeding JPY120 of our original budget. As to financial income and costs, it's JPY52.3 billion and it's increased a lot from the previous year. This is thanks to the increased dividend from ViiV. The timing of the receipt of the dividend has shifted to April. That's one factor. And ViiV is doing very well because of the reasons we are now having very good figure. And the dividend is fluctuated because of the cash available at the ViiV. Because of that, we are very conservative, but the progress rate is more than 90%. As to profit before tax and profit attributable to owners of parents, it seems lower than the previous year. But last year, there was a one-off factor of return money from Osaka tax office. And this is revenue by segment. As to prescription drug in Japan, the actual between April and December is 54.7. It's a big down from the previous year. This is because of the Intuni and Vyvanse they are doing well. However, because of the generic Cymbalta and also because of the return of the anti-influenza, the sales declined. As to progress rate at 71.5%, it seems lower figure. However, the weight of the infectious disease is big in the fourth quarter. Therefore, it's on track for Q3. And as to overseas subsidiaries and export, it's going very well. As to Shionogi Inc. it seems like same as the previous year, but there was JPY2.2 billion of onetime revenue for the last year. But this year, we are seeing a big increase because of the sales of Fetroja. As to contract manufacturing, it seems delayed. However, on the full year there will be no difference from the budget. As the OTC, because of the [suite] (ph) of COVID-19 is going very well. As to royalty income, continuing from the second quarter HIV franchise is going very well in terms of the sales and also there is a favorable effect of the exchange rate. So it's going very well. As to Crestor for this year from AstraZeneca, we didn't factor in the royalty from AstraZeneca. But it's selling very well globally. Therefore, we received JPY1.3 billion as royalty. As to COVID-19related products, the purchase of the Xocova by government, that was JPY100 billion, JPY10 billion more is necessary to achieve the target. And we will try our best in Korea and China, so that we can achieve our target. Page seven. This is the revenue forecast for prescription drugs in Japan. With regard to the revenue of this, as I have said, it is smoothly progressing. With regard to influenza family in the second quarter there were some returns, so it was minus JPY3.8 billion, but as it says in the notes, from -- there was a revenue of JPY1.5 billion from April to December. The next page, this is the results and progress in Q3 of FY 2022. What I would like to tell you is that, we are finally able to deliver Xocova to our patients. Up to now to COVID-19, we have conducted a much investment and at least this is contributing to our revenue and profit. And also with regard to vaccine S-268019, we are conducting the submission for the approval, and we have been able to attain great progress. With regard to the settlement in the cost and also SGA in the COVID-19 related financial forecast, there were a lot of uncertainties. Therefore, we had a very conservative forecast, however, we were able to exceed our forecast. And now, I would like to explain the financial forecast for 2022. This is regarding the changes in earnings forecast. In the HIV business, we are doing well and there is a royalty from ViiV, and therefore, we are going to revise our forecast. Xocova cost and also because of the volume increase of the manufacturing, the cost ratio has increased or improved. With regard to general and administrative expense in order to prioritize COVID-19 related business, some of the originally planned growth investments will be shifted to the next fiscal year. And also, it is -- there is going to be a proactive investment and increase in R&D expense in order to cope with the R&D expenses, aggressive investment in product development, including COVID-19 related projects. Page 11. Because of there were uncertainties in the past. I said that there is going to be a revision in the forecast. And because of the clarification of the Xocova and the HIV business situation, we are going to implement a second upward forecast revision. It seems like there is not much a difference in the forecast, but because of Xocova business in Korea and China [STS] (ph) 2030 update will be conducted and also the forecast will align with that forecast starting from April. And this is a forecast that we are quite sure that we would like. We would be able to attain. And therefore, further increase in sales are may be expected from overseas progress of Xocova and reflecting this situation, the second upward forecast revision will be conducted. Page 12 is the revision of earnings forecast: statement of profit and loss. Revenue and all the profit categories are upgraded. Page 13. This is revenue by segment after revision. As I explained, royalty from ViiV and also royalty for Crestor for [indiscernible] have been incorporated. We are going to achieve our target and for the next year, we would like to achieve further increase of both sales and revenue. As to Xocova, we believe that we are going to increase the sales further. COVID-19 will be categorized as category five and as because of this change, I think more people would use our product. And we also like to negotiate with the government about the storage of the product. And depending on the situation in China and Korea, we may further increase our sales. And also, we are thinking of getting approval for vaccination. In April, we are going to update our midterm plan and [indiscernible] activities will be done very actively. There are many other items that we cannot disclose now. However, we are taking a lot of measures and please stay tuned. That's all. Thank you very much. Now we are going to -- Kiyama is going to talk about Q3 and the growth for the future. This is about the Xocova. And this is the summary. And page 16. And because of the approval last year and for Shionogi getting approval is not the start, it is a start, not the end. As the new variant comes up, the role of the antivirus is increasing, and we believe that there will be strong needs. Shionogi is going to sell Xocova globally and we will also focus on pediatric and prophylactic. And then along COVID, we are going to gather evidence so that we can contribute to the normalization of people's lives. As to the coexistence with the COVID-19, we will continue to take measures to fight against COVID-19. And using the following two slides we are going to explain a situation. This is the Japanese situation for Xocova. Supply from government purchase is different from the normal sales and we have been able to deliver Xocova to more than 20,000 patients in Japan and there is no major safety concerns. For the future, we are under discussion with MHLW and PMDA for general approval and also the Phase 2 -- Phase 3 part of the Phase 2/3 trial conducted in Japan and Asia, the data of that will be announced at academic conference. We will talk about the long follow â along the COVID follow-up interim analysis results and antiviral reduction effect around February of this year. With regard to the Xocova, in Korea, we have submitted an approval application on January 3 of 20 23. Initially, we were going to aim for approval under condition. But right now, we are continuing discussion with Korean government and regulatory authorities. And we are aiming at approval by fourth quarter of fiscal year 2022. And next is the global study situation for Xocova. With regard to SCORPIO-HR, we are increasing sight outside of the United States. And in 2023, we are aiming for completion. And also, a STRIVE trials for the hospitalized patients, we will be starting this trial in February of 2023. And also SCORPIO-PEP, right now we are continuing protocol discussion with PMDA and FDA, and we will be starting this trial in February of 2023. Next, with regard to Xocova in China. There is a greater need for the clinical trial. And right now, PingAn-Shionogi is preparing to apply for NDA. After we have gained approval, we want to be able to deliver at Xocova as soon as possible. So we will provide the product from Japan initially and then switch to domestic production in China as soon as preparations are completed. And also with regard to the construction of the production system, we have completed PV at drug substance and formulation plants. Right now, we are aiming to build a production system to supply more than 20 million people a year. And 100 million production capability is also available at this point. And also with regard to the supply and sales system, our license agreement for import and distribution with SHAPHAR and license agreement for promotion with a CTTQ has been conducted. And with this, we would like to -- and we have established the system so that we can deliver a Xocova to all of the population throughout China. Next is the pipeline progress. In total, the development is in progress smoothly. And today, I would like to highlight on S-309309 and Olorofim. With regard to S-309309, this is an indication of obesity and it's a mechanism different from GLP-1 for obesity. With regard to S-309309, it can be provided at low cost and with a nonclinical study, there is an expectation for high efficacy and it can be combined with GLP-1 as well. So we will be able to deliver another option for treatment. And therefore, we are aiming at a global development. And also, we have not seen any adverse events of any concern so far, and there is a high tolerability as well as efficacy. Based upon this good study result, we are going to conduct a global Phase 2b study. Next is the Olorofim. It is a new mechanism of action and its indication is a limited treatment options for invasive fungal infection and invasive aspergillosis. F2G is conducting a Phase 2b study right now, Study 32, and it's mid-term result has become available. A Study 32 is for any unlimited treatment options for invasive fungal infections and invasive aspergillosis, which does -- patients who do not have any other treatment options, so it's an open label study in patients with limited treatment options and you can see that the results -- 87% is the death rate for the control. However, with Olorofim this rate has been reduced to 32%. So as you can see, the efficacy including high survival rate was shown and also it was well tolerated even with dosing up to two years. Therefore, NDA based on positive results is underway -- under review by FDA at the moment. And we will be making steady pipeline progress, including these two progresses. And next, I would like to explain about the progress of HIV franchise by ViiV Healthcare. As you can see from the financial report of ViiV, their sales is increasing, driven by the HIV franchise. With regard to Dovato, the sales was 360 million pounds in Q3 2022. It was an increase of 73% Y-o-Y. And as you can see for each quarter, it is increasing and it is offsetting the decline of the others. With regard to Cabenuva, the Q3 2022 sales has been over 100 million pounds. With regard to Apretude, which is a long acting inject in for prevention. It will be an important growth driver going forward and up to 2026 towards 100 billion pounds goal, it will be growing steadily. And also for S-365598, it is penetrating into the U.S. market very smoothly. And also, we will be going into the European market and that we are expecting growth, that was with regard to Apretude, sorry. And next is with regard to S-365598. It is an ultra-long acting injection and Phase 1 trial has been initiated already in December of 2022. It is an oral administration formulation and the steady growth of innovative portfolio and development progress of next generation long acting products to drive medium to long term growth can be seen. Next is, with regard to the development status of the combination candidates for ultra LA Injection. As you can see, these are not compounds developed by Shionogi, but they are the combination candidates for our LA Injection. Virus resistance should be prevented by combining with other drugs. And therefore, we need to develop combination drugs. And ViiV company is right now developing five compounds as combination candidates. And today, I would like to give you a progress report on broadly neutralizing antibody N6LS. By blocking HIV's entry into human CD for a positive cells, the HIV transmission process may be prevented by this N6LS. And a single infusion of N6LS demonstrated strong antiviral efficacy, while being well tolerated by the participants. And also we expect to begin Phase 2b trial of this N6LS in combination with other antiviral -- retroviral in that 2023. That is all from myself. Thank you very much. Yes. About the Xocova, as you mentioned, after becoming category five, I think there will be spread of COVID-19. We've used a lot of the drug for influenza, so I think people would use it for COVID-19. And the reason why because we are using other anti-influenza in order to lower the risk. There is non-COVID problem as well. So I think people would use it. And as compared to influenza, there was no selling of the antigen tests, but now antigen test is available for people. And if the government subsidy maintains, I think it would be easier for COVID-19 product as compared to influenza. But there is also a negative scenario and the current share price is reflecting that. So I have a question to [indiscernible]. If it's categorized as category five, what will be the reasons -- potential reason why it wouldn't be used if there is any reason for not being -- Xocova to not be used. Okay. Thank you for your question. As you mentioned, at to Xocova at influenza, we got less of risk factors once people get positive they would receive the medicine so that they can prevent the spread of virus and to decrease the conditions, not only the patient themselves, but also their family members and community as a whole can be benefited. Thanks to this drug. And that's how we obtained the data. Therefore, as you mentioned, after getting emergency approval it would be shifted to regular distribution, and then it will be easier for people to get access to this product. And you asked if there is any negative scenario about Xocova, if there is any potential scenario where people wouldn't use our product Xocova and that would -- so far, more than 20,000 people use this drug, and we now have accumulation of safety data. And there's no concern about safety so far. Therefore, I think that people would continue to use Xocova. But if something happens in terms of the safety, then, of course, doctors may not prescribe this drug to low risk patients. However, we don't see any signal, but if you ask that will be one factor. I hope I answered your question. I don't think that will be a problem. Now under the situation of emergency approval, there are complicated process, such as informed consent, therefore, some hospitals and pharmacists are not using this drug. However, once it shifted to regular distribution, it will be easier to prescribe Xocova. And as you mentioned, for young people, they don't generally use other drugs. And once they get used to it then they can immediately check if there is any problem in terms of DDI according to the feedback from our doctors. So I don't think that'll be a big problem. With regard to the treatment for COVID-19, Xocova overseas. I am a little pessimistic. Vietnam is complicated, but also in Korea and China I think on 28 of December, Xocova was not approved. And your partners' stock price declined. And after that, you have submitted for the approval. So I don't think that Korea, you can -- I don't think for Korea you can expect approval? On the other hand, China too, it is not being approved. We [indiscernible] is being announced in [MDGM] (ph) and it seems that the Chinese made drugs are being prioritized. Therefore, again, for China too, I do not have a very optimistic forecast for [indiscernible] in China. So what do you think about your forecast in China and Korea? Thank you for your question. So activity in Asia for Xocova. With regard to Korea, first of all, in Korea, our partner company has told us that for ERA we were not able to apply. But the result of the Phase 3 study has -- is a data that can be reviewed. And so, as a conditional approval, we made progress with regard to the application of -- for the approval. But we were going to shift to ERA and we are expecting that we will be able to receive the review from the authority of Korea. And with data package we will be subject to discussion as to whether it is applicable for ERA in Korea. In China, the Chinese made drug is being gone through reviews, and we have heard that they might receive ERA in China. On the other hand, Xocova is also applying. So the data review is being made for Xocova in China as well. And we will be considering whether NDA will be possible in China based upon their review of our data. And also, with regards to Phase 3 study, the SCORPIO study, PEG study in U.S. What is the situation? So in 72 hours after the event and I think the condition was the same as in Japan. And for HR study, it was within 130 hours. So with the longer duration after event, I think there'll be more noise and therefore I would think -- I would say that the success rate would be lower for the HR study. And so do you think that you will be shortening the duration? Or do you think that you will be successful with the present condition of the hours after the event down set? In the global Phase 3 study, the protocol is going to be changed. We are discussing with FDA so that we can change the protocol. And NIH is fully committed with this study, so NIH chair and the committee will be having a discussion for this protocol discussion. And therefore, it might take some time, but we are in the process of trying to change the protocol. So thank you very much. I look forward to your further feedback. My name is Ueda from Goldman Sachs. I have a question about Xocova domestic market. Going forward, when do you plan to get full approval? And you also talked about long COVID. You said that you are getting information about long COVID. What kind of criteria did you use for evaluation? [indiscernible] criteria, have you made agreement with the authority? Thank you for your question. About the process of the full approval -- for regular approval [indiscernible] MHLW and PMDA, we are discussing the schedule. We don't have the specific dates or schedule yet. As you know for emergency approval there is a condition that we have to get full approval within a year. We have to submit all the data so that we can move on to the regular approval process. About your second question, about long COVID. We've conducted Phase 2 and Phase 3 and all the patients in this study after one month, three months, and six months -- excuse me. Three months, six months, and 12 months at each time point we check if they have any non-COVID conditions. It may not possible to get answers from all the patients, but the feedback ratio is very high in Japan. The result of the feedback will be analyzed and then we are going to announce that figure in February. We looked at 12 conditions and also hearing and smelling. I mean, the taste and smelling and also other psychological or psychiatric long COVID conditions. We ask them if they have such conditions, and we also ask the grade of those conditions. We will analyze those information, and then we'll see in which way we can lower the risk, and that information will be disclosed soon. Thank you very much. Was it a blinded study? And as to those criteria, have you made agreement with the authority? It was an unblinded study. Because they don't know if they are having active drug, but the key has already been opened. So this is unblinded test. And as to long COVID, a definition of the long COVID and also any effectiveness of treatment. There is no fixed or established ways or established definition. Therefore, we are going to analyze the information that we are getting from this study and then we will talk to PMDA and experts so that we can have discussion and digest or interpret the results together. As if they try to get information, the doctors have information at the sites. But I don't think they informed patients whether it was placebo or not. I think that they don't know which they take. That's my understanding. So with regard to the forecast of the expenses for the future R&D. So after next year, what will be the standard or the numbers for the R&D expenses? And will we consider the R&D expense for your company, I think, Xocova will have a great impact. So when making the plans for R&D expenses, what are your conditions that you are using? Thank you for the question. With regard to R&D expense, I will give you some figures with regard to vaccine, the COVID-19 drugs as well. We will be accumulating evidence and also expanding indications. And therefore, in the fourth quarter and the next year, we will be conducting several studies. With regard to the expenses, the expenses will not be so large [indiscernible] the R&D will be conducted proactively and investment will be conducted -- R&D investment proactively. But after next year, I think the R&D expenses will be similar to prior COVID-19. Yes. Xocova sales will have an impact on the R&D expenses that will be available for your company. So based upon that, do you have any plans for the investment for R&D going forward? So it will have an impact both on, to some extent, on R&D investment, but also on strategic investments where further expansion of the pipeline and other activities. So we will be obvious calibrating those expenditures along with our top line. Both for Xocova sales, as well as, of course, the royalty and other factors that usually impact. My name is Yamaguchi from Citi. My first question is about the revision of your forecast. As you explained, as to Xocova the sales remains the same and the cost of goods was lower than the previous forecast. For other items, if it was not approved that's about JPY30 billion buffer in case it's not approved. This time that had been advanced or is there any other upfront potential? For [SGA] (ph) there is a buffer -- feature growth buffer in FGA. But this time there are some uncertainties about the global development of Xocova. And as I mentioned, we have to strengthen our financial foundation and we want to invest in growth driver for the future. So as of now, including that buffer that's the minimum figure that we are having now. Okay. And my second question is about the revision of the midterm plan. Do you have any specific date? Is it in April to revise your midterm plan? My last question is about domestic Xocova. [indiscernible] has IVMS. So you have some sales booked, and I think it's going very well. It's about JPY30 billion. On the other hand, [indiscernible] and government purchase, so we don't have any figure, and it's 20,000 people have taken this drug. But you are not -- you are not able to do marketing yet [indiscernible] is used a lot, and other drugs are not used. So there is a bias or imbalance in terms of the uptake, what do you think is the reason? And do you think this situation will be resolved? And about the onset of your drug, do you have any feedback from hospitals? Onset of the effect. Masako speaking. As to [indiscernible], as you mentioned, after regular distribution because of the public subsidy, the restriction is about 10,000 or 11,000 or even 15,000 and that would increase to about 40,000. And the other factor is that, in the government purchase there is a process of patient registration. And once it gets full approval, that kind of complicated process will be eliminated. And then I think the number of patients would increase. But on the other hand, if it's categorized as five the number of patients may increase. However, we are not sure if all [DGPs] (ph) would accept COVID-19 patients. That's something that we are not sure. It will depend on NHI price and the number of patients. But if we assume that we will get public subsidy, we can expect certain number of patients. Well, seven days -- well, eight days has become seven days. So there's one day reduction. And all five symptoms are being improved. And also in the clinical level, the fever declines and the sore throat has improved. So individual symptoms are being improved. And there are some doctors who are very positive with regard to that. And also, there is an advantage in preventing worsening. So once you've used it, clinically speaking, the symptoms do improve. And we have received many of such voices. This is Sakai from Credit Suisse With regard to Xocova from myself as well. I have two questions. one is with regard to the -- so JPY100 billion for the third quarter, that's the sales. And how have you settle this based upon the [VS] (ph). There seems to be no changes in the VS. So Kudou-san, could you tell me with regard to how it has impacted the VS? It's a government purchase of JPY100 billion and it was divided into two occasions in the VS. With regard to the second income, it is written here in the settlement financial report. And also, again [indiscernible] the increase will be seen in January, that will be the next increment. So this is a government budget. So all of the incomes will be coming in by March 2023, correct? And it will be incurred as cash. Is that correct? So whether it's going to be category five or whether it's going to be subsidized. If it becomes a category five, it will automatically become a normal distribution. And so what do you think about this? Could you reorganize your thoughts with regard to how you forecast? Whether it will -- what will happen if it is re-categorized to category five and what will become of the subsidy from the government? With regard to category five -- Sorry. With regard to the official subsidy, I think up to the next fiscal year, I think the government subsidy will continue. Maybe the amount may be declining. However, the official subsidy will continue in the next fiscal year as well. With regard to category five, the government has made the official announcement only last week. So if it becomes a normal distribution and the illicit price will change, I think our sales will increase because it will be expanded to greater number of patients. And I do not know exactly how it will relate to category five. So the announcement was made only last week. But one of the point is that because -- with the pandemic, the listing of the price is going to be revised and also with the listed price, whether it is going to be unique to COVID-19 or whether it is going to be a list similar to influenza drugs is still a matter of discussion. I think the timing of the listing will be in -- like in the normal case. But as far as how the price will be settled is unknown. So in other words, the purchasing price from the -- purchasing by the government will not be repeated in the normal pricing listed price, correct. Kumagai speaking. Do you hear me? My question is about Xocova in Korea. Is it going to be government purchase? And the second question is, the sales of COVID-19 products, JPY110 billion and the remaining JPY10 billion is mainly in Korea. Because for China, because of the fiscal year ending that the sales will be booked for the next year, that's my understanding. Is it correct? With respect to Korea, those aspects with respect to purchase are also under active negotiation by our partner at present. And with respect to sales -- about the sales of the China, as you mentioned, the booking period is different by three months. So the figure until December will be booked only. But the sales -- when the sales is significant and when the profit is booked, then that should be reflected on our statement. So it will be depending on the significance of the amount. If it's big, that will be booked for this fiscal year. Thank you. About China, I understand that they are doing rolling submission. When is the last submission and what is the expected approval date? Actually, it's is a little ahead of our projections that there's two things to consider. One is, as you recall, Cabenuva launched during the period of COVID. So it took some time to set up the injection at the sites, as well as the purchase and billing processes. It turns out that the overlap between sites that provide LA treatment and sites that provide LA prep is only about 40%. So although we are now outside of -- mostly outside of the COVID window, we have to do a lot of that basic work that was done for Cabenuva needs to be done for the sites for Apretude as well. With respect to reimbursement, we are on track with our own projections [indiscernible]. But it certainly would be helpful if there is more government support for the prep area. From a policy point of view, that is under discussion with many positive words, but there hasn't yet been a federal strong position taken fully supporting preps. Individual states and individual plans are. So we are hitting the trajectory, we anticipated to hit at this stage, but there is as you know, a lot of startup work still to do. This is Hashiguchi. With regard to Xocova in Japan, I have two questions. The first question is, going forward, in order to expand Xocova one of the important points would be, I think, the guideline. The guideline will be revised. That's my forecast. And also if -- I think this will be a drug, who are not high risk patients? And also in non-high risk patients, the judgment of non-high risk patients need to be made carefully, that's what the guideline says. And in order to apply the Xocova to abroad set of patients, I think the guideline is based upon evidence. So in going forward, what kind of data will you publicize us in order to revise the guideline? And what is the timing of the data which will be available, which will figure the revision of the guideline? This is Uehara speaking. Let me respond to your question. So as I have indicated in this diagram, right now in ERA, the primary symptom is to be shortened. This is included in the package insert. So with regard to antiviral efficacy in the second and the third Phase study, all of the analysis has been completed. And so with regard to the Omicron, the Phase 3 part data, what kind how many hours will be necessary in order to have an antiviral efficacy is included in this study results. So we will disclose this and not only this antiviral efficacy with regard to non-high risk patients, whether this is applicable to such patients. Safety is one of the important factors that is important. And another factor is with non-risk, high risk patients, there are many patients who suffer from the aftermath symptoms. Therefore, we have taken data with respect to those symptoms, and these symptoms will be confirmed by the specialists. And by applying Xocova if such aftermath symptoms can be alleviated by Xocova. This can lead to the promotion of the prescription of Xocova. This is our expectation. In the third phase apart, this is data of after the onset and three months and six months data is available today. And this will be disclosed in the conference in February of [indiscernible]. And also, for longer period data, we are now collecting such data. In the Congress, in February, with that data which you will be announcing, do you think it will have an impact to revise the guideline or is that too much to expect? I do not know how to respond to that question. I hope that the doctors will look into the data and I hope that the doctors will discuss about the impact of this data to the guideline. With regard to the listed price, I think there is much discussion ongoing. And I think there is going to be a hearing from the patient organization as well. And -- sorry, the industry organization, sorry. And so what kind of opinions do you want the industry or organization to express and advocate. This is Iwasaki speaking. The epidemic or the pandemic, the seventh wave, the eighth wave, ninth wave, when it will come has been forecasted. And based upon this forecast, the listed price is to come down. I think that's the intention. So the listed price is always ready to decline. And this seems to be universal to all kinds of drugs so they are ready to reduce the price for all kinds of drugs at any time. However, this time, this is a drug for pandemics. So I think we should advocate that point. Thank you very much. So with this, we would like to conclude the third -- the announcement of the third quarter of fiscal 2022 financial results for Shionogi & Company. And thank you very much for your attendance and participation.
EarningCall_1087	Welcome to the Q4 2022 Ameriprise Financial, Inc. Earnings Conference Call. My name is Dennis, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. Thank you, operator, and good morning. Welcome to Ameriprise Financial's Fourth Quarter Earnings Call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we'd be happy to take your questions. Turning to our earnings presentation materials that are available on our website. On Slide 2, you will see a discussion of forward-looking statements. Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provide insights into the company's operations. Reconciliation of the non-GAAP numbers to their respective GAAP numbers can be found in today's materials and on our website. Some statements that we make on this call may be forward-looking reflecting management's expectations about future events and overall operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our fourth quarter earnings release, our 2021 annual report to shareholders and our 2021 10-K report. We make no obligation to publicly update or revise these forward-looking statements. On Slide 3, you see our GAAP financial results at the top of the page for the fourth quarter. Below that, you'll see our adjusted operating results, followed by operating results excluding unlocking, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. Many of the comments that management makes on the call today will focus on adjusted operating results. Good morning, everyone, and thanks for joining our fourth quarter earnings call. As you saw in our release, Ameriprise delivered a strong fourth quarter, completing an excellent year in 2022. We continue to navigate uncertainty and serve our clients exceptionally well. I'll give you an update on the business, and then Walter will discuss our financials. Let me start with the market environment. Equity markets were down 19% year-over-year, with the average equity markets down 3% sequentially. So far this year, we're starting to see markets rebound to some extent as inflation eases, However, inflation is still at a high level. The question is, will the Fed have to continue to raise rates a bit more? Or will they maintain higher rates for longer if inflation remains stickier? With that backdrop, Ameriprise continues to be in a strong position. Revenues were good at $3.6 billion, only down 2% from a year-ago relating to the impact of the equity and fixed income markets. Earnings were up nicely with EPS up 13% for the quarter and 11% for the year, both on new records, and ROE continued to be excellent among the best in the industry. Importantly, we're also managing expenses well with total expenses down 5% compared to a year-ago. Assets Under Management and Administration were down to $1.2 trillion largely driven by the steep decline in equity markets, lower fixed income markets and a difficult foreign currency translation and Asset Management. As in previous quarters, our combination of businesses generates a consistent level of free cash flow and good returns across market cycles. We're able to consistently invest in the business, which is strengthening our competitive position and our ability to deliver differentiated results. Now I'll talk more about our businesses. In Advice & Wealth Management, we continue to deliver very strong results and build on our leadership positions. We had good client flows in the quarter as clients remained engaged working closely with their advisors and benefiting from our comprehensive advice and solutions. Total client flows for the quarter were more than $12 billion, which is very strong, and in fact, the second highest quarter we had and just below our record fourth quarter last year. And I'll highlight that client flows were a record for the year at nearly $43 billion. With the investment climate this year, we've seen an even split into the mix of flows into advisory and non-advisory accounts, which is appropriate in this environment. We're maintaining an appropriate level of cash balances with good growth in our certificate business and the Ameriprise Bank, which is a key growth area for us. With regard to the bank, we've been consistently investing to expand our capabilities. The bank provides important flexibility in this interest rate environment and enables us to further engage and deepen our relationships with clients. Our bank has grown more than 50% this year to nearly $19 billion. We have good growth in our pledged loan business, and we're on track to launch more deposit and lending-based products this year. Our certificate company has also grown to nearly $10 billion, up $4 billion for the year. Clearly, 2022 was a very challenging year for investors to navigate the market volatility. That's why our high level of engagement and advice is so important. Clients highlight the positive experience they're having with Ameriprise and our advisors. And that satisfaction leads to a strong level of trust, which we're being recognized for. And just recently, we ranked #2 for trust in 2022 in Forrester's new Financial Services Customer Trust Index, and that complements our Newsweek rating as one of America's most trusted companies last year. Let's look at advisor productivity, which also remained strong, up 4% to nearly $830,000 per advisors in a challenging market environment. One of the reasons our advisors are so productive as the level of support and tools we provide, we're making important investments, including our branding, marketing and integrated technology. We're helping advisors engage clients really well in driving growth in their practices. And for the fourth consecutive year, Ameriprise was recognized by J.D. Power for providing outstanding customer service experience for phone support for advisors. Turning to recruiting. We had another good quarter with 72 highly productive advisors joining the firm. advisors are attracted to our value proposition and the strength and stability of the firm, and the pipeline looks good. So overall, we are consistently investing in the business, including the bank, which is helping to drive organic growth and continue to generate strong results. Advice & Wealth Management continue to drive the firm's results with earnings up 41% year-over-year. Now let's turn to Retirement & Protection Solutions, where earnings were up 25% in the quarter due to the improved rate environment and our ability to invest out. As part of our strategy, we focused on products that meet our risk tolerances. Overall, sales were down consistent with the industry. We're very much focused on variable annuities without living benefits, our structured products of variable universal life and DI products given our move away from fixed products. This business is very stable and delivers a very good cash flow and returns. I'd note that RiverSource was recently ranked as one of the most profitable life insurers. Now I'll cover Asset Management. 2022 was a tough year when navigating the volatility as we focused on our clients and execute our strategic priorities. Similar to the industry, our Asset Management business faced significant headwinds due to markets depreciating in the U.S. and globally, which pressured earnings. Equity markets were down 19%. With this, assets under management were down 23% to $584 billion, driven by market declines as well as a negative FX impact. Overall flows in the quarter were $0.4 billion out that included $1.7 billion of legacy insurance partner outflows. In retail, overall, we were in net outflows of $3.7 billion, including reinvested dividends, which were driven by the weak market conditions that both pressured gross sales and increased redemptions. In addition, in the U.S., we believe there was a heightened level of tax loss selling in December. Turning to Global Institutional, we were in net inflows of $5 billion, excluding legacy insurance partners with some nice wins in LDI strategies. With regard to investment performance, we continue to have solid three, five and 10-year numbers. However, we have weakness in one year's numbers given market volatility. In Asset Management, we are maintaining our expense discipline while continuing to invest in long-term priorities. They include our investment research, alternatives, responsible investment, globalizing our operations and BMO integration, which is on track. We have a strong lineup of products and capabilities, a clear focus on serving our clients. And as the environment improves, we will be well situated. Overall, Ameriprise is in a position of strength entering 2023, and we're very much focused on engaging our clients and continuing to execute well in this environment. And with the strength and diversification of our business, including the growth of the bank, we continue to be able to invest across the firm, while continuing to return capital to shareholders at a differentiated level. In the fourth quarter alone, we returned $610 million to shareholders. Thank you, Jim. Results this quarter were very strong, and we continue to demonstrate the strength of the Ameriprise value proposition. Adjusted EPS increased 13% to $6.94 in the quarter and increased 11% for the full-year. Our diversified business mix supports good performance across market cycles, which was certainly demonstrated in the quarter. Fundamentals & Wealth Management, particularly in its cash businesses were very strong. In total, Wealth Management now represents 64% of adjusted operating earnings up from 48% a year ago. Asset Management, like the industry, is facing substantial headwinds and earnings from this segment declined in the quarter. And the Retirement & Protection Solutions business continues to generate solid financial results and free cash flow. We remain focused on the aspects of the business that we can control. We are executing our priorities, including investing for profitable business growth, expanding the bank and completing the integration of BMO all while meeting and exceeding client needs and maintaining a disciplined approach to managing expenses. In fact, total expenses, excluding BMO, were flat for the year. Our balance sheet fundamentals and free cash flow generation remains strong. In the quarter, we returned $610 million of capital to shareholders, totaling $2.4 billion for the full-year, while continuing to grow the bank and certificate company. We have dedicated significant capital to grow these businesses. Let's turn to Slide 6. As you would expect in these markets, Assets Under Management and Administration ended the quarter at $1.2 trillion, down 17%. This was driven by depreciating markets with equity and fixed markets down 19% and 12%, respectively. Additionally, Asset Management AUM levels were impacted by the weakening of the pound and the euro, with 36% of Asset Management AUM outside the U.S. at the end of the year. Despite the lower AUMA levels, operating net revenues declined only 2% to $3.6 billion as a result of higher interest earnings and pretax earnings reached a new high of $973 million reflecting the diversified revenue dynamics I discussed, coupled with the excellent expense discipline. Let's turn to Advice & Wealth Management on Slide 7. Wealth Management continues to deliver strong organic growth and business momentum, a reflection of our differentiated value proposition. With the challenging market backdrop, clients' assets declined 12% to $758 billion in 2022. However, we have sustained growth of 4% over the past two years. Total client net flows remain very strong at over $12 billion in the quarter and reached a record $43 billion for the full-year. While we continue to see a solid level of flows into ARAP accounts. There has been a distinct pickup in flows going to brokerage accounts and certificates as clients navigate the market backdrop. Revenue per advisor reached $827,000, up 23% over the past two years from continued enhanced productivity and business growth. On Slide 8, you can see Wealth Management profitability was exceptional, up 41% and reached a record margin of 30% as strong organic growth and higher interest earnings exceeded pressure from market depreciation and lower transactional activity. Adjusted operating expenses declined 5% with distribution expenses down 10%, reflecting lower transactional activity and lower client assets. G&A increased 11% in the quarter. And for the full-year, G&A grew 8%. Expense growth in the quarter was driven by continued investments in the bank and higher volume-related activity from strong organic growth. Additionally, the prior year included unusually low expenses relating to staff levels and T&A. Cash balances in the quarter increased year-over-year and sequentially to $47 billion, which included $10 billion of certificate balances. Cash rebalances have declined slightly, bringing it closer to historic levels. However, certificates have grown 76% year-over-year as clients are laddering liquidity to garner higher yields. As a complement to our certificate offering, we are continuing to build out our savings and deposit products in the bank this year to meet the growing client appetite for yield. As a reminder, the majority of our clients sweep cash balances are working cash accounts with the average account size being only $8,000 and constituting over 60% of our total cash balances. And our operating rates continue to remain competitive with continuous benchmarking against the industry. This has translated into higher interest earnings in the quarter. The gross fee yield in the quarter reached 373 basis points, up 300 basis points from the prior year and over 100 basis points sequentially with bank and certificates driving most of it. The bank ended the year with assets of $19 billion with additional capacity to grow further. This provides flexibility to capture the benefits of rising entries by investing in high-quality, longer duration securities. These investments will create sustainable multiple year benefits regardless of interest rate changes over that period. New mine purchases in the quarter were approximately 250 basis points above the spreads from worth balance sheet cash. This has been supplemented with strong growth within our certificate company with assets growing to nearly $10 billion in the quarter and a gross fee yield of nearly 400 basis points. As we move into 2023, we are on a trajectory to generate growth in interest earnings from the bank and grown on our incremental yield, while continuing to maintain high credit quality. In the first half of the year, we were moving $3 billion on to the bank's balance sheet. We expect to transfer additional balances in the back half of 2023. And as we previously indicated, we will reinvest approximately $3 billion of maturities into our yielding assets throughout the course of the year. Let's turn to Asset Management on Slide 9. In 2022, the backdrop remained challenging for both us and the industry. AUM and was $584 billion, down 23%. This decrease was driven by double-digit equity and fixed income market depreciation as well as negative pound and euro foreign exchange impacts. Flows during the period remained challenged as global institutional net inflows during 2022 were more than offset by ongoing retail pressure. As a reminder, 2021 net flows benefited from the $17 billion BMO U.S. asset transfer, which had limited impact in 2022. On Slide 10, you can see asset manage financials reflect the continuation of the challenging market environment and reflect deleveraging that occurs in this business. Earnings were $146 million, a 56% decline as a result of market depreciation and net outflows. In addition, the prior year period included $35 million in performance fees, while the current quarter only included $5 million as well as $12 million of unfavorable mark-to-market adjustments. As a result, margin in the quarter declined to 29%. Importantly, we are focused on the areas we can control and on executing our strategic priorities. Expenses remain well managed, total expenses were down 12% with G&A and other expenses down from continued expense disciplines, lower performance fee compensation and timing of mark-to-market expenses. As a reminder, results last year include a partial quarter of BMO-related expenses. As we move forward, we will continue to make market-driven trade-offs and discretionary spending and remain committed to managing expenses very tightly based on the revenue environment. Let's turn to Slide 11. Retirement & Protection Solutions earnings increased 25% with strong cash flow generation and a clearly differentiated risk profile. Results in the quarter were driven by enhanced yield from repositioning of the investment portfolio, lower deferred acquisition cost amortization and lower sales levels. We remain well capitalized with an estimated RBC ratio of 545% at year-end. Consistent with the industry, sales in the quarter declined as a result of the volatile market environment as well as the impact from our actions to discontinue sales of variable annuities with living benefits. Now only $43 billion of account value is in products with living benefit guarantees, a $14 billion decline from past year. Protection sales remain concentrated in higher margin asset accumulation VUL, which represents one-third of total insurance in-force assets. The increase in investment income was a direct result of the actions taken to reposition the investment portfolio. In the quarter, we repositioned $600 million primarily into longer-duration corporate bonds, while maintaining a high-quality portfolio. These actions will generate higher investment income in 2023. On Slide 12, our balance sheet fundamentals remain strong and our diversified AA-rated investment portfolio is well positioned. During the quarter, new money purchases were AA+ rated at yields that were accretive to the overall portfolio. Despite continued market volatility in the quarter, VA hedging effectiveness remained very strong at 97%, and excess capital and holding company liquidity remains strong. Our diversified business model generates significant and stable free cash flow. This enables the company to deliver a consistent and differentiated level of capital return to shareholders, while continuing to invest for growth. During the quarter, we repurchased 1.6 million shares returning a total of $610 million of capital to shareholders, bringing the total for the year to $2.4 billion. Our capital return strategy over the past five years has reduced our share count by 28%. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question is from the line of Brennan Hawken with UBS. Please go ahead. Good morning, thank you for taking my questions. You flagged the certificate growth in the Wealth business, and that's certainly consistent with what we've seen at other wealth management firms. So would you expect that as long as rates stay high, that type of shift and that type of growth should be sustainable? And how should we think about the corresponding impact of that mix shift on your deposit beta so that deposit beta seemed to take a step up this quarter. And so should we continue to think that, that will move higher? Yes. This is Walter. So the answer is yes you should, with our CGs, continue to see that sort of trend line. And certainly -- and you'll see in our bank, we are going to develop new products with and have them coming out in 2020, which will also enhance the capabilities for our advisors and their clients to certainly navigate this situation on interest rates and giving them choice. And from a deposit beta standpoint, looking on sweep, we are certainly -- we are up. We are certainly being competitive from that standpoint. But we are offering a wide choice, and we see good significant opportunities as we move forward. Yes. That makes sense. And like I said, that's consistent with many of your competitors in the wealth space. So when we think about -- shifting gears a little bit for the follow-up and staying in wealth, strong overall net new asset trends certainly have been encouraging 7% annualized growth in that business and what -- it's been a challenging quarter for some competitors. As I understand it, it's not really recruiting driving the numbers, but rather advisors growing their practices and expanding wallet share of existing clients. So what have you done to sustain and hopefully encourage that trend into the future? So this is Jim. We are very much focused on continuing really around having the advisors engage with the client through this market cycle and really providing the advice they need. Part of the journey really is how do you think about achieving your goals over time, not just based on a quarter or the market situation in the current time. And so that engagement and the tools and capabilities that we provided to help them do that, I think is paying really good dividends. And so as you saw last year, we had a record amount of client inflows for the full-year. And the fourth quarter was really strong at $12 billion. It's actually the second highest quarter we had. The highest was actually fourth quarter of last year, and that was only $0.5 billion more. So we want to continue that journey around that advice value proposition and the engagement and helping the advisors really do that more consistently over time. Hey, good morning, Jim and Walter. This is Michael Anagnostakis on for Steven. I just wanted to start with one around AWM here. Certainly, the margin expansion in AWM was very impressive. You had 30% roughly. Assuming the Fed pause is here, what do you view as a peak pretax margin in wealth inclusive of the ongoing suites you plan to make at the bank? Thanks. Sure. So it's Walter. What we achieved in the fourth quarter, we certainly see as sustainable and as it relates to 2023. And certainly the cash side of it is contributing to that, but we're also having strong productivity and growth in our basically core activities. There is a shift and going with us going to basically the bank generating the earnings and certificates joining. So if the Fed does pause, we think we are well positioned with the sustainability of that profitability that is now basically has a duration play that will take it over multiple years. So we feel comfortable. Obviously, it will have some impact. We have to evaluate as it looks not just what the Fed is doing in the short end, but what happens on the long end, but we feel we're in an excellent position as we grow those two activities to ensure that sustainability and profitability. Got it. Thanks. So -- and for my follow-up, I just -- I wanted to shift gears maybe to Retirement & Protection here. You had noted that results in Retirement & Protection only captured a portion of the actions you had taken in the portfolio. How much incremental benefit should we expect next quarter? And what do you believe could be the new run rate for that business versus that $180 million quarterly cadence you had provided in prior quarters? Thanks. Yes, so we certainly started the investments, and we weren't completed in the fourth quarter. We still have some ways, a little ways to go in first quarter. But yes, we will see that probably what you're estimating the run rate that we talked about, the $180 million, but it's probably with that improvement that's taking place with the yield. There's always areas going in and out. But I'm comfortable with I've seen people being in the $200 million range, but it's over a one-year cycle. So I would say more like the $800 million range for the year. Yes, thanks. So going back to Advice & Wealth Management, again, when we think about on balance sheet deposits versus certificates, I think both had similar gross fee yields, but how do the rates that you're paying on those compare? And as we think about those two, are you fairly agnostic in terms of margin benefits to you between those two products? Or is one more favorable than the other? Are you saying certificates on bank or yes. Okay. Clearly, the bank has a higher margin than the certificates. And that's where certainly we're concentrating our growth, but we are getting very strong results, and we have very good margins in the CD business. And so the answer is, we feel we have the capacity to grow those two. And it is going to take a larger and larger percentage of the profitability that's being generated. Certainly, we will be generating good earnings in the sweep activity, but the real growth potential is coming in a primary bank, and we will get a lift in CDs. But the margin is better in the bank versus the CDs because of different investment strategies and liquidity strategies. No, I don't have it, but I'm just telling you, it is better at the bank, and we can take a look at that and see if we can give more insight onto that. Yes. Makes sense. And then, I guess, you talked about an $800 million investment in both the bank and the certificates business over the course of the year. Is that something that you expect will continue into next year? Or any way to think about the level of capital investment that you expect for 2023? Yes. So the short answer is yes. We will be continuing it. It's obviously a matter of equity and cash closing. And it is considering and we have the capacity to do that. And it's really, from our standpoint, it is giving us very good returns. Got it. And then maybe if I could sneak one more in on the long-term care business, it looks like you're taking advantage of extending portfolio duration there as well. Should we read into that as the sign that maybe a risk transfer solution is less likely? Or is that reading into it too much? Yes, possibly. Listen, for the longest time, we've kept short direction case where the third year was. And now we're taking advantage and both in LTC and with the protection. So we are lengthening out duration, but it's we're running the business from that standpoint, and you can see we're garnering good profitability, both on the claims side as we demonstrated in the fourth quarter and certainly now with the investment capabilities that it's providing us. So no, if something comes along, that's great, we'll take a look. But right now, we're managing it and we're taking advantage of the opportunity that's there. Hi, thank you. In Investment Management, I think you mentioned about $12 million of negative one-time items. But even adjusting for these, I think the margin was at the low-end of your target range. So how are you thinking about margins for 2023? And should we be expecting some improvement given the AUM rebound that you saw in the fourth quarter and then the emergence of BMO synergies over the course of the year? It's an interesting situation at this stage because of the dislocation is taking course, especially as you look at the equity markets, you look at the fixed income, depreciation and foreign exchange. So -- but there's a lot of actions that we're taking. I'm managing through, but it's -- the margins are -- from that standpoint is deleveraging, just like the industry is. But I would say that at this point, as we look at it, it's heavily dependent on certainly things we don't control. But the things we do control, like you mentioned, BMO synergies and other things of that nature, we are on track. So we feel comfortable from that standpoint. So I think there's a lot of variables now, but we are certainly cognizant that the margins breach through, but that's related to a lot of market activity that we are now managing. We see -- I mean, listen, again, we don't know if it will hold enough, but you've seen some pickup on the international market front as far as appreciation occurred as well as the improvement in the Pound, et cetera. So we think that's a little of the headwinds have relieved a bit. That will be helpful. And we're not changing our range as we move forward. Got it. And then maybe moving to capital management. I think for the full-year, you returned about 85% of earnings to shareholders in the fourth quarter, the percentage was a little bit lower. So should we still think about 90% being the right target? Or has this come down at all given the capital being allocated to the bank and/or the uncertain macro outlook? So as we look at it, we've been one of the highest returning companies out there in capital and even last year was very strong. So as we look forward, we have flexibility. But as Walter said, we're continuing to grow the bank, which is going to require some additional capital, but the returns are strong as well as our certificate company, which are all good uses of capital. In the past years, we have freed up capital. We used some of that to purchase the BMO as well as now growing the bank tremendously. So we think that we're going to generate continuing good free cash flow that we will return to shareholders. But as far as the percentage and rate will depend on how we utilize that both our core investments in the business, as we said, as well as return to shareholders. So it is coming down from where it was because of those other growth opportunities, but will still be a strong return. So I'd leave it at that at this point in time. Good morning. Walter, just coming with a follow-up on Retirement & Protection, the $800 million or so run rate for 2023, does that contemplate any LDTI accounting impacts. If it doesn't, can you give us some indication up or down, whether that will have a negative or positive impact? And if $800 million is the right number, why was your $29 million of over-earning this quarter? Was it all back? Or maybe if you could quantify that. No, [indiscernible] with that. That does not contemplate LDTI. We're still evaluating that. And from that standpoint, so it does not. And we'll obviously settle on the approach that we're going to take before the quarter. As it relates to the -- why it's lower, again, we're on part of that profitability improvement was lower sales. And so we're looking at activities as it relates to that. And so that gives a positive PTI in that situation, plus there was some anomalies as you basically look at what the changes and the huge change in equity markets and other things that took place, it gave a lift on SOP, so from that standpoint, we're -- I'm just saying we're comfortable with the -- what you guys are indicating in that $800 million range for the year, and we'll continue that when we're getting that lift. There's no question about it for the investments that we repositioned. And Walter, does the $800 million contemplate a little bit of extra spread that you would expect to still get? Or is that more of a 4Q static look at it? No, it's the continuation of the volume of it. But actually, at this stage, since that point, certainly since we're still investing, the spread has come down from that, but we still feel very confident in the ability to generate whether just on the $800 million for the year. Okay. And then my follow-up is how should we think about the fees and margins of the wrap versus the brokerage flows in AWM. I think your wrap has a little over 100 basis points of fees. The non-wrap is more commission-based. But just curious, how do you compare the economics of the two, particularly now if we're going to see stronger flows into brokerage, I just want to understand how that's going to impact your overall margins? Yes. So Erik, I think as we -- Tom, as we look at the business, okay, we've had a bit slower flows into wrap but still good flows, but you also had the depreciation of the markets, which impact the wrap overall fees for the firm. And so I don't feel that, that's permanent. As I said, we also had some transaction volume being down on the commission side. So I would probably say, if markets settle as they are, you'll continue to see part of that going back into the wrap programs. You'll also -- depending on what happens with market, you may see some appreciation of that, which really was a negative in the last few quarters. And regarding the brokerage activities, we will hopefully see some pickup in the commission side based on getting back into some of the contracts that people have again been more conservative investing in right now. So I can't really like piece together exactly what that shift is. But I would probably say there's a bunch of dynamics occurring over the last few quarters in that regard. Hi, this is Mark [indiscernible] filling in for Craig. I had a question within AWM. I was curious if you were seeing any incremental demand from third-party bank suites for deposits and what that environment looks like? And then kind of following up on that, too. I believe your contracts were historically priced on kind of floating with a spread. Is there any possibility of extending the duration on those contracts, which would let you capture higher yield and also offer some more visibility into cash flow, while also taking pressure off of your bank? Okay. So let me answer that. The answer is back about a couple of months ago, there was certainly -- you couldn't give deposits way. Now clearly, at this basis, there is more demand, but we are evaluating what is really -- from our standpoint, what is the appropriate balance for balancing cash and bringing it back on balance sheet. So we have a very good relationship. We've been doing this for multiple years through promontory, not promontory [indiscernible]. So our relationship banks, when we do have a combination and laddering of long and short. So there -- we are assessing it, but it's a good situation from our standpoint, both from the demand from coming on the suite and our capacity to bring more back on to balance sheet and the fact we are still attracting good balances in. And just for a quick follow-up and kind of switching gears a little bit. Really like your significant program, that's a great cash management solution for clients with competitive rates. I was curious, looking at the historical allocations from past cycles, is there anything different this cycle that you would say that would affect allocation that we should be taking into consideration? Into the [indiscernible]. We have -- are very cognizant trying to give our clients the capabilities there. So that trend has been going and been evaluating as the Fed makes it ships and other things and alternatives. So you're seeing that. And yes, we will continue to do that. But the important thing is we're also building that capability very shortly into the bank, which also gives a different set of alternatives for them to really look at their laddering as I mentioned. So you're just adjusting and certainly having the product capability and the capabilities to grow either our balance sheet, our balance sheet and on balance sheet in the bank and insert. Hey all, this is Luke on behalf of Alex. Thanks for taking the question. So keeping on topic of the bank, you had a few billion of securities maturing in 2023. What kind of incremental reinvestment spread are you looking at picking up here relative to what's rolling off? Okay. So yes, we have about $3 billion maturing during the year. So right now, we are thinking in the range that will be 200 to 300 basis points, so we'll pick up from it. I don't have the exact, but I'll have stepping to get back, but we will pick up reasonably good spread from what's maturing versus what we can invest at. Got you. Helpful. That's awesome. Thank you. And then switching gears to firm-wide. Do you have any thoughts on how you're thinking about firmwide G&A growth in 2023 off of the $3.6 billion, $3.7 billion base, if this is the right base to think about? Yes. Listen, we manage -- I think we've always managed, we're very disciplined in managing our expenses to ensure that we are investing for growth. At the same time, analyzing the margin capabilities as it relates to it. So we will remain disciplined as we go and we look at shifting and where that is from that standard and getting the efficiencies that we are constantly evaluating. So I would say the ranges you've seen is the ranges that we believe will certainly be sustainable, but it's situationally driven as we manage our expenses very tightly. Hi, good morning. In Wealth Management, just thinking about cash sorting and I guess, you may be capturing some of that, if that's being shifted into the certificates business. But do you have a sense on how much has sort of shifted maybe in the sort of third-party mutual funds or some other investments? Yes. So over the course of the year, as you would imagine, and started last year, you would have a higher level of cash from clients as they move things to the sideline or et cetera, that put it fully back in the market or even in fixed income. And so went into money markets, went into broken CDs, went into other short-duration products, just like we have the cash here going into some of our certificates. The amount of cash we're holding pretty much on transactional is pretty at the consistent levels. It's not where that has built up tremendously. We just had more client flows coming in and that just as a percentage. And then we got a piece of that into our own certificate program as an example. And now when we actually launch some of the preferred savings and deferred deposit programs within the bank, we'll start to capture even a bit more, hopefully, of that. But new cash has come in, and that has raised our levels overall, but there's been sorting all through this going into those other instruments as well. As our advisors look at what that balances, what's positional versus transactional. So that's why we feel like those levels are pretty consistent because things have already sorted as through the year. Okay. Is that lower than some peers maybe just because of the client mix? I mean, is there a greater concentration maybe of lower account value that would... Well, in our case, as I said, I think if you look at certificates, which is actually investing out a bit, and you just look at the amount in our cash sweep products, et cetera, you're actually less than 5%. And so that's consistent with our history based on the level that clients keep for both emergency and transactional activity. So I -- that's why I said, I think money has already been in all these different positional areas to garner a level of interest that the clients want with the advisors. So I actually feel comfortable. Now some of that, I think, will go back when they feel comfortable putting more back into RAP and investment programs as well or longer duration products in the fixed income market. Okay. And then just one on the bank portfolio. I think that's mainly invested in MBS securities. But how much -- what percentage of that book is in fixed rate investments? Well, the majority isn't fixed. But and like I said, it's in structured. The majority of construction, high AA rated and certainly at the highest levels of the security ladder. Good morning. Thank you very much for the opportunity. My question was on long-term care. I know third-party claims administration accelerated the pace of terminations. Is that anticipated to persist? And how should we think of run rate within that now? Sure. So yes, in the quarter, we had a combination of basically, as you indicated, a strong continued claims performance, along with basically the effects of our benefit programs and basically a premium increases. And -- but there was this one-time catch-up because a vendor did get behind. But that was not -- that was about half of it, but we are seeing good trends as it relates to the claims. And it's typical to forecast, but we think we have all the foundational elements in there. It's been within our expectations for multiple years. And so we are feeling that comfortable where it is, and we do again get the continued benefits of the programs that we have in place to basically contain and manage that effectively. And we've been able to now start investing out, which is garnering a higher spread for the portfolio, which is good. That's very helpful. Thank you. And then my follow-up question. There's been lots of G&A restraint across the franchise this year. But is there an optionality for Asset Management expense reductions, given the lower AUM. There were some other reductions that asset managers announced this morning. Yes. So as you saw in our Asset Management business, we have brought expenses down, and we will continue to really manage expenses tightly there. Now we are making good investments in certain areas. We see opportunity like in some of our real estate and other areas and responsible investing. But we have tightened the range a bit based on the appreciation of the markets. And we feel that is necessarily inappropriate. Now on the other side, like the Advice & Wealth as we build up more capabilities in the bank, we're making some investments. But overall, for the company, we've managed expenses quite tightly, not just the current year but over the years, and it is actually favorable. Now we're going to have merit increases, other things, et cetera, but we're going to look at areas of opportunity to tighten if necessary, based on the market conditions. But Asset Management is one of those areas that we will be a bit more disciplined then. Hey, good morning Jim and Walter. Question about the advisors. You added 72 this quarter. Good, but a little light of where you were. I'm kind of curious as to your pipeline and how you see that playing out in terms of adding new experienced advisors. Yes. So we did add -- it's a little less than the previous quarter, et cetera, but there's always timing with year-end and activities that occurred, as you would imagine with market conditions, the volatility there with advisors. But I would say the advisors we added actually had very strong productivity. So actually from a production perspective, the amount in total was higher and what we brought in. And the pipeline looks very good. So I think as you see some of the advisors being added, they're really coming over because we do have a really great integrated technology platform. We give a lot of great support. The types of -- they're even coming because they trust the firm and the quality of the firm. And they really think that that's really a benefit for them for their practices. So we feel very good about what the opportunity to continue here. Got it. And then just thinking about the insurance subs RPS. Equity -- in terms of dividending capital to the parent company, the equity markets are sort of a headwind, but then you're doing this tremendous repositioning on the investment portfolio. Could you talk a little bit about expectations for dividending capital up apparently in '23? Sure. So it's Walter. We have -- and certainly, as we look at it, and I mentioned as related to the earnings that certainly related to '22, 2023. We will manage and keep our obviously a ratio. And so we feel very good about the dividend capability coming out of RPS, but the thing with the change and certainly enough growth going on in AWM, the bank, the stability of that. We also have an opportunity -- and that increase in the flows of dividends to this parent from AWM and still get dividends coming up because even though they're under pressure for Asset Management, they still are dividending a reasonable amount. So our cash flow coming out of the various segments, including RPS, is really -- we are feeling very good about its capabilities in 2023 as a source of funding for us at the parent. Awesome. Can I sneak one last one. Just on M&A, last quarter, you seem to think that you were going to kind of maintain the status quo in terms of divesting of blocks. Any change in that? Yes. So as we looked at the environment, et cetera, in the market, let me put it this way. I mean, you probably saw a thing that was reported out even this week. RiverSource has it's like the second highest and ozone up by a few basis points, second highest return out there of any insurer -- a large insurer. And so I think you got to look at it in a sense as Walter just said the free cash flow, how we de-risk the business, how even what we have on the balance sheet with guarantees is coming down. The products we're selling are lower risk appropriate for the client. And we have a lot of other alternatives on the shelf for the client. So we feel like this is a good hand that we have. And now that the spreads have gone back up we're able to invest out a bit more and garner some. So listen, there may be some opportunities that come along, and we will continue -- we'll look at them as they do. But this is a comfortable hand to have as a complement, particularly with depreciating markets. Hi, thanks. Good morning. I think we've often seen some level of seasonality with cash balances within AWM to come down some sequentially from the fourth quarter to the first quarter. Is that something you would expect to occur in this year. Absolutely. Yes. I think we do expect and we will probably experience the same seasonality and that's been part of our overall planning. So it's -- we don't see any change. Okay. Got it. And then just -- I know there was a question on overall G&A expenses. Perhaps AWM is a little bit -- you have maybe more insight into the outlook there, given the backdrop from an earnings standpoint. Can you give any sense of your expectation for growth in AWM, G&A expenses in '23? I think, again, we'll go back to is geared towards making sure we get the payback on that with discipline as we focus. And so we'll manage it relative to the revenue and the growth opportunities we see, but we will be very disciplined in it. And I think it will be in ranges that you've seen in the past. But again, it's situational. Yes. I mean, AWM this year, remember, we had a bounce back in meetings and other travel and T&E, again, coming back from a pandemic sort of thing where we cut all those things out as well as we may continue to make good investments in the growth of the bank and bringing in advisors, et cetera. So you're going to have merit and other things that are there. But I think on a balance basis, our expenses will be managed pretty well. And we don't see that accelerating in any way. But as Walter said, whatever we're making investments, we'll get good returns on, but I don't think that will be at a high level. We have no further questions at this time. This concludes today's conference. Thank you all for participating. You may now disconnect.
EarningCall_1088	Welcome to SGS Full Year Results Conference Call. As usual Frankie and Dominik will present, and then I will return to host the Q&A. As the operator just said there are two ways to submit questions. One is by joining the conference call and speaking live. The other one is by webcast. So please write your questions on the webcast and I will read them out afterwards. Please note that we will restrict it to two questions maximum for each person. And then if we have time at the end of the call, you can join the back of the queue and then start again and we may have time to answer them. Thank you, Toby. Good afternoon everyone. As usual, I will give you a highlight of our performances for the year. Dominik will then provide you a more detailed financial review and then I will cover the business outlook for 2023 followed by Q&A. But before we start on the result, I would like to take this opportunity to thank all my colleagues across SGS network for their contribution to the group. Many of them in their personal and professional lives were impacted by some significant challenges in 2022, including the war in Ukraine, COVID in many countries, and particularly in China recently, are the impact of high inflation. Beyond their dedication to keeping operations running the sense of community and the support provided to each other during these challenging circumstances is something that I have really appreciated and I have learned from. So thank you to all of them. So as for the results. Just before the inverses of the last November, we issued an ad-hoc communication revising our guidance for the full year 2022. Since then, some further operational disruptions has occurred in China. The lifting of all the COVID restrictions resulted in high sickness rate, which is impacting us on our customers operations. However, I'm pleased to report that despite the unforeseen event, our operations performed strongly and we have close the a year in line with our revised guidance. So for the full year 2022, total revenue increased by 6.8% at constant currency, while organic growth was 5.8%. Adjusted operating income stand at CHF1.23 million, at the same level in constant currency as 2021. Free cash flow stands at CHF507 million. This is the decline of 20.2% compared to prior year, partly due to the increase working capital required to support the growth of activities. And the Board of Directors is proposing a dividend of 80 Francs per share at AGM, same as last year. Despite the difficult market conditions, we are continuing our journey as a purpose driven company. We are convinced that the balanced approach to planet, people and performances will result in the best long term value creation for all our stakeholders. This slide shows some of the progress we made during 2022. Maybe one of the most important changes in these slides is the approval of our SBTi 1.5 degree operations by the Science-Based target initiative. Our commitment to 1.5 degree is the first step in our new trajectory. This require us to step up our effort on current reduction program on scope 1 and 2, and to launch additional programs to tackle as Scope 3 emissions related to our supply chain in a more systematic way. We are also looking at expanding the sustainability related short-term incentive KPIs across a larger population of managers. These to create marketability and to give a stronger focus on achieving our goals. We will further update you as those programs are implemented. And now with our strategic focus, we made for more acquisitions during the second half on top of the three companies we acquired during the first half. Proderm base in Germany is a leading players in the cosmetic and personal care testing sectors with strong scientific expertise. Significantly we inforce our global auditions in Europe and globally. Silver State Analytic Laboratories based in the U.S. compliment our network of Excelchem [ph] Laboratories in North America. They're specialized in the environment testing of water and salt. Penumbra Security in the U.S. helps SGS to continue the expansion of his subsequent testing network, adding accreditations and competencies in all information security conformance and regulatory compliance testing. Industry Lab in Romania, specialized in food, microbiological testing. These acquisition growth also our service offering in Romania on our food network in Eastern Europe. As a reminder, the three companies are caught during the first half were Gas Analysis Services based in the UK, bringing the pharmaceutical semiconductor, food and beverage expertise in gas instrumentation and calibration. Ecotecnos based in Chile is specialize in monitoring the impact of industrial activities on biodiversity and aquatic and marine ecosystems. AIEX based in France is a technical inspection and disease specialist in the nuclear sector. We have also acquired the minority, stack of two companies during the first half. 32% of our advanced metrology solution based in Spain, specializes in metrology and commercial measurement in aviation industry, and 49% of SGS digital comply a JV created by SGS that specializes in regulatory monitoring in the food sector using digital technology. Thank you, Frankie. Good afternoon, ladies and gentlemen. I will start with the overview of the financial highlights for fiscal year 2022. Frankie already mentioned operating highlights in his introduction the revenues of CHF6 billion [ph], and adjusted operating income of CHF23 million and free cash flow CHF507 million. Revenues for the group and constant currency increase strongly by 6.8%. Adjusted operating income was CHF23 million in constant currency broadly stable, fully in line with our trading update provided a couple of days prior to our investor days. Consequently, AOI dropped by 100 basis points in constant currency to 15.4%. We incurred restructuring costs of CHF46 million versus CHF50 million the prior year and one of costs of CHF29 million due to our decision to cease to keep upstream projects in Libya following the absence of cash collection. Net profit after minority interest declined by 4.1% to CHF588 million, which is to a large extent a function of currency. Adjusted EPS increased by 3.4% to 92.46 Swiss Franc. Cash flow from operating activities declined by 11.9% to CHF1.30 million mainly due to higher network and capital requirement to support the strong revenue growth. For 2023, we expect less network capital need than 2022 and therefore, a stronger cash conversion. Organic revenues increased by 5.8% in 2022 equally split between volume and price growth. The contribution from acquisition is with 1% limited and reflect several smaller, but strategically very important additions to our network. The currency impact was the 3.1% negative. SGS Swiss Franc continued to strength against several important currencies leading to revenue growth with an extra rates of 3.8%. Moving on to the revenue growth by business. Organic growth in connectivity and products was 3.9% very solid, especially considering the COVID related impacts in China. Growth accelerated strongly after the lock downs in the second quarter 2022 in China, but slow towards the end of the year as higher thickness rates occurred given the opening up, reopening of the economy. The strongest growth was achieved in Softlines given very strong performance outside China, namely Turkey, India and Bangladesh. Also connectivity experienced above average growth given recent investments and the strong performance of private side. Hardlines organically declined given the change situation in China and supply chain disruptions. Revenues in health and nutrition increased by 7.6% supported by the continued focus on M&A. Organic growth was 4.1%. Food grew organically above the dividend on average supported by growth across the network. As science has replaced much of COVID vaccine related work, however, organic growth declined slightly. Revenues in industrial environment increased by 5.4% in constant rate, while organic growth was 4.8%. Field services and inspection grew above divisional average driven by good performance in environment viewed in marine services. Technical assessment advisory delivered double digit organic growth continuing to benefit from the increase in supervision and consulting work in Latin America, as well as strong performance in Middle East and Southeast Asia and Pacific. Public mandates revenue declined due to loss of contracts in Africa, partly compensated by price increases in Latin America, Latin American legal and compliance services. The 8.7% organic growth natural resources was driven by double digit growth in laboratory testing and metallurgy and consulting. Growth and trade inspection was strong, primarily driven by good momentum in minerals, and in oil and gas commodities. Knowledge fostered strong organic growth of 8.7%. Growth was achieved across all SBUs and regions. The strongest growth was delivered by consulting, primarily driven by the strong performance of main point, benefiting from strong demand for supply chain optimization, and performance improvement services. From a regional point of view, growth was primarily driven by the Americas and Asia-Pacific. The Eastern Europe and Middle East countries achieve double digit growth across the maturity of its key and markets with the exception of Russia. Both in the African countries was mid single digit, while growth in the key European countries was to large extent modest to moderate. In the Americas revenues increased strongly by 11.1% in constant weight, while organic growth was 10.2%. The strong growth was notably driven by double digit growth in several LATAM key countries by growth in North America also strong. The organic growth in Asia was 6% strong, especially considering that China was impacted by COVID. In most markets mid to high single digit growth was achieved while India, Singapore, Vietnam and Japan posted double digit growth. FTEs at the end of 2022, increased by 2% versus prior year, primarily driven by organic additions partly offset by the impact of restructuring. Average FTEs in 2022 increase by 3.7% clearly lower than the total revenue growth of 6.8%. Adjusted operating income was CHF1.23 million broadly stable in constant currency. Currency had a negative impact of 3.1% leading to a decline in AOI of 3% in the period under review. On this slide, I would like to provide an update on our level up initiatives. In 2022, project Prometheus was implement. The purpose of the program was to outsource IT infrastructure, application maintenance and application development to reduce the time to market for new solutions and to reduce costs. This program is the basis to roll out new solutions globally in an accelerated manner. For 2023 we expect the full realization of the benefits of this program. We established the Builders Organization to design and develop new technology based products, initially focusing on higher productivity internally, leading to 5 MVPs in 2022 and we aiming for 12 MVPs in 2023. We introduced Salesforce as the new global CRM tool. We implemented CertIQ as the global knowledge platform. Almost 20% of our lab revenues are covered by the digital lab concept, while we expect the coverage to increase to 30% in 2023. At the same time, additional functionalities will be considered via release upgrades. We added 15 additional countries to our financial service center setup, covering now 6% of group revenues with regional financial service center support. For 2023, we will add an additional shared service center in Mexico to cover the Americas. And we expect to add globally 20 additional countries to cover 70% plus of our group revenues. We also implemented billing centralization. We added 17 countries covering 13% of group revenues in 2022. We will add more than 20 additional countries in the current year to cover more than 70% of group revenues. Our world class service program 65% of the labs are audited, and we expect that 20% of the labs will reach cross award level during 2023. With these initiatives we are building a strong platform for growth, positioning SGS as a more resilient and a higher productive business. With the benefits realizing from those investments, margins and returns will further increase. Our adjusted operating income margin dropped by 100 basis points to 15.4% in constant rate in 2022 as strong revenue growth didn't result in an increase in AOI, as I mentioned before the AOI was broadly stable in constant rate. Our margin performance in 2022 was negatively affected by more impactful lockdowns in China primarily in the second quarter, worldwide supply chain disruptions and subsequent effects of geopolitical events, leading to notably higher inflation a second half and softening of demand in some of the European. Higher sickness rates in December in China and temporarily higher bad depth expenses in the second half. Our connecting and products businesses mostly geared to China. Given the COVID related impact in China in 2022, the margin decline is just 30 basis points rather limited, as an improved profitability in cybersecurity and strong performance of some key affiliates partly offset the negative COVID effect in China. The AOI margin in health nutrition decreased to 13.3% from 17.1% the prior year, affected by the end of COVID vaccine related testing, the impact of the lockdown and China in Q2, as well as the continued investment into our global network and inflationary pressure, which was partly offset by price increase. AOI margin, industrial environment decreased by 90 basis points to 10.4%. Due to COVID restrictions in China, the ramp up of new contracts and collection delays from certain government contracts, this was partly offset by the positive performance of recent acquisitions. AOI margins natural resources decreased by 20 basis points to 14.2%. Strong operational level to minerals was offset by changes in portfolio mix in oil and gas and agriculture commodities. The margin decline of 70 basis points to 20.3% in knowledge is primarily a function of change in the service mix as an easing of travel restrictions and return to on site audits resulted in increased travel costs with the full impact of price increases will be in 2023. Operation at working capital stands at 0% of revenue. By not any more negative as in the last two years, it is still the best network capitalization in SGS. The high network capital needs is primarily a function of strong growth, as well as some collection delays, especially in China at the end of 2022 and in general somewhat lower levels of provisions. For the whole year, these old levels remain strong and sustainable, supported by centralized cash collection years to come, as well as network capital benefits from our centralized building initiatives. Cash flow from operating activities decreased by 11.9%, compared to the prior year, primarily due to higher working capital needs given the growth of the corporation, partly offset by lower tax payments. We spent net CHF369 million investing activities, which considers also CHF65 million for several smaller bolt on acquisitions. Dividend payments as well as NCI transactions amounted to CHF651 million. We bought back on shares for an amount of CHF268 million. We paid back a CHF250 bond and issued CHF500 million bonds. All this leads to a cash position of CHF1.6 billion at the end of 2022. For 2023, our cash conversion will be stronger, as stronger as less network capital need is expected to be required compared to 2022. Gross CapEx for 2022 decreased by 2% to CHF329 million and the same percentage of revenues with 5% slightly lower compared to the prior year. Net CapEx stood at 4.8% in 2022. To sum it up, our revenue in 2022 increased by 6.8% which 5.8% is organic. Our adjusted operating income is probably stable as guided during the investor days in November. Our return on invested capital went strong, but decreased by 100 basis points to 18.6%. We will propose a stable dividend of CHF80 to the each year. Thank you, Dominik. So, let me go through the outlook of the five divisions. As usual, all the divisional growth outlook comments relate to our expectation for full year 2023 organic growth and are relative to the total group organic growth. So let me start with C&P. Connectivity and Product should grow above the group average. We're expecting some short term market disturbance to continue in Q1 in China following the lifting of COVID restrictions. The situation should gradually improve in the second quarter and we anticipate some catching up for some of those activity in the second half. Connectivity is a key growth driver for C&P. We expect the market to continue to grow strongly in 2023 as product demand cycles and new testing requirement continues to evolve. For example, our order book for our cybersecurity lab network is already secured to for the full first half. The investment we have made in both our capabilities and capacity in C&P globally will continue to generate positive momentum, especially as part of the supply chain continues its transition from China, particularly in hardgood and Softline. At the same time as the Chinese market reopens, we are seeing new market opportunities for operations supporting our domestic market growth. On health and nutrition, growth should outperform the group average. Our largest headwinds in 2022 for health science were decreasing volume of COVID vaccine testing and talent retention in that very tight market. Both of these factors should ease as we move into the new year. The underlying market remains strong and our continued investment across the network should help to add further growth momentum. Our food testing services will see pressure in Europe as customers are becoming more cautious due to the current economic volatility. However, as Asia and particularly China reopens, foreign COVID we expect our food services related to the hospitality sectors to pick up. Together with new investment made in testing facilities in North America and South America, we're expecting growth in these sectors, but slightly below the divisional average. The recently, our Proderm in Germany strengthen our leadership in the cosmetic and hygiene sector. With product becoming more complex on a greater regulatory focus on ingredients, we're seeing increasing market demand for our solutions. And in industrial environment, growth should be below the average. Our strong momentum in health and safety rating services will continue in 2023 with expansion of our scope into the renewable energy sectors. New contract wins in Latin America and Europe will start this year. Technical assessment related to the infrastructure and construction sectors is also expecting to have a strong year with new project in Asia and Latin America. Market condition remains difficult for now in our environmental testing activities, particularly in Europe. Low economic growth and project delays are having an impact. However, growth in 2023 should be better than last year. The structural drivers of the environmental market remain healthy and will strengthen as one of the concern and control increases. Our [Indiscernible] field services will continue to be impacted by end of contract in certain countries as well as some project delay. Natural resources. So natural resources growth should be above the group average. While of all mining expirations expenditure is expected to decrease in 2023, it should not have a significant impact on our activities. Demand for minerals related to the renewable sectors such as copper shall remain strong. SGS is the leading service provider in on-site lab activities, we are continuing to expand our network with new project. For the agricultural sectors, while a better crop season is expected, overall market has been significantly disrupted by the war in Ukraine. As new supply chain emerges, we will see new opportunities within our network. The demand for oil and gas is increasing and drive better volume for inspection and testing services. However, current pricing can be very competitive, particularly in the inspection services. The oil and gas supply chain also being impacted by the war in Ukraine and we expect the market to remain volatile throughout this year. As a consequence, we are continuously redistributing our network resources to manage these changes. And finally, knowledge. Knowledge should grow above the group average. The underlying market conditions for knowledge remain healthy supported by increasing demand in certification scheme, such as medical devices, information security, and food safety. We're also seeing a noticeable increase of market interest in services related to ESG including gap analysis, consulting and auditing. The revenue impact is still limited, but as the market develops, we should see ESG related services becoming a clear growth drivers for the division in coming years. Clinical Consulting Services had a strong year in 2022 and we're seeing the same momentum moving into 2023, with expansion of services in Asia. Interestingly, the evolution of our technical consulting is partially driven by our customers seeking helps to reduce the operational environmental impact of our field and testing expertise in enabling us to provide a broader ESG solution than pure auditing. So, going into the outlook. In terms of outlook for 2023, many of the uncertainties of last year continues, including the current macroeconomic environment, uncertainty over the impact from COVID in China in Q1 and the ongoing war in Ukraine. However, I'm confident that with our focus on key tech market of sectors, continuous improvement, operational efficiencies, and our ability to get better pricing in sectors of expertise, will deliver growth and margins improvement with annexation in the second half. So given that, the expectation for next year is mid single digit organic growth, improving adjusted operating income and margin, strong cash conversion, maintain best-in-class organic ROIC, to continue to accelerating investment into our strategic focus area with M&A as a differentiator, and to at least maintain the dividend. The last slide. We are entering the final year of our planned 2023. And this slide is a reminder of the different objectives we set up at the beginning of the period. With the outlook I have just given for this year and the progress we made in our vision, we're well on track to achieving all our midterm target by the end of this year. However, while we expect an improvement, we improved adjusted operating income and margin for 2023, th4e 10% plus adjusted operating income CAGR target for the period of 2023 becomes more challenging, given the progress in 2022 on our discipline approach toward M&A. As a conclusion, the long term drivers of the tech market remain intact, will continue to develop positively and in many cases are strengthening. We're investing in the business, building our platform for growth and SGS is well positioned to capture on this evolution. Hi, everyone. Thanks for taking my question. Two for me. So, if I look at the organic growth for the second half, relative to what you reported for July to October, it looks like organic growth decelerated quite sharply to 3% in those last two months of the year. Just want to check how much of this deceleration was a function of one-offs from absenteeism in China and COVID revenues leaving the system versus a broader slowdown in activity? And then second question. Just if you could clarify how much you expect pricing to contribute to growth this year. And also what the underlying cost inflation assumptions are? Thank you for the question. Kate, so basically, if we look to this two month, the organic growth in these two months was actually 3.8%. So November, December, so you take the organic, which was to the investor days, October, year-to-date, and then these two months 3.8%. And if I would take out the effect from China, we would be by roughly 5% growth for this two month. And then regarding the pricing environment, I mean, the half of organic growth is basically was the price increase. Now this is basically fully in line with what we expected. And that obviously means there was a good acceleration also into to the end of the year. So, we expect the further acceleration into this year. And we have seen good momentum for price increase the second half, which would be effective this year. So there's definitely a higher, and clearly higher impact on price increases in 2023. And then, on the cost inflation, surely, in some labor markets, there's higher wage inflation in 2023 than in 2022. But there are also some areas very proactively taken some personal cost already in 2022. So it will also accelerate. But, yes, we will see how it's moving on. But overall, the vast majority of the cost will be passed on. Thank you very much. Can I remind everyone so all media inquiries should be directed to corporate communications or directly to me. So this call is aimed to analysts investors. So we will stick to analyst investors on the call. The next person to ask questions and please [Indiscernible] is Daniel, please go ahead, Daniel Yes. Hello, everybody. I would have another question on pricing. If I look at your guidance for 2023, you also expect some volume growth, you'd be happy to soft are stable in volumes and pricing will do the rest. That's the first one. And you mentioned higher labor costs, probably more acceleration than 2022. Could you maybe also discuss other cost like energy for example what the impact to expect then in 2023? Thank you. I mean, obviously, let's say that there is no - let's put it this way. Obviously, we look for mid single digit organic growth, which is a certain range, and I think it's now too premature, but it's the exact growth number, I know where were you coming from, but our view would be the majority of this growth is coming from pricing given the environment in which we are in and we see how things are going in that regard. If you think about cost inflation, and obviously some areas we are the kind of costs one rate, which we experienced in the second half of last year, it's not yet in the full year. So there is a little bit of catch up. So for example, if we think about energy costs, energy costs, was of course, clear increase in certain jurisdictions like Europe, very in the first half last year still benefited from contracts in place prior to the increase in energy costs, they are renewed, and they are now on a different level. So that's definitely some I would say, additional cost moving from our incremental cost, as the full run rate of H2 was lower and H1 coming into next year. And other part is also if you think about travel related cost, in the beginning of last year, we were still not traveling that much. We went and up. But the country like China traveling, a real traveling only started with the opening up. So there will be also some cost increases which would be higher than what you normally expect from inflationary point of view, to get it to the right level. Thank you very much Dominik. The next question or questions, I guess, come from [Indiscernible] from Morgan Stanley. Please go ahead [Indiscernible]. Hi, thanks, Toby. And thanks for taking my questions. And so just firstly, just a quick one on the replacing of the vaccine volumes in health and nutrition. I think in the comments. Dominik you said that most of that has been replaced. Do you have a timeframe over replacing the rest of it? And if you could give some flavor as to what kind of work you're replacing that with and how the margin compares to the COVID vaccine work you were doing last year? And then secondly, just on industries and environment where you sound fairly bearish for this year. Clearly, there's been a lot of talks from capital goods and chemicals around destocking and it's lower volumes. Is that the main dynamics that you're seeing in your end markets? And do you see that continuing through till at least the second half? Or are there other dynamics at play? Any color on that would be helpful. Thank you. So if you first think about the COVID related work, so basically the health science part a very slight decline in terms of organic growth, but it was really very, very slightly. So the most of the COVID related work is replaced. There was still some remaining work there which is phasing out, but it's not anymore, very relevant in that in that regard. Obviously, it has taken over some time until certain projects are coming in. So there are sometimes a bit of a time delay during 2022 where the vaccine work to large extent reduced a lot after Q1 and until new businesses is ramping up. So that's one of the key reasons why the margin is more materially down than other segments in health and nutrition and surely the vaccine block at rather high profitability. But that being said, it's now in the baseline, the new businesses and projects started. So you should expect the strong margin increase of the health and nutrition business in the current year. The second question [Indiscernible], I think the R&D portfolio is quite large. So in fact, there is a lot of moving parts in there. Clearly the health and safety related activities, or the construction supervision related activities, we're looking at the positive development, especially we have secured quite a few contracts related to renewable energy, wind farm and so on. On the environmental sector, the year is still going to be positive politically more challenging than the other two services I just mentioned, because of the fact that they are some delay in information recreations, as well as some project in Europe. So this is we're looking at it. But it should be slightly better than the last year for sure. Then you have sectors like the life science sectors where it could be a little bit more negative in our outlook. The automotive statutory inspection sectors would be flat, flattish. Also, all the strategy work with the MDT and so on, as well as some of the transportation sectors will be pretty soft in our views in our party in Europe and to some extent in North America. Thank you very much, Frankie. And the next person we have on the call is Simon from Stifel. Please go ahead, Simon. Yes. Thanks Toby. Two questions please. First of all on 2023 outlook, could you give us some details on the phasing of margins between H1 and H2? And secondly, on the working capital, if you could give us some details on the dynamics there and should we expect another outflow for 2023? Thank you. If we think about the phasing of the margins, they are -- there should be clearly from the margin increase in H2. Now, what are the kinds of events? Obviously, H1 was already impacted last year by China, excluding China margins were in the H1 still okay. Now, we need to see probably the first or second month in China, there will be still a little bit of higher sickness rates even though we hear good signs, which could have a little bit slower start, but then it should ramp up and have then the second quarter easier compass. There was the lockdown in China and then in the second half the margin should basically a more accelerate. To certain extent the question is a little bit how the bad debt recoveries happening. We assume obviously, the majority of the of the kind of incremental bad debt expense which occurred in 2022 will be collected in general more in the first half, but it could be also throughout the year, but in general I would say the margin increase is more geared to the second half. And then on the working capital. The working capital out there will be with mid single digit growth. There will be some outflow, but the outflow will be surely lower than what we experienced. But we experienced in 2022, because while for the whole year, these are, we are stable, it's clear that towards the end of the year with especially in China with having high sickness rates, there was also much less collection, which should move into this quarter and into this year. In that regard, and also in general provisions we are somewhat lower end of for last year. So yes, there will be outflow, but it will be less. So cash conversion should clearly increase for 2023. Thank you. Hi, good afternoon, everyone. First question, could you discuss a little bit more of the margin trajectory? You said margin up and I guess you've identified the bad debts, you still expect to collect those? What about the cost savings of CHF50 million? How much of that has been done already? Is that fully going to benefit 2023? And then, could I just check within the knowledge business what margins is that consulting business coming in? It seems to be growing very quickly? Thank you. Maybe the second one first. So basically the knowledge business has good margins, but it's below. Sorry, the consulting business within knowledge has good margins, but it's below the average within knowledge. So it's slightly lower. So you could argue it's a bit dilutive. But I would not say and that's the reason of the margin decline and last year, it's really more that in the year before, we did a lot of work remotely and had this, so basically in the year 2021 situation where our delivery model, was simply cheaper, because we worked remotely. So we definitely expect a much an increase in knowledge, even if the consulting piece which probably will outgrow the rest has slightly lower margins, because the difference is not that big, but they are somewhat lower in the consulting business than in the more legacy management system certification businesses. Regarding the margin development, I mean, we not guiding for exact margin. I mean, we are, I think we are very confident that we have good margin increase, but I can give you some, of course, some moving parts. So basically, the CHF50 million restructuring is in implementation, is in motion. So this should, we expect it to be achieved in 2023. Then the majority of the attempt is CHF20 million was to higher bad debt. Last year, the maturity should be collected. So this is definitely on the positive side. Obviously, we should also get the first benefits from the digital lab program in terms of productivity. But there are also some offsetting items which we need to consider. So, for example, bonuses in 2023 are assumed to be on target. Bonuses in 2022, they were clearly lower given the fact that we had to rise our guidance, and certain KPIs related to it. We have as I mentioned before, on the question regarding cost for gas electricity, it's not the new norm of this costs. It's higher than what we have in 2022. So the H2 run rate needs to be considered. What I also mentioned before on the travel costs. There will be more traveling. Also China opening up there will be more traveling and one of our biggest markets in that part. And we will also further accelerate our investments into IT, into the digitalization into level up. Hey, good afternoon, guys. Just two quick follow ups from me if it's okay. I just really go back to kind of the November comments from the first question. Obviously, the time, the run rate was pretty good. The guidance was for the upper end of mid single digit. So I just want to just dig into, was it purely the China recovery that kind of caught you off guard? I just wanted to check was there anything else in those November, December months that maybe was slightly weaker than you were expecting back in November? That's my first question. And secondly, I just wanted to provide a little bit more color on China specifically like what exactly you seeing in terms of a group level, the sickness levels, the impact on activity and margins, how has that been trending through January and then just thinking about kind of Q1 versus Q2 impact for 2023, obviously, over the low base and the restrictions in there would you expect China to still be down year-on-year in the first half or net-net positive? Thank you. If you first start with guidance. So basically when we had investor days, our guidance was we said we were looking for a gaining growth more on the upper end of mid single digit. So, if I say mid single digits between four and six, so I think the 5.8 we are basically there and what we assumed, obviously, we could not know, mid of November, when we had investor days, the sickness challenge in mid of December in China. So obviously, this was a -- could say, this was not considered. What we assumed like we also said at the investor days, we see some softening in some of the European markets, which occurred. So that was the assumptions. The only difference is really the China part. But again, if we adjust for China, this two months will be about five. So from this point of view, and 5.8 was achieved. And it considers a bit of slowing in Europe what we kind of expected. On the second part regarding China, if you think about China, it is actually, of course, they are often challenges. If you think about the big lockdown, or the COVID start back in H1 and was it again, H1, 2020 we've recovered very well in the second half. I mean, I think our team did a fantastic job to recover in the second half. Yes, we were helped also, by all this work for the masks. If you think about the lockdown in the second quarter, we had after the lockdown in the big cities in the second quarter, we had very quickly strong growth, basically up to late autumn. And so from this point of view, I think our business, our ability to recover fast is very strong. So I'm not concerned about the growth rate in H1. Maybe just to add on the. So end of the year, or as toward the end of the year, we are about 70 plus percent sickness absence. So the operation was pretty down. By the second week, just before Chinese New Year we are more or less back up to not fully 100%, but pretty much close to 100%. So, but this also considered that our customers has their own problems. So it's not one, it's one thing that we are back up with. The second thing is whether the supply chain and our customers are back up to 100%. So, we're going to monitor the situation after Chinese New Year to see how things goes. But quarter one will be a bit challenging, and quarter two will pick up again once the situation stabilize. Thank you. Good afternoon. Two questions. The first one is regarding capital allocation priorities. And if you have identified any further areas of potential divestments with the possibility to deploy to cash elsewhere? And the second question tying into that is your equity dropped quite a bit. So net debt to EBITDA continuously increasing. You mentioned that cash flow will be better in 2023. But are you planning any other measures to improve the balance sheets? Thank you. If you think about capital allocation, obviously, we focus first of all, of course, on organic growth. We put two years ago, our CapEx more towards the higher end of the range 4.5% to 5%, which we'll continue to do and allocate especially capital into above average allocation into areas like connectivity, into areas like health science, but we'll continue to do. We are obviously open for acquisitions in the core segments, which we defined their acquisitions will also help. As I mentioned, the investor days, we're not seeing currently a lot of acquisitions, although we are very disciplined on pricing, we will be more smaller bolt on acquisitions in that regard. We also continue to work on our portfolio. So there are a couple of businesses where we have some discussions about with external parties about divesting and so maybe there's one or the other could be announced during the course of the year, but this will be more smaller ones in segments, like the outline that the investor days that we have, which are not of high strategic priority where we have a low market share, and also not the right or the best returns. Net debt to EBITDA increased. Now, obviously, we had some years ago, it was a very, I would say unlevered balance sheet, it increased. They also had a share buyback throughout last year. So share buyback is definitely not a priority. It's really about bolt-on acquisitions, organic growth, and of course, a stable dividend. Otherwise, we feel comfortable with our leverage, so there is no other actions needed. Thanks, Toby. First question from me, just on the working capital outflow again. And are you just able to sort of specify how much of that you think is China driven? I know you've mentioned it, some of it but whether you could just put a number on that and likewise, what the outflow is likely to be in 2023? And the second question I had was just within connectivity and products, obviously, we've talked quite a lot about connectivity. But in the autumn, some of your peers were talking about destocking cycles, having an impact on softlines and hardlines. I was just wondering whether that was something you were seeing any impact of now or not so much? Thank you. I go on to the second part of questions. Certainly, there is lot of cautions from the retailers about the inventory level, and so on. So,- but on the softline side, we are still seeing quite good growth for 2022. And moving into the New Year, I think that growth trajectory might be slightly lower than last year, but I'm not too concerned about that. How good some trajectory? I would say last year was even more difficult. We're looking at the better year this year. But again, while the destocking is an important factors, we're also looking at number of SKU and so on. So there's not always a one to one ratio between the large inventory of our customers and retail sectors versus what we do in the production countries. And the last one as well I think we also extended our network to capture different sources of supply chain away from China. As I mentioned within the call lot over the past few years into Turkey, Vietnam, and so on, we are we seeing these to be part of the drivers in terms of the way we're growing our unit there. So. Regarding the development in terms of network capital movement, it will be in the ballpark, I would say outflow this year round plus minus CHF75 million for 023 and 2022. China effect, it's a bit hard to say what if and so on, right, because, but it was most likely it was around CHF25 million, CHF30 million, there is a bit of a timing issue. But also I know there were also bad debt, which we still want to recover or which will recover which impacted also working capital in the 2022. Yes, thanks, Toby. Just two for me, as well. Back on the health and nutrition business. Just looking at the second half margin development, I mean it dropped back almost 500 basis points, that's created a super easy comp for you it next year. The question would be the extent to which you believe that that margin can recover for the full year 2023 to levels that we saw in 2018, 2019, sort of 14% to 14.5%. That's my first question. And then the second question, I just wanted to check, I heard it rightly, it seems that all of the divisions on the outlooks we're going to outperform the group average with the exception of I&E and just mathematically are you signaling there that I&E is going to be particularly weak versus the group average, or perhaps I've misheard one of the divisions? No, in fact, yes. It'd be confusing, I agree. But because they're all pretty close to the average, let's put it this way. So we have a clear view on where we can land as a company. So most of those [Indiscernible] outperformed. They're pretty close to each other, as well as the I&E on the other side of the middle points. So considering the size of I&E which are larger, so it has an incident on average, but I would say they're pretty close to each other. So there's no massive drop on the I&E versus the older form. Then on the margin in health and nutrition, if we think about definitely the second half, if you compare second half 2022 versus second half 2021 definitely you recall, probably after the year 2021, when we had our announcement, and we had a margin at the time of 16.5%, which was a very strong impact also from the second half at the time, was also a lot related to health and nutrition and the fact that we had a big part of this vaccine work in this second half of 2022 and obviously now, it's very small. So this is the main reason obviously. And that regard that there will be a good recovery, because the projects are running. There should be definitely clearly higher than in the prior years. Obviously, the match and as we outlined at the time they match in 2021 was definitely more on the higher end, given the special impact of this vaccine, which was nicely priced. Hi, thank you. Two for me please as well. So, the decision to seize the two upstream projects in Libya due to the absence of cash collection, can you please give some color on how big it is? And what impact you'd expect on revenues and margins for 2023? And then, what exactly you're thinking about wage inflation for 2023, please? I know you have the offsetting factors, et cetera for restructuring and so on. But is it like mid to high single digit wage inflation that you're penciling in? Thank you. So basically, if you think about this business, the revenue which we recognize and was for last year was around CHF15 million. So, but we, it's really a kind of one-off, and we put basically everything in the one-off line. So from this point of view, that will be no real impact on a year-over-year comparison in that regard, because obviously, they also not recognized revenue in the base case, as we basically decided to seize this business and in given the absence of cash collection. In terms of cost inflation, it really depends market to market, about inflation. Our inflation you need to see is more geared to wages, right. So it's probably not high to mid to high single digit in that regard, because it's more geared to wages, and then things like traveling and so on, but that outlined into the second half. First half is more question of volume. Thank you. Now we move to the last questions on the call. As I said, you can rejoin if you'd like and if we got time at the end, we'll get around to you again. And the final caller please is Rory from UBS. Please go ahead, Rory. Thank you. Two for me please. Can you give us the price and contribution by division? Or even just rank them in terms of where it has been hardest or easiest increase contract prices? Just think about your performance dashboard on slide 34. Is it those businesses that have a lower market share where you've struggled to pass on cost inflation? And does that influence any decisions about disposing of units? And then secondly, just on the knowledge division. Do you see any risks that the consulting service lines face a tough outlook over the next few years? I know there's quite a few companies talking about wanting to cut back on consulting bills and other areas of spend. So any headwinds you're anticipating there? Thank you. If you think about pricing, I mean, first of all, we see price upticks in basically all the businesses. Now it's fair to say that for sure, certain businesses, their barriers to entry are materially higher, where it's easier to pass on in other areas, when it's more to commodities. It is more -- it's more challenging. But it's also fair to say if we think about our large accounts, that is also a realization. That is inflation was really high, and openness to accept price increases. So I think it's more in that regard. Certain businesses, I think the kind of what we dispose, or what like to change the portfolio is less a function of inflation or price. It's more our view about the structural outlook of this businesses, our market positioning and our ability to achieve strong returns because we are obviously very, very return focused. On the consulting part, what we're doing on consulting has a lot to do with supply chains and other portfolio what we're doing there. And actually, we are pretty optimistic because in this part there is rather more incremental demand of advice needed. And so from this point of view, we have a rather positive outlook also for the years to come. Thank you very much. We're now moving to the questions which have been sent via the web. So I will read this out. So please bear with me. The first two are from Neil Tyler from Red Burn. How are we thinking about headcount into the next 12 months keeping in terms of the balance between capturing growth and keeping costs in check? I mean let's say, we drive, we have our objectives to basically drive productivity very clearly. And obviously, headcount planning on headcount deployment is a key parameter. And we adapt the headcount to the needs to the market demand. But it's obviously if we see opportunities for growth, and potential to have good returns, we will invest. Frankie, you want to add something? No. No. I would say also, it depends on the mix of a portfolio certainly. As you know that for quite some time, we have been pushing more into the testing part of the portfolio. So the testing in terms of headcount, and the manpower intensity is different than the field activities. So I would say, as we migrate, including the level up initiative to help to optimize the efficiency across our laboratories as we migrate toward these directions certainly, the labor intensity will change over time towards more laboratories and more automated level up initiative that we've been trying to push for the past couple of years already Thank you. And then the second question from Neil is specific to health and nutrition. Following the fall in profits in the first half and second half, and based on the assumption that is based upon the vaccine development work coming out of the business. We've also mentioned the cost of network investment. So on that is the 2022 base now clear of vaccine work? And secondly, how are we budgeting for network investment this year? End of 2022 was still some related vaccine work, but it's really the minor part. And regarding investments, especially in health and nutrition, and health science, we see good opportunities for the midterm, and also opportunities to enlarge our footprint. So we will continue to invest in certain labs across the world. Yes. Absolutely. I mean, the health science is a strategic direction that we set, we have nutrition a few years back. So we'll continue to invest into network and this will include some additional investment in a couple of Asian countries, in Europe, partially to just create some of our facilities probably in North America. Thank you. And we have [Indiscernible] and he would like to have an update on the M&A pipeline and our vision for FX in 2023? So from the M&A side I mean, nothing changed to what we discussed at the investor days that we not seeing for the time being sizable, more sizable opportunities. On the market, it's more smaller things and we looking after this and conclude certain things like a Proderm, which was a very nice addition for our cosmetic business. I would expect for this year not too much M&A part, because we simply not seeing enough supply on the market in the areas of our high interest. And also given that last year was of course also very demanding I would say from a pricing point of view, we are very disciplined in that respect. We have to see what more supply comes back to the market better in the private market, how pricing has adjusted. Thank you very much. And There are two from Pablo from [Indiscernible] I'll start with the sort of more technical one, which is an update on cost of debt and tax for 2023. So if we look to our cost of debt, our overall portfolio of debt instruments outstanding ones, which is biggest part is 0.8% interest expense, obviously, we'll have an interest income, but also hedging costs. So finance expense made CHF50 million should be a good number. Tax rate improved. And we would foresee and we believe this tax rate is more or less sustainable, which we posted. So we expect the tax rate going for between 26% and 27%. Thanks very much and then one which is similar to question we had before, actually, but Back in November, we expected to get -- I'm not saying we expected to, but the expectation from Pablo was that we would get 100 basis points of margin benefit in 2023 from the factors of cost savings and bad debt recovery. Could you talk around those points and what we expect to realize in 2023? So I mean, there are positive items there, like outlined before the CHF50 million restructuring benefits, which we fully occur on 2023 and we have, we also have bad debt to expect it to be a large extent. And all the things, of course, have a positive impact. But as I mentioned to one of the questions earlier, there are also some offsetting items, like higher bonuses, then in 2022, we expect for 2023, if assuming bonus at target, obviously, higher kind of the facing of electricity gas costs, which is more the run rate of H2 versus what we had in H1. The same is true for traveling and where traveling given the opening of China. So overall, we expect very nice margin increase, but we're not guiding now to fixed much. Thank you. And I'll cover two capital allocation questions at the same time, because I think it's going to be easy to do that. Patrick from __ is asking whether we will consider a share buyback program this year, and what factors does it depend upon? And then secondly, part of the sort of overall picture, I think, net debt has gone up and free cash flow hasn't covered a dividend. Should we be, is there a case for cutting the dividend rather than holding it flat? So to the first question, we concluded the share buyback program, which we announced a good half year ago. And with this, we are done. I'm not foreseeing share buyback programs in the near term, clearly not. So in terms of capital allocation, it's really the dividend of CHF80, which should be stable. Yes, the free cash flow is it was last year, lower. We expect clearly better cash conversion into this year, and the dividend will stay stable at CHF80 until the moment that the payout ratio will move down towards 70%, 75%. And then dividend increase is an option. But up to this moment is basically CHF80 in no share buybacks. Thank you very much. And then we have the final two. So the first one is from [Indiscernible] Alpha Value. We're targeting 50% of revenue from sustainability solutions. Based on interactions with customers, where do we think which divisions do we believe have the most room to introduce new services and solutions into 2023? The way we calculate our system sustainability solution framework includes some of the existing activities. So I would say, Knowledge will be certainly one of the beneficiary, because the fact that there's already increased demand on the market about sustainability related audit assessment and consulting. I would also believe that the way we continue to grow our health and nutrition portfolio will be contributing to this segment. And on the C&P side, we also have some new project this thing to suitability solution in terms of product certificate, and so on, as well as the transitions from I&E. But I would say if I have to pick two that will contribute, the more we'd be health and nutrition and knowledge. Thank you very much. And then our final question, because I think we've overrun already. So we'll cut it off there. And going back to health, could you break down the difference in margin impact from China and investment? And how much of that will reverse into 2023? Okay. Maybe [Indiscernible] from Barclays. If you send me that question, we can come back to you a bit more detail. So thank you very much. It's been a long call. And I think we've got through a lot of questions. Thank you for attending the call. And with that, I'll hand over to Frankie for a couple of words at the end. Thank you, Toby. So I think just to conclude that the team and I are very focus on the winter, the outlook we set here. So we are clear that productivity growth will focus on midterm long term of the regional market is essential. And as we discussed last November for those of you who attended the industries date, the long term drivers are still there. We're investing for the long term and the reasons of the companies clear. And we are looking at the strong year for 2023. Thank you.
EarningCall_1089	Good day, and thank you for standing by. Welcome to the First Hawaiian Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Haseyama, Investor Relations Manager. Please go ahead. Thank you, Shannon, and thank you everyone, for joining us as we review our financial results for the fourth quarter of 2022. With me today are Bob Harrison, Chairman, President, and CEO; Jamie Moses, Chief Financial Officer; and Ralph Mesick, Chief Risk Officer. We have prepared a slide presentation that we will refer to in our remarks today. The presentation is available for downloading and viewing on our website at fhb.com in the Investor Relations section. During today's call, we will be making forward-looking statements. So, please refer to Slide 1 for our safe harbor statement. We may also discuss certain non-GAAP financial measures. The appendix to this presentation contains reconciliations of these non-GAAP financial measurements to the most directly comparable GAAP measurements. Good morning, everyone. And I'd like to start by welcoming our new CFO, Jamie Moses. He brings us wealth of banking experience and proven track record in financial management. We're excited to welcome Jamie to the bank. I also wanted to extend a special thanks to Ralph Mesick for his contributions as acting CFO over the last year until Jamie joined us. Now, a brief update on local economy. The Hawaii economy continues to do well. In December, the statewide unemployment rate fell to 3.2%, slightly below the national unemployment rate of 3.5%. Total visitor arrival grew 735,000 in November of last year, 9.1% below the November 2019 arrivals. Japanese visitor arrivals remained below historical levels at 3.8% of the total, compared to 16.3% in November of 2019. We continue to expect a gradual return of Japanese visitors to more normalized levels. Despite the lower number of overall arrivals, visitors tend in November was $1.5 billion, up 13.7% over November 2019. The housing market has remained stable. In December, the median sales price for a single family home on Oahu was just over $1 million, unchanged from the year before. Median sales price for condos on Oahu was 503,000, 3.6% higher than the previous year. Turning to Slide 2. Comment on our fourth quarter results. We ended the year with a very good quarter as net income grew to 79.6 million or $0.62 per share. Loans grew, net interest income continued to increase while non-interest income returned to normalized levels and non-interest expenses was stabilized. Our return on average tangible assets was 1.34%, and return on average tangible common equity was 25.93%. We continue to maintain strong capital levels with the CET1 ratio of 11.82% and total capital of 12.92%. The Board maintained a quarterly dividend of $0.26, and adopted a $40 million share repurchase program for 2023. Turning to Slide 3, the balance sheet continues to perform very well. It remains moderately asset sensitive with about 5.6 billion or 41% of the loan portfolio repricing within 90 days. We continue to use excess cash and the investment portfolio funded loan growth and deposit runoff. We ended the year with cash and cash equivalents at about $527 million, compared to where we started the year at $1.2 billion. The investment portfolio duration remained stable at 5.6 years for the quarter and cash flows from the portfolio was about 75 million per month. Our liquidity position remains very strong with a 65% loan-to-deposit ratio, a strong core deposit base, and steady cash flows from the investment portfolio. Turning to Slide 4, period end loans to leases were 14.1 billion, an increase of $392 million or 2.9% from the end of Q3. About half of the growth was due to a $201 million increase in C&I loans, which was primarily due to $120 million increase in dealer flooring and $38 million increase in other dealer related loans. For all of 2022, total loans and leases were up 1.1 billion or 8.7%. Excluding PPP loans, total loans and leases were up $1.3 billion or 10.4%. We expect loan growth to be in the mid-single-digit range for full-year 2023. Thanks, Bob, and good morning, everyone. Turning to Slide 5, deposit balances decreased by $403 million or 1.8% to $21.7 billion at quarter-end. Retail and commercial deposits declined $668 million with most of that decrease coming from commercial deposit accounts. Commercial deposits declined by about $611 million, while retail balances were relatively stable declining by only $57 million. The five largest outflows from commercial accounts accounted for over $290 million, almost half of the total decline and were all part of normal business operations. Our total cost of deposits was 52 basis points in the fourth quarter, an increase of 28 basis points from the prior quarter and consistent with our expectations. RAC rates on checking and savings accounts continue to remain stable. Turning to Slide 6, net interest income increased by $9.1 million or 5.6% over the prior quarter to $171.8 million. The increase was primarily due to higher yields and balances on loans, partially offset by higher deposit costs. The net interest margin increased 22 basis points to 3.15%, driven by higher yields on loans, cash and investment securities and was partially offset by higher rates on deposits. The acceleration in deposit costs can be seen in the fourth quarter beta, which is about 38% on interest bearing deposits. Our cumulative beta on interest bearing deposits to date of about 19% was within our expectations and we continue to expect that the full cycle beta will be about 30% on interest bearing deposits. Looking forward, we expect net interest margin to increase by 4 basis points to 5 basis points in the first quarter. On to Slide 7, non-interest income was $48.2 million in Q4, a $2.3 million increase over the prior quarter. The improvement was due to the return of BOLI income to a normalized level as market volatility subsided in the fourth quarter. Expenses were $113.9 million, essentially unchanged from the third quarter. Using the fourth quarter non-interest expense as our new baseline, we expect that full-year 2023 expenses will be approximately 4% to 4.5% higher than the annualized fourth quarter number. If you exclude the impact of the increase of the FDIC assessment fee, which we estimate to be $4 million to $5 million annually, we expect 2023 expenses to be approximately 3% to 3.5% higher than that annualized fourth quarter number. Thank you, Jamie. Moving to Slide 8. The bank enjoyed good credit performance in 2022 and our asset quality metrics were strong year-end. Net charge-offs were down by $1.2 million year-over-year or almost 10%, and our annual net charge-off rate was 8 basis points, 2 basis points lower than in 2021. NPAs in 90-day pass through loans were 11 basis points at the end of Q4, up 1 basis point from the prior quarter. Criticized assets continue to decline dropping 9 basis points over the quarter to 72 basis points. The bank recorded a $3 million provision for the quarter. And finally, loans 30 to 89 days past due were $57 million or 40 basis points of total loans and leases at the end of Q4, 6 basis points higher than the prior quarter. Moving to Slide 9, you see a roll forward of the allowance for the quarter by disclosure segments. Reserve needs for loan growth this quarter were again offset by improvements in the portfolio risk profile. The allowance for credit loss decreased $4.3 million to $143.9 million. The level equates to 1.02% of all loans. The reserve for unfunded commitments increased $3.7 million to $33.8 million based on an increase in undrawn exposures. The allowance anticipates cyclical losses consistent with every session and include a qualitative overlay for potential macroeconomic impacts not captured in our base model. Thank you. [Operator Instructions] Our first question comes from the line of Steven Alexopoulus with J.P. Morgan. Your line is now open. I want to start, so I appreciate the loan outlook mid-single-digit, can you talk about the deposit growth outlook for the year? And in terms of the cost of deposits, I appreciate the 30% full cycle beta on interest bearing deposits, but how do you think about by the fourth quarter of 2023? Yes. Well, that's the question, isn't it Steve? This is Jamie. Good morning. I think that â I think that that's going to be entirely dependent on what we see macro [indiscernible] if they said, it continues to increase, we'll see deposit costs go up probably consistent with that beta that we described. And if they don't, then we'll probably see some stabilization here in rates in the first or second quarter. Yes. No, just from the beginning of the cycle, we stayed very close to our customers and really taking care of them on deposit rates and making sure that we're competitive. That will continue depending on where that goes with rates, but we're comfortable and that we don't see a lot of pressure on the consumer side to where we can still maintain a decent margin throughout the cycle. And then on the growth side, can you guys talk about that, you know 2022 used cash, right, to fund part of the loan growth? How are you thinking about that obviously have a lot of room because the loan to deposit ratio is still very low? I think we'll start as we have been funding it with the run off of the investment portfolio at that 75 million a month, that might slow a little bit, but still we're in the 800 million plus range of investment flows for 2023. That's the start and certainly that allows us to not only fund a good amount, if not all of the loan growth, but also if you take care of future deposit run-off should that happen. Okay. And then on the non-interest bearing outflows, is there a way to quantify what portion could be a risk? We're seeing customers are investing some of that cash or chasing higher rate. Can you size for us? We're trying to get a better sense. I know we keep asking the same question. Where that mix of non-interest bearing could move to? Yes, we're going through that same analysis, to be totally honest with you Steve, we don't have precise answer for you. We have seen some of that money that had been on balance sheet, moved in the money markets that we offer to the customers. So, it hasn't âleft a bank in that sense.â We haven't seen customer relationships leave, but we had a lot of money parked on our balance sheet in addition to the normal title companies or construction project deposits, that sort of thing. So, there's a lot of moving parts of that without seeing a big change in customer relationships. But Jaime or Ralph, anything you would add to that? No, I think you've nailed it, Bob. I think we will â are likely to see some migration continue to go from non-interest bearing to interest bearing accounts. And I mean, I suppose if you look back at the history, we were, kind of just under 40% or so, non-interest bearing deposits to total deposits. So, I mean, I think if you think about that, sort of migration, I think that is maybe what we could see or maybe slightly better than that. I mean, it really depends on how long this cycle lasts. Okay. Jamie, congrats on the position. Ralph did a great job while they're waiting for you. And thanks for taking my questions. Question on the margin here sounds like little bit more expansion this quarter, but then do you think it's going to top out there or is there still some benefit that could come from rate hikes, depending on what we get here in the next few months? Yes, I think the guidance is pretty good in terms of where we expect Q1 to be, if there are some more rate hikes, we could see a little bit more accretion to the NIM. And if there aren't, then maybe we're sort of at that range on the guidance there. So, again, right, this is all forecasting what we think the Fed is going to do and how our balance sheet, sort of catches up on those things. So, I think we feel good about 4% to 5%, but I think there is room for improvement if we see some more Fed rate hikes. We do [indiscernible] where deposit rates are now relative to interest rates. So, we don't feel there is a catch up. We've been saying pretty close to our customers on this and making sure that they see the value in their relationship with the bank and as we take care of that. Got you. And then on the cadence of the loan growth mid-single-digits, how is that going to transpire throughout the year? I guess, how is the pipeline looking for this quarter? How much is â what are the dealer flooring customers telling you? Yes. As you saw, we ended up the year with a strong fourth quarter in dealer flooring, higher than it had been going to about $25 million a month increase for fourth quarter, it was above that right at [$120] [ph], but that still left us at just about 450 million versus December 2019 at 860, so I don't think there's any way we're going to go up $400 million in 2023, but I think there will continue to be accretion and increase in that dealer flooring book as supply lines become unstuck and we see a little bit slowdown in buying activity by the consumer. So, I think there will be, kind of a tailwind for us in dealer flooring. That's up against certainly a headwind in residential. The refinance market has essentially ended. As we all know, we are seeing a little bit slower activity in home equity lines as far as new loans, but we are seeing growth in that based on existing relationships we have with customers. So, I think those are some of the puts and takes. The one that we have more control over and we're still in that market is commercial real estate and that still remains active, but probably not at the same level we saw in 2022. Hi, good morning. And Jamie, it's nice to have you on the call. I thought I would follow-up on the loan growth side. If you could provide any further outlook on what your mid-single-digit loan growth guidance incorporates in terms of growth in Hawaii versus on the mainland? Yes. As we've talked about, we have seen the Hawaii activity increase, but then 2022 is more heavily weighted towards the mainland. So, I think it will still continue to be a mix between the two. On the dealer floor plan, most of that growth in Q4 was in the mainland. We have more of our lines in the mainland now as we've talked about on previous calls. So, as far as a ratio of dealer floor plan growth, it will be a little bit more heavily weighted towards mainland versus Hawaii, but primarily because there's a large amount of lines to our mainland customers and our Hawaii customers. So, I think that will happen. On commercial real estate, we are still seeing transactions here in Hawaii, but we still look at them on the mainland as well. So, I think the mix might continue to go up a little bit, as far as the mainland portfolio, but not dramatically so. Thanks. That's helpful. I would like to turn back to the expense guidance. I think what you said implies about 118 million to maybe 120 million quarterly run rate, which is certainly a step-up from this quarter. Part of that was the FDIC, which you called out, which you donât control of, but can we just walk through some of the other parts and kind of pressures you're seeing? And conversely, is there any areas where, you know if you look into the next year and beyond where you can find areas of improvement on efficiencies? Yes. Hi, Kelly. This is Jamie. I think we'll always be looking at that and trying to improve some efficiencies wherever we can. I think the 3% to 3.5% guidance is, sort of reflective of inflation and inflationary pressure that we're seeing, which I think is pretty normalized in this environment. And I think we want to make sure that we're continuing to invest in the business. Continuing with the digital transformation that we're undergoing. Core is, kind of behind us for the most part now. Now, we're really looking to take advantage of all the options that that is going to bring us. So, I think the guide is a good number. Of course, we'll always be looking, but I don't see much difference off of the 4% to 4.5% inclusive of FDIC at this point. Thank you. [Operator Instructions] Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is now open. Hey, good morning. Jamie, congratulations. Hope you enjoy the weather there better than New England, it's a little colder here today. Maybe just looking at the â on the loan production side, what are you seeing in terms of new loan production rates? And then when you look at the construction pipeline funding up, is that funding up at rates or at lower rates from a, sort of prior rate environment or what is the construction funding looking like specifically to? Jared, maybe I'll start. This is Bob and ask Ralph to have some comments on it. We have seen the increase in margin in construction loans. And also an increase in rate because I think pretty much 100% of those are floating rate. So, we have seen an increase in both absolute rate and margin on that. So, that's been a nice tailwind. We have seen quarter-over-quarter nice increase in our weighted average coupon across the entire loan portfolio. And so, maybe was there anything else Ralph you would add to that? No, not really. I mean, I think we're at a point in the cycle where we would anticipate some improvement in the margins. Yes, yes, that was good. We just â I wanted to make sure that we weren't going to just see it drag on maybe that incremental loan yield from funding of construction loans in a prior, you know earlier construction loans, but all floating is good. Yesâ¦ Yes. And then on the allowance, with the decline this quarter in the ratio, can you just give a little more color behind what you're looking at to drive that lower? I think that's a little counterintuitive to what we're seeing from some other banks that are still growing the ACL and the Moody's baseline model continues to be more heavily weighted to a downside scenario? I guess just some color driving that ratio move? Yes, I would say, this is Ralph. Jared, I think when you look at our model, our base model, actually it really is reflective of current conditions and current risk rating of the portfolio that actually improved this quarter. As far as the economic outlook, our economic modifier is based pretty heavily on unemployment â in anticipation of an unemployment rate here in Hawaii, that's a little bit lower than the U.S. mainland. In fact, I think this quarter, we did put a little bit more stress on the qualitative side, still ending up with a slight reduction in the portfolio. Now having said that, I think we are provisioned for what would be our recession. I think when we calculate our one-year expected loss against the portfolio, it's probably a little bit higher than our peak loss, which I think during the [GXT] [ph] was about 72 basis points. Okay. And then just finally for me on the buyback authorization, is that something that we should think you're fairly active with earlier in the year or how should we be thinking about the timing and pace of 5x? Yes, maybe I'll start and turn over to Jamie. This is Bob, Jared. And really we're still looking at that CET1 guide of 12%. We had some very good loan growth in Q4 and is that mix changes out of lower risk weighted securities into obviously much higher risk weighted loans. That's more of a capital drag. So, that's what â we didn't increase CET1 to our target in Q4, but we're still working on that. I think with the increased profitability based on the margin expansion along with a little bit slower loan growth that we're forecasting into the year that we will be at some point looking to use that authorization, which is really hard to peg a date on when that would be. But Jamie, anything to add to that? Yes. No, I think you got it, Bob. I mean, I think it sort of boils down, it's like a combination of opportunism and dependent upon where our capital ratios go. So, yes, I wouldn't expect it to be even throughout the year. So, circling back to dealer floor plan, can you help us think about how big that portfolio is going to go to? You've added a lot. And then what's the split on the 456 million in terms of what's in California? And can you just remind us what are the terms of the new loans coming on the coupon? Yes. Maybe I'll start-off with that and ask Ralph to jump in and help me out [indiscernible] on some of dollar details, but the dealer floor plan, we don't have a huge difference and I go back to 2019. I don't think it's a real significant difference in the amount of lines available to our customers. There's been some ins and outs increases decline. Some customers actually selling their business to other of our customers or outside of our network, but there hasn't been a big change in the total of commitments. The mix in Hawaii stayed â the amount in Hawaii stayed pretty constant over the years, while the growth has been in California. So, as I mentioned earlier, the higher percentage of our lines are in California relative to Hawaii. I don't have that percentage. I'll ask Ralph to comment on that in a second, but when you look at the growth in the fourth quarter, much of it was from California. It was [117 million and 120 million] [ph] were draws under the California lines. So, the [cars] [ph] that are getting delivered in Hawaii [Technical Difficulty] more of a backlog and that sort of thing, hard to tell. What I think you'll see is, as we go into 2023, we will see [Technical Difficulty] outstandingâs relative to the total. To the greater question on what the total is completely is I might have mentioned earlier, we're about $400 million less in outstanding than we were at the end of 2019. I really don't think we get $400 million increase in 2023, but I think we could see some substantial growth off of where we are today. Clearly the manufacturers are figuring out production issues and chips are more available, demand is down slightly, although we still have a pretty good backlog to a lot of our dealers that are people that have ordered cars that have not yet been delivered. So, it's really hard to pick when supply lines unlock and cars get delivered and do people follow us around the reservation commitments they've made or give that car up to somebody else. All that's going to be the flex, but I think we're going to see healthy growth in 2023, just based on our existing customers. But Ralph, do you have any specifics you could add? Yes. Iâll just to give you the numbers. The mainland portfolio, is about 310 million, Hawaii and Guam about 146 million. So, most of that growth, as Bob had mentioned, came in the mainland. Got it. Perfect. And then can you just remind us what the coupons are right now? Any loans coming on there? Perfect. Thank you. Thank you. Okay. And then just going back to the funding side for a moment, you obviously had some increase there in the public funds, the 1.9 billion, how much of that is time versus your second transaction? And how are you thinking about where that book goes? Yes. So, on the public side, just under a billion was time and the rest was demand and savings accounts. I think â it's hard to say, Laurie. I think that we will use the public markets there to, kind of plug any holes that we fill or that we need to fill in terms of on balance sheet loan growth that aren't quite filled by the securities portfolio run-off. So, that sort of number is going to be entirely dependent on our loan growth and our ability to gather other deposits. So, that's kind of how we're thinking about it right now. Okay, perfect. And then Jamie or Ralph, can you share with us where is your spot margin for December, if youâve got that? [319] [ph]m okay, perfect. And then just two last questions on the income statement. How should we think about forward looking tax rate, and then secondly, can you comment a little bit , you had an upsized BOLI in the quarter and I know that line item is lumpy, but was there any [death benefit] [ph] there or was that, sort of the market moving? Can you help us think about that 2.9 million in the BOLI line? Yes, sure. So, in the BOLI line, we see that as, kind of normalized back to where we think it will run on a go forward and that was no [death benefit] [ph] in there, that was market driven. And then your other question, Laurie was tax rate, yes, sorry. So, we think a good guidance is 25%. We had some tax credits come through in the fourth quarter that sort of reduced our tax rate here to that lower level, but we're expecting 25% for 2023. Hi. Thanks for letting me jump back in. Just a real quick one. Can you just â was the expense guide 4% to 4.5% or 4% to 5%. We have different things and I don't trust a live transcript, so I just want to make sure I have the number correctly. Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Kevin Haseyama for closing remarks. Thank you, Shannon. We appreciate your interest in First Hawaiian. Please feel free to contact me if you have any additional questions. Thanks again for joining us and enjoy the rest of your day.
EarningCall_1090	Welcome and thank you for joining the Independent Bank Corporation 2022 Fourth Quarter and Full Year Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's fourth quarter and full year 2022 results. I am Brad Kessel, President and Chief Executive Officer, and joining me is Gavin Mohr, EVP and Chief Financial Officer; and Joel Rahn, Executive Vice President, Commercial Banking. Before we begin today's call, I would like to direct you to the important information on Page 2 of our presentation, specifically, the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today, you can access it at the company's website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks. Independent Bank Corporation reported fourth quarter 2022 net income of $15.1 million or $0.71 per diluted share versus net income of $12.5 million or $0.58 per diluted share in the prior year period. This represents increases in net income and diluted earnings per share of 20.6% and 22.4%, respectively, over the fourth quarter of 2021. For the fourth quarter of 2022, we generated an annualized return on average assets and return on average equity of 1.21% and 17.94% respectively. For the full year December 31, 2022, the company reported net income of $63.4 million or $2.97 per diluted share compared to net income of $62.9 million or $2.88 per diluted share in 2021. Our fourth quarter performance capped a very strong year as our entire organization executed extremely well despite a macroeconomic environment with many challenges and uncertainties. This past year, with our successful expansion into new markets, in addition of new banking talent, we were able to generate strong commercial loan growth and higher net interest income, which enabled us to offset a significant decline in mortgage banking revenue and deliver a higher level of earnings in 2022 than we did in 2021. These full year results generated a return on average assets and return on average equity of 1.31% and 18.41%, respectively. Importantly, we have generated significant growth in our loan portfolio while maintaining sound underwriting criteria, a low level of past dues and net recovery is credited to our allowance in 2022. We continue to see positive trends during the fourth quarter, including double-digit annualized growth in our commercial loan portfolio and further expansion in our net interest margin. Independent Bank has grown to $5 billion in assets as of year-end '22 as compared to $4.7 billion as of December 31, 2021. Our current position in our markets has had a positive impact on business development, as we consistently see more commercial clients wanting to do business with a local bank that offers superior level of responsiveness and customer service while also having the size and scale to meet larger financing needs. Given the health of our loan portfolio and our high level of liquidity and reserves, we believe we are well positioned to continue effectively managing through the challenging and uncertain economic environment that we're presently in and delivering strong results for our shareholders as we continue to leverage the investments we have made in banking talent and technology over the last several years. During the fourth quarter, our total deposits grew to $4.38 billion from $4.33 billion the prior quarter end. Of that $4.38 billion, we consider $3.85 billion to be core. During the fourth quarter, we did see a decline in our core balances of $91.7 million. We believe a good portion of the decline to be seasonal, but also some movement related to the competitive market conditions. For the quarter, total cost of deposits increased from 0.33% to 0.77%. For the full year, total deposits increased by $295 million, of which $53 million is core. Stated another way, our core deposits increased for all of '22 by 1.4%. We have included in our presentation a historical view of our cost of funds as compared to the Fed funds spot rate and the Fed effective rate from the last rate hike cycle through the most recent quarter end. It may or may not be indicative of what we see prospectively, but does provide a good historical view of our company and its cost of funds during a rising rate environment. Through year-end, our beta for the cycle to date is 16.2%. We are currently forecasting a 50 point hike in February, a 25 basis point hike in March and then 25 basis point cuts in September and December of this year. Given the more competitive market, we are now seeing for deposit pricing, we estimate a higher beta with future rate hikes. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we're having and growing our loan portfolios as well as provide an update on our credit metrics. Thank you, Brad. On Page 7, we provide an update of our well-diversified loan portfolio. Total loans increased $55.4 million in the fourth quarter, led by our commercial portfolio, which increased $58.6 million. This continues our trend of strong quarterly commercial loan growth. For the year, our commercial portfolio increased $263 million or 22%, as a strategic expansion of our commercial banking team as well as marketplace disruption positively impacted growth. While moderating slightly in the fourth quarter, we see low double-digit commercial loan growth continuing into 2023 based on a solid pipeline and our continued focus on adding talent to our commercial banking team. In terms of residential activity, despite the headwinds of higher interest rates, our mortgage portfolio increased by $13.5 million in the quarter. For the year, our mortgage portfolio grew $228 million. Consumer installment lending softened in the quarter as we have strategically pulled back in that area, that portfolio declined $16.7 million in the quarter. For the year, we grew our consumer loan portfolio $68.3 million. Overall, we are extremely pleased with our loan growth and believe we are on track to continue our planned asset rotation from the investment portfolio to higher yielding loans into 2023. On Page 8, we provide detail of our $1.47 billion commercial loan portfolio. C&I lending continues to be our primary focus, representing 64% of the portfolio. Manufacturing is the largest concentration within the C&I segment, comprising approximately 11% or $157 million. The remaining 36% of the portfolio is comprised of commercial real estate with the largest concentrations being industrial at $124 million or 8.5% and retail at $118 million or 8%. It's worth noting that of the $662 million of new commercial loan volume generated in 2022, $411 million or 62%, with C&I versus $251 million or 38% investment real estate. By design, this portfolio is very granular in nature, and we're maintaining our credit discipline to ensure that we maintain good diversity in this portfolio. Page 9 provides an overview of key credit quality metrics at 12/31. Total non-performing loans were $3.7 million or 0.1% of total loans at year-end. Loans 30 days to 89 days delinquent totaled $3.1 million at 12/31, up slightly from the third quarter, primarily due to an uptick in consumer loan delinquency. At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of the year. Thanks, Joel, and good morning, everyone. I'm starting at Page 10 of our presentation. Page 10 highlights our strong regulatory capital positions. The CET1 ratio and the total risk-based capital ratio increased in the fourth quarter of 2022. Net interest income increased $6.3 million from the year ago period. Our tax equivalent net interest margin was 3.52% during the fourth quarter of 2022, which is up 39 basis points from the year ago period and up 3 basis points from the third quarter 2022. I'll have some more detailed comments on this topic in a moment. Average interest earning assets were $4.64 billion in the fourth quarter of 2022 compared to $4.43 billion in the year ago quarter and $4.61 billion in the third quarter of '22. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income and the net interest margin. Our fourth quarter 2022 net interest margin was positively impacted by two factors, increase in yield on investments at 13 basis points and change in loan yield and mix of 36 basis points. These increases were partially offset by an increase in funding cost of 46 basis points. We will comment more specifically on our outlook for net interest income and net interest margin for 2023 later in the presentation. On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis fourth quarter '22 and third quarter '22 calculates the change in net interest income over the next 12 months under 5 rate scenarios. All scenarios assume a static balance sheet the base rate scenario applies the spot yield curve from the valuation date. The shock scenarios consider immediate permanent and parallel rate changes, the decrease in the base rate forecasted net interest income in fourth quarter '22 compared to third quarter '22 is primarily due to an adverse shift in the funding mix in a higher than modeled betas on interest-bearing deposits during the quarter. These changes were partially offset by earning asset growth and a favorable change in earning asset composition. The shift in sensitivity is primarily due to faster liability repricing due to a shift in the funding mix with the decline in less sensitive DDA and savings deposit and an increase in wholesale funding. Currently 28% of assets repriced in one month and 41.3% reprice in the next 12 months. Moving on to Page 14. Non-interest income totaled $11.5 million in the fourth quarter of '22 as compared to $15.8 million in the year ago quarter and $16.9 million in the third quarter of '22. Fourth quarter 2022 net gain on mortgage loans totaled $1.5 million compared to $5.6 million in the fourth quarter of '21. The decrease in these gains was due to a decrease in mortgage loan sales volume and in the mortgage loan pipeline as well as lower loan sale profit margins. Mortgage loan applications have slowed and the mortgage production mix has rotated to a lower percentage of salable mortgages positively impacting non-interest income was $0.7 million gain on mortgage loan servicing due to $2.2 million of revenue that was partially offset by a $0.5 million or $0.02 per diluted share after tax decrease in the fair value due to price and a $1 million decrease due to paydowns of capitalized mortgage loan servicing rights in the fourth quarter of 2022. As detailed on Page 15, our non-interest expense totaled $31.5 million in the fourth quarter of 2022 as compared to $34 million in the year ago quarter and $32.4 million in the third quarter of 2022. Compensation increased $1.3 million compared to the prior year quarter due to raises that were effective at the start of the year, a decreased level of compensation that was deferred in the fourth quarter of '22 as direct origination costs on lower mortgage loan origination volume and an increase in lending personnel. Performance-based compensation decreased $0.3 million due primarily to a decrease in mortgage lending volume and lower performance level within the corporate incentive compensation plan compared to fourth quarter '21. The fourth quarter of '22 included a $0.7 million credit to the expense related to the reserve for unfunded lending commitments due to a decrease in volume of such lending commitments as well as the expected loss rate. Other expenses decreased $6 million compared to the prior year quarter, primarily due to a lower fraud related losses as well as contract termination costs incurred during the prior year quarter. We will have more comments on our outlook for non-interest expense later in the presentation. Page 16 is our update for -- our 2022 outlook to see how our actual performance during the fourth quarter compared to the original outlook that was provided in January of 2022. Our outlook estimated loan growth in the low-double digits. Loans increased $55 million in the fourth quarter of 2022 or 6.5% annualized and $560.3 million or 19.3% for the full year 2022, which is above our forecasted range. Commercial mortgage loans had positive growth in the fourth quarter of '22, while installment loans decreased. Fourth quarter 2022 net interest income increased by 18.4% over 2021, which is higher than our forecast of low-single digit growth. The net interest margin for the fourth quarter of 2022 was 39 basis points higher than the fourth quarter of 2021. Net interest margin of 3.13%, which is higher than our original forecast. Actual results benefited from a notable increase in interest rates during 2022. The fourth quarter 2022 provision for credit losses was an expense of $1.4 million or 16 basis points annualized. This is within our forecasted 2022 full year provision range of 15 basis points to 20 basis points of average total portfolio loans. The primary driver of the increase in the provision for credit losses was an increase in subjective (ph) allocations related to general economic conditions. Non-interest income totaled $11.5 million in the fourth quarter of '22, which below our forecasted range of $13 million to $17 million. Fourth quarter 2022 mortgage loan originations, sales and gains totaled $138.9 million, $80.6 million and $1 million, respectively. The decrease in net gains on mortgage loans sold was primarily due to lower sales volume and decreased profit margin on mortgage loan sales. Mortgage loans servicing generated a gain of $0.7 million in the fourth quarter of '22. Non-interest expense was $31.5 million in the fourth quarter within our forecasted range of $30.5 million to $32.5 million targeted quarterly. Our effective income tax rate of 18.9% for the fourth quarter of 2022 was at the lower end of our forecasted range. Lastly, we purchased 181,586 shares at an average cost of $22.08 for the year-to-date period in 2022. Turning to Page 17. This will summarize our initial outlook for 2023. The first section is loan growth. We anticipate loan growth in the low-double digit range, and are targeting a full year growth rate of 10% to 12%. We expect to see growth in commercial and mortgage loans with installment loans remaining flat. This outlook assumes a stable mission (ph) economy. Next, is net interest income, where we are forecasting growth rate of 7% to 9% over the full year 2022. We expect the net interest margin to be stable -- to slightly higher compared to full year 2022 by 5 basis points to 10 basis points, primarily due to increasing yields on earning assets. This forecast assumes a 50 basis point increase in February, a 25 basis point increase in March, followed by a 25 basis point decrease in both September and December and the target Fed fund rate in 2023 with long-term rates declining slightly by year-end. A full year 2022 provision expense for allowance for credit losses of approximately 0.25% to 0.35% of average portfolio loans would not be unreasonable. Related to non-interest income we estimate a quarterly range of $11 million to $13 million. We expect mortgage loan origination volumes to decline by approximately 20% in 2023. Our outlook for noninterest expense is a quarterly range of $32 million to $33.5 million, with the total -- for the year 1.5% to 2.5% above the 2022 actuals. The primary driver is an increase in data processing and FDIC deposit insurance premiums. Our outlook for income taxes is an effective rate of approximately 18.8%, assuming the statutory federal corporate income tax rate does not change during 2023. Lastly, the Board of Directors authorized share repurchases of approximately 5% in 2023. Currently, we are not modeling any share repurchases in 2023. Thanks, Gavin. Each quarter, we share a high level view of our key strategic initiatives as we head into 2023. Our focus will continue to be on the rotation of our earning asset mix of lower yielding investments into higher yielding loans, growing our deposit base, while managing our cost of funds and controlling our non-interest expenses. While there is an increasing concern about a potential economic slowdown, at this point, we continue to see healthy economic conditions and loan demand in Michigan. We're excited about the opportunities we have to continue to grow -- continue our growth trends into 2023. We built a strong franchise based on a talented team, a low-cost deposit base and well-diversified loan portfolio, which we believe positions us well to effectively manage through a variety of economic environments and continuing to deliver strong results for our shareholders. Thank you. [Operator Instructions]. We'll have our first question from the line of Erik Zwick of Howard Group. Please go ahead, when you are ready. First, I just wanted to start on the net interest margin. The guide for '23 would imply some compression here from the 4Q '22 level. So just curious how you might expect that to trend throughout the year. If it would be some of that compression front-loaded just as the deposit cost catch up. And then if the Fed stops itâs hiking campaign towards the middle of the year with the compression potentially be slower in the back half of the year or do you expect it to be kind of more even just curious maybe talk on that topic. Yeah, Eric. This is Gavin. You explained it very well. So the first part of the year, we do believe we'll see some compression. And then with the rate forecast we've utilized, there would be stabilization midyear, potentially slight expansion at the back end. Okay. Great. And then with respect to the investment securities portfolio, I think I heard you mention there's still opportunities to optimize the entire asset mix. So just curious how you would expect the size of the securities portfolio to trend throughout the year, either in terms of kind of dollar amount or percentage of total assets, how it could look at the end of '23. Okay. Thank you. I appreciate that. And then in terms of the non-interest expenses that you mentioned in the presentation on some opportunities to gain additional efficiencies as you optimize delivery channels. Curious, if you could talk to maybe any specific projects, either and that have been implemented today or others you might expect to initiate in 2023? Sure, Eric. This is Brad. And point your attention back to when we did our core conversion in May of '21. And here we are now coming up almost on the second year anniversary date post conversion. And we continue to see opportunities for efficiencies with that conversion. So in 2022, we had quite a bit of savings in the FTE count within the -- in the branch network. And I think there's the opportunity there also just as we have vacancies not having to replace those as well as in the back room where we're just not touching the paper like we did previously. So those are a couple of areas that we think there's opportunity. Okay. And then last one for me. You spoke to a little bit in terms of the loan growth and the outlook for 10% to 12% led primarily by commercial installment loans flat. I'm curious maybe from a geographic perspective, if there's any particular markets that are stronger today that you expect to drive that growth more relative to others in the coming year? Yeah. Well, I think it's pretty straightforward, answer. I'll frame it up by saying in 2022, we had good growth in our entire footprint. All of our regions contributed, but there's no question that our two largest markets, Southeast Michigan and West Michigan are driving a lot of our growth, and we see that continuing. So Southeast Michigan and West Michigan are our two most active growth markets. Hi, guys. This is Matt Renck filling in for Damon DelMonte. I hope everybody is doing well. With respect to credit, just curious if you're seeing any signs of stress within any of your loan categories? And then more specifically, with regards to the office portfolio, you just provide some more color about what type of exposure you have to office and how those loans are performing? Hi. This is Joel. In terms of just the overall credit quality, no broad trends that we're seeing. We're seeing a little bit of stress in the manufacturing sector, with just upward rising price cost of manufacturing products due to increased wages and raw material price inflation. But again, there's not a broad theme to it. We're just seeing isolated cases of that. But we continue to watch that carefully. And then in terms of office exposure, we've got about $81 million. It's shown on Page 8. It's about 5 point -- about 5.5% of our portfolio in office. And I would characterize our office exposure as primarily suburban, low rise and with a fair amount of medical office usage. So we actually feel very good about our office exposure in our portfolio. It's held up extremely well. Yeah, Joel. I'd add over on the consumer side, we continue to watch closely, but are not seeing any early signs of stress there. Got it. Great. Thank you for the color. And then just one follow-up to Eric's question about loan growth. Are you planning any new additions of commercial bankers or expansions into new markets? Yeah. I think we are continually recruiting additional commercial banking talent probably the best way I would answer that. So that will just be an ongoing strategy for us or focus and that's what we've got built into the '23 plan. Hey. Good morning, guys. Hope you doing well. Maybe just to start off on kind of the equation between loan growth and funding it in the year ahead. Thanks for the comments on the securities book. I think you said $170 million of cash flow there. I guess that kind of funded about half of roughly 10% loan growth for the year. Just kind of thinking about the balance of that growth, how much would come from core funding ideally versus the need for more wholesale funding? Yeah. Well, we want to grow deposits, and we're still low-single digit deposit growth for next year and then the balance would come through wholesale or potentially, I guess, I would say wholesale. Yeah. Got it. Okay. And then maybe one more for me. You may have kind of addressed this in a prior question already. But just conceptually, I'm wondering what would be a better outcome for the margin at this point, whether it's stability after the Fed wraps up its tightening program or a more rapid pivot to rate cuts? Yeah. So it's the more rapid cuts -- rate cuts, but the caveat I'd give you there, Brendan, is that assumes that we're able to achieve the betas going down that we've seen historically. And so that -- you get a less inverted curve, which we do benefit from. Okay. Understood. With the prospect for rate cuts, I mean do you think like the first couple of cuts allows to start pushing back on deposit pricing or maybe not so much given that Fed funds will still be so far ahead of the industry's cost of funds at that point, most likely? I think that's a great question. I think what it does is, we're -- then you could sort of stop the catch up. right? And so it -- then you don't have the large gap between your deposit base and maybe alternative money market and U.S. treasuries. And so I think that's where the benefit comes in. [Operator Instructions] We have had no further questions on the line. I'd like to hand it back to Brad for any closing remarks. Very good. In closing, I would like to thank our Board of Directors and our senior management for their support and leadership. I want to thank all our associates. I continue to be so proud of the job being done by each member of our team. Each team member in his or her own way continues to do their part toward our common goal of guiding our customers to be independent. Finally, I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. We wish all of you a great day. Thank you all for joining. That does conclude today's call. Please have a lovely day, and you may now disconnect your lines.
EarningCall_1091	Good day, everyone, and welcome to the First Internet Bancorp Earnings Conference Call for the Fourth Quarter and Full Year 2022. [Operator Instructions] Please note that today's event is being recorded. Bancorp's financial results for the fourth quarter and full year 2022. The company issued its earnings press release yesterday afternoon and is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us today from the management team are Chairman and CEO, David Becker; and Executive Vice President and CFO, Ken Lovik. David will provide an overview and Ken will discuss the financial results. Then we'll open the call up to your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Internet Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as a reconciliation of the GAAP to non-GAAP measures. Thank you, Nick. Good afternoon, everyone. And thanks for joining us today as we discussed our fourth quarter and full year 2022 results. For the fourth quarter 2022 we reported net income of $6.4 million in earnings per share of $0.68. For the full year in 2022, we reported net income and diluted earnings per share of $35.5 million and $3.70 respectively, compared to $48.1 million and $4.82 respectively for full year 2021. Most of our lending teams had strong production in 2022. Net interest income for the year was up 12.1% compared to '21. As we deploy cash balances to fund loan growth, driving average loan balances higher along with higher loan yields from the rise in interest rates throughout the year. Loan demand was particularly strong in the fourth quarter as portfolio balances totaled 3.5 billion at year in increasing 7.5% compared to the third quarter and 21% compared to one year ago. During the quarter, we both posted strong across the board growth led by our commercial lending areas where balances were up 184 million or 7.3%. And we're up 350 million or 15% for the year. We saw growth in printouts for the construction, single tenant leasing, small business lending, and commercial and industrial. Our consumer loan balances increased 61 million or 9% compared to the prior quarter and grew by 263 million for the full year 2022. Or 56% with residential mortgage trailers and RVs leading the way. We achieve this exceptional loan growth without sacrificing our proven commitment to credit quality, for the provision for loan losses in the fourth quarter was higher than in our prior quarters, the increase was due primarily to the strong loan growth as net charge offs remained low, or about 3 basis points of average loan balances, and only 1.1 million throughout all of 2022. Again, only about 3 basis points for the entire year. In fact, our asset quality improved on a year-over-year basis, with nonperforming assets representing just 17 basis points of total assets at year end and nonperforming loans representing just 22 basis points of total loans, both of which are well below industry averages. With the increase in interest rates throughout the year, we have been able to increase rates on loans, as new portfolio origination yields increased 84 basis points during the fourth quarter as compared to the prior quarter. Resulting in a total portfolio yield increasing 39 basis points quarter-over-quarter. However intense competition for deposits through the most rapid set of federal funds, rate hikes and decades has also driven interest expense higher pressuring net interest margin. To defend net interest margin on the asset side, our 2023 loan origination efforts will be focused on variable rate loan products, notably commercial construction and small business lending. And then other high yielding portfolios such as franchise finance and consumer lending. We believe the increasing mix of variable rate loans combined with new loan production coming on at higher rates will help to offset the pressure of higher deposit costs. If interest rates follow the market expectations, deposit costs should stabilize later this year in decline thereafter. Setting the stage for us to achieve higher earnings and profitability in 2024. Turning to mortgage, while other lending lines has strong demand, the combination of housing prices, housing supply, economic uncertainty, and interest rates have caused mortgage applications nationally to plunge to the lowest level in 26 years. Due to the steep decline in mortgage volume, the unfavorable outlook for mortgage lending over the coming years, we announced yesterday that we are exiting our consumer mortgage business. This includes our direct-to-consumer mortgage business that originates residential loans nationwide for sale in the secondary market, as well as our local traditional consumer mortgage and construction to firm business. This was a difficult but ultimately necessary decision. Given every economic outlook we have reviewed the points to prolong sluggishness across mortgage banking. Excluding onetime costs, we estimate we will deliver approximately 2.2 million and higher pre-tax income in 2023. And over a longer horizon remove an element of volatility from our earnings and be a stronger, more efficient company. I want to thank everyone on the mortgage team for the hard work and dedication to homeowners. We are providing each of them with tools and resources to help them transition into new opportunities. I would also like to note that our commercial construction and land development business will not be affected by this decision, and remains an important part of our lending strategy. To wrap up the lending discussion one final point I want to make is that we have never wavered from our underwriting and credit standards regardless of market conditions. We believe our excellent asset quality and strong credit culture, in addition to our strong capital levels, positions as well to weather any economic slowdown that might be on the horizon. Lastly, I want to provide an update on our banking as a service and fintech partnership initiatives. During the fourth quarter we went live with our platform partner increase and launch our first program through that partnership with ramp, the corporate card and spend management fintech. We are providing payment services to ramps bill payment offering for about 30% of their customers currently, and are now processing between $8 million to $10 million a day in daily volume. We also have two other fintechs, a payroll provider and a neobank in the pilot phase, and we have four more fintechs that are approaching the pilot phase, and one in due diligence. We are also betting new opportunities with increase on a weekly basis. We also expect our other partnerships with a platform treasury prime to be fully implemented in the first quarter of '23. With the first fintech partner to be on boarded in the second quarter. Similar to our partnership with increase, we are looking at new opportunities regularly as we get ready to go live with treasury crime. To wrap up my prepared comments this past year was a mixture of both successes and challenges. I'm proud of the business that we have built over the last two decades. And of course, there is always still work to do. We are focused on controlling what we can control to build an earnings stream that is resilient to changes in the economic and interest rate environment. We have a strong balance sheet and are well capitalized, allowing us to withstand whatever challenges the economy may throw at us. Like you we are shareholders and we are committed to continuous improvement and creating shareholder value. Before I turn it over to Ken, I'd like to thank the entire first internet team for their hard work and commitment to both our customers and our shareholders. We have developed a culture that fosters and champion teamwork and innovation. That is why we were named one of the best banks to work for by American Banker for the ninth consecutive year, and that's why I'm confident in our collective ability to identify compelling new opportunities that will further diversify our business lines, improve our funding profile, and elevate our status as a leading technology forward financial services provider. Thanks, David. The first thing I will start with is discussing the financial impact of the decision to exit the mortgage business that David spoke about earlier. We expect this to reduce total annual noninterest expense by approximately $6.8 million in increase annualized pre-tax income by approximately $2.7 million. We expect to realize about 80% of the annualized improvement in 2023 and 100% in subsequent years. Additionally, we estimate that we will incur a total pre-tax expense of approximately $3.3 million associated with the exiting of this line of business. The majority of this is expected to be recognized in the first quarter of 2023 with the remaining amount in the second quarter. Therefore, the Aaron Beck in this decision will be between four and five quarters to exit a line of business that is otherwise forecast to remain subdued for the next three years. Now turning to Slide 7, David covered the highlights for the quarter from a lending perspective, including the growth across the board in all active lines of business. Throughout 2022, we increased rates on new loan originations, our fourth quarter funded portfolio origination yields were up 84 basis points from the third quarter and up 118 basis points year-over-year. We did fund certain loans during the quarter that were in the pipeline before the Fed, September fed rate increase and were therefore priced at lower rates, which created a drag on new origination yields. The majority of these loans have been cleaned out of the pipeline, with our focus on higher yielding asset classes new production is coming on with yields north of 7% and in many cases much higher, setting the stage for higher average loan yields in 2023 and beyond. While loan growth was very strong during the fourth quarter, we expect overall portfolio growth in 2023 to be lower than it was for 2022. Our higher yielding and variable rate channels continued to have solid pipelines. But much of that growth is expected to be financed by cash flows from other portfolios over the course of the year as we remixed the composition of the total loan book. Moving on to deposits on Slide 8, overall deposit balances were up $249 million, or 7.8% from the end of the third quarter. Non-maturity deposits, excluding banking as a service broker deposits increased by 64 million compared to the linked quarter, with money market accounts leading the way which were up $41 million. We also had a nice increase in noninterest bearing deposits of almost $33 million, the majority of which were driven by deposits from our commercial construction borrowers. As we previewed in the third quarter earnings call we expected and we experienced a significant decline in bass broker deposits during the quarter due to the winding down of a fintech deposit relationship. However, this was partially offset by just over $13 million of new deposits related to the payment services were providing to ramp that David referred to earlier. We also brought in about $18 million of deposits from our relationship with increase, which are classified within the interest-bearing demand deposit line item. As we grow the number of fintech partners we expect these types of deposit opportunities to expand in the future. CD balances were up over $100 million compared to the prior quarter due to new production in the consumer channel, while broker deposits increased $166 million as we access the wholesale market for longer duration funding to take advantage of the inverted yield curve and help to offset the impact of continued fed rate hikes on deposit costs. Competition in the digital checking and money market space combined with ongoing fed rate increases and the continued trend of overall deposits leaving the banking system continue to present challenges to grow non maturity deposits. In both the digital bank and small business markets we saw appear betas in the fourth quarter range from 80% to 100%. With the 425 basis point total increase in the fed funds rate since March 2022, including 125 basis points in the fourth quarter. Our current pricing and money market products results in a cycle to date beta of about 70%. As a result of all the deposit and interest rate activity during the fourth quarter, the cost of our interest bearing deposits increased by 104 basis points from the third quarter. Turning to Slides 9 and 10. Net interest income for the quarter was $21.7 million and $23.1 million on a fully taxable equivalent basis, down 9.6% and 8.7% respectively from the third quarter. Our yield on average interest earning assets increased to 4.40% from 3.91% in the linked quarter, due primarily to a 39 basis point increase in the average loan yield a 60 basis point increase in the yield earned on securities and 103 basis point increase in the yield earned on other assets. The higher yields on interest earning assets combined with the growth and average loan balances produced solid top-line growth and interest income increasing 16.5% compared to the linked quarter. Deposit cost however increased at a faster pace, resulting in the decline in net interest income. We recorded net interest margin of 2.09% in the fourth quarter, a decrease of 31 basis points from the third quarter. And fully taxable equivalent net interest margin was also down 31 basis points to 2.22% for the quarter right in the middle of the range that we guided to on last quarter's call. The net interest margin roll forward on Slide 10 highlights the drivers of change in the fully tax equivalent net interest margin during the quarter. For 2023, we continue to feel confident that the combination of higher priced new loan originations variable rate assets repricing higher and additional draws on the high level of construction commitments will drive strong growth and total interest income. Currently, we expect the yield on the loan portfolio to be up around another 40 to 45 basis points for the first quarter of 2023. With loan interest income up in the range of 10% to 12% compared to the fourth quarter, and for the full year do increase 35% to 40%, compared to 2022. On the funding side with higher forward rate expectations based on the feds continued language regarding rates and inflation. We also expect deposit costs to increase. The pace of increases will depend heavily on price competition and the magnitude of fed rate increases, as well as for how long it maintains the terminal rate. Assuming the fed continues to increase rates early in 2023, we expect the cost of deposit funding to increase 60 to 65 basis points in the first quarter with total interest expense up in the range of 25% to 30%. In terms of how this impacts fully taxable equivalent net interest margin, we expect elevated deposit costs will compress margin further for much of 2023. However, as we improve the composition of the loan portfolio, margins should stabilize and be in the range of 2.05% to 2.15% through the first three quarters of the year. If the fed hits its terminal rate during 2023, we should see the dollar amount of interest expense stabilized in the fourth quarter, which would get us back to a higher fully tax equivalent net interest margin in the range of what we realized during the fourth quarter of 2022. Turning to noninterest income on Slide 11. Noninterest income for the quarter was $5.8 million up $1.5 million from the third quarter. Gain on sale of loans totaled 2.9 million for the quarter up slightly over third quarter and consisting entirely of gains on sales of U.S. Small Business Administration 7A guaranteed loans. Our SBA team closed out the year well as sold loan volume was up 23% over the third quarter. Net gain on sale premiums were down almost 120 basis points, however, offsetting the impact of greater sales volume. Mortgage banking revenue totaled $1 million for the fourth quarter of 2022 and other income totaled $1.5 million for the fourth quarter, up significantly over the third quarter due to distributions received uncertain SBIC and venture capital fund investments. Moving to Slide 12, noninterest expense for the fourth quarter was $18.5 million up $500,000 from the third quarter. Now let's turn to asset quality on Slide 13. As David mentioned earlier, credit quality continues to remain excellent as nonperforming loans and nonperforming asset ratios remain low. Net charge offs of $238,000 were recognized during the fourth quarter, resulting in net charge offs to average loans of 3 basis points as David referenced earlier. Total delinquencies 30 days or more past due were 17 basis points of total loans as of December 31, compared to 6 basis points at September 30th. When delinquencies are this low, it takes just one loan to make the difference. In this case, we had to delay converting a C&I construction loan to a 504 loan for its permanent mortgage when it was determined there was a mechanic's lien on the property. However, subsequent to year end, the construction loan was brought current. The provision for loan losses in the quarter was $2.1 million, up from about $900,000 in the third quarter. As David commented earlier, the increase was driven primarily by overall growth in the loan portfolio. This was partially offset by a reduction in specific reserves related to positive developments on a certain monitored loan. The allowance for loan losses increased $1.9 million, or 6.3% to $31.7 million at quarter end, while the ratio of the allowance to total loans decreased 1 basis point to 0.91%. While growth in the allowance was generally in line with overall loan growth, the slight decline in the coverage ratio also reflects the removal of the specific reserve I just mentioned. Growth in the residential mortgage portfolio that has a lower coverage ratio and the continued decline in health care finance balances that have a higher coverage ratio. We will be implementing the current expected credit losses or CECL model during the first quarter of 2023. As a result, we expect our initial adjustment to the allowance for credit losses to be in the range of $2.5 million to $3 million. With respect to capital, as shown on Slide 14. Our overall capital levels and both the company and the bank remain strong. While total shareholder's equity increased in terms of dollar amount, our tangible common equity ratio declined to 7.94% as the combination of balance sheet growth and share repurchases, offset the effect of net income earned during the quarter, and the decrease in the accumulated other comprehensive loss. During the fourth quarter we repurchase 284,286 shares of our common stock at an average price of $25.16 per share as part of our authorized stock repurchase program. For the full year 2022, we repurchase just over 800,000 shares at an average price of $34.62 per share. Along the lines of controlling what we can control. Our solid capital position allowed us the flexibility to be in the market repurchasing our shares at a price far below what we believe to be our franchise value, helping to increase tangible book value per share to $39.74 at quarter end, up 3.7% over the third quarter. Before I wrap up my comments, I would like to provide some comments on our forward outlook for earnings. Earlier I provided some thoughts on loan yields, deposit costs and net interest margin. With the plan to exiting of the mortgage business, there will be some noise in the first quarter's results. But going forward from there, the impact should be accretive to earnings in the range of $0.25 to $0.26 on an annualized basis, so around 20 cents for 2023. The largest impact of exiting mortgage will be a non interest expense, when excluding the onetime costs of $3.3 million. We expect total non-interest expense for 2023 to increase in the range of 2.5% to 3.5%. Compared to 2020 twos full year results, which is much lower than the previous guidance we gave on expense growth for the year. On the flip side, non-interest income will be down from the original forecast in the range of a 15% decline from 2020 two's total non-interest income. In line with the fully tax equivalent net interest margin expectations discussed earlier. We expect net interest income to remain consistent with the fourth quarter's results and remain stable from the first quarter through the third quarter 2023 as earning asset growth and higher loan yields help to offset the increased deposit costs. If deposit costs stabilize in the fourth quarter as the forward curve suggest, we would expect to see low double digit growth in net interest income during the back end of the year. For the full year, we are expecting operating earnings per share excluding the mortgage exit cost to be in the range of $2.55 to do $2.75 per share with the first quarter to be roughly in line with the average estimate and improving in the second and third quarters. As deposit costs stabilize and loan income continues to grow. Combined with the seasonality of the SBA business, we are expecting significantly improved results in the fourth quarter with earnings per share in the range of $0.92 to $0.98. Looking ahead to 2024, if you simply take the low end of that range and annualize it, the results are significantly higher than the current 2024 estimates. Some factors that might provide additional upside to 2024 results may include the pace of fed reductions should they follow the market's expectations as opposed to the fed dot plot. SBA gain and sale premiums reverting to historical averages as rates and prepayment speeds decline and higher than expected noninterest income from banking as a service activities. To wrap up well, the next several quarters may continue to provide challenges from an earnings perspective, we're beginning to see light at the end of the tunnel. When the fed begins to bring rates back down whether in line with the forward curve expectations or the fed dot plot, deposit costs should come down significantly, with a meaningful and positive impact on net income and earnings per share. Wanted to start with the buyback and wonder firstly, I think you had the $25 million authorization how much is left and then how much or how active you think you might be this year, just given the opportunity with the stock where it is presently? Thanks. Brett, we're in the market had been since the first of the year buying on average about 4000 shares a day and intend to continue that. Would you have an idea, David, of how much you might purchase this year or retargeted capital ratio or how to think about the volume that you might do this year? Well targeted capital ratio, we want to stay pretty close to that 8% level. So as Ken said, there's little noise here in the first quarter. So we'll definitely be in that $4,000 range, probably the same for the second quarter. And then we'll figure out as things start to come our way in the second half of the year. We're forecasting out of the 25 million probably by year end getting to 20 million and buybacks. But the balancing act, as you said between TCE and share buyback to. And then you've made some progress on the fintech front, and just wanted to make sure I understood the implications of the two that you've got and then treasury prime as well as the two fintechs in the pilot phase and the four others that could be soon. Can you give us any call gave us a lot of color on expectations for various metrics? Any thoughts on what those fintechs might contribute or how to think about that this year? Well, the one that we discussed in there that that came live back in November ramp, which is the National Credit Card program, we're doing their bill payments services, and between November and now we've converted about 30% of their customers onto our side. So that $10 million a day we're clearing and payments should go up to 30 million plus a day in the next few months. That deposit balance offsetting from them, it's going to triple down. The same way we have a clearing account. The two that are in pilot phase 1 is a small business payroll system, and the other is a neobank that's launching and in pilot phase with kind of friends and family side of things that we hoped some live maybe beginning of the second quarter. So our overall forecasts being pretty conservative on the rollout of this stuff is probably about a million this year and income somewhere 750,000 to a million in income from the fintech side, and a couple 100 million in pretty low cost deposits to kick it off. The Neobank could be a homerun hit, it's backed up by some phenomenally strong VCs on the West Coast. That one could be an out of the park, play, but like you say, it's stable, it's running and we're really looking forward with treasury prime. They got a couple of good candidates for us, we're doing the final phase of testing on the, I think the credit card portion of their interface, and we'll be live with them hopefully in the second quarter with one or two opportunities as well. And if I could sneak in one last one on the loan growth, the construction growth, specifically, where might you guys be on a risk adjusted basis to capital? Are you close to 100% and how much growth would you expect from here in the construction portfolio? We won't even be close to the 100%, because I remember, that's done at the bank level, Brett. So I mean, we got well over half a billion in capital at the bank. But we do, obviously, we expect, we do have our construction team had a great year this year with originations and those will fund. We actually pulled forward some of that funding this quarter is some deals started a fund earlier than we expected. But we expect next year, I guess the good part about from the construction piece is that, historically we've had a maintain balances in the 50 million-ish range revolving around residential land development here around in our home market here. But as we build out construction, I mean, we're really starting from a low base. So, even if we hit our targets for next year, that construction portfolio is still under 10% of the total loan portfolio and well under capital limits. I just wondered if you could walk through the decision to exit the mortgage business versus just pulling it back to a smaller level being able to reenter the market when that seemed to be the right thing to do? George, we probably spent the last 60 days doing all kinds of configurations of cutting back on sales, marketing efforts, staffing, trying to hold a shell together. There was just no way to get there, we couldn't even get it close to breakeven basis. So staring at a solid 6 million potentially plus in losses over the next three years and no idea. I mean, that's as far forecasting out as Annie and Jenny and everybody's doing, they don't even know come 2026, whether mortgage is going to rebound or not. Consumers are getting used to a 6% interest rate, assuming that's all they can get. But it fell off so dramatically that we couldn't make sense out of it to have that kind of a loss for that long a period of time. And is that part about out on the other side when mortgages going great. The market doesn't give us credit for it and mortgage is bad everybody else at it. So it's kind of one of those products where you're damned if you do damned if you don't. So it was a, believe me from my perspective, probably the toughest business decision I've made in my 40-year career. It's been a tremendous group of individuals still loved working with them for some of them now almost 16 years. And it's tough, it is really, really tough. And as you know, the market nationally is just blowing up. So there's not a lot of great opportunities, staring them in the face in the industry they've been a part of for years and mortgage has been cyclical. I've been around it now for close to 25 years. And I've seen that three or four cycles but this is by far the worst that I've seen in my lifetime, and probably the worst we've seen in the country and 40 to 50 years. I appreciate that perspective, one of the things I can mention, you're doing this act of buyback, which we love to see, but you mentioned you're doing it in part because you're well below what you find to be your franchise value, I just wanted to see if we get a picture and into what you believe your franchise value to be? There, at least from my perspective, franchise value should be booked value. And that's almost on $40 will be $40 by the end of the year. And when we're below that, I think it's good use of capital. We don't want to put ourselves in a bad position, obviously with TCE and capital risk out here. But again, the quality of our portfolio who knows six months from now we might be in a full blown recession and the walls are coming down. But from everything we see, and we know of what we're doing today, we're comfortable to we're below 40 bucks to keep buying back shares as we think it's a great use of capital. Apologize I paused a little late. As you're going through, can your comments around the margin? Look for the first half of the shooting? We get the grades twice. We know and then, I was worried Ken you said I think you said in your discussion, your comments about loan growth, you said loan growth for 23 would be less than 22. What loans were up? I think, by my math 20%, 21% and 22? I mean, can you narrow down the growth a little bit more? I mean, are we talking 10% to 12%? Are we talking 15%? Or what are we sort of talking about? No, overall, John, we're probably talking in the range of 5% to 7%. And maybe I'll just elaborate on that a bit. I mean, we have we're, as we talked about focusing, kind of re mixing the composition of the loan book. I mean, we still have within construction and SBA and franchised and consumer we still have some great opportunities to put on, higher rate and variable rate and in both cases, both the variable rates that are higher rates. But a lot of that financing is going to be done through amortization and cash flows from other parts of the portfolio. There's just some of our lending areas right now the market is so the competition still has rates very, very low that just don't work for us. So we're going to see I mean, there's probably in combination within say residential mortgage and some other areas that there's going to be roughly $250 million of lower balances year over year. So, again, a lot of that focus on the higher yielding asset class is just going to be a reshuffling of the loan book, if you will. One of the other issues out there, John is on the consumer lending side, we had tremendous growth in the RV horse trailers last year, a lot of that was pent up demand because of the pandemic and the demand for those units. The Elkhart, Indiana and Northern Indiana is kind of the heartland for the RV industry. Their pipelines are getting caught up, they're getting back to normal sales activity, I think fourth quarter '22 versus fourth quarter '21 sales are down 26%, there about close to 30%. So that's going to drop down tremendously to over the course of the next year, we were up 200 million plus over '21 and that'll follow-up. So as Ken said, between repayment of existing, again, the healthcare portfolios and a total wind down and repayment status that we could, we're still going to do a lot of volume of new loans, but the overall balance sheet growth is not going to be that huge. And then Canada securities portfolio was down I think 10%, 12% this year, would you expect sort of a similar amount next year just to fund that loan growth too? Well, I mean, we'll probably got to keep it. We got we kind of got to keep it somewhat flattish or better or perhaps down a little bit. Because right now, we still have to maintain a certain amount of liquidity on the balance sheet. But I'll tell you right now, we might be better off just keeping it in cash in fed funds than then buying mortgage backs. So I would expect, probably you might see higher cash balances at quarter end than what you've seen here, maybe in the past couple quarters. And then Ken just a couple of other quick notes. On your expense guidance, you set up 2.5% to 3.5%, excluding the 3.3 million. Is that based on total expenses for the year, so 73 million? I'm sorry, just I was trying to write while you're talking, but on spread it net interest income? I think you said the first quarter, sort of flat with the fourth quarter and then sort of stable for the first three quarters. Is that right? Yes, that's what we said. We'd like it. Yes, we think is as the best, assuming the fed hit the terminal rate and keeps it there that deposit costs will stabilize and we'll be able to start kind of net interest income will begin to start growing again in the fourth quarter. I'm on for [indiscernible]. I had a clarifying question first real quick. You mentioned $250 million lower balances year-over-year and like the, some of the portfolios are paying off was that in reference to the residential mortgage portfolio only or all of like the likeâ¦ No, that probably spread among three or four different portfolios. That's, resi is going to be down. David talked about health care finance that's basically, we're not originating anything new there. I would expect to see balance declines in public finance and single tenant lease financing as well, just simply is my comments earlier that the some of those markets right now are just so competitive, we got price floors in there, and we might win a deal every now and then. But we're not chasing, we're not doing deals below 7%. So when you when we can't get that it's hard. So you'd expect to see some decline in those portfolios. Okay, yes, just making sure that wasn't just the residential mortgage. That seems a little. That's like at the end of the year. So what you're talking about 250? And then, with all the actions, you guys have taken the initiatives you have going on the bass program, as we look out over the next few years, what is like a realistic mix of revenue? And if you have a target or anything and kind of like spreading Converse fee income, trying to get an idea of what that could look like over the long-term? Well, Tim, if I had a crystal ball that could do that, I could make a small fortune on that prediction. The bass world, it was the darling of everybody 12, 18 months ago, now everybody's question is, should we be in there and two or three American Banker articles in last couple days mentioned run from the bass worlds and play. There is a tremendous opportunity to partnerships with great folks like the ramp organization that we're working with. Now, on the bill pay services. There's a lot of those out there. Obviously, there are banks and fintechs, getting in trouble with the regulators, because they're not doing the proper due diligence and the overseeing on the compliance issues, which is one of the reasons we're a little slower to market than a lot of other people because we wanted to make sure we had the house in order and we could handle it, our prior acquisition opportunity would have given us a great team, we had to build that. So we're very thoughtful, very judicious. I've used the term several times on the calls that were kissing a lot of frogs to find the princess. And we think very good companies in the pipeline. The one I talked about a minute ago, the neobank can be an absolute, it can be the unicorn that just blows up. And that's deposits, that's fees, that limiting income, there's just a ton of things that could come out of that. So we were probably that half a million to a million in revenue for '23. That might be a little bit to the conservative side with some of the things that are in signed, sealed, delivered in, in the pipeline. But we'll have a better handle on that as the year goes by. And, again, we see how the market settled. There are some other institutions that might have to exit from some of their programs. And we could be in a position to pick up some very well established customers just because they got into regulatory issues that we could pick up and move forward. So we probably can't give him much more guidance, and that kind of 0.5 million to 1 million in revenue this year. And as these come on, and we get a handle for how they're going to grow and go, we'll have better numbers and we'll update you on a quarterly basis. And if I get asked one more, you maybe need a crystal ball too. But what is a realistic expectation for how these vast deposits can help on the funding side? Or like, I know, it's still a small part of your business right now. But what is sort of the cost range? He's deposits are coming on at and they priced it fed funds minus something, or how should? I would, I would tell you historically, the a lot of the bass funds were zero class. But much like HOA dollars, much like $1,031, all these funds that historically have never cost an institution anything. These folks are getting very smart. The bass companies and the fintech companies all have to make a profit. And for them to continue to survive and get VC money, they have to tow a path to profitability. So were they were giving away that deposit didn't have any value to them. They now know they do have value? I would say ours are somewhere between fed funds minus 50, minus 75. Most of them are not above fed funds. But yes, it's not free money. But I'd say -- well, I can't pay take that back on the other side. The two accounts that Ken talked about are both free. If it's a settlement account, where we're just drawing funds for payments against them, those are still free. But if we get the positive base with a Neobank, that's probably going to be somewhere in the range of Fed Funds minus 50, minus 75. A lot of my questions have been asked and answered at this point. But just one to think about kind of the reserve trajectory, maybe on a percentage or absolute dollar basis after the CECL adjustment in the first quarter. I guess I'm just curious about if you get any major charge offs on the horizon, or how you guys are kind of think about the reserve trajectory over the course of 2023? Well, I guess the question on the horizon is no. We continue to try to stay on top of the portfolio and have all of our teams and credit admin looking at things real closely given the uncertainty. If you, that's why I kind of threw the number in, in with everything we released, just so you guys out there would see that the reserve is going to go up, call it in the 98 basis point range or so, 98 - 99. I guess what I would also add to that though, is most banks, especially banks are size don't have a 20% of their loan portfolio that is in public finance. That is we've never had a credit loss, never had a delinquency, and the coverage ratio for that portfolio because of its nature and sources of repayment is very low. When you exclude the public finance portfolio, the coverage ratio is closer to 115 basis points. So I think even though again, maybe credit losses, the unforeseen none of us have a crystal ball, maybe credit losses or net charge offs take up a little bit, but I think, with the increase in where we're at with the increase with CECL plus factoring in what the coverage ratios are in our commercial lines and consumer lines, I think we feel pretty good about where that coverage is. I just wanted to follow-up on a couple of topics if I could. One on the linked quarter increase in loan yields and funding costs. I guess first a 45 basis point increase in loan yields in the first quarter. Can you talk about how many loans or the bucket of loans it's repricing in the first quarter? How you get to that 45 basis points? I guess just the first part of that. Well, I mean, it's a combination Brett. We do have construction, I mean, if you figure that right now, the markets got a couple fed increases in there, because you're talking about '23, correct? Okay. Yes, I mean, between, -- our construction portfolio is virtually all variable, the FBA is virtually all variable. There's a component of C&I, that's variable. And we also have pipelines in franchise finance that, again, that pipeline continues to remain strong. Those yields now are coming on high sevens, eights, and nines in some case. And again, we're not really lending in certain other areas, unless we can get really good pricing. So it's continued higher yield, new production, lower yielding stuff paying off or just amortize and cash flowing. So it's just, it's a combination of all those factors that should continue to drive the overall portfolio yield higher. The other issue that's going to make it a little stronger in the first quarter Brett is a lot of those loans that we added in the fourth quarter came on in the last two weeks, everybody was trying to get things done before year end. So we'll have a full 90 quarter run on those balances, which we only had them for the last five to seven days of the fourth quarter. So that's part of that those two. And then the same sort of topic on the funding side, the 60 to 65 basis points. When I look at the current rates, I see it looks like from an NMDA perspective, you're at 335, maybe retail and maybe 340-ish on the commercial for that, versus the 289 for the 1.4 billion average in the fourth quarter. Can you remind me how much of the money market is retail versus commercial? And then, that those rate, I assume you're kind of thinking those rates of close to have topped out on the money market, but any color on that would be helpful. Yes. The breakdown is roughly 1/3 commercial -- maybe 1/3 to 40% -- excuse me, 1/3 to 40% consumer and the remainder is commercial. And we do have two tiers of pricing in there, we do have some that are, if your balance is above a certain amount you're getting higher rate. But probably the biggest single bucket in there is what we'll call small business and commercial money markets and those the current rate on that 280. I would say we, again, I know we got a fed rate hike here coming up in a week or expected, possibly another one. But I would say as of late, the pace of increase has slowed down. I mean, we still kind of run what I'll say, pretty high betas through our model. But the pace of increases seemed to slow a bit. So I don't think, obviously, we saw over 100 basis points of increase in the last quarter. Again, think about it yet 125 basis points of fed increases in the fourth quarter, whereas, this could be, I guess, a minimum of 50 and a maximum of 100, depending on your view on what the fed is going to do. So, I mean, just by virtue of, what the fed did is expected to do this quarter versus what they did in the fourth quarter. I would, our forecast suggests that the pace of increase shouldn't be as high quarter-over-quarter as it was last time. And I guess one thing, probably one more thing, I'd probably add to that as we did, you saw the balance of broker deposits go up. And I said in my prepared comments, what we probably pulled forward some deposit funding as well, just because of where the long rates were relative to, again, the short end of the curve continued to go up, we took advantage and did some three, four and five year brokered CDs that what else, at a blended rate that's lower than fed funds. So, some of that is good for long-term interest rate risk, but also good to give us some stability, pulling that funding forward, as opposed to trying to go out and do more in the fed funds plus wholesale market in the quarter. And then maybe one last one. I was trying to keep up with the notes. I missed what the commentary around the SBA expectations were, for the full year. Any color on SBA, and I know that's not necessarily an easy business to predict, given lower gain on sound margins, et cetera. But any color on how much that might contribute to the income this year? Yes. The thing is, we still have, we continue to bring on high performing videos. We brought some on within the later part of the year. You have staff in place to service and we have originations up year-over-year. But I will tell you that from our perspective, right now. I mean, gain on sale premiums in the fourth quarter net gain on sale premiums were very low. They're in the 6.5, 107 range. And our forecast, we're not making any assumptions that those go up. So we're just and for the full year of 2022 on the front end of the year. We were getting higher gain on sale premiums, we were getting 110, 109 in some cases higher than that, and that came down. So we're, while we do have origination growth for the year. A lot of that is really offset by just assuming lower gain on sale numbers for the full year. So I mean, we're probably right now modeling that number that we recognized for the full year for 2022, weâre probably think modeling right now that to be flat to down a little bit. But entirely driven by gain on sell premium. Ken just back on fee income, in my notes did you say fee income down 15% for the year is that total fee income? Or did I â Yes. That is total non-interest income. So â if we take the 21.3 million for 2022 and just cut that 15% thatâs probably â thatâs weâre estimating. So weâre obviously we did have mortgage revenue thatâs not going to be here this year. And as we talked about SPA here being flattish, David did talk about our â what we think our conservative expectations on some increase from revenue but for this year weâre forecasting that to be down just by, the biggest piece is just removing the mortgage number out. And then just one other question Ken, the tax rate kind of made new low in fourth quarter what should we use for next year? Yes. Iâll guide you back to about 12 to 13, the one reason why the tax rate was low in the fourth quarter is when we do taxes, I will tell you the calculation isnât necessarily done for a quarter at a time, what weâre trying to do is forecast â we use earning taxable income estimates for the year and I will tell you back earlier in the year in the first couple of quarters before the Fed started rapidly raising rates and weâre having the subsequent impact on earnings in the back end of the year. Our taxes, we were estimating higher net income. So all it really â I donât like to use the word true-up but maybe thatâs the best term I can come up with is, that affective tax rate is really what it takes for us to get our taxes in line for the full year. So again, I probably just guide you back to the 12% to 13% and that will probably be a reasonable estimate. Thank you, Mr. Rodis. There are no additional questions waiting at this time. So I will turn the call over to David Becker for any closing remarks. Everyone Iâd like to thank you for joining us on todayâs call, weâll continue to exercise discipline and use all of tools that are just falls out to preserve earnings in 2023. And fellow shareholders we remain very committed to driving improved profit ability and enhance shareholder value. Thank you again for your time and have a good afternoon.
EarningCall_1092	Good day and welcome to the CVRx Q4 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Joining me on today's call, are the company's President and Chief Executive Officer, Nadim Yared; and its Chief Financial Officer, Jared Oasheim. The remarks today will contain forward-looking statements, including statements about financial guidance. The statements are based on plans and expectations as of today which may change over time. In addition, actual results could differ materially due to a number of risks and uncertainties, including those identified in the earnings release issued prior to this call and in the Company's SEC filings, including the upcoming Form 10-Q that will be filed with the SEC. Thank you, Mike, and thanks everyone for joining us today. To begin today's call by providing an overview of our fourth quarter and full-year performance followed by an operational update, a review of our financial results by our CFO, Jared Oasheim. And then I will conclude our thoughts on 2023 before turning to questions-and-answers. We are very proud of everything that our team accomplished in 2022. It has been a great year for CVRx. We made progress towards all our strategic initiatives resulting in the increased adoption and utilization of Barostim, despite several macro disruptions throughout the year. This is demonstrated by the fact that our worldwide revenue increased by 72% over 2021 primarily driven by our U.S. heart failure businesses 108% annual growth. And the year was capped by a strong fourth quarter. Our worldwide revenue for the fourth quarter was $7.2 million, an increase of 96% over the fourth quarter of 2021. Performance in the quarter was driven by the continued expansion for U.S. sales force and contributions from our marketing initiatives, which led to an increase in U.S. active implanting centers. In the U.S. our heart failure business generated $6.0 million, an increase more than 121% over the fourth quarter of 2021. The increase was primarily driven by continued growth and expansion into new sales territories, new accounts and increased physician and patient awareness. When we went public in the summer of 2021, we were in the very early stages of our commercial launch in the U.S. At the time, we expect it to consistently grow this business in line with the investments in our commercial organization. We are very pleased with how this has played out with the fourth quarter being our 10th consecutive quarter of increasing U.S. heart failure revenue with average quarterly sequential growth in excess of 20%, since the IPO. Now for an update on operational developments during the fourth quarter to support greater adoption in use of Barostim. Our focus areas were: one, the continued expansion of commercial infrastructure; two, innovation of our product portfolio; and three, the expansion of the clinical body of evidence. Starting with the continued expansion of our commercial infrastructure. During the quarter, we added three new territories bringing that total to 26. We are excited with the quality of sales talent we have been able to attract and look forward to continuing to build upon that quality in 2023. During the year, we generated momentum with several for marketing programs, including our direct-to-consumer or DTC pilot program, our new branding campaign and patient education programs. The DTC pilot program has been successful to-date and has had a positive impact on our U.S. business. To-date, we have made minimum investments in localized DTC campaigns and we have seen more than 100 patients undergo a Barostim implant and have a robust pipeline of potential patients with interest in learning whether they are candidates for the therapy. We plan to continue to optimize these campaigns to make them more cost effective as we evaluate whether to roll them out more broadly. Our second area of focus is innovation of our product portfolio. During the second half of 2022, we launched Barostim [Neo 2] (ph) IPG the second-generation device, which reduces the size of the IPG by 10% and extends virtualized by 20% reducing the frequency of device replacements for patients and their providers. It is remarkable for the Neo 2 extends longevity by employing a smaller footprint and allows for a streamlining of the implantation procedure. Our third focus of area is the expansion of our clinical body of evidence. The BeAT-HF clinical trial was designed to demonstrate that Barostim provides a mortality and more rated benefit in addition to a reduction of symptoms of heart failure in patients with reduced ejection fraction. As previously announced, we accrued the required 320th event in the trial and are working to collect and monitor all the data. As a reminder, the primary endpoint is a mortality and morbidity composite endpoint, and we have pre-specified a few potentially meaningful secondary and ancillary endpoints and analysis. These include the hierarchical win ratio analysis, few COVID sensitivity analysis, and waste account for the severity of hospitalization. While we and the steering committee are still blinded to the results, but also based on how the data collection is progressing with our belief that we will be in a position to unblind and share the data before the end of the first quarter of 2023. Our goal for this post market trial is to broaden Barostimâs labeling. We plan to submit the totality of the evidence in our corresponding analysis to FDA when we outline the data. Please note that FDA is the ultimate decision maker on whether to allow additional claims a new labeling for Barostim based on its own evaluation of all the available data. And team also seek advice from a panel of independent experts. At this point, it is difficult to plan for a specific scenario. The results may produce a conclusion that is more complex in the last than a straightforward binary answer. In addition, we continue to make progress BATwire, our ultrasound guided implant toolkit. In 2022, we added more sites and more patients into the clinical trial. As a reminder, we expect to complete the trial in 2024. We announced in late September that we added the veteran medical device executives, Kevin Hykes to our Board of Directors. Kevin brings his business acumen and his decades long experience in the field of cardiovascular implantable devices. Additionally, with the promotion of four leaders to the executive team, we now have eight out of 10 of our executives promoted internally. Showcasing the strength and depth of our talent bench at CVRx. In summary, we had a fantastic 2022 as we considerably expanded the adoption and application of Barostim as seen by 10 consecutive quarters of strong growth in our U.S. heart failure business. The year was start off with a successful fourth quarter during which we continued to push the growth of active implanting facilities in the United States, highlighting once more the benefits that Barostim can provide both healthy and professionals and patients with cardiovascular disease. Thanks, Nadim. Total revenue generated in the fourth quarter was $7.2 million, which is an increase of $3.5 million or 96%, when compared to the same period last year. Revenue generated in the U.S. was $6 million for the fourth quarter, which is an increase of 109% over the same period last year. Heart failure revenue in the U.S. totaled $6 million in the fourth quarter on a total of 193 revenue units, up 121 percent as compared to 2700000.0 dollars in the same period last year on 95 revenue units. The increase was primarily driven by continued growth in the U. S. heart failure business as a result of the expansion into new sales territories, new accounts and increased physician and patient awareness of BaroStim. At the end of the fourth quarter, we had a total of 106 active implanting centers, as compared to 46 at the end of Q4 2021 and 91 at the end of Q3 2022. At the end of the fourth quarter, we have a total of 26 territories in the U.S., compared to 14 at the end of Q4 2021 and 23 at the end of Q3 2022. Revenue generated in Europe was $1.2 million in the fourth quarter, which is an increase of 49%, when compared to the same period last year. Total revenue units in Europe increased from 39% in Q4 2021 to 68 in Q4 2022. The revenue increase was primarily due to the lessening impact of the COVID-19 pandemic in Europe. The number of sales territories in Europe remained consistent at six during Q4 2022. Gross profit was $5.7 million for the fourth quarter, an increase of $3 million, when compared to the same period last year. Gross margin increased to 79% for the fourth quarter compared to 73% for the same period last year. Gross margin for the three months ended December 31, 2022 was higher due to a decrease in the cost per unit and an increase in average selling price, partially offset by a larger percentage of our revenue units coming through both systems versus battery replacements. Research and development expenses were $3 million for the fourth quarter, which is an increase of 70%, when compared to the same period last year. This change was primarily driven by increases in compensation expenses due to increased head count. SG&A expenses were $14.1 million for the fourth quarter, which is an increase of 46%, when compared to the same period last year. This was primarily driven by an increase in marketing and advertising costs associated with the commercialization of Barostim, as well as higher compensation costs from increased headcount. Net loss was $10.5 million or $0.51 per share for the fourth quarter, as compared to a net loss of $10.6 million or $0.52 per share for the same period last year. Net loss per share was based on approximately $20.6 million weighted average shares outstanding for the fourth quarter and approximately $20.4 million weighted average shares outstanding for the same period last year. At the end of the fourth quarter, cash and cash equivalents were $106.2 million. Net cash used in operating and investing activities was $10.9 million for the fourth quarter, compared to $7.6 million for the same period last year. We continue to believe we have enough cash on hand to reach cash flow breakeven without needing to raise additional capital. Now turning to guidance. As announced in early January, for the full-year of 2023, we expect total revenue between $35 million and $38 million. Gross margin between 78% and 79% and operating expenses between $76 million and $80 million. For the first quarter of 2023, we expect to report total revenue between $7.1 million and $7.5 million. Thanks, Jared. Before opening the line for questions, I would like to discuss our key areas of focus for 2023 as we seek to drive the increased adoption and utilization of Barostim. First, the continued expansion of our commercial infrastructure especially our direct sales force in the United States remains a top priority. We expect to continue hiring top talent throughout the year and are targeting a total of approximately 38 U.S. territories by the end of 2023 or on average adding three new territories per quarter. In addition, we will continue to invest in marketing efforts to help drive increased awareness of Barostim. Outside of the U.S., we have added additional talent to our direct sales organization in Germany and we continue to expect to add incremental headcount in 2023 to support our commercial strategy in that region. Our second focus area is the expansion of our clinical body of evidence. Both our post market study of BeAT-HF and BATwire remain on track with our previous updates. In regard to BeAT-HF we have been conducting this trial since early 2016. And here we are seven years later, we are looking forward to potentially unblinding the data and sharing the results with you before the end of this quarter. Looking ahead to 2023, we are very eager to accelerate the development of Barostim by utilizing the positive momentum we have built over the previous two years. While we are still very early in the commercial ramp and the market penetration, we are totally focused on the significant potential to provide treatment to as many patients as possible. Thank you. [Operator Instructions] Our first question will come from the line of Robbie Marcus with JPMorgan. Your line is open. Great. Thanks for taking the questions. Maybe first the cash burn is going to be -- it looks maybe a bit higher than last year based on the sales and OpEx guidance and you talk about a pathway to profitability without further capital raises? How important is a positive readout from BeAT-HF to getting to that target? And any time frames that in terms of revenue or years out that be thinking about cash flow profitability? Thanks. Hey, Robbie. Thanks for the question, so one thing that we've been consistent on is the model that we've built is under the assumption that we get a neutral readout from the morbidity, mortality trial. And that's not based on us being pessimistic about the results it's just us taking a conservative approach. And so when we say that we think we still have enough cash on hand to reach cash flow breakeven and comes with that assumption that morbidity, mortality is neutral. We haven't yet drawn a line in the sand for when a publicly when we're going reach that cash flow breakeven point from a run rate perspective. But we do expect this to be the year where we see that cash burn start to flat line. To be similar to the burn that we saw in 2022. And then from there, starting to see the overall burning start to drop on a quarterly basis. Great. If I just want to dream big and say it is a positive trial. How important has or how big a barrier has not having a mortality benefit been to driving physician adoption? And if it does have a positive, do you think we should be thinking more like a rapid improvement in adoption following? Or is there still -- would it have to wait for FDA labeling? So maybe a little time afterwards? Hey, Robbie, Nadim here. So thanks for the question by the way. Listen, when we started the trial in 2016, beginning it in 2016 started enrolling it, we powered it to win it, right? So we're still hopeful that the data will be put out [Technical Difficulty] clear cut simple yes answer to all of the questions below. That said, it's the risk certainty here is the time it takes to get the word out. First, we'll probably if there is a medical meeting, we'll do the announcement of the results during the medical meeting. But if there isn't one, closed by in terms of time, long enough to sit on the data for too long, so we'd like to get it out as soon as possible. So we may end up doing -- and basically in the next event where weâll invite you and other people who wants to listen in and will present ourselves the data. But that does didn't get it [Technical Difficulty], so we'll have to wait for that medical meeting and do the presentation there via symposium or [Indiscernible]. After that, you also heard those, one is the FDA labeling that would allow us to market the data. And the second is the publication [Technical Difficulty] surprisingly, FDA has been faster than most journals. The median time to publish and manuscript [Technical Difficulty] this month. So those are the uncertain element that's would make me hesitate to say, yes, we will see a pickup in 2023, but the pickup in sales would happen in 2024. But based on your previous question, if the data is positive, we may desire to [Technical Difficulty] so paradoxically, we may burn cash a little bit faster earlier to funnel that [Technical Difficulty] Got it. Okay. Just last quick one for me. Is this something you're going to try and submit for a late breaker at ACC? Or do you think you'll miss the date there? Thanks a lot. Thank you. The [Technical Difficulty] if you're still listening, the ACC deadline for late breaker was -- has passed. And that's why we don't know. We don't know if the data will be, right [Technical Difficulty] unblinded number one, and if we are, if they would accept us even after the deadline. Thanks, Robbie. Operator? Thank you. One moment for our next question. And that will come from the line of Matthew O'Brien with Piper Sandler. Your line is open. Good afternoon. Thanks for taking the questions. I don't know, Nadim or Jared, which one of you this is for, but I don't want to overstate this too much. But when I look at the unit number in Q4 versus the number of active centers that you had the last in Q3 and even in Q2. That productivity rate is down somewhat here in Q4. So can you just talk a little bit about why that's the case? And then the confidence and why those metrics improve so steadily especially even in Q1 and all the way throughout 2023. Yes. Hi, Matt. This is Jared. I can take that one. So as we look to the productivity for the accounts that we saw throughout 2022. Part of this was driven by the success on the addition of new accounts driving the overall average productivity down. We've said early on that right when an account starts, we see them treat one or two patients and then they push pause for a period of three, four, five or six months. They check out the results from a reimbursement perspective, but then also as to how the therapy is going with or doing with their patients. After they see that, then they start to pick up the pace on their own productivity. So the longer they are with us on average, the more patients they are treating. So we still have confidence that the longer these accounts stay with CVRx, they're going to treat more and more patients based on the data that we've seen and collected over the last three years. But I think the challenge we're facing over the last couple of quarters is that we've exceeded expectations on the number of accounts we're expecting to add, which just drives that overall productivity rate down, because of the newness of those new accounts. Got it. Makes sense. So just to put a finer point on it, just because you're up 15 and 20 active centers in Q2 and Q3 respectively. That's the reason why that metric is down a little bit. And you're not seeing any change from trend line as far as utilization among those accounts as we're kind of exiting that six-month window? Yes, that's correct. Yes, we're still seeing the centers that have been with us for a couple of years doing more than the centers that have been with us between one and two years and they're doing more than the centers that have been with us less than 12 months. Got it. Okay. And then we can get into margins and all the other stuff, which are positive updates, I guess later. But the other question I did have was really on the DTC campaign. It seems like there's a lot of patients out there and I know it's just a pilot study, but what are you seeing as far as running some of those studies getting in front of patients that could be good candidates for this and then transitioning them all the way through to potentially getting an implant. So the -- Matt, this is Nadim. Thanks for the question. [Technical Difficulty] our DTC pilot, and why we kept it as a pilot still for a little bit longer is to understand exactly those questions that you're asking. They need to have no idea what form of heart failure they have if they have an ICD or a CRT, they think they have a pacemaker. And I'm over general [Technical Difficulty] itâs a disease that's harder to characterize. And when you look at our incidence rates that we calculated, because [Technical Difficulty] new patients every year, that's about 4% to 5% of the heart failure patients overall. So it's a small percent [Technical Difficulty], it's a game of numbers and we track every single click, every single patient when they provide us the information we try to get as much as possible. [Technical Difficulty] in medical condition as much as we are allowed to know. And if they are seeing their own physicians versus seeing how [Technical Difficulty] to pass diverge, and if the heart failure specialists they're seeing happen to be on the site where we are already activated, as well there is a [Technical Difficulty] it will go much faster, on the other hand, much slower. So it's all of those uncertainties now that keep this for the timing being as a very difficult one [Technical Difficulty] because all centers. Thank you. One moment for our next question. And that will come from the line of Margaret Kaczor with William Blair. Your line is open. Hey, good afternoon, everyone. Thanks for taking the question. Just because BeAT-HF obviously is a short-term catalysts. I was just curious if you can walk us through any commercial and marketing changes that you would make based on, let's call it, three scenarios where the first is positive on morbidity, mortality or on all events, maybe a more gray area, but numerical improvement mortality, but not on events. And then third of maybe a less good morbidity outcome or whatever gray area that would be less good that you would look at? How would that change your behavior? I guess, relative to the guidance that you have? Thank you, Margaret. Thanks for the question. [Technical Difficulty] of the three scenarios that you mentioned, let's start from the most negative to the most positive. And the most negative the data is neutral, there is no [Technical Difficulty] until what we have been doing. Our plan is built on that scenario. As Jared just mentioned earlier, it's not that we don't believe that we will win, itâs just, you know, us [Technical Difficulty] that I would like to establish a baseline that is conservative and consider all of the past and use as upside. If it's base positive trending positive, but not meaning the endpoint itself, then probably there'll be no change in our marketing [Technical Difficulty] sales strategy. Now if it's a clear-cut positive where we met the most accretive endpoint and that FDA will give us the labeling that this device improves heart failure's outcome. Then it is possible that Jared and I with the approval of our Board, we may decide to accelerate the [Technical Difficulty] in our sales and marketing efforts in the United States. And when that would happen, it will take time. You don't see it [Technical Difficulty] adding territories, you have to identify the talent, hire them, train them and so forth. So that ramp will accelerate, but you will not see it overnight. [Technical Difficulty] answered your question? Yes. That was great. And then, I guess, turning further on that right, so the existing accounts who already have a good sense of training and patient use and history with Barostim. Have you talked to them about what their expectations are for the trial and how they might change their utilization once the data is now [Technical Difficulty] I'll also make one more and walk us through how they would view their TAM opportunity changing? Should one of those more positive scenarios come up? [Technical Difficulty] question and now I wonder if I should have spoken with some physicians about this, number one, we instruct our sales force to be super careful and stick up with the [Technical Difficulty] FDA approved labeling. So that's why they do not engage in speculative discussions regarding outcome. However, I could do that as explore that kind of getting feedbacks perspective. That said, there is one area where our TAM will increase even if we hit the endpoint. When we negotiated as the current labeling with FDA back in 2019. FDA was very clear that we have not met yet the more customer base, because it was not what we outlined it for. And PRC devices when they are a Class 1 indicated, so QRS about 150 and the presence of a left bundle [Technical Difficulty], they have a and more talking about modality benefit. FDA did not want physicians to prescribe auto device itself. In those situations. So that's why in our calculation of the total addressable market, we excluded patients who are eligible actually indicated for a CRT treatment. I believe that if we hit, [Indiscernible] endpoint, I know that we will ask FDA to remove that exclusion and I believe that FDA will accept exclusion, because we should then let the physician decide what therapy is more appropriate for their patients and the labeling would allow us than [Technical Difficulty] for those patients who are indicated for a CRT device. So that will increase the total addressable market. [Technical Difficulty] we have to expand of how much Margaret, but at the right time, probably during the discussion about the results, we -- I'm speculating here, but I believe we'll be ready with the updated numbers of the total addressable market at the same time. So in Q1. Thank you. One moment for our next question. That will come from the line of William Plovanic with Canaccord. Your line is open. Great. Thanks. Good evening. Thanks for taking my questions. A lot of them have already been answered, so I think I'll stick with some guidance and P&L stuff. As you talked, you gave us the rep cadence you expect in terms of the new account cadence. Would you expect that to stay the same or are you shifting more to a go deep strategy? Hey, Bill, this is Jared. I can handle that one. So from an account perspective, last year, we were talking about adding high single-digits on a quarterly basis throughout 2022. This year, we're expecting that to be in the range of about 10 to 12 new active implanting centers added on a quarterly basis as we march through 2023. And then there is going to be a bit of work done by the account managers to really start digging a little bit deeper and work in the referral pathway for those centers that are already active. So the centers that have been around for 12 or 24 months trying to go a little bit deeper, reach out to more of the referral cardiologists along the way. Okay. And that kind of that ties into the DTC question and I think you kind of alluded to the fact that I want to make sure I heard that right is, is this more of a efficiency in terms of spend that you're trying to titrate and find out what is the most efficient in terms of getting a patient and converting them or getting a lead and converting it through a patient. Is that where a lot of the focus on the DTC is today? Bill, the study and by the way. Thank you for this question. It's an excellent question. Yes, direct-to-consumer awareness campaigns that medical device companies did 20-years ago are very different from what we are doing today. Think about it, what they did back then, putting TV ads was an open loop system. What we're doing is a closed loop system. We favor channels where we have traceability of every single click and every single patients. I mean, everything was [Technical Difficulty] saw the ads and convert it, so we know all of those metrics at every single stage of the game. And the visible tip of the iceberg is the marketing campaign itself. 90% of the work is what happened behind the scene. Those consumers who saw the ad all the way to becoming candidate or not becoming to identify if they are candidates [Technical Difficulty] to basically offer them possibilities and contact our sites that are doing the procedure. So cost for every single one of those campaigns is very closely tracked and monitored almost on a daily basis and we wanted to optimize. We're not in the business right now of throwing money and creating awareness. This is not what we're doing. We're paying money where we believe that those money would lead to X number of patients. And that equation should be profitable for us from their [Technical Difficulty], that's what we're trying to explore. As an example, we added a new channel two days ago. And we'll be testing it for a few weeks, [Technical Difficulty] iteration and see if itâs as profitable, more profitable or less profitable than other channels we're using. And that's mainly what we're trying to do here, trying to figure out different geographies, different type of sites different type of advertisement, different channels between some of the [Technical Difficulty], social media out there. And you do not advertise Facebook the same way you do it on Instagram or TikTok or Twitter and so forth. So it's a big [Technical Difficulty] Okay, good. And then quick Jared, the 1.136 gain in the other, that's a little it's kind of a big number, just curious what would that was. And then just you've kind of went through it with Margaret, but in like as simply as possible, what would you define as positive, what would you define as neutral and what would you define as negative for the B2HF outcomes. And I know that's hard to do, but I think for investors, if you could sum it up like where are those kind of break points and how should we think about it? Thanks. Hey, Bill. I'll just -- on the first piece of it, I mean, the biggest chunk that's fallen into that other expense net bucket is the interest income that we're seeing from the cash balance that we have at this point in time. So that's kind of the biggest number there. Nadeem, Iâll let you cover the second piece. Yes. Regarding the [Technical Difficulty] and statistics though, there is a p-value that you've widened five to ensure that the [Technical Difficulty] type one error less than a certain percentage, right? So what FDA wants to know is whether you achieve those results as a fluke by chance or whether the observation is preparation [Technical Difficulty]. What I consider to be positive is if the primary endpoint met the statistical relevance that FDA is looking for. I would then say it will be in between [Technical Difficulty] Margaret, if either the [Indiscernible] is trending close to that point, but not reaching it or what if other pre-specified, prioritized endpoints that we have previously agreed with FDA to analyze with clinical relevance. Why do I say so? Usually, when you're designing a [Indiscernible] for approval, you select the endpoint, FDA approved the endpoint and if you need the endpoint, you win, if you don't beat the endpoints, you lose and that's the end of the game. What we have seen over the past 20-years [Technical Difficulty] medical devices, it's a little bit more complicated than this and FDA has to rely on the totality of evidence before the issue adjustment on whether it's approved or not. In our case, our device is already approved to benefit outweigh the risk according to FDA. So what you're looking here is, what does the device do in other elements that FDA would allow us to tell physicians that yes, [Technical Difficulty]. And that's why it's a little bit more complicated than the usual situation. And even if we don't meet the primary endpoint per se, but [Technical Difficulty] to meet another secondary, or ancillary endpoint, we still believe that there is a net-net positive, not as positive as meeting the primary endpoint, but positive above our base case right now. Thank you. One moment for our next question. That will come from the line of Alex Nowak with Craig-Hallum. Your line is open. Okay, great. Good afternoon, everyone. And perhaps I missed this, but can you expand on what is happening in the background collecting all the morbidity data to move the readout from the first half to first quarter? You must be seeing something or hearing something to give you that confidence it's going to come this quarter, rather than more in the first half of the year? Hey, Alex. This is Nadim. Nice hearing from you. [Technical Difficulty] it's actually not the data, but the rate of collection of the data and the rate of monitoring of the data. So we're just identifying the trend of monitoring of sites to ensure that we will have all of the data monitored as required by FDA before we are [Technical Difficulty] and based on the synergistic that we see, we are able and we're able to narrow the timeline for their blinding showing that now it's a very strong likelihood that this will happen in Q1, not in Q2. Okay. Understood. And then would [Multiples Speakers] Okay, yes, understood. That makes sense. You're all good. When you think about the rate of new center ads in 2023, you more than doubled that number in 2022. I'm just going to throw it out -- double the number again in 2023? Or what are you thinking about what the ramping sales can do this year? Yes, Alex, maybe I'll just kind of baseline on that guidance again. So for the U.S. heart failure business, the midpoint of the range, the expectation is that we'll be seeing ads of around 10 to 12 active implanting centers on a quarterly basis going forward. Continuing to see those longer-term accounts continue to ramp up the productivity level similar to rates we saw in the past. And then as I just look to the hypertension business in the U.S., itâs still flat, right, itâs a set patient population. And then just one more piece on the European side of it. We still haven't necessarily cracked the code over there at this point. And so our base case, the middle of the road of the guidance is that it would stay consistent at around that $1 million or so per quarter. We saw a bit of a uptick there in the fourth quarter, but some of that was distributors stocking up some shelves -- shelf units there for the first half of 2023. So we don't expect that to be repeated here in the first quarter. So overall, the vast majority of that growth coming from the U.S. heart failure business, but most of that revenue is coming from those centers that have already signed up have already been activated in 2022 and then adding that 10% to 12% per quarter going forward. Okay, understood. That makes sense. And maybe on that last point, what do you need to happen for Europe to really ramp. Is it just you need to put a little bit more focus on it? You're just focusing too much on the U.S., probably for good reason. Is it a reimbursement dynamic? Just how are you thinking about Europe? Alex, it's Nadim. It's all of the above, first we're really not in Europe, I'll put in Germany in a couple of other countries. In regards to Germany, we have a ZE code from a reimbursement perspective. ZE code is kind of the middle layer, itâs not as low as new as it's not as good as DRG. Once the constraints about ZE code is that, that the profit that has to pretty significant burden procedures at the beginning of the year with their payers. But even if they pre-negotiated it, they could do the procedure, and they can still be paying after by an entity called the MDS that is made up medical auditors with common eyesight. And that kind of [Technical Difficulty] of engaging in procedures that are not yet at GRG or are not yet in the guidelines. And if we are neither. And because of this, we are not currently in Germany right now waiting until we have more data and do more advocacy and education in regards to getting in the guidelines in Europe. It's a chicken and egg, to get a DRG, we need a certain number of units per year. It goes about 1,500 procedures, we have a device that's a high price, low number of units, as I've mentioned earlier in quarters. And because of that, it's harder to get 1.500 units in Germany to get into that DRG examination mode. [Technical Difficulty] all of the above that we have not yet decided to invest heavily in Europe. Just in the comparison, we have more in our markets [Technical Difficulty] we have our entire team in Europe right now. It takes from an education perspective, physician education, patient education, and direct-to-consumer marketing, the physician directed marketing team and so forth. It's a large effort that we [Technical Difficulty] resources right now to duplicate that just for Germany, in Germany. And we don't have the volume to decide being able to do it. And again, it's a chicken and egg [Technical Difficulty] have to decide to do it and break that loop. But right now, our focus is in the U.S. I'm showing no further questions in the queue at this time. I would like to turn the call back over to you, Mr. Nadim Yared for any closing remarks. Excellent. Thank you so much, operator, and thanks everyone again for joining us for our fourth quarter earnings call. We appreciate [Technical Difficulty] and we look forward to updating you on our progress during our next update. Good night.
EarningCall_1093	Ladies and gentlemen, thank you for standing by, and welcome to the Pathward Financial's First Quarter Fiscal Year 2023 Investor Conference Call. During the presentation, all participants will be in listening-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Justin Schempp, Vice President of Investor Relations and Financial Reporting. Please go ahead. Thank you, operator, and welcome. Pathward Financial's CEO, Brett Pharr; CFO, Glen Herrick; and Deputy CFO, Sonja Theisen will discuss our operating and financial results for the first fiscal quarter of 2023, after which we will take your questions. Additional information, including the earnings release and a supplemental investor presentation may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements, including with respect to anticipated results for future periods. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statement. Please refer to the cautionary language in the earnings release, investor presentation, and in the company's filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual results to differ materially from the forward-looking statements. Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends. Reconciliations for such non-GAAP measures are included within the appendix of the investor presentation. Thank you, everyone, for joining Pathward Financial's first quarter 2023 earnings call. The company performed well during the quarter. Core net income excluding the impacts of rebranding was $23.2 million compared to $24 million in the prior year and core earnings per share of $0.81 was up 4% compared to $0.78 per share in the prior year quarter. Our continued focus on our key strategic pillars of asset optimization, deposit optimization and operational simplification, helped drive further expansion of our net interest margin, which rose over 100 basis points to 5.62% for the first fiscal quarter compared to 4.59% in the prior year quarter. Our strategy also enabled us to achieve return on average assets and return on average tangible equity that are amongst the top in the industry. Our commercial finance portfolio grew 7% year-over-year and totaled $3 billion at quarter end. Total loans and leases on December 31, were $3.5 billion, a decrease of 5% from $3.7 billion in the prior year. The year-over-year decline in total loans and leases reflects the sale of the student loan portfolio, timing of tax season loans and a few relationship pay downs in our warehouse lending portfolio. Credit quality across the portfolio remains strong as nonperforming loans of 1.16% were the same as a year ago. As we head into a potential recessionary environment, we remain confident in our active collateral management and the quality of our loan portfolio. On the liability side of the balance sheet, the company continues to demonstrate its proficiency in managing excess deposits by storing them at our program banks. In the first quarter, off balance sheet deposits averaged $1.4 billion, earning revenue roughly equivalent to the federal funds effective rate. In addition to generating revenue, these excess deposits also serve as a readily available source of liquidity. As of December 31, we had $2.2 billion of customer deposits stored off balance sheet with program banks, a level that is seasonably elevated due to holiday related gift cards and other products. As we have indicated during the two previous quarters, the landscape of the banking-as-a-service market is changing. While we continue to see fewer start-ups receive funding, our legacy partners are launching new programs and using our services to attract new customers. With our diversified clientele and our long history and experience in banking-as-a-service, we steer clear of the current turmoil experienced by others in the industry. We believe our strong risk and compliance capabilities continue to serve us well during this time of industry transition. Regarding our rebrand, I'm happy to announce that company completed the remaining efforts during the quarter. Consequently, we've received the final $10 million of the original $60 million sale associated with our Meta trademarks. We are pleased to be serving our customers under our new Pathward name, which has been well received by our customers and partners. We look forward to building upon the brand value it provides. Looking ahead to the remainder of fiscal year 2023, we believe our unique business model allows us to benefit from rising rates, positioning us well to continue delivering solid financial results. Consequently, we have increased our fiscal year 2023 GAAP earnings guidance range which we now expect to be between $5.55 and $5.95 per share. Finally, we are well prepared for tax season, which is kicking off in the second fiscal quarter. We have a long history of operational success are leader in supporting the independent tax industry and serve a major franchise in the business. Our historical experience and operational excellence position us to succeed in the unique economic environment of this year's season. We look forward to sharing more on our next earnings call. Now, let me turn the call over to our Chief Financial Officer, Glen Herrick, who will provide additional detail on the quarter's financials. Thank you, Brett. Total GAAP net income for the first quarter was $27.8 million or $0.98 per share, down from the $61.3 million or $2 per share recorded in the prior year quarter. As a reminder, the last fiscal year's quarter included an initial $50 million gain on sale of the Meta trademarks and this fiscal year's first quarter included the remaining $10 million gain associated with the sale. Excluding the onetime gains and expenses associated with rebrand related activity and severance expenses, core net income of $23.2 million decreased slightly compared to the $24 million in the prior year. Adjusted earnings per share of $0.81 for the quarter represents a year-over-year increase of 4%. The business does not expect to report any additional rebrand related financial impacts moving forward. Net interest income grew 17% year-over-year, driven by expansion in Pathward's net interest margin. Total net interest margin for the first quarter of 5.62%, increased substantially relative to the 4.59% recorded in the first quarter of fiscal year 2022. We expect our net interest margin to continue to expand, given the current rate environment and ongoing optimization of our balance sheet. Provision expense in the first quarter of $9.8 million is a $9.6 million increase from the prior year. However, the prior year benefited from a $12.7 million provision reversal associated with the disposal of the bank's remaining community bank portfolio. GAAP noninterest income declined from $86.6 million in the prior year quarter to $65.8 million in fiscal year 2023. Excluding the $50 million and $10 million trademark sale gain in the first quarters of fiscal years 2022 and 2023, respectively, noninterest income increased 52% year-over-year. The large increase was attributed to fiscal year 2022's losses on the community bank portfolio sale and money line investment write-off. Meanwhile, the current year benefited from revenues associated with off balance sheet deposits servicing. On the expense side, total GAAP noninterest expense of $105.1 million represents an increase of 27% from the prior year quarter. When adjusting for $3.7 million of rebrand related items in 2023, expenses of $101.3 million grew 23% year-over-year. This increase resulted primarily from $15.5 million of additional card processing expenses, mostly attributable to the higher rate environment. Other expenses excluding rebrand related items, grew at a 4% pace year-over-year. The company remains well capitalized, while continuing to return value to shareholders. During the fiscal 2023 first quarter, the company repurchased 654,000 shares at an average price of $38.10. Through January 20, the company repurchased an additional 478,000 shares at an average price of $45.45. As Brett mentioned, we are increasing our guidance for fiscal year 2023. For the year we expect GAAP earnings per share between $5.55 and $5.95. This guidance assumes the federal funds target rate rises to 5% in the second half of fiscal year 2023 and remains flat thereafter. Just wanted to ask -- I wanted to ask about higher guide. Can you talk a little bit about what is driving that? Is it just early thoughts on tax season are shaping up pretty good or what's kind of driving the change linked quarter? Well, I think the big thing is, there is a slight increase in Fed funds beyond what our original basis was. And so, we expect that to show up in -- are experiencing that starting to show up in higher yields. We think we're well prepared for the tax season as we always are. This is one of our core competencies. And the macro environment for the tax season is positive, but we haven't made any bets on that yet. So it's too early. I mean, the IRS just opened up for return this week. So it's too early for us to make any prospective views of what's going to happen in tax season. Okay. And then, can you talk a little bit about what the guide might imply for loan growth here, just given overall commercial finance was kind of flattish linked quarter and I know the ABL and factoring balances have declined. Not sure what you're thinking, that was a good kind of run rate for commercial finance growth from here. Again, it's a mix of asset classes that are going to behave differently. Working capital is where we're hoping for the growth as we get into a more recessionary style environment. There likely will be some slowdown in various kinds of term lending. Conversely there seems to be a bit of uptick in the -- in our solar financing and other alternative energy financing opportunities. So, I think we're going to be continually plotting forward as we have been, making that rotation from one asset class i.e. securities to another, I don't expect it to take off and I don't expect it to dive or anything like that either. Okay. And I think in the past you might have talked about sort of double-digit growth overall in commercial finance. I don't know if that's still kind of reasonable bogey going forward? Yeah, I mean I think low-double digits overtime through economic cycles is quite reasonable for us. We want to make sure that we have the yield in it and that's been some of the challenge and we've talked about that from a liquidity perspective, that's gradually getting washed out. But, I mean, I think, long term, that is a reasonable assumption. Okay. And then in terms of the -- on the depository side, unless I heard wrong, it sounded like the off balance sheet deposits maybe are boosted a bit linked quarter given some seasonality. So in such case, maybe those come down from whatever, this is $2 billion plus at the end of the quarter. Just wondering, how to think about the rest of that I guess? Do you continue to think you -- that remains off balance sheet and you pick up Fed funds on it? Is there opportunity or thoughts to bring it back on balance sheet, and given some of the opportunities you can get in terms of yields on the asset side? What's sort of the strategy there overall? Well, a couple of things. You're correct. There is some seasonality in the fourth quarter and I think in my comments, I highlighted a level that's probably more like core. We do think that -- and this is one of our advantages that the liquidity is gradually wiping out in the general economy and there may be some minor shrinkage even in that core just because of what's going on in the economy. I don't -- because we have plenty of money in the securities portfolio, I don't need to pull those deposits back on to the balance sheet to fund the next asset rotation. We've got plenty on the balance sheet to do that and there is no sense in inflating the size of our balance sheet until we kind of keep working through that asset rotation. Okay. That makes sense. And then just lastly on credit. You talked in the release about the increase in provisioning and increase in NPA. I assume it was kind of part and parcel same, I think you talked about one relationship on the commercial finance side. Any additional color you can give on that relationship and hopefully your comfort in limiting losses there? Yeah, one of the things I talk about all the time is, we are a collateral managed credit facility. We don't do unsecured credit. And even though something might be in a nonperforming, there is collateral behind it. We're kind of experts at liquidating that, whether it's working capital or working with partners on equipment and those kinds of things. And so just because you see in nonperforming doesn't mean that's a loss. What that means is, we're working it down with the collateral that we have. We're seeing continued good performance in the credit portfolio. We're not seeing any negative impacts as of yet. You always have companies coming and going, that's true, but we're not seeing any trends to the negative side at all. Okay. But can you say where that -- is that in working capital, or is that a term loan? Just trying to get a little bit more color onâ¦ Glen, do you want to respond to that. I mean we know, but I don't know what we can disclose on that. Yeah, that's a term loan, Frank. And I would also note that, for us, NPLs is a better metric than NPAs. As we continue to mix shift earning assets in the loans from securities, our NPAs are going to go up, just as we reduced the securities percentage. And our numbers are pretty low. And so, if we get $1 million, $3 million or $4 million loan, it can spike up short term, but we feel real confident about our outlook. Good. On the -- I guess just on prior conversation that we're having, could you walk us through some of the collateral you have in different pieces of your loan book, particularly some of the higher loss categories, such as like the term lending, and factoring and I guess kind of like run through the terms, you have on those as well? So, on the working capital arena, these are accounts receivable and inventory. In those kinds of transactions, we either have a borrowing base of receivables where we've pre-approved the debtor, which is the one that owes our customer money. In many cases depending on the situation, we actually have dominion of funds, where all the payments are coming straight to us. And obviously, you have a security interest in those things. And we do some things that are kind of unique, at least for bank, in the way that we manage those. In the inventory cases, we have pre-planned buyers often for the inventory or at least appraisals on it. So we know what we would do in the event of liquidation. In equipment arena, it varies a little bit about what it is. Some of it is mission critical equipment, which means that even in the event of a reorganization bankruptcy its mission critical, and they're going to reaffirm the debt and pay us. So we emphasize that a lot. Or in other cases, we have relationships with third parties who are ready buyers for that and we regularly work on and cultivate those relationships, so that we can take advantage of them. So, it's not like a traditional C&I lending. It's -- we go in assuming there's going to be a default and then how would we get out, if there was a default and not lose money. So generally, particularly in the working capital, where there is a problem, it's because of fraud, not because of an actual weakness in the collateral position. Tim, this is Glen. I would also refer to Page 16 of our investor presentation on the deck. Some additional information around our different types of commercial finance and then at the end of the deck, we have some industry concentration information. Great. Yeah, that's helpful. And when you guys stress the portfolio run in your stress test, what are some of the scenarios you use and like, which variables are you focusing on? We're just trying to get an idea of like how different parts of the loan book would react to certain stressed environments? Yeah. So, Glen, I'll let you answer here in a second. What I would tell you is that, we're always looking at every transaction as if it's stressed. We certainly look at industry concentrations, what can happen in that industry and adjust appropriately. Particularly strong thing that we do is, we look at the debtor credit book, that again, that's the people that are paying our borrower and make regular decisions about that. And so, examples of some fairly common high named bankruptcies that have occurred recently, 18 months ago we were out and wouldn't accept receivables from them. So that's more of a kind of thing we do. Each transaction is so unique in this space. It's really not conducive to a portfolio stress type arrangement that you might be used to in a traditional C&I. Okay. I got you. Going back to the guidance a little bit. What is sort of the NIM expectations you have for like Q1 and Q2, like you're through all the interest rate floors, right, and I mean you had like 40 basis points of NIM expansion for the last two quarters in a row basically. Like, is it reasonable to expect that again or should it start slowing down? Yeah. Like all things, it depends on the mix where the growth comes from. That said, we will gain NIM just by continuing to remix our balance sheet if rates didn't move at all. But we are comfortable that NIM will pass through 6% in our fiscal year 2023. Okay. All right. Great. And could you provide a little bit of color on, like the expectations you have within the guidance, assuming like there isn't like a serious economic deterioration? We're not guiding by line item on our income statement. And so our expenses, we have -- for a bank, we have a fair amount of variable expenses that are driven by activity which relates to revenues. And so, those are correlated with the revenue expenses that we have. And our goal is to grow our core expenses at less than half the rate of our revenue growth and then that's what's factored into our guide. Thank you. And that concludes the Pathward Financial first quarter fiscal year 2023 investor conference call. You may now disconnect. Thank you.
EarningCall_1094	Good morning, and welcome to the Premier Financial Corp. Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Thank you. Good morning, everyone, and thank you for joining us for today's fourth quarter 2022 earnings conference call. This call is also being webcast, and the audio replay will be available at the Premier Financial Corp. website at premierfincorp.com. Following our prepared comments on the company's strategy and performance, we will be available to take your questions. Before we begin, I'd like to remind you that during the conference call today, including during the question-and-answer period, you may hear forward-looking statements related to future financial results and business operations for Premier Financial Corp. Actual results may differ materially from management forecasts and projections as a result of factors over which the company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release and in the company's reports on file with the Securities and Exchange Commission. Just as a comment, as we begin, I want to acknowledge that Matt Garrity, a gentleman who's been a participant on this call for a number of years, will not be with us this morning. Matt has accepted a role as CEO at a very fine institution over in Western Massachusetts. And I wanted to take a moment to thank him for all these contributed to us over the years. It's very much appreciated, and we wish him well as new endeavor. Last evening, we reported net income for the quarter of $25.3 million or $0.71 a share with full earnings for the year, topping $102 million, or $2.85 a share. The fourth quarter saw a continuation of the theme for Premier in 2022. Strong loan and deposit growth driving net interest income, tempered by higher growth-related loan loss provisions and a weakened residential lending environment. In addition, Q4 expenses underperformed uncharacteristically for the organization this quarter. For the year, loans were up 20%. Deposits are up 7.7% and net interest income was strong. Through the three first quarters of the year, excuse me, the first three quarters of the year, deposit pricing lagged very purposefully and margins expanded. The fourth quarter results reflect higher repricing velocity in select deposit portfolios along with an increase in noncore funding, and thus, the margin has retracted. The Fed's actions over the third and fourth quarters have elevated our clients' deposit pricing expectations. And when combined with our increased utilization of noncore funding sources, our total cost of funds are likely to remain elevated in the near term. Beta management has never been more important. We've made meaningful strides in repricing our most elastic deposit business lines to ensure deposit retention and in support of growing our deposit base in '23, and Paul will have much more on this topic shortly. Overall loan growth for the quarter was up $239 million. That's 15% on an annualized basis. That ran a little hotter than we had telegraphed at the end of the third quarter. Commercial growth was up just shy of 13%. The higher-than-anticipated loan growth triggered a hike in our loan provision figures for the quarter as well as it has all year as is a seasonal impact on such growth. Full year total loan growth totaled $1.17 billion, with the commercial growth of 20%. Consumer was up 26%, and residential mortgage growth came in at 25%. The new money commercial commitments were $1.75 billion for the year. Obviously, a very big year for the team and good momentum going forward and a nice combination of business to both existing and new clients. Our C&I originations totaled 41% in the fourth quarter, and it continues to be a primary focus for our commercial team, while line utilization remains under 40% because our clients are utilizing their cash on hand. Residential mortgage originations for the quarter came in at about $200 million and $1 billion for the year. That's about 75% of the expectation we had when we entered 2022 when the year looks so different. Difficult market -- a difficult market and a challenging environment to be selling to the Fannie and Freddie network. Our gain on sale continues to underperform historical levels in terms of basis points. Swings in residential construction hedges valuations unfavorably impacted fourth quarter revenue as falling residential rate environment in November actually negated a positive hedge position that we recorded in the third quarter. And so net-net, the two quarters combined, the right number got posted, but it certainly had an unfavorable impact on the fourth quarter alone, and we estimate it to be about $0.04 So think of that as timing within the two quarters. 12/31 delinquency was 74 basis points, and that's very much in line with the performance over the course of the year. Net charge-off trends remain very low. We had 1.5 basis points of net charge-offs for the year when you exclude a large charge-offs that we took in the midyear that we had specifically reserved for in 2021. Nonperforming loans were down 4% versus the third quarter. I'll summarize some of our fourth quarter and full year results, beginning with the balance sheet growth. Total loans, including those held for sale, increased by $239 million during the quarter, representing a 15% annualized growth or 20.5% year-over-year growth. As Gary mentioned, growth occurred in all categories, including commercial, residential and consumer. Deposit growth was also healthy where we added $100 million of customer deposits in the quarter or 6% annualized growth or almost 8% year-over-year. Noninterest-bearing deposits led the way with over 9% annualized growth in the quarter, while interest-bearing deposits grew almost 5% annualized. Due to loan growth outpacing deposit growth, creating a continued reliance on higher cost FHLB and an accelerated deposit beta, we did experience some compression of net interest income and margin during 4Q. Excluding PPP and marks, loan yields increased 27 basis points to 4.51% and total interest-earning asset yield increased 31 basis points to 4.21%. These represented betas of 18% and 22%, respectively, compared to the increase in the average effective Federal Funds rate for the quarter. Deposit costs, excluding marks and broker deposits, increased 34 basis points to 0.72% for a 22% beta in the quarter. However, total cost of funds, excluding marks but including broker deposits and floating rate borrowings increased 41 basis points to 0.97% for a 28% beta. The increase in cost of funds in excess of the increase in our earning -- interest-earning asset yield less than the margin compression for 4Q. On a full year basis, net interest income increased $15 million or almost 7% on a tax equivalent basis and $29 million or 14% on a core basis, excluding PPP and marks. Net interest margin also increased 4 basis points to 3.28% on a core basis. Next, noninterest income of $14.2 million for 4Q was down $2.5 million from the prior quarter primarily due to mortgage banking. Mortgage banking income decreased $4.3 million on a linked-quarter basis due to a $4.6 million decrease in gains offset slightly by $300,000 higher MSR valuation gains. This was primarily driven by hedge fluctuations. In prior quarters, our hedges increased in value as rates increased and mortgage prices decreased, and the reverse occurred in 4Q at an accelerated pace such that our prior hedge gains were effectively eliminated. As a result, the cumulative net hedging as a wash, but the individual quarters can be volatile once corrections occur like in 4Q. Security gains were $1.2 million in 4Q, primarily from $1.3 million of gains on the sale of $8.7 million of equity securities which were partially offset by $100,000 of decreased valuations on our remaining unsold equity securities. We also sold $9.6 million of available-for-sale securities for a minor gain and the combined $18.3 million of proceeds from security sales will benefit net interest income beginning in the first quarter of 2023. On a full year basis, noninterest income declined $17 million with $5 million from security gains and $12 million from mortgage banking, which decreased due to lower production, saleable mix and margins. Expenses of $43 million were up 4.7% on a linked-quarter basis partly from further lower deferred costs related to the lower quarterly residential mortgage loan production as well as higher health care benefit costs that increased in 4Q after positive trends in the prior two quarters. On a full year basis, expenses increased $7 million or 4.6%, primarily due to compensation and benefits, which increased due to higher staffing levels for our growth initiatives and higher base compensation for annual increases plus one year adjustments that we mentioned previously. The allowance increased $2.2 million in 4Q due to $3 million of provision expense for loan growth, offset partially by $830,000 of charge-offs. Our asset quality stacks remained solid during the quarter with annual decreases for nonperforming loans and classified loans of 30% and 37%, respectively. At December 31, our allowance coverage of nonperforming loans was 215%. Finishing the balance sheet of capital with a quarterly increase primarily due to earnings in excess of dividends and an $8 million positive valuation adjustment on the available-for-sale securities portfolio. At December 31, our tangible equity ratio was 6.78%, an increase of 11 basis points from 9/30 and excluding AOCI, TE would still be approximately 9% at 12/31, consistent with 9/30. Additionally, our regulatory ratios remain comfortably in excess of well-capitalized guidelines with Tier 1 capital at approximately 10.1% and total capital at approximately 11.9% on a consolidated basis at 12/31. I'll share a few thoughts on our financial performance expectations for '23 as is our norm. Expect point-to-point earning asset growth of a more modest 5% or so, plus or minus, in '23. Average balance growth will benefit from the very strong '22 growth trajectory we've experienced. Pipelines entering '23 a bit lighter as you might expect. Deposit growth will be in line with the balance sheet growth. And our core net interest income, excluding PPP grew $29 million in '22 versus '21, and that same momentum and trajectory will be a benefit to us in '23. We have a bit more margin uncertainty in the first six months of the year. We think we could see movement in either direction to some degree until things settle down with the Fed and customer expectations. We do have 50 bps of Fed turns cooked into our plan for the upcoming year. Provision for growth and modest net charge-offs meet our expectations. No meaningful movement and unemployment is expected, which would affect potentially the provision expense. No material change in the residential mortgage fee income contribution in '23 versus '22, we're going to assume it continues to be a soft market. Noninterest income otherwise will range between 3% and 5% up. We have the typical cost containment measures, and we expect 3.5% or so year-over-year. We continue to support our digital bank enhancement program for this year, which is our mobile and online offering. And this year also, '23 will include the annualized effect as the midyear salary year readjustments we made in '22. So 3.5% is an aggressive number. For '22 as a whole, we were up 4.6%, which I think would be a bit higher than we had anticipated, but well within the environment and what we're seeing with peer organizations. Our efficiency ratio targeted for '23 is just a hair over 53% and we do have positive operating leverage when we adjust '22 for the PPP and security gains impact. So we've given you a lot to work with there. [Operator Instructions] And our first question today goes to Brendan Nosal of Piper Sandler. Brendan, please go ahead. Your line is open. Just to start on the mortgage piece I want to make sure I kind of interpreted your commentary right. It sounds like the sum of the past two quarters is kind of the right run rate going forward. Does that kind of imply like roughly $1.5 million to start the year in total mortgage banking income on a quarterly basis? I think we were a little north of $6 million for the year. I think we're closer to $8 million, like $2 million a quarter. That would include the servicing income along with the normal gain on sale. That's why it was so the answer there. The $6.5 million might mean the gain on sale, but overall fee income would be $8.5 million. Your point on the hedge activity kind of overstated Q3 and with the rate movement that if it hadn't occurred, we'd still be sitting on it, but the rate movement did the offset in Q4. So that's the mismatch. Okay. Understood. Understood. And then maybe one more for me before I step back. Certainly, we hear your comments, Gary, on kind of margin sounds like plus or minus from here depending on the variety slightly better influencing things. I mean, what gives you confidence that we won't see another quarter or two of compression of this magnitude in the fourth quarter? Well, and Paul can share some details. We have dug into the product portfolios and the business portfolios as we've gone through our pricing strategy in response to some of that higher demand and asked some of our clients as well as our intent to raise new money in the market. And we've really find very managed betas in our consumer book, the majority of our business book and so forth. And we've isolated all of our efforts around wealth management and certain segments of our business clients, where we see that elasticity and the competition really being fierce. And we have at this point, I'll take wealth management book as an example, that's a money market book of about $0.5 billion. We have repriced 75% of that book. So I guess if I would leave you with anything, I'm not sure everybody has got to that point yet, but they will. But that was one -- we're wanting to raise deposits. The first thing was, let's not unintentionally lose deposits by dragging our feet too long in that book. But that gives you some indication of where we've been very busy in getting repriced and so we don't have that to deal within the next six months. So there's that. And I think we've isolated the other portfolios to understand the elasticity and we feel pretty comfortable that we will be able to continue to sort of slow place some rate increases as we launch or the competition elsewhere. Paul, anything you would add there? No, you pretty much hit it. I mean, included in the business would be about funds. And those would have higher betas traditionally than some of the other buckets, partly just due to the product mix, like a STAR Ohio product. Yes. And that's the obvious one. I mean, we do have pricing that's linked to the Federal Home Loan Bank. So to the extent the Fed is not going to do 225 basis points of movement in a quarter, then '23 would be a little bit more stable relative to that large funding source as well. So obviously, Gary, you provided quite a bit of commentary for next year, but just to confirm on the efficiency ratio, kind of taking into consideration all different parts. I mean it sounds like you expect to be more in the full year range than the fourth quarter, I think you said the 53%. I just want to make sure that I'm thinking about that correctly, which would likely assume some rebound in mortgage, maybe some stabilization in NIM and then the cost efforts that you mentioned. Is that fair? Yes. Correct. Mike, this fall on the full year estimate for efficiency. It won't be the fourth quarter run rate. We have some elevated expenses there, as we mentioned, but that will be coming back down. And yes, NIM plays out the way that we're talking about here, if mortgage -- we're not projecting it to really rebound. We just expect it to be kind of steady state. If you look at it on a full year basis, '22 versus 23 mix will be different. Gains should be a little better, but we won't have the MSR gains that we had this year but servicing in excess of our amortization. So net-net, call it a push or so on mortgage that's how we're getting to that full year efficiency estimate. The fact that we've got -- it's not as high as our traditional number, but we do have positive operating leverage kind of helps keep a cap on the efficiency ratio. Got it. Thank you for clarifying. And then just on the -- maybe a follow-up to the NIM kind of line of questioning. I mean when I think about the fourth quarter and what happened in terms of the new compression, it doesn't really seem like kind of the foundational elements of how your NIM structure change. It just seems like loan world accelerated in a quarter where incremental funding was expensive, right? And so I guess, the follow-up I would have is you guys guided to lower earning asset growth, but like, what's the line to site on that? I mean it sounds like pipelines are a bit slower to start the year. Is it more environmental? Is it both environmental and you guys being more selective? Is there more of an effort to kind of target a specific earning asset growth rate that will be easier to fund in this environment? Or is it just kind of the way the cards are playing at this point in time? Mike, I think your comment on the environment combined with targeted effect will be bought us by design, whereas take the fourth quarter, I think we had targeted that we thought we'd see 1% to 2% growth, let's call double of that and the third and fourth quarters for both quarters, we thought we would see a pullback on the client -- from the clients on business and it just kept coming. So as we plan for '23, there will be certain asset classes and transaction types that core customers and so forth that will get more preference on our attention, and we will manage our number from a growth standpoint to deliver those sort of growth that we talked about, a little more so than we've had to do in the past. Is it just a simple Gary, is limiting the on-balance sheet mortgage production? I mean that would seemingly -- if you have decent growth elsewhere and you just put a lot less mortgages on, that would seemingly we get you like 6% or 7% point-to-point growth on the loan book. I mean is that -- is it that simple? Or is it more nuanced than that? Mike, we started in '22, back in the middle of the year to do just that on the mortgage book. We still have some funding that's coming from that because we're in a -- we're a pretty big construction player. So commitments that we had made back in '21, we're funding all during '22, even though we weren't still originating in that space. But -- so rest assured that we have backed off and made some product adjustment and we're back to about a 70% sales versus portfolio mix, and we had allowed ourselves to get off of that when the pricing was so forth, Fannie and Freddie back in the second quarter of last year, and we won't be doing that this year. Same thing on the consumer side. We had a really great consumer growth through the first three quarters, and then we put the TAMs on it, mostly around indirect, which is what that portfolio is designed to do. And we really haven't grown that book in any meaningful way over the last four months. We are creating our capacity for balance sheet growth through commercial. But having said that, if we just let commercial run, given the team we've got in the market the way it is now, we might be surprised at how much growth we see just through the commercial channel. So we will be managing our effort a little more so in '23 to make sure that we don't outrun our appetite and get over our skis too much. That's the right side of the balance sheet catch up with the left side. Got it. And then just lastly for me. As we look to next year, based on the guide you provided should still be generating pretty good capital internally. I think the back half of this year will probably be the low point on capital for you guys, especially if the balance sheet growth kind of moderates. I'm just thinking -- wondering are you seeing similar M&A headwinds? And does that free up maybe some capacity to do some buybacks in '23? Or just any updates on the capital plan would be great. Thank you, guys. Yes. Thanks, Mike. Yes, it does create that kind of capacity. But we've turned the corner here on capital. So we're going to let this chug most likely for a while here and kind of let that grow a bit. But obviously, opportunistically, if it makes sense. We've got over -- sorry, 1 million of approved shares for our buyback plan that we could deploy if it made sense at the time. But we don't have dividend plans right now to do that at this point. So we'll just monitor the market. Mike, over time, we've always said we play a balance for our card on equity utilization. We want enough there to support organic growth. We want to provide the dividends and shareholder return through that vehicle and buybacks are part of that shareholder equation. With the balance sheet growth that we've seen right now, it feels like balance sheet -- organic balance sheet support gets a bit of a priority, but it didn't change the scorecard timing of how we're using our capital and we're fully deployed right now. Thank you. [Operator Instructions] And our next question goes to Christopher Marinac of Janney Montgomery Scott. Christopher, please go ahead. Your line is open. Hi, thanks. Good morning. So Gary and Paul, I wanted to kind of go back to some of the comments I think you were making at the beginning of the call about loan yield repricing and just better understand the kind of betas on the loan side and maybe even earning assets, too. Is there an opportunity for those to be stronger this next quarter or 2? And do you think that will look differently as this year shapes up? Yes. Good question, Chris. There is some possibility for that, but there's some variables in there, right? So on the loan side, generally, we have a lag in terms of the repricing on that because the -- our variable or floating rate loans reprice first of each month. So the action that happened in December, we won't feel until January and so on. So a lot happened in that fourth quarter from the Fed and it will take a little while for that to kind of fully come through in those yields. So that's a tailwind for us head in the 1Q here. Part of it will depend on what happens in the C&I book. We're still at pretty low utilization. They came up a little bit during the year, but not that much. So if we get more action there, same thing in the HELOCs and such that are the higher yielding floating rate type stuff, that could be a positive for us. We're not going to count on it. If it comes great, but that's where we could get some incremental lift because we're pretty low on those utilizations today. On the flip side, just a reminder, we do have that swap that we had done a couple of years ago. So that -- now that we're -- where we are on LIBOR. That's a little bit of a drag, and that's why our loan yields and overall earning asset yields drive just a touch. I think it was about 7 bps in the fourth quarter there. So -- but if we do get to the point here where the Fed pauses and rates can stabilize, we will have hit our max impact on that. And then that's future upside, honestly. If rates can start to normalize, either late '23 or into '24 and so on, that will start to come back. And then we'll get extra lift coming down on that side on the yield or on the asset yield side as well. That's well as said, Paul, if there's a silver lining on the current situation, it's just that. I know when we watched the quarter unfold, our loan betas were outrunning our deposit betas in October. They got closer in November and then they get almost to neutral. But what really -- in December, but really changed for December was when -- now we were getting full throat of the Federal Home Loan Bank activity and from just a funding beta regardless of the source of the funds, all of a sudden, we became liability sensitive because of what was going on with the Federal Home Loan Bank rate. And as Paul mentioned, the swap but was now more in play and so forth. So December was kind of a change month for us on the overall balance sheet, and that's upside going forward is dramatic or as quickly as it showed up it can evaporate as Fed behavior changes. No, that's great background. And that all makes complete sense. I mean my thinking was kind of a big picture, you have still a lot of advantages for you. You still have access to a bunch of liquidity. Your debt is not high by any means, it's kind of stable from last quarter and you have the good pricing benefits that we just talked about. Do you have a sense, even though I know it's early to call the whole cycle for the rate move. Would the betas kind of come in high 20s, low 30s, I mean I think you made comments in prior calls. I'm just curious if your thinking is any different in terms of the cumulative beta as you look out a few more quarters? Yes. I think we've always talked about 30s. And we're still in that range. At this point, though, the way the fourth quarter played out, it might be mid- to higher 30s versus the low 30s that we were originally thinking. But we're still in that range. And one way to break it down, Chris, that I've been looking at, if you just look at the big piles of our deposits there, right? We've got $2 billion of savings and EDAs that don't really move. They haven't moved. We don't plan to move on. So effectively a zero beta there. We've got $1 billion of our time deposits. Full cycle that will probably have a 30% to 40% beta once we're all set and done with the specials and promos kind of driving that. And then we've got about $2 billion of our money market accounts between wealth and business and up funds and things like that, as well as retail and the retail piece hasn't really moved. That's our high beta, right? So that's going to be 60% to 75% of beta by the time we're done with this. So you blend that all together in the $5 billion of those deposits, excluding our broker, and that's a 30% to 40% blend but then you throw in our interest-bearing and we're in the, call it, back down to the 30% range. So -- and then off to the side, obviously, it would be our other funding sources, whether it's FHLB, broker deposits, and those are high beta things. So that's what drives up our overall cost of funds like we saw here in the fourth quarter. And we've been making concerted efforts to grow the deposit base, our core deposits. We had higher-than-anticipated loan growth in the quarter. So we weren't able to eat into the FHLB like we would have liked, but we're going to keep pushing core deposit growth, and that will get better as time goes on here, and we'll get full upside on the FHLB pay downs as they come through. Got it. Thanks for all the detail. And then my last question just as a reminder about the cash flow that you get from the investment portfolio, whether it's quarterly or annual however you think about it? Yes. I think we're around $75 million-ish per year. We're still in that range at the current -- in the current environment, and we do plan to roll off. But we also, like I mentioned in my opening comments earlier, when the opportunities come up, we're taking advantage of them. So we exited about half of our equity book for some very nice gains -- cumulative gains of about $13 million from when we bought them. And we enjoyed the dividend yields while they were good. But those -- the ones we exited were all below our incremental borrowing costs. So we got out of those, and that just helps our NIM go forward. Same thing on the bond book. There are here and there are opportunities that come up, bond here and bond there that we're not going to get a gain off of it, which is okay. But again, the yield is below our incremental borrowing, so we can exit that and not take a direct P&L hit and deployed into some NIM accretion. It's a small stuff here and there, but every little bit is helping. Thank you. And we have a follow-up question from Brendan Nosal of Piper Sandler. Brendan, please go ahead. Your line is open. Sorry about that, my apologies. Just some clarification on a few of the items you mentioned, Gary. The earning asset growth of 5%, is that full year over full year? Or is that off the 4Q '22 base into 4Q '23? 12/31 to 12/31, the average growth would be much better than that. Loans would probably be another 1% above that, but securities will bring down at least 1%. Yes. That's perfect and super helpful clarification. Then just on the cost outlook. I think you said 3% to 5%. I mean, kind of the midpoint of that suggests that the run rate would kind of hold around the fourth quarter level, it's not even a little bit better. Just can you talk a bit the about some of the leverage you've had throughout the year to kind of hold that cost run rate roughly in line with the fourth quarter? Sure. I might have misspoke. I actually had 3.5% relative to the growth range for the year. We have some opportunities from a cost perspective as we rightsize a few segments of our organization and acknowledge the situation that we're in and some projects that are a little less crucial going forward might be put on a partial delay and so forth. So nothing that's going to change the strategic or the direction of the organization, but the normal trimming that you will do with throughout the organization and throughout business groups where it's appropriate to be doing. So that, combined with just our normal good diligence, but it's kind of in our DNA. We're always looking for the lease value added 2% or 3% of what we're doing and how to redeploy it to the best or the next 2% or 3%, and that's still important to our organization. I think we got 4.6% up over the prior year. That's probably going to be a pretty reasonable number versus what the industry as a whole delivers year-over-year. That would be an indication that I would expect we'd be on the better side of that average. Thank you. [Operator Instructions] And we have another follow-up from Michael Perito of KBW. Michael, please go ahead. Your line is open. Hi guys. Thanks, sorry. And I apologize if this was in Gary's guide, and I just missed it. But just on the tax rate for 2023, should we be assuming more something in line with the full year versus the fourth quarter? It looked like the fourth quarter was a bit lower than normal? Yes. I mean you can use a 20% effective tax rate estimate, and it will be plus or minus from there. It won't change much. Well, thank you. And I do have a closing comment or maybe something to just keep in mind for perspective. I would suspect that over the next 12 to 24 months, inflation is going to resolve itself or at least to the amount of distraction we currently are involved with. And the inverted yield curve will abate and the cost of funds curve will return to something a bit more normal for us. And that will be a good day. However, the business that we booked over in '22, the 20% growth clients that we brought on board, the clients we've served, that's going to be with us for the next 7 to 10 years. And the value that, that will bring to the organization over that period of time, I think, will outweigh the bumps that we're experiencing right now. And just want you to understand. We keep our eyes on the horizon, although we're starting right in the weeds as well. But that is kind of the way we view the business. We're trying to take the steps that add the most value for the shareholder and the organization over time and balance that with some of the issues of the day. And that's what we're busily engaged with right now.
EarningCall_1095	Greetings, and welcome to First Foundation's Fourth Quarter and Full Year 2022 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures. See the company's filings with the Securities and Exchange Commission. Additionally, I'd like to inform you that the First Foundation in terms of the filing a proxy statement and related proxy materials with the Securities and Exchange in connection with the company's 2023 annual meeting of stockholders and in connection there within extracted in terms of its executive officers are participants in the solicitation are proxies from our stockholders in connection with the annual meeting. Stockholders are First Foundation strongly encourage to read such proxy statement and all other related materials filed with the Securities and Exchange Commission. Carefully and in their entirety, when they become available as they will contain important information about the 2023 annual meeting and we'll not be making any comment on this call about the recent nominations made. Good morning, and welcome. Thank you for joining today's earnings conference call. First, I'll discuss the highlights of our fourth quarter and full year 2022 results, followed by Chris Naghibi, our newly appointed Chief Operating Officer, who will discuss our loan and deposit business. Then we'll open it up for questions. The earnings that we reported this morning reflect the resilience of our core businesses and our commitment to managing expenses strategically slowing loan growth, identifying greater operational efficiencies while growing the meaningful relationships we have built with our new and existing clients. As you know, we also made some key management changes in organizational realignment over the last quarter that are reflective of our commitment to optimize our workforce, identify the right talent for critical positions and realign First Foundation to best execute on behalf of our clients and shareholders. I can truly say that everyone has done a tremendous job and I am so proud of how our deep bench of talent has stepped up. Our diverse business model and service focus culture, continue to perform well and this is particularly true during this market cycle. There is no question we continue to face the pressures placed on the banking industry due to the Fed's actions over the last nine months. In the last quarter, the Fed raised rates an additional 125 basis points. This has occurred while the tenure year also has decreased by 50 basis points. This interest rate inversion has put pressure on both margin and income for the entire banking sector, and we fully realize those factors remain a challenge for 2023 and beyond. It is against that backdrop that I am pleased to report our earnings per share was $0.31 or $0.35 when accounting for the valuation adjustment on the NYDIG equity investment, recent executive departures and professional service fees. We generated $81.9 million in revenue and $17.4 million in earnings for the quarter and $366.9 million in revenue and $110.5 million in earnings for the full year, while our adjusted return on average assets ended the quarter at 0.63% and 1% for the full year. We continue to actively position ourselves for long-term success. We are focused on optimizing our operation to reflect the current environment and we have taken steps to create additional operational efficiencies. We have always run a lean operation compared to our peers and we continue to manage with this in mind. That said, we will prioritize our spending on client service, risk management and security. We will not sacrifice our strong reputation in these key areas. This means that projects such as optimizing our data warehouse in cross-promoting our services will be a priority. Our Bitcoin project to our banking clients will be on hold indefinitely as we continue to seek regulatory guidance. Our tangible book value per share ended the quarter at $16.20, which represents a $0.24 increase for the quarter and a $1.28 increase for the full year. We also declared and paid our fourth quarter cash dividend of $0.11 per share. We experienced an 11.5% year-over-year growth in tangible book value per share, including cash dividends paid. We believe this will continue as we deliver strong returns to our shareholders. As we mentioned in the last quarter, we began strategically managing our loan growth while focusing on keeping and adding deposits and our fundamentals remained strong with excellent credit quality. Notably, our credit quality remains pristine and our NPA ratio declined to 13 basis points, which is even low for us, considering we started the quarter at 14 basis points. This reflects our continued underwriting discipline and standards. Our loan-to-deposit ratio decreased to 103.5% as of December 31, 2022 down from the 108.4% at the end of the quarter. This is a testament to the incredible strides we have made and this important metric continues to already improve as we head into 2023. Although it is still early in the quarter of 2023, we have seen further improvements on our loan-to-deposit ratio. Our plan to slow funding while actively raising deposits is working. Given the successful strategic management of our balance sheet that has resulted in bringing the loan origination numbers down, we do not see the need for utilizing a loan sale as we have done in the past. Our bank is defined by maintaining exceptional credit quality standards while delivering growth in value for stakeholders. And while this is a challenging macroeconomic cycle, we were executing on a very solid business plan and expect the results to follow once we experience a more normalized rate environment. Our NIM for the quarter was 2.45%, which obviously is a reflection of the interest rate environment and the continued pressure by the fed's action. And we expect this to normalize to historic levels as soon as the fed eases and the market conditions settle. We are focused on making more adjustable rate loans, which should offset some of those pressures of the current rate environment, but we are limited by a variety of factors including funding constraints as the deposit market remains extremely competitive and liquidity continues to drain from the financial system along with limiting our exposure to higher cost wholesale funding. Looking at our wealth management and trust business, we continue to experience meaningful contributions to the firm as evidenced by combined business unit revenue of $40 million for the year. 2022, this diversified revenue source in the form of recurring non-interest income accounted for 14% of the company's total revenue. We have also been successful in retaining existing clients and attracting new loans. Assets under management increase by $359 million in the quarter and ended the year at $5 billion and trust under advisement ended the year at $1.3 billion. The increases in ARM [ph] and AUA were the result of both new client inflows and positive market performance. When there is a market volatility and uncertainty, we typically experience an inflow of assets from existing clients and new clients. New clients are attracted to the independent RIAA model where they know they're working with a fiduciary, which is even more important than ever during market conditions like these. We have been proactively communicating with existing clients and strategically managing their portfolios as needed. We have been successful in engaging with them from an educational standpoint through our written market commentaries, our blog, our webinars, and our in-person events, as well as through our robust suite, our products and services such as an advanced wealth planning and tax aware investing. As a result, we are seeing strong client retention across the entire wealth management platform. Our investment performance has also been another bright spot. While the S&P 500 and another major indices were down more than 19% for the year, our moderate balanced portfolios were only down 14% on average and our total return fund received a three year and five year, five star rating from Morningstar. As we reflect in the quarter, I confidently say that we have an incredible client base and extremely attractive markets. I also want to say how proud I am of our entire management team. They are more aligned than ever and we have been working hard to accomplish our strategic objectives. Our entire team is working towards a common goal and I am so pleased that our executive management and the board have responded to all the events that have unfolded last quarter. We have a board that is well positioned, well represented across various industries with deep domain experience in financial services and banking, and I am pleased with their support of our go-forward approach. Let me touch on a few final data points. As a financial institution, we remain well capitalized with a tier one risk-based capital ratio at 9.18% at quarter end. Our tangible book value ended higher at $16.20 a $1.28 increase for the full year. Liquidity remained strong with no net charge offs and our provision for credit losses reflects the strength of our multi-family lending portfolio, which continues to be the strongest performing asset class across all real estate loans. We believe it is worth noting that we have never taken a charge off or a loss in multi-family in the history of this firm. As mentioned in previous calls, we are focused on managing our tax rate. We have tax rate substantially downward, and we have successfully gotten it to a run rate of 26%, which is largely attributable to our municipal loans and LIHTC deals and an increase of loans in Florida and Texas. We believe we can continue to experience favorable tax treatment as part of our growth strategy. Heading into 2023, our balance sheet remained strong with total assets of $13 billion. Between the strength of our existing management team and board, our relentless focus on client service and our ability to offer solutions to clients wherever they are in their financial lives, I continue to be very excited about our future. Once again, I want to thank everyone at First Foundation for the contributions through a difficult year and the continued support I have received. Now, before I hand the call over to Chris, let me first introduce him to you all. Chris Naghibi was appointed as our Chief Operating Officer in November and has seamlessly stepped into the role and has already started making a very positive impact. Chris sits in Irvine where our banking operations are headquartered. As some of you know, Chris was one of the original members of the First Foundation Bank team when we started the bank 15 years ago. He has continued to progress through various departments of the bank, most recently having served as our Chief Credit Officer. Among the many areas of focus and his role as the Chief Operating Officer, he has dedicated his first 90 days to building a stronger alignment among our business units, including the bank, wealth management interest department. These are the cornerstones of our business model and I am so thrilled to have Chris working to help optimize them. Thank you for the kind words, Scott, and let me be the first say that I'm honored to have been appointed Chief Operating Officer Loan originations were $849 million for the quarter and $5.8 billion for the full year. Looking at the breakdown of loans that we originated in the quarter, the percentages are as follows. Commercial, including owner-occupied commercial real estate, 51%; multi-family, 35%; single family 7%; land and construction is now at 3% and CRE investment at 4%. It is always important to note that we accomplish this without changing our high underwriting standards and our MPAs fell to a low of 13 basis points for the quarter, which as Scott mentioned, is low even for First Foundation Bank. This is also reflected is low even for First Foundation Bank. This is also reflected in our conservative underwriting standards as evidenced by our LTVs of 54% for multifamily loans and 49% for single-family loans. While it is true that we have followed the plan to slow our growth, we still reached peak levels of loan originations in 2022. As we look ahead, we anticipate that growth will continue to be strategically slowed in 2023 as we wait for the market to catch up to the actions of the Fed. Speaking more specifically about our loan yields, we achieved a weighted average rate of 5.72% on originations, which increased substantially from the third quarter. This quarter, we continue to see the impact of higher origination rates due to increases in the long end of the yield curve and as prior lower yielding rate lock loans have largely funded out our pipelines. As of December 31, 2022, our loan portfolio is comprised of: 50% multifamily loans; 32% commercial business loans; 7% nonowner-occupied commercial real estate; 9% consumer and single-family residence loans; and 2% of land and construction loans, which are selectively and carefully considered for our most valued clients. Before we look at our deposit business, I want to touch on our multifamily portfolio. As you may have seen, we added a few slides to our investor presentation about our multifamily lending business. The updated section in the presentation highlighted three things that I will speak to here: First, the markets we serve; second, the profile of our borrowers; and third, the assets that we lend on. Let me try to help paint a picture of the markets we serve. 90% plus of where we lend is in the State of California. In many of these areas within the state, rent control applies, which serves as both a ceiling when prices go up, but also as a floor when prices go down. In addition to this in almost all of our regions, the cost to buy is far greater than the cost to rent. There's a limited supply of units in land, which serves to keep the barrier for entry into the markets quite high. And even though we have referenced it on these calls, we have limited exposure to the Sunbelt region having never actively pursued lending there. The second point is our borrowers. We largely lend to what we consider real estate professionals, typically too big to take standard terms from a bank, typically too small to be part of a fund or large syndicate, although we do some syndicated deals. This all boils down to the fact we are working with knowledgeable and oftentimes repeat clients. And finally, let me touch on the properties or assets we lend on. These are what we consider essential or workforce housing in prize of 15 units to 20 units on average. A large portion were built between 1950 and 1980. And so these are classified as C&B grade buildings with higher quality, generally newer construction A-grade buildings mixed in. It has been our experience that Class A properties like this have greater downside risk given they are often leased up at top of market rents in our markets. It is this profile, which gives us confidence that the multifamily asset class will hold up like it historically has, as being one of the top-performing real estate loan products that banks can offer. This data goes back to before the financial crisis. Okay. Shifting gears and looking at our deposit business. Deposits increased by $802 million for the quarter and $1.6 billion for the year to end the year at $10.4 billion. As Scott referenced last quarter, it is a dogfight out there, and there is increased competition across all deposit channels. Our deposit costs came in at 1.47%, which is on par with our expectations. Before I wrap up, I just want to recap some of the successful projects we completed last year. During 2022, we successfully opened a retail banking location in Plano, Texas. We also completed the integration of our Florida acquisition. While we still maintain our banking headquarters in California, we have successfully expanded into new growth markets. To assist in that endeavor, we also launched our redesigned mobile app. This has allowed us to virtually connect with thousands of clients nationwide as they now can conduct banking via any mobile device. The app is very valuable as we continue to see client base expand into markets where we do not have a physical retail presence. Before I hand it back over to the operator for Q&A, I want to reiterate Scott's comments. I am very grateful for our team's dedication to delivering excellent client service when it matters most. This is a challenging time in banking, but I am confident we have the right team in place. At this time, we are ready to take questions, and I will hand it back to the operator. Hey David, before you begin, I'd just like to say that I have two other people here with us -- with Chris and I that are here to assist answering questions. So Amy Djou is here our Interim CFO and also Dave DePillo, our Deputy CFO, is here. So I just wanted to kind of formally say they're here as well to help assist with questions. And Chris, congrats on the promotion, very well deserved. I guess maybe at a high level, could we just talk about the organic growth trajectory going forward? We've strategically decelerated. Maybe just how do you think about the composition of production going forward? Would you expect to see more commercial business? Maybe that becomes a larger proportion of production? Or just curious kind of how you think about the growth trajectory as we head into 2023? So first and foremost, we have to get our loan-to-deposit ratio under control. We made significant improvements, lowering it from 108.4 down to 103.5. And we've made additional improvements since that time, and we're not even at the end of January. But we're hyper focused right now I think I said at the end of the third quarter, deposits just evaporated. And I think we made an amazing turnaround to be able to get our loan-to-deposit ratio down to that 103.5 and continue to improve. But that being said, David, and I appreciate your question because we're not looking to shrink the balance sheet. We really do hope to continue to modestly grow the loan portfolio throughout the year. Joe can touch on the modeling in terms of loan activity that we are projecting this year. But I will tell you, just to start with, multifamily is in a very weird spot right now. That's a technical term. The John Ecopia and FFA, our advisor, told us that some of his clients are funding stuff through Freddie and Fannie right now in the 4.60, 4.70 range, which, clearly we can't follow. I know that there are a few banks that are still modestly doing apartment lending, especially in the state of California, and those rates seem to be in the 5.50 range, which again, given where funding costs are, don't seem to make a lot of sense to me. And so there's not a lot of activity in the multifamily space. And I think I believe it to be prudent that we should not be lending on more fixed rate assets until we get greater clarity from the Fed on what their intentions are. So to answer, this is long ended way of saying, yes, we're going to focus more on C&I, it will help us more from an asset liability perspective on a go-forward basis. The great thing is that I want to mention before Joe and Chris step in here the duration of multifamily is pretty short. And it's like 2.3 years, 2.4 years. And part of that is the seasoning of some of our older years of books, the newer stuff is probably more like 2.8 years. But you're going to start to see a real turnover of some of those low coupons. Right now, it's not real advantageous for a borrower to want to pay those off. But this year, we've got quite a few that roll into the adjustable rate phase, which obviously will help our NIM, and bring the average coupon of our portfolio higher. But Joe, you want to talk about what you think are projections for this year. Yes. Just at a high level in terms of loan production, we're forecasting in a range of, call it, $1.5 billion to $2 billion, excluding draws, potentially higher. We normally report with drugs. So it could be a $500 million on that. Multifamily, as Scott alluded to, is certainly less as a percent. So of what we have modeled in C&I is definitely over 50% of the forecasted growth on the production side. So I think that covers essentially what the market looks like, but I'll also add one other -- a little bit of color, much like the single-family market, which was a bit of a stalemate towards the end of the year. the life cycle of the multifamily market has been a bit of a stalemate as well. Some of the seasoned investors are choosing not to sell and to hold off and see what the actions by the Fed are taking. So some of it is market di in and of itself in addition to the pricing that we're seeing out there. So the renewed focus on relationships and the additional detail as it relates to the C&I book, I think, is important for where we're going and what we're doing, and it really dovetails into the value proposition of the brand. So historically, we've grown those channels prior to the Fed's decision-making in the last year. And I think that growth has served us well, and we'll continue to see the benefits of that moving forward. Okay. That's great color. And maybe along the same lines, I mean, you talked about some of the repricing dynamics. Could you help us think about the yield pickup that you would expect from that just -- and given the shorter duration of those assets? And ultimately, like how should we think about the margin trajectory going forward once the Fed does stop and funding pressures start subsiding a bit and assets continue to reprice higher? Well, I believe the books of business this year that are to reprice is around $1 billion. Is that right, Djou? Yes. And in terms of the over forecasting for across, I'd say, all at costs. And of course, we actually have about $1.5 billion of adjustable C&I between both the term and the revolver as well. So a combination of those. What we're forecasting for loan yields going forward is kind of hitting a height somewhere in the high I'd say, high 4s for 2023 as those books continue to reprice. So I think as I indicated on the call, NIM is definitely going to continue to shrink a little bit until the Fed stops their actions. But I truly believe that the trough that we are experiencing is -- we're about to be at the trough. And I believe by the time we get to the second quarter, that will be the trough of NIM, and we will start to see an improvement of NIM shortly thereafter. So I think -- and that's going to be a combination of repricing of some of the multifamily and largely an increase in C&I. Okay. All right. That makes sense. And I wanted to maybe shift gears. You talked about some of the focus of Chris and better aligning the business units. I mean, the trust business has been phenomenal. And you talked about some of the strength there. Just curious if you could talk about some of the initiatives that you're working on? And just give us maybe some more details on the outlook for trust and some of the integration that you're talking about. Well, I'll answer this, and Chris can step in. But Trust is, in my opinion, one of the most important aspects. As you know, most trust companies are not on the West Coast. They're on the East Coast and banking sectors. And when it comes to First Foundation Advisors probably about 90% of our assets are held at Charles Schwab, which is an extremely strong institution. I've said in the past, we're part of their SAN [ph] program and the SAN program is a program that you're basically allowed as a registered investment adviser to go into select offices of Charles Schwab. It's prenegotiated with Charles Schwab, which branches you're allowed to go into. There's off matrix and other types of things. But when you look at across the universe of RIAs, every RIA is all pretty much the same, with the exception of what I feel is a very select offering for us. We're one of only a few trust companies, solutions for the Charles Schwab, and we're really trying to exploit that as well as continuing to get out to professionals. As you know, a trust department that starts, which our trust department is 15 years old, same as the bank, has grown tremendously because of First Foundation Advisors having a strong presence with CPAs and attorneys in the Orange County marketplace. We've now expanded that across all of California. We're getting into Florida and Texas. And I believe as we -- some of our referrals have been coming from Charles Schwab, and we've noticed that the activity is picking up as a solution. And we believe that, that's probably the best ringed for both First Foundation Advisors and the trust department. So I'll speak more a little bit on that and provide a little additional color. Having grown up in this platform, I can tell you that we have 55,000 bank clients that, frankly, have deep pockets and a deep relationship in Nexus to our brand. The stickier they are, the better it is for the brand. That means that trust clients and FFA existing clients take advantage of the wealth planning services and that wealth planning services creates new business banking opportunities for the bank. And it's an ecosystem that I think in some ways we can continue to still expand and exploit particularly as it relates to our data warehouse and the vast capabilities of the information that we have with every single one of our clients. One of the key initiatives that I'm really looking at doing is being a better partner with the advisor side, on the bank side to work more collaboratively as we push forward. And I think that those conversations could actually be very, very fruitful, not say that they haven't been historically. But certainly, with the amount of information and the amount of product offerings that we have, it's an exceptionally broad brand that frankly has things that larger banks can't compete with, certainly from the value proposition of service. One of the things, I think, David, that we have not done well is penetrate ourselves, especially through the branch network. And recently, Rick Keller, our Chairman of the Board, in conjunction with our bank employees reached out to the 20 largest clients in our Irvine branch. And as a result of that, just by Rick speaking to these 20 individuals, and it was really about what the economy is doing his typical what he would do with any client or a group of people talking about what the Fed is doing, what's happening in the economic cycle, etcetera, etcetera, generated something like $8 million to $10 million of new deposits, which is not even what you would expect to happen and he got additional dollars for First Foundation Advisors. So we're going to -- I think one of the things that Chris just touched on is we need to do a better job of working our own brand, and that's what you're going to see on a go-forward basis. And I'll leave it with one last thought on that topic. Overall, $68 trillion is set to exchange hands. We are well positioned to facilitate that with not only our existing clients, but with new ones. So there's a lot to grab for there, both inside and outside the company. I wanted to shift over a little bit on the deposit side of things. Scott, can you tell us what the what the spot rate was on deposits at the end of the quarter. I don't know if I saw that in your deck at all anywhere. Okay. Okay. So in terms of customer service fees, they didn't go up quite as much as we would have thought given the rate hikes in the fourth quarter. So -- is part of that related -- was there a decline in the [indiscernible] bearing deposits that are ECR deposits in the fourth quarter? Was that part of the decline in overall noninterest-bearing deposits in the quarter? Well, we've stated in the past that MSR deposits, in particular, are always on a low around the December time frame, and that's due to tax and insurance payments going out with our MSR clients. And it's also in the April time frame. So right now, you should see deposits picking back up with those MSR clients. I will also add that 10/31 exchange has probably decreased a little bit due to the activity of transactions slowing. But right now, the next probably 4 months, you should see a pickup in deposits. But yes, it's considered a low point in the fourth quarter. Okay. And then in terms of the brokered deposits that you added in the quarter, can you talk about kind of -- tell us what the yield or the rate on those and kind of a [indiscernible] in terms of maturity? We've kept all our maturities under -- majority, let me say, 90% under 2 years. So we're funding really more on the short side. It's really our belief that the Fed is way more towards slowing increases on the Fed cycle. And we don't want to, at the wrong moment, go extremely long term on CDs or other types of broker deposits. So they're all really more, I would say, probably 90% of them are 2 years and under. Okay. Great. And then last question. Just in terms of -- you talked about the expense or some last quarter, I think, some expense focus. Obviously, the reversal of some incentive comp in the fourth quarter related to the departures. Separate from customer service deposit or customer service go up a bit more as the Fed raises more in the first quarter, any opportunities to offset that NIM compression and NII with lower expenses or anything else to be there beyond what you've done? Well, it really pains me to say this, as a person, it's not something that anybody wants to do, but we did just go through a pretty significant round of layoffs. I'm not happy that that's the case. But as the CEO of a publicly traded company, that's would also forces us to consider all alternatives. And we will continue to look operationally to see where we can continue to provide call saves. I was trying desperately not to have to go there, but we, like I think many other institutions, have had to go through that. Was that -- so was there any impact there in the fourth quarter from whether it be severance or otherwise? Or is that going to be reflected in the first quarter, Scott? Yes. Dan, the severance are included in the fourth quarter. And so we -- I mean, it's not much. Basically, it's a severance is offset with what the other accruals that we reversed due to the exit of executive management. The largest of the bonus accrual reversal was in the non-GAAP. But in terms of what Amy described as the severance. Scott, maybe just to go back to some of the competitive dynamics in the multifamily space right now. It obviously sounds pretty tough right now. And I guess I'm just curious how you see the competitive landscape shaping. And specifically, are you seeing competitors kind of reducing capacity across the board in multifamily? And do you think that could have a positive, I guess, eventual impact as you think about the spreads in the business moving forward? Yes. I think as long as the Fed, it provides a lot of uncertainty in the marketplace. You're going to see people all over the map. I do know that our traditional competitors, I have seen people put out entire departments in the multifamily sector. completely or dramatically slowed down their production. But that being said, there's almost no volume. I think as Chris was trying to say earlier, a lot of our borrowers, and we've talked to a lot of our larger borrowers, they're not buying. They're not selling. They're just kind of sitting back at this particular point, trying to understand what the Fed is going to do and what that might do to cap rates, other types of things. Yes. To your point, I think the competitive landscape in the future is obviously changing somewhat dynamically as these people choose to pull out of the market. Their time to re-up and rehire people should they choose to dip their toe back in or prepare themselves for volume, will make them slow to act relative to how fast we can move to position ourselves back in. But it does take a little bit of, I guess, end client, end customer appreciation for the new rate environment in markets, like California, where I would say the underlying land value is very high. They're used to a low loan to value versus the debt service that they're going to get to ultimately get the loan. So I don't think there's a huge impact to their willingness and ableness to refinance whereas in other markets, that might be a challenge. But for our primary lending areas, it should not be impactful, and we should be well positioned should rates support the NIM. Yes. Okay. And just going back to the, I think, $1.5 billion to $2 billion origination target. Can you just help us think about what you're targeting for the year from an incremental spread standpoint? So just the incremental kind of loan yield less the cost of funding, just understanding the funding costs will probably be elevated. I know it's probably not great in multifamily, it sounds like right now, but just what's the incremental spread you're targeting? And how does that compare to the margin today? Well, the -- to the extent that we put more C&I on, currently, those yields are in the 8.5-ish -- 8 to 8.5-ish range. Is that right? . It is. It's in the 8%, 8.5% range. Incrementally, I would tell you that if we were to put on a borrowing at the Federal Home Loan Bank, that's somewhere between 4.60, 4.65 currently today. So to the extent that we are successful on rolling over some of those multifamilies, I see those probably going from handles up to 5.5. So by the time you blend some of that stuff, you're talking mid- to high 6s, I think. Yes, okay. Got it. That's helpful. And then if I could just take a stab again at the year-end, either year-end total interest-bearing deposit costs. I think the 1.47 was the full quarter average. And I just want to clarify that. So December, the -- I misunderstood the question, the spot rate was closer to 2% for December. First one for me, just on the lending side of things, the $1.5 billion to $2 billion of production with the potential maybe for an additional $500 million. So let's just call it, $2 billion I think I recall after pulling kind of your prepay and payoff activity recently, it kind of implies net loan growth of about 10%, call it, 10, 11, 12. Is that kind of in the ballpark in terms of your expectations? Or should we be able to lower that? . Okay. And then in terms of the margin, do you happen to have it for the average margin for the month of December? I feel like we're in the ballpark, but I just wanted to kind of reaffirm, it kind of looks like your margin might shake on the low 2s this coming quarter. Yes. It's going to continue to decline. And I think you would be accurate in saying. I think we're projecting right now 2.15% range to 2.20% range. Okay. Great. And then just on the borrowings, I think you have about $1.5 billion of borrowings at the end of the year. How should we think about those balances throughout the year? I mean, do we kind of just hold at that level based on your actions on the deposit side or not? Yes, it should hold pretty steady there. To the extent that we continue to be successful even if it's a broker deposit, we will, obviously, pay down the home loan bank, but I don't really see it expanding much. Okay. And then last one for me, just on the expense -- the noninterest expense run rate probably, can exclude the customer service costs just to isolate or not up to deal that variable? Can you maybe quantify the savings from the recent layoffs and probably your thoughts are around kind of a core expense run rate going forward with any other initiatives you might have? I was hoping to avoid that answer, but the savings on this latest round, including some of the management is somewhere between $11.5 million and $12 million. Okay. So that's on -- that's kind of on an annualized basis out of the run rate this coming quarter, I assume? We haven't seen any of those savings yet. . No -- yes, you're right. And no, we have not seen any -- it would -- all of this transpired this month. except for that you read about. Just had a follow-up part of which was just answered in terms of the savings annually. But that annual savings number, so the fourth quarter kind of comp line of $23 million included the $4 million of reversals. So those savings should work off of more of a $27 million kind of gross up top line. Is that accurate? . Yes, yes. And by the way, nobody has brought up and I did that was a pretty significant reduction. That brings our total investment in that category I think, down to around $2.8 million. So there's not much left in that space. And as you guys are aware, with the recent things that have been going on in the crypto industry, I believe we're going to sit back and take a pause. That being said, our regulators, along with every other bank's regulators, has put a letter out basically indicating that they want to put structure in place. What that means? I don't know. But what I would tell you is that any initiative that we may have had on that front will not come to the forefront anytime soon until we clearly understand what the regulators will expect once they put those guidelines in place. If I could just ask one more clarifying question in terms of the expense numbers. Joe, I think you mentioned -- you kind of pointed us towards that non-GAAP table in your press release. So the $4.2 million reversal of incentive comp, that was net of severance? Or was that severance somewhere else? That was net of severance. So what was the almost $1 million of the professional service costs in the quarter that you called out there? This concludes our allotted time for today's question-and-answer session. I will now turn the call back over to Mr. Scott Kavanaugh for closing remarks. Thank you again for participating in today's call. I'm very proud of the results we reported, and I am pleased with the path that we are currently on in spite of difficult economic times. As a reminder, our earnings report and investor presentation can be found on the Investor Relations section of our website. Thank you, and have a great day.
EarningCall_1096	Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Fourth Quarter 2022 Results Conference Call. All participants are at present in listen-only mode. Following managementâs formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the companyâs press release. If you have not received it, please contact Silicomâs Investor Relations team at GK Global Investor Relations 1-212-378-8040, or view it in the News section of the companyâs Web site www.silicom-usa.com. I would now like to hand over the call to Mr. Kenny Green of GK Global Investor Relations. Mr. Green, would you like to begin, please? Thank you, Operator. I would like to welcome all of you to Silicomâs fourth quarter and full year 2022 results conference call. Before we start, Iâd like to draw your attention to the following Safe Harbor statement. This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and may change as time passes. Silicom does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of our increasing dependency for substantial revenue growth and the limited number of customers in the evolving cloud-based SD-WAN, NFV and Edge markets, the speed and extent to which solutions are adopted by these markets, the likelihood that we will rely increasingly on customers which provide solutions in these evolving markets, resulting in an increasing dependency on a smaller number of larger customers; difficulty in commercializing and marketing Silicom's products and services, maintaining, protecting brand recognition, protection of intellectual property, competition, disruptions to our manufacturing and development along with general disruptions to the entire world economy related to the spread of the novel coronavirus COVID-19 and other factors identified in the documents filed by the company with the SEC. In addition, following the company's disclosure of certain non-GAAP financial measures in today's earnings release, such non-GAAP financial measures will be discussed during this call. Such non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company's current performance. Management believes that the presentation of these non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing core operations and prospects for the future. Unless otherwise stated, it should be assumed that financials discussed today in this conference call will be on a non-GAAP basis. Non-GAAP financial measures are -- disclosed by management are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not in accordance with or a substitute for GAAP. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release, which you can find on Silicom's Website. With us on the line today are Mr. Liron Eizenman, President and CEO, and Mr. Eran Gilad, CFO. Liron will begin with an overview of the results, followed by Eran who will provide the analysis of the financials. We will then turn over the call to the question-and-answer session. Thank you, Kenny. I would like to welcome all of you to our financial results conference call discussing our fourth quarter and full year 2022 results. We are very pleased to report another solid quarter capping a strong year of revenues, margins, and EPS growth for Silicom. In particular, this is all the more impressive against the background of what has been a continued challenging and complex environment with significant component shortages and a lot of supply chain issues. We are very happy with our performance, growing our fourth quarter revenue to $45.2 million, which is up 24% over last year. For the full year of 2022, our growth was 17% year-over-year to $151 million in revenue, a record year for Silicom. Furthermore, the strong operating leverage within our business model allow the revenue growth to translate into accelerated profit growth. This is demonstrated by our operating margin expanding to 15.6% for 2022 versus 12.4% last year, and our net margin growing to 14.1% for 2022 versus 10.9% last year. The continued success led to our 72nd quarter of uninterrupted profitability, and we reported 2022 earnings per share up 55% year-over-year to $3.12 per diluted share, double that from only 2 years ago. It all highlights the strong and broad demand for more end markets, especially the edge products, and the markets understanding of our unique value proposition that we have built over the years, including high performance products, reliable delivery, quick customization, and unmatched support capabilities. Our success demonstrate the markets clear need for our groundbreaking products, while underscoring the benefit of the leverage inherent in our business model. 2022 is taken up a step towards meeting our long-term target financial model that we shared with you a few years ago. Back in 2020, our target was 18% operating margin and 15% net margin when we reach full year revenue of approximately $250 million. At that time, our respective operating and net margin were about 10%. And this was an aggressive target. The results in 2022 demonstrate that in only 2 years, we are well on the way, thanks to the impressive leverage we demonstrated in our business model throughout the year. Our cash position currently stands at $50 million, up by approximately $7 million since last quarters. As I explained last quarter, our working assumption is that the component shortages will continue to improve during 2023, in fact we have decided to actively and gradually reduce our inventory levels. Peak inventory levels are therefore now behind us. And as inventory has decreased during the past two quarters and is expected to continue to gradually decrease in the quarters ahead, it is and will directly translate to an increase in the cash level. Our continued strong cash position remains a key strategic asset and significant competitive advantage, especially in today's market. It allows us to serve our existing customers better, maintain a high-level of critical inventory allowing us to deliver products which are not readily available. This in turn enables us to attract new customers and new businesses, which have difficulty finding product elsewhere. Furthermore, it enabled us to capitalize quickly as opportunities present themselves. I would like to discuss our recent edge networking design win from Fortune-500 SD-WAN F. This networking leader serves customers across the Americas, APAC and EMEA, and is a new important edge customer roster. The win was for a customized version of one of our 5G integrated [indiscernible] edge networking products. And the win was due to our unique feature set, flexible connectivity options and offering differentiation in the market. We expect orders to ramp up through 2023 with deployment levels reaching a steady state beginning in 2024. This win is another clear demonstration of the depth and quality of the potential opportunities in our pipeline, as well as the compelling value proposition that we offer for next generation edge networking use cases. We can now point to a record pipeline of opportunities for our edge products in multiple varied markets as well as significant interest from potential new customers for our product. Wins such as those have established us as an industry edge platform provider of choice with a product rapid customization capability, delivery capabilities and ongoing support that many customers need. We expect to continue benefiting strongly as the market transitions to the edge platform paradigm, driving multiyear growth for our company. Telcos, service providers, enterprises, network vendors, cyber vendors as well as cloud players, all are seeing the need for edge products for various applications, such as SD-WAN, virtual CPE, telco dedicated routing and SASE and more. As our edge products, which are initially target to the SD-WAN market became a clear growth driver for us, we realized that those same products are highly attractive for significant broader applications and varied markets, thus making our total addressable market potential even bigger than what we had initially thought. Finally, in terms of our guidance ahead, while we move into 2023 with all-time record, year-start backlog, our visibility is limited due to a challenging mixed-signal environment that is impacted both by the global economic slowdown and the expected loosening of the supply chain after a long period of component shortages. We therefore project that our revenue for the first quarter of 2023 will range between $37 million and $38 million. The midpoint of this range represents 17% year-over-year revenue growth over the first quarter of 2022. In summary, we remain very pleased with our performance throughout 2022 with strong year-over-year growth in revenue and a significant acceleration in our profit growth, proving the operation leverage inherent in our business. We have strong tailwinds in the form of our highest-ever level of year-start backlog and a strong roster of leading customers in design wins, many of which are in the early ramp up stage. Furthermore, we maintain a healthy and quality pipeline of future design wins. Finally, we see that the company shortage is easing up. And over the coming year, we expect to put this issue behind us. On the other end, there are headwinds emerging in the form of global economic slowdown, which is starting to impact our visibility. We are being cautious as there is increased potential for longer decision making processes and delayed ramp up by customers, as well as the potential for cancellations or push outs of the high-level of orders that were issued during the very long component shortage period. All in all, looking at the coming years, we remain optimistic that are double-digit compound annual revenue growth will continue. As we enter into 2023 with a total addressable market larger than ever, our highest-ever year-start backlog and a healthy quality pipeline, we have never been better positioned. With that. I will now hand over the call to Eran, for a detailed review of the quarter results. Eran, please go ahead. Thank you, Liron, and hello, everyone. Revenues for the fourth quarter of 2022 were $45.2 million, up 24% compared with revenues of $36.3 million as reported in the fourth quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows: North America 72%; Europe and Israel 23%; Far East and rest of the world 5%. During the last 12 months, we had only one over 10% customer and our top three customers together accounted for about 27% of our revenues. I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the noncash compensation expenses in respect of options and RSUs granted to directors, officers and employees, acquisition related adjustments as well as lease liabilities, financial expenses. For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the fourth quarter of 2022 was $15.1 million, representing a gross margin of 33.5% within the range of our gross margin guidance of 22% to 26% and compared to a gross profit of $12.7 million, or gross margin of 34.9% in the fourth quarter of 2021. The variance in the gross margin is a function of the specific product mix sold in the quarter. Operating expenses in the fourth quarter of 2022 were $7.2 million, below the $7.5 million reported in the fourth quarter of 2021. Operating income for the fourth quarter of 2022 was $7.9 million, an increase of 55% compared to operating income of $5.1 million as reported in the fourth quarter of 2021. Before moving to the net income data, I would like to mention the relatively high effective tax rate we had in the quarter. The higher the normal tax rate is mainly due to one-time FX in the fourth quarter. Please note that our full year tax rate is 15.2% in line with our 15% expected tax rate. Net income for the quarter was $6.6 million, an increase of 48% compared to $4.5 million in the fourth quarter of 2021. The earnings per diluted share in the quarter were $0.98. This is a year-over-year increase of 51% compared with EPS of $0.65 as reported in the fourth quarter of last year. Now turning to the balance sheet. As of December 31, 2022, the company's cash, cash equivalents and marketable securities totaled $49.9 million with no debt, or $7.41 per outstanding share. That ends my summary. I would like to hand back over to the operator for question-and-answer session. Operator? Great. Thanks so much, and super job against a challenging environment on the print as well as the conservative guide. So the obvious first question here is, you've cautioned on concerns about the macro environment, potentially resulting in some of the backlog potentially being either pushed out or diminished as a result of macro conditions. But you also have a significant number of new projects that are in the early phases of ramp, which, obviously they could ramp a little slower given the environment. So have you actually seen any of the backlog be committed to? And second, how do we balance those two as we're thinking about the progress through the year? So first of all, thank you, Alex. First of all, we did not see any significant cancellations or push out yet. But it's definitely something we're monitoring and wanting requires us to speak with our customers every day to understand their plans, and how they see 2023. As we look into 2023, as we said, we have limited visibility. That's part of the big question. I mean, how really those new design wins will ramp up? Will there be significant push outs? Will customers ask to cancel orders? Those are the big questions. So it's hard for us to give a definitive answer, because our visibility is limited for 2023. If we will look at the supply chain side of the equation, you said in the December quarter that you're starting to see some improvement in availability. Can you talk to what degree that is factoring into your thinking at this point? And how much further do you expect that to improve over the course of the year? So right now we see the improvement continuous. Things are improving, more vendors are able to support shorter lead time and have better availability, but not all of them and in some cases, certain vendor will have certain parts more available and other parts less available. So the work that we are continuing to do with the finding alternatives and finding solutions continues all the time. But the number of parts that we need to focus on is decreasing all the time. And our assumption is that during 2023, it will, at some point, I don't know exactly when in 2023, it will be almost back to normal. But hard for us to say exactly when. We do not expect it to be Q1 for sure, but later in the year, we think it will become better and better. And then looking at the OpEx side of your equation here, obviously, the Shekel have bounced around a little bit, but it's still pretty low relative to historical ranges. And you've managed to do a fabulous job of essentially flat costs at the OpEx level in '22. Should we be thinking about '23 OpEx in investment mode, in containment mode. How do we think about it? How do we -- how should we be modeling it? I think we should definitely maintain it. I mean, assuming those significant exchanges -- exchange rate changes, we expect it to be the same. Just to clarify, Alex -- Alex, just to clarify, we expect it to be around $33 million, not the same, sorry. I was thinking about the model, not about 2022. Right. I see. And then on the interest line, given your cash balances going up and the benefit of higher interest rates on cash balances, should we be seeing an increase from the 524k that you posted in the December quarter, each quarter? Is that -- that's below the watermark for the year? Not necessarily. On top of the income from investing activities, with its higher yield, the financial income presented in our P&L is largely dependent or impacted by exchange rate differences. In other words, indeed, the yields right now are better than the yields a year ago, no question about it. However, exchange rate is a big factor in the financial income number. Therefore it is hard to predict right now. Assuming the exchange rates stay flat, that would be I think the assumption most people work off of. Would that then be fair to say that the interest line ought to be higher over the course of the '23 timeframe? Okay. Right. And one last question. And then I'll cede the floor. The pipeline, these projects are longer term in nature, most companies even in a macro environment are still going to be looking at the projects that they need coming out of a recession in 18 months or whatever the timeline is, how does your pipeline look in terms of larger contracts? And what is the kind of the timing of the next contract wins? Do you expect to see meaningful wins in the first half of the year against this environment? Or does that slow those down to the point where we shouldn't be anticipating them? From a pipeline perspective, we have a very good pipeline. I think I said it a few minutes ago in our opening words. Yes, we see a very good pipeline, very fast pipeline, especially for our edge products. We -- all the time, we see more and more need. I don't know exactly how those will ramp up eventually, that will definitely depends on the global economy. But I think from companies pushing more and more network equipment towards the edge, or still needing our equipment in data centers or in enterprises, we still see that and we still see a very set [ph] pipeline and our sales team is very, very busy in addressing all those opportunities. [Indiscernible] addressing new wins as opposed to existing pipeline of business, that's -- how to say it, already in hand. Obviously, the timing of ramping specific projects that have already been won can have a different curve to it. But what about news flow of large new wins? Definitely working on that. I mean, the -- we don't see a slowdown necessarily in closing the deals, we will see it. Each project has its own nature of how the company is working, and how quickly or slowly they're moving. But from the point of getting wins, I don't necessarily see that we'll see a slowdown. The actual ramp up and deployment of those projects, that will be a big question. But getting the wins, Iâm sure, we will get more wins and we'll see them. Deployment, that's a big question. One last question. If I look at the geographic display of your customers, is there any difference in the behavior of customers that are located? Obviously, it doesn't translate into where the products going, but located in different geographies, or are they all behaving pretty similarly at this time? I think it's mainly a function of culture, not more than that. I mean -- but we don't see specific markets behaving economically, I would say, differently than other markets right now. Obviously, each geographic with its own culture and the way they are used to doing business, but nothing special beyond that. I was hoping somebody else was going to queue, but nobody else is queuing, myself continue. Given the improvement in cash flow, given the volatility in the stock market, do you anticipate utilizing the cash in terms of buybacks or any other activity that -- how should we think about use of cash in this environment? Still, right now, we feel that the best use for our cash, given the uncertainty still to be able to use it for inventories if we would need to do so. And for components, we don't have any other plans at the moment for that. Just one for me. I want to get back to the gross margin and [indiscernible] this quarter. I think you call that product mix, but can you elaborate just a bit on that? And also, is that something that continues into the first half of this coming year? Or do we kind of move back to that 35%, 36% level that we saw in the previous two quarters? Thank you. So we still see that we're going to be in the same range. We don't see any reason to change the range right now. We still believe will be in the 32 to 36. There are no further questions at this time. Before I ask Mr. Eizenman to go ahead with his closing statement, I would like to remind participants that replay of this call will be available tomorrow on Silicom's Website, www.silicom-usa.com. Mr. Eizenman, would you like to make your concluding statement? Thank you, operator. Thank you everybody for joining the call and for your interest in Silicom. We look forward to hosting you on our next call in 3 months time. Good day. Thank you. This concludes Silicom's fourth quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
EarningCall_1097	Greetings, and welcome to Hawaiian Holdings, Inc. Fourth Quarter and Full Year 2022 Financial Results Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Thank you, Doug. Hello, everyone, and welcome to Hawaiian Holdings Fourth Quarter and Full Year 2022 Results Conference Call. Here with me on Honolulu are, Peter Ingram, President and Chief Executive Officer; Brent Overbeek, Chief Revenue Officer; and Shannon Okinaka, Chief Financial Officer. We also have several other members of our management team in attendance for the Q&A. Peter will provide an overview of our performance, Brent will discuss revenue, and Shannon will discuss cost and the balance sheet. At the end of the prepared remarks, we will open the call up to questions. By now, everyone should have access to the press release that went out at about 4 o'clock Eastern Time today. If you have not received the release, it is available on the Investor Relations page web page of our website, hawaiianairlines.com. During our call today, we will refer at times to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found at the end of today's press release posted on the Investor Relations page of our website. As a reminder, the following prepared remarks contain forward-looking statements, including statements about our future plans and potential future financial and operating performance. Management may also make additional forward-looking statements in response to your questions. These statements are subject to risks and uncertainties, and do not guarantee future performance and therefore, undue reliance should not be placed upon them. We refer you to Hawaiian Holdings' recent filings with the SEC for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. These include our most recent annual report filed on Form 10-K as well as subsequent reports filed on Forms 10-Q and 8-K. Hello, Marcy. Hello, everyone, and thank you for joining us today. It's encouraging to be entering a year where COVID restrictions are no longer hovering over our network. But we know that we have a lot of work ahead of us as our financial performance remains quite a ways from being fully recovered. As we continue to build upon the progress we've made, we've also embarked on a number of significant initiatives that will strengthen our company and make Hawaiian a better airline our guests, our community and our shareholders. I want to start by thanking our team. We've been tested over the past few years by a global pandemic, intense competition and during the waning weeks of 2022 by Mother Nature. Through it all, our team has shown their metal and continued to deliver unrivaled hospitality. Our team cares deeply about our company, our guests and each other. And more than anything else, this is what sets us up for success as we move forward. Leisure travel demand remains strong. We've experienced a full recovery in much of our network, most notably in the largest part of our network between the Mainland U.S. and Hawaii. Low fares in the Neighbor Island market have stimulated traffic and we continue to materially outperform our competitor on all these routes. Australia, New Zealand and South Korea have all seen strong demand recoveries over the course of 2022. Having said that, despite the removal of COVID travel restrictions in October, Japanese travelers have not yet resumed international travel at a pace comparable to pre-pandemic levels as Brent will discuss in more detail. With the timing of Japanese demand recovery is still uncertain, we will need to be nimble. In recent weeks, we've made adjustments to slow the deployment of capacity to Japan. While we remain confident that with time the long standing affinity of Japanese travelers for a Hawaii vacations will manifest. We also need to be pragmatic in putting capacity elsewhere if recovery remains slow. The natural question for investors is to wonder why it is taking Hawaiian longer to return to profitability than other U.S. airlines. On the cost side, our outlook relative to 2019 is comparable to others. We are facing cost inflation in a number of categories, including labor. I should emphasize that our cost outlook now includes the impact of new contracts for each of our unionized group since 2020, including the economics of the TA we recently reached with ALPA. Where our 2022 results and our near term outlook diverge from our peers is on revenue. Not because we are underperforming our competitors on specific routes, but because of the characteristics of the markets in which we compete. We don't control the timing of demand recovery from Japan. We only make decisions on one side of the Neighbor Island competitive battle. And even in North America, the North America to Hawaii market, which is operating profitably, with supply demand environment relative to 2019 is less favorable than in the domestic 48 and transatlantic markets. As a result, I can project the timing of our return to profitability as precisely as I would like. What we can do and what we are doing is to focus on what we do control. We can focus on operational execution to unlock efficiencies, which help offset an inflationary environment. We can invest in a continuum of initiatives to position our company for sustained success. And we can work to win competitive battles and maximize revenue generation in each of our markets. That is our focus. Everyone in Hawaii is keenly focused on winning in Hawaii. Last quarter, I talked at length about the competitive situation on our Neighbor Island routes. Based on the most recent information available through DOT reporting, we continue to succeed in earning a disproportionate passenger share with higher average fares than our competitors and the gap is substantial. We continue to believe that our place in the community, our product and schedule, our knowledge of the guests and our fabulous employees give us structural advantages here that will enable us to win. We are Hawaii's airline. The current battle continues nonetheless, which suppresses near term financial performance. We are standing our ground and remain resolute that we will win in the end and emerge stronger on the other side. Also among our key imperatives this year is to firmly reestablish an efficient operating rhythm. 2022 was marked by an unprecedented level of hiring and training throughout our organization as we rebuilt our network after the pandemic. Almost 20% of my over 7,000 teammates have joined our company since the beginning of 2022. Being in rebuilding mode meant that we sometimes accepted ways of working that were not optimally efficient at scale. For 2023, the focus is on operating more reliably, consistently and efficiently, something that is good for both our guests and our cost structure, countering inflationary pressure in a number of areas. Over the past few months, we have not performed to our standards operationally. The root causes are not a function of our decisions, but it is our responsibility to overcome external forces and deliver the level of service and reliability our guests expect. Since October, on-time performance at our Honolulu hub has been undermined by construction on a primary arrivals runway and the air traffic control programs that constrain arrivals into the airport. These changes have disproportionately affected short haul Neighbor Island flights. As a consequence, our reliability has fallen below our high standards and we've been forced to make adjustments to our scheduled to stabilize operations. This construction will continue into the second quarter and will continue to challenge our operations for the next few months. We've adjusted our schedule to add block time and have created schedule recovery buffers on our lines of flying. As a result of these changes and an intense focus on daily reliability by our operations team, we've seen considerable improvement in performance over the past two months. But even with these changes, it will be a day to day battle during the construction period to manage through the capacity constraints at our primary hub and we will be more susceptible than usual to weather our mechanical disruptions. A huge mahalo goes out to our teams and the trenches who are working every day to deliver on our customer promise. We are also not immune to global supply chain challenges. Since late last year, we have encountered constraints on the availability of A321 engines, for which Pratt Whitney's MRO supply chain has been unable to keep pace. Most recently, this has resulted in two of our 18 A321s being grounded for an extended period awaiting available serviceable engines. Here again, we have made adjustments to protect the integrity of our schedules, but not without operational challenges and associated revenue and cost headwinds. As we deal with these near-term challenges, we remain keenly focused on completing an extensive list of initiatives that will position Hawaiian for long-term success. Our team has deep in preparation for the launch of freighter operations for Amazon later this year. Over the next few months, we will also be -- we will also complete the insourcing of certain elements of the maintenance programs for our A330 fleet, for which we have relied on a third-party for over a decade. This will improve our cost structure overtime and immediately give us more control over fleet reliability and performance. While separate from the Amazon initiatives, taking on this in-sourcing at the same time as we are adding at least 10 freighters to our A330 fleet makes it even more timely. We're putting mobile technology in the hands of more of our employees to make us more operationally nimble and to allow us to serve our guests better with real time information. And in April we will go live with our new passenger service system. Not only does this un-shackled us from a core system that has limited our pace of innovation, it also has served as a catalyst to accelerate transformation of our technology, streamlining the connections between the PSS and other systems, enabling better use of data and providing an opportunity to modernize code for our e-commerce platform. This year, we will begin cycling our long-haul fleet through the installation of StarLink inflight connectivity, which will position us as a global leader in offering free, fast and frictionless Internet to all our guests. We're also pleased to have reached terms on a four year pilot working agreement with ALPA this month. Since this agreement is currently out for a ratification vote, we won't be commenting on the specific terms of the contract. But we have reflected the expected economic impact of the agreement and the guidance we're sharing today. Should our pilots ratify the agreement, we will have reached new contract terms with all of our organized labor groups since 2020. And none of our contracts will become amendable prior to 2025. So we have a lot to do in a year with significant challenges in some of our core markets. While we might wish for these initiatives to be a bit more spread out, you don't always get to choose when the opportunity presents. And I believe the priorities I just mentioned will be transformational for our company. 2023 promises to be an exciting year and I am fortunate to have an unbelievably talented team to tackle the challenges and opportunities. Thank you, Peter. Hello, everyone. During 2022, we saw robust demand for travel to Hawaii from North America and our international markets, excluding Japan, a strong performance by our premium and ancillary products. We saw overall PRASM surpassed 2019 due to the strength in these areas. Our ability to be flexible and adapt our network and schedule to address a dynamic environment served us well. Overall, fourth quarter revenue performance was in-line with what we have anticipated, despite the operational challenges we faced in the last two weeks of the year. Although ASMs were down 6% from 2019 due to a slower than expected rebuild in Japan, our system RASM was up versus 2019, demonstrating the continued strength weâve see in our U.S. Mainland to Hawaii routes and International routes, excluding Japan. Consistent with our expectations, approximately $25 million of passenger revenue was attributable to spoilage from pandemic era credits that expired at the end of December, a level that we do not expect to see going-forward. The resilience of the leisure market was evident in our domestic travel demand. U.S. Mainland to Hawaii total passenger revenue was up 29% on 9% more capacity compared to the fourth quarter of 2019 with load factors remaining in the high 80s. We achieved this revenue growth despite 11% more industry capacity between the U.S. Mainland and Hawaii than in 2019. 2022 was also a strong year for our international markets outside of Japan. In July we resumed service to Auckland and pent-up demand to and from New Zealand drove strong RASM gains. On the back-half of the year, Korean PRASM returned to pre pandemic performance levels and we continue to experience very strong demand in the Sydney market. Unlike our other international markets, Japan's ramp-up has been slower than we anticipated when it began reopening. This difference can be attributed to three primary factors. First, Japanese consumers have exhibited a degree of conservatism in returning to the long-haul international market -- international travel. Second, the Japanese government is encouraging major domestic travel agencies there to promote domestic travel in lieu of international travel. And lastly, the weakness of the yen has made it more expensive to travel to Hawaii now than it was prior to the pandemic. The relationship of Japanese travelers to Hawaii is a strong one. And Hawaii is still a cherished an aspirational destination, more so than other international destinations. This drives our belief that the weakness in demand is transitory and we will be well positioned to fully serve Japan to Hawaii market when demand returns. Moving on to the Neighbor Islands, it continues to be a challenging market from a fair perspective. Our competitor is no longer offering $39 last seat availability as they were for much of the second half of 2022. But low fares are widely available in the market. We continue to manage yields above $39 when possible and the low fares have had the near term effect of stimulating demand. We continue to offer the best service and schedule in the market and we are seeing positive signs that our strategy is paying-off. The most recent DOT statistics show that for the third quarter, our load factor was 22 points higher than our competitor. And our average share of roughly $50 million was nearly double there's. While our ticket PRASM of -- while our PRASM of $29.3 was well below our historical standards, it vastly exceeded our competitors $10.6 result. With our premium products demand remained strong, both domestically and internationally. For the fourth quarter, North-America premium cabin unit revenue improved over 30% compared to 2019. In the longer-term, we're excited about both expanding our premium -- expanding our premium offerings with the arrival of our first Boeing 787-900 at the end of 2023. The 787 fleet will offer 34 lie flat suites versus the 18 seats our A330s -- on our A330s, as well as additional extra comfort seats. Ancillary revenue remains strong. We saw continued momentum in Extra Comfort sales. Our newer preferred seat option performed in-line with our expectations and we launched this product for international flights during the second half of 2022 with promising initial results. Among other successful products our co-branded credit card had another record quarter and year with spend up over 19% compared to the fourth quarter of 2019. This program is uniquely designed to reward people who love Hawaii and those who live here. We've also implemented a new benefit for cardholders, a second free checked bag. Our cargo team had its best fourth quarter on record, which contributed over $34 million in revenue, driven by strong yields from the international market. We do anticipate our cargo activity to slow moderately as we head into 2023, as international yields continued to decline. Additionally, we don't have any charter flying in 2023 for the U.S. Postal Service, as we did for the first three quarters of 2022. As Peter mentioned, we will face some operational challenges associated with the maintenance of our A321 engines. With the reduced scheduled to and from Japan we have the ability to shift our A330 aircraft to cover A321 routes. That results in a heavier A330 schedule into North-America for the first quarter than we would normally plan and [shoulder] (ph) season. While that allows us to maintain service in well-performing Mainland markets, weâre not optimized on gauge and that will have an unfavorable impact on first quarter 2023 RASM. We continue to work with Pratt Whitney and anticipate improvement in the quarters ahead. Our first quarter 2023 capacity is forecast to be approximately 15% higher than the same period in 2022. Compared to the first quarter 2022, we plan on operating a slightly lower capacity for North America routes, higher in the Neighbor Islands and substantially more international markets where our network rebuild was only starting to take shape in early 2022. The first quarter of 2022 had some unique pandemic related challenges. So we expect a difference versus 2022 to narrow as we progress throughout the rest of the year. At the end of last year, we saw some softness in North America bookings for travel in the first quarter of 2023, but these have improved over recent weeks, and we're encouraged with booking index. Even with some fares discounting initiated by other carriers. We are now forecasting first quarter 2023 PRASM to be up approximately 15% compared to the first quarter of 2022. As with capacity, we expect 2023 PRASM to be closer to 2022 levels in future quarters. We look forward to strengthening our international and U.S. Mainland to Hawaii markets. Rebuilding our presence in Japan and continuing to be the airline of choice for Neighbor Island travel. 2023 does not come without challenges in some of these markets. But we are equipped to be nimble as we review demand and opportunities. We have a well thought out product lineup for our market, a strong brand and team that is second to none. I'd like to thank our amazing team for their outstanding efforts, not just during the quarter, but during the entire year. We've had some challenging weeks to wrap-up the year. And it's great to see everyone pulled together. Thanks, Brent. [Foreign Language] Happy New Year, and thank you for joining us today as we walk through our fourth quarter and full rear Results, share our 2023 first quarter and full year outlook and talk about initiatives that we have on the horizon. We finished 2022 with an adjusted EBITDA of $25.6 million for the fourth quarter and adjusted EBITDA loss of $31.0 million for the full-year. This equates to an adjusted loss of $0.49 per share for the fourth quarter and $4.08 per share for all of 2022. These fourth quarter results are slightly better than expected due to the strong demand in North America and certain international markets, partially offset by the competitive Neighbor Island market and slower buildup in Japan. Our fourth quarter unit cost, excluding fuel and non-recurring items were up 14.2% compared to 2019, which was in-line with our expectations. As mentioned on the last call, we saw increases in wage rates and airport rents, and as expected we also incurred costs related to future growth opportunities such as startup and pilot training costs for our new cargo flying for Amazon and the induction of our 787 later this year. Regarding the 787s, we recently announced the amendment of our deal with Boeing which solidified our delivery schedule and increased our order with Boeing from 10 to 12 aircraft. We're very excited about the delivery of our first 787 aircraft, which is scheduled for the fourth quarter of this year. Several factors influenced our decision to add two more 787s to the order, including the exceptional revenue generating capability of the larger premium cabin and increase in overall seat count. In addition, the 787 delivery schedule will provide flexibility in our growth rate as we decide whether to extend or return A330s when leases expire. Our next four A330 lease expirations occur in 2024. The finalization of the 787 deliveries schedule resulted in just over $70 million of capital expenditures moving from 2022 into 2023. We now expect 2023 aircraft related CapEx to be in the range of $290 million to $300 million. In addition, we expect our 2023 non-aircraft related CapEx to be in the range of $40 million to 80 million, which is higher than normal due to preparation for the 787 induction and the in-sourcing of our A330 maintenance. Our investment in technology and facility initiatives will also be slightly higher than 2022. Notable facility investments include reconstruction of the security checkpoints at Honolulu airport for better throughput and guest experience. And new below the wing workspaces to increase the efficiency of our operations in the new [indiscernible] terminal at Honolulu. Looking at costs going forward, it's clear that our costs will remain structurally higher than pre pandemic levels, much of which is driven by industry wide cost inflation. To address this, we're focused on productivity above people and assets, as well as on revenue generating capability. While we did not expect to be at pre pandemic levels of productivity this year, we believe that our investments and the recovery of our network position will yield sizable improvement in the future. And as we start-up our new Amazon service and enter the 787 into service we'll reap the revenue benefits and grow shareholder value. For the first quarter, we expect our unit cost ex-fuel and special items to be about flat to the same period in 2022. And that's low-single digits on a percentage basis for the full-year compared to 2022. This includes our estimate for the cost of implementing the new ALPA TA effective March first. The primary drivers behind the increase in unit cost are training of our pilots for the Amazon flying and for the new 787 fleets, contractual rate increases in our power by the hour agreements and a more intensive heavy maintenance schedule for our A321s. 2023 is a year in which we are making substantial investments in our fleet, technology and guest experience, which reflected in both our operating costs and capital expenditures. These initiatives are building blocks to make Hawaiian Airlines a stronger business. And as we get back to operational excellence and fight to win in our markets, our investments in technology and product are going to better enable our frontline team to deliver that aloha and hospitality that is one of our primary competitive advantages. Having faced the challenges of the last few years, we have renewed energy around innovation to improve our revenue generating capability and manage our costs. We're excited about our future as we lay the foundation that will set us up for success. Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Conor Cunningham with Melius Research. Please proceed with your questions. Hey, everyone. Thank you for the time. I'm just going to the 1Q RASM guidance. Iâm a little confused on what's kind of happening there. So you talked a little bit about higher utilization kind of impacting the results there or the outlook there, but just when I think quarter-over quarter, it implies a pretty massive step-down versus historical trends. I would just wonder if you could maybe provide a little color on what's kind of happening there? And then why you expect it to snap-back in the remaining quarters after? Thank you. Well, I mean, we guided, Conor, to year-over-year and not over the sequential quarter. I do think we've got some different moving pieces as you look through, we talk through some of the -- some of the changes in spoilage in particularly as you move through the quarter. And like I mentioned, we saw a little bit of softness in the front part of the quarter, particularly in North America in addition to some of those [indiscernible]. So it's basically a function of just like a larger spoilage in 1Q and then it kind of normalizing like high level... On a sequential quarter-over-quarter basis, we see that from 4Q to 1Q, but from a year-over-year perspective, it will be a little bit different, yes. Okay, all right. That make sense. And then just -- your cost cadence is going to be probably a little bit different than some of your other peers. I realize you have the final contract in your numbers. But I was wondering if you could just provide a little sort of color around the Amazon cost build there? I would imagine it's much more second half weighted, but I'm just trying to figure out the lumpiness itâs going to happen through 2023. Thank you. Thanks, Conor. This is Shannon, I'll start. Yeah, we do have -- we haven't broken this piece out, we do have a good amount of pilot training going right now and it's kind of combined with the preparation for 787s as well, because we, of course, have one pilot training planed, which includes getting ready for both. So that is definitely in our first quarter cost in our guidance. As we move throughout the year, that training kind of stays at that rate, but we will be, to your point, adding in forward costs as we get ready and get closer to flying for Amazon. Once we are actually flying the airplanes and we can specifically identify costs related to the Amazon flying. I'll try to point that out. But for right now, it is somewhat intermingled with all of the other things that we're planning for. Thanks very much, operator. Hi, everybody. Peter, you said a number that I wanted to double check. How many people did you say you've hired in the last year? I said about 20%, just a hair under 20% of our employees on payroll today have joined the company since the beginning of 2022. Right. So that's -- you only have about 775,000, so that's a significant amount of new talent that's been trained in the last one year. So when do you think they hit their productivity levels that contribute to the bottom-line? I think for a lot of the group's, Helane, you get the productivity fairly quickly. You're always wanting to do more training, probably over the course of part of the year last year if you think about our airports organization, we would have people who were trained on certain functions, but they weren't necessarily training to be cross utilized across the operation and as we get more of that training done, it makes you a little bit more efficient and adaptable, in the day-to-day operation. So that. I would say is the story in that part of the business. With flight attendants for us, we are fully staffed to be able to operate a -- not only the schedule we're operating today, we're not planning on having any material hiring of flight attendants this year, although we had a lot last year. There it's just really a question of having the ASMs back, which is, to a certain extent a function of getting our wide bodies flying to Japan, getting the A321s back in the operation at full force would be helpful and sort of flying the full capacity that we have. So in terms of -- that's what really is the one limiting factor on efficiency there. And then as Shannon was alluding to with regards to pilots, we still have a lot of training this year, and we did a lot of training last year. So -- And as we work to position through so that we have the right staffing for the initial tranche of the freighter aircraft and work to move people through the training cycles to get equipped for the 787s coming on later this year, we'll still have some unproductive time in terms of pilots spending time in training rather than flying revenue block hours for us and that is going to continue, really throughout this year and probably start to level out some next year. But as we are in growth mode with the freighters we'll still have some jobs that carry-on activity beyond, I would say, a normal steady-state level, even as we go into 2024. Okay that's hugely helpful. Thanks, Peter. And then just for my follow-up question on the Japan routes. I know that DOT rejected the initial alliance that you had put forth, would you consider circling back around and applying for an alliance again or JV or however you want to term it with Japan Air to sort of in the short term anyway improve those results. Yes. So, we've continued our commercial relationship with Japan Airlines and we still work closely with them on codeshare and interline and some frequent flyer reciprocity. We're doing that without the antitrust immunity protection that you get from an approved antitrust immunized joint venture with DOT. So that constraints a little bit how much we can optimize that relationship and how closely we can work with JAL. For the time being that is our plan going forward is to continue working on that way. We still have the opportunity to go back to DOT at some point and we spent some time in 2020 when the [ATI] (ph) application was turned down, trying to understand the concerns that DOT had and obviously the time came when we wanted to reapply we would hopefully be in a good position to be able to address those and structure the partnership in a way that it made sense in terms of how DOT looks at it. So, no immediate plans to go and make a filing there, but it is still something that we have the ability to go back and take another look at again. Hey, good afternoon, everyone. Good to be back this quarter. So I just wanted to circle back on the first quarter revenue outlook if you allow me. A quick clarification, first Brent. Was your comment that 1Q passenger revenue will be up 15% but trend toward flat, was that on your total system or is that just North America to Hawaii routes? Okay, got it. And then looking back historically, load factor is usually pretty flattish between fourth quarter and first quarter. So if we assume the same for this year, maybe that's wrong, maybe thatâs right. But that means yields are down year-over-year versus last year with that pretty material Omicron impact, is that just like more competitive at [indiscernible] or is there a stage linked impact we should be thinking about given the international add-back. Yeah. I mean, there is a really big 1Q year-over-year change on the international side. Our international capacity is up, I believe, almost 70% in terms of 1Q. So, it's a really difficult kind of transitioned from a comp perspective, Cathy, and I think that -- a lot of that will smooth out as we get into 2Q and beyond. It makes lot of sense. And then, Peter, I know it wasn't very firm guidance but last quarter you spoke to low-single and mid-single digit growth on a full-year basis versus 2019, just like in the Q&A. So understandably not super firm. But your guidance today points to very slightly down, maybe up 2% if I'm doing that math right. Can you just walk us through the underlying change versus your prior expectations? Is that just all Japan offset by the new [indiscernible] flight or is there a pull out anywhere else in the network, maybe given some of the competitive situation. Thanks so much for the time. Yes, so a lot of that is certainly driven by Japan, slowing the pace of our return to service their. I think in an ideal situation -- ideal circumstance if we were flying Japan less intensely we might have been a little bit more aggressive than we are planning right now in terms of redeploying capacity to other more productive markets and to a certain extent, that's a function of the aircraft availability that I alluded to with our 321s not being as available as we would like and having a little bit of uncertainty there. If that uncertainty can be alleviated, that would give us an opportunity to make a couple of adds at least seasonally elsewhere in the network. And then, of course, if we saw a rapid change in Japan we'd love to come back there a little more quickly. But that's most of what has changed since we talked about the numbers three months ago. Hi, thanks for taking my questions. So you noted three reasons why Japanese markets have been weak. Japanese consumers are exhibiting foodservices on Japanese government promoting domestic travel over international, Japanese yen [indiscernible]. So could you kind of just give us a high-level view -- your view of the Japanese leisure market, for example, why are Japanese consumers conservative than before? What will change that? Would you expect the government to start promoting international travel that king thing [indiscernible] high-level view of that market. Yes. Sure, Hillary. Maybe I can just sort of reiterate and emphasize some of the things that Brent talked about. I do think some of this is a national temperament issue and Japan was one of the more conservative places in the world in terms of dealing with the pandemic and maintaining a fairly high-level of caution. That was frankly contrary to how some restrictive policies were considered by the population in the United States, there was a lot more acceptance and even to certain amount of popularity the level of restrictions. And so, I think it is perhaps not entirely surprising but it is taking a little bit more time to embrace traveling internationally. The folks in Japan have been traveling for leisure domestically and some of that has been stimulated by some incentive programs to try and encourage domestic tourism as an economic stimulus opportunity. And frankly, the existence -- ongoing existence of those programs is perhaps shifting some of the behavior towards domestic opportunity -- travel opportunities versus international. And I do think as those programs go away, that should be less of a factor. And then of course, Brent talked about the exchange rate, where the yen has depreciated relative to the dollar which hurts the spending power of Japanese coming to the United States. So I think the middle one of those, the travel incentives for domestic travel probably normalizes fairly quickly over time. The general sentiment towards travel and comfort is going to be a gradual thing and your guest is as good as mine on how the currency exchange goal is going forward. But the good news is, there weâre at least in a better place than we were, we were as high as JPY150 to the dollar a few months ago. Now it's been back more in the plus or minus from one JPY130 range. So that's still higher than when it was before. One thing I'll just point out, and I'm -- our crystal ball has not been very reliable when it comes to predicting the return of, travel and so we're hesitant to stick our necks out and point to a specific date, but they are -- there is one bit of policy news that was announced this week that I think is on the margin encouraging. And that is that, Japan is reclassifying COVID and their sort of treatment of diseases to be treated more like the seasonal flu as opposed to being treated like much more severe diseases and that goes into place in May and will help contribute. I don't think it's going to be a silver bullet, but I think it contributes to that evolution of the sentiments and more comfort around getting back into the rhythm of international travel. Got it. Thank you. That's that was really insightful. Thank you very much. And then just one more question, you deferred delivery of 10 Boeing aircrafts with deliveries expected to start in the fourth quarter. So if you continue to experience delays from the OEMs, will that impact your planned schedule this year, if you have any contingency plans in-place to continue to see delivery delays from Boeing, Airbus and engine manufacturers maybe like perhaps the leisure or like any other contingency plans or you think you are in good shape when it comes the fleet plan even if thereâ¦ Yes, so. We reset the delivery schedule with Boeing, with the new agreement. We don't have any 787 ASM contribution in 2023 in our plan, we expect to take the first airplane before the end of the year and have it in service in early 2024. Given the freshness of the delivery forecast on which that deal, which is basically right now about a month old. I think we've got a pretty good level of confidence about Boeing's ability to deliver on that. And we do expect to get a couple of 787s in service in the early part of next year. We don't have any other deliveries we're expecting this year aside from the A330 freighters which is contingent on getting them out of the transition program from a passenger airplane to a freighter airplane, which is the responsibility of our partner on that. And then the other area where I've talked a couple of times about some risk to aircraft availability is not so much around aircraft deliveries, but it's the supply chain for spare engines, particularly on the 321 where we know we're already running short and have their airplanes that are unavailable to us in the near-term as a result. Hi, thanks for the time here. So going back to the script, investing in continuum of initiatives, starting with, I guess, premium revenue. I just wondered if you can help us understand what capabilities you're gaining in 2023 versus what you were doing in 2022? So the IT limitations that go away and the percent of the revenue picture that the IT improvements are touching here. So I don't think the [indiscernible] which gives us materially different capabilities in terms of managing front cabin as we look into 2023. I do think the things that will continue to benefit from, obviously, we've executed very well on the revenue management side, that's a capability we will continue to have going-forward. We'll have an annualization of our preferred seats products that we launched last year that will hit, it's kind of long-term run-rate and a lot of initiatives that we had around Extra Comfort and seeing optimization. We think some of those have some more growth as we look into 2023. I see. Okay. Next question here. I think if I heard you correctly, it sounds like the three biggest drags on the business are a slower recovery in Japan, the inter-island dynamic and then the airport challenges at Honolulu. And Iâm just wondering if you can just help us understand just how big a drag these three components are. And so, I guess, if one of these were to flip what could that really mean? And then finally the suboptimal schedule at Honolulu, how many points of revenue is that overhang that's embedded into the first-quarter guide here? I'd just say, Dan, the first two of those, the Neighbor Island competitive dynamic and the slower recovery in Japan. They are much more impactful in terms of the near-term financial performance than the operating challenges at Honolulu. We've been able to make adjustments to the scheduled to stabilize the operation without having to stay-in a material amount of capacity and particularly as we as we get beyond the construction period. We think that will become even more stable, but it's not costing us economically so much as it is sort of challenging our teams on a day-to day basis and causing a few hairs to go gray as we battle through some of the challenges, especially as we did in October and November, where our performance was particularly pressured before we could get the scheduled changes in-place. I would say, in addition to the two big revenue dynamics that are in-place, Neighbor Island and Japan. The other thing that does constrain us a little bit is the aircraft availability. And do we have as many airplanes as we want to fly our flight and server demand, particularly in the peak time of the year and the summer and if we can -- we're going to continue to work with our partners at Pratt, who have been a good partner with us over the year to see if we can get a little bit more certainty and hopefully a little bit more aircraft availability in the summer which would allow us to get some of the revenue back that we're leaving on the table if we don't have aircrafts flying. Hey, good afternoon, everyone. Brent, first question for you. In your prepared remarks you spoke a bit about some modest softness in Mainland to Hawaii, I believe. Why do you think that is? And how are you seeing -- what are you seeing out of your competitors? How are they behaving on that route as everyone tries to vie for the strong leisure consumer? Yes. I think we clearly saw some real strength in the fall last year. We started to see as we came in the holidays. Things were slowing down a little bit for 4Q, but we hit that in our forecast. The front part of 1Q, I will say, we saw bookings slow a little bit. Early on in the year, we saw some promotional fares that got a little more aggressive than what we had seen in some of the shoulder periods for the fall. However, since we've really come back from the New Year, I am pretty encouraged with some of the progress we've seen on the traffic front and we've seen some real positive builds. We've seen some of the levels of discounting abate versus where they were early on the year. So I think we're trending in the right direction. Got it. Thank you. And then Shannon, I think you said that you include the pilot contract as of March 1. Did I hear that correctly? And given that it's partial quarter, could you just give us a sense of what the quarterly labor impact is through 2023? Sure. Thanks, Andrew. Yes, you did hear that correct. If the pilots do ratify the agreement, it'll be effective -- the rates will be effective March 1, which is why we've included it from there. So the effect of the contract, which is more than just rates. But for the first quarter, I think we've added a little over half a point for the impact to the first quarter, I think for the full year, it's a little over 1.5 points from the ALPA contract. And again, that's 10 months of the year, not 12. Right. Okay. Look, I know it's hard to forecast an exact inflection in earnings power here, but until you get there, how should we think about potential cash burn here over the next several quarters? Yeah. I think it is a little difficult just to forecast, given we're hopeful that Japan comes back quicker. I think in the short term, we are just going to be more conservative about how we use our cash. So we've got -- we're not -- we're still missing absolutely. I think that's very important for our future. But we're looking at ways to reduce costs, which then conserve cash. But we're not -- I don't have any major program planned to conserve cash. We still have quite a bit of cash in our bank that we're going to use to invest in long term initiatives. Yes. And just to add on to that. I think we need to act with urgency to improve our financial condition, but it's important that we don't panic. And if you go through how we're performing competitively in each of the geographies, we are performing well head to head against our competitors. In some cases very, very well. So we don't want to panic, we don't want to stop investing, but we have to be -- and we're comfortable with our liquidity position, but we have to be mindful of the fact they need to act prudently and make good decisions going forward and that's what you can expect from us in the period ahead. Good afternoon, everyone. So Peter, I appreciate all the direct comments here and on the revenue initiatives here, so you have some here with your IT, I think your passenger service system, your premium cabinets. We have Amazon I believe slated for the back half of this year. Could you talk a little bit about what's going on outside of Japan, Australia, New Zealand and South Korea? And then also on the competitive landscape, there was a promo that went out today. It looks like the $39 fares for inter-island are still out there and there was a one way [indiscernible] 255 or so. So when you mentioned on the inter-island piece and you talk about average fares being higher in few reports and that you feel confident about your position. How long are you willing to hold the fares here? And if you could kind of just put some -- as we think about some of the revenue initiatives out here and if you could perhaps frame that piece, but also some of these other sale promotions that we see here? Thank you. Maybe just sort of start on some of the revenue initiatives and I think Brent touched on a number of these earlier, but over the last year or so, we've implemented a new revenue management system and there's still upside in terms of being able to generate performance from that. We've enhanced our capabilities around the pricing of our preferred seats and our extra comfort seats to allow us to be much more dynamic in terms of how we price by the day of week by specific seats on the airplane that are more desirable. And we've saw a lot of progress over the course of the last year in terms of generating returns from that. But I don't think anyone on our team would argue that we've squeezed that real last drop of opportunity out of that yet. Some of those things have not been -- they were initially rolled out primarily on our North America network and so there's opportunity to further rollout things like preferred seats internationally, which Brent said, we've just begun. So there's a variety of things that we're continuing to work on and a long list beyond that. In terms of the PSS itself, it really doesn't on day one turn on new revenue generating capabilities. I think where the payoff is longer term as we modernize the systems that underlie our technology. It just makes it easier for us to adapt and evolve and develop new products and get them into market on a more timely basis. So I think it is -- there's not sort of a flick the switch sort of benefit on the revenue side that comes from that. But I do think there is a broader improvement of capabilities that comes with that. And then turning to second part of your question of how we're going to compete. You're right, the $39 fares are still out there. It's not every seat seven days a week anymore, but it is generally four days a week of $39 and a little bit higher on the weekends and pretty broadly available, although not last seat availability. And the fact of the matter is, we have to continue to compete. We do have better schedule and service and great reliability and great employees. But we all know that you got to be cost competitive and you got to be price competitive in this business. So we're going to like going to continue to compete and we ultimately know that we're going to be successful. Okay, apologies. There was a lot in that first question. Just on the other international point of sale markets, if you could give a little bit color on what you're seeing there? Thank you. Yes. So I think certainly Australia and New Zealand have had a really, really strong winter strength out of those points of sale, but also really good strength both from volumes and fares for U.S. point of sale. We've also seen really strong U.S. point of sale for Japan and Korea, albeit that represents a much smaller portion of our overall traffic mix, but clearly there's been some demand there. And then Korea point of sale, I would say, has held up pretty well also. So I think overall, we're pretty encouraged with how those are going. Is there additional runway there? Certainly, we'd like -- we think so. And again, I would say front cabin has been exceptionally strong, particularly in the South Pacific where we've had a real ability to capture demand at materially higher fares. There are no further questions in the queue. I'd like to hand the call over to Peter Ingram for closing remarks. All right. Thank you, Doug and mahalo again to everyone for joining us today. We have a lot of important work in the period ahead, and I am very fortunate to be a part of a terrific team. Together, we're going to face our challenges hear on and cease the many, many opportunities that are ahead of us. We appreciate your interest and look forward to updating you on our progress again in a few months. Aloha. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
EarningCall_1098	Good afternoon. Thank you for attending the 8x8 Fiscal Third Quarter Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines have been muted during presentation portion of the call and opportunity for question and answer session at the end [Operator Instructions] I would now like to pass the conference over to our host, Kate Patterson, Vice President of Investor Relations. Kate, please go ahead. Thank you, operator. Good afternoon, everyone. Today's agenda will include a review of our third quarter results with Samuel Wilson, our Interim Chief Executive Officer, and Kevin Kraus, our Interim Chief Financial Officer. Following our prepared remarks, there will be a question-and-answer session. Before we get started, let me remind you that our discussion today includes forward-looking statements about our future financial performance including our increased focus on profitability and cash flow as well as our business, product and growth strategy. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements as described in our risk factors in our reports filed with the SEC. Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligation to update them. Certain financial measures that will be discussed on this call, together with year-over-year comparisons in some cases, were not prepared in accordance with the U.S. generally accepted accounting principles or GAAP. A reconciliation of those non-GAAP measures to the closest comparable GAAP measures is provided in our earnings press release and earnings presentation slides, which are available on 8x8 Investor Relations website at investors.8x8.com. Thank you, Kate, and thank you to everyone joining us on the call today. I believe our solid third quarter results were a strong indicator of our ability to perform against our objectives. We said we would forgo some near-term revenue growth for profitability as we build a sustainable long-term business and that's exactly what our teams did in the quarter. Despite the lower-than-expected total revenue, we delivered almost 10% operating income, increased deferred revenue and RPO, and experienced high customer retention, all early indicators of future success for a SaaS business. I'm impressed with the quality of our performance in the third quarter, and I want to thank our employees and everyone in the 8x8 community for their hard work. Turning to the future. I have been working closely with the leadership team and the Board of Directors on a multiyear strategy to grow our business and create value for our stakeholders. We laid the foundation for our next step several years ago when we re-architectured our core technology. We built a modern microservices-based platform that powers both our current UCaaS and CCaaS solutions. We have fully embraced continuous integration and continuous deployment and are delivering more than 1,000 micro service updates every quarter. This enabled near perfect uptime for the third quarter and reduced the number of customer identified defects to single digits. We are innovating faster than we ever have before. At the same time, we embarked on this journey we could not have predicted the global COVID pandemic or how it would accelerate adoption of cloud-based telephony and internal collaboration tools, especially Microsoft Teams. While UCaaS migration continues to create revenue and profit opportunities for efficient providers like 8x8, I believe the opportunities to differentiate based on stand-alone UCaaS are becoming increasingly rare. Our XCaaS platform, which delivers the high availability, scalability and security of a unified cloud native solution and a lower TCO is highly differentiated. By focusing on CCaaS innovation within the platform, we can continue to extend our leadership. Specifically, I believe the contact center market is at an inflection. According to PwC's Future Customer Experience survey, 1 in 3 customers would leave a brand they love after 1 poor experience. No longer can the contact center be viewed solely through a cost lens. It has become the primary way for companies to interact with their customers and build brand loyalty. At the same time, advances in ML-AI technologies as well as customers' growing preference for high-quality digital and self-service interactions set the stage for a new wave of contact center migrations and upgrades. Technologies like large language models such as ChatGPT have the potential to transform the customer experience. Our modern platform enables these technologies today and I believe we are well positioned as this opportunity evolves. We have identified 6 areas I believe are critical to our future success. One, further acceleration in CCaaS innovation while maintaining our leadership position in cloud telephony. We began our shift to an innovation-led company with the acquisition of Fuze, which doubled the R&D resources dedicated to innovation. We have successfully accelerated the pace of project completion and are already seeing the results of our increased investment. We are already in beta on a number of new CCaaS features, including capabilities based on advanced machine learning and large language models. We remain committed to our leadership position in cloud telephony as an important component of the XCaaS platform. Our ability to deliver both voice and CCaaS solutions for Microsoft Teams users is increasingly a deciding factor in new business wins around the world. We saw triple-digit growth in voice for Teams seats in the third quarter and have now sold more than 300,000 licenses. The largest team's customer has already deployed the technology to more than 30 countries. Global coverage matters. Recent XCaaS with Teams wins include the Australian Computer Society selected 8x8 XCaaS with voice for Teams to help drive operational efficiencies, productivity gains and enhance their contact center performance. This channel-led win demonstrates the competitive differentiation of our XCaaS solution within the Teams environment. In the U.K., Gateshead Metropolitan Borough selected 8x8 XCaaS with voice for Teams to support hybrid work for their nearly 3,000 employees and enhance their 200-plus agent contact center. Two, increasing our focus on small and midsized enterprise customers. Small and midsized enterprise customers need the same automation and ML-AI contact center capabilities as large enterprises, but don't have the large enterprise budgets or a team of in-house developers. Our mix and match pricing model, unified communications and enterprise class APIs, make XCaaS the natural choice for these customers. Just as important, our modern platform enables the adoption of advanced contact center capabilities, future-proofing their investments. The strong product market fit improves customer satisfaction, often leading to follow-on sales and reference sales down the line. A great example of a win directly tied to a happy existing customer is Chubb Group Security Limited, a global fire safety and security solutions provider protecting more than 1 million locations worldwide. After acquiring a division from an existing 8x8 CCaaS customer, Chubb reviewed and selected 8x8 CCaaS for a complete secure cloud contact center solution. Another example of a customer satisfaction driving new business is Indiana Hemophilia and Thrombosis Center, the only federally recognized comprehensive Hemophilia treatment center in Indiana and 1 of the largest centers in the nation. With a key decision-maker having previous experience with 8x8, the nonprofit entity selected 8x8 XCaaS for its comprehensive CCaaS solution that is certified for Microsoft Teams. Our best-in-class reliability was also a factor in the decision. Three, increasing XCaaS win rates and sales and marketing productivity. As we continue to innovate and expand our XCaaS platform, our win rates should increase. We are attracting more go-to-market and technology partners every day, especially around our market-leading Teams integration. This expands our market reach, increases our capacity for innovation and creates an ecosystem of application and features that allow our customers to tailor their customer experience to their business needs. A customer that fits squarely in our sweet spot is Panine Care NHS Foundation Trust in the U.K., a provider of mental health, learning disability and autism services to 1.3 million people across Greater Manchester and beyond. They selected 8x8 XCaaS to upgrade to modern reliable cloud communications and deliver enhanced patient engagement capabilities for over 3,000 staff. Another U.K. win, the South Hampton Football Club in the English Premier League is a good example of how unified XCaaS platform delivers contact center features to users across the organization to enhance the customer experience. The Sanks selected 8x8 XCaaS with 8x8 Front Desk to deliver a premier fan in hospitality experience and introduce new communications channels such as e-mail and web chat because they are customer obsessed. Four, maintaining an outstanding experience for customers so they can focus on theirs. The investments we've made in customer success, including more than 8,500 hours of training for our Tier 1 support engineers are evident in our statistics and customer success scores. We've seen a 50% reduction in escalated issues, a 20% improvement in First Day resolutions and a 49% reduction in global backlog. As a result, our customer satisfaction scores are up double digits versus a year ago. We still have a lot of work to do, but are passionate about leveraging our platform and the solutions of our technology partners to drive continuous improvement in customer experience and customer satisfaction. We use our own products and intend to document our progress as an early adopter of each new innovation in an ongoing case study. In this way, we remain accountable to our commitment for improving the experiences of our customers and we provide a road map for our customers to do the same in their organizations. Five, establish CPaaS leadership in the Asia Pacific region. CPaaS was down year-over-year and sequentially again this quarter. It was the single largest factor in our third quarter revenue miss and downward revision to our revenue guidance for the fiscal year. That said, the CPaaS technology is important to the XCaaS platform, and we continue to add new customers on a regular basis. We are going through a transition in the business and there are some signs of stability. This gives me confidence that CPaaS will make a positive contribution to our operating performance in the future. Several third quarter wins illustrate this point. Plugo, an Indonesian D2C e-commerce platform with a vision to democracize e-commerce, uses a combination of 8x8, SMS, APIs and WhatsApp through 8x8 Chat Apps API to send secure onetime passwords and notifications as well as for customer care. Privy, Indonesia's first and leading legally binding digital signature with more than 37 million users and 1,800 enterprise customers, uses 8x8 SMS API to keep all users secure with onetime passwords. Plusdane Housing, a U.K. housing association that owns and manages over 13,000 homes across Northwest of England. They selected 8x8 XCaaS with 8x8 CPaaS, voice for Teams and Verint workforce management to support their over 500 employees and drive customer satisfaction with greater omnichannel capabilities. We love our triple play customers. Sixth, increase our profitability and cash flow to delever our balance sheet and fund investments in innovation that will drive our future growth. We have already shown tremendous progress in fiscal 2023, and we have come very close to our second half '24 target of double-digit non-GAAP operating margin this quarter, a full year ahead of schedule. As Kevin will discuss, we believe we can drive our margins higher again in fiscal '24 as we align our investments and cost structure and improve our sales productivity. We intend to leverage improvements in our operating margin to pay down debt, which will reduce our interest payments and allow more enterprise value to accrue to our equity holders. We began this process in Q2 when we repurchased $6 million in aggregate principal value of our '24 notes, and we continued in the third quarter with the repurchase of approximately $22 million in principal. What I have outlined here is a long-term strategy based on an efficient, focused innovation engine and a modern cloud dative platform. At the heart of this strategy is delivering superior customer experiences. The experiences of our customers and partners as they engage with us and the experiences they can deliver to their customers and their employees with our XCaaS platform. This is our North Star. Every customer interaction is an opportunity to delight. And our goal is to make every touch matter, whether digital or in person. This commitment to our customers' experience is already built into our DNA. Our financially backed commitment to Five 9's availability is just 1 example. We are already well on our way on our multiyear plan to lead with innovation and be the customer success platform of choice for our customers. The best measurement of our continued progress is the willingness of our customers to recommend our solutions to their peers. Our goal is to achieve 100% referenceability within our targeted customer segment. It is a lofty goal, but 1 I believe will allow us to deliver sustained growth and profitability for many years to come. Thanks, Sam, and good afternoon to everyone. We remained financially disciplined and delivered solid profit and cash results for the third fiscal quarter. In the third quarter, despite service and total revenue being slightly below our guidance ranges, we delivered non-GAAP gross margin, non-GAAP operating profit and cash from operations above our expectations. Total revenue for the quarter was $184.4 million, and we generated $175.8 million in service revenue, both an increase of 18% year-over-year. Our revenue performance reflected strong customer retention and renewals, partially offset by a continued decline in our CPaaS business in the Asia-Pacific region. Fuze accounted for $26.5 million of service revenue and total revenue and was impacted by a $1 million third quarter reserve adjustment we made as part of our integration of back-office processes. Fuze' customer retention remains strong and the business continues to outperform our initial expectations. Strong retention across the customer base was reflected in our RPO and ARR metrics. Remaining performance obligation was approximately $750 million for the quarter, up from $715 million in the second quarter on solid bookings performance. Customer renewals were notably strong and our customer retention was the highest it has been in many quarters. Total ARR was $698 million at quarter end, up 22% year-over-year. Enterprise customers accounted for 57% of total ARR, and Enterprise ARR was up 30% year-over-year, but down approximately $1 million sequentially due to the continued decline in CPaaS ARR. We had hoped this part of the business had stabilized last quarter, but due to continued challenges, we are taking a conservative view of the potential revenue contribution going forward. Turning to gross margin. Operating expenses and operating profit. Please remember that all items discussed are non-GAAP unless otherwise noted. Service revenue gross margin came in at 75.7%, an increase of approximately 600 basis points from Q3 '22 and 160 basis points sequentially, driven by continued COGS improvement programs, which drove down unit costs and, to a lesser extent, lower CPaaS revenue. Other revenue gross margin came in at negative 1.4% for the quarter compared with negative 32.2% in Q3 '22. Other revenue gross margin has shown consistent improvement over the past few quarters due to increased professional services operational efficiencies plus better product margins. Overall, second quarter gross margin was 72.1%, an increase of over 700 basis points year-over-year and up 200 basis points sequentially. Turning to operating expenses. R&D was 14.5% of revenue, which was in range of our 15% target. We improved sales and marketing leverage as we realigned costs early in the quarter with sales and marketing expenses down $3.3 million sequentially, and sales and marketing as a percentage of revenue declining over 100 basis points sequentially. We expect further improvements in sales and marketing efficiency as a result of our most recent cost alignment action in January, which further reduced our investment in sales and marketing initiatives in nonstrategic areas of the business. G&A declined $3 million sequentially, improved 140 basis points as a percentage of revenue to 11.4%. Total non-GAAP spending as measured by cost of goods sold plus R&D, plus sales and marketing plus G&A, was up approximately 8% year-over-year, primarily due to the addition of Fuze' operations, but it was well below our 18% total revenue growth. Non-GAAP operating profit was $18.3 million, up nearly 6x from fiscal Q3 '22 and more than double sequentially. As Sam mentioned in his opening remarks, we achieved approximately 10% operating margin in Q3, nearly a full year ahead of previous expectations. Turning to the balance sheet. Total cash, cash equivalents and restricted cash ended the third quarter at approximately $132 million, substantially equal to last quarter despite consuming $20 million in cash for debt repurchases. As Sam mentioned in his prepared remarks, during the quarter, we made notable progress delevering our balance sheet by repurchasing approximately $22 million in aggregate principal amount of 2024 convertible senior notes, after repurchasing $6 million in Q2 '23. These debt repurchases and the exchange transaction from August 3, leave approximately $68 million of aggregate principal value of 2024 convertible senior notes remaining. Given our current cash balance and expected future positive cash flow, we see no issues with repaying the 2024 debt with cash at maturity in February 2024. Going forward, we expect cash flow will increase with operating leverage subject to timing differences in collections and other payables. We intend to use the excess cash generated to opportunistically prepay debt, including our term loan. This will lower our interest payments and will enable continued investment in product innovation while simultaneously shifting more of our enterprise value to our equity holders. Cash from operations was over $15 million for the quarter, ahead of our expectations and approximately $2 million higher than Q2 despite paying approximately $3 million more in interest expense in the third quarter. We continue to actively manage cash flow and customer collections remained solid in Q3. Free cash flow was over $12 million for the quarter, a greater than $1 million sequential increase. As previously stated, we took action in January to realign our workforce to accelerate innovation as we continue to shift to enterprise and XCaaS. And this included the difficult decision to further reduce our total headcount. When completed, the action will impact approximately 7% of our employee population. This action will be factored into our non-GAAP guidance, and we expect some onetime severance and restructuring costs will impact our fourth quarter cash flow and GAAP results. Before turning to guidance, let me provide some context based on our commitment to building a sustainable growth business with SaaS-like operating metrics. We have been doing a top-to-bottom strategic review of our business to ensure that all areas are operating efficiently. The strategic cost realignment activities from last October and in January allow us to reallocate limited resources to the areas of focus for the future, while improving our operating metrics in the near term. We are raising our exit operating margin target for the fiscal year based on improving efficiency and discipline around the business we are pursuing. For operating expenses, we plan to control sales and marketing spend and would like to exit fiscal year 2023 between 33% and 35% of revenue, down from 39% 4 quarters ago. We plan to focus our R&D efforts on our core product offerings and expect R&D as a percent of revenue to remain about 15% as we continue on the path of investment in our customer-focused product strategy with an emphasis on contact center features and functions. We are focused on extracting more leverage from our G&A functions as we work to improve operating efficiencies in those areas. We are establishing guidance for fourth quarter of fiscal 2023 ending March 31, 2023, as follows. We anticipate service revenue to be in the range of $175 million to $178 million, up sequentially from Q3 at the midpoint and representing approximately 1% to 3% year-over-year growth as we pass the Fuze 1-year anniversary and remain cautious on the CPaaS revenue outlook. We expect that Fuze' service revenue contribution will be roughly flat with Q3 at approximately $26 million. Please note that next quarter will be the last time we provide Fuze revenue contribution as we will have passed the 1-year anniversary and the businesses are now integrated. We anticipate total revenue to be in the range of $184 million to $187 million, up sequentially at the midpoint and representing approximately 1% to 3% year-over-year growth. This guidance reflects the 1-year anniversary of Fuze and our cautious approach to the CPaaS revenue outlook. We expect other revenue to be approximately flat compared to Q3. We are targeting an operating margin of approximately 10%, roughly flat with fiscal Q3 '23, as we experience our normal expense headwinds related to the restart of employer taxes and other benefits, such as the 401(k) match. These expense headwinds impact all cost lines in the consolidated statement of operations. We expect cash flow from operations to be positive, but down quarter-over-quarter as we make semiannual interest payments on our 2024 and 2028 convertible debt and absorb severance costs from our January headcount reductions. We are updating our guidance for fiscal 2023 ending March 31, 2023, as follows. We anticipate service revenue to be in the range of $708.5 million to $711.5 million, representing approximately 18% year-over-year growth at the midpoint. We continue to be cautious regarding our CPaaS business and with the Fuze 1-year anniversary past us, we expect to exit fiscal 2023 with service revenue growth in the low single digits on a year-over-year basis. We anticipate total revenue to be in the range of $743.4 million to $746.4 million, representing approximately 17% year-over-year growth at the midpoint. Our total revenue guidance for the fiscal year reflects the combined Q3 and Q4 impact, resulting in a reduction of approximately $5 million at the guidance midpoint. We also would like to provide some directional color on fiscal 2024, which commences April 1, 2023. We anticipate total revenue and service revenue growth in the low single digits, as the revenue step-up from the Fuze acquisition will be reflected in every quarter of fiscal 2023. Additionally, we remain cautious regarding the revenue trend for the CPaaS business. We anticipate non-GAAP operating margins steadily growing from the expected Q4 '23 base of approximately 10%, hitting double digits every quarter in fiscal 2024. For the full year, we expect operating margin to be 4 to 5 percentage points higher than full year fiscal 2023. Additionally, I would like to mention that we are reviewing our key metrics to ensure that we are providing the appropriate insight into our revenue growth drivers. We will follow up in subsequent earnings calls on this matter. In closing, I believe the continued focus on our operating margin and cash flow is the correct strategy for us at this time. This strategy enables us to remain an innovation-led company as we fund investments in key product areas. On a personal note, I also would like to say that I'm happy to be continuing my business partnership with Sam in my new role as interim CFO. With 8x8's modern, unified XCaaS platform, we are well positioned to deploy our strategy to capture more of the contact center market, to delight our customers and to deliver on our commitment to improve profitability and cash flow generation. I guess as you look at sort of the realigned cost structure here and an outlined kind of focus around servicing smaller customers and also the Teams ecosystem. Just curious on sort of where within the sales and go-to-market organization are we seeing the most cuts? And it sort of feels like some of these investments are in areas that were maybe less focal for the previous leadership team. So just curious on how much of this is a change versus just kind of moving from 1 pocket to another. I'm going to give you 1 of those great answers that CEOs like to give, which is a little bit of both. I mean -- so we are in line with what we've said in the past, we continue to moderate our investment in our smaller customer segment, so the small business side of the house, while we continue to invest in mid-market and enterprise. We have made some -- reduced some investments in the sales and marketing front, in line with what we have again said in the past, where we're willing to forgo some revenue growth for increased profitability and the 9.9% operating margins clearly shows that we're taking that seriously. I think the things, Matt, that we changed a little bit is we're a little bit more aggressive on not making those changes sooner than later, and we're continuing to focus on investing in contact center, XCaaS and innovation, those 3 things. And I think we're a little bit more aggressive behind those investments also. So a bit of both, if I can give you that answer. And then, I guess, as you look at the Fuze business that you acquired and we're understandably we're lapping that and create some headwinds on growth. But curious, as you look at that customer base, is that -- should we think about that growing at any different pace than the legacy 8x8? Is there limitations on sort of how much you can grow in that base and as much of the acquisition is around the technology and the development team, I guess maybe just help us think about what that Fuze base looks like? And eventually, is there still plans to move them to XCaaS? So in order -- the first and most important thing, and we have not done a great job of this yet, is cross-selling our contact center into that UC base. So there's a tremendous opportunity, and that wouldn't show up necessarily in the Fuze numbers if we continue to report those. We're not going to report after next quarter, but if you can imagine the wind the each open the side of the house. And we've already started upgrading some of the customers to the 8x8 platform, and we'll continue to do that. That's part of the reason Kevin said in his prepared remarks, that as we anniversary it just gets kind of meaningless to report these. And remember, we're not adding -- we're not investing a new logo acquisition on the Fuze side of the house. We're investing on the 8x8 side of the house. So in a notional sense, the Fuze number we report is the Fuze UC base. And with natural sort of things, we'd expect that to slowly degrade a little bit over time. And as the numbers show, it's been a very slow over the last year. It was well -- it's done much better kudos to the GCC team. It's done much better than we expected when we originally did the acquisition. And so I would expect that to continue. The number one area of focus besides retaining the revenue is cross-selling our contact center into it. Maybe as you look to fiscal '24 and just kind of the low single-digit outlook that you gave. You guys mentioned a lot of conservatism around CPaaS or conservatism just on Fuze term. But just if you could give kind of an update as far as like what you're seeing as far as deal activity, trajectory, just given kind of the macro environment. And then maybe as a follow-up question on the CPaaS business. I guess, just like what is the ongoing rationale particularly just given it's in a region that you guys don't do a tremendous amount of business in, like what is the business rationale continuing to kind of invest in that business when you're making kind of cost decisions elsewhere? This is Kevin. So in terms of the 2024 growth of low single digits, we are being conservative with respect to the CPaaS business, as we said. We do see signs of stabilization in that business. But since it's usage-based, it's a pretty dynamic market. We're just going to continue our conservatism into the forward-looking forecast on that, until we see absolute signs of change. In terms of the rationale for the investments in that business, that business can really turn revenue up pretty quickly. So we're very interested in that business. It could provide a lot of growth on -- in pretty short order, more so than our typical recurring revenue business does. So that's 1 of the areas where we're looking at potentially ramping up our growth. Yes. So a couple of small things I'd add is, so you talk about economic sensitivity, probably some things like CPaaS, which isn't contracted revenue, we're seeing a little bit more of that economic sensitivity. I think on the core business, where it's really interesting is our collections were absolutely fantastic. So as Kevin talked about, our cash and cash balance was sort of in excess of what we expected for the quarter. Our collections portfolio is the best it's been in a long time. And that's also a clear sign in our retention metrics. So if you look, our retention metrics were highest in many quarters, months, I forget out exactly what Kevin said, but in 1 of those -- so the quality of our portfolio from an economic perspective is absolutely fantastic. And you did see RPO trended up, right? So the contracted revenue had a pretty good quarter relative to some of the other things. So I think from an economic front, I'm not super stressed right now about the economic health of our -- both on the recurring side and the ability to add new logos. And then lastly, just on the conservative nature of the model, look, it's my first quarter. I'm definitely not going to stick my neck far out with a super aggressive model. We've got a ton of new innovation that's going into beta, which we basically have 0 in the model for. We're trying to be really conservative on the CCaaS side of the -- sorry, CPaaS side of the house also. Sam, it's good to see focus on profitability side. Just wanted to ask on the revenue side. Your service revenue, I say organic services revenue growth was flat, excluding Fuze. So you did talk about CCaaS, but what do you see in terms of macro trend, anything on the enterprise side? Is it definitely disoriented. What are you seeing in the market right now? I -- it's a fair question, and yes, your math is correct. It's just -- it's a little hard for me to tell. We took an action in the beginning of October, and we took another action in January. So both of those had consequences. And as we said earlier, we're walking away from low margin or negative margin revenue for improved profitability. We think the improved profitability allows us to delever our balance sheet, just makes the company better off and allows us to reallocate investments in the better ROIC areas. So I think absolutely, economics played a relatively small role in the revenue performance, it was really self-generated. And the other thing I would say is I think that reallocation of investment is working, deferred revenue's up quarter-on-quarter, deferred commission's up quarter-on-quarter, RPO's up quarter-on-quarter and retention at the highest levels we've seen in a long time. So in terms of the underlying indicators of a healthy SaaS business, they all got better last quarter. And so I sort of believe that the right play right now is to sacrifice a little bit of revenue growth to make all those things substantially better. And then in the CPaaS business, I know you talked about weakness in the CPaaS business the last few quarters. So wondering what's the current run rate of CPaaS right now? We don't disclose that. As Kevin mentioned in his script, it's 1 of the things that we're looking at disclosing potentially in future quarters, so we kind of put the breadcrumbs out there, but it's under review. Sam, when you talked about your bullet point #5, Asia Pac and CPaaS revenue has been down. What other assets are you looking to build that up with, so you can really drive that as a key growth driver? It's a completely fair question. So I think in the past, we missed a bit of a product cycle in CPaaS in Asia. And you could -- like I can get into more details in -- at another time, but just we missed the product cycle, and we sort of caught up on that. We're investing in the platform in the business. Our unit volumes have continued to increase. And we're continuing to land brand name customers, as I mentioned in the prepared remarks. And so I think the business funnel is there, et cetera. We just need to close the gap on a few product features. And there's some other news that's coming in the near future on that front also in the CPaaS business. And so I think that the stars are starting to align for us to turn that business around. It is taking longer than we had expected, and I grant that to everyone, but I think the stars are therefore, to turn around and do better. Well, then, you also then layer on your CCaaS business in like the Australian market, it seems like that would be a right market for you. I know I don't want to pooh, pooh, the Australian market. It just happens to be that Australia is like the 58th largest population country in the world and the State of California is the sixth. I'm not sure if I wouldn't rather invest in California than in Australia. Right now, we're investing pretty aggressively in the U.S., U.K., California -- I'm sorry, Canada, Ireland, because those are just great contact center markets right now for us. Sam, you talked about the importance of your customer recommendations to their peers, as being a driver of your business. Can you talk about that in a little more detail? Is that something you've actually seen? And is that -- is there something you can quantify there? Kate may know the quantification numbers off the top of her head, but 1 of the things that we've been very focused on over the last few quarters has been improving our reference ability. So we really were talking about NPS, so there's notion of referenceability and we saw a pretty substantial increase in our referenceability. This all goes sort of full circle, right? So in my prepared remarks, I talked about our investment in customer success. Kevin talked about the very high retention rates we're having. That in turn leads to happy customers, happy customers give good references, which then, in turn, drives RPO improvements and deferred revenue improvements and those kinds of things, right? So we're trying to get that virtuous cycle, maybe spinning a little faster than it has in the past. Just as a follow-up. You mentioned customer churn is something you're comfortable with. I'm curious if you can talk about seat churn. And of course, as we're starting to see some layoffs around the market. Is that starting to have an impact in the results? I'll let Kevin follow up if you want to add anything. Look, so when we talk about retention, we talk about logo plus seats, right? So if a customer down sells from 100 seats to 90 seats, where a customer goes from 10 seats to 0, we count that the same. And last quarter, we had the highest retention in many years. And so I don't think it's that much -- I think what's interesting is we're launching a lot of really important things, Conversational IQ, some of the things we have in beta, et cetera. So even if we're seeing a little bit of ARPU decrease from the core product, just the number of seats, we are seeing an uptick in the number of add-ons going into our contact center. Yes. I think -- so on the customer retention, we need to go back over more than 3 years to get -- I just can't find any numbers for more than 3 years that are better than the ones that we just put up this quarter. I will also say that we're making the right investments in global customer care and delighting our customers. So it's really starting to pay dividends for us, and we're keeping the right high-value customers. And looking forward, although we don't give guidance on this, we do look out. We're very, very proactive about what customers are renewing, what's coming up, and we address any risks that way. We're doing a really good job of that right now. So I think that's reflected in our recent trend. Yes, I guess I had a question on the revenue guidance, both for fiscal Q4 and in '24, thanks for the initial framework there. And I guess I recognize that CPaaS is going to be a headwind. You've talked about that. Is there any way to kind of help us parse apart what you're seeing in kind of XCaaS and CCaaS, which I know is the strategic priority versus UCaaS? I mean are there demonstrably different growth rates there? Any color you could provide on that front? Yes. I mean, I'll start, and I'll let Kevin fill in. So a couple of things, right? So XCaaS is now almost 40% of our ARR and has growth rates well in excess of what we're seeing across the whole business, right? So the whole business is flat and our growth rate in XCaaS is high 20s. And so definitely a situation where we've got a lot of moving pieces under the table. CPaaS, you mentioned small business, UCaaS. It had an okay quarter this quarter. It was kind of flattish on a year-over-year basis, right, up 4%, those kinds of things. But not blowout numbers. And so we are still under the covers. I think all of this is starting to show up in a complete soup though, right? XCaaS, our contact center doing better. That's driving higher growth rates in enterprise. And small business is starting to become a smaller and smaller component of the overall ARR mix. And so as all that flushes out over time, we should naturally see a lift in growth rates. Let me ask you 2 then maybe this ties into that. I mean you noted RPO was -- had a nice sequential increase. And what's helping drive that? I mean is that XCaaS adoption? What are kind of the key pieces of that? Yes. no, I mean, I'd love to make it -- well, I'd love to make it super sophisticated and cool, but -- we had a good quarter for XCaaS sales, right? The combination of UC, CC and a world-class Microsoft Teams integration, I mean we mentioned right? Microsoft Teams triple-digit growth year-over-year. That's pulling in our contact center. Our contact center then has higher dollar ARPUs attached to it and good margins associated with it. So if we can just keep in princing and repeating that, the numbers will continue to get better. Yes. We also -- I mean, in addition to the strong new logo bookings, we had a great renewal quarter as well, which is indicative of the investments we're making in delighting the customers. Yes. And XCaaS has a net dollar retention well in excess of 100, right? So like the more that XCaaS becomes a bigger part of the business, the more the math starts to work itself out. And I'm sorry, maybe just a quick clarification. On the -- for fiscal '24 on the operating margin guidance, I think you said 400 to 500 basis points. Was that above the full year fiscal '23? Or is that above the exit rate of '23? Yes, we took about 7.5% we'll have for the full year and then just add 400 to 500 basis points on top of that for the full year, but we do expect a steady improvement on the strength of the balance sheet. When we think about foregoing, I think, near-term growth of profitability, managing the business for more cash. I think your comments on having, a, become more of an innovation by company, but it does sound like the offsets that will be sales and marketing. So is the idea to rely more on partners for net new? Or is the strategy to kind of focus back on the base? Just what initiatives are in play, I think, today to deliver, I think, greater sales and marketing efficiencies, if you're going to be pulling back a little bit on the sales for? Yes. So we are a partner-led company. And so we're putting -- I think the key is -- and there's a timing aspect to this, and I know that everybody sort of gets that. But if we invest today in innovation, it takes a little while for that before that to show up in pipeline. And so what we have done is we've really worked on improving the sales and marketing efficiency at the company, while we incubate a solid innovation road map, particularly around contact center. And so once that innovation road map starts to get into the market and whatever, we should be more of a customer pull model instead of a sales or partner push model, and that's much more efficient over time. And so there is a timing aspect to this. We'll deal with some quarters of relatively low growth rates as we make this transition to XCaaS being a larger part, to innovation to new products driving more of the business. But that's really what we're focusing on to improve that efficiency number instead of some of the things we've done in the past. I apologize if I missed it, but can you quantify, I think, the CPaaS headwind this quarter? If I look at organic growth year-over-year, I'm just trying to understand how much of that was attributable to the CPaaS headwind versus kind of macro just impacting customer purchasing decisions? We don't break out CPaaS separately. We don't want to run a foul of the segment reporting rules of the SEC and some of the other rules that are out there. I would just tell you that it was the -- the difference between our guidance and what we actually produce, the vast majority of that was the CPaaS business, if that helps you quantify it. Sam, I want as you look at the kind of the broader UC space and obviously slowing growth across the board. Are you seeing signs yet of consolidation that could improve the health of the industry? Well, we consolidated Fuze and the Street didn't like that deal. So I'm not sure anybody is going to be consolidating anything too soon. Fuze for us has been a big success. I wouldn't -- I would do it all over again. But so far, no. I don't see a whole lot in the consolidation space. And in terms of the Fuze installed base, no update there in terms of customer migration or how we should expect any kind of impact on the model going forward at this point? We're accelerating my upgrades as I say, migration we selling upgrades. And we've got automated tools and the work we've done on the engineering front to make that just a really easy seamless transition, is starting to come into market. So we would expect that, that -- those upgrades to start to accelerate over the next couple of quarters. And if any Fuze customers are listening, we're not going to force you to migrate. We're not going to force it upgrade. We're going to do it when you're ready. Sam, also nice to see the improvement quarter-over-quarter in non-GAAP gross profit. It seems like you're certainly targeting the right revenue. For the 2024 target for low single-digit top line growth and look, I'll cut you some slack on this one, but on a quarterly basis, should we think about any differences in the year-over-year revenue growth rates for the first half of the year versus the second half? Like at this point, are you thinking stronger year-over-year growth later in the year? Yes. I mean we haven't baked really any of the new products in, but because of the comps and some of the other things, the growth rates will naturally lift as the year goes on. Thank you for calling it out, right. Last quarter, 31% year-over-year growth in gross profits. And we would expect that next year gross profit growth is in excess of revenue growth. We continue to get solid gross margin improvements. But yes, more back half of the year. Kevin, anything you want to add? And provided what happens with CPaaS, we're going to be taking a look at that and doing what we can to help ramp that above our conservative estimation. Yes. Good to hear that for sure. We also noticed that your disclosure for Microsoft Teams licenses went from a few hundred thousand last quarter to over $300,000 in this quarter. Do you have a sense of what percentage of 8x8's net new business comes with the Microsoft Teams integration? And then separately, the strength around renewals, but did you notice any additional price headwinds, perhaps from competition around those renewals in the quarter? So I'll get back to you on the first 1, because we give away the integration for Microsoft Teams for effectively free. So it has no real consequence on the UCaaS number. Just before everybody freaks out, it's not I'm giving seats away for free. They stop to buy an X1 or X2 or X3, X4 seat to go with it. The integration is free. So it's easy for me to get the seat number, but I have to go do some math to say what percentage of new logo dollars that was. Microsoft Teams is an important aspect. And obviously, if we're talking about organic growth at 0 and Microsoft Teams growing at triple digits, it's becoming a larger share of our new logo wins. And I think it is pulling through contact center and some of the other things. Sure. And just around the renewals in the quarter. Did you notice any like additional competition around price renewals? Or was it pretty similar? Yes. If I speak really candidly, it's the fiscal fourth quarter, December for a number of our competitors, and I swear at the end of the year and at the end of their fiscal year, they have absolutely no pricing discipline at all. So did we see mud thrown in several directions, sure. I suspect that while they're busy, they're SKOs now and posting on LinkedIn, they'll forget to do that this quarter. This is Austin Williams on for Michael Turrin. I wanted to go back to margins. I'm wondering if there's any way to quantify how much of the margin improvement that you've seen thus far are from taking costs out of Fuze and how that compares to just the core business efficiencies? So we have really gotten a lot of great margin out of the core business as well as Fuze. So it's really on both sides. And the Fuze gross margins comparable with the 8x8 organic gross margins. And we've done the same kind of work on, say, COGS that we did with the Fuze base. So it's kind of been done in tandem. So I would say that there's a fairly equal distribution of margin improvement from both entities, if you will. Just 1 follow-up. RPO was up nicely on a sequential basis. I'm just wondering if there's anything to call out as it relates to deal duration, if there are any longer-term deals in there? Yes. We saw a slight change, but the vast majority of it was just more contracts. It's roughly the same. It's roughly the same. Yes. A couple if I could. So earlier, you mentioned hoping to see attach rate of CCaaS increase over time. So just wondering more details on what's going to make that happen? Is that just a sales training and processes, better partner training? Is it technical integration? So what's the gating factor there? I believe that -- okay, so I believe as we -- as the innovation we're investing in, particularly on the contact center of the side of the house, comes into market, our contact center is going to start to pull through more and more. And given the fact that we have things like Conversational IQ, which gives a distinct advantage to moving your base on to UC from the same vendor on the same platform. So as our contact center gets better, it gets us involved in more deals that, in turn, makes the prospects look at the fact that we have Five9 SLA, a single platform, high availability, high reliability, tremendous feature set and all those other things, just makes it a lay up to buy it all together in 1 package. And I think that's why we're seeing XCaaS resonate with the market, right, 40% of ARR, higher retention rates, higher net dollar retention numbers, all those things. And the more we invest on the contact center side the more, I think that flywheel spins faster and faster, because contact center is where there's a tremendous amount of white space in terms of innovation room today. Understood. And then also, I think the comment was made about addressing risk about expirations and that being helpful with the retention rate. Is that related to some of the competitive pricing pressure you were seeing in the market? And then how are you addressing those risks? Is that through discounting, incremental product additions? How are you addressing that with customers? I think that was my comment about how we're looking forward. So yes -- so what we're trying to do is we're trying -- first of all, we have a pretty good -- we've operationalized fairly well an understanding of the customer renewals and when they're coming up and well in advance of their renewal, just make sure that the customer is using the product, it's working as promised, making sure that they're delighted in the performance of the product and so forth. And that's where the investment came in -- the investment comment comes in that I mentioned about making sure that the customers are happy. So by doing so, we don't necessarily have to go discount on renewal. It could happen, but basically, we just want to make sure that we get ahead of it. Yes. And I would sort of piggyback on what Kevin said, right? Switching costs are not low in this industry with line nonreporting and everything else. We are training agents or doing it as other things, right? So really, like once we land to customers, there are ours to lose. And the GCC organization here has just done an exceptional job of removing the bottlenecks to renewal, number one. And then the engineering organization has done an exceptional job with just very high reliability. I mean we have Five9 platform SLA, and most of our competitors don't because they can't meet those kinds of numbers. Good to see the improving operating margin guidance as the company continues to make progress on the deleveraging front here. Just -- most of my questions have been answered, but I guess I'd say, if you could kind of compare and contrast what you're seeing in the U.S. versus other markets such as U.K. that'd be interesting given the economic weakness that we're seeing and that foreign markets have been a lot faster growing from you of late. Just curious what that looks like today. Kevin, you should chime in. I think the biggest difference I see is our XCaaS messaging resonates in our Microsoft Teams messaging resonates really strongly in the U.K. market and the foreign market is a little bit better. In the U.S., there's still a little bit of the Microsoft channel and the telecom channel being 2 separate channels. And so the -- our channel team has done a tremendous yeoman's work, building our Microsoft Teams channel, and that's paying dividends. And so I think it's just -- I see economics less. It's just 2 different structured markets, in particular. And it's easier for us to gain that sweet traction in our foreign markets. And then last question for me. I guess it sounds like the CPaaS business has been a little bit of a headwind. I know that's a lower-margin offering, but likely stabilizing over the next couple of quarters here. One, I guess, like will the companies focus on deleveraging, like one, would you consider that like a core business or potentially not as you look at opportunities to kind of accelerate this deleveraging process? And are there any also like repayment restrictions that you have on your debt aside from the remaining notes that are due in '24? I'll let Kevin take the second one. Look, the CPaaS business is a great business. It's got beautiful unit economics when it's running right. Step 1 is to get it running right, and then we can talk about strategic options for it. But Josh, as you know me, I'm a seller from strength, not from weakness. Starting in August. Yes, that's what we have. And then there is a prepayment penalty for the succeeding year, small prepayment penalty. And then after that, there's none. There are no additional questions waiting at this time, so I will pass the conference back to Samuel Wilson, CEO, for any closing remarks. All right. Thank you, Matt. Thank you for your continued support. I hope we have conveyed some of the excitement about our opportunity and our future path tempered by the recognition that success will require commitment and hard work. I am confident we can do this. We are a vibrant and financially strong organization, and we are accelerating the pace of innovation. With a steady stream of new products coming this calendar year, including ML-AI based features and tailored experiences, we are well positioned for the future.
EarningCall_1099	Good morning, and thank you for joining Bank of Marin Bancorp's Earnings Call for the Fourth Quarter Ended December 31, 2022. I'm Andrea Henderson, Director of Marketing for Bank of Marin, and thank you for your patience this morning. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question-and-answer session. [Operator Instructions] This conference call is being recorded on January 23, 2023. Joining us on the call today are Tim Myers, President and CEO; and Tani Girton, Executive Vice President and Chief Financial Officer. Our earnings press release which was issued this morning can be found on our website at bankofmarin.com, where this call is also being webcast. Before we get started, I wanted to note that we will be discussing some non-GAAP financial measures on the call. Please refer to the reconciliation table on Page 3 of our earnings press release for both GAAP and non-GAAP measures. Additionally, the discussion on this call is based on information we know as of Friday, January 20, 2023, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release, as well as our SEC filings. We are pleased with our record fourth quarter and full year earnings. Both reflected the strength of our relationship banking model, paired with disciplined expense control, liquidity and credit risk management efforts. As always, we remain dedicated to disciplined underwriting and prudent lending. Originations eased in the fourth quarter, but our $240 million in full year production represented the second best since 2019 without the need to compromise credit quality. In fact, we saw a steady derisking of credit portfolio over the course of the year. We are of course mindful of recessionary concerns and associated impact on loan demand. However, we will continue to rely on our balanced approach to meeting customer needs, while maintaining a strong credit culture in order to navigate any economic slowdown. We provide exceptional service and local market expertise, deepening ties with our customers without competing strictly on price or taking unnecessary risks. Although our loan balances declined modestly from the third quarter, we funded $35 million in commercial loans in early January 2023, that had been scheduled to close in the fourth quarter of 2022. $20 million of that is expected to remain on our balance sheet as we have participation commitments for $15 million of that total amount. Our asset-sensitive balance sheet helped our performance in 2022 driving yields on interest earning assets and we will be diligent about protecting our net interest margin in 2023. More than half of total deposits were non-interest bearing at the close of 2022. While our cost of deposits rose just 2 basis points in the fourth quarter, rising rates boosted our tax equivalent net interest margin by 10 basis points in the fourth quarter and 23 basis points over the fourth quarter of the prior year. Finally, earnings and synergies generated from our 2021 acquisition of American River Bank further contributed to our improved efficiency ratio, allowing us to allocate resources towards our strategic initiatives as we head into the new year. In Q1 2023, we will deliver on our plans to further gain efficiencies from the merger by consolidating four Northern Sonoma County branches into two that have overlapping customer coverage. Also in the quarter, we will close two additional branches where we will be able to serve customers effectively from nearby locations. These efforts are expected to generate savings of $470,000 in 2023 and approximately $1.4 million per year thereafter that will be reinvested in both talent and technology. Now I'll turn to some additional highlights. We produced record net income of $12.9 million in the fourth quarter compared to $12.2 million in the third quarter. Diluted earnings per share of $0.81 compared to $0.76 in the third quarter. For full year 2022, we generated record earnings of $46.6 million, up from $33.2 million in 2021. Diluted earnings per share were $2.92 for the quarter compared to $2.30 per share the prior year. Noninterest-bearing deposits accounted for 51.5% of total deposits at the close of the year, down slightly from the third quarter, but our average cost of deposits remained very low at just 8 basis points. While the market anticipates interest rates will climb further in the first quarter, we will continue to carefully manage deposit pricing on a customer-specific basis. Credit quality, as I noted, is strong and improving. With fourth quarter nonaccrual loans declining $8.2 million or 77% in the fourth quarter and representing only 0.12% in total loans, down from 0.49% at September 30. Our efficiency ratio for the fourth quarter was 50.92% compared to 52.24% for the prior quarter and 56.92% in the fourth quarter of 2021. The improvement was driven by lower operating expenses and higher net interest income on both loans and securities. Given the consistency of our performance and record earnings, our Board of Directors declared a quarterly cash dividend of $0.25 per share payable on February 10, 2023. This represents the 71st consecutive quarterly dividend paid by Bank of Marin Bancorp. We are proud of our fourth quarter earnings, which translated into a return on assets of 1.2% and return on equity of 12.8%, up from 1.1% and 11.7% in the third quarter. Net interest income of $33.4 million in the fourth quarter increased $343,000 over the prior quarter as higher yields more than offset the 2.2% sequential decline in earning assets and the 2 basis point increase in cost of deposits. For the full year, net interest income was $127.5 million, up 21.4% from 2021 as a result of higher earning assets generated from the acquisition, as well as deposit growth in 2021 and lower funding costs primarily related to the early retirement of subordinated debt in 2021. Loan balances were down 3% in the fourth quarter as $55 million in payoffs consisting largely of real estate asset sales and cash paydowns more than offset new production of $36 million. Deposits were also down in the fourth quarter, decreasing by $329 million or 8.4% from the prior quarter. While some of the decline can be attributed to our commercial customers' year-end activity and specific planned events, we have been anticipating outflows of pandemic surge deposits for some time. At the end of 2021, the bank held $521 million in cash and deposit network balances in anticipation of expected and potential unexpected outflows. Over the course of the year, those balances as well as $112 million in borrowings and $164 million reduction in loans financed deposit outflows and growth in the securities portfolio. Our fourth quarter tax equivalent net interest margin improved 10 basis points, driven by the higher yields on interest-earning assets, partially offset by a 6 basis point increase in our cost base interest-bearing liabilities. There was no provision for credit losses on loans in the fourth quarter compared to a provision of $422,000 in the third quarter, an increase in qualitative risk factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance was offset by the decrease in loan balances. Fourth quarter noninterest income of $2.6 million was down slightly from the third quarter, mostly due to the reduction in fee generating deposit network balances. 2022 noninterest income decreased -- sorry, increased $773,000 over 2021 due to higher fees on balances held at deposit networks and more transaction volume due to the larger size of the bank. Those increases were partially offset by the reduction in earnings on bank-owned life insurance. Noninterest expense of $18.3 million in the fourth quarter was down $368,000 in the third quarter. Decreases from the prior quarter included a $957,000 reduction in salaries and employee benefits, largely due to a bonus accrual adjustment and an increase to the discount rate applied to retirement plans. In addition, other real estate-owned expenses declined due to a $345,000 valuation adjustment in the prior quarter. Full year noninterest expense increased $2.6 million over 2021 as a result of our larger size investments in software and equipment, the valuation adjustment on real estate owned and accelerated costs associated with upcoming branch closures. Those increases were partially offset by the $5.6 million reduction in pretax merger-related and conversion costs. We continue to reap the positive benefits of operating leverage as our efficiency ratios were 50.9% and 54.4% for the fourth quarter and full year, respectively, both improved from 52.2% in the prior quarter and 63.1% in 2021. As there were substantially more acquisition-related expenses in 2021, the year-over-year improvement on a non-GAAP basis was 374 basis points. All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.9% at December 31, compared to 15.1% at September 30. And the bank's diluted based capital ratio was 15.7% at December 31 compared to 14.7% at September 30. Year-end tangible common equity of 8.2% for Bancorp and 8.1% for Bank of Marin were up 76 and 85 basis points, respectively, from the prior quarter due to the decrease in after-tax unrealized losses on available-for-sale securities associated with interest rate decreases during the fourth quarter as well as the contribution from our strong earnings. Overall, Bank of Marin's strong balance sheet, liquidity and capital continue to yield healthy results as has been the case across many interest rate and economic cycles. We believe that this will continue in 2023, enabling us to further invest in our strategic initiatives that will further improve profitability and strengthen our franchise. Our performance throughout 2022, combined with our more than 30-year history of delivering attractive returns to our shareholders in all cycles positions Bank of Marin well for the year ahead. We remain highly focused on diligent expense control, prudent risk management and proactive balance sheet positioning. Yet, we also continue to explore new ways to invest in technology upgrades and talent ensuring we can meet both meet clients' increasing preference for advanced digital banking tools and high-touch service backed by well-established bankers of proven market expertise. We are committed to our existing clients and continuing to expand our commercial lending to new customers across Northern California, building on the American River Bank acquisition. As we further optimize our delivery channels, we will continue to identify cost-saving opportunities to offset new investments we make, which are exceptional delivery of products and services throughout our footprint. With that, I want to thank everyone on today's call for your interest and support. We will now open the call to your questions. Thank you. [Operator Instructions] We'll proceed with our first one on the phone from the line of Matthew Clark from Piper Sandler. Go right ahead. Maybe first just on your updated thoughts around your deposit beta this cycle, interest bearing deposit beta of only 1% cycle to date. I think on the last call, you spoke about maybe getting towards 20% through this cycle, it seems like you might do a lot better than that at this stage, assuming the Fed's done here in the first half of the year. Just any commentary around your thoughts around deposit pricing in light of the decline in deposit balances as well. Yes, so I'll start Matthew and then I'll hand it over to Tani. But bigger picture, if you look at the biggest chunk of deposit runoff both on a year-over-year basis and quarter, it was accounts tied to our - what we call business as usual, we had outflows from accounts side to election cycles and things like that. We did have some runoff in a couple of key client areas where they manage money for other people, where they were looking a higher yield and went to alternative investment vehicles. Very little of the amount we lost both quarter and on a year-to-date basis, we're losing money to other financial institutions relative to the total. But that can change as the rate environment changes and rate increases further. So our model beta on the interest bearing deposits is 34%, but historically we've achieved less than that, but because we have about 50% of our deposits in non-interest bearing. Obviously, the total beta is going to be roughly half of that. And I'd say, I would just reinforce what Tim said, we're really proactively reaching out to customers when rate concerns come up and making sure that we're addressing them on a full relationship basis as opposed to raising rates across the board. We have a significant amount of liquidity, contingent liquidity that we have not tapped into for many, many years. And so that enables us to really be thoughtful about how we manage our cost of deposits. Okay. And then just to round out the margin discussion. If you have it, the spot rate on interest bearing deposits at the end of the year and the average margin in the month of December? Yes, the spot rate at the end of the year or at the end of December on total deposit costs or interest bearing other one, and then the overall average NIM for the month of December if you had it? Yes. And then just on the buyback, there's some mention in the release about reconsidering - reinitiating the buyback. I guess can you give us a sense for what's changed other than rates? Capital obviously is up with the benefit of rates, but any other color there would be helpful? Yes, we want to be prepared, Matthew. We think at this valuation, it's really attractive for us to buy back stock. We have to continue to watch trends in the economy and credit risk and for other potential impacts on capital. But we don't want to be boxed into not doing it. We want to have the ability to do that and it's something we talk regularly with the Board about. Okay. And then last one from me. Just on your office exposure, could you just remind us the outstandings there and the kind of split between downtown metro office relative to rural and what you're seeing there in terms of the impact of ongoing tech layoffs and how that exposure might perform over the coming months? So as of December 31, we had about $450 million in total office commercial real estate. The loan to value based on the most recent valuations we have on file and obviously that changes all the time is just under 44%. San Francisco is $82 million of that. That loan to value is the same. So we have good cushion and we are proactively working with borrowers where we think there is significant exposure to that environment you're alluding to and reevaluating those properties. So, we haven't really seen the trends materially worsen for our portfolio. We're not lending to the Salesforce Tower buildings of the world, but that - as a fact other properties. But that loan to value is pretty consistent throughout all the various submarkets. So we have, again, valuations change, but we proactively do that and we have properties, we have concerns on. But that that gives us significant cushion to work with those borrowers. And in the vast, vast majority cases, we have sponsorship behind those and work closely with them to make sure we stay on track for repayment. Matt, I've pulled those spot rates for you. So for the month of December, the cost of deposits was 8 basis points and the net interest margin was 3.27% tax equivalent. Thank you. We'll get to our next question on the phone line from the line of Jeff Rulis from D.A. Davidson. Please go right ahead with your question. Yes, those were legacy Bank of Marin. So we had one earlier, the $7 million one we've referred to before. That was a longstanding non-accrual of Bank of Marin. And then the other small ones related to a similar borrower were legacy Bank of Marin. If you're talking about the payoffs overall, there was a chunk related to acquired loans. Gotcha. And just would you - some of that success or movement, would you chalk it up to timing or was there any shift in aggressiveness seeing kind of potentially what could be ahead economically speaking, was there a, let's chase some of these down just trying to get a sense for if it was timing or some self-directed things in-house? Yes, it's partially both. So the one larger loan that I just referenced, that's been on the books for long time. If you're talking about the smaller ones, we were very proactive in - resolving that situation with the borrower and certainly that was in the back of our minds that this external environment is not going to get any better. And so, we worked with them closely and came to a mutually agreeable solution. So there's no question that this environment played into that. Okay. Hopping over to the 2023 expense growth rate, how should we think about maybe year-over-year figure given the branch consolidation savings that are expected to be a partial offset, just not specific and/or just the puts and takes of how you see expenses in '23? So I'd say we had quite a few vacancies in 2022. We've resolved a lot of that. So that's an upward push. However, and then also, we plan to invest some of the savings from the branch closures and other efficiencies that we realize into some of our strategic initiatives. So, but on the other hand, we had very few expenses related to the merger and conversion in 2022. So I'd say in general, you're probably going to see kind of a normal uptick in expenses, but there are a lot of moving parts in both directions that can counterbalance each other. We do also have sort of the typical first quarter increase associated with bonuses and 401(k) contributions that go along with those bonuses. Yes, okay. Maybe a last one just on the payoff activity - can you get a sense that any of that was sort of year-end timing driven or and/or do you have any visibility that payoffs could subside going forward, especially given where rates are and where they've been? Yes, we do. Well, I'll start with that last part. We do think it's going to subside. If you look at the full year trend, asset sales have been typically one of the largest components. That was actually down year-over-year. Cash payoffs were deleveraging that was pretty flat. We did have a larger jump in payoffs from project completions and Park as we had $125 million construction loan payoff that was very lumpy. The biggest component that or the largest increase category wise year-over-year was just third-party refinancing and that - refinancings and that jumped up relatively significantly. But over half of that were acquired loans where we didn't have the appetite to refinance or continue on with those loans. And so to your question about timing yes, the intense rate competition we had earlier in the year drove a lot of activity and really accelerated that. Those were undoubtedly things that would have come to life and happen anyway, but having banks compete over those, kind of things, force that decision early on. So, there was a timing aspect of that, but that was over half of those - third-party refinancing, so a little bit of a long-winded answer. But yes, we have every reason to believe that, that trend will subside both in terms of one, those - assets being off the books, but two, the rate environment overall. And we did, like I said see a couple of those key categories actually decline. Okay. So I guess, consistent with your initial comments, sort of a strong year of originations, but you did quite a bit of de-risking under the hood, if you will, at least - for our eyes, there was a bit of churn in there that you feel better about the quality of the book? Thank you very much. We'll get to our next question on the line - from the line of David Feaster with Raymond James. Go right ahead. I just wanted to go back to the deposit side. We touched on a bit when you talked about the betas, but I'm just curious, as we think about the surge deposits or maybe some more of the rate-sensitive money, have we gotten most of that out at this point or are you still seeing more flows on that side. And you talked about excess liquidity being used to pay down debt. And so, are you looking for more outflows to continue, is the first question? And then how do you think about funding that? I mean Tani, you talked about having some other sources of liquidity. It kind of sounds like maybe additional borrowings would be the primary source to fund outflows versus selling some securities here? And then maybe just touch on the securities cash flows as well? Yes, so if you look at what our deposits have done since just before the pandemic, deposits went up from trough to peak by about $800 million. And since the beginning of - 2022, we've lost about $400 million. So you could say, well, there's $400 million in question. However, the last time we had a situation like this, when we had a deposit surge in reaction to the financial crisis and the Great Recession, we did not lose all of the deposits. And so as I said before, the beauty of - having all the contingent liquidity that we have enables us to really make choices about where we're willing to pay capital markets rates versus where we want to raise deposit rates. And that gives us a lot of flexibility. As you said, we do have some unrealized losses in the securities portfolio. The duration on those securities is multiyear. So we're not inclined to sell at significant losses to finance a cash need for several months. So it's better for us to go out into the capital markets or to increase rates selectively on the deposit side. Cash flows off the securities portfolio generally average about $100 million per year. I think I got all your questions there, but let me know if I didn't. Yes. No, that was terrific. And then may be touching on the credit side. You guys have such a conservative approach and good insights. But I'd just be curious, maybe as you look at your portfolio and you stress some of the floating rate borrowers where there - we've seen borrowing costs go up materially. Are you seeing a material change in debt service coverage ratios and as we look at the prospects of another 50 basis points of hikes? How do you think about the cash flows and the collateral values for some of these loans as they come up for renewal? And ultimately, how do you think that, that impacts credit quality? I mean, would you expect to see more TDRs or just - I was just curious how you think about approaching that and what your thoughts are at a high level? So, one of the things you mentioned, David, is our disciplined approach. We've long stressed especially commercial real estate for rate sensitivity for higher rates. And we are constantly doing that on both floating and fixed rates and so far within our portfolio, that's holding up well. I can't really predict where overall office rent trends are going to be that will affect the cash flow vacancy rates. But right now, we feel good about the position we're in. We've talked about some of the problem credits that we've had that we've moved the substandard in the past. Those have now worsened. And in the meantime, we're cleaning out the portfolio, things we can control in a mutually agreeable way with our customers to create a runway for dealing with potential future problems. But right now, we feel good. But certainly, everything you said in that question is a risk, but I don't know how to quantify or even fully qualify that for you at this time. Yes, okay. And then one thing you said in your prepared remarks, Tim, just you - talking about optimizing delivery channels. I was hoping maybe you could expound on that a bit. Talk about some of the things you're working on. I know you've hired a lot of talent. You've invested in technology. Just curious what you guys are working on and some of [technical difficulty]? Retail network and it's an extremely important part of our customer service model. But at some point, when you get into cycles like this, it's begs a question of how many do you need covering what service area. So what we're closing, certainly two of those were redundant with American River Bank. We had - we both had branches in Healdsburg and Santa Rosa, and we had put off doing that. The other two are in markets where there's service nearby. So our customer we can continue to service our customers, but - that includes looking at commercial banking. We've always had a model of having regionally centric commercial banking office serving relatively narrowly defined markets, and we just need to always look and say okay, is this, the right way to deliver our relation banking model. There's no promise in there that we're going to do anything else or guarantee, but I think we always have to look at - are we most efficiently delivering on loan growth and C&I deposit growth, core deposit growth in a way that builds our operating leverage into our model. So as we've talked about before, we're going to continue to look for ways to drive that. Hi, maybe - just starting on loan growth, looks like timing might have been an issue for some of the fourth quarter loan growth. I guess Tim wanted to hear your thoughts on just how the pipeline stood and overall kind of loan growth expectations? And then maybe more specifically, any pockets of strength within the portfolio where you would anticipate more growth? And then conversely, any areas where you're kind of pulling back? Yes, you know it's a good question. In terms of the timing, yes, if you're looking at our pipeline now at Q1, it's not as quite as robust as it was last year, but last year was a very different rate environment. What's encouraging is it is increasing. And depending on where you set your threshold for probability close, it's actually the fairly decent amount given that external environment right now going into Q1. There's, not a lot of areas where we're pulling back per se certainly, we're going to be cautious about large new investor real estate office property request in San Francisco. But by and large, we're going to continue to look for - look at credits, the way we always have. And that's why we do it the way we do. So we don't - whiplash our customers and our prospects with disparate credit parameters. But we are looking closely at everything the timing certainly on the payoffs. Yes, we had - a fairly large chunk of the problem loans that paid off. Certainly, the volume did decrease in the fourth quarter. I'm not sure that was fully unexpected, given the rate environment and the caution among the borrowing universe out there in this economic environment. But we are continuing to focus on growing every one of the regions we have. Certainly, one of the things that was an absorption of time and effort this year was bringing American River Bank into Bank of Marin and then certainly on the commercial banking side embedding credit culture people. It took some time to rebuild that team, as we've talked about in the past, and they're doing a really good job. So the production across our regions was fairly typical. Marin, Napa, Sacramento, Oakland, and we continue to believe we can drive growth in all those areas, and we'll continue to look for ways to generate activity that leaves the loan growth. That's great color, I appreciate it. And maybe just kind of sticking on that point, the competitive dynamics for new loan growth today and I'd be curious, are you - have you seen spreads compress as rates - market rates have gone up or are you still getting kind of similar spread as 12 months ago for new loans? So certainly, the yield on loans that we're booking is up in every category. I really can't speak to a consistent trend on spreads, but I have no doubt the level and type and nature of the competition that we're going to see heading into early this year is not the same we saw in the first two quarters of last year. It's always a competitive market, but we have a lot of competitors that are focused on very disparate things and different things right now than they were last year at this time. So, I can't really promise how the spreads are going to continue - by way of competition, but we're certainly happy for the higher yields and being asset sensitive helps. That's a tough one. I mean I think it - kind of hovers around 265. Our tax rate was a little higher this year because as a total percent of the balance sheet. The tax-exempt earnings from munis and bank-owned life insurance played a smaller role in reducing the tax rate. On the other hand, we didn't have as many non-deductible merger expenses in 2022. So, there's nothing jumping out on for that - in the horizon to have a significant impact on our tax rate. And we'll get to our next question on the phone lines - it is from Woody Lay with KBW. Go right ahead. I wanted to circle back on the buyback. I know it depends on sort of a myriad of factors, but just as it relates to capital. I mean, do you have a constraining capital ratio that you sort of look at in regards to the buyback? Well, I think that's been a bit of a moving target. Early on, when deposits were running up, there was obviously a focus and a lot of talk about the leverage ratio, now tangible common equity to tangible assets and certainly taken sort of more aerospace about conversations. So we're really looking at all of those, honestly. And we want to, again, be in a position to take advantage of opportunities, but being cautious about the impact that would have and how that might affect our margin of safety of capital going forward in the environment. Yes. Makes sense. And then just last for me, I believe in your opening remarks, you sort of mentioned that you're focused on improving profitability ratios. If I sort of look at sort of focus on pretax pre-provision, I mean, do you think 4Q is sort of the high watermark? Or do you think you can continue to see improvement in the year ahead? That's a tough question. I mean, with provisions -- okay, you want to talk pretax pre-provision. We still stand to benefit from an increase in interest rates. So not necessarily, but also the balance sheet size does make a difference. So to the extent that our balance sheet is steady, then I think we can continue to see improvement. So there are just a lot of moving factors in that question. So sorry to punt on that one, but I can't really predict. [Operator Instructions] We do have a question queued up from the line of Tim Coffey with Janney Montgomery Scott. Go right ahead. Tani, I appreciate the color you provided on deposit and potential outflows, and I think that you put you're spot on. I'm wondering though, where do you think noninterest-bearing deposits as a percentage of total deposits could end at the end of this year? So again, that's another tough question. When we had the Great Recession, we -- our noninterest bearing kind of went up from an average of, say, 35% to 40%, 42%. And toward the end of the cycle there, we had every expectation that, that percentage would go down. And it never did, it did nothing but climb. So I'm not going to predict that it's going to go up any further. And I'm not going to say that it can't go down. But I think historically, that is just -- that's a big, big focus for us, and it's something that we will work hard to maintain. And yes, it can go down from 50%. But I think that given our business model, that's something that we pay attention to all the time. Right. Okay. And I apologize if I missed it earlier, but were there any costs associated with the branch closures in 4Q? Yes. We had some small amount of accelerated costs. So what happens is we have some tenant improvements and lease expense that gets accelerated over the remaining time that we occupy those properties. And so a small piece of that happened in December. Most of it will happen in 2023, but as you saw, the net impact of that and the savings for the year ends up being positive. And that cost is really the differential between the costs we set for 2023 and the annualized run rate going forward. We're retaining all the employees. We're just going to reposition them into the nearby branches and other places. So there's no employment-related costs there. It's almost entirely what Tani mentioned. Okay. All right. I appreciate that. And then, Tim, can you provide some color on this general customer sentiment in the current rate environment? I mean, clearly, you're still able to open for business and booking loans but I'm wondering what's the soon it like? Is there a bit of hesitancy to make investments right now? I think hesitancy to the word. I think for a few months there a couple of months at least, it was -- it was a bit of silence, right? The rates continue to increase and a lot of doom and gloom news out there are certainly uncertainty around what the news is going to be. But as I mentioned, we're really starting to see the pipeline build back up. And so people do grow accustomed to higher rates. They are not abnormally higher long-term rates than we've seen historically, but they're certainly different than they were most recently. So I think there's an adjustment period. And -- but we are seeing that activity increase. And -- that just means we have to work harder to generate that activity, but we are committed to doing that. Certainly. We have actually one more question on the phone. It's another follow-up from Andrew Terrell with Stephens. Go right ahead. Tim, I just wanted to -- it seems like focus kind of at the company right now is maybe more internally focus. I just wanted to get maybe an update from you on M&A if that was of interest to you at all or how conversations were going in the market right now? Sure. Well, as I'm sure you've heard it, it's slow from what I can tell in the market out there. We always remain open to those opportunities. I'm out there talking to other banks and investment bankers as are many of my competitors. And as you know, they're sold, not bought. So you have to wait for someone to raise their hand. But no, we remain open to the opportunity, remains a key part of our strategic plan, but I can't force that activity and then most importantly, finding the right partner when that does and activity increases. So the total -- the duration of the total portfolio is 4.99 years. However, it's important to split that up between the available-for-sale portfolio and the held-to-maturity portfolio, which is roughly, very roughly half. But the held-to-maturity portfolio has a longer duration. That's 5.92 years and the AFS portfolio is 3.98 years. So I think that answers that question. And then we had another question about the tangible book value per share at year-end that was $20.85. And related to that question, I think similar to a question answered earlier, with the larger accumulated losses on the portfolio, at what point would we start selling securities losses in order to finance the bank? And as I said, I think we have a lot of -- we have a lot of headroom right now to manage our liquidity position, both through our deposit pricing, as well as in the capital markets. So we don't feel like we'll be forced to take losses that we don't want to take. I don't have that level of data in front of me on the granularity. Yes. If we have a contact information on that, we'll have to make that available, but I don't have a loan level detail to talk about the granularity on average size. But yes, I'm sorry, the second answer is health care office would be included in commercial office. For those on the line that didn't hear the question, it was what is the granularity of the office commercial real estate exposure? And is health care office embedded in that or included in that? I don't have that level of detail to provide on the granularity, so we'll follow up. With that, I will end this call. Thank you all for joining us. We appreciate your support and your questions. If any of you have any follow-on questions, please reach out to us. We're happy to answer them. Thank you.

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