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EarningCall_1300	Greetings. Welcome to Huntington Bancshares Fourth Quarter Earnings Call. At this time all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. Thank you, operator. Welcome, everyone, and good morning. Copies of the slides we will be reviewing today can be found on the Investor Relations section of our website at www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about one hour from the close of the call. Our presenters today are Steve Steinour, Chairman, President and CEO; Zach Wasserman, Chief Financial Officer; Rich Pohle, Chief Credit Officer, will join us for the Q&A. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website. Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We are very pleased to announce our fourth quarter results, which included GAAP net income of $645 million and adjusted net income of $657 million. For the full-year, reported GAAP net income was $2.2 billion, and adjusted net income was $2.3 billion. Both results reflect record earnings for Huntington. 2022 marked a year of numerous successes driven by our team's execution of organic growth initiatives, realization of both expense and revenue synergies from the TCF acquisition. An unwavering focus on credit discipline and proactive balance sheet management. We ended the year with substantial momentum. Clearly, the economic environment is becoming increasingly challenging. However, Huntington is better positioned today than at any time since I joined over a dozen years ago. And over those years, we've transformed the risk profile of the bank and remained highly disciplined. We are taking proactive steps now to again position Huntington to outperform, and we entered the year with solid capital levels, top-tier reserves, a growing core deposit base and strong credit metrics. We continue to see opportunities to grow revenue and profit. Now on to slide four. First, we finished the year with our fourth consecutive quarter of record pre-provision net revenue. This was supported by higher interest income driven by earning asset growth and an expanded net interest margin. Revenue growth has been exceptional over the course of the year, and we intend to protect and grow that revenue base. Second, we delivered broad-based loan growth ex PPP up 10% year-over-year. As we drove this growth, we also optimized for return while still exceeding our loan growth outlook. One example of this optimization is indirect auto, where our production in the quarter was approximately 15% lower than the prior quarter, while our new loan yields increased by over 100 basis points. Importantly, we continue to grow our deposit base with multiple consecutive quarters of growth. We believe this is a differentiator for Huntington in this environment. It also demonstrates the breadth of our franchise and our colleagues' ability to acquire and deepen primary bank customer relationships. Third, our financial results for the fourth quarter and full-year reflect a top-tier return profile and were at or above our medium-term targets. These results demonstrate the earnings power of the company, and we expect to continue to deliver on these targets. As we intended, we delivered common equity Tier 1 capital to the middle of our 9% to 10% operating range. We are also very pleased to announce a new two-year share repurchase program. Fourth, we ended â22 with strong momentum across the business that we carry into this new year. We remain focused on growth, aligned with our risk appetite. Importantly, we have the capital, credit reserves and strength of balance sheet that give us confidence to continue to deliver on our organic growth priorities. Slide five highlights the tremendous earnings power of the franchise, which has improved sequentially over the course of the year. PPNR is over 60% higher than pre-pandemic levels. Our return on tangible common equity is top tier. We managed our asset sensitivity throughout the year and deliberately positioned the company to benefit from higher interest rates, which resulted in significant revenue growth. We've also been prudent in taking actions to protect this revenue base should we experience lower rates over the next few years. We will continue to be dynamic in this regard with our goal of reducing volatility and creating a tight quarter around the path of spread revenue. At our Investor Day in November, we shared with you our highly defined set of strategic priorities. We expect these strategies will drive sustained revenue growth and support gains in efficiency over the long-term. As you also heard, this management team is a group of experienced operators. To further accelerate the execution of these strategies and support increased efficiency, we will be taking a series of actions during â23 to align our organizational structure with a focus on our critical priorities. We expect these actions will result in new growth and efficiency opportunities. We will share more details on these actions as they're finalized over the course of the first quarter However, one element will be a voluntary retirement program for our middle and senior management. Overall, I believe this program will be important to support our colleagues and create value for our shareholders. In closing, we are well positioned for continued growth. We have the strategies and the momentum in our businesses to support growth. We also benefit from highly engaged colleagues who have consistently delivered outstanding customer service and are a true differentiator. We have a credit discipline to outperform and remain focused on rigorous expense management, investment prioritization and capital allocation. We remain committed to our long track record of managing to positive annual operating leverage and are intently focused on driving shareholder value. Thanks, Steve. And good morning, everyone. Slide 6 provides highlights of our fourth quarter results. We reported GAAP earnings per common share of $0.42 and adjusted EPS was $0.43. Return on tangible common equity, or ROTCE, came in at 26% for the quarter. Adjusted for notable items, ROTCE was 26.5%. Further adjusting for AOCI ROTCE was 19.8%. Loan balances continued to expand as total loans increased by $1.9 billion and excluding PPP, increased by $2.1 billion. Deposit balances increased by $1.6 billion on an end-of-period basis, while average deposits were essentially flat compared to the prior quarter. Pre-provision net revenue expanded sequentially by 4.2% from last quarter to $893 million. And on a full-year basis, year-over-year increased by 36% to $3.2 billion. Credit quality remained strong with net charge-offs of 17 basis points and nonperforming assets declining to 50 basis points. Turning to slide seven. Average loan balances increased 1.7% quarter-over-quarter driven by both commercial and consumer loans. Commercial loans continue to represent the majority of loan growth within commercial, excluding PPP, average loans increased by $1.9 billion or 2.7% from the prior quarter. Primary components of this commercial growth included distribution finance, which increased $900 million tied to continued normalization of dealer inventory levels, as well as seasonality with shipments of winter equipment arriving to dealers. We also saw the continued long-term trend of demand within our asset finance businesses, which drove balances $300 million higher in the quarter. Commercial real estate balances increased by $500 million largely as a result of production late in the third quarter and lower prepays. End-of-period balances were higher by $180 million. Auto floor plan utilization continued to normalize, which drove balances higher by $300 million. Additional increases in line utilization over time, represents a substantial ongoing opportunity. We also saw higher balances in specialty verticals. Such as mid-corporate and tech and telecom, which were offset by lower balances in other areas as a result of our return optimization initiatives. In Consumer, growth was led by residential mortgage which increased by $500 million as on sheet production outpaced runoff and was supported by slower prepaid speeds. Partially offsetting this growth were lower auto balances, which declined by $230 million and RV Marine, which declined by $50 million. Turning to slide eight. We delivered $1.6 billion of deposit growth for the quarter and $4.6 billion for the year on an ending basis, on an average basis, deposits were lower by two-tenth of 1% while increasing 2.4% year-over-year. Competition for deposits has intensified, beginning in earnest in September and continuing into the fourth quarter. Notwithstanding that, we are pleased with the traction we saw over the course of the quarter as our teams delivered robust production, demonstrating the deposit gathering capabilities across the bank. Ending deposit growth was led by consumer, which increased by $1.6 billion. We saw a mix shift in line with our expectations, including incremental growth in both money market and time deposits. We continue to remain disciplined on deposit pricing with our total cost of deposits coming in at 64 basis points for the fourth quarter. We will remain dynamic balancing core deposit growth, the competitive rate environment and the utilization of a broadrange of funding options. On slide nine, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income, excluding PPP and purchase accounting accretion, increased by $67 million or 5% and to $1.459 billion. Net interest margin expanded 10 basis points on a GAAP basis from the prior quarter and expanded 11 basis points on a core basis, excluding accretion. Slide 10 highlights our high-quality deposit base and diversified funding profile. For the current cycle to date, our beta on total cost of deposits was 17%, as we have noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Overall, our beta continues to track to our expectations. Turning to slide 11. Throughout 2022, we were deliberate in managing the balance sheet to benefit from asset sensitivity. We also incrementally added to our hedging program to manage possible downside rate risks over the longer term. During the quarter, we executed a net $3.2 billion of received fixed swaps and $800 million of forward-starting swaption collars. At this point, based on the current rate outlook and yield curve opportunities, we believe we have optimized the size of the program. We are comfortable with our position today as we balance near-term costs versus longer-term protection. As always, we will be dynamic as we monitor the outlook and the yield curve. We maintain unused hedge capacity that we could deploy should the curve revert and/or steepen to a level where we would add incremental downside rate protection hedges. On the securities portfolio, we saw another step-up in reported yields quarter-over-quarter. We are benefiting from reinvestment as well as the hedge strategy to protect capital. We will continue to reinvest cash flows of approximately $1 billion each quarter, at attractive new purchase yields around 5%. Moving to slide 12. Non-interest income was $499 million, up $1 million from last quarter. We drove record activity within our capital markets businesses during the quarter and throughout 2022. Capstone continued to perform well and our underlying capital markets businesses outside of Capstone finished the year strong, up 26% year-over-year. We remain pleased with the client engagement we are seeing in the wealth management business with another positive quarter of net asset flows. On a year-over-year basis, we saw lower mortgage banking income as a result of the higher rate environment and from lower deposit service charges from fair play enhancements we implemented during 2022. Offsetting these factors were higher capital markets revenues and payments revenues. Importantly, we're executing on our strategy to drive higher value revenue streams and our fee mix continues to trend favourably. Moving on to slide 13. GAAP noninterest expense increased $24 million compared to the prior quarter. Adjusted for notable items, core expenses increased by $19 million. This quarterly increase in core expenses was primarily the result of revenue-driven compensation tied to capital markets production. Additionally, we saw seasonally higher medical claims in the quarter, which increased by $16 million. Underlying these results, core expenses were well controlled, demonstrating our commitment to disciplined expense management. Slide 14 recaps our capital position. Common equity Tier 1 increased to 9.44%. Our tangible common equity ratio, or TCE, increased to 5.55%. Adjusting for AOCI, our TCE ratio was 7.3%. We ended the year having delivered on our plan to drive common equity Tier 1 to the middle of our 9% to 10% operating range. Going forward, our capital priorities have not changed, fund organic growth, support our dividend and provide capacity for all other uses, including share repurchases. After having held back on share repurchases for the last several quarters, our expectation is that over the course of 2023 and beyond, we will now return to a more normalized capital distribution mix, including share repurchases. Our Board has authorized a $1 billion share repurchase program through the end of 2024. Given the current economic outlook, our thinking is that we will not actively repurchase shares during the first-half of 2023. And as we watch the path of the economy. This may result in capital ratios continuing to expand in the near-term. We like the flexibility the program provides, and we believe it is prudent to maintain an authorized share repurchase program as part of our overall capital management framework. On slide 15, credit quality continues to perform very well. As mentioned, net charge-offs were 17 basis points for the quarter. This was higher than last quarter by 2 basis points and up 5 basis points from the prior year as credit performance continues to normalize. Nonperforming assets declined from the previous quarter and have reduced for six consecutive quarters. Criticized loans have similarly improved for four consecutive quarters. Allowance for credit losses was up slightly, driving the coverage ratio higher to 1.9% of total loans. Turning to slide 16. You will note a strong reserve position. As I mentioned, the portfolio has continued to perform extraordinarily well, and we believe our disciplined approach to credit through the cycle underpins the overall strength of our balance sheet. We were pleased to update our medium-term financial targets at Investor Day in November, and these form the foundation of our expectations over our strategic planning horizon. We believe these metrics are at the core of value creation. Profit growth, return on capital and the commitment to drive positive annual operating leverage. Turning to slide 18. Let me share some thoughts on our 2023 outlook. As we discussed at Investor Day, we analyze multiple potential economic scenarios to project financial performance and develop management action plans. Our targets are anchored on a baseline scenario that is informed by the consensus economic outlook and the forward yield curve as of December 31. The baseline assumes a mild recession in 2023 with modest net GDP growth for the full-year. The economy is expected to exit the year on the path toward recovery with inflation gradually subsiding. Since Investor Day, the economic outlook is incrementally worse and is likely at the lower end of the baseline scenario outcomes. Our baseline outlook for 2023 is for average loans to grow between 5% and 7%, led by commercial with more modest growth in consumer. We will continue to focus on optimizing for returns and driving loan expansion in select areas. Deposits are expected to increase between 1% and 4%, reflecting continued growth and deepening of customer and primary bank relationships. Net interest income is expected to increase between 8% and 11%, driven by continued earning asset growth and expanded full-year net interest margin. Non-interest income is projected to be approximately flat. We expect continued robust performance from our areas of strategic focus: capital markets, payments and wealth management. During 2023, several other factors are offsetting that growth including our anticipated holding of the majority of our SBA loan production on sheet, thereby reducing near-term fee revenue in favour of longer-term high-return spread revenue. Lower income of approximately $23 million associated with purchase accounting accretion in fees. Please refer to slide 30 for more details. Lower operating lease revenue as we continue to transition to more capital leases. Importantly, we expect this will result in lower operating lease depreciation expense as well. Lower mortgage banking income for the full-year 2023 versus 2022. And finally, in light of the economic outlook, we are implementing risk mitigating deposit policy changes that will result in a lower incidence of overdrafts and related service charges. In addition, we are reducing NSF fees to 0 in the first quarter. This will result in an approximate $5 million reduction in fee income per quarter, which we expect to be more than offset by lower associated charge-offs. As you know, the first quarter is generally a seasonal low for overall fee income. We expect fee income will grow sequentially throughout the remainder of the year. On expenses, as Steve noted, we intend to hold growth to a low level given the environment, even as we remain committed to funding critical long-term investments. We plan to manage core underlying expense growth between 2% and 4% for the full-year. This level of expense growth benefits from the ongoing efficiency initiatives we've discussed previously, such as Operation accelerate, branch optimization and the organizational alignment actions that Steve highlighted. Added to the core expense growth, we expect approximately $60 million higher expenses from the full-year run rate of Capstone in Toronto, and $33 million of increased FDIC insurance expense associated with the surcharge. In addition, we expect the first half of the year to include some amount of restructuring charges associated with the expense management actions we are taking. We will provide more details about these actions later in the quarter. Overall, our low expense growth coupled with expanded revenues, is expected to support another year of positive operating leverage. We expect net charge-offs will be on the low end of our long-term through-the-cycle range of 25 to 45 basis points. Our 2023 guidance reflects the current macroeconomic outlook. We will continue to be diligent in analyzing the macro environment and will react as needed to manage as the year plays out. We ended 2022 in a position of strength and have good momentum. We have every expectation of continuing to outperform this year. Thank you, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has additional questions, he or she can add themselves back into the queue. Hey, good morning. Hey, question on deposit growth. You mentioned deposit competition has intensified quite a bit. And we can see from the CD rates that you're offering in the market that you've been proactively raising the CD rates and offering more 14-month CDs. So just given all of that, can you talk about how much of the projected deposit growth in 2023 will be driven by CDs? And what the overall deposit mix is likely to look like? Sure. Yes. This is Zach. I'll take that question. Thank you for asking it. Generally speaking, we're seeing our deposit growth continue to trend pretty well in line with the outlook that we've given between 1% and 4% growth for the full-year. So, we think we're on that run rate. I think it will be balanced between both consumer and partial and to your point, we'll continue to the mix of that deposit gathering will continue to trend as we expected and it is baked into our overall rate and beta expectations for higher rate products like time deposits like money market et cetera. I think we're beginning -- we're operating in this rate cycle clearly at a lower level of mix of those products than we were, for example, the last rate cycle. So, we'll see that trend higher throughout the course of the next several quarters, but in line with our general expectations, it all comes back to our focus on deepening relationships with our existing customers and our primary bank relationships. And so, we think it's working pretty well and expected to continue as we go toâ¦ Got it. And then maybe on the NIM trajectory from here, can you comment on if we're close to peak. And given what you said on the hedges and the fact that the program, at least for now. I mean how should we think about a floor for NIM from here over the course of the next four to eight quarters, as I said, does start cutting rates. Yes. On the topic of NIM, I think just take a step back, we've significantly benefited over the last two quarters from explicit actions to manage asset sensitivity seen more than 60 basis points NIM expansion in the last three quarters alone. And that was very intentional with in mind towards continuing our top-tier performance in NIM over the course of long periods of time that we've done. As we stand now, as we start to look into, we do believe there's more room to go on asset bases, and we'll see yields continuing to increase out over the next few quarters. However, we're further along in that process probably three quarters of the way through than we are on the deposit beta side, but we also expect, as we said, rates continue to track higher over the course of the next several quarters, we're probably only about halfway through the deposit beta cycle. And when you couple that dynamic with what is currently expectation, the yield curve that we'll see short-end rates fall towards the latter part of 2024. It is reasonable to project a somewhat downward trajectory of NIM over the course of 2023. Our goal will be to manage NIM, as we've said on a number of occasions previously within a tighter corridor in 2023 as we can, really protecting the downside hedging program and ultimately driving towards sequential and sustained growth in net interest income on a dollar basis. And I think when we couple what we expect to be a pretty strong NIM level overall with the loan growth that we expect to continue to drive, again, to the guidance 5% to 7% over the course of this year, we'll see that NII on dollar rate is continuing to expand, and it's about focus. I want to start sort of follow-up, Zach. With the NIM expected to trend down given all the hedges and protection you've put in place to sort of tighten that ban. And can you frame for us how much downside could we see what's the range? Yes. Thanks, even, for the question. Look, I think the trend is something on the order of single-digit reduction on kind of a quarterly basis as we go throughout 2023. There's a range of uncertainty. So, I want to be clear, not being overly precise, you just think about all the factors that are going to play into that. The Fed funds actions, which, as you know, from staring at the dot plots are not aligned with the market expectation. So how that all plays out, I think it's going to be the most important factor the pace and trajectory of beta, which at this point seems to be fairly well linear across time, but we'll have to wait and see how that goes. And clearly, the big one is the economy where that tracks over the near term. So, it's difficult to be overly precise, so I'm trying not to and bring back to dollar. Our goal will be to drive NII on a dollar basis. I said, I do expect some downward trajectory in them and probably something on the order of single digits on a sequential basis each quarter. Got it. That's helpful. And then Zack, when we look at, you're obviously expecting more loan growth than deposit growth, a fairly large issuance of sub debt this quarter. Could you walk us through the funding strategy? I know you said you expect the overall growth in average earning assets. But what's the funding strategy? It seems like you have to do much more than just on the deposit side? And maybe what will be the cost of that? Yes. I think it's an important point. And it's something that we feel is a point of strength and an advantage at this point in the cycle, given that we're coming to the early to middle stage of the cycle has still a very advantageous overall position in terms of loan-to-deposit ratio, the mix of important categories of spot like time deposits in our noncustomer funding kind of relative to history. And so, it allows us, as I've mentioned on a number of previous occasions to utilize the balance source of funding. If you look back at what happened in 2022, we grew loans at 10% deposits were more in the 2.5% range. Clearly, loan deposit ratios have tracked up, and we used a broad range of other funding sources like long-term debt like the FHLB and other noncustomer sources to balance out. The same is going to be true for 2023, albeit to a somewhat less degree thinking about loan growth in that mid- to high single-digits range, 5% to 7%. Deposit growth in the 1% to 4% does imply we'll continue to see loan-to-deposit ratios tick up. And you'll see us, therefore, continue to utilize other balance funding sources like the Federal Home Loan Bank, other noncustomer sources of funding there. The rates that we're seeing are pretty reasonable. The incremental economics certainly on that loan growth continued very accretive to return on capital and the overall cost of deposits and funding within that beta expectation so NIM expectation. Could I just talk on that question. Hey, good morning. Hey, Zach, I wanted to ask you; I know we talked about this last quarter. The security swaps that you had added a nice amount of net interest income again. And I'm just wondering, can you help us understand just the benefit from that, if ineffectiveness helped that again? And just how does that go -- like how do we track that going forward relative to just interest rates in terms of the benefits that you should get from there? Yes. They were a very powerful benefit. I think it's -- they're protected, as you know, about one-third a whole would have otherwise been AOCI Mark reduction, which was their primary attention originally, but also have played out in terms of really strong reported yields in the securities portfolio. Roughly half of the approximately 50 bps increase in securities yield was from that hedging program to give you a sense of the scale of it. And I think where it goes from here in terms of incremental benefit is going to be, to some degree, a function of just where that mid-portion of the curve goes and at this point, it's fairly well topped out. I'm not expecting a ton more lift there. The lift from that has reduced somewhat from the third quarter, but it still is very accretive we're not adding to that portfolio now. And so, I think we're getting the benefit that we expected from it. Okay. Great. And then one follow-up on deposit beta. 17% total cumulative so far through the cycle. Can you just remind us what you're thinking about betas from here and just to be super clear for us, if you don't mind, on I think you guys usually do talk on total? Yes, sure. So, it was 17%, to give sense is kind of tracking across time, it was 6% in Q2, 11% Q3, 17% in Q4. So, continues to track and kind of in the additional 5 to 6% to 7% range each quarter. And the expectation is to go out into Q1, it can be sort of more of the same, continuing out over until we get into the middle part of the year. Our planning assumption Ken, is something on the order of 35% total through the cycle, which would indicate we're about halfway through to the prior point that I made. With nothing that I'll tell you where we're intently focused is on the day-to-day management and really very, very rigorous looking client by client in the commercial portfolio, geography by geography in the in the consumer portfolio and ensuring that we can stay competitive and ensure we've got a strong deposit franchise. And so, we'll continue to wait and see and manage against that. If the outlook changes will let you know. But at this point, it continues to track according to that broad expectation. Hi, good morning. You mentioned on slide 18 that you expect to be at the low end of your net charge-off range. The tone very quickly changed this week from some land into hard landing. I guess my question here is this may be obvious to us that have covered the company for a while, but what makes you confident despite the deteriorating economic outlook that you could stay at the low end of that already pretty low range and given some of -- there was a -- I wouldn't call them up here, but there was a company that reported pretty eye-popping delinquency numbers in auto this morning. I'm wondering if you could give us what's going on with auto credit trends underneath. And again, we remind us why you feel confident about how that portfolio would perform in an economic downturn. Erika, it's Rich. Let me take that. I'll go -- I'll answer your second question first with respect to auto. So, we are seeing delinquencies in our portfolio. And again, remember, this is a prime and super prime portfolio. And as we talked about at Investor Day, we've been in this business for decades, and we've got very sophisticated custom scorecards that we use in our client selection process. So, we feel very good about where this business is today and spend through numerous cycles and it's proven itself that it can outperform peers from a loss content through various cycles. So, we feel good about that. The delinquencies right now are right where we would expect them to be from a seasonal standpoint. If you go back and you look at where would have been in that 2018 and 2019 area. We're still trending below those pre-COVID levels. So, we feel good there. And we've been very proactive as it relates to how we're managing our loan to values in that space as well. So I don't have any real concerns about our indirect auto space. I feel very comfortable with how that business is growing. With respect to the overall comfort that we have in our net charge-off forecast. I think it goes back to our customer makeup. As I talked about at Investor Day, on the consumer side, we are overwhelmingly a secured creditor. 95% of our loans are secured. And again, we've got that prime focus and high FICOs of origination around 770. So, it is a very strong book and throughout all of that back I just talked about auto, but even RV Marine resi, all of those portfolios are showing very well from a delinquency standpoint. So, we feel good there. On the commercial side, we have taken a lot of steps to reposition this book over the last several years going through into more specialty businesses, more larger companies, public companies so we feel that we've mitigated the loss content in that portfolio as well. So even though, as Zach pointed out, we're looking at more of a mild recession than a severe landing that's why we feel comfortable with where we are from a charge-off forecast at that low end. Now clearly, if the economy worsens, where we land within that range is going to depend on where the economy goes and how the Fed reacts. But at this point, we're comfortable with where we put that guidance. But Erika, this is Steve. A number of the guidance is through the cycle, and we've been well below the through-the-cycle average. And at this point, we're guiding to the lowest end of the range. And we've been strategic on how we position the lending activities now for a dozen years. We've been very disciplined Richard team, along with the lending teams that have adhere to the discipline, didn't open up in some of the areas of my benefit to frothy and recent vintages. So, we've got a really good core book on both the commercial side. And as a super prime and secured lender generally on the consumer side, we actually think of that as a lower risk book. So, our aggregate out low risk profile and discipline over many years will serve us well, certainly in auto and frankly, the entire portfolio. And my second question is on that 6% to 9% PPNR growth, medium-term target. Clearly, you expect to hit that this year. And I'm wondering, obviously, it gets more difficult if the Fed is cutting which a lot of investors expect for 2024. And maybe the question is I know we'll hear more from you on this expense management actions that you're taking for which you will incur a restructuring charge. But is that an example of the commitment that Huntington has to deliver this PPNR growth range with consistency over the medium term on an annual basis, even if the revenue tailwinds dissipate, like rates? Erika, this is Zach. I'll take that one. And the answer to your question is yes. We in terms of that very much is a sign of our trying to look ahead. Look at not only 2023 but also over the entirety of the strategic plan in Horizon and ensure that we're setting up the overall financial performance in terms of revenue and the growth rate of overall expenses such that we can achieve the objectives in terms of profit growth -- that is a very deeply held objective and we're not looking in the short term, but in the long term to achieve it. As we talked about at Fairmont Investor Day, there are multiple strategic levers that we use to manage overall expenses to grow less than revenue to support that PPNR growth. And even as we drive a faster growth rate of the expenses -- or sorry, the investments within expenses to drive ultimately business growth over the long term, but the efficiency drivers, operation accelerate that is going in reengineering, major customer-facing processes, taking waste and cost out of the system as we improve productivity our long track record of optimizing the consumer and retail branch distribution network, which is still very relevant, still it made, but it does represent an opportunity over time to reduce and to harvest expense saves and things like this organizational alignment, which are designed to help us to improve efficiency and hold cost growth at a low level. I will note, it's in the guidance that I've given in terms of overall core expense growth for 2023. But importantly, also helps us to achieve our strategic objectives. Align our organization yet even more towards our most important strategic priorities and to operate as efficiently and at pace as we can. So, we are extremely focused on driving that long-term efficiency program, which is an important component of the PPNR guidance. And I do expect we'll achieve the financial medium-term targets this year. That's what's baked into an implied by our overall guidance. I think Erika, Steve, if I could add on just a bit and as you'll remember from the Investor Day deck, shared a number of economic scenarios. And we were asked a question and commented that we would take action that the scenarios that the economy worsened and the more challenging scenario emerged. We've already closed 32 branches this month we are taking action consistent with our prior statement and the commitment around driving towards these medium-term financial goals. We're looking ahead as well to â24 with how we're positioning the reinvestment off of the expense actions. So, team is doing a great job. It's a quick pivot, if you will, from a record year and a record quarter. But it's with a very clear set of actions and plan and we're executing. Just to follow-up on Erika's first question. You guys talked about your buyback being on pause because you're watching the path of the economy. In the first half, you talked a little bit about the economic outlook since the Investor Day was slightly worse, yet Rich, you sound pretty confident. It feels like you feel good about your credit outlook just help us square that a little bit more. Are you actually seeing erosion maybe outside of your portfolios? Or help us understand your overall thinking because it seems like it's pretty positive from my view. Well, I would say it's positive right now, and we're certainly cautious as we enter a downturn, but everything that I'm looking at right now, Jon, is holding water exactly where we thought it would be our delinquencies, both in commercial and consumer are right where we would expect them to be. We had a very sharp drop in our commercial delinquencies and our commercial real estate delinquencies are essentially nothing. The [indiscernible] momentum and NPA momentum that we've got both down 20% year-over-year, puts us in really good stead as we enter a downturn. So, we're looking at everything. Every portfolio we're going deep into to make sure that we're proactive in identifying potential issues and trying to get ahead of them in terms of working with customers as there's potential problems. But certainly, the headwinds are there in the economy, but we feel good about where the portfolio is positioned. Like I said, we're not going to bat 1,000. We do have higher losses forecasted in â23 than we had in â22. So, we understand that it's going to be a more challenging environment, but we feel good where we're sitting. Okay. And then can you guysâ touch on the one fee line that stood out was Capital Markets. Can you touch on what you're seeing there? You talked about Capstone and then some of your other businesses. Are these referrals coming to Capstone internally. Is it business generated on their own? And what do you think there in terms of the longer-term runway? In terms of -- so this Zach. I'll take that one. Capital markets is a real bright spot for us. the core underlying capital markets, excluding Capstone, grew 26% revenue year-over-year in 2022, and we expect another run rate of double-digit teams are above revenue growth as we go into '23. So, we're seeing just really sustained traction in the underlying strategy there is to deepen relationships with additional clients continue to penetrate that set of services and products into our core customer base and reap the benefits of it. It's been an area as you know that we've been investing in considerably over time, and we're seeing that play through into incremental revenue growth. And then Capstone to your point, is a nice addition to that. And I would tell you that Capstone is doing really, really well. They beat the plan for Q3. Overall, more than the $100 million run rate, if you look at the back half of revenues. I look at the back half of '22, and we expect that to continue and sustain and continue to grow as we go into '23. It's early days, I would say, in getting client referrals from the Huntington base, but at the beginning, we are seeing, particularly as late to the pipeline and in the future, a lot of positive engagement of core Huntington clients with the Capstone team and with the service set there. And so, it's going to be an area that there's continues to bear fruit and we're quite bullish about the opportunity to grow capstones what was previously $100 million revenue run rate up into something that continues to perform well and above that as we go forward over time. So, it's definitely a strong point at this point. I'll add to that a little bit, Jon, if I can. So, Capstone's had a good performance thus far. They had a very strong pipeline coming into the year. Obviously, multiples of change valuation is impacted by that. Timing becomes a little more uncertain. But we're really pleased with that. The integration into the bank channels is going very, very well. The core businesses, foreign exchange, a record year, Institutional Sales & Trading. Commodities has had a very good performance. So, a number of the businesses are doing very, very well at the core and expect that they'll continue to so that the laggard is, as you would expect, the rates businesses given the inverted curve and but this is a very strategic growth for us. We're continuing to invest in it and the integration of both Capstone and the combined efforts of our core teams and what you earn district at the Investor Day make us very bullish about '23 and beyond. Good morning, guys. Hey, I just wanted I just wanted to ask one back on credit. Just sort of in light of your updated economic assumptions, what sort of additional reserving needs do you think Huntington might have? I mean you're already starting with 190 plus reserve here. So, I mean does that seem sufficient in light of what you're thinking? Or would it continue to drift upward a bit? Scott, it's Rich. I'll take that. So, as you saw, we held our coverage levels flat in the second quarter then we had two incremental builds in Q3 and Q4. So, the 190 coverage that we're sitting with today, we think is fully reflective of the current economic scenario. Now where the reserve goes from there is really going to be a function in the short-term where the economy is having, we see significant degradation to react to that or that isn't as bad will react there. So, it's hard to answer it. We go through that process every quarter in terms of looking at the economic scenario that's in front of us and what the potential for improvement or degradation is, and we make the call at the end of the quarter based on all that. So, the near term is really going to depend on where the economy shapes up. I would say that longer term, as we've been past the downturn, however long it might be, we do think that we will bring the reserve coverage down over time. It's just a question of the timing around that. And then year-end reserves that reflects this adjusted thinking in terms of the baseline economic scenario goes off in the comment and a problem. Thank you and then itâs just actually a piggyback question. Just the expense guidance for the full-year. I'm presuming that includes the restructuring charges to which you alluded earlier. I know you said you're talking in more detail about those later, but do you have maybe an approximate level of what we might expect just to get a sense for what the sort of underlying expense growth might look like from here on out? Yes. Thanks, Scott, for asking the question. I want to take the opportunity to clarify. The guidance we've given is 2% to 4% growth in underlying core. And then on top of that, the run rate for Capstone, which is around $60 million plus the FDIC surcharge we estimate to be $33 million to be relatively precise about that. We have not yet fully sized the potential restructuring costs from the organizational alignment actions that Steve mentioned. So that is yet to be included in that guidance, just to put a very specific point on that. And there I don't expect it to be overly large, but we'll have to see, ultimately, it will be a function of a number of factors, including the final nature of the changes and importantly, as Steve noted, we're instituting a voluntary retirement program, which by a certain name has a function of employee selection and take up on their own and so they'll be some degree of variability until we have a sense of where that program lay in. So that -- more to come on that. There's a few opportunities during the first quarter for us to provide additional updates around the nature of the program and the size of our on and we intend to do that as we to get further out in the Q1. There's some pickup on that expense, that one-time expense that we would expect to see just in the run rate in â23, and there may be other things we can do to absorb that also not the forecast. Good morning. I just want to push on the buybacks. You've got almost 9.5% CET1 capital. You've got very strong reserves. You got a very strong capital generation, solid loan growth, but not good at consumer a ton of capital, seem pretty confident on credit. So, I guess I'm just trying to better understand why you wouldn't buy back stock in the first half and then just to kind of throw it out there, it feels like the uncertainty might increase as we look to the back half. So, what would make you kind of more confident to buy back in the second half heading into maybe more macro uncertainty? Yes, Matt, it's a good question. I think just take a step back to probably to frame it. the expectation now as we get out over the course of the totality of '23 and certainly as we think about '24 and beyond to get back to a more normal mix overall payout ratios between dividends and share purchases and retaining capital to grow. And so, I think you could see this buyback is really just the program with the repurchase program as being indicative of that part of that, and I think a really healthy sign. And when we thought a little more tactically zooming in into the near term, I just really want to see the depth of the economic environment during the course of '23 before you make any substantive or significant commitments. And hopefully, the launch of that is understood. How long exactly does it take to get clarity to your point, is somewhat uncertain. I suspect we'll know a bit more over the course of Q1 and as we get into Q2. It's more resolved at that point than I think we'd be more active but still highly uncertain we'll have to see and be dynamic. But generally speaking, the size of the program was designed to keep us in the middle of our CET1 operating range over the course of the proceeding periods. And so that will be our plan to generally manage in that way. More clarity in the near term. Okay. And then as we think about potential uses of the capital besides buyback, just remind us your appetite for bolt-on deals and I guess, specifically within fees, right? Because we kind of step back right now in net interest income, maybe itâs not peaking, but itâs probably not going to be a key driver of growth as we get through this year and beyond? And I know you guys have been talking about kind of better balancing some of that fee mix over time. So, whatâs the appetite to do something, whether itâs small or maybe bigger than you find in the past? Matt, itâs Steve. We are interested in building our fee income opportunities and net revenue stream. And so, if we can find things that we think make sense, that would enhance our current business lines and/or what we can offer to our customers, we would be interested. Just as last year, we were fortunate to get cash on the board and a fintech opinions [indiscernible] So weâll be looking at the as the year progresses, whether it makes sense to bolster the acquisition on the fee side of our businesses. But thatâs not sort of an intended set aside on that buyback conclusions that just related. Our capital priorities havenât changed. Thank you. At this time, we've reached the end of the question-and-answer session. And I will now turn the floor back to Mr. Steinour for closing remarks. So, thank you very much for joining us today. As you know, we're very pleased with the record year for Huntington and a third straight quarter of record net income, fourth straight quarter of PPNR growth. We come into this year with a lot of momentum. We think we're well positioned to manage through a model recession, and we remain committed to and confident of our ability to continue creating value for our shareholders. And as a reminder, the Board executives, our colleagues are a top 10 shareholder collectively, reflecting our strong alignment, strong alignment with our shareholders. So, thank you for your support and interest in Huntington. Have a great day.
EarningCall_1301	Good morning, and welcome to KeyCorpâs Fourth Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Chairman and CEO, Chris Gorman. Please go ahead. Well, thank you for joining us for KeyCorpâs fourth quarter 2022 earnings conference call. Joining me on the call today are Don Kimble, our Chief Financial Officer; Clark Khayat, our Chief Strategy Officer. Upon Donâs planned retirement, Clark will assume the CFO role; and also Mark Midkiff, our Chief Risk Officer. On slide 2, you will find our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments as well as the question-and-answer segment of our call. Iâm now moving to slide 3. This morning, we reported earnings of $356 million or $0.38 per common share. Our results included $265 million of provision for credit losses, which exceeded net charge-offs by $224 million or $0.20 a share. The additional provision builds our allowance for credit losses, adjusting our credit models to reflect a more cautious economic outlook. Our results reflect continued growth in both our consumer and commercial businesses. In our consumer business, we have added new households with younger clients being our fastest-growing segment. Our commercial business also has continued to add and expand relationships. In 2022, we raised a record level of capital for our clients. Net interest income was up 2% from the third quarter, reflecting continued relationship-based loan growth supported by stable deposits. Deposit costs continued to move higher with a step-up in deposit rates late in the quarter. At the end of the fourth quarter, nearly 60% of our deposits were in low-cost retail and escrow balances. In our commercial businesses, over 80% of our deposits are from core operating accounts. Our average loan balances increased 3% from the prior quarter as we continue to add relationships and offer the best execution with both on- and off-balance sheet solutions. We continue to benefit from investments we have made in our business, including the health care sector. In 2022, we continued to grow relationships with significant health care providers and expanded our Laurel Road business. Despite the student loan payment holiday, we originated over $1.5 billion of Laurel Road loans last year and increased our member households by over 30%. Additionally, we expanded our offering to nurses, added new products and capabilities and completed the acquisition of GradFin. Since acquisition, GradFin has held nearly 30,000 individual consultations for refinance and public service loan forgiveness. These consultations are with prequalified credential prospects, all new to Key. Our fee-based businesses in the fourth quarter reflect the continued slowdown in capital markets activity and the impact of changes to our NSF OD fee structure. Investment banking and debt placement fees were up $18 million from the prior quarter, but down meaningfully from the year ago period, reflecting broader capital markets trends. The new issue equity market is virtually nonexistent and the M&A market continues to be engaged in price discovery. Our pipelines remain solid, particularly in M&A. However, the pull-through rates continue to be adversely impacted by market uncertainty. We have also continued to see more activity moving on to our balance sheet. In 2022, we raised a record $136 billion of capital for our clients, of which 23% was retained on our balance sheet well above our long-term average of 18%. Credit quality remained strong this quarter, with net charge-offs as a percentage of average loans of 14 basis points. Nonperforming loans declined again this quarter and delinquencies, criticized and classified loans all remained near historically low levels. We will continue to support our clients while maintaining our moderate risk profile, which positions the Company to perform well through all business cycles. Our capital remains a strength, providing us with sufficient capacity to support our clients and return capital to our shareholders, including a 5% increase in our common stock dividend in the fourth quarter. Before I turn the call over to Don, I want to share some thoughts on our outlook and priorities for 2023 and beyond. First, we will continue to execute on our differentiated business model and strategy. We will focus on expanding our presence in our fastest-growing markets and targeted industry verticals. As we demonstrated again in 2022, we are uniquely positioned to support clients through various market conditions. Secondly, we will continue to benefit from our balance sheet and interest rate positioning. We have been very deliberate and intentional in the manner in which we have managed our interest rate risk with a longer-term perspective. Although our positioning is providing less current benefit, we have significant upside over the next two years as swaps and short-term treasuries mature and reprice. If we were to reprice our existing short-term treasuries and swaps at todayâs interest rates, we would have an annualized net interest income benefit of $1.1 billion. Thirdly, we will maintain our strong credit quality. Weâve spent the last decade derisking our portfolio, positioning the Company to outperform through the business cycle. Despite our strong credit metrics, we built our loan loss reserve this quarter, which using our 2023 net charge-off outlook now represents almost 5 years of coverage. To put this in perspective, our reserve is now above our CECL day 1 level while nonperforming loans and delinquencies are roughly 1/2 of our prepandemic levels. Finally, we will continue to create capacity to make targeted investments in our business by reducing expenses. Although expense management has been an ongoing area of focus, we will be accelerating our cost takeout plans early in 2023. We will pursue cost opportunities across our company, including areas where we can leverage technology, automation and process improvement to reduce redundancy, improve efficiency and enhance effectiveness. Our 2023 targets represent a cost reduction of approximately 4% relative to our full year 2022 level. The acceleration of our expense reduction plans will benefit us in two ways. First, we cannot grow if we are not investing. This will give us the capacity to continue to drive our targeted scale strategy, investing in points of differentiation. With the benefit of our cost reduction plans, we expect to hold expenses relatively stable this year compared to our full year 2022 results, which would be a significant accomplishment given inflationary pressures and our commitment to continue to invest in our future. I am confident in our long-term outlook and our ability to create value for all of our stakeholders. With that, Iâll turn it over to Don to provide more details on the results for the quarter and our 2023 outlook. Don? Thanks, Chris. Iâm now on slide 5. For the fourth quarter, net income from continuing operations was $0.38 per common share, down $0.17 from the prior quarter and down $0.26 from last year. Our results included $0.20 per share of additional loan loss provision in excess of net charge-offs as we continue to build our reserves, reflecting a more cautious economic outlook. For the full year, we delivered positive operating leverage marking ninth time in the last 10 years. This is a testament to our differentiated and resilient business model and our ongoing focus on disciplined expense management despite the inflationary environment. Turning to slide 6. Average loans for the quarter were $117.7 billion or up 18% from the year ago period and up 3% from the prior quarter as we continue to add and deepen client relationships across our franchise. Commercial loans increased 17% from the year ago quarter, driven by growth in commercial and industrial loans and commercial real estate balances. Relative to the year ago period, consumer loans increased 22%, reflecting growth in consumer mortgage and Laurel Road. Compared with the third quarter of 2022, commercial loans grew 3% and consumer loans were up 2%. Our commercial growth continues to reflect the strength in our targeted industry verticals and higher line utilization. Our consumer business continues to benefit from residential real estate originations, which were just under $1 billion for the fourth quarter. Approximately one-third of our originations came from targeted health care professionals. Continuing on to slide 7. Average deposits totaled $145.7 billion for the fourth quarter of 2022, down 4% from the year ago period and up $1.4 billion or 1% compared to the prior quarter. Year-over-year, we saw declines in non-operating commercial deposit balances and retail deposits. The increase in deposit balances from the prior quarter reflects higher commercial deposits due to seasonality and our focus on maintaining our relationship business. Consumer balances declined in the quarter, driven by inflationary spending and the movement of interest of rate-sensitive balances. Interest-bearing deposit costs increased 49 basis points from the prior quarter and our cumulative deposit beta was 19% since the Fed began raising interest rates in March of 2022. We continue to view our strong deposit base as a competitive strength with approximately 60% of our balances in core consumer and escrow deposits. In addition, over 80% of our commercial deposits were from core operating accounts. Turning to slide 8. Taxable equivalent net interest income was $1.2 billion for the fourth quarter compared to $1.0 billion in the year ago period and $1.2 billion in the prior quarter. Our net interest margin was 2.73% for the fourth quarter compared to 2.44% in the same period last year and 2.74% for the prior quarter. Year-over-year, net interest income and net interest margin benefited from higher earning asset balances and higher interest rates. Quarter-over-quarter, net interest income and the net interest margin were negatively impacted by higher interest-bearing deposit costs and a change in the funding mix. Later in the quarter, we experienced changing market conditions and customer behavior. Market rates increased more than we expected and the migration from noninterest-bearing to interest-bearing commercial deposits picked up. This resulted in a higher deposit beta, lower-than-expected net interest income and net interest margin. Our outlook for 2023 has our cumulative deposit beta peaking in the mid- to high 20% range, well below our historic levels. Included in the appendix is additional information on our future net interest income opportunities and asset liability position. Based on our feedback from our shareholders, we have also included detail on the maturities of our interest rate swaps and short-term treasury secured. As Chris mentioned in his remarks, we have been very intentional in the way we manage interest rate risk with a long-term perspective. Although our position has provided less near-term benefit, we have significant upside over the next two years as our swaps and short-term treasuries mature and reprice. We expect this to drive both, our net interest income and our net interest margin higher over the next few years. We believe this is a true differentiator. Moving to slide 9. Noninterest income was $671 million for the fourth quarter of 2022 compared to $909 million for the year ago period and $683 million in the third quarter. The decline in noninterest income from the fourth quarter of 2022 reflects a $151 million decline in investment banking and debt placement fees, along with a $35 million reduction in other income, primarily from market-related gains in the year ago period. Additionally, service charges on deposits were $19 million lower due to changes in our NSF OD structure that we implemented in September as well as lower consumer mortgage income down $16 million. Partially offsetting these declines was an increase in corporate services income, up $13 million due to higher derivatives income. Relative to the prior quarter, noninterest income declined $12 million. Service charge on deposit accounts accounted for the majority of the decline, down $21 million, once again reflecting our new NSF OD fee terms. Additionally, corporate services income decreased $7 million, driven primarily from an evaluation adjustment benefit in the prior quarter. Investment banking fees increased $18 million. Iâm now on to slide 10. Total noninterest expense for the quarter was $1.16 billion, down $14 million in the year ago period and up $50 million from last quarter. Our expenses reflect our ongoing investments in digital, analytics and our teammates. Compared to the year ago quarter, we saw declines across most non-personnel line items, including business services and professional fees and operating lease expense. Personnel expense remained flat compared to a year ago period, reflecting higher salaries and employee benefits, offset by lower incentive and stock-based compensation. Compared to the prior quarter, noninterest expense is up $50 million. Higher non-personnel costs drove most of the increase. Other expense increased $17 million, reflecting a pension settlement charge in the fourth quarter. Also, professional fees were higher in the quarter, some of which were temporary in nature. Personnel expense also increased, reflecting lower deferred costs from slower loan originations. Moving on to slide 11. Overall credit quality remains strong. For the fourth quarter, net charge-offs were $41 million or 14 basis points on average loans, which remain near historical low levels. Nonperforming loans were $387 million this quarter or 32 basis points of period end loans, a decline of $3 million from the prior quarter. Our provision for credit losses was $265 million for the fourth quarter, which exceeded net charge-offs by $224 million. The excess provision increases our allowance for credit losses, reflecting a more cautious model-driven assumption set. For our CECL modeling, we start with the Moodyâs consensus scenario. This quarter, the consensus estimates reflected a marked slowdown in the economy and meaningful reductions in home prices, both of which impacted our allowance levels. Despite the increases in the allowance, our outlook for net charge-offs in 2023 of 25 to 30 basis points remains well below our through-the-cycle loss levels of 40 to 60 basis points. Now on to slide 12. We ended the fourth quarter with common equity Tier 1 ratio of 9.1%, within our targeted range of 9% to 9.5%. This provides us with sufficient capacity to continue to support our customers and their borrowing needs and to return capital to our shareholders. We will continue to manage our capital consistent with our capital priorities of: first, supporting organic growth in our business; second, paying dividends. In the fourth quarter, our Board of Directors approved a 5% increase, which now places our dividend at $0.205 per common share per quarter, and finally, repurchasing shares. Our current share repurchase authorization of $790 million is in place through the third quarter of 2023. We did not complete any share repurchases in the fourth quarter. On slide 13 is our full year 2023 outlook. The guidance is relative to our full year 2022 results. Importantly, using the midpoints of our guidance ranges would result in another year of positive operating leverage in 2023. We expect average loans will be up between 6% and 9%, and average deposits will be flat to down 2%. Net interest income is expected to be up between 6% and 9%, reflecting growth in average loan balances and higher interest rates. Our guidance is based on the forward curve, assuming a Fed funds rate peaking at 5% in the first quarter and starting to decline in the fourth quarter. These interest rate assumptions, along with our expectations for customer behavior and the competitive pricing environment are very fluid and will continue to impact our outlook prospectively. Noninterest income is expected to be down 1% to 3%, reflecting the implementation of our new NSF OD fee structure last year and continued challenging capital markets activity, at least for the first half of the year. We expect noninterest expense to be relatively stable with the benefit of the cost takeout opportunities Chris described in his remarks, along with ongoing investments that we will make in our business. For the year, we expect credit quality to remain strong and net charge-offs will be in the 25 to 30 basis-point range, well below the through-the-cycle range of 40 to 60 basis points. Our guidance for our GAAP tax rate is approximately 19% to 20%. Finally, shown at the bottom of our slide are our long-term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency, which will drive returns. Overall, it was a solid quarter and a very good finish to another successful year for Key. We remain confident in our ability to grow and deliver on each of our long-term targets. With that, Iâll now turn the call back over to the operator for instructions on the Q&A portion of the call. Operator? I know you mentioned that you saw a step-up in deposit rates late in the fourth quarter. I wonder if you could give us a little more detail on what products and the magnitude that you saw maybe your -- how you see that falling through. And then, related to that, you also said that higher-than-expected pressure on deposit cost as well, not just a step up but a greater-than-expected amount of pressure. And just trying to get a feel around what areas surprised you. And why do you think given the outlook around deposit pressures and rates, what was what attributed to the surprise there? Thanks. Sure can, John. And as far as late in the quarter and late November, December, we started to see a different migration pattern as far as some of the deposits and the rates. We saw market conditions start to pick up as far as rates and many products. Our expectation coming into the quarter was continuing to drift up some of the money market rates on deposits, but the customers were migrating more towards time deposits which had a higher incremental cost than what our assumptions were as far as deposit -- money market deposit accounts. We also saw a shift away from noninterest-bearing accounts at a faster pace than what we would have expected late in the quarter. And so both of those had an impact of driving net interest income down for the current quarter compared to what we would have expected even coming into the end of the quarter and is also reflected in our outlook going forward. And Clark, I donât know if you want to offer up any thoughts as far as trends going forward as far as the deposit rates and betas and what have you? Sure. Thanks, Don. A little bit more just to get your question, John, a little more pressure on the commercial side than the consumer side, which would not be unexpected, we did see, as Don mentioned, a rotation out of noninterest-bearing to interest-bearing. And we saw the ending balance of noninterest-bearing around 29% and thatâs a little bit of seasonality, and weâve seen that come back. Thatâs a ratio kind of high-20s that we would expect through the year, and thatâs a little bit better than where weâve been historically, which we could -- would have been sort of mid-20s. In terms of products and rates, as Don said, CDs coming through, weâd expect the betas for the year to be mid to high 20s, as Don said in his prepared remarks. And again, a little bit more movement to CDs than money markets than we expected, but weâve factored that in, and again, that sort of stable, high-20s noninterest-bearing ratio for the year. John, itâs Chris. Itâs interesting. Customer behavior is really hard to model. We wouldnât have expected that the cumulative beta for the first three quarters would have ever been as low as 9%. And as we got to the end of the year, it really accelerated. A lot of it was on the commercial side. A lot of it were excess deposits in places like our private banking area. So, itâs been interesting. This has been the steepest rate of increases in the Fedâs history. And I think some of the conventional curves are sort of out the window. Okay. Thanks. Chris, that helps. And then, I know you mentioned the need for investment and youâre focusing on ratcheting up investments in certain areas. So, I want to see if you can give us additional color on what changed there in terms of areas that youâre investing in that necessitated the greater pullback in costs elsewhere? Thanks. Yes. So, itâs really a continuation of the investment, John, that weâve been making. And the point I was making there was weâre not going to cease to invest as we take out costs. And when we were at Investor Day a year ago, we talked about growing our consumers by 20% by 2025 focusing really on our growth markets, and weâre having a lot of success with our younger customers, and weâre going to continue to focus both products and marketing in that regard. Also, we talked about hiring bankers. We talked about -- we think we have these unique platforms that are under leveraged, and we talked about increasing our banker population by 25% by 2025. Admittedly, last year, we tapered off in the back half of the year. The market was obviously overheated. And also, frankly, we saw the downturn coming in the economy. We think will be -- it will be a very good environment to recruit and successfully bring people onto the platform going forward. And then lastly, it was Laurel Road and the commitment we made around Laurel Road, where weâve continued to invest is that we were going to grow our members from 50,000 to 250,000. This year, we successfully grew by 30% and weâve made a lot of investments expanding to nurses having a full product line there, buying GradFin, being a leader in public service loan forgiveness. Weâre also going to get into the income-based forgiveness gain as well. So, those are the three areas. And so, it wasnât really new investments so much. Itâs a continuation of the investments weâve made in critical areas of the business including around things like continuing to migrate to the cloud and investing in digital. Okay, Chris. No, that helps clarify that. I appreciate it. And thatâs it for me. And best of luck to you, Don. Can you give us some more color on the reserve build this quarter? To your point, your NCO guide for â23 is well below your long-term targets. So, I guess, what changed in the macro environment that necessitated the reserve build? And I guess, is this you being a lot more conservative? And should we expect the reserve ratio to stabilize from here, or could there be factors that drive that reserve ratio higher? Sure, Manan. First of all, thank you for your question. And youâre right. Despite the fact that we have really good credit metrics, we did, in fact, build the reserve. And so, if you kind of step back for a second, kind of look at the macro perspective, we believe the economy is clearly slowing. We think the probability of a recession has increased from the third quarter to the fourth quarter of last year. Our base case, by the way, is that there will be a mild recession. Thereâs really three drivers of the CECL reserve. The first is the macro view, which I just described, which is the driver for us. The second is loan growth, and we obviously have some loan growth. The third is really idiosyncratic risks, specific portfolio, specific credit. That is not driving our reserve build at all. So, just to kind of bring it to life for you. From the third to the fourth quarter as we look at our models, we looked at GDP declining by about two-thirds from sort of 1.3% to 0.4%. Unemployment going from, say, in the third quarter, we thought it would peak at 4.1%, we now think it will peak around 5%. But significantly, when we look at things like home price index, in the third quarter, we thought homes were going up by 1.3%. In the fourth quarter, as we modeled it, it was a decline of 4.6%. So fairly significant quarter-over-quarter change of 5.9%. Now to bring it back to kind of our portfolio, we, for example, have $21 billion of mortgages. Thatâs about 18% of our loan book. Itâs booking about -- the FICO scores on those are, say, 761 from memory, or some such number. We also say that 40% of our mortgages are 800 or above. And I share this texture for you because we are not worried about our mortgage book. But as we drive our CECL models, which are forward-looking, the macro drivers have significant impact. And Iâm just using that as an example for why the reserve build. Does that answer your question? Yes. Thatâs really helpful. Thanks so much for the color. And then, if you could just round that out with how youâre thinking about the NIM and just managing the NIM as you go through 2023. Earlier on, you were in the camp of the Fed keeping rates higher for longer. Has that changed? And has that changed how youâre managing putting on any additional swaps or hedges on the books? Well, sure. As far as how weâre managing it right now, our assumption set is basically that we would just continue at this point in time to replace roll-off of swaps that we have that weâre continuing to evaluate that. I think the challenge that we all have is just with this inverted yield curve is when do you pull the trigger to start to lock in some of that rollover risk and outlook. And so, right now, weâve not embedded any of that into our base assumptions, but itâs something that weâll continue to have as optionality to take care of that in the future. I guess just wanted to follow up on credit. So, you talked about the consumer book and the FICOs. When we look at the commercial book, both on the C&I, CRE, just talk to us about the idiosyncratic risks, I mean, the leverage lending book you provide on slide 15 is relatively small. But when we think about the impact from higher rates, cooling demand and you talked about mild recession as your base case. Like where within the CRE and the C&I portfolios do you expect delinquencies to start moving higher? And where is the lost content? Sure. Well, Ebrahim, thanks for the question. So, you started at the right place where we focus. We focus any place where thereâs leverage. And obviously, if you think about leverage finance, which, by the way, for us is only about 2.5% of our entire loan book, and itâs focused in our 7 industry verticals, and it has a pretty high turnover. But youâre exactly right, where thereâs leverage and you go into a mild recession and you have declining EBITDA, you have to watch that very closely. We feel good about that portfolio. Nothing has bubbled up to the surface. But as you can imagine, weâre modeling it very, very regularly. The next area that you mentioned, which I think is really appropriate is real estate. And real estate is an area that we look at closely. What weâve done with our real estate business is weâve completely rebuilt it around a business that not -- we not only put real estate loans on our books, but we also distribute a lot of paper. So, itâs a little bit of a different business than a lot of our competitors have, Fannie, Freddie, FHA, the life companies, the CMBS market, et cetera. So, we distribute a lot of risk. Weâre also focused on -- very specifically on certain asset classes. And the certain asset classes that weâre focused on, first and foremost, multifamily in its broadest sense but within multifamily on affordable housing. Weâre watching those closely. So far, the rent uptakes are good. Rent -- the rents are still holding firm. So we feel really good about that portfolio. The portfolio that we look at very closely, and fortunately, we have very little of it. Thereâs actually two portfolios. The first is B and C class office space in central business districts. Right now, weâre down to $250 million, but weâre watching that very closely because those buildings are multi-tenant buildings. And the reality is whether itâs Key cutting expenses and getting rid of occupancy costs or any other business, I think thatâs a real risk going forward. So, weâre watching that closely. The other area where we only have about $1 billion of exposure is in retail. And retail is an area where we keep a close eye. So, thatâs kind of how weâre thinking about it. And as you can imagine, we are continually modeling this portfolio as we look at the delta between where theyâre borrowing and where their debt rolls over. Got it. And I think in there you mentioned that youâre actively derisking some of these loans. Whatâs the market for that in terms of being able to get out of some of these credits without having to take a big mark-to-market or credit charge? There hasnât been -- there really hasnât been a lot of movement yet. I think people are still just like in the M&A environment, I think people are in price discovery. Obviously, if you take my example of B and C class office, thereâs a lot of people that have impaired equity, but I think people are going to have to, frankly, endure some more pain before thereâs a meeting of the minds on kind of how to restructure, how to bring in fresh equity, et cetera. Got it. And just one question, Don, on NII. Do you think the mid to high-20s beta is conservative enough? Iâm just wondering, in a world of 5% plus Fed fundâs QT, like a lot of banks are kind of nudging their expectations a bit higher. Like, do you think that sets you up for more downside risk over the next few quarters? Just give us a sense of your comfort level with that beta guidance. Iâll go ahead and offer up some thoughts and I ask Clark to go ahead and chime in as well. But I would say that keep in mind that, as Chris mentioned earlier on, we really were kind of best-in-class for the first few quarters of this rate increase cycle that our cumulative deposit beta is at 19%. Most of the peers Iâm seeing are closer to 30% already. We did do a thorough scrub as to where we see rates going. And I think what youâre seeing and why we have confidence in our deposit beta assumptions is the fact that we have shifted our priority and focus over to more primacy, both on the commercial and consumer side. And we think that will continue to pay dividends for us as far as keeping our overall deposit cost down. Yes. The other point I would add is just that itâs less for us about new deposit acquisition. Weâre always going to acquire deposits from new clients and new relationships. But a lot of what weâre looking at this year is managing clients from product to product, and that just allow us a little bit more flexibility on pricing. Ebrahim, the only thing I would add, I agree with everything that Don and Clark said, the thing that I will share with you though, this is sort of uncharted territory. And while weâre really pleased with the trajectory of our deposit betas, weâre not going to win the deposit beta battle and lose the -- win the beta battle and lose the deposit war because itâs very important that we serve our clients and we keep them here at Key. I wanted to start on the loan outlook. If I look at where period end and average loans ended 2022, it appears that youâre not looking for much loan growth in 2023 on a period-end basis. Can you confirm that and maybe give some color on why such a sluggish outlook? I donât know if youâre tightening the credit box or whatnot? Steve, this is Don. And as far as the outlook, the period-end balances sometimes can be a little misleading. So, if you just look -- take a look at the fourth quarter average for total loans at $117.5 billion, our midpoint of our guidance range is in the $120 million range, and all of that really is coming from commercial. And so with this change in our economic outlook that also influenced or determine what our allowance was, weâve also pulled back on some of the loan growth outlook. You also see, Steve, that our consumer loan balances are flat throughout next year. And what our expectation is there is that weâll continue to have residential mortgage originations that weâll continue to see some of the home equity balances trade down and relatively flat on other consumer categories. And so, it is very modest incremental growth from here, but we think itâs appropriate given the backdrop of the economic outlook we have. Got it. Okay. Don, thatâs helpful. And then, on the reserve build, if the reserve build was a change in the economic assumptions and not idiosyncratic risk, why did a specific reserve not go up materially in some of these consumer categories? I know theyâre smaller, but home equity, consumer direct card, I would have thought if you changed unemployment rate, et cetera, we would have seen an increase in those as well. One of the biggest things that Chris talked about were the larger moves were this GDP coming down and also the home price index. And so, what you would have seen is the residential real estate backed credits having a larger increase than some of the others. You also factor in the position that our delinquency levels in our criticized and classified levels are still very benign. And I think thatâs why youâre not seeing some of those other higher risk categories showing increased reserves because weâre not seeing the migration of those portfolios at this point in time. Got it. Okay. Thanks. If I could squeeze one more in. Just looking at the NII guidance, up 6% to 9%. I know you said mid to high-20% range for deposit beta, but what is the assumption? Is it mid or high thatâs underlying this guidance range? And what are you assuming the mix of noninterest-bearing is by the end of â23? Thanks. Yes. Steve, itâs Clark. So, itâs -- the mid to high question is sort of mid to high, 27-ish, 28 area for the year on the beta and then the noninterest-bearing percentage is 29%, roughly high-20s for the year. Don, I think you mentioned in your remarks that there wasnât any share repurchases completed in the fourth quarter. Maybe Chris or Don, whatâs the outlook for stock buybacks? I may have missed your comments if you gave it, but whatâs the outlook for stock repurchases in 2023? Gerard, weâre not assuming that thereâs going to be any meaningful stock repurchases. As we look at our balance sheet and supporting our clients and we look at our second priority, which is paying our dividend, I just donât see us out there repurchasing a lot of shares based on our current modeling. Very good. And then, you talked a lot about what went on with the deposit betas and the mix of deposits in the quarter. Obviously, your peers have had similar comments and the difference that we saw with Key was that the margin was essentially flat where others went up. How much of the borrowings -- I noticed in your average balance sheet that you included in the press release, your short-term borrowings and long-term borrowings have gone up and theyâre much more expensive, of course, than deposit funding. Can you share with us your thinking on how youâre using those and why they have been going up? Gerard, as far as the funding, what weâve seen is that the loan growth throughout the second half of the year especially exceeded deposit growth. And so, we were using FHLB and some other issuances to help address the funding needs. I would say that our loan growth outlook and our deposit outlook wouldnât suggest the continuation at the same pace as far as building that other funding sources. And so, we wouldnât expect to see that same type of growth rate going forward. But near term, weâre fine with that. But I would say, traditionally, we would look at a loan-to-deposit ratio in the 90% to 95% range, and weâre still well below that. And so, weâve got plenty of capacity to continue to leverage that funding source as needed. Don, with regard to the $1.1 billion of NII repricing benefits to which you guys alluded I was wondering if you could just sort of walk through the trajectory of when and how those kick in? I mean I see the repricing numbers in the appendix, which is very helpful. But just would be curious to hear kind of more vocally how you think about it, maybe put it another way or I wonder if thereâs an easy frame of reference. What would first quarter â23 NII look like versus, say, fourth quarter â23 or first quarter â24? Not looking for specific numbers, but is there an easy way to say, hey, we sort of trough here and then start to accelerate meaningfully off of here? And if thereâs a time frame around that, something like that? Good. And I will offer a couple of quick comments, but turn it over to Clark because Clark is to be the one thatâs here to deal with that going forward. And I wonât be around. So, will go ahead and pass the baton from that perspective. One thing I want to highlight, though, Scott, is as we take a look, for example, you mentioned in the first quarter of â23. Keep in mind, there are some things that impact the first quarter relative to the fourth quarter that are more seasonal. Day count-related issues cost about $20 million from where the fourth quarter is to the first quarter. We also typically see fee income drop from the fourth quarter to first quarter, given some of the refinance activity on the loan side. And so, we would see the first quarter traditionally being the low point for both, our net interest income and net interest margin and would expect to see growth from there. And Clark has been spending a lot of time taking a look at strategies as far as the swaps and treasury. So Clark, why donât you take it from there as far as other insights? Sure. Just to try to address your question directly, Scott. I think really, the majority of the value is going to come in â24. If you think about whatâs coming off in swaps and treasuries in â23, that number is about $7 billion to $7.5 billion. Itâs more like $15 billion and $24 billion. So think about that kind of two-thirds, one-third almost ratio. Iâd say, of the number weâve shared, which is, again, just to remind you, kind of taking all $29 billion of swaps and $9 billion of treasuries and spot pricing them, again, I think youâd see about a third of that benefit in the â23 exit run rate. So, the beginnings of some steepness in that NIM and then more of that pulling through in â24 as youâd see again, the majority of that maybe two-third or three quarters of that value starting to come through by the end of â24. Okay. Perfect. Thank you. And I guess out of curiosity, Iâm a little surprised at how well the estimate kind of held in $1.1 billion versus -- I think you were saying $1.2 billion last quarter, just given all the changes in the way the curve has behaved. What does it take to really move that number one way or another? Is that sort of a $1 billion plus kind of a pretty sturdy number almost regardless of the way things behave? Yes. Iâd say the biggest impact there is the movement in the two-year end of the curve. And what we saw was the longer end rates moved a lot more significantly than two-year point. You guys see financing to a wholesale company from both the lending side and the capital market side. And one topic during this earnings season is the capital market conditions are a lot tougher whereas the lending conditions are not that much tougher. So, when do you think these will converge? In other words, the pricing in capital markets is much more difficult than the pricing in the lending markets? Are you seeing any firming up or not? So, the answer is, Mike, it depends. And when I say it depends, it depends on kind of what the customer strata is. So 50% of our loans are to investment-grade customers. And the adjustments there are immediate. Thereâs a bunch of different inputs, whether people are hedging, putting a swap on, thereâs multiple people looking at it, et cetera. Where thereâs a disconnect, and I donât really think the disconnect goes away, is in those kind of quality middle-market companies that one bank or one fund can finance. And I donât think weâve seen -- not I donât think, we havenât seen the adjustment there that you would expect. Okay. Do you expect that to change coming up? And just your general outlook on capital markets, thatâs a nice tailwind at times, recently a headwind. Sure. So I think -- look, I think, ultimately, things get repriced and it takes time, whether youâre talking about bank debt going into the middle market or youâre talking about people doing major strategic acquisitions. My experience is it takes literally over a year for people to kind of readjust their expectations. And so, weâre obviously easily six months into this. But I think the first half in capital markets is going to be challenging because people still remember what the business or the financing was worth, say, six or eight or nine months ago. But eventually -- and by the way, anyone thatâs a buyer is acutely aware of how things have been repriced. But those will converge. And I think itâs going to be -- I think it will be challenging in the first half of the year, Mike, and I think this big pent-up backlog will start to kind of -- as people go through price discovery, will start to clear out in the second part of -- second half of the year. Hey. Good morning. And Don, best wishes as well from me. I just have to come back and just super clarify, Don, the 27%, 28% beta for cumulative, that is interest-bearing that compares to the 19% through three quarters? Okay, cool. And then, so just -- I guess, the comparison question that I think continues to come up is just that many peers are talking mid-30s, even low-40s in some of the calls that weâve heard so far. So, can you just kind of go one step deeper into the type of pricing assumptions and, I guess, within products and businesses that just gives you that much better relative confidence to peers? Thanks. Sure. Ken, itâs Clark. So, Iâll pick that up. Again, for us, what we saw in the fourth quarter and what weâre looking at in â23 is much less about new to Key deposits where those kind of new business rates are much higher and necessarily have to be higher to bring them in versus motion in the book of noninterest-bearing, interest-bearing or from different accounts to different account where we can manage that transition a little more comfortably. And given that what weâre avoiding, we think, in large part, is the significant marginal cost of funds that the new price or new offer dollar requires in repricing the larger book. The only other thing I would add, Ken, is that right now, weâre at 19% cumulative. I think most of our peers are close to 30%. And so, by them going to 40%, itâs the same thing as us going to high-20s. So, the incremental change from this point forward is probably fairly consistent. Itâs just that weâre at a better starting point than peers. Yes. That makes sense. It does seem like though to get to that point, your incremental interest-bearing deposit costs have to be -- the betas have to be lower than the 33% in the fourth quarter to square to that. As far as a cumulative, probably not because youâd only got a 50 basis-point increase going forward as far as rates in 2023, but we can go back and reverse engineer the math, but I think it still lines up. Sure, Ken. So Laurel Road, obviously, from a straight origination outlook perspective, has been challenged. Itâs been challenged really by three things. One is the federal loan student payment holiday, thatâs a challenge. I think thatâs been extended several times. The next is just the rising interest rates, which are a challenge. And the third challenge that weâve had there is all the discussion around student loan debt forgiveness, obviously, I think, has some borrowers wanting to stay on the sidelines to preserve optionality. Having said all of that, I was impressed that we were able to originate last year, $1.5 billion of refinance loans. But even a bigger picture, Ken, is we are trying to create a national digital affinity bank. So first of all, those originations will come back, and theyâll come back when thereâs clarity around all the issues I just talked about. And thereâs a bunch of raw material being priced right now that youâll be able to refinance advantageously. But in the meantime, what weâve done is build this national digital affinity bank that has a full suite of products for doctors, a whole suite of products for nurses. Weâre getting a 30% cross-sell on the business that we do. So, thereâs no question that originations have been challenged, and theyâll continue to be challenged in the very near term. But what weâre trying to do there is a lot broader. This GradFin business that we bought is really interesting because theyâre a leader in public service loan forgiveness and where youâre going to see a lot of discussion going forward is around this income-based repayments. And weâre kind of uniquely qualified to be in their advising on that. Any time we advise people, obviously, weâll bring them on as full customers. So, does that answer your question? Sorry if I missed it, but what part of the yield curve are we most concerned about as we think about your fixed rate assets rolling? And I realize there might be a variety of kind of parts because from the short term from the longer term. But as we think about, I think that $1.1 billion, you said, what part of the yield curves should we watch, which obviously longer rates coming in, but shorter rates staying high? Yes. Matt, as far as the $1.1 billion, itâs really a 2- to 3-year into the curve, and thatâs where we would be looking to extend those swaps when weâre in a position to do that. And so, it is in that portion of the yield curve. Beyond that, we also have a little over $1 billion a quarter and roll over our bond portfolio. And we tend to look at somewhere around the five-year end of the curve there. We tend to do more CMO structures and shorter pass-through like 15-year type pass-through assets as far as our normal investment strategy there. Chris, I heard the comments on the capital markets in the second half of the year. I was just wondering if you could give some more color about the moving parts to the fee income in â23 for being down 1% to 3%. Sure. So, thereâs a few areas where we will get pickup and then thereâs a few areas where weâve got some headwinds. The areas where weâll get pickup is in our investment banking area. Weâll get some pickup in cards and payments. Weâll get some pickup in trust. Don, do you want to cover the other puts and takes? Sure. The largest decline for us will be in the deposit service charges category. We mentioned that this quarter was the first full quarter of the implementation of NSF OD fee. Thereâs about another $70 million impact in â23 compared to â22 for that. And our outlook right now also would suggest that we think that our corporate services income will be down year-over-year just because weâve had such a strong program this year as far as derivatives, interest rate swaps and what have you for customers. And we think that with less rate volatility, weâll see less opportunity there for that category. Thatâs the blended impact as to how we get to that down 1% to 3%. Got it. And then, the loan-to-deposit ratio is now at 85%. Is there a certain level that you donât want to go above? And secondly, Iâm assuming that youâre going to continue to let securities cash flows and use those to kind of help support loan growth? We -- typically, we target between 90% and 95%. Itâs been a long time since weâve been up at that level, but thatâs where we think our balance sheet is still very efficient and access to the capital markets for that national funding source is available and supports that. I apologize. What weâve talked about a lot is that weâve got that $9 billion of short-term treasuries that start to mature later in â23 and throughout. That can be a very good source of liquidity for us. And weâre really indifferent whether that replaces funding or whether we roll that over into new securities. But if you look at the rest of the portfolio, itâs about $40 billion, and we think thatâs a good core size. We can let run off there, fund some of the liquidity needs on a short-term basis, but longer term, we think that thatâs probably a good relative size for the portfolio given our overall liquidity management position. Peter, the other thing that I would add to that, as you think about the puts and takes on the balance sheet is that in the fourth quarter, for example, we put 24% of the capital that we raised, which was $33 billion on our balance sheet. Historically, that number has been 18%. So, with the dislocation in all the capital markets, weâre able to structure things in a manner that we want and put them on our balance sheet. As these capital markets work their way out that wonât -- it will basically start deviating back to kind of 18-type percent as opposed to 24%. So thatâs just a little bit of a different wrinkle that I think is pretty -- as I said, short term over the next half a year or so. Well, thank you, operator, and thank you for participating in our conference call. If you have any follow-up questions, you can direct them to our Investor Relations team, 216-689-4221. And I just want to thank everybody for your interest in Key. And on that note, we will hang up. Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.
EarningCall_1302	Good morning, everybody. I'm Chris Schott, diversified biopharma analyst at JPMorgan, and it's my pleasure to be introducing Regeneron this morning. Representing the company, we have the company's Co-Founders, CEO, Len Schleifer; as well as CSO, George Yancopoulos. 2022 was obviously a very successful year for Regeneron, with the company making significant progress across its core drivers, as well as its pipeline, and we're very much looking forward to an update as how the team is thinking about 2023 and beyond. Thank you. Go ahead, George. Come on up, Marion. Hello, and good morning to everybody. It is really good to be here, face to face, dare I say virus to virus, or variant to variant. I hope not. Anyway, we've got a lot we want to cover. So, I'm going to jump right in. I'm Len Schleifer, and this is our forward-looking statement. We'll be making a bunch of forward-looking statements. So, check out our filings. There is risks associated with them. And read this, please, when you look over our material. So, in 2022, we had three imperatives that we had to accomplish. First of all, we had to figure out what is our long-term strategy for EYLEA. And I think when you look at the data with us and when we saw the data we've disclosed, it really -- 8 mg or high-dose aflibercept really positions our retinal franchise for prolonged leadership. We're very excited about the data. And in fact, the data turned out better than, I think, our high expectations. The second thing we had to do is continue to demonstrate that Dupixent should be the leader and should continue to grow as the leader in type 2 inflammatory or allergic diseases. There was talk about competition with oral JAKs and what have you. But Dupixent has really shown its colors in 2022. Let me just emphasize, for example, on the safety side. The FDA has approved our drug for children as -- infants really, as young as six months. That really speaks a lot to the safety of our product. And it is the leading drug, and it's now approved in five different type 2 allergic diseases and -- with more to come. So, we accomplished what we wanted to. That's the result of great collaboration and partnership with Sanofi, and that product continues just to drive forward and I think it has a great future. The third thing we needed to do was really convince ourselves, convince the scientific community, and then obviously convince you that our oncology efforts were going to bear fruit. We've had a long-term strategy that George will get into in more detail, but we've always believed that Libtayo was foundational -- our PD-1 inhibitor was foundational to that strategy. So, we acquired back half of the rights that we had licensed. So, we now owned and control that product so we could put it together. And we were able to put it together with really very promising data, both in the LAG-3 space and in our costimulatory space, which we'll talk a lot about in this presentation. Finally, we have been trying to do our part to serve COVID. As you know, early on, we were able to really through a Herculean effort get a monoclonal antibody out there, a cocktail of monoclonal antibodies that could address a treatment paradigm for COVID. We did this in record time, and it worked great for a while. But like many of these antibodies that have come forth -- and now all of them, in fact, the virus has outsmarted them. The virus has mutated in a way that the antibodies that you might make and even in response to being infected with the virus, you might make in response to a vaccine or you might get from us, all seem to be now being evaded by the latest strains that are taking over, such as the XBB. The team has been hard at work, and I think we have hit sort of a jackpot antibody that George is going to tell you now about that we're going to push forward very rapidly. So, let me get into a little bit more detail on these topics. First of all, EYLEA. Look, EYLEA is just an amazing product. If you think about it, it is growing year-over-year at 8%, and this is more than a decade into the product. We anticipate, based on preliminary numbers for the end of the year, about $6.3 billion in sales in the U.S. We are the category -- branded category leader with a 75% approximate branded market share. The fourth quarter -- everybody has been fussing a little bit about this, this morning, the sales of EYLEA were a little bit less than we expected. This was -- the sales were negatively impacted by a short-term shift to off-label Avastin. This was associated with the temporary closing early in the fourth quarter of a fund that provides patient co-pay assistance. But our recent data has suggested that, now that this co-pay assistance is back and available, that the shift is reversing. And we ended the December -- the late part of December, with the latest data we have, with a consistent 75% branded category share. So, EYLEA is doing great. But the long-term future of EYLEA, really, we think is in the data for 8 mg. I can tell you now that we did submit in December the BLA for 8 mg aflibercept. We believe it has the potential to become the next-generation standard of care. We are starting to plan for pre-launch efforts anticipating, hopefully, approval sometime in the early second half of this year. If you look at the data -- and I must admit, we were really surprised. And even the KOLs, the pundits, everybody said, well, if you could get 35% of patients on the 8 mg dose -- 35%, if they could maintain intervals at greater than 12 weeks, you could have a really big product. And if you look at our data, we got 93% -- more than 90% of people who were randomized to 8 mg were able to maintain dosing intervals of 12 weeks or more in our DME study. That was also true in our AMD study. Once again, staggering results compared to the expectations; greater than 80% maintaining intervals of greater than 12 weeks. So, these data were really quite spectacular from our perspective. We don't use that word too often, but they really exceeded, I think, everybody's expectations. Just to put it in a little bit of perspective, and these are cross-trial comparisons. We don't have any head-to-head data. So, you should take this with some caveat. But the data are what the data are and you can't manufacture data unless you do studies. If you look on the left side of this slide, the green represents patients in our DME study who were maintained on Q16-week dosing through the end of the 48-week experimental period. That's almost 90%. On the right side of slide, you can see that that's a much smaller number were able to be maintained on that 16-week interval in the faricimab, or Vabysmo studies. I mean, this is -- these are staggering differences, different trial designs. You can hear arguments; well, is it really the drug or you did a different trial? We could have, we should have, we might have, we didn't. But whatever it is, our data, I think, are really resonating well with the experts that we've shown. And it's also true in the AMD study, where once again nearly 80% maintained 16-week intervals with only a little bit more than 40%, 45% in the faricimab studies. So, we think these data say that the 8 mg aflibercept has the potential to become the standard of care. Let me turn to Dupixent, which, as you know, we're in a collaboration with Sanofi. In the first nine months of the year, global product sales grew 41%, exceeded $6 billion. We had lots of regulatory progress. We had new approvals. We've got approvals in younger -- in younger age groups, as I mentioned, as young as six months; approvals in eosinophilic esophagitis, prurigo nodularis. And we have an sBLA submitted for chronic spontaneous urticaria. These new approvals represent big new opportunity. I think if you attend Sanofi's talk, I -- you'll hear a little bit more about what this means. But this is sort of a representation of our journey that we have taken with Dupixent, starting with atopic dermatitis, working our way through many opportunities. Really, some -- if you talk to some expert and you say, how do you define a type 2 allergic disease, some experts will say, well, if it responds to Dupixent. So, it has sort of become the standard, if you will, of type 2 allergic diseases. There is an opportunity to expand even further into COPD, both with our IL-33 antibody, as well as with Dupixent. Data coming up on Dupixent in the not-too-distant future, fingers crossed there; significant additional opportunity for the product. Let me just close by saying my part of my remarks is that oncology was something we've made a long-term investment in. We've got finally Libtayo, a foundational drug approved for all people with non-small cell lung cancer in combination with platinum-based chemotherapy. And it's only one of two antibodies, obviously Keytruda being the other, that's approved irrespective of the PD-1 expression levels or histology. So, we're excited about the possibilities for Libtayo, but what we're most excited about is what Libtayo can do in combination. Let me turn it over to George, who is going to tell you a lot more about this and some of our other work. George? I want to start by reminding everyone of the keys to the Regeneron approach. When we founded the company -- coincidentally, it was exactly 35 years ago yesterday, we had the goal of using the power of science and genetics to repeatedly bring new medicines to patients. We soon realized that to do this, we had to revolutionize the technologies that could actually deliver new medicines and, in particular, create turnkey therapeutics delivery platforms. Our Trap platform yielded EYLEA and some more minor successes. We then utilized our proprietary mouse genetics technologies to produce arguably the most valuable platform that produces fully human antibodies, notably, our VelocImmune mouse, with a genetically humanized immune system that has delivered seven FDA-approved or authorized medicines, including Dupixent that you just heard about and Libtayo. Many people realized how innovative we were in our early years. But what I'm proudest of us is that we have not lost our edge in innovation, but instead, continually push that edge further and further forward. We have evolved our biologics platforms. So, we are now leaders not only in the human antibody arena, but with bispecifics and costimulatory bispecifics. And over the last few years, we are becoming leaders in genetic medicines, starting with our Regeneron Genetic Center eight years ago, leading to several successful collaborations in a series of novel experimental turnkey therapeutic modalities from siRNA to CRISPR-based gene knockout and insertion to viral-based gene therapy. We are a very unique and rare company for our size, whose innovation is still driving and filling its pipeline. And on this slide, we list significant pipeline advantages during '22, some of which were just highlighted by Len. I'm going to focus on our advances in immuno-oncology, where we think our pipeline can meaningfully advance the standard-of-care multiple tumor types. This Slide 18 delineates our immuno-oncology strategy, which is built on our turnkey therapeutics platforms that yield several different classes of therapeutics, including our immuno-modulating checkpoint inhibitor antibodies, our CD3 bispecifics, and our costimulatory bispecifics, all of which were prospectively designed to be flexibly combinable in potentially synergistic manners. All these classes were initially validated using our proprietary and highly predictive genetically humanized mouse models. And over the last few years, each class has been individually clinically validated in human trials. Most recently, we have been -- we have seen early clinical confirmation of the power of combinations of these classes, and I will focus on some of this recent combination data. Slide 19 lays out our various stage clinical programs, which we have for each class' individual agents, as well as some combinations. I'll now focus on recent data for two of these specific exciting combinations, our PSMA by CD28 costim bispecific, combined with in cemiplimab in metastatic castration-resistant prostate cancer and fianlimab, our LAG-3 antibody, in combination with cemiplimab in metastatic melanoma. Starting with our PSMA by CD28 combination, last August, we announced the first clinical data in metastatic castrate-resistant prostate cancer patients, a tumor considered immunologically cold and largely unresponsive to PD-1 monotherapy. We hope combining costim bispecifics with PD-1 could confer responsiveness to such cold tumors. At the five lowest combination doses, there was almost no evidence of clinical activity, as you see on the upper right. But at dose levels six to eight, as seen in the bottom right, we began to see clear evidence of dose-dependent antitumor activity. Importantly, grade 3 or higher immune-related adverse events only occurred in patients with antitumor responses. On Slide 22, we provide some incremental updates on this data. On the left, you can see graphs depicting PSA responses in three of the four patients at our highest dose. In these patients, the PSA tumor biomarker continued to rise during the three-week PSMA by CD28 monotherapy leading. And soon after, concomitant administration of Libtayo, you can see dramatic PSA reductions, exactly as we predicted from our preclinical studies. In terms of longer-term follow-up, we can report on our first responding patient or our index patient, who also experienced a dramatic reduction in PSA shortly after Libtayo co-administration at week three, as you see for these three patients. But this index patient discontinued treatment after seven weeks due to an immune-related adverse event. The AE has resolved and he has not received any subsequent prostate cancer treatment, yet his complete response has endured for over a year and a half. His PSA remains below detectable levels, his soft tissue lesions disappeared, and his most recent bone scans normalizing with a negative PSMA PET scan; a truly remarkable success for a patient previously thought to be terminal and non-responsive to PD-1 immunotherapy. These very encouraging initial data for our PSMA by CD28 costimulatory bispecific provide the first clinical evidence supporting the promise of this exciting and entirely new class of immunotherapies. This slide provides our already extensive list of clinical or near-clinical costim bispecifics and their various ongoing or upcoming combination trials. We not only have the ability to combine these with Libtayo, as I just showed for PSMA by CD28, but with our CD3 bispecifics. Such combos have profound activity preclinically. As I already mentioned, we have validated our CD3 bispecifics as individual agents in the clinic, many with first-in-class or best-in-class activity. But we now have the ability to take these to the next level by combining them in a logical manner with our costim bispecifics. Along these lines, we anticipate dosing our first DLBCL lymphoma patient with our CD22 by CD28 costim in combination with our CD20 by CD3 bispecific in the first quarter. We also expect to update on several of these programs this year. On Slide 24, we talk about now and another exciting recent advance with combination immunotherapies involving fianlimab, our LAG-3 antibody, in combination with Libtayo. Last year, we reported that this combination showed consistent and strong efficacy in two independent cohorts in melanoma and also promising early activity in an expansion cohort in non-small cell lung cancer. These data supported our initiating a robust clinical development program in melanoma, and we also plan to initiate Phase 2/3 studies this year in non-small cell lung cancer. This Slide 25 summarizes the combination data I just referred to, which we recently reported at ESMO, showing a second cohort in first-line metastatic melanoma that confirm the promising data we had seen with an earlier cohort. Both cohorts demonstrated overall response rates of over 60% for the fianlimab/cemiplimab combination with pooled median progression-free survival of 24 months. These data compare very favorably to the FDA-approved and now new standard nivolumab/relatlimab combination, which had an ORR of 43% and a median PFS of 10 months. Importantly, the fianlimab/cemiplimab combination had a safety profile that was comparable to anti-PD-1 monotherapy. This Slide 26 lists our upcoming oncology data readouts. As you can see, we have a busy couple years ahead. In addition to our 2023 data disclosures, we also anticipate BLA submissions for odronextamab in two kinds of lymphoma as well for -- as well as for linvoseltamab in myeloma. Moving now beyond immuno-oncology, and as Len mentioned, we continue to use our antibody technologies to play our part in the COVID pandemic. Despite mass vaccinations, millions of immuno-compromised people in the United States alone don't adequately respond and are less vulnerable. Monoclonal antibodies could help protect and treat vulnerable patient populations like these, but viral variants rendered obsolete all previously authorized antibodies, including our REGEN-COV, which had helped so many. We have one of the most sophisticated and largest screening efforts for COVID antibodies, and we believe we have identified one-in-a-million antibody that works very differently to all prior antibodies by binding outside of the immuno-dominant highly variable RBD and NTD domains. These domains have been the primary site of antibody binding and correspondingly of variant mutations. We have caused the initial vaccines in previous COVID antibody therapies to lose their activities. We hope that by binding outside of these domains to a unique targeted epitope that is highly conserved, with over 99.9% conservations since the beginning of the pandemic, it will lower the risk of losing activity against future variants. Importantly, this antibody, known as REGEN14287 demonstrates high neutralization potency against all known SARS-CoV-2 variants and lineages to date. Activities enabling clinical manufacturing have commenced, and we expect to enter clinical development later this year. Finally, I want to go back to the beginning of my section where I talked about how everything starts with our innovative turnkey therapeutics platforms and how these platforms are helping make us leaders in biologicals and in genetic medicines. Now, I want to highlight how these are coming together in a novel way, using biologics to allow specific tissue targeting of genetic medicines. Major limitations of genetic medicines is delivery of the genetic payload to the cells of interest in the body. Currently, systemic delivery is largely limited to the liver and local injection is limited to a couple of sites. Regeneron has invented a proprietary approach that builds on decades of our antibody experience so as to use antibodies to deliver genetic payloads to specifically targeted cells in the body, and we have validated this approach in non-human primate studies. With this antibody targeting technology for systemic genetic medicine delivery, we believe we can empower the winners in the gene medicine field and become a leader ourselves in gene medicines by combining these unique targeting approaches with innovative payloads across many disease settings. This slide depicts our current clinical stage pipeline of our approved products, as well as over 30 product candidates, all of which were developed with the technology platforms I discussed earlier; as I said, a rare example where our own innovation is driving our pipeline. This indicates upcoming submissions, and we have a new wave of submissions coming over the next few years. And these list our anticipated 2023 milestones, which span ophthalmology, immunology, oncology and immunology. I wanted to close with something core to how we operate our company. Since our founding, Regeneron's mantra has always been doing well by doing good. With the mission of using science to improve lives, we recognize that acting responsibly is crucial to ensuring that we can continue to deliver new medicines to patients and needs. Along these lines, I'd like to highlight our STEM efforts to engage and inspire the next generation of scientist-entrepreneurs. Towards this end, we have committed over $100 million to support the premier high school science competitions, that is the Regeneron Science Talent Search and the Regeneron International Science and Engineering Fair. These are the very competitions that got both me and Len and many of our generation our starts in science when they were sponsored back by Westinghouse and then Intel. We are sure that they will deliver scientific leaders of the future. With that, I thank you for your attention. Now, I would like to thank everyone and hand it back to Chris for the Q&A portion of our presentation. Marion, our Head of Commercial, will join Len and myself for the question-and-answer period. Thanks very much for those comments. Maybe just to kick off the Q&A, talk a bit more about EYLEA. I know you had the fourth quarter results out today. You referenced some of the short-term uptake of Avastin. Just elaborate a little bit more on what the dynamics are. And I think you referenced in the comments that you're seeing some of this normalize as you're getting later in the quarter. Just maybe share a bit more there? Yes. I mean, the sum and substance of it all is that the EYLEA marketplace is sensitive to co-pay assistance, and when that co-pay assistance is not available, patients are forced to go to what has been proven to be an inferior product, unfortunately, which is Avastin compounded. And they -- very early in the quarter, there was a disruption in the co-pay assistance and that quickly moved patients from branded EYLEA to Avastin. That has been resolved. We -- they are fully back in full funding. So, I think of this as a sort of short-term blip, which should not affect the trajectory of the molecule at all. In fact, in late December, our branded market share remained at a consistent 75%. So, frankly, I think this is really much do about an unfortunate transient episode. Yes, absolutely. And I know you shared some of the data in the presentation. But regarding Vabysmo, share a bit more what you're seeing in the market. I know you've been -- especially when you think about the 8 mg coming, you've got a very differentiated profile. But what are you seeing in the near term before that -- Sure. I'm very happy to, and good morning to everybody. So, I would say that the very competitive profile we see with EYLEA is the most important element, and as Len described today, the results of the year, the 8% increase in overall net sales. Now, to characterize the competitive dynamic, the breadth of indications, our visual acuity, safety, efficacy are really what physicians are looking for. Probably best to ask my competition about competitive product uptake. But I want to answer your question. We would say it's probably been low-modest at this point, and I think the issue of the sustainability, durability of efficacy is something that perhaps over time will be seen. Where the greatest enthusiasm is really is for our aflibercept 8 mg product. So, we'll look forward to additional clinical discussions, the FDA review, and share with all of you that our team is really excited about potentially launching that product later in the year. Yes. Consistent with what Marion said, and we're keeping a close eye on this, we're seeing switches back from Vabysmo to EYLEA. So, that's an interesting indicator. Yes. Longer term, in terms of the growth of the overall market, anything changed in your view in terms of the sustainability of growth for the category? No. I think what's driving the category are demographics; aging of the population, as well as increase in diabetes and diabetic eye disease. And then just -- I don't -- you probably are not going to share your full commercial strategy at this point, but just help us contextualize, once 8 mg approved, how we can think about kind of the velocity of conversion away from the 2 mg. So, thinking about kind of later this year into '24? So, I would say we have an amazing opportunity in a market that we know very well with our EYLEA today. And when you start looking at the clinical data for aflibercept 8 mg, it gives the possibility of patients having the same sort of clinical effect, improvement in their vision and safety, but not having as many injections. And for anyone thinking about saving their vision, of course, you would have an injection in your eye. But for everyone who is involved with treatment and the providers to take care of them and the volume of patients coming into offices, this ability to extend durability of product and as we're looking at the data today, getting patients out to 12 weeks or more is really very important. So, when we think about strategy and possible product uptake, we're looking at a situation where physicians could look at making a choice for initiation of therapy. They could look at choice for patients already on therapy. And how we actually bring strategies into the market remains to be seen, but most important to us is that physicians are able to make the choice that's right for their individual patients and their patient characteristics. It's a bit funny. We talk about -- we -- you constantly just talk about fewer injections, fewer injections. But what we shouldn't forget is that there have been a ton of injections, nearly 60 million injections since the launch of EYLEA. That's a remarkable testament, I think, to the product safety and efficacy. So, just to sum up on this, it seems like -- yes, we had a blip in the quarter, kind of thinking out to next year, that normalizes and then just kind of all speed ahead watching for the 8 mg. Is that a fair way to think about it? Okay. Pivoting over then to Dupixent, you've got a growing set of indications. Maybe just talk a bit about what you see as the biggest opportunities for growth in that asset as we think about the suite of areas you can go with this. I'm happy to start. So, I would say when we think about Dupixent first, think about the existing indications, think about atopic dermatitis, where, even today, we haven't even begun to get into the full potential patients who could benefit from this transformational therapy. So, think of adults, think of adolescents, and think of our youngest patients and the more recent indication we launched for little ones -- six months and above, which frankly is really important to the treatment atopic dermatitis, because for all patients, it's an element of reassuring every one of the safety, coupled with the efficacy of the product. And obviously, beyond atopic dermatitis, patients sometimes are troubled by more than one type 2 allergic disease. So, that same atopic dermatitis patient might have asthma. They may have other type 2 condition. So, it's a really important element of the Dupixent profile. But then to your question of future growth, it's kind of a land of riches for the commercial person and my commercial team, because even in this past year, recently, we launched eosinophilic esophagitis, that added in a population, a very important population of about -- just in the U.S., about 50,000 patients. We also launched for prurigo nodularis. That was a population in the U.S. of another 75,000 patients. And the data goes on with indications coming this year. We're obviously excited about all the indications, but COPD is probably one that could have a remarkable impact on patient opportunity and making a difference for patients struggling with COPD. That population is about 500,000 in the U.S. And then when I think about the competitive dynamics, Rinvoq launched, obviously, had very strong performance for dupi in '22. As I think about lebrikizumab coming to market, how do you think about that as a potential competitor? Is that potentially something that could be more impactful for Dupixent, or do you think it's -- with the breadth of indications, et cetera, that's not a concern? Yes. I mean, I think there are two things to comment on that. First of all, there's plenty of room for more than one drug. You look in the psoriasis world, how many different drugs there are in the inflammatory bowel disease, rheumatoid arthritis. We've barely scratched the surface. But I think in terms of the advantage we have, it's what George has been emphasizing all along as we developed this molecule, is that you have more than one disease, okay, that lebrikizumab is not going to be able to address when they launch this product, and who knows even down the road, because I think that product may not have been able to work in when it was tested in asthma in a prior existence. So, the fact that we have Dupixent, which can address more than one type 2 disease, mind you, it's not like the type 1 diseases, where if you have psoriasis, you tend not to have rheumatoid arthritis kind of thing. But here, you actually tend to have -- George, what's the number? How many people have -- has been on -- started trials? I don't know. Yes. For example, in most of our trials, when you look at one disease like atopic dermatitis, more than 50% of the patients have another comorbid allergic disease, many of which are also treated with Dupixent. And this just shows the power. Allergy is a systemic disease. Sometimes, it manifests mostly in the skin, but it also is occurring simultaneously in the lungs in the upper respiratory system. Dupixent allows you to treat all of these. As Len said, when you use other drugs like lebrikizumab, basically, it's only addressing part of the pathways and only treats some of these diseases. It's not treating the systemic disease that's occurring throughout the patient's body. So, I think that any treating physician, if they're trying to do the right thing by the patient, would give them the drug that treats systemically the cause of the disease. Breadth of label really differentiates and protects the franchise. Pivoting a bit over to oncology, obviously, some pretty exciting data on the costim side. When I look at the -- or think about the PSMA/CD28, the data you've seen so far, maybe just help us put some of this into context. And I guess, the heart of it's how derisked do you see this approach at this point, based on what you've seen so far? Well, I think that it's not overstating it; that this may be one of the biggest breakthroughs in the history of immunotherapy. Think of what we've done. The field has been talking about cold tumors that don't respond to immunotherapies, particularly PD-1 therapies. That's the vast majority of cancers. And we came up with an approach entirely in-house, which came up with a targeted way that we could now activate immunotherapy in cold tumors in combination with either PD-1 or with CD3 bispecifics on a tissue cancer specific manner. And of course, we had incredible animal data using these very proprietary and very well validated and unique, genetically humanized mouse models that we used. But until you prove it in humans, you don't know. The data was really stunning. Like Len said, EYLEA performed unbelievably in its setting, Dupixent continues in its setting. And now, we have this entirely new class of costim bispecifics that have seemly just taken immunotherapy to the next level. As I just showed you, in the highest-dose level, three out of the four patients had these incredible rapid responses in otherwise terminal patients. And our index patient is now out more than a year and a half, looking like a complete remission. These are really staggering data. And as we showed you, we already have in the clinic a pipeline of these with a whole myriad of combination opportunities. We really think that this has a real chance to change the face of cancer treatment and allow so many of these patients who need -- desperately need something to have a real opportunity to fight back against their cancers using their own immune systems. Very exciting. As we think about the PSMA data and the work you're doing, what can be done to address safety here? I know it's -- on a positive side, really seems to be correlated with efficacy. But talked about the efforts to maybe kind of balance out that overall profile. Right. Well, I think that activating the immune system, we know, with the PD-1 therapies comes with a cost that, at times, you will get some autoimmune reactions that can cause problems for the patients. We see this. Since we are giving a more powerful anti-cancer therapy, there will be some more concern about some of these autoimmune responses. But in patients who otherwise have no other options, I mean, their lives are literally at stake, looking at the results that we've already seen, the benefit/risk ratio seems to be in favor of treating patients who are otherwise, unfortunately, without any other options and at death's door. And as, Chris, you mentioned, just what's -- repeating what you said, and I think it was in George's presentation as well, that the side effects were seen in the patients who were benefiting, that really changes a risk/benefit analysis. If you're treating 100 people and you're helping 50, but you're harming 100, it's a lot different than if the people who are really benefiting are having some of these immune reactions, which is what we've seen. Very important point. Yes, just a couple of quick ones on this. Once you land on the right dose later this year, is there a pathway that you can accelerate a filing here? As you mentioned, these are patients that have very few options. You're getting very profound responses. Yes. As we've already done in other settings, we think that we can get an accelerated filing in these late-stage patients who have run out of other options, where we can demonstrate this profound activity with a suitable benefit/risk ratio. And as Len said, very critically important. I'm glad he made the point. Only the patients with benefits seem to be having these immune-related adverse events. And then the last one on this, when I think about moving into other CD28 kind of opportunities, will there be an ability to progress the Phase 1 studies faster now that you may have a better understanding of this, or are these always going to be kind of fairly slow going, just to the nature of the -- Well, we hope. It's always in negotiation with the FDA. They're always concerned. Certainly, the reason they were so concerned here, there was some real disasters with people trying to take advantage of CD28 before. In order to avoid those, we came up with this very targeted approach. We seem to have avoided the problems that the earlier non-specific approaches had, and we hope the FDA will correspondingly recognize this and allow us to move faster with these class of agents as we have them going forward. Great. And just maybe last question for me. You mentioned COVID antibody. That seems to have a pretty unique profile. Just maybe give us a sense of how quickly that could move forward and how much capacity the organization could build with that? Well, we've shown before that we can move very quickly, and we have capacity to treat millions of patients. And it's going to be less limited by our technologies and our capabilities than our discussions and negotiations with the FDA. And also, at the time that we're doing our clinical studies, what kind of studies will be required by the FDA, part of that negotiation, and also the prevailing amount of disease, which obviously would allow any studies to go more quickly.
EarningCall_1303	Greetings, Good evening, and welcome to the IDW Media Holdings Fourth Quarter and Full Year Fiscal 2022 Earnings Call. [Operator instructions]. Good evening. I'll take a brief moment to read the safe harbor. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the company's SEC filings. IDW assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that the IDW earnings release is available on the Investor Relations page of the IDW Media Holdings corporate website. Thank you, and thank you to everyone on the call for joining us. It's great to have you with us. My remarks today will provide an overview of our strategy and execution for the fourth quarter and full fiscal year 2022, which closed October 31, 2022. Additionally, now with just about five months in the CEO seat, I'll provide some thoughts around our vision for IBW and our strategy moving forward. After my remarks, Brooke Feinstein, our CFO, will provide details around our financial results, and then we'll be happy to take your questions. So on to our results. Brooke will provide a deeper dive but at a high level, we finished 2022 with strong fourth quarter results, including consolidated revenue growth of 48%, enhanced operating results and improved profitability. Our delivery of the third season of Locke & Key during the quarter was the primary driver of this revenue growth. For the full year of fiscal 2022, we achieved consolidated revenue growth of 11%, which included delivery of Seasons 2 and 3 of Locke & Key as well as Season 1 of Surfside Girls. We also made progress improving our full year operating results and profitability as compared to fiscal year 2021. Now let's look to the future and where we're going in the coming year. We have spoken about our heightened focus on leveraging what we believe is one of the most valuable intellectual property libraries in our industry with hundreds of titles in our library today and hundreds of submissions coming in each year, our robust library is constantly growing. To frame how this creates tremendous opportunity for IDW, let me step back a bit to go through the basics of our strategy. IDW along with its top shelf in print is a leading publisher of traditional comics as well as graphic novels, and we work with some of the best known creators in the industry to publish original titles for all audiences, kids, tweens, teens and adults. And some examples of titles you may recognize are March by the late Congressman John Lewis; They Called Us Enemy by George Takei; and Locke & Key by Joe Hill and Gabriel Rodriguez. These are well-known personalities and creators, and we're pleased to call them partners. Our publishing team also reviews hundreds of submissions every year from first time or as yet undiscovered creators with the goal of identifying intriguing new stories and characters. With our solid content foundation and unique ability to find and publish new, original and creative concepts, IDW is well positioned to release and capitalize on exciting new visions. We focus on attracting top talent and acquiring original content so that our team can identify, which submissions have the best opportunity to move from creative idea to published work to entertainment vehicle to financial success. And in today's environment of multiple media platforms, that entertainment vehicle can take many shapes. It could be a television show, a streaming series, a feature film, a podcast or perhaps even a short long video. So at its core, our strategy is fairly simple. Continue to increase our industry recognition as the creative partner of choice that we are presented with the best content from the most talented creators. That's our first goal. Our second is to publish comics and graphic novels that resonate with broad audiences and are successful. And our third goal is to develop those published content, graphic novels and comics into entertainment vehicles like TV shows, feature films, podcasts and other media platforms. To date, our success stories include Lock & Key, Surfside girls, Wynonna Earp, V Wars and October Faction. We are confident that there are more successes to come, and we currently have about 10 entertainment projects in place being developed. At this time last year, we had virtually no new development deals to speak up. Having said that, it takes time to develop a premier entertainment project from the idea to having an agreement to getting it into production, getting it delivered and achieving success. Predicting that timing is difficult, and I, along with the entire executive team know how frustrating that can be to shareholders. It is the nature of our business. We are focused on what we can control, growing IDWs reputation as the creative partner of choice so that we continue to see submissions of excellent material from inventive creators to continue to expand our library while also identifying creative material that we believe can go the distance on a variety of media platforms. From what I've seen and experienced during my first 5 months as CEO, I believe our company is in the early stages of realizing its enormous potential. Looking into 2023, we are focusing on various strategic initiatives on the publishingdrive efficiency. We see tremendous opportunity for IDW Publishing and IDW Entertainment to continue to work together to optimize the financial returns of the intellectual properties which we control, and we will keep you apprised as we move through the year. Over the medium to long term, our company is very we'll positioned to scale revenue and drive more consistent and enhance profitability. As we move through 2023, we have a lot of work ahead. Ultimately, we are well positioned to leverage the strength of our content library and to drive our project pipeline. IDW is a respective brand and we, the entire management team, are energized to discover new ideas and creators as we continue to grow our position as a leading independent media entity and to drive accelerated growth across all our platforms. Long-term investors will be rewarded. Now I'll turn the call over to our CFO, Brooke Feinstein to go over our financials for the fourth quarter of 2022. Thank you, Allan. My remarks today will focus on the fourth quarter and full fiscal '22 results, the three and 12-month periods ended October 31, 2022. Except where I indicate otherwise, I'll be comparing the fourth quarter of fiscal '22 results to the fourth quarter of fiscal '21, and I'll also be comparing full year fiscal 22 results to full year fiscal '21. IDW Media Holdings fourth quarter consolidated revenue increased 48% to $10.5 million compared to $7.1 million a year ago. IDW's fiscal year '22 revenue was $36.1 million compared to $32.4 million in fiscal '21. Publishing revenue for the fourth quarter of '22 decreased to $5.7 million compared to $6.9 million in the prior year period. Primarily related to a decrease in the overall number of titles released in Q4 '22 and also reflected the strong comic release of Teenage Mutant Ninja Turtle: The last Ronin 4 in '21. Publishing revenue for fiscal 22 increased slightly to $25.8 million, primarily due to increased non-direct market revenue, an increase in games revenue related to Batman Adventures and an increase in retailer exclusive revenue related to Sonic the Hedgehog. In addition to strong book market sales for Teenage Mutant Ninja Turtle: The Last Ronin and They Called US Enemy. This was offset by a decrease in direct market revenue due to fewer titles being published and a decrease in digital sales compared to fiscal year '21. In the fourth quarter of '22, IDW Entertainment reported revenue of $4.8 million, mainly related to the recognition of revenue for the delivery of Season 3 of Locke & Key. For the full fiscal year '22. IDW Entertainment reported revenue of $10.3 million, primarily driven by the delivery of Season 2 and 3 of Locke & Key as well as Season 1 of Surfside Girls. Our consolidated income from operations was $300,000 in the fourth quarter of 22 compared to a loss from operations of $1.9 million in the prior year period. For the full year ended October 31, 2022, we reported a loss from operations of $700,000 compared to a loss in operations of $8.7 million in fiscal year '21. IDW Publishing's loss from operations in the fourth quarter of '22 was $1.6 million compared to breakeven in the prior year period. In fiscal 22, IDW Publishing reported a loss in operations of $1.9 million compared to a loss of operations of $800,000 in fiscal '21. IDW Entertainment's fourth quarter income from operations was $2.8 million compared to a loss from operations of $1.5 million in the fourth quarter of '21. IDW Entertainment's income from operations for fiscal '22 was $3.1 million compared to an operating loss of $6.7 million in fiscal '21. Consolidated net income in the fourth quarter was $400,000 or $0.03 per share compared to a net loss of $700,000 or $0.06 per share in the prior year period. In fiscal '22, net loss was $700,000 or $0.06 per share compared to a net loss of $5.4 million or $0.51 per share in fiscal '21. Now turning to our balance sheet. At October 31, we held $10 million in cash and cash equivalents and had no debt. Working capital, current assets less current liabilities totaled $18.5 million. As we head into 2023, our strong balance sheet provides us with the resources to execute on our strategy. Our plan is to continue deploying capital judiciously and increase operating efficiencies to drive long-term growth. Hi guys. Allan, you've been here for a few months now as CEO, I'm just wondering if you could maybe expand a bit on your top priorities for 2023 Ed, delighted. We just reviewed this and our priorities are really clear. We have a core focus, which consists of 3. At the Publishing group, we have some revenue growth that we're going to be focused on. And we have a key relationship with Penguin Random House that will be not only instrumental in our growth, but which we are nurturing very, very assiduously and carefully. On the Entertainment, we are maniacally focused on pushing the many options that we have into production. We don't control that, but we know that there is breakout potential in what we have in place. And in Media Holdings, we have some digital initiatives that we're working on that we will be bringing to bear this year. So that's the core focus. There are some near-term opportunities. They fall into five categories, which I can enumerate very briefly: first, other companies have fallen to some challenges, some in the bankruptcy. If it makes sense, we'll have a conversation there. We're looking at a form of monetizing our intellectual property through motion comics. In the past, others have tried that. So we're exploring that carefully, Third, we are exploring podcasts where we can contribute our intellectual property and return for a share. We're being very careful with how we use our resources. A fourth category is in mobile and games. We have a conversation possibly using our intellectual property in games. And our fifth category is short-form video. So those are near term, which gets some of my attention, but we are really focused on our core. We're really focused on being the partner of choice because if we're that, we will succeed in every other important endeavor. Okay. And then on the 10 entertainment projects, are these options? Are these officially greenlit? Just wondering if you could maybe give us some indication of where some of these projects stand within the whole process? So, Ed, that is - I'm so glad you asked that question because that has been -- that needed clarity with the Board and even internally. We have standardized how we're going to talk about these. We standardize how we talk about them amongst - within the company. How we talk about them with the Board and how we talk about them with external interested parties such as yourself. So first, what we don't talk about outside the company is when we're in negotiations, there are a large number, I have reviewed the list. It is a very large number of negotiations. We don't talk about that. The second term that we do use is option. Options means a contract has been signed and modest money has moved. The third category, which is the most important category is where something has been put into green light and is moving towards production. That is where the opportunity is. That is we saw the operating leverage that was provided by Locke & Key. That is where we are maniacally focused. I've been super clear with the entertainment team that it's great to have tremendous number of negotiations, and it's great to have a large number of options. What we really need to do is cross the finish line, our step on home base and put something into production, that is outside of our control, just to be clear. But we're really focused on that. So three categories. To be clear, negotiating, we don't talk about. Options, we do talk about, and we try to make clear what an option is, it's modest money. And the third category is put into production, that's significant. So I hope that clarifies a really important topic for you, Ed. Yes. Absolutely. Just wondering if you can maybe silo the 10 entertainment projects between options and greenlit those categories in the grid. So I'm sad to say that at this time, we have optioned a number of projects, which we've spoken about publicly. At this time, at this occasion today, none of those have been put into production. There is one small, which I believe we've announced, Brooke can jump in. There is a small production called Essex County, a book. Has that been announced? Yes. That has been announced. We are not really involved in the production. We are just getting an executive producing fee on top of that, and that is being produced in Canada, the Canadian broadcast. So thank you, Brooke. So we and that's a small production. So the positive is we control the IP, someone felt important enough to option and produce it. It could lead to great things. But at this time, it's modest. So Surfside Girls at Apple has not been renewed in its current form. Its current form for all our listeners was live action, tween-oriented and it has not been renewed and furthermore, we're in conversations, and we have conversations. We're in discussions about the future of Surfside Girls, and we'll share more when we can. Okay. Got you. And then you mentioned in a recent radio review that you expect to release 100 to 200 new titles during the year. Just wondering how this range of new titles compares to the number of new titles released this year. So the Publishing group has a significant increase in what we have planned. We have reviewed that. Our expectation is that we will be -- we are working towards being more successful by every metric, but of course, it's early in the fiscal year Okay. And last one for me in the fourth quarter, it looks like SG&A was up quite a bit. Brooke, just wondering what's driving that, Yes. So that's an easy one. We had the CEO severance in August, all that was booked, and it will be paid out cash wise over the next two years. Congrats on the quarter. First, just to follow up on that last question. Could you - Brooke, could you quantify the non-recurring SG&A? Okay. That's helpful. And then as we start '23; I guess one question on the Entertainment side. Is there any residual revenue opportunity around Locke & Key hitting any part of the fiscal year this year? Or was all of that revenue realized in Q4? Yes. So all of the revenue related to the prior seasons was all in this fiscal year. However, there are other opportunities that the Entertainment team is currently exploring. So that's kind of open. Okay. That's helpful. And then, I guess, just on the 10 projects, Allan, obviously, too early to pinpoint specific titles. But could you give us a sense generally speaking around genre that these titles fall in so that we have some idea of what to expect going forward? So I can try to answer that, David, by two metrics. First, we have agreements with a significant different diversified group of partners including Universal, including 20th, tenth century, including Hulu, including Warner Bros including Cartoon Network, including Lionsgate. So we're diversified. We're not tied to. We're not hamstrong. So we have a diversified set of relationships As it relates to genres, we are across all genres within the movie business is called four quadrants. So we do have properties that range from animated for the Cartoon Network and children through tweens, teens and adults. And so I would like to say that we have a wide enough portfolio of intellectual property and a diversified set of relationships that give us excellent opportunities. So I hope that answers your question, David Yes, that's helpful. And you've mentioned that you are exploring some opportunities perhaps it sounds like perhaps in mobile gaming. Did I hear that correctly? And could you talk-I mean, obviously, again, those titles, but could you talk a little bit broadly about what maybe some of the kind of low-hanging fruit might be there? And timing perhaps if you have any on any possible releases into iTunes and the Google Store and so forth? So on timing I can't, except to say it's not near term. Console games, I was in the console business before, and I've also been in the mobile business. Console games take a very long time. Mobile games do not. We are focused on opportunities that will put our intellectual property into games quickly, cheaply and allow us to see if we can monetize it. Just to be clear, we do not invest our capital in these Initiatives. We don't invest it really across podcasts or mobile games. We may put a little bit of money into some explorations in the future, including those categories. But it's we're in conversations, and I wouldn't be - I could call the negotiations, David, but I'm not going to I'm going to call them conversations. People who have come to us, ask if we're interested. We've said yes, and that's where we are. So it's early days. Sure. It makes a lot of sense. And then I guess lastly for me, I mean, you guys ended the year with $10 million in cash, which is a pretty solid position. I mean as you look forward, do you feel like that sufficient liquidity to fund operations going forward for the next multiple years if it'd be just given the pipeline that you see and the expense structure that you currently have? So we have enough cash to execute our strategy in 2023 That being said, I don't want to project beyond that. We're focused and we're careful, and our strategy is to use what we're strong in and to partner with people who are stronger in other sectors, including cash. So we're focused on conserving cash, executing our plan, and we're going to be able to do that for 2022 Sounds good. I'm sorry, just let me slip one more in. Do you have a number of projections for capital expenditures for this year? Like assets and stuff. I mean we signed our two new leases this year, and you'll see those ROU assets on the balance sheet. And basically the old improvement and the private and equipment, all of that would have hit this year. So I would say very minimal
EarningCall_1304	Good afternoon, ladies and gentlemen and welcome to the Ilika plc Half Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions and this is today and where appropriate, we will publish those responses. Before we begin, we'd like to submit the following poll. And I'm sure the company will be most grateful for your participation. Thank you for that kind introduction, Mark. And many thanks to everybody that's taken the time to listen to this presentation. I'm joined today by Jason Stewart, our new CFO, who is just getting his feet under the table, and he will be co-presenting with me today. So let's get into the presentation now. This is our half year update that covers the period from the 1st of May last year through to the end of October. I think many of you know about my own profile. And of course, this information is on our website. So, I'll just give Jason the opportunity to say a few words about his background as is new to this forum. Thank you, Graham. So to introduce himself, Jason Stewart. I'm a semi-qualified accountant with over 20 years of experience within the commercial sector. I have a degree in business from antiemetic University and have then been working through a number of finance roles within a variety of businesses, starting first with Kerry Foods before moving on to B&Q as part of the Kingfisher Group before most recently being with Sunseeker International, helping them through the last 12.5 years. Through that role, I both helped to deploy significant capital and navigate various challenges for the business but ultimately, the excitement and the challenge and the opportunity presented by Ilika and the products that are being developed were such a great traction that I was delighted to take the opportunity to come and join Graeme and the team and hopefully provide some help towards the success of the business over the coming years. Thanks, Jason. Very welcome. So from luxury yachts to solid-state batteries and that's what we're going to talk about over the next 20 minutes or so. Ilika is one of the few global experts really in the design and manufacture of solid-state batteries. There you see one of our Stereax miniature batteries on the end of one of my colleagues fingers; that's our M300 device. And then on the other hand, we have our second product line which is our Goliath solid-state pouch cells which are designed for consumer appliances and EVs. So why are people interested in solid state for med tech? Well, first of all, they're very compact. You can see from the size of these batteries relative to the tip of that pencil. So clearly, if they're going to be incorporated into an implanted device, they're ideal because of their low volume impact during that surgical procedure. There are also high power density which is important because you need them to deliver power pulses not only for a therapy, say, in the case of neuro stimulation but also for communication, so to be able to power the data chips and the radio chips that actually send out information from the patient that can be picked up and then relayed to the consultant. And also, they're intrinsically safe. If you're to have an implant, you don't want any risk of toxic fluid leakage. And with solid state batteries, there are no liquids involved. So what are the applications? Well, really, in Medical Devices, we are building on this wave of tech innovation that is all about replacing traditional pharmaceuticals which are chemical-based with electroceuticals, -- so typically, stimulation of the peripheral nervous system, so the PNS with very small currents and nanoamp of current to avoid the need for patients to ingest what can sometimes be quite toxic chemicals in order to deal with their complaints. The Vegas nerve is a really good example of part of the peripheral nervous system that is linked to a number of organs that you can electrically stimulate and therefore deal with some unpleasant conditions. And of course, we have been using electronic devices in med tech for a while pacemakers are ubiquitous. And one of the major advantages of being able to use Stereax miniature devices is that actually the size of the implant becomes much reduced and therefore, the surgical intervention much more palatable. The other example is in cardiac sensing, cardiovascular diseases, unfortunately, are the number one cause of death globally. And it's not only stimulation that can help address this problem but also actually just data collection. So implanted sensors can help with heart failure prevention and also monitoring of arrhythmia -- and in fact, these devices are being designed so small that they can be implanted by a catheter which means that the surgical intervention is reduced in scale even further. So where are we with operational implementation. So in 2020, we raised sufficient capital to be able to move from our pilot line at the local University, the University of Southampton here to a mid-scale fab which we installed on time and on budget in 2021 in the teeth of the pandemic. And over the last year, we've been carrying out our product qualification and also process optimization to increase the yield of that process. And actually, we've made alpha samples of our first product, the M300 which are currently undergoing testing, ready for release to our customers starting in Q2 of this year, so starting from April onwards -- so what is the commercial traction for Stereax look like? We've actually got commercial orders from a diverse med tech customer base. You see the company names here are kept private because, of course, a lot of these orders are placed under NDA. But they cover companies that vary from being start-ups through to listed multinationals. Actually, in the U.S., a start-up can be very well funded, can have hundreds of millions on the balance sheet. So they're not necessarily small organizations. And there you can see the application area, a lot of med tech applications that we'll talk about in a minute, with very interesting sector sizes and addressable markets and then reduce their to the serviceable addressable and serviceable obtainable markets. So basically which are the exact customers in those market sectors that we can talk to that we are talking to and how many devices are those customers likely to buy so that we can build bottom-up forecasts to support our scale-up activities. And here's a bit of analysis actually about those commercial orders by application. You can see that the majority of the orders in the green pie chart on the left are in implanted medical devices. A number in smart dental applications and these are what we call braces in the U.K. or retainers in the U.S., compliance monitoring, making sure that patients are wearing them correctly to ensure that you get proper alignment of teeth so that the efficacy of these retainers is guaranteed and also actually to monitor the chemical content of saliva. Then we also have smart lenses. This is often used for interacting with the so-called Metaverse, a very important area of new technology development that has seen massive investments, in particular, on the West Coast of the U.S. And then some other miscellaneous opportunities typically in industrial IoT applications, ranging from aerospace through satellites, applications and some other industrial deployments. And then on the right-hand side, you can see actually the jurisdictions that are key for our business development efforts. The vast majority of these orders have come from the U.S., so actually about 3/4 of the orders with the remaining ones in Europe. So really the pipeline dominated by U.S. med tech opportunities. And the pathway that we have to navigate for med tech is a reasonably long one. Typically, it takes about 5 years to get products to market to get regulatory approval. And so clearly, we need to make sure that we manage our cash through this period as we're supplying relatively low volumes of batteries in the initial years through preclinical trials, the first human trials through to regulatory approval and then mass production. And of course, the ultimate end markets for a lot of these applications are very large, as we've seen, in fact, larger than the capacity of the U.K. facility that we've got. And therefore, we need to make sure that actually we support our customers on this journey through to full market commercialization. What does our business model look like? Well, we have a mid-scale fab manufacturing facility right now that we're using for the vast majority of the process steps, although we are outsourcing some of the steps where it makes sense at lower volume production that we're at right now before forming the batteries, testing them and dispatching them to customers. But as per our announcement on Monday, we've entered into a tech transfer agreement with Cirtec in the U.S. that's allowed us to accelerate our licensing model. This is ultimately where we wanted to get to as an organization where Ilika remains the design authority effectively selling the IP or licensing the IP. In fact, as part of this arrangement, we will retain the responsibility for manufacturing the cathode which is perhaps the most proprietary of the steps in our process. Cirtec will carry out most of the manufacturing, including, in particular, the microfabrication activities before we wrap up with the forming and testing of the cells -- and this is a business model that we believe will allow us to significantly scale our business. So we're very excited about the MOU that we've signed with Cirtec Medical. They're an industry-leading, vertically integrated outsourced partner for the big medical device OEMs who actually outsource platforms as well as components to Cirtec for manufacture. And we plan to transfer the manufacturing that we currently have in the U.K. from our facility to their much larger facility in Massachusetts and Lowell, Massachusetts which is a large thin film facility that they've built up there. So in terms of the benefits to liquor and our shareholders, it provides validation of Stereaxâs capabilities. It's a manufacturing partnership with the economy of scale that we know we need in order to push down the cost of manufacture while going hand in hand with an ability to ramp production. And also, of course, they have a substantial and very skillful business development team that's capable of bringing additional momentum to the activities that we've initiated through building the pipeline that we were just looking at. So in terms of next steps, actually, there's a show coming up called the MD&M show that we'll be doing some joint marketing ads in California at the beginning of February, from February 7 through to the 9th in Anaheim. We will be completing our contract in the coming months and, of course, initiating transfer of the technology to bring this through to commercial conclusion. So in summary, for the first half of this financial year, the highlights for Stereax. We've launched that program for product qualification and process optimization heading towards commercial release in quarter two of this calendar year. We've got these 21 orders from 18 customers as we've seen mainly for medical devices in the U.S. And most recently, we've signed this MOU with Cirtec Medical to allow us to transfer manufacturing under license. So let's now start talking a bit about Goliath, so a large format, solid-state batteries. So why is automotive interested in this technology? Well, first of all, actually, the compactness of the technology is very attractive. It occupies half the volume of standard lithium ion. So it enables more attractive designs, smaller designs in vehicles. And also the high-temperature tolerance of Goliath allows designers to reduce that pack size and weight. So ultimately, confers a greater range on the vehicles that use solid-state batteries. It's also non-flammable. It doesn't have any formal liquid in it. So solid-state batteries are intrinsically safe. And also, there are some environmental benefits. So as time goes on and a larger number of batteries enter the market and some reach the end of their life. We have to have a robust strategy for recycling those cells. And the attraction of solid state is that once we've stripped off the outer packaging, we're able to crumble and granulate the batteries more readily and then extract the metals, put them back into the supply chain using standard recycling technology. In terms of the market dynamic here, we've got an electric vehicle uptake mechanism that is growing, actually has significant momentum. And solid-state batteries can really enhance this momentum. It can allow designers to overcome range anxiety because we're getting that extension of range that we talked about, a very robust battery life, so a larger number of cycles and also overcome any safety concerns. So where are we in terms of technical readiness? Here, we've got an updated technical development program, hopefully, a little bit simplified relative to previous charts that we've shared. So we've achieved an energy density of about 100 watt hours per kilo. We're ramping that up to a point -- data point that we're calling D4 which will be closer to 200 watt hours per kilo and that will be at a level that then becomes interesting for us to productize with our product P1. So effectively, that's the same performance but is capable of being manufactured in batches that allow us to send out reproducible pouch cells to customers for their validation and testing. We'll then be moving on through lithium-ion equivalent towards the end of the year through to what we call D8 which will then be sufficiently powerful to be able to support our first product launch which is our MVP, minimum viable product which will be turned into a process that will support manufacturing volumes. In parallel with this work, we've been trailing processes on larger scale equipment or production intense equipment, including roll-to-roll processes like you see pictured on the bottom right of this chart. So, where are we going to sell ourselves in the first instance? You've heard us talk about high-end vehicles, high performance and specialist vehicles in the past. We've probably extended that into luxury vehicles now. It's a large addressable market. We think that's about 50 gigawatt hours per year. So large enough for Ilika and its competitors. And we're actively engaged with brands that you would recognize from this sector. I also wanted to say a few words actually about the outlook for EVs. There's been some talk in the press recently that actually EV sales are perhaps not as robust or not as significant as perhaps had been forecast earlier in 2022. This is actually a chart from the Bloomberg NEF team that are actually revising their forecast for 2030 upwards. They're about 20% higher than they were a year ago. So actually, the long-term forecast for EVs looks very robust. Probably the near-term disappointment of some of the OEMs is more related to short-term inflationary effects and supply chain constraints. But most analysts expect those to be overcome in the coming years. So what's our scale up plan? I think it's important to understand the direction of travel here. And to understand also the amount of capital that we're likely to need to deploy Currently, we are manufacturing on a pre-pilot line. The automotive industry uses a certain language to define the stage of maturity of the samples, the cells that they use in their process. So, A) samples are effectively cells that meet a given specification but are not necessarily manufactured at scale. So often, they're manufactured on pilot lines like we intend to do. B) samples are manufactured on production intense equipment but are not necessarily available in large quantities. So they're manufactured in limited quantities. And C) samples are manufactured at the scale that is required to support a vehicle launch. So with the investment that we raised in 2021, we are currently investing in a pilot line that will allow us to make a samples that will enable us to respond to RFQs which are requests for quotation issued by automotive OEMs. If we're successful in winning those contracts, then we will collaborate to produce B samples and C samples on larger scale equipment. And typically, we've seen that the OEMs would invest in the equipment in order to enable that level of cell production. And so we do not intend to come back to shareholders to try and finance, let's call it, a mega facility or a Gigafactory. A lot of the finance for these facilities would be provided by the ultimate customers who are interested in offtake from these plants and also manufacturing partners. So that creates then as in the case of Stereax-licensing [ph] opportunities. So we are not a Gigafactory building company. We will work with companies who've got the expertise to be able to manufacture at that scale -- in terms of commercial interactions, we've met with most of the global automotive OEMs across different countries and sectors. And we have participated in RFQs to understand time lines and the scale of demand. We will be issuing commercial quotes with our P1 product at the end of 2023. And actually, some of those OEMs have entered into early evaluation contracts in anticipation of P1 availability. And then, of course, further partnerships and grant support is being pursued and there will be some news flow associated with those interactions as we move forward this year. So in summary, in the first half year, we have increased energy density for our GLIA cells by over 80% over the last 6 months. We've launched the scale-up studies, one of them an equipment design study with [indiscernible] that's given us lots of insights into the type of equipment that is needed in order to manufacture at scale. Weâve carried out an economic feasibility study with the U.K. BIC which has demonstrated the feasibility of manufacturing at megascale at their facility in Coventry. And weâve also carried out a series of manufacturing equipment trials with equipment vendors. Weâve also continued the interaction with both automotive but also consumer appliance OEMs. So Jason, this is our half year results. So if you could talk through the numbers, I think that would be useful. Thank you, Graham. So just to review the financial results for the half year, the turnover position of $0.2 million is flat year-on-year from the same half 2021 and once again resulted from funding in respect of 3 ongoing grant-funded projects as part of the evaluation matrix. And we will continue to seek further opportunities for that through the latter half of this financial year. And as Graeme said, into next financial year. With regard to the EBITDA loss of GBP4.1 million versus GBP2.7 million in the prior year. This is a reflection of the increased operational costs associated with Stereax manufacturing fab facility which was fully expected as that facility came fully online and up to speed to our capacity expectations. And although that is in line with our expectations for the performance, it does reflect the increased cost base that we're seeing naturally across the U.K. with expensive energy prices and increasing inflation. So in line with our expectations despite those external factors pushing the cost base up. And the cash balance at GBP18.6 million is in line with our expected drawdown on the capital, both for the consumption required for operating costs but equally with the deployment of capital towards the Goliath development program as we discussed. Thanks, Jason. So, let's just wrap up with a bit of outlook here. So what can you expect over the coming months? Well, first of all, delivery of the initial batch of 300 samples in quarter two of this year. We'll be progressing that Cirtec relationship through the joint marketing activities we were talking about and also moving towards contract completion and tech transfer. And of course, we'll be continuing to mature that Goliath technology with partners through the defined technical milestones that we covered earlier. And we believe that these activities allow us to build that increasing commercial opportunity to address these large markets, giving us a strong platform for future growth. That's great. Graham, Jason, thank you very much indeed for updating investors this afternoon. Ladies and gentlemen, please do continue to submit your questions using the Q&A tab just situated on the right-hand corner of your screen. I just want to give the company a couple of moments to review the questions you submitted already. I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A will be accessed or can be accessed via your Investor-Meet Company dashboard. Graham, Jason, as you know, you received a number of pre-submitted questions which you very kindly provided some written responses. And of course, you've got a number of questions that have come in on that Q&A panel on the right-hand side. I wondered if I may, just hand back to you guys. If I could ask you to read out the questions, of course, where it's appropriate to do so and give a response and then I'll pick up from you at the end. So just click on that Q&A tab; hopefully you should see them all there. Thank you, Mark. We will do our best and let's have a look to see what questions we've got today -- so the first one is, when will you enter a partnership agreement with an actual automotive manufacturer. So we're actively in discussions with OEMs and we'll leverage opportunities to collaborate with these OEMs alongside grant funding. So we believe that grant funding will be important in catalyzing those interactions. And we expect to be able to provide some more news flow on this in the coming months. The next question is 2 years to OEM prototype for Goliath is way too slow. Why can't you go faster? Well, look, we have a very dedicated technical team working on this technology. Actually, the feedback that we've had from people in the industry that are active in this field is that actually this rate of innovation is realistic and entirely aligned with the road maps of the automotive companies. And unfortunately, this type of new technology development does take time to mature but we believe actually that we're moving at a competitive pace. So there's a question here. Do we have any update on the Stereax fab in terms of yield. So the answer is, actually, we've been increasing the yield of that facility very effectively. I think last time that we gave you data on where we were, we were about at 40%, while that's been gradually improving. And in fact, we expect that with the additional expertise of the Cirtec team that particularly on the microfabrication steps that we're going to transfer that we should see some further benefit on increased yield from that process. But the yield is adequate for us to meet the needs of the initial orders that we've got and we will be optimizing that further through the tech transfer. There's a question here from an investor who recalls that we need to go through a medical testing regime before something can be used and they'd like a few words about that time scale; so that's right. All of us, of course, would like to make sure that any medical device that we use has been properly tested and validated. It depends a bit on the nature of the device. Most of the applications that we've got are either for Class III or Class II devices. Typically, Class III devices are implants and so need to be tested more thoroughly, more rigorously. That testing can take up to 5 years. And then the Class II devices require testing that usually is a bit shorter. They're often wearables and that can be in the order of about 3 years. So we'll be supplying products to our customers who will be testing their devices powered by our batteries over that time frame. But of course, we have a revenue-generating opportunity in the sale of those batteries to those customers while they're doing that testing. And that's what we'll be ramping up together with has have a look at some others. Question here. Are we seeing any new technologies that might compete with Stereax? So yes, we're monitoring that very closely. We have a function within the company that is responsible for updating competitive landscape. I would say the competition really comes from a couple of different angles. One of them is miniaturization of existing technologies, so conventional lithium-ion technology. This is getting down to pretty small sizes but is intrinsically limited in terms of energy density because of the weight and size of the can. These are often cylindrical devices that look a bit like miniature AA batteries. And clearly, there's a limit to how small you can make these containers, effectively, they become more container than active material at a certain point. But also solid state has got the advantage of being completely solid and more safe. The other area of competition comes from something called MLCCs which are multilayer capacitors or ceramic capacitors. They typically act in situations that require a high power but have got a lower or shorter energy storage life so that they're reasonably leaky in terms of draining over time. So you charge them and they don't really hold their charge as well as batteries. So if you don't need to hold charge for a very long time, then sometimes MLCCs can be very effective. A question here. Are you looking for other industrial applications for Stereax batteries outside of aerospace? Is that what have shown as the other 17% in the pie chart? Yes. So actually, a lot of those other applications are miscellaneous industrial applications. And the -- that is the minority of our pipeline at the moment but we believe that as we get to larger scale, that we'll be able to offer the product at a price point which will be interesting to a number of other application sectors. So typically, people are interested in sales for aerospace, satellite applications and hostile environments where normal lithium-ion technology struggles to deliver the performance that's required. Let's have a look. There's a question here; a technical question. So a recent QuantumScape press release mentioned a new hybrid prismatic and pouch architecture to support the uniaxial expansion and contraction during charge and discharge. Is this the direction you're heading in? Or is your architecture different? So actually, we use a traditional pouch cell architecture, the mechanism with which our batteries charge and discharge is not the same as Quantum scape batteries. As you probably recall, they have an nodes design which means that the anodes played out during the charging of the cell and ourselves actually use a structured anode which absorbs the lithium as you charge the cell. So we haven't got the same mechanical stresses in our design as the Quantum scape architecture. A question here. Can we comment on potential revenue values you'll be able to generate for Stereax line in '23, '25, -- what level of gross margins are you expecting as well in this time period. Well, I've got to be careful not to give forecasts here as we want to stay on the right side of the regulations. But gross margins that we expect are for the product in excess of 50%. And -- and once we get through licensing, of course, the revenue that you get from that activity is typically higher margin in the order of 95% because, of course, your cost base for the licensing model is much reduced. Targeted timescale for Goliath achieving lithium-ion equivalents looks extremely ambitious. How confident are you of achieving this? Well, these charts are done in close collaboration with our technical team. And we take guidance from them on what can be achieved. And actually, we've seen great progress over the last 6 months that we expect to extrapolate. And also, we expect an acceleration of energy density progress as we move into the stacking activities that we've got which become more of a packaging challenge rather than a chemistry challenge. Chemistry is quite difficult to get to work, particularly when you're dealing with novel chemistries and compatibilities, whereas once you get into the realm of stacking and mechanical engineering, then that becomes more predictable in terms of the likely outcome. A question here on the Cirtec deal. Congratulations on the Cirtec deal. Besides medical, are you considering other market sectors in the future. that could use miniature batteries. Yes. So one of the advantages of that particular deal is that it gives us an economy of scale and we're pretty agnostic as to the end applications as long as they leverage the advantages of the Stereax technology. So once we've done some joint marketing and had feedback from people who have been able to consider the use of Stereax in their devices in more detail and have probably been given comfort from our ability to manufacture at scale, then we will incorporate these opportunities within our forecast. Okay. So with regard to the monthly cash burn, that element is actually just under review as a result of the Cirtec MOU and tech transfer. So part of the text transfer activity is allowing us to transfer through the microfabrication activities that take our experts at some of the more energy-intensive and cost-intensive aspects of the production process within our fab, that then allows us to reduce the monthly spend that we're experiencing to better protect the cash flow that we have and capital available so that we can then better deploy that to the longevity and development of both, Stereax and the Goliath products. So currently under review at the moment but we would expect that to be reduced as part of the tech transfer negotiations as we see that to conclusion. Thanks, Jason. So as our patents regarding solid state -- sorry, I'm not reading that correctly, are our patents regarding solid state, still in date? And will they effectively protect our IP from competitors? And is the position different between Stereax and Glint Yes. So a lot of our patents are still in date; patents typically are valid for 20 years. So we haven't been active in solid state for that length of time. We've got good patent coverage in Stereax -- more of our patents cover the Stereax technology than Goliath because actually, we started earlier developing the Stereax technology. So that's proportionately a bigger part of that protection. But we maintain a freedom to operate search with our in-house patent attorney and where we identify potential problems or where we believe that patents have been incorrectly granted to competitors, then we will challenge those patents and make sure that we retain the ability to market our product. How confident are we in being granted the funds to finish the job? I guess this question, so granted is written in capital here. I think this question is asking if we are likely to get further grant support for our work I think that is likely. The U.K. government has reiterated its commitment to the industrial strategy of supporting battery development and vehicle electrification. And I'm sure there'll be some news flow regarding this as we go through 2023. So here's a question that says in view of current levels of expenditure and delays to product sales, do you envisage a further capital fund raise in '23, '24, given cash deposits of only EUR18 million, how long before Cirtec have an approved production facility capable of manufacture, what is projected product sales, licensing revenue in the next 12 months. So there's a few questions stacked on top of each other there. Iâll take that. The first one, Graham, in terms of the level of expenditure. So as explained earlier, we're looking to reduce the level of expenditure on an annual basis as we go through the tech transfer piece. So as mentioned, that will help to protect the capital that we do have and allow us to deploy that appropriately. Although we have always said through the Goliath scale-up process as we move to the scaling from our pilot line to the more industrial applications, we will have to deploy capital into machinery to make sure that we are proving that we'll operate at scale and that's where we will be looking to utilize our capital to best effect. And ultimately, as we are looking to go to sort of the final stage with automotive OEMs, we will probably need to look for additional funding but hopefully to do that with news around an OEM partner that is coming on that journey with us. So, no need for additional capital in the immediate future and looking to shepherd our capital that we do have for that term. However, as we look out into longer-term development to be able to bring the product to a conclusion, we will need to review the needs to deploy further capital. All right. And this says how long before Cirtec have an approved production facility capable of manufacture. Well, you have to bear with us on that. We're in the middle of a tech transfer discussion with Cirtec. So, I don't want to pre-empt that but needless to say, we're targeting early completion on that and we expect that to be done certainly within this calendar year. And then finally, what's the projected product sales and licensing revenue over the next 12 months? Well, analysts who cover us are predicting between [indiscernible] in this financial year which ends in April of '23. And then beyond that, we expect to see a ramp up, particularly actually in grant funding. Question here. You talked about increasing Goliath capacity 80% but how does this compare in absolute output vis-Ã -vis the competition that you track? Well, actually, I think we feel pretty comfortable that we're still in that cohort of leading large format, solid-state battery developers and the fact that OEMs continue to interact with us and support us in our grant applications means that actually we must still have a competitive offering. Another question here. Have you considered solid-state batteries for storage purposes, so the renewable energy sector? And how does solid state compare with vanadium flow batteries, Yes. So that's a good question. So for renewable energy storage, typically, you're not too worried about the volumetric [indiscernible] energy density of the batteries, you've typically got a larger space in which to place those batteries. So often lower cost, larger scale energy storage formats are used for that. Our flow batteries are a good example actually that are often deployed -- and more recently, people have been talking about using sodium ion batteries for that application. So they're probably more suitable than solid state. Solid state is more useful when you're dealing with a constrained space where you have constrained weight considerations, particularly in the applications we've been talking about this afternoon. Timeline for Goliath [ph], please [ph]? So, the timeline really is given on Page 20 that we reviewed earlier, you can expect early revenue generation in addition to grant income from the point in time when we are able to sell a samples. So OEMs and other evaluators are happy to pay for those prototypes. And then as you go through the different stages and get to larger volumes, obviously, we're able to run revenue. So significant revenue probably from 2020 onwards for Goliath. Question here. Please, could you talk about your choice of chemistry, i.e., solid lithium or silicon anodes and why you chose that? Well, we've had quite a long history, a successful history of using silicon anode technology. I know historically, actually, a lot of commentators have said well, solid state is really just the use of solid lithium anodes. But as Stereax cells use a silicon anode and that's been very effective in increasing the cycle life of sells beyond that which we achieved when we used a similar construction and lithium anode architectures. And we've decided in our Goliath program to use a similar approach. So, we find that by using a structured and that we actually get a better longevity from the cells and also less expansion and contraction of the sales when you charge and discharge them. And actually, other solid-state developers seem to agree with us recently solid power in the U.S. move from using a lithium metal anode to a silicon anode. So there's an increasing wave of support for that approach. A question here. Is the Cirtec MOU exclusive? Or can you seek similar relationships with others, if necessary? And what's the history of the relationship did Cirtec come to you or did you approach them? Well, I can't disclose any confidentialities here. But for the moment, actually, the MOU is a nonexclusive relationship. We're very excited about it. We think it's the best way for us to approach the medical device sector. And we've had a reasonably long exchange with Cirtec over the past year or so. they have a strategic interest in acquiring battery technology expertise to supplement the rest of their portfolio. And we have a strategic interest in scaling up our manufacturing capability. So far, it appears to be a very well-matched relationship. Great. And I might just interject just coming on the basis that we're coming up to time. And I'm mindful that you have a follow-up meeting beyond here. And for every question you answer, there's another 1 or 2 that pop their way through. So if there are any further questions within that list that you wish to go through at this time. If not, obviously, we'll make those available post the meeting for your responses where it's appropriate. I don't know if there's anything there that you wish to address. And if not, if I may, just ask you for some closing comments because I will then redirect investors to give you their feedback. There's a question here. Any implications up or down in Britain for British folk. Well, I think it's a very sad announcement that British fold were not able to secure the finance that they required for their business model. I just want to emphasize the difference in business model that Ilika represents relative to the one that British we're pursuing. In Brushfield, we're planning to build a Gigafactory or, in fact, giga factories -- and I see that really as an infrastructure type project that requires substantial project-based financing with a mix of equity and structured debt. Ilika is a development -- technology development offering and we're developing a differentiated novel type of battery technology which will be licensed. We don't intend trying to finance our own Gigafactory. So they are very different propositions. And I don't think really the British fold story is really relevant to the journey that we're on here at Ilika. Thanks very much for your interest today, guys. We will endeavor to answer the rest of the questions that you've raised. And I'd like to thank you for your continued support and I look forward to updating you again shortly. That's great. Thank you, Graham, Jason, thank you once again for updating investors this afternoon. A company's asking investors on the call not to close this session. We're now automatically redirect you for the opportunity to provide your feedback in order the management team can better understand your views and expectations. Just want to take a few moments to complete but I'm sure we'll be greatly valued by the company.
EarningCall_1305	Welcome to the Sanofi presentation at the 41st JPMorgan Healthcare Conference. I'm Richard Vosser, European Pharma Analyst at JPMorgan, and it's my great pleasure to introduce Paul Hudson, the CEO of Sanofi. Before I hand over to Paul, just to remind everyone, we will take Q&A after Paul's presentation in this room. Please put your hand up and wait for a microphone, and then we'll take your question. Paul, welcome to the conference. Okay. Thank you, Richard. Thank you. Can you hear me okay? What a wonderful and warm introduction, Richard, thank you very much for that. It's three years since that we've been here together at least, and it used to be the big room, I think, and then a scramble to get to the small room for the Q&A. I think I prefer this already. So let's see how far we get. In those three years, an awful lot has happened for us at Sanofi. We've really been on our journey, really transforming the company, really modernizing what we're doing. And over the next few minutes, I'm going to share with you a little bit about what that looks like. Behind the scenes, there's a lot of work going on. But visibly, of course, nine consecutive quarters of growth, an outstanding performance and outperform against the objectives we set ourselves back in 2019. We said that we would introduce these four pillars, we would deliver against them, and we would also drive a higher performance in vaccines. We would go past EUR 10 billion with Dupixent and that we would double down on our pipeline. We've made huge progress transforming the company what you can see. What you can see on the financials, what's going on in the background? I'm going to try and bring that alive a little bit for everybody. It's important, I think, to see how rigorous we've been on delivery, how important it has been from our own credibility perspective, to make sure that we're getting the important things done whilst transforming this amazing company, not least in terms of the sales performance has been incredible. The BOI performance, which we committed to 30% in 2022 and a 32% in 2025. We wanted people to really understand that we were going to completely renew this amazing organization and deliver the financials at the same time. And you can see for EPS in 2022, our guidance, we've got full year results coming up in the next few weeks. We're very proud of the delivery and what we've been able to do whilst modernizing and whilst transforming. Of course, to do that and to deliver those numbers without any consequence to reinvest in the pipeline to have trouble the number of programs that we have. We've done it by a well-managed and directed EUR 2.5 billion resource reallocation initiative, most of which has gone back into helping drive the top line and to driving through an increased and more important pipeline. This sort of takes us to a point now this -- for Sanofi is what an average sort of year should look like. This is what we've been working towards since we got together as a team laid out our strategy at the end of 2019, indeed early in 2020 here. This is what we were gunning for, which was the sort of steady state as our organization, an organization of our size. We took our first in humans to double digit for the first time in the company's history. We made enough progress to know that we're now on a cadence of launches. This year, we'll do two first-in-class, best-in-class launches for the first time in the company's history. We'll launched Fortis in RSV. We launched Eluvia in hemophilia A. And we hope to really demonstrate not only can we bring to our science, but we can really commercialize it and do important work for patients. We have two pivotal readouts. We have tolebrutinib in relapsing remitting MS, and we'll also have Dupixent in COPD. Both, we hope to be breakthrough data sets, particularly in COPD. When you think about the huge unmet need and the challenges that patients face, this could be a real game changer. And then this number of 27 readouts over the next 18 months. I can tell you, having joined the company in late '19. This number, this internal ambition seemed like a real stretch at the time, incredible work by John Reed, the team in R&D and everybody pulling forward to really do things that are meaningful. Between 90% and 95% of our pipeline is first and/or best-in-class. That comes with some risk, of course, because when you're trying to break new ground, some things won't work, but this is the new cadence for our company. This is what we're doing. This is why we're here. This is trying to do transformational things for patients. This is what a typical year, certainly for launches and readouts should look like for our company. We're proud, really proud of the progress that we've made. So when we came in the beginning of '20, we laid out the fact that we thought Dupixent would go beyond EUR 10 billion on his journey. And in fact, when we laid that out at the end of '19 as well, there were some raised brows about what was, in fact, possible. Could it be done? Atopic dermatitis, for example, was not a well-understood disease. It's taken us five years to get to this point. And then certainly, in the last three years, we've accelerated our performance. We've committed and we will go -- we will cross EUR 10 billion in 2023 in annual sales. It's an incredible performance. It's an incredible performance given how difficult the markets are, how challenging it is for payers and reimbursement, but the unwavering absolute best-in-class efficacy and safety profile and meaning that this medicine is going on to do incredible things. Now at the same time, we're often asked, well, where could this end up? How big could this be? Well, we've said our next waypoint, and it is a deliberate use of the word waypoint. Waypoint is, of course, the next grid reference on the map for us will be EUR 13 billion. We didn't say it ends there. We just said that's the next compass bearing that we will give. So we'll go through EUR 10 billion in 2023. We have a compass bearing for EUR 13 billion, and we have COPD results to read out on top of that. Where this could take us could be absolutely incredible. In addition, back in '19, it was not accretive to group. Right now, it's accretive to group. So each time we make progress, we improved the overall performance of the company. The economies of scales that are coming from that, the refined manufacturing processes, the improvements that we've made that will yield a massive reduction in cost of goods over the next three years. The equivalent, in fact, of launching a blockbuster in scale in terms of saving on cost of goods over the next three years. COPD, well, if we get the data later this year and the data is positive and you know the unmet need will come back and will help dimensionalize for people what that looks like. We will owe it to everybody to share how important can this be for patients? And indeed, what sort of size will this look like? This is a really big moment for us. And the work we're doing with Dupixent and how we're building it out is pretty fabulous. We take our moment to recognize that even with this astonishing performance, that we are really only penetrating a very small percentage of the eligible patient population. About 0.5 million patients are already being treated with Dupixent. We added over 225,000 new patients in approved indications already. We're now moving into a chronic spontaneous early carrier, another 300,000 patients. But as you can see, there are over 7 million eligible patients, biologic eligible patients for DUPIXENT across indications. And we are in the hundreds of thousands. I get letters every day for people thanking me not that I did too much for the incredible work on how this medicine has transformed their lives or their children's lives. But we haven't even touched the surface yet. We have so much more to do and so much opportunity to really make a massive difference. It's just the beginning for Dupixent. So we move into our launches. It's first-in-class, best-in-class time. So Altuvio, our factor will move forward and launch, we hope, getting approval by the end of February. And why is this such a big deal? Well, you know this, I think for many of you that have been around hemophilia A, 2, 3 infusions a week is a lot. Or going out to a longer interval and having less efficacy is a choice that has to be made by patients. We've really broken new ground here. We have a best-in-class factor. We should become the factor of choice. There should be no need to use any other factor at all. And why? Well, it's weekly, already a major breakthrough certainly for those patients that just can't infuse three times a week. But a near normal factor level and what that means for patients, that is a complete breakthrough. It was at ISTH in London last year. And it was quite clear from the profession of the hematologist. This will be standard of care in factor. But it gets a tiny bit more exciting than that, too. Because we know Hemlibra worthy competitor, we know a large proportion of their patients are also on weekly treatment. And we recognize that when you're weekly versus weekly, having a normal factor level will be a new and improved choice. We're going to be able to even go after the newest entrant on a weekly basis. The expectations for us are very high. You can read the quote. You can see a patient, and you can get a very clear understanding that for those that want to live a near normal life, it is finally possible with hemophilia A. Its outstanding work done by the team excited about what it's going to mean, and it is really going to mean a huge deal for these patients. And it's just around the corner. And on our journey, deliver the financials, develop the pipeline, commercialize the assets, do it to a high standard, do it first-in-class, best-in-class. This is another major point. So this year, the American Academy of Pediatrics asked the White House to declare a national emergency for RSV. The alarming surge in cases of RSV, the number of young children less than one year of age, infant babies that were being admitted invade distressing circumstances became almost unmanageable across the world, but in particular, in the United States. Bay Fortis will launch later this year. We hope in time for the season, which can change everything for these patients. We will reduce hospital admissions in RSV by 80%. Now of course, that not only helps relieve the stress on the system for the first time. First time this has ever been done at scale. But at the same time, it reduces the stress on parents, particularly new parents who've never been in this situation before watching an infant struggling to breathe. This is a new game in town. This is two medicines that will be best-in-class, 1 first-in-class invest and in hemophilia A best-in-class. This is game-changing for us. This is the sort of work we've been aspiring to since we put the strategy together back in 2019. This is the new Sanofi and how we're operating. Behind the scenes, again, I use immunology as an example because I think it's important for everybody to understand that we're not just running asset to asset. We're really trying to build something very special here. Of course, we have Dupixent as a cornerstone in what we're doing in immunology, but it goes much, much deeper than that. We've been able to put together over the last few years, a very sophisticated and deliberate portfolio in immunology that can change everything. This is not waiting to a mega blockbuster drug as during patent exclusivity loss. This is doing something deliberate for patients now. This is recognizing they're not all drugs for all patients, certainly not immunology. This is recognizing the need for orals, we've just advanced our RAC 4 from Chimera into Phase II. We have a BTKI. We have a topical. We have an OX40 ligand. Many of the patients that finished the study are still symptom-free because of the incredible disease modification opportunity that this medicine may present. We'll also pull through our Nanobody platform. We'll see an IL-13-TSLB combination that will raise the bar of efficacy in asthma, set a new standard. When you're the leader in immunology, and we will be the world's leading immunology company. There's some special moments to do things for patients looking end-to-end at the patient journey and recognizing when you look at RA, psoriasis, other treatment areas, the patient heterogeneity that our responsibility to develop medicines for subpopulations to such a precise standard that we can help these patients go on their end-to-end journey is our responsibility. And we're really going to change everything with this. Nobody has got anything like this in immunology. We worked very hard to put this together, and this is just the beginning for us. This road map in immunology is what we're building out in rare disease in neurology, in vaccines. We're really now starting to put together a long-term and coherent plan to bring first-in-class, best-in-class at scale right across our organization. And this is going to be a real gift for patients. We mentioned at the bottom, 9 new NMEs before the end of the decade. Greater than EUR 22 billion in sales in immunology alone, which will mean 9 medicines in flight in the second half of the decade on their launch trajectory. What it means for patients is phenomenal. What it means for us and the organization is pretty fantastic. While all that sexy cool work is going on, there's even more important work going on behind the scenes across the rest of the portfolio. Our consumer business, which was trailing the industry is now growing faster than market and it has been doing for a number of months. We carved it in. We gave it agility. We put it back where it needs to be. We started to invest in it. We've doubled down on e-commerce. We've radically overhauled the pipeline -- the portfolio, we've shut down things and reduce families, made ourselves more efficient. So we can contribute back to R&D, of course, but also we can run a more agile, fast-growing business. And we're seeing the proof of it. It was a long time before we cut up with market growth. And now we're ahead with a regular cadence showing what we're capable of. And shout out to our General Medicines business, which is a huge business for us. But it's a very important business because, of course, within it, it hides incredible growth opportunities. And that's why we split it between core and non-core assets. And we do that because while some assets have been declined, of course, through price or end of life, there are real magical assets, our transplant business, for example, are now emerging type 1 diabetes business. These provide real opportunities to change the way our General Medicines business is viewed and to really celebrate the excellence. We've moved to distributor models. We've reduced costs. We've reduced product families. We've streamlined. It's allowed us to deliver on our overall BOI objectives. It's allowed us to reinvest in R&D, but it's allowed us to innovate at scale. And that's never been done before in our organization. So even the two big areas that we don't talk about frequently are on their own innovation journey, and we're making staggering progress. It's -- you normally come to the end of a slide presentation and you get to these moments and you -- people put in a few slides on DNI or on corporate social responsibility. And we know people do it with the right meaning and the right intent. For us, it's non-negotiable. For us, there's no point winning on all of the things that we've laid out in terms of science for patients a change in the practice of medicine unless we're doing it the right way. Unless we're building a company that is representative of society, and we believe we're well underway on that journey. 34% representation of people of color here in the United States, 41% of women in leadership roles. It's not there yet. We're not declaring victory. We're saying that it is not acceptable to change the partisan medicine, deliver for investors unless we are absolutely responsible for the workforce that we have a contract with to make sure that they look like the society that they live in and represent as patients that this point is non-negotiable for us. Likewise, 95% of our clinical studies have diversity objectives. It is non-negotiable not to do that anymore. These are minimum standards. That's why the fast-rising investment opportunity for us in our operation and our operating expense is in diverse and inclusive suppliers. This takes a lot of energy and effort from everybody across the company. These are non-negotiables now. If we think we can just pass through and celebrate the odd scientific breakthrough, it is not enough. We need to win, we need to do it the right way, and we need to do it absolutely categorically by doing things and celebrating them the right way. I touched on the ERGs, which doesn't get talked about a lot, it's the employee resource groups. Why should you even mention it in a group like this because people need to see people like them in organizations? So people need to talk to people like them in organizations in a safe environment and feel championed, feel a safe place to talk about who they are and what it needs to include them. And we have found and rightly, and I don't think it's a surprise to anybody that the more people see people like them in our company and the more they can be the best version of themselves, the more productive, the more fun, the more engagement and all those things come together. This is not coming too late. This is coming at the right time. It is not acceptable not to deliver this while delivering amazing science. Maybe for our last slide, I think one last distinguishing factor in our transformation, we're a really fabulous company, but we were a collection of 300 acquisitions over 3 decades. We weren't always fully integrated in terms of data lakes, and we were indeed often patched together in terms of architecture and infrastructure. We made a conscious decision that we could try and fix all that, which we will, and reduce the cost to serve those technical aspects. But at the same time that we were a company in transformation that should jump straight to AI. For most of us in our industry, the AI question is really in R&D, perhaps in supply. It's not really an everyday for everybody. We've made a conscious decision. We're partnering with a company called Daily, but we made a conscious decision to go after AI-driven insights for the vast majority of the people in the organization. And after 18 months, we have over 8,000 people being informed with insights and predictive analytics in a snackable format on their mobile phone similar to Instagram stories about where they should be spending their time, where we may go out of stock in Q3 2024. Where are we on quality issues? Where can we be on inventory? Where can we be on investing more in an asset in Brazil, where could we be pulling back in an asset, say, in Australia and getting informed insights right across our business real time. Imagine that's in your hand, not many companies have done. And I would argue not only do people not have it, but they don't have it at scale. Our ambition will be to use AI at scale and to have almost all of our organization benefiting from it on our journey over the next 12 to 18 months and be well ahead of the rest of the industry. So massive progress, a massive transformation for us. We're delighted with that. At the same time, pipeline is coming 27 readouts to come over the next 18 months, 9 consecutive quarters of growth, outstanding success with DUPIXENT, not even started. Two first-in-class, or best-in-class launches this year and at the same time, modernizing a company that truly reflects society. That's the work we're doing. That's why we're proud of what we're doing. And thank you for your attention. Thanks very much, Paul. We're moving to the Q&A session. So if you have a question, please put your hand up. Shy as always. So maybe I'll ask a question to start us off on Dupixent. Clearly, very, very strong growth and accelerating growth, as you highlighted. When we think about the pressures on the immunology space, maybe biosimilars coming not of your product at Humira and pressures on payers. How are you thinking about that over the next few years? And also the growth within the in-line indications that you've got? And then maybe I've got another one. Well, I think at the very beginning of it all, the best way to protect yourself from payer pressure is to have transformational innovation. And the biologics have often provided that for all of us. And this medicine, in particular, has provided opportunities for patients to have normal labs. I was speaking to something this mentioned just yesterday who said that their sister had suffered from AD for 20 years. She moved to Dupixent, and she finally up to see what a normal life was like and the impact it had on her mental health and those around in her family. This was just yesterday. This happens all the time. If you don't have that level of transformational impact, then it can be a stretch in terms of reimbursement. You mentioned biosimilars and other things. I've worked around biologics for a long time. We're always surprised by the number of biologics that can coexist in, say, psoriasis or rheumatoid arthritis to different areas. And we shouldn't be in immunology and autoimmune disease, patients are very heterogeneous. There are a lot of different stages. That's why we're building out such a sophisticated pipeline in immunology inadequate responders, partial responders, pre-biologic, on top of biologic, after biologic disease modification, topical. And you have to innovate. You have to have the right patient subpopulations. And you'll find that, I believe, that you can more than justify your position in the market and be rewarded. Like we said, we're 9% penetrated of AD eligibles. And we will annualize -- we will have annual sales issue of more than EUR 10 billion, 9%. We have work to do, and new entrants, new competition, bring in education, bring in investment dollars. It's all going to help make sure those patients. Whether it's not our drug is perhaps slightly less relevant that patients who need access for advanced therapies can get it. And maybe on the profitability, you touched on it in terms of new manufacturing and actually being accretive to the margin. How should we think about that coming forward? You're going to be adding -- I mean, you're hitting EUR 10 billion, you could be adding EUR 1 billion, EUR 2 billion of sales this year. How should we think about that when it -- in terms of adding to the profitability of Sanofi? Yes. It's not just a great drug. It's an incredible also that on this fantastic drug, we can deploy on all our manufacturing site, a new process, which will some lower COGS. And that will come up progressively and the full impact will be by 25%, which is when we want to expand our margin by another 200 bps. So that's quite timely. As you know, Dupixent, we declared was already accretive to our threshold of 30% in 2022. I thought at the beginning, it would be by year-end. In fact, it was from January onwards. So we are going quicker than what we expected. And the last piece of negotiation we had around Libtayo, also help us to recoup our development costs that we spent initially on Dupixent and have an accelerated reimbursement, which makes our share of the Vixen profit for the years to come closer to 60%. So great growth and great contribution on our road map to 32% in 2025. Well, I mentioned at the beginning that we said it was a priority also shared the RSV launch that is coming up later this year. So we did touch on it. But we, like many have moved rapidly towards mRNA, created a center of excellence, investing between $400 million and $500 million a year in purely developing in mRNA, taking it into new opportunities, for example, such as acne and doing things that have never been done before. We're also in flu. And it's quite interesting, really what's being done because we know how to do, say, influenza. And we know the expectation is that you have to have something that has no side effects and in a prefilled syringe as thermo stable. Nobody wants to get sick to two days with mRNA and flu to avoid being sick for four days, right? That's not great math. So we know how to set a high bar. We know what it needs to look like. Our team are doing that because we know how to do it really well. But we go beyond that into Mining, we go into pediatrics and much broader. We are really setting ourselves up for if there's an opportunity to take from innovation and mRNA will take it, plus our own continuous innovation on through new McCorkle [ph]. Maybe you want to add to it, you [indiscernible] Well, yes, because thanks for your question because effectively, it's not just about the success of flu, which is great because with the lower immunization rate in the U.S., we've been able to increase our net sales during the last three years, which is a great kudos to the team, honestly, because it was really moving very fast to this differentiated flu. We own the standard of care for flu. But mRNA platform, you mentioned, of course, acne, which huge unmet need. We have also clammed on the bench. But outside of mRNA, we are also gave you some information about other products like PCB, MenB, RSV Toddler, and we will come back to you in '23 with more information on those developments. RSV Toddler would be a great complement to our franchise on all infants with RSV. So you see vaccine is top of mind and well gone delivering. You remember, we said that it would be mid-to high single-digit growth, and we are delivering on our promise. And we said that we want to double this franchise by 2030. So we are on our way. Yes. Just on RSV, I mean I won't ask for a share of hands, but almost everybody has had a child or know somebody who's had a tough experience with an infant with RSV. I mean that's it's pretty much everybody gets touched at some point. And I want to be clear again that what we're doing with Bay Fortis, which sort of kicks off the renaissance and what we're doing in vaccines. -- is truly transformation. Imagine it doesn't matter when a baby is born, if a baby is born in the season, they'll be protected with Bay Fortis. This is not a maternal vaccine where you're playing serendipity with when the baby is conceived and when the baby is injected and all the variables that go with that. There's just no need for that. You can just really protect those infants at risk fast. And so I think that marks a sort of the next chapter for vaccines and of course, the expectations on growth, which is -- which are impressive. Thanks for your presentation, earlier. I have a tolebrutinib question. I think back end of last year, you had alluded on our conference call that the IDMC was lifting the clinical hold, but we still haven't heard from the FDA. Can you just provide the latest thoughts on that, please? Yes. So thank you for the question. So just to remind everybody that tolebrutinib is a brain -- active brain-penetrant, BTKI. So the whole rationale was if you can cross the brain barrier, you have a shot at treating the progressive nature of the disease and the microglia, and this was always our goal. Our goal was to be able to go after superior efficacy in relapsing remitting and/or indeed doing something very important for patients with progressive disease, which we know, particularly in secondary progressive, is a horribly debilitating and inevitable journey. What people don't realize that whilst we were discussing the clinical hold in the country at the moment, we fully recruited both relapsing remitting studies and the second reprogressive study, and we continue with primary progressive. So they're all on track, on deadline, nothing has changed. Patients from what we understand, doing very well. So our hypothesis about where this can help hold true. For the DMC, of course, nothing has changed for them either. Everything is on track. It's really only our back and forth now with the FDA on the partial hold. And we're in very active dialogue, exchanging information because them, like us, are interested in making sure we can choose the right patients that will benefit. There is clearly a class effect here in terms of what might happen with initiation of BTKI. But anybody that's been around MS for a long time will tell you. Efficacy is the objective. Finding the right criteria to start a patient on drug, monitoring them, managing them and getting them to very much as normal a life as possible holds true. Nothing has changed for us. The dialogue is ongoing. And when we have the latest update, we'll share it in an earnings call or indeed in a more public communication. Yes. Thanks for taking my question. Elizabeth Jones, Ivy. I was wondering if you could just talk a little bit about the COPD opportunity. I don't think of COPD as a highly allergic disease. So I just wanted to understand if there's -- who you're targeting within that broad population and the size of the opportunity. So I think I think CBD is one of the top 3 or 4 list of killers for patients and is an absolutely devastating impact and you imagine reading through a straw for most of your day, you sort of get a sense of what it's like to field constrained that way. I think you also probably know that inhalers have been the standard of care or oxygen in an acute care setting. This is not a good situation. That really hasn't evolved. Some of the anticholinergic, for example, have been around for 20 or 30 years. So we went after it to try and change the pace of medicine literally. And we looked at 2 different types of COPD. We looked at a Th2-driven disease, those with an inflammatory component those almost towards the asthma-COPD overlap syndrome to see what could be done to try and reverse that. What could we do to give people 200 milliliters in FEV 1 back or reduce submissions acute emissions into hospital? And we set a high bar, but we'll get the data soon enough. And we've seen it with biologics when they first enter huge unmet needs, they move very quickly in terms of opportunity if you can show a benefit. If a patient can walk upstairs unassisted to a bed, that is major. If you can avoid going to hospital, that is major. And then behind that, of course, we have the IL-33 Itepekimab. We'll get results next year in the pivotal readouts, which is less Th2-driven disease and, of course, more looking at the fundamentals and around IL-33 itself. So we think we're going to provide 2 very important advanced therapies. Now they have to work. We haven't seen the data. We have no indication yet what it will read out. But the earlier phase data was really encouraging really encouraging and in particular, in subsets, say, for example, former smokers. So we will see. We'll turn the cards over. I have to say, and it's interesting for us because Sanofi not really been for many decades, people waiting on us to turn over a pivotal study to see if you can change the practice of medicine. We're moving into that territory now. And we have to take these bets. And we're well organized, we know the areas we'll turn the cards over, and we'll see what we have. We remain optimistic, right? We've done everything right. But of course, you never know. But if we can provide an advanced therapy for COPD patients, I mean, that's why we've kept COPD. Whenever we talk about Dupixent, we've always had COPD as the addition because depending on the profile of the data is good, we have to recalibrate for everybody what the model looks like because there's so many patients struggling. So that will be on us. Let's get the data and then let's see if it's good and what that looks like. Thank you for the session. So just to proudly announce that we are your partner since December in Indonesia. So we have come from the Kobe. So we are continuing to grow your Genmab business and also vaccine in the country. So I just want to see what you have thought about the country or region that is still concerned about affordability because it's very important for Indonesia or the Asian countries that talk about the Gen-med even it's still a bit old products, but I think the accessibility is very important. What do you think about it? Yes, let's not confuse age of products with usefulness for patients, and we all know that, right? And we moved to a distributor model, and thank you for your support in many countries because we were carrying a lot of infrastructure that we could reinvest in R&D and many of the local distributors could do a better job and really understood the local market even more in a more sophisticated way than we did. So that will continue. We think that's important work. And that's the modernization, the stuff you never hear about you do, but others don't that allows us to free up BOI and reinvest and go and go and go on science. On a more fundamental note, we committed through our corporate social responsibility agenda to give 40 essential medicines as defined by the WHO at cost to the 30 poorest countries in the world and we agreed to do that through the Sanofi Impact brands to make sure that those that needed a central medicines got them, and there was no reason for anybody to go without. And often, this is in cardiovascular and diabetes, for example. Fully committed to that. We've launched the initiative. It's up and running, patients already benefiting. And we do it at cost because we want people to understand they have to recruit more physicians. They have to educate the up to train. Often, they just don't have the right infrastructure. We're in the right place now for what that looks like. No, thank you. That's not the focus. We still have some activities through our Gen Med portfolio. And it's working very well, but to focus is on innovative science for us clearly. Just wanted to come back to Bayer Fortis and the launch. Clearly, a very bad RSV season here and globally. Is that the urgency, particularly in the U.S. from the regulators to sort of get the product approved so that it can be recommended by ACIP by regulators so that you can get there? Yes. Look, there's -- the regulators are -- have; been incredibly supportive. They're finding these of baby Tylenol and different things to try and make sure that those suffering now without a treatment can really get there. There've been a lot of energy and time invested the -- I've got to complement the FDA. They really understand how important this is, and they know what it's going to take. But let's also remember, this is a monoclonal antibody, a lot of vaccine. So it takes a little bit of time to make sure that everybody understands, not often when you bring a map through, it's for a population health strategy, right? So it's taken a bit of energy to get there. The season in RSV is still happening. And the ACIP meeting, I think, is in June, something like that for the next guidelines and then one again early fall. So if we get the approval sometime around then, we'll have the guidelines updated and we'll move very fast. There's a huge amount. I can't even tell you whether it's ASIC, the AAP, patient groups, everybody is asking, can we get it? Can we move? When can we protect people? Crying out for an alternative. Literally deciding which infant gets a bed in a critical care unit is a choice being made in the United States, choosing between infants. So the pull is massive. So if we can get ourselves set up well, it's better if we get approved earlier, gives us more time in prep gives us the guidelines. But even if it comes a little bit later as we start the season, the appetite is huge. And maybe just a last question on flu. There's a bit of vaccine apathy or exhaustion that COVID has brought, that may be detectable in the flu market this year, but then flu is quite severe. So how should we -- it's a severe season. So how should we think about sort of flu in '23, flu in '22 and the ongoing growth of flu? Yes, in spite of our immunization rate, as I was saying. So you know that the time line is always the same. Once you have flu, you don't run for a shot. You remember the following year. Well, I have to do better, and I have to be -- to get my shot early in the season. And that's what normally happens when you look at statistic on long period. So normally, we should see a rebound of the immunization rate in 2023 in the U.S. and across the world, while the COVID-19 problematic will dwindle.
EarningCall_1306	Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of this morningâs short remarks, we will open the floor for questions. At that time, instructions will be given after the procedure to follow if you would like to ask a question. Thanks, Shelby. Hello, and welcome to our 2022 Year-End Earnings Conference Call. Joining us today are Mike Hsu, our Chairman and Chief Executive Officer; Nelson Urdaneta, our Chief Financial Officer; and Brian Ezzell, our VP of Finance. We issued our press release and published supplemental materials that summarized our results and outlook this morning. You can find these resources in the Event page of our Investor Relations website. Before we begin today, a few reminders. Our statements will include forward â our statements today will include forward-looking statements. Please refer to the latest Form 10-K or 10-Q for the list of factors that could cause our actual results to differ materially from expectations. Our remarks will focus on adjusted results, which will exclude certain items described in our Q4 2022 earnings news release. Please consult our press release and public filings for more information about these adjustments and a reconciliation to comparable GAAP financial measures. Mike will provide his perspective of the business, and then we will open the floor for Q&A. Okay. Thank you, Christina, and welcome to K-C. Good morning and thank you all for joining us today. Back when we introduced our strategy in 2019, we could not have imagined the unprecedented challenges we are about to face. Over the past four years, K-Cers did what we do best, provide great care, care that our consumers, our customers, our employees and our communities needed all around the world. At the peak of the pandemic, people counted on our brands to support the health and hygiene of their families, and Iâm proud of what our teams were able to achieve to fulfill our purpose of Better Care for a Better World. Now as we look back at our results, there are three themes Iâd like to emphasize. Theme number one, our strategy to accelerate growth is working. Since 2019, weâve grown our business by about $1.5 billion in sales and delivered 4% average organic sales growth. In that time, weâve accelerated our organic growth by improving our product offering and market positions, with meaningful innovation and world-class commercial execution. In 2022, organic sales increased by 7% and over delivering on our goals at the beginning of the year. This was achieved in what turned out to be a uniquely challenging global environment. 2022 also marked Kimberly-Clarkâs 150th anniversary, a year in which we celebrated generations of category defining innovation. Weâre proud to have created many of our categories, including feminine care and facial tissue under the leadership of our Kotex and Kleenex brands. We are inventors at heart. New products created during the last three years contributed to over 60% of our organic growth in 2022. Whether itâs Kotex DreamWear for ultimate overnight protection, or Kleenex Allergy Comfort, our product obsession, advantage technology and consumer-centric focus is enabling us to create meaningful value and accelerate category growth. This is perhaps most evident in China, where we continue to post double-digit organic growth in the face of a declining birth rate and challenging COVID operating conditions. With major upgrades in dryness and thinness, our products are among the best in the market, led by Huggies Super Deluxe, the softest diaper in China. Our strong portfolio supported by superior technology will continue to anchor Kimberly-Clarkâs leadership in the worldâs largest baby and child care market. Theme number two, weâre making strong progress on margin recovery. Over the past two years, we faced unprecedented inflation worth over $3 billion, a roughly 1,500 basis point headwind to gross margin. Our teams have done an excellent job mitigating this impact. Our product leadership, commercial agility and cost discipline enabled us to rapidly implement broad pricing actions and generate over $700 million in cost savings. The successful implementation of revenue growth management actions drove an inflection in our profitability in the second half of the year. Gross margin stabilized in Q3 and increased year-over-year in Q4 by over 200 basis points. This was our first major improvement in the last eight quarters. Collectively, these actions enabled us to fully offset inflation and currency headwinds in 2022 on a dollar basis. Recently, market prices of some inputs have begun to ease, although they remain elevated relative to pre-pandemic levels. While weâre encouraged by this, it will take time for these benefits to work through our contracts and flow through the P&L. Nevertheless, weâll continue to leverage our scale to improve efficiency and reduce costs. At the same time, we expect our revenue management efforts will continue to positively impact this year. This will aid ongoing gross margin recovery while also enabling us to continue investing in our business. At the midpoint of our 2023 guidance range, we plan to improve operating margin by approximately 80 basis points. With incremental headwinds below the line, this translates to 2% to 6% growth in earnings per share in 2023. We also intend to increase our dividend for the 51st consecutive year. Theme number three, we will continue to invest to drive balanced and sustainable growth. Weâre scaling innovation that delivers better value, more benefits and better care for our consumers. We continue to see strong demand for great performing products. New Poise Ultra Thins and expanded sizing for the pants drove share gains in adult care, both from a dollar and unit standpoint this past year in North America. Weâll be launching several exciting initiatives in 2023, including our GoodNites youth pant, which can hold the equivalent of three bottles of water exclamation point as well as exciting performance upgrades for Huggies diapers. At the same time, weâll leverage the broad range of our offering to address the growing need for value through compelling commercial programs. Now to wrap up my prepared remarks, Iâm very proud of K-Cers around the world. They continue to execute with excellence standing tall in the face of countless challenges all to fulfill our purpose of Better Care for a Better World. Weâve assembled an excellent management team that has tremendous experience unlocking global growth. We have a long runway of growth ahead of us, and weâll continue to invest in balanced and sustainable growth to create long-term value for our shareholders. So I just wanted to go into the 2023 outlook in a little more detail. First, Mike, can you just outline what youâre assuming for pulp prices as you look out to next year? Iâm assuming youâre not fully using the RISI forecast, but maybe you are, just any clarity there would be helpful. And then you talked about the greater investment in growth in people by 100 basis points to margin. Can you just help us understand the motivation behind that? Are there specific areas of opportunity? Is it more you had to pull back a little bit in 2022, just given such a tough commodity environment? How are you sort of thinking about that? And also maybe just a little more detail on functionally where you are spending, is it ad spend, or is it other areas, is it headcount and maybe geographies and product categories you plan to invest? So that would be helpful. Thanks. Okay, weâll do, Dara. First of all, I feel great about where the brands are globally and where our business is, and we can talk about performance in the fourth quarter and I know weâll get to that. But overall, Iâd say we plan to deliver a better performance in 2023 for sure. Weâre going to build on our organic growth momentum. Dara, clearly in the plan for next year, there is plenty of carryover pricing, but there are new pricing actions in the plan as well. Most of those have already been announced to our customers. But in terms of the investment, I would say, Iâm really excited. We got a robust innovation and commercial program for 2023. In some ways, if I calibrate, I think this year will be stronger than last year, and we feel good about that. Consumer demand in our categories generally remains very resilient. And so I think from that aspect, we have good things to invest in. In terms of the overall spending, we are taking advertising back up a little bit more, just for reference, and we havenât discussed this as much. But obviously, with the challenges that weâve had over the last couple of years, we had pulled back slightly over the last couple of years. And so some of this is returning back to where we were back in â perhaps back in 2020. But beyond that, Iâd say itâs more based on the merits of the commercial programs that we have. And weâre excited about the programs that we have and we want to invest behind them. And at this point, youâre probably aware, Dara, weâre pretty good at evaluating the returns of our investment and making sure that they pay out. And so we feel great about that. And so from the organic momentum, we continue to see that. I will say we expect continued progress on margin recovery while weâre making that investment. Weâve got high single-digit operating profit growth while offsetting, I think, what we said in our release, about $600 million in inflation and FX headwinds. And so yes, we are restoring some between the lines. But obviously, as you saw, the non-operating items really kind of get us back to that mid-single-digit EPS guide, or low to mid-single-digit EPS guide. So I will say â and before I let Nelson â Nelson will comment on the pulp. Iâll say, Dara, we are aiming for the top of our range internally, right? And I think we did the same thing last year. Iâm glad we did because when we came out this time last year, I think, we were calling for about $700 million of cost inflation. We ended up seeing closer to the $1.7 billion and still stayed within our original range. As I mentioned, we have very high-quality plans for this year. Weâre really excited about that. So weâre aiming for the top end of the range. Why we call it the way we are? Well, volatility remains extraordinarily high. And so if you have a good call on interest rates, FX, the war, energy, supply chain, COVID, civil unrest, there is a lot going on. So thatâs a mouthful. Maybe Iâll pause and let Nelson comment on pulp and then Dara if you have any follow-ups. Yes. And to add, Dara, in terms of pulp and the fiber complex as a whole, I think, just to give a little bit of context of where weâre at. Overall, the fiber market prices have plateaued in Q3, and they actually began to turn slightly in Q4. And to your question as to do we take RISI as a reference, yes, we take it as a reference. And just reiterating where weâre at today, prices have more or less remained largely in line with where we in Q3 and what weâre projecting into this year is that on average, eucalyptus, as an example, would be down 10% for the full year. Now same goes for fluff, and NBSK and some of the other components of the whole fiber complex. We would see prices begin to ease throughout 2023. One thing that we need to take into account is that we donât cover at RISI. I mean we actually enter into specific contracts in all the different components of fiber. So what you see in RISI or some of these indexes does not necessarily translate one to one at that time to our P&L. So thatâs also whatâs playing out. To give you a context, out of the commodity inflation of $200 million to $300 million that weâre quoting in our guidance. The pulp complex as a whole is right around half of that at the midpoint. So we will see pulp as a whole, be up for us in 2023 based on what weâre forecasting at this stage, albeit a very small number compared to what weâve seen before and markets are giving up on that end. I think Iâll add, Dara, is also, while weâll take some of those declines that you see in RISI will take a little time to work through our system. I would say if you saw a spot in what weâre paying you want to pay what weâre paying. Great. Thatâs helpful. And just one quick follow-up. On the higher ad spend, are there specific geographies or product categories youâre most focused on, Mike? And then if I can slip one additional question in, also just the FX guidance for 2023, the revenue guidance is worse than our currency models indicate based on your country exposure. So just any clarity there would be helpful, but also the flow-through to profit look pretty severe in terms of the FX impact to profit relative to revenue. So any clarity there would be helpful. Thanks. Yes, the spending, Dara, I would say itâs broad improvements. I mean, certainly, in our major markets like the U.S. and the diaper category, for sure, we have great news that we want to make sure that weâre supporting appropriately. I think I cannot share exactly what that news is because itâs coming out in the second half. But it will blow your mind when you see it. And it has to do with â not to say this on an earnings call, but the poop side of things, and so thatâs kind of the business weâre in. And so weâll do miraculous things with poop. And so thatâs one set of areas. Weâve got huge momentum in China, and we feel great about that. The team is doing a fantastic job. Weâre going to continue to plow and invest in the brand and the advertising in our digital capabilities in China. And so those are two core areas. But obviously, we have strong traction around the world, and we feel good about our investments around the world. And addressing the question on the ForEx, Dara, just to unlock that a little bit, so for next year on the top line, weâve said that for the full year, weâre talking around 2 percentage points of a drag. And itâs important to highlight that we are seeing that concentrated in the first half of the year, when we do the comps year-over-year. I mean we would not â we would see that really ease or not be that much of a headwind as we get into the second half from a top line standpoint. So you could work that out and there. And then when we go down to the flow-through to the bottom line, a couple of things. As a reminder, weâve got about half of our revenue coming from overseas and about a third of our profit coming from overseas. But we do have a significant amount of costs that impact the P&L, either exposed to hard currencies in the foreign subs in which we operate. The other element you need to take into account as you model is that weâre not covering the spot rates. I mean, we have particular risk management strategies in place that Iâm not going to get into details in the call, but we have to work through those risk management strategies as they flow through the P&L. And as you know, thatâs not a one-to-one if youâre engaging in hedging and doing risk management strategies that we do. Hi, good morning. I just â so one follow-up on the currency piece and then another question. But just on the currency piece, I think itâs getting so much attention this morning because itâs such an atypical multiplier versus what weâve seen here, right? And so â and I appreciate thereâs hedging and it sounds like thatâs something you have good facility into. So maybe Iâll just take that as a given. And what â how should we think about an improvement in currency or a worsening in a currency? So youâre hedged, does this now â is this now the outlook? Or should changes in currency imply a change in whatâs going to be flowing through on your model this year. So perhaps you can just help us understand that. Thatâs a fair question, Chris. And a couple of things, obviously, on top line, it will be what it will be because we donât hedge top line. So thatâs in essence whatâs going to happen, so it will translate. When you go to costs, we have models in place for risk management strategies, and there are currencies we hedge, there are currencies we donât hedge, and it depends on the amounts we do. So itâs model-driven. So changes in currency, to your question, would have impacts. Now it wonât apply to all the currency payers because it depends on where weâre at, at any given point in time. So definitely on top line, yes, we will see that very fluid as markets move, and thatâs happening literally on the hour. As to profits, we will also see, to some extent, some flow as the currency changes and we update our models depending on whatâs hedged and whatâs not hedged. Okay. Okay, thank you. Just given, I think one other thing this morning is that the commodity outlook relative to what we can see on even forward prices would suggest worse than expected probably on that front. Clearly, youâre saying more of thatâs happening in international markets may be harder to track. So I think that makes sense. But nevertheless, weâll probably end the year now at a gross margin of, say, 32% still a few hundred basis points below pre-pandemic operating margins even farther below pre-pandemic. And I think conceptually, the organization does have goal to get back to that margin structure. It just feels like with commodity volatility and the non-operating inflation that youâre talking about. Do you still think thatâs a realistic medium to long-term objective or has the inflation been such that thereâs probably not enough pricing and savings to get you there or at least it will take a very long time. So any thoughts on that. Yes, Chris, I definitely feel like itâs a realistic goal, and I think weâll get there. And my view is weâve turned the corner on our margin recovery program. We â obviously, we saw in the fourth quarter continued strong organic performance. But for the â I said this in my prepared remarks, pricing exceeded input costs and inflation for the full year. So we fully offset inflation and FX for the full year last year. So I think the teams did a great job there. And our operating margin, as I said, stabilized in Q3 and expanded by 200 basis points in Q4. In terms of the cost outlook, so I think weâre making great progress there. And let me say this about costs. From my seat, Iâll say thereâs â I see green shoots, okay? But even though we still see cost headwinds coming into the year, there are green shoots, and we have seen selected commodities start to ease. And Iâll also say, having been in this company for 10 years, reversion is around the corner, when it happens, it happens fast. We offset extraordinary headwinds over the last couple of years, as I mentioned. We see another 600 this year. Historically, though, there has been rapid reversion, and weâve seen some signs of it. I donât have a timetable for that. I donât know if itâs going to hit this year or not. But at some point, it will happen. And when that does happen, it will accelerate our margin recovery. And as I said in the past, weâre not counting on reversion to deliver the margin recovery. But when it does, it will accelerate our time line, which is why I feel confident about it because we all know $3 billion over two years, itâs not going to stay at that level, right? At some point, itâs going to come back down. Just to add a little flavor on the gross margin, too, Chris. A couple of things, we had three quarters in a row where we actually expanded gross margin. And as Mike pointed out, for the first time in Q4, we grew gross margin year-over-year versus the last time we ever did that was back in mid-2020. So it had been a few quarters. That had not been the case. And that reinforces Mikeâs point that what we have been talking about since July of really remaining committed and having line of sight to recovery in the margins is going to happen. As we stare at this year, our plan calls for year-over-year margin expansion in gross margin every quarter. Thatâs what we have in place. I think you quoted 32% of gross margin, itâs actually higher what weâre aiming for at the â for the full year because weâre expanding operating margins at the mid-point of our plan by 80 bps. If you look at what we put out in the release and the remarks, weâre investing about 100 basis points of net sale into the brands. So we got to add that back to that 80 bps, and that gives you a sense of what at least is going to be the gross margin expansion that we have planned in here. So we definitely have â weâre building on those green shoots that Mike say in, but weâre not staying sitting here. I mean weâre moving on the productivity line. Weâre moving on the margin accretive innovation, and weâre also moving on the net revenue growth management programs that we have in place. So all of that is really putting us there. And as Mike has said in the past, reversion will accelerate this. Thatâs the only thing that would do that, so. So can I just confirm, and I apologize, because Iâve gotten questions on this, and Iâm going to get back in the queue. Do you expect gross margins up, but the 100 basis points is what youâre investing into gross margins. So if you can you just maybe confirm what your expectation for gross margin is for 2023? Because I think there has been some confusion. Yes, yes. I want you to add, right. So it would be like this. We have 80 basis points of operating margin. You add 100 basis points that we are reinvesting into the brands. That gives you 180 basis points by which at least gross margin would have to expand. Hello, good morning. Good morning. Just to pick up on that math because thatâs sort of the math that weâre working with too. But that implies, if you take the numbers literally that the 23% gross margin objective is a tick below the 4Q 2022 gross margin that you realized. So just to Nelsonâs point about seeing that progressive gross margin improvement sequentially, it doesnât imply a lot more movement in 2023. So maybe just talk about that in the context of, overtime, easing costs and the like. So Steve, I think a few things that â just to add a little bit of color or how we get there on the math. So I think the important thing to take into account is weâre staring right now at about $250 million of commodity costs at the midpoint, as weâve guided. We have about â in terms of currency, about $350 million at the midpoint in currency. And then in other costs, we have around $200 million. So when you add it all up, we will be for another year in a row, having a significant revenue growth management realization that weâve planned for, which, by the way, around two-thirds of that is solely carry over from 2022. So what happens at the end is, for the year, weâre going to be realizing positive pricing net of commodity and ForEx, whereas last year, we were pretty much neutral. We were able to fully offset the $1.7 billion. So thatâs going to flow through. And exiting Q4, itâs not a straight line as Mike indicated, because, again, the quarters are pretty different and the dynamics between the categories and the mix and our cost impact us differs. But the reality is that on a year-over-year basis, we continue to expand margins, and it would be quite the game because if you recall, our pre-COVID gross margins were around 35%. So we would be getting â we would be making pretty good advance on the full year with the movement that weâre planning for. Yes, Steve, and maybe Iâll just add for context, I mean, I wasnât trying to sound facetious, because when I say itâs a bumpy road, Iâm not one for hyperbole and I think I said in my prepared remarks, unprecedented a few times. And so thereâs been unprecedented effects kind of on the demand side and on the supply side, just in terms of demand, obviously, COVID in and out, the war, which caused demand to change in and out, then you have all the supply issues either associated with COVID, the war or just the product availability or transportation availability. So thereâs a lot of things moving around. Then you throw in our Texas storm, which, at this point, Iâm on the third order impact of the Texas storm. And so you got all that. Thereâs a lot of volatility inherent in the numbers, and they were not consistent quarter-to-quarter and very unusual in our business, because typically, I think you all are right, this tends to be a very stable business. But because of that, both from a demand perspective and a cost perspective, things are going to move around from quarter-to-quarter a little bit. Okay. Thatâs fair. And I agree. Unprecedented has become the new precedent. So two other, I guess, follow-ups, if I could. One is on the enhanced essentially net pricing, revenue growth management. I guess, you talked about mostly carryover. Thatâs great. That makes sense. In terms of the incremental, is â do you anticipate incremental actual pricing actions versus just kind of other RGM actions? And you â just some color around where those might occur and what portion of them are actually list price movements versus count reductions, that kind of thing would be helpful. And then another thing that you mentioned in the release, itâs been a topic across other companies that have been reporting just in terms of retail inventory levels and some downshifting in terms of trade inventory levels, just some color around what youâve seen and how youâre thinking about destocking inventory levels across the trade as you go through 2023? Thanks very much. Okay. Thanks, Steve. Yes. First of all, weâve moved fast on pricing the last couple of years, right? And so Iâm really proud of the team and their ability to fully offset inflation on a dollar basis in 2022. But for the plan this year, I would say, the majority of our pricing is like â is going to be carryover, but we have taken new actions, some list pricing, which is, in general, across most markets already been announced into the marketplaces. But there are additional RGM actions weâve taken as well that you might say, whether itâs promotional changes or productivity around trade spending. So those are the more typical that are kind of evergreen programs that weâre going to have in place. But overall, we feel very good about our RGM, our revenue growth management capability. Itâs executing well. If we didnât â if we had not invested in it, over the past five years, we would not have been able to make the moves that weâre making. And then in general, I think itâs been working very, very well. In general, I would say, demand is holding up pretty well. I know that will be a topic people will want to double-click on. But I would say the elasticities are holding up, in general, better than we modeled originally. So that maybe, hopefully, thatâs it on the pricing one. Any follow-up, Steve, on the pricing? Okay. And then retail inventory, it was interesting. Nelson and I were at a conference in September â Lawrence Conference in September and almost every investor asks us about retail inventories, because it was starting to change for a couple manufacturers. It had not affected us at â that was back in September. I would say, subsequent to that meeting, perhaps a week or two afterwards, we started getting news from retails that they were going to look at retail inventories as well in our categories. And itâs happened. I would say itâs been typical, generally typical to kind of what weâve experienced year-over-year. So in the fourth quarter, Iâd say, it came in about what we forecasted. It did affect the consumption, because if you look at North America, I think our overall organic between tissue and personal care was up 1%, which is a little soft relative to what the consumption was. And in my mind, consumption is really what the business is really performing at. And so youâre going to have some other changes that affect your shipments. But over the long-term shipments must equal consumption in my book. And so consumption for the quarter was up 7% in personal care and 7% in tissue. So we feel like the business remains very healthy. But we work through some typical retailer inventory issues. Hi. Good morning. Thank you so much for the question. I was wondering if you can comment from your guidance on why most of your inflation is outside of the U.S. in 2023. Meaning what is different really in terms of the markets outside of the U.S. in terms of rising costs? And then I have a follow up. Yes. In general, inflation â so a couple of things. Out of the commodity inflation, the one weâre quoting, the $200 million to $300 million impact, the majority of that bucket is on the international markets. So the U.S. would be not the big â the market largely impacted by that bucket. However, when we move down the line obviously ForEx would be mostly in â would be the international markets as you could see. But then on the other cost, itâs broad-based. So that would be broad based across the portfolio. Okay. And then just how should we think about the phasing of your forced cost savings through the year, just given the rising input cost are more pronounced in the first half. Should we expect greater cost savings to offset that in the first half as well? Yes. As weâve said in the past Anna, our FORCE savings are not linear and it all depends on movements within the quarters go live of projects. And it is very difficult for us to predict exactly how it comes into play. I would not skew FORCE into the first part of the year because typically, weâve got a lot of projects that are going live. Weâre still dealing and managing through some challenges, especially internationally on the supply chain bid. And that weighs into how FORCE plays throughout the year. But I canât give you a specific percentage of what you should be planning. But I hope that helps guide you as to how weâre thinking about it. Thank you. Good morning. How are you? So I wanted to just perhaps hope to bridge the top line guidance a bit between volume and pricing. And Nelson, I understand you mentioned obviously you have some carryover impact of about two-thirds, I think youâre called out from pricing. So it implies that potentially you are announcing or embedding some additional pricing. So first of all, wanted to check on that. And by my math, probably youâre embedding flattish to slightly up volume for 2023. So Iâm hoping to figure what regions would that be? And related to that from a regional perspective, D&E it was a bit softer in the fourth quarter. I understand like you called out Southeast Asia, and Iâm thinking, and correct me if Iâm wrong, Softex being an acquisition that you made towards the end of 2021. Perhaps thereâs some puts and takes there. Anything you can add in terms of like 2022, it seems to me was a year that D&E had a very strong year. And actually, sorry, developed markets had a very strong year. D&E was a little bit softer. Is that going to reverse, because youâre obviously having tougher comps in China and in developed markets? So if you can help us with that. Okay. Maybe Andrea, Iâll start with the D&E and then maybe Nelson you can come back in on the on bridging the top line. D&E, yes, it did soften. So in Q3 I think we were up about 11% Andrea, and then it was plus 2% in the fourth quarter. I would say, as you already talked about primarily due to what I would call discrete challenges in Southeast Asia. So what weâre doing is, weâre excited about our business in Indonesia, itâs great business, great brand. I would say weâre working through some business approaches that we prefer. And so thatâs had an effect of the year. They did things a certain way, I prefer to do them a different way. And so weâre just working through that. And that had an impact on sales kind of in the quarter. Hopefully weâre through that. And then beyond Indonesia, weâre seeing a little increased competition in Vietnam and India. And so weâre going to work through that and something thatâs been going off and on for a couple years now. Beyond Southeast Asia, China was up double-digits. Latin America was up in the 20s, and Middle East and Africa was up mid-single-digit for us. So, weâre still, we still feel very good about our D&E performance overall, but recognize we have a little bit of work to do in Southeast Asia. I mean, the team overall is doing a great job executing bringing innovation into these markets, driving the price execution, which weâve talked about and we feel great about our commercial programming for this coming year. Does that give you enough on the D&E? Yes. No, I guess on the developed markets though, what is embedded in your guidance? Because Iâm assuming you are thinking of elasticities just kicking in stronger for this year or because it seems as if, at least in North America, I know the puts and takes from North America growth was subdued in the fourth quarter. So hoping to see if there is any puts and takes as you took more pricing and what is â what are you embedding into 2023? Yes, well, let me just say, we had great performance across developed markets in the fourth quarter. I think generally, approaching a double-digit in developed markets outside the U.S. U.S. as I mentioned, was up, I think if you add tissue and personal care was up about 1%, mostly driven by retail inventory changes differences. We exited a private label contract that was pretty significant. We exited or changed timing on a pretty significant promotion at a big retailer. And so that affected I would say the fourth quarter overall in the U.S. But overall, I donât think weâre putting out a number there specifically on each of these segments, but we are expecting continued good performance both in North America and developed markets internationally and very excited about the plans going there too. Itâs strong innovation as well. I mean, for all the developed markets, weâve got very pretty strong innovation pipeline thatâll come through. But going back to your deconstruction of the top-line I think a couple of things Iâd like to highlight on the year and how to think about it. As first and foremost, we â as we go through the year, itâs important to note that the first half of the year will be more muted. And when we say more muted, itâs important to take into account the fact that one, we will still lap the private label exit in North America that we talked about just now. So thatâll continue to impact us in the first half. And then the other bit is also weâre lapping very strong comps from last year. As you remember, we grew 10% in the first half and we grew 5% in the second half. And then the third point is, we will still have a lot of pricing that on a year-over-year basis is coming through in the first half because of the carryover. So all that put together would put pressure on volumes, because of those three reasons as we think of the first half of the year, as we go into the second part of the year, then that would ease, and thatâs our expectation. And thatâs the way that I would think about it, Andrea. Thatâs helpful. Just as one clarification thatâs missing on the, when you said two-thirds of the âcorrect me if Iâm wrong, I understood, itâs like everything that you have in plan, in terms of pricing is about two-thirds carryover, so it implies that you have another one-third of pricing to come through in the plan? Yes. And I said earlier, I canât remember, maybe it was with Steve, but yes, we have a significant portion of carryover pricing that was launched last year that still carries over into this year. And then weâve taken additional pricing actions since then. And so weâve generally announced pricing actions across markets that are taking an effect this quarter. And so thatâs also factored in the plan. Yes, and then on top of that, as I said to Steve, we have additional RGM actions or revenue growth management actions that are more typical in Evergreen [ph]. Good morning. Thanks. So want to talk a little bit about consumer behavior in North America and elasticity. So, I guess first on personal care, Iâm sure youâre not going to give us a number, but if I make some rough assumptions around the private label exit and inventory destocking, it looks like elasticity is less than kind of a one for one on the North America personal care business. So just kind of curious on your perspective on that and knowing how much of your innovation has been premium over the last few years. What youâre seeing in terms of trade down behavior, because the market share data looks not great, the brand is losing shared of private labor all label overall, but your shares look a little bit softer. And then just on tissue, there obviously expect there would be significant elasticity. There always is. But what are you seeing there in terms of that a timeline to that kind of stabilizing? Should we think about it as when you start to lap the price and that the volume stabilizes? Or is the consumer under so much duress that thereâs space for that trade down to persist? Okay, Lauren, I knew you were going to ask this, and so Russ and I were on the phone last night working through this, and so as so anyways hereâs a couple things. One, let me just say in North America and I would say globally overall, weâre seeing a resilient consumer. And I think that does reflect the essential nature of our categories. Generally, as you know, our POS or consumption volume where the POS Nielsen sales is in line with expectations. As I mentioned, our shipment volatility has been a little higher just because of some of these discrete items that weâve worked through. This is the thing Russ and I were looking at last night. I definitely would say observed elasticity was slightly higher or the elasticity impact on volume was a little bit higher in the second half than the first half. But remains, I would say far below whatâs modeled. And I think that does reflect the nature of our categories as being essential. And Iâll throw a couple numbers at you. And these are category numbers, so not brand and theyâre public anyways, so not proprietary us. But in Q4, pricing was up 7% in diapers and Eq, right, equivalent units, the measure of volume was down three. And so I think as you point out, therefore, the implied elasticity impact is less, certainly far below one to one. The thing that I would throw in there on top of that is in the second half us and our competitors have made a lot of count changes across all these categories. And so the Eq definition includes count reductions because itâs based on a standard unit, right? And so my venture to guess almost half of the volume decline is related to count and tissue sheet count changes. So that was diapers and then the bath tissue, yes, for the fourth quarter price was up 11 for the category and volume was down seven. And recognize, I might factor in, three or four points of that seven is likely to be sheet count changes. And then adult care of the outlier because, price was up eight and then volume was still up, right up to. And the delta, I think those were all fourth quarter numbers. What we â and the reason I say the elasticities kind of seems like the impact has increased slightly in the second half. Is â in the first half, pricing was up mid to high single digit and volume continue to be up. And so there is a difference. I think the consumer environment was different. I do think there is more pressure on the consumer, but I still think the category remains very resilient because of the essential nature of the category. So Iâll pause there, Lauren. Is that answer? Yes, again, we feel very good about overall performance. At the brands, I think, in adult care, we were up 12% in consumption of the quarter. Feminine care, weâre up almost double digits. Diapers was down five. And the biggest driver behind that, private â that private label exit was a minor one for us. But the bigger one was we have a large retailer that we knowingly shifted an event from Q4 last year, prior year into Q3 of this year. So we lost that. On top of that, they had a big private label event, which we know about and planned for. And that moved from Q3 to Q4. So thereâs a double whammy on the share side, and that accounted for the majority of our share impact in the quarter. And that happened in October, I think the cycle for us. And so we saw later in the quarter, certainly, better performance from Huggies and we feel great about where we stand. And as I told you, we have â this is the Disney 100. So weâve got great commercial programs for our characters on our products. Weâve got great innovation that weâre really excited about. I hate to say, but â well, when you come out and visit with us, weâll take you to our war room on poop [ph] superiority. And so, but we feel very good about our offering and what weâre going to be doing there. Yes, no, I got it. I get it. And then Iâd be remiss if I didnât jump in on a modeling question. But just briefly on the FX headwinds relative to what just seemed like not terribly well timed hedges unfortunately. And then the wage inflation that you called out, just any dimensional like gross margin versus OpEx, just how to treat those as we work through the pieces? Yes. So, the 200 million is on the other operating costs. Thatâs all gross margin as you model it. And the â in terms of the Forex, a meaningful portion of it would be gross margin. Thereâs a little bit on translation because of earnings, and thereâs a little bit on mark-to-market of any liabilities or assets we have in foreign currency, but the lion share of it would be in gross margin. Hi. Good morning, everyone. I would like to come back to this elasticity question. So you mentioned that itâs healthier, but yet your volumes are down 7%, and Iâm sure you could have itemized how much is your underlying volume growth versus market growth? So if you can give us that, so what is the underlying growth without going to this happening in incontinence or diapers, just tell us, of the 7% volume decline, how much were one-timers? Because the other branded competitor also saw volume decline of 6%. And my concern is how â what makes you think that you can keep pricing at these levels given what this contradiction between the elasticity that you mentioned that is better, but we see this mid- to high-single-digit volume declines? Yes. I mean, Javier, I think the thing that you have to get picture is thereâs a difference between whatâs happening in consumption, right? And whatâs happening sold-through to consumers versus shipments, right? And so â and I think thatâs what maybe the other manufacturer; I didnât listen to their call, but Iâm also supposing I think they probably lived through some of the same effects as us. Thereâs a difference between whatâs consumed, right? And so I said for the quarter, in North America across our businesses, our Personal Care business grew in consumption by 7%. Our tissue business grew by 7%. In the long run, I think youâll have to â hopefully, youâll agree that in the long run shipments should equal consumption, right? So youâre not going to perpetually deplete the retailer inventories or eventually grow retail inventories over time, right? So generally, thatâs kind of what I look at as kind of the ongoing health of the business. In the quarter, we did see some discrete changes particularly as it relates to one, retailer inventory, which is probably the biggest impact for us in the quarter. But the other aspect for us is we did exit a pretty significant private label contract, which added a piece of it as well. So those are discrete items, in general, and I said on an earlier question, the retailer inventory changes for us, itâs about typical for what we normally see. And so â and it goes back and forth from year-to-year, and so it tends to build itself back up over time. And thatâs why I donât view retailer inventory changes as representative of whatâs happening to elasticity. I view whatâs happening to consume volume and consume dollars, right, as to whatâs happening with elasticity. Yes, I couldnât agree more, but you have not quantified those one-timers. So what Iâm asking you is to tell me, what do you think is underlying category growth for you... ...the branded competitor and inclusive of private label because you are talking about price increases in addition to whatever carryover comes from this year. And we wonder to what extent you are taking too much pricing and whether you can keep it? Well, all Iâll say is the underlying category growth in the fourth quarter was 7% for both personal care and tissue. So what about volume, not pricing. Iâm referring to volume declines of 7%, Mike, if you could explain the underlying volume compliance? Javier, going back to your question â to answer the question that you have on the one-timers, we have about 3 points would have been the one-timers. If you think of the inventory destock, if you think of the private label contract that would have been about 3 points out of that set. Excellent. And then I have a more, a strategic question when it comes to private label. What do you see private label role in diapers, both in the U.S. and Europe? And to what extent that does it make sense to hold on to your operations in the U.K.? Thank you. Yes. We exited our Personal Care business primarily, especially our diaper business in the U.K. about 10 years ago. So Iâm not sure what youâre referencing there. Yes. I mean, yes, we have â yes, we have a great tissue business. Itâs the market leader in the U.K. Whatâs the question? The question is if you can tell us how is private label pricing in the U.S. versus the U.K., which we donât have, I personally donât have access to and whether it makes sense to hold onto the tissue operations in the U.K. given the situation there? Thank you. Okay. I got it. I understand. Hey, yes, overall, again, we feel great about our brands and where their position is. Andrex we have taken significant pricing just as weâve done in the U.S. this year. It continues to perform well and despite the price increases, it has grown share. And so itâs a leading brand in the United Kingdom and much by consumers. And so itâs a great business for us. Certainly, this year thereâs room for improvement because of all the cost pressure. And so thatâs the priority for us, as youâve heard all here is weâve been working to recover our margins on our branded businesses to offset the significant inflation that weâve had over the course of the year. And I think the teams have done a fantastic job of that. That said our margins are still below where they were pre-pandemic, and so weâre working our way back up towards that. Hey. Great. Good morning everyone. Thanks for squeezing me in, and Christina, congratulations, and welcome. Hey, Mike, just to maybe tie together some of the more recent questions I wanted to hit on your U.S. market share, which I think Lauren touched on a bit. And then the promotional environment, which Javier, I think was kind of getting at a little bit, but very specifically, how this plays out with the promotional environment. Some of the conversations we have with investors now is the pricing stick, is the consumer going to be able to with withstand it, particularly in some of your categories? And then obviously whatâs going on with commodities is not lost on retailers either thereâs still kind of a long way to go to get back to gross margin targets, but still more benign oil, pulp et cetera. And then, Iâm sure your share is not quite where you want it to be in some categories, where itâs eroded tissue, diapers, wipes, et cetera. So question just around promotional environment, how you see this playing out in your categories, given the recessionary backdrop and more benign commodity cost environment, and then may maybe what youâve embedded in your outlook? And thatâll do it for me. Thanks guys. Okay. Yes. Kevin, let me try to package that up. I mean one, let me start with the share. It was a bit softer than we like in Q4, but I feel confident weâre moving on the right track. I mean, the softness was primarily in diapers for the reason I told Lauren, which is we had a big event come out and then a big private label event, which we happen to supply go in and so that had a big impact on market share in the quarter. For the full year we were upper, even in five of eight categories we were down in five and Q4, thatâs why it, I said itâs softened in Q4, but weâll get it back on the right track. I do think, I feel really good about our plans for this year and feel confident in our commercial activation in North America, and then, in nearly all markets around the world when we have a few discrete items weâre working across in international markets. In terms of the pricing environment, I would say the promotion environment right now remains competitive. But I would say overall constructive, given the cost environment, weâve seen kind of, obviously the broad pricing actions from most manufacturers across categories. Promotion frequency has returned to normal levels, both in tissue and personal care. And that, that happened, a while back. I would say the depth of promotion remains a bit shallower than historical. And I think thatâs related to the cost environment. However, on the consumer side, we can certainly, our, my comments on elasticity and the essential nature of our categories, notwithstanding, I do sense the consumers under pressure. And so, and weâre â weâve been, out talking to our top customers, and so we recognize that the consumer is working through some challenges pocketbook wise. And so, weâre going to meet them where they need us and make sure that weâre continuing to offer a strong value across our business. And the thing about us is, our aim is to lead our categories. And so weâre not really, weâre not a niche premium player. We want to play across both value and premium. And so we have a broad offering and we want to make sure we support our consumers effectively along that. But for the most part, yes we have taken significant pricing we are managing our promotions with discipline and weâll continue to do that. I donât know if that answers exactly, what youâre looking for, Kevin. I think that helps. But just to kind of tie that in with, with your intentions on the advertising and marketing, is it fair to say that should the promotional environment pick up because of a weaker consumer potentially from your position, trade down in your categories that you, itâs not optimal, but you kind of view that a hundred basis points in advertising and marketing. If you have to reallocate that to trade promotion as the year progresses, then youâll cross that bridge when you get there. Is that a fair way to think about it? Yes. Weâll, yes, Iâll say yes, weâll cross that bridge when we get there. Youâll have to, no, my personal bias is Iâm not a fan of driving the business through promotion. I donât â I can, we can do it effectively, because we know our ROIs on trade promotion as well as we know our advertising ROIs. And so and frankly, now the returns, on both are okay. I like the advertising ones better. And so thatâs kind of my go-to. And I think itâs better for the long-term health of the brand. And frankly, Kevin, this is related to the question youâre asking. Our customers expect it. I mean, they theyâre concerned about value for their shoppers. And so, theyâre not the biggest fans of all these price increases, but part of what theyâre looking for from us is to make sure that weâre bringing commercial programming to grow the category for the long-term. And theyâre so, theyâre excited about our innovation and theyâre excited about the, the commercial ideas that weâre bringing this year. And so they, they want us to bring it. And so thatâs probably the bigger reason, why weâve ticked up the investment in our advertising. All right. Thank you, Kevin. And Shelby, Iâm going to make my closing comments. Hey, Iâll just say a couple things one, Iâm confident in the strength of our brands and our commercial capabilities to position Kimberly-Clark for the long-term. Iâm really proud of the focus leadership talent in this organization, and confident that weâll drive business, drive our business great long-term shareholder value and fulfill our purpose of better care for a better world. So I want to thank you all for joining us today. And with that, weâll sign off.
EarningCall_1307	Welcome everyone to UMC's 2022 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcast live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website www.umc.com under the Investor Relations, Investors Events section. Thank you, and welcome to UMCâs conference call for the fourth quarter of 2022. I'm joined by Mr. Jason Wang, President of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the fourth quarter financial results, followed by our Presidentâs key message to address UMCâs focus and first quarter 2023 guidance. Once our President and CFO complete their remarks, there will be a Q&A section. UMCâs quarterly financial reports are available at our website www.umc.com under the Investors Financials section. During this conference, we may make forward-looking statements based on managementâs current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the companyâs control. For a more detailed discussion of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC security authorities. During this conference you may view our financial presentation material, which is being broadcast live through the Internet. Thank you, and happy new year to everyone. Thank you for joining our call. I would like to go through the 4Q â22 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page four, the fourth quarter of 2022, consolidated revenue was TWD67.84 billion with gross margin rate at 42.9%. Net income attributable to the stockholder of the parent was TWD19 billion and earnings per ordinary shares were TWD1.54. Utilization rate came down to 90% in 4Q from 100% in the previous quarter. And on Page five, this is quarterly result. Revenue declined by 10% sequentially to TWD67.8 billion. Gross margin rate was 42.9% or TWD29.1 billion. We kept the operating expenses at nearly the same level quarter-over-quarter, which is around TWD6.79 billion. And total operating income declined by roughly 20% to TWD23.6 billion. And net income attributable to the shareholder of the parent is TWD19 billion or TWD1.54 EPS in the 4Q of â22. Our next page is the full year result of 2022. Total revenue grew by 31% to TWD278.7 billion and operating income has more than doubled to TWD104 billion and the growth rate was 101% year-over-year. And EPS grew to TWD7.09 in 2022 compared to TWD4.57 in the previous year. On Page seven, our cash on hand currently stands at TWD173.8 billion, with our total equity now is over $10 billion mark to TWD335.4 billion. ASP on Page eight, in Q4 continued to edge up slightly in the fourth quarter of 2022. On Page nine, for revenue breakdown, the change was most significant in the North American market, which represent about 30% of our total revenue compared to 23% in the previous quarter. Asian probably showed a biggest decline from 52% of revenue to 54%. On Page 10, that's the full year breakdown and the change is less significant compared to the quarterly results. Asia represents 51% of the total pie and U.S. represent about 24% in the full year of 2022. On Page 11, quarterly breakdown of IDM versus Fabless stand at 19% IDM and 81% Fabless. For full year, on the next page, it remain almost unchanged with IDM represented about 15% for the full year revenue. On Page 13, communication, computer and consumer didn't change much on quarterly sequential comparison with communication still remains the biggest of 45% of the total revenue. Other segment, which include auto has continued to grow at a faster pace compared to the rest of the segment and is now 18% of our total revenue. For the full year, communication remained around 45%, and consumer is about 26%. On Page 15, the quarterly technology breakdown. Now we can see 22/28 nanometer represent 28% of the biggest pie of the chart for the Q4 revenue. 40 nanometer is about 17%. The legacy 8-inch of 0.25 and above are declined the most in the 4Q 2022. For the full year, 20/28 nanometer represented about 24% also the biggest pie of the chart for the full year of 2022. On Page 17, the quarterly capacity breakdown. We have some new maintenance in Taiwan and also China for Q1 2023. So there's some minor decline in available capacity, which will gradually back to normal in Q2 of 2023. And there will be also some new capacity come on stream in the third quarter or our P5 and P6 in Taiwan. Our next page is our current full year cash based budget or CapEx, right now is about $3 billion with 90% of the $3 billion contribute to around all the 12-inch related expansion. So the above is a summary of UMC's result for Q4 2022. More details are available in the report, which has been posted on our website. Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's fourth quarter and 2022 highlights. In the fourth quarter, due to a significant slowdown across most of our end markets and inventory correction in the semiconductor industry, our wafer shipments fell 14.8% quarter-over-quarter, while overall fab utilization rate dropped to 90%. Average selling price increased slightly during the quarter as a result of our ongoing product mix optimization efforts, moderating the decline in revenue. For the full year 2022, UMC's revenue hit the record high of TWD279 billion, while operating income exceed TWD100 billion. Gross margin reached 45%, driven by a more favorable foreign exchange rate, expanding 22/28 nanometer portfolio and nearly added capacity. We have taken advantage of the industry upturn over the past two years to enhance our differentiation in specialty technology offering, improved profitability and different relationship with our key customer. Revenue from 22/28 nanometer technology increased more than 56% year over year, driven by our industry leading 28 nanometer process for OLED display drivers and image signal processors. Our automotive segment also delivered impressive growth in 2022, increasing 82% year-over-year to account for approximately 9% of total sales. We expect this segment will continue to be a key growth catalyst in 2023 and beyond, driven by the long-term trend of vehicle electrification and automation. UMC is well positioned to serve the market with our comprehensive portfolio of auto-grade process technologies and facilities certified according to the rigorous quality standards, while we continue to build strong partnerships Given the soft global economic outlook for 2023, we expect the current challenging environment to persist through the first quarter as customersâ days of inventory are still higher than normal while order visibility remains low. To manage this period of weakness, the company is implementing strict cost control measures and deferring certain capital expenditures where possible. In the longer term, we remain positive that UMCâs differentiated specialty technology leadership, geographically diversified capacity offering, and quality and operational excellence will enable the company to capture demand, fueled by continuous digital transformation across industries and be the foundry of choice for leading customers. Now let's move on to the first quarter 2023 guidance. Our wafer shipment will decline by high teens percentage range. ASP in U.S. will remain flat. Please note that we expect a 3% to 4% adverse impact on foreign exchange on revenue. Gross profit margins will be in the mid 30% range. Capacity utilization rate will be approximately 70%. Our 2023 cash based CapEx will be budgeted at $3 billion. Thank you. Ladies and gentlemen, we will now poll for questions. [Operator Instructions] Thank you. And our first question comes from Randy Abrams with Credit Suisse. Please go ahead, Randy. Thank you. Okay. Yes. Thank you. Good evening. My first question, if you could just discuss your view on the scope of this business cycle. With the high teens decline in first quarter, do you expect it to mark the low? Where do you see or expect given demand in the inventory, further correction into second quarter? And then if you could give a view just on the end market. Do you see any areas getting closer to stabilization or inventory levels already getting down then from the stronger like auto/other, are you seeing any weakness start to come in? Well, currently, we are still in the midst of the inventory correction. Like I mentioned earlier, however, we did see some inventory improvement in some segments, such as TDDI for high voltage devices in mobile space. And so, we are working closely with our strategic customer to proactively address those inventory burden in addition to the TDDI and we expect those inventory situation will improve gradually and with high visibility in second half 2023. And so we think that the inventory situation is improving. But probably not going to have -- not going to become better until second half of 2023. For the 2023 outlook. Well, I mean, given the cyclical nature of the semi industry, there is no one thatâs immune from the end market downturns. While we were able to mitigate our loading in the second half of our 2022 amidst the downturn, thanks to the growth in our auto business sustain our business momentum and which I also touched and search about 82% year-over-year. But for the first half of 2023, we do foresee a continued softened demand in smartphone PC consumer market that will continue for the inventory digestion reason. Meanwhile, the inventory digestion will continue to be our first priority. Nevertheless, we expect the first half, if not, the Q1 will be the trough. Okay. Yes. So it sounds like first half, if not, Q1. So itâs still too early to call for sure, not pretty close. It sounds like based on what you see, if that's correct. And then, I wanted to ask, your breakeven utilization is much lower now, like at 70% you have a mid-30s gross margin still. So is that influencing or if you could discuss your feel on pricing, given some cycles you might be close to loss making. But how is your view on your baseline pricing and also just pressure coming from customers needing help out? If you could discuss a view how well it could continue to hold? And if you could discuss the latest on how the LTAs on the 28 new capacity are holding up? First, given the continued end demand weakness in the PC smartphone and consumer segment, we are experiencing the prolonged inventory correction cycle. And we believe the pricing adjustment at this point will still produce very limited effect in demand creation under the circumstance. And for the UMC's pricing consideration is still based on limit upon the value proposition and supply chain relevance. We expect ASP outlook to remain firm in 2023. While the ASP is not the only consideration in customer management, the yield improvement, technology offering, capacity support, also key factors to strengthen our customers' competitiveness, which will continue supporting that. Meanwhile, we will continue working with our customers to make sure they remain competitive and relevant in their respective market. So for the outlook of the ASP today, we still remain firm in 2023. Now for the 28 nanometer ASP situation, we continue with our cost reduction and productivity improvement efforts to remain competitive even in light of the higher inflationary costs throughout the entire supply chain. And we will cooperate with our customers to navigate through those headwinds in conjunction with our internal cost reduction effort. But we still feel we have pretty solid position on 28. And if there is any cost related, we will closely working with our customers on that. And I think there's also a question about LTA? Yes, that's right. How the -- like if you had customers need to change negotiation and how well -- most of them, I think, are tied to the new capacity, how those are holding in? Well, I mean, while the LTA is becoming more of a common practice in our -- I mean, for us in the semi industry, because the industry is starting to recognize that semiconductor is essential. To plan the future mutual growth, strategic customers are willing to sign LTA to secure additional capacity. And our strong customer engagement and product pipeline have also demonstrated to us and as well as the customers' key objectives. So right now, we think the ASP situation is less relevant in those LTA situation. And even with some of the loading consideration, maybe some penalty occurred, but the penalty is not our key objective for those LTA. And at this point, it's still insignificant as a percentage of our revenue. Okay. And if I just fit one last one on your tax rate, maybe Chi-Tung can address. I think fourth quarter looks like it went up some, so if there was a factor. And then just netting out credits going away, but also the new program, if you could give a view on the tax into the coming year? Q4 was like a -- there is a one-off, our overseas subsidiaries with annual remittance policy about the profit, where we took a provision for this potential remittance of the overseas profit. It was mostly on paper, it's not really happening yet. Itâs just a onetime tax provision at the year-end. Yeah. Hi. Thanks. Could you talk a little bit about what is -- what you're expecting now for 2023? Any early reads in terms of the outlook? Your bigger competitor talked about foundry industry being down 3% or so this year, just wanted to hear UMC's view? And secondly, in terms of Q1, could you talk a little bit about 28-nanometer utilizations. I think overall utilization, you didn't mention it will go down to 70%. Could we talk a little bit about how 28-nanometer is holding up? Is it holding up better than the overall company utilization? Sure. For the 2023 outlook, the 2023 will be a sound year for both semi and the foundry industry due to the deterioration of the global economics, ongoing inventory correction and weaken consumer demand. So we project the semi industry is going to forecast a decline by the low single digit and while the foundry industry to shrink by mid-single digit. And the question about the loading on the 28 nanometer in Q1. In July, in general, the 8-inch loading will be lighter than 12-inch to 30. And we expect 8-inch will operate below the corporate average, while the 12-inch will be higher than the corporate average. For the 28-nanometer -- Okay. Understood. My second question is on the CapEx. The $3 billion number, given that we are running into a downturn, could you talk a little bit about what is the primary -- I think it's mostly 28-nanometer and some Singapore-related expansion. But could you give us a little bit more color on what that $3 billion CapEx comprises of this year? And any qualitative thoughts on -- do you think about any adjustment in the CapEx, given we are entering the year with utilization at a lower level and the inventory correction? Sure. The majority of the 2023 CapEx will be budgeted for new capacity expansion for the 12A P6 and 12i, the P3 facilities, which are endorsed by the customer as well deposit for that too. A portion of the 28 -- I mean, the portion of the 2023s CapEx budget are also geared toward to a product mix upgrade. And the remaining budget will be reserved for the clean room maintenance and general budget. So basic is the P6 and the P3 facility as the major portion of that. As far as the CapEx adjustments, we have a plan to dynamically adjust the CapEx spend, depends on the macro conditions and market demand. And we will -- we do have the flexibility to adjust our CapEx expansion and the general maintenance budget if it comes to a need. Got it. Just wanted to follow up on the first half bottoming. As things stand right now, do you feel the inventory in the supply chain will reach a normal or a low enough level by end of Q1? Or you think that there are several areas where it still needs another quarter of inventory clearance to kind of get over that? I think, like I said earlier, some areas are improved and some are still high. I think by the end of the Q1, I think will be better than the Q4. And I think by Q2, I think the -- we expect inventory will improve significantly to more than normal level. So we're expecting that inventory will gradually improve. And the second half of 2023, we have a much -- we have certain confidence that will come back, yes. Is that confidence driven by any specific projects that you have or you are basically thinking about overall inventory restocking in the industry happening in second half? Actually, multiples. One is the DOI check with the customer. And the other is the engaged projects and also the end market outlook, the alignment that we have with the customers. So there are multiple factors. And however, we are cautiously optimistic about second half and we just have to continue monitoring the progress of the DOI situation. Hi, Jason, Chi-Tung and Michael. And first of all congratulations to a very strong first quarter result and a happy Chinese New Year ahead. So Jason, my first question is really about your industry assumption. I think you shared with us and also investors about your methodology, right, to forecast the industry revenue. So when I think about the foundry industry, I feel like that revenue should be much lower than semi customers because there is at least one month or even more than one month's chip inventory at the customer side. So that means the foundry revenue should be at least at 5% or even 10% lower than your customers in 2023 because customers need to pay off those inventory before they reorder. So can you explain why your industry assumption is that semi now high single digit, but foundry will be down only mid-single digit? Can you start with that question? Thank you. Well, I mean, it is -- like you said, we do have a methodology of calculating that. It is maybe a really complicated answer. [indiscernible] The semi is better right now, it's low single digit, but we are -- the foundry is about mid-single digit. But even within the foundry, there are different technology nodes and some nodes are better than the others. So -- and then, for instance, even we report that the foundry industry will shrink by mid-single digits, but UMC addressable may be a little bit different. And then if you look at the end market exposure and every foundry will probably be different. But -- and so we do look at the multilayers of the data. And at this point, we think the foundry will be about mid-single-digit decline, yes. I'm sorry about that. Yes. So just a quick follow-up, right? First of all, with the UMC addressed low market does better or worse than the industry average? And second question, you said that you consider some major foundries, the wafer price hike in your foundry industry assumption? Thank you. I mean there are some, but not to the full extent. But going back to the question about the UMC addressable note. Currently, we anticipate the decline will be in the low teens percentage range. Okay. Got it. Okay. And -- you just said that 1Q could be better than the cycle. Do you mean that your second quarter foundry utilization will flat to up? Is that a right interpretation? Just Iâll say, in the first half will be trough, it's not Q1. So some time in first quarter, we hope to be the trough. Hopefully, this change to be Q1. I see. Now I get it. Thanks, Chi-Tung. And let me switch gears to the pricing, right? I appreciate company strategy that cost cut doesn't translate into better demand, et cetera, right? But some of your competitors are cutting price. Would you foresee some market share lows in some mature nodes, if you want to be firm up on your pricing? Thank you. I mean, our objective is clear. We will support our customers and to make sure they remain competitive and also with their respective market shares. Now the -- for UMC consider the AC business loading trade-off, the way we see it is there is a considerable progress was made in pricing reposition for UMC. And the cost reduction -- the productivity improvement in the past two years actually help us with that. We intend to preserve the win-win structure profitability between the foundry and customers. And under the recent market condition and our product portfolio, we believe the trade-off between the loading and the price will end up with limited benefit in demand creation, because the weakness of the PC and the smartphone and consumer sales group. However, we will continue to work with our customers to make sure they secure their market share in their respective markets. Okay. So could you be nimble on pricing if customers come back to say, hey, is demand if you cut price. I'm just wondering how firm are you on the pricing? I mean we [indiscernible] in terms of our guidance right now for 2023 and we also -- I mean, it's our intent to preserve that structure of the profitability and protecting the pricing position in terms of AC management, and we'll continue to manage that with our customer closely. Okay. And my last question is probably for Chi-Tung. So based on above discussion, assumptions, et cetera, can you give us a kind of full year gross margin guidance? And do you have like a minimal gross margin target based on your depreciation assumption, pricing assumption, et cetera? Thank you. Yes. We don't give out the full year gross margin outlook. We do have the depreciation assumption for 2023, which right now after the cut in CapEx will be a low single-digit decline compared to year 2022. So does that mean -- okay, okay. So does that mean that first half is also the bottom of the gross margin? Overall, as Jason just mentioned, from a business standpoint of view, we hope the trough will be first half, sometime first half of this year, it's not first quarter. So margin should reflect to the business momentum, but maybe one or two quarter differences, there could be some time lag on how you reflect the cost versus the revenue improvement. But overall, we certainly hope the trough will be some time in first half. I see, I see. So Jason, I come up with one question. I think some investors are concerned about your -- one of your IDM customers, because they also have some challenges about their own fab utilization, right? So they may receive back some 40-nanometer or 17-nanometer or 22-nanometer project back to their own fab in 2024. How do you address that -- their concern? I think the end market should be -- end products should be like a smartphone ISP or AMOLED driver IC. Thank you. Well, I mean, there's always a cyclical nature of this industry, right? So we are no stranger to that. So we have to just deal with all business circumstance. The way we see it is we believe the product mix optimization is to continue to pursue for UMC to enhance the long-term fundamentals. And we'll continue our business development out of the mega trends, not just limited at one customer, but there is diversified market focus as well as the customer base and continue to strengthen our specialty technology offering, quality operations. So then we can continue to be the best foundry and for those products to be produced in UMC. And now, we do have -- we do believe and we have a strong engagement product pipeline to support that long-term fundamentals. So any short-term volatility, we will continue to work with the customer to make sure that we both remain very competitive and relevant to this market. But you should have to make a decision about your 17-nanometer capacity, right? So do you have any visibility right now for 17-nanometer capacity expansion? Yes. I mean the -- that's more of a question about the technology migration, right? So in our view, the technology migration will continue. And once we are aligned with our customers, then we will also put adequate capacity to support that migration. And at this point, we -- I mean, I'm not commenting about the customer specific or product detail, but the question is about 17-nanometer for the driver and the ISP, we expect the next mainstream note for that is after 28-nanometer will be 22 nanometer. The 22-nanometer is a mature technology and with the manufacturing feasibility is already proven. And we believe the 22/28 is a long-lasting node, the 17-nanometer solution could be a sub-segment of the total OLED driver and ISP solution. And before 2024, the volume production for 17-nanometer will be very minimum. And right now, we're seeing the 28-nanometer still the most competitive offering in the marketplace. And when considering the overall factors, performance, cost, capacity availability and the system acceptance, our outcome in the 22-nanometer solution have already been adopted, okay, by the leading partners with their design. And so, therefore, we our confidence with the 22-nanometer will continue to have a business sustainability well into the next wave. And from a technology migration point of view, we are also working with our customer and partners to find the future roadmap, and we will not be absent on that market anyway. Hi, gentlemen. I have two questions on 28 nano. Given the fact that we are still building up 28 nanometer capacity in multiple locations in Taiwan, China and maybe later on in Singapore, right? So will we be offering a comprehensive portfolio of technologies in each of the fab locations or will we be more selective in offering the technology platforms? Well, I mean, the product mix on different sites is very dynamic. We are aligning to the outlook and the idea is, we want to be creating as much as the flexibility, but without the sacrificing the scale. So many of that is ongoing discussion. So I don't have a specific or fixed mix for you as a reference. But the message is -- I mean, the update is that, we have an option to dynamically adjust that, subject to the outlook and alignment with the customer. Yes. More importantly, if I may, we actually offer more choices for customers in terms of the production sites. So if customer place 22/28 nanometers orders to UMC, they have an option to be produced either in Taiwan, China, Singapore. So we are one of the very few foundries that can offer multiple site choices amid the current geopolitical attention. Okay. Sounds great. And the second one on the 28 nano. How easy would be upgrading the capacity to the next-generation 40-nanometer FinFET? I mean there is an option to do so and nothing is easy. The next major wave, it will probably be upgrading from migrating the 28-nanometer to 22-nanometer. And after that, there will be a 14. So there will probably be a couple of layers before -- another set before we get into the FinFET. But there are good percentage of the two that actually can convert between those node. So I think we are in a good position to cover all the way to 14 given the two mix. First, thank you for taking my questions. So my first question is on geopolitical development. So I wonder if in recent quarters have you started to see some new order opportunities from clients evaluating the supply chain diversification? And if yes, what kind of products do you see more imminent upside? That's my first question. Thank you. Well, I mean, we do see trends like that, and we believe we are in position to be benefited from that trend. However, given the current inventory correction, we expect the progress in engagement and the [indiscernible] will be more obvious beyond 2023. We will not comment on specific product or customer on this, but we are aware of this geopolitical supply chain concerns for many of the customers and the potential implication on our global customers. So -- and some of it is already in discussion with us to fulfill their sourcing plan. And probably not a good idea at this point giving anything specific, yes. No problem. Just to quickly follow-up. I understand some of the engagements are still in early stage, but any way we could try to quantify the upside for the coming years? Quantify, that is -- it's still too early right now, because given the current inventory correction, I think many of this is under the discussion in terms of volume and the product and also the process. And so, I think it's still kind of early again. I think the -- many of this will probably take a year to see them realize it. So I assume we can probably another -- once we have a clear visibility, we'll be able to update you on that. Got it. Thank you. My second question is real quick on capacity increase. So based on your current CapEx target, what kind of capacity increase you target to increase for this year? And specifically on P6 for 28-nanometer, so your Singapore expansion for 28, are you still targeting for late 2024? Thank you. For 2023, capacity will increase by 4.9% year-over-year and mainly for the 12A P6 profile. The 12A P6 will start on by mid-2023, and it will reach about 12,000 a month by Q4 '23. The P3, the Singapore P3 is targeted to the first half of 2025. Hello. Hi. Thank you. Good afternoon. Happy New Year. Thank you for taking my question. My question is also on the 28-nanometer. While we see the demand is still quite resilient, even we see a lot of inventory correction, but we know that many of them still are PC or smartphone related. So just wondering, do you think that the resilience will continue even during the first half inventory correction at the client side? In that case, how would that impact the overall gross margin as we know that 28-nanometer probably also one of the key catalysts to drive better pricing and also better product mix? That's my first question. Thank you. Sure. And first, happy New Year to you, too. And for the 28-nanometer loading, I mean, we remain confident with our 28 and 22 nanometer business. Given that it's a long lasting node driven by many applications, such like ISP, WiFi6, OLED driver. So we expect this 28, 22 nanometer will be partially impacted by -- partially impacted by the inventory correction in communications segment during the first half of 2023, and we do anticipate a full rebound in our 28 and 22 nanometer business starting from second half 2023. So given the current visibility, we have some confidence that they will come back in the second half of '23. For the ASP, we're going to do our part. I mean, we will continue to do our cost reduction, productivity improvement effort to make sure that our customer can remain competitive. And we will cooperate with our customers indicate headwind -- the market headwinds, the cost headwind in conjunction with our cost efforts, and we want to make sure that they will stay competitive with respective to their market share position as well. Okay. Thank you. That's very clear. And also on the IDM business, you note that throughout the last year the growth are quite solid and quite substantial. I'm just wondering that on what nodes we see the most growth and also, what kind of application? And given, again, the cyclical downturn across the board, do you think that the IDM outsourcing will continue, particularly in some like MCU or automotive related? Well, I mean the -- yes, I mean, particularly for the 12-inch and across all different technology node from 28, 22 to extent of the 55 and the 40 automotive space, we do see there is a continuous opportunity for us to engage. It's also aligned to our megatrend and that we have been talking about it. We believe our addressable model will continue to grow, okay? And given our upcoming capacity planning, the 28 and 22 will actually continue enhancing our position in that context. And we are excited to many of the new opportunity that brings to us to increase our relevance to those bundles application. We touched that already, the ISP, the WiFi, OLED as well as automotive. And we -- because not just IDM which is what we focus to align with the industry megatrends. Okay. Great. Because for one of the IDM customers probably also see some weakness on the automotive or the industrial. So I'm just wondering since some of the IDM also ramping up their own 12-inch capacity. So whether that will be slightly impact our short-term business, like the megatrend in the longer term is still quite solid. So just wondering, will you also see that kind of MCU automotive business to come down after maybe later in second half or -- later in the first half into second half? Not really. I mean we -- it's not -- well, I mean, given the alignment that we have with our customer and we're closely working with them, the capacity growth even within the IDM is actually incorporated to our sourcing strategy with us. So we are part of their sourcing strategy. And so, I do not -- we do not expect the IDMs -- the in-house capacity expansion will become a threat to us. And I think given our long-term alignment with the customer and while the customer also recognized the semiconductor supply chain is essential now and I think they've been sharing the data with us in a much better way, and it's more transparent, high-visibility, so -- no, I mean, at this point, we don't anticipate any impact on that. I think I still need to go back to the pricing. I mean I'm surprised to talk about our full year pricing will be firm. I want to know the basic assumption for this pricing. This is assuming like healthy recovery in the second half. Does that take into consideration that your new fab will be LTA protected, will be like price premium versus marketplace or you're talking about like-to-like basis, the pricing remain firm for the full year? Well, I mean the pricing has a mix, right? I mean, the way I have to look at it is, there's a mix of pricing and our ASP basically reflects the product mix as well as the pricing adjustment, okay? And so, for the blended ASP guidance that we're taking into account, there's a short-term variation of 12-inch product mix and also the adjustment and also the new P6 ramp. So they are multiple facets that we have blended together so that what we provided to you is more of a blended ASP guidance. So you're right. So this is not like-to-like, yes. Okay. So what about the like-to-like base pricing for the -- well, let's say, for the second half of this year? If you take all the -- Yes, we won't be able to comment on that, as this kind of information, first of all, it's very difficult to predict. Secondly, we can only give you a blended ASP guidance as we always have. So the like-to-like overall conceptually, we can talk about it on a quarterly basis. I see. I understand that. I understand that. So the second thing -- I got a quick question for the R&D expenses for the whole year. Your competitor was talking about like a big jump in terms of R&D for 2023. What about operating expenses for UMC for the whole year? Yes, we intend to somehow keep the absolute numbers in terms of operating expenses. Of course, the employee-related compensation will be affected by the full year profit sharing program. And other than that, such as R&D and some other projects, the expenses will be somewhat flattish. On top of that, because of the short-term volatility, we are implementing a pretty stringent cost control for other areas, but not on the R&D program. Okay. Lastly is, you have a lot of fab in different regions. Do you consider to like price in the different -- with a different pricing with different geographical location? TSMC was talking about like flexibility in terms of different multiple locations has a value, which means they want to sell those kind of -- do you consider to do that kind of pricing strategy as well? Well, I mean, like you said earlier, the P6 and P3, the 12A and the 12i, definitely have a different pricing scheme. And because the production ramp for the P6 and P3 will indeed incur some of the higher depreciation costs for us. So for us, the new build capacity is under the LTA base and with the building the wafer price. Given that our customers do recognize our value as well as believe our total solution is competitive for both of us to capture the market growth and they agreed to that. So those fab investments are also based on such alignment and to drive our CapEx and ROI decision. And so, yes, from those new field capacity, there are different pricing scheme but not for the rest of them. Yeah. Thanks for taking my follow-up question. First of all, could you talk a little bit about time line for your 17-nanometer FinFET? And what kind of demand you're getting from customers? Is this happening in the next couple of years itself or is it something that will happen beyond the next couple of years, you focus on 22-nanometer migration? And lastly, also, I wanted to check whether the 17-nanometer is something that you have committed to customers as part of some of your LTA arrangements, whether it is for fab 12A P6 or for the Singapore new fab that is coming up? I mean, first of all, it's our understanding that before 2024 the volume production for 17-nanometer will be very minimum, if any, because the 17-nanometer production is still under the exploratory stage. And the current discussion that we have is many [indiscernible] the trade-off between the power consumption, transistor performance cost and the capacity plan. So it's still in a very early stage even to predict when we'll start the production, yes. Okay. And is it covered in any of your LTAs or that will be separate agreements that you sign, if and when you decide to go ahead with it? Okay. Understood. Just one quick question, Jason, on your overall view on 28-nanometer industry demand, because we are now hearing TSMC also building a lot of 28-nanometer capacity in Japan, Nanjing, as well as potentially considering Europe. You guys are considering Taiwan as well as Singapore. There's a lot of announcements from some of your competitors as well. When we look at all this together, it looks like 28-nanometer capacity will be 50% to 60% higher than any of the prior nodes in terms of installed capacity. Do you agree with that? And do you think that the demand is that big that we can kind of fulfill all this capacity, especially as we are also heading into a bit of a downturn? Yes. Well, I mean, we definitely don't look at this from the [indiscernible] point of view. We look at from a long-term standpoint, we remain very confident in the 28 and 22. And I can't really comment -- I won't be able to comment on our competitors' situation, but we are confident with our own business, mainly from our highly differentiated and customized technology solution. And together with what Chi-Tung mentioned earlier, we have a geographical diversified capacity offering. And we -- with the current customer alignment and mutually committed to the -- some of the new capacity build that we see in the 28 and 22 is a sweet spot for many of our customer and their applications, which we believe those demands continue to grow. With the strong product pipeline in 28, the short-term market turbulence will not change our long-term view and the relevance on the 28 and 22 based on the alignment we have with our customer. Thank you, everyone, for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact us ir@umc.com. Have a good day. Thank you. Thank you. Ladies and gentlemen, that concludes our conference for fourth quarter '22. Thank you for your participation in UMC's conference. There will be a webcast replay within two hours. Please visit www.umc.com, under the Investors Events session. You may now disconnect. Goodbye.
EarningCall_1308	Good morning and welcome to FB Financial Corporationâs Fourth Quarter 2022 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer; and Michael Mettee, Chief Financial Officer. Both will be available for questions and answers. Please note FB Financialâs earnings release, supplemental financial information, and this morningâs presentation are available on the Investor Relations page of the companyâs website at www.firstbankonline.com and on the Securities and Exchange Commissionâs website at www.sec.gov. Todayâs call is being recorded and will be available for replay on FB Financialâs website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During this presentation, FB Financial may make comments, which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on managementâs currents expectations and assumptions and are subject to risk and uncertainties and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financialâs ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks may cause actual results to materially differ from expectations. This is contained in FB Financialâs periodic and current reports filed with the SEC, including FB Financialâs most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financialâs earnings release, supplemental financial information, and this morningâs presentation, which are available on the Investor Relations page of the companyâs website at www.firstbankonline.com and on the SECâs website at www.sec.gov. Alright. Thank you, [Rocco] [ph]. Good morning. Thank you everybody for joining us this morning. We appreciate your interest in FB Financial as always. So, as we put a [ball on] [ph] 2022, we're pleased with some of the results from the year and we're disappointed with some others. We grew loans by 22.3%, while holding deposits flat and keeping deposits flat from 2022 was a bad result. We made strategic investments and people systems and processes that will propel us into the future. And we exit the year with strong capital and liquidity positions. With an adjusted ROAA of 1.11% and an adjusted PTPP ROAA of 1.58%, our profitability was not where we expect it to be, which was disappointing. The restructuring of our mortgage segment, our capital liquidity management actions in the second half of the year, and our operational enhancements scheduled for 2023, we feel well-positioned with those for a range of potential economic scenarios entering 2023. For the quarter, we reported EPS of $0.81 and adjusted EPS of $0.85. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14.8% since our IPO in 2016. On last quarter's call, I highlighted that we were prepared for a potentially challenging operating environment in 2023. By [bringing in] [ph] loan growth, particularly C&D and CRE and focusing on liquidity and customer deposits. This quarter's performance is a reflection of those near-term priorities. Our deposit portfolio increased by $850 million this quarter or 33.7% annualized, which we're proud of. When you exclude the change in mortgage escrow-related deposits, the true growth is actually $915 million or 37% annualized, which is even more impressive. Deposit growth includes some seasonal increases in public funds, but the vast majority is customer funding spread across our customer base in both TAM and non-TAM products. The negatives to that stellar deposit growth this quarter were our decline in our non-interest bearing accounts, which were down $225 million during the quarter when you exclude the effect of the mortgage escrow deposits and the cost of our interest bearing deposits, which were up by 93 basis points, compared to the prior quarter. While our deposit growth came in expense of our profitability this quarter, we've got some urgency to increase the deposit balances now as we expect deposit competition to intensify in the coming months. While non-interest bearing accounts, we know some of that decline was a permanent movement out of the NIB bucket. With Fed funds being over 4% for the first time in 15 years, we're seeing less in idle funds sitting in noninterest bearing accounts. While we expect tough sliding and noninterest bearing growth in 2023, we believe the fourth quarter decline is an anomaly, and this is always going to be an area of focus for the company. Our interest-bearing deposits â all our interest-bearing deposits, our goal with rates is to be able to continue attracting customer relationships. It will be long-term high value customers to the bank. Since we intend to maintain a loan and deposit ratio near its current level, we have to go deposits to grow the balance sheet. So, our incremental cost to deposits will be near market rates. We've limited our loan portfolio to 8.4% annualized growth after producing 20% plus annualized growth in each of the prior three quarters. We could have grown much more than the 8% by holding on to more of the balances that we originated as we sold $126 million in participations during the quarter. If we kept that 126 million in participation on the balance sheet, we would have had 14% annualized loan growth during the quarter. We think the current economic environment calls for caution around credit and liquidity So, we'll continue to intentionally limit our loan growth to keep our loan to deposit ratio in the 85% to 90% range and be conservative on credit until we gain some clarity on which asset classes will be impacted in this economic environment. As we signaled last quarter, our combined C&D and non-owner occupied CRE balances decreased $12 million during the quarter, we're not seeing any negative credit trends in these portfolios to this point, but we're intent on managing our exposure down heading into 2023. With construction, we've been managing new commitments down since the early part of the second quarter of 2022, but due to funding of existing commitments, the balance has increased over much of the year. The balance decline we saw in the fourth quarter is the result of our management of commitments throughout 2022 and is beginning of a trend of declining balances in that portfolio that we expect to continue throughout 2023. For mortgage, seasonality paired with market headwinds led to a loss of $4.2 million -- pretax loss of 4.2 million for the quarter. While we felt that this unit was right sized following actions taken earlier in the year, we've continued to reduce the size and scope of the segment as the mortgage industry continues to hit new depths. The environment causes mortgage to be exceptionally difficult to forecast. So, we're budgeting a positive contribution for 2023 and we're not comfortable right now getting a lot more precise than that. One last area that I'll touch on for the quarter is our commercial loans held for sale portfolio. We had a negative mark to market adjustment of 2.6 million in the quarter, primarily driven by one credit. The portfolio is down to three relationships with 30.5 million in remaining exposure. We believe that we will see full payoffs on two of those three remaining relationships in January, and should exit the quarter with one remaining relationship and less than $10 million of remaining exposure. As a reminder, we marked this portfolio conservatively when we had a combination with Franklin and have experienced net gains of 7.4 million since closing. So, as a result of the actions taken during the quarter, we entered 2023 with loans, HFI loans to deposits comfortably below 90% and 85.7%. We also were able to pay down over 300 million in short-term borrowings at a cost of nearly 4% and have approximately 7 billion in contingent liquidity readily available to us should we ever need it. We maintained strong capital ratios for the CET1 ratio of 11% and our total risk-based capital ratio of 13.1%, while repurchasing $7 million worth of shares following the decline in our stock price in December. We would expect similar balance sheet management throughout the first half of 2023. Our actions have positioned the bank for improved profitability and [got] [ph] offensive once we gain clarity on the economic environment. But touching on a couple of our longer-term priorities that we'll continue to prepare for an execute during 2023. First, improving efficiency and effectiveness of our core community banking model through a project that we've had going on, what we call FirstBank way, we operate through a local authority, regional present model that has served us well and will continue to serve us well into the future. As we continue to grow the company, we saw the opportunity to better quantify the why and how of our community banking model. This allows us to better perpetuate our culture and our banking model as we grow. It also ensures consistency of processes that allows us to deliver efficient and effective customer service cost of footprint, while improving the associate experience. In 2022, we committed significant time and resources to what we wanted our community banking model â business model to look like as we grow from our base of $13 billion in assets today. Much of the implementation will take place in 2023 and we're excited about seeing the fruits of that labor. Second, our local authority model is a weapon that positions the bank for strong organic growth via relationship manager recruitment and lift outs of existing teams and new markets. We had outstanding results in our Memphis and Central Alabama regions recently as a result of lift-outs of strong teams and we continue to hold discussions with the bankers across the Southeast, both in existing markets, as well as in continuous geographies. The third, we'll continue to have a dialogue with a small number of banks that we find attractive as merchant partners. We position the balance sheet and our internal processes and procedures to be able to act with one of these handful of banks to satisfy the partner. The current uncertainty around the operating environment clouds a timeline for some of these management teams. However, with the scarcity, our potential partners that have the qualities that we value, we want to be in a position to act if the opportunity presents itself. So, to summarize, we defensively positioned ourselves over the last half of 2022 to put the company in a position to improve profitability and go strongly on the offensive when we get comfortable with the economic outlook. We've also undertaken a number of strategic initiatives that will benefit the customers business and our customers and associates and make us more efficient operators. We believe this improvement will create a superior return for shareholders through strong organic growth and the capacity to capitalize on opportunities. Thank you, Chris, and good morning, everyone. I'll speak first in this quarter's results in our core bank. Our baseline run rate pretax pre-provision income was 55.5 million in the fourth quarter. According to the core efficiency ratio reconciliations, which are on Page 19 of the slide deck and Page 19 of the financial supplement, we had 111.3 million in core bank tax equivalent net interest income this quarter. Along with that 111.3 million in net interest income, we had 11.1 million in core bank non-interest income. Finally, we had 66.9 million of bank non-interest expense. Together, that comes to our 55.5 million in run rate PTPP, which has grown 27.7% over the comparable 43.4 million that we delivered in the fourth quarter of 2021. Moving on to our net interest margin with summary detail on Page 5 of the slide deck, our net interest margin of 3.78% contracted by 15 basis points from the third quarter. 9 basis points of this decline can be attributed to lower loan fees that were a result of less loan origination activity. The remainder of the decline can primarily be attributed to balance sheet restructure and the cost of interest bearing liabilities accelerating at a faster rate than our yield on earning assets. Looking forward for our margin, we had a run rate margin for the month of December in the 3.75% range, inclusive of 23 basis points of fees on loans. Our cost of interest bearing deposits was 1.97% in December versus 1.67% for the quarter. From our deposit cost trial in February of 2022 through the month of December, we estimate that we have experienced a roughly 40% beta for our interest-bearing deposit cost. Contractual yield on loans continues to get a lift from Fed rate hikes and was 5.61% for the month of December as compared to 5.45% for the quarter. While we reprice the existing deposit portfolio in the fourth quarter, which ultimately led to decline in overall margin, our spread on contractual yield on new lines originated as compared to cost of new deposits raised, continues to be in excess of 4%. With the increase in deposit costs having accelerated as rapidly as they have in the fourth quarter, we are cautious in our forward guidance. Our best estimate right now for the first quarter would be that we hold margin relatively close to December's margin. We anticipate mid-to-high single-digit loan growth for the year and we will work our funding sources to manage the cost of incremental deposit growth. We anticipate banking non-interest income in 2023 to be in the $10 million per quarter range. And as I mentioned earlier, our core banking noninterest expense was 66.9 million in the fourth quarter. We expect continued growth in our banking noninterest expenses due to higher regulatory costs and inflationary pressures. For 2023, we are currently estimating mid-single digit growth over the fourth quarter's annualized run rate of 267.6 million. Moving to mortgage, we posted a loss for the quarter as the impact of rising interest rates combined with seasonality drove down demand of rate locks by 31% quarter-over-quarter, subsequently reducing revenue. While we had hoped that we were done with our restructuring, the continued reduction in volume created this additional evaluation of staffing and organizational structure in order to position ourselves to return to operational profitability at seasonal headwinds this pace. While we do expect Q1 to be â while we do not expect Q1 to be profitable, we would expect minimal losses if the environment holds in this current state. Moving to our allowance for credit losses, we saw our ACL to loans decreased by 4 basis points this quarter and we recorded a release of 456,000. Economic forecasts deteriorating slightly from quarter-to-quarter were offset by improving overall portfolio metrics and a lower required reserve on unfunded commitments. We have continued optimism for the long-term health and growth of our local economies where we're closely watching inflation that we are experiencing and increasing conviction of many economists that we will see [an interim] [ph] recession. If conditions do not change, we would anticipate maintaining similar level of ACL to loans held for investment over the near term. Thanks, Michael. And again, we are for the quarter pleased with how we're positioned and prepared for what's coming. Thanks for the prepared remarks and we will look forward to questions. You mentioned the deposit growth would continue and be relatively I think in-line with the loan growth, any more color on what the market rates are you're seeing for the incremental deposit growth in recent weeks? Yes. Hi, Matt. Good morning. Yes, I mean, we saw kind of the time deposits depending on term coming in around 350 basis points and that's kind of an 18-month weighted average term there. And then â and money market came in like market rates below Fed funds, but call it 60% to 80% of Fed funds is where we're seeing money market rates coming in. So, really right at market there. Okay. Thanks, Michael. And then on the non-interest bearing deposits, just thinking about your prepared comments, Chris, it sounds like you expect continued pressure on those balances that perhaps not to the same degree that we saw in the fourth quarter, did I get that right and any more color on why that would be? Yes. I don't really â yes, I think you heard it right, but let me shed some additional light on it. I mean, I think â yes, I don't think that they'll continue to move [down as they did] [ph] in the fourth quarter. As a matter of fact, I think they'll likely stabilize to a large degree, but I do think that that's going to be a point of pressure. I mean, you've seen it â frankly over the last couple of years grow pretty easily. You didn't even have to do much. The balance just grew, and, you know, if you go back to when we were having these calls in the latter half of 2020 and throughout 2021, there was a common question of how much of that you think is sticky. How much of that you think is real? And we always answered the question, and I know others â most others did too. We're not sure. We don't really know. And so, as a fact of matter, we still don't really know. We knew that some of it would leave, you're seeing consumer accounts finally begin to return to [the balances they had in the] [ph] pre-COVID, and so we just think that's going to be a tough market for non-interest bearings in 2023. But we also think that especially in the last half of the year, you begin to see balances leave those and we think that that a lot of the â I guess, I call it the low hanging fruit for â that you knew would likely be leaving probably left in the fourth quarter or I'd say in the second half of the year, but I'm also qualifying that by saying we're not sure to be honest with you. Understood. Okay. And just finally, as far as the outlook on the net interest margin, Michael, you mentioned I think a few things. I think you mentioned the incremental spread there in 2023 would be similar to December level. Did I catch that right? And just remind me what you saw in December again? Yes. The net interest margin for December was about [3.75] [ph]. So, the outlook, right now, we feel like we maintain around that level. Spread on kind of new loans versus new deposits is coming in over 400 basis points. So, if you kind of think about that [3.50] [ph] number, I just pointed you to on your deposit cost question, Iâd say that new loans are coming on in that [7.50] [ph] plus range. Hey, Matt. I would just add this on the deposit side. One other thing. We did feel a need to get out front on deposits. And so, obviously, we had a big deposit quarter and it was expensive and we expected it to be especially as we get deeper in, but if you look at where we were headed from a loan to deposit ratio in, sort of the way that our [arrows] [ph] trending with three quarters and 20% plus loan growth and knowing that deposit growth is going to get difficult. And also remember, we did have a reduction back in July of one account that we didn't renew. That was a $500 million plus account, actually plus. And so, with all that, we felt the need to really get out front. And so, we knew it'd be expensive and we â but when we look at the balance of 2023 and look at our projections, we feel pretty good about where we put ourselves with regards to how margin looks moving forward. Chris, you talked a lot about efficiency initiatives that you [got to help] [ph] profitability this year, can you give any guidance on just core bank expense growth outlook excluding some of the mortgage noise? And then separately, maybe kind of thoughts around efficiency initiatives that you specifically have within mortgage as well? Thanks. Yes, sure, Catherine. So, a couple of things. When I talk about efficiency initiatives, again remember also historically where we're coming from, we went from 6 billion at the start of 2020 to 13 billion today in asset size or two acquisitions that we closed in there, both in 2020. One was converted later â one was converted later, but we closed two acquisitions in 2020 remotely, by the way, during COVID and then we went through the [$10 billion] [ph] barrier. And so with all that, we just said, it's a good time in 2022 to be able to really do a deeper dive on our core banking model, make sure that scalable. We refer to ourselves as a scalable community bank and so make sure that we've got the right scalability, we've got the right model that we were moving forward with. That's a collection of the things we've learned over the years. And so, we've done that. And so, as we implement different pieces of that in phases, we're excited about what that means to us. It frankly is not intended to be an efficiency ratio in terms of the efficiency â an efficiency exercise in terms of the efficiency ratio, that's not why we did it. We did it for scalability purposes and to make sure that we had the model right. But one of the outcomes is, we're going to gain some efficiency from it. And so, we frankly haven't spent a lot of time quantifying those. That being said, we're looking at a 6% to 7% type of expense growth over fourth quarter as we go into next year. And we feel pretty good about that. On the mortgage front, the second part of your question, we've been through, I'd call it two phases of expense reduction there. And at this point, it's now, sort of also, I'd say a very vigilant approach to expenses in that part of the business. And when we look in, again, we said, then it's been hard to try to forecast mortgage is still is hard. We're forecasting it to have a â certainly have a positive contribution next year, but we're frankly not comfortable saying much more than that. Other than we'll experience the normal seasonality, we'll be able to lower in the first quarter, lower in the fourth quarter, but the second, third quarters should be â that's where we should really see a higher level of contribution. So, I don't know if that helped you on mortgage other than the fact that it's, you know given where it is, it's a constant expense initiative for us. Got it. And to [indiscernible], so your comment on the 6% to 7% growth rate, so for that, are you saying I should take this fourth quarter 2022 ex-mortgage expense base of about 67 million and then grow that at 6% to 7% and that's my annual expense number for 2023? That's right, Catherine. If you basically, when I was â in my comments, you take that 67 million and annualize that, and then grow it off that base of 6% to 7% is where we think we'd end up. And yes, I will say, there's some regulatory stuff in there. You have expense going up and some of that as well. So, little bit fungible, but that should be the range. Got it. And then with that, should we â I mean, you're still growing at a slower pace than obviously you were last year, but still I feel like you still got, kind of an expectation for balance sheet growth into next year. And if that's coming at still an incremental 4%-ish margin just given your kind of December NIM guide and the difference in your deposit costs and new loan yields, I mean, that 6% to 7% expense growth is still coming with NII growth in 2023. Is that correct? Great. And then do you have flexibility in your expense plan if the NII growth comes in less than expected? I guess the question is, how much flexibility do you have to kind of control that operating leverage if the margin compresses more than expected as we move through the year? Yes. So, we do have some levers, Catherine. We feel like in a couple of places on both sides of that equation. And again, that's what we were trying to create in the fourth quarter, was trying to give ourselves a little bit of some levers that we can pull on the [net margin] [ph] side and then we also have leverage that we pull on the expense side. Doing great. Thanks. Wanted to use a football analogy, Chris, and college football analogy. And you know, you guys are usually in the playoffs in terms of profitability, but obviously mortgage banking has been a stymie to that here in the past year. And so, my question is, you're obviously in a better position than a lot of the industry related to the reserve build need, but my question is, do you really need mortgage banking to get back to a solid level of profitability to get back in the playoffs? Or do you think that this first bank way and then initiatives you have in place could get you back in the play offs? Yeah. Like your analogy, by the way. And so, I'm going to give you one back. At the risk of â Michael was pointing to as University of Alabama sucks, which he has on. And so, at the risk of â I won't know, I'll keep this short, but I use an analogy. I do have â I do orientation for all of our folks. Every single new hire I spend about two hours with all the new hires going through culture and mission and values. And Brett, I use a football analogy. I use a college football analogy because that's big in our part of the world. And one of the things I tell them is, hey, you joined First Bank, you need to feel like you â and some people by the way would really like this analogy and some people are envious of it, but Iâd say you need to feel like you just signed a scholarship with University of Alabama to play football because we go to â that's exactly what â Iâd say, we compete for the national championship every year. Okay. We go to the college football playoff almost every year. We expect to be there all the time and realize that's what you just signed on for when you took a job with First Bank. So, I use the â almost a very, very similar analogy when I talk to all of our folks. And when you said, you missed the playoffs this year, I'd say another term I use, I'm going to refer to the book, the [greatest] [ph] Confront the Brutal Facts. I use that one internally a lot. And I would say our internal talk is a little tougher than you missed the playoffs this year. You need to confront the brutal facts that we haven't had a good year in terms of profitability. And if you go back, since we've been a public company, we've never had a return on assets less than 1.5% until this year. And so, [indiscernible], right in front of you ask about levers we could pull, we have levers that we can and we'll pull because this organization doesn't miss the playoffs. We do not. We also don't like, I tell them unless we're in the top quartile, then it's not acceptable performance. And so, now to a couple of specifics, mortgage has been a great contributor for us. You'll have to go back to 2020 when we had $105 million contribution from mortgage. And so, it's been a great contributor for us. It's been an important additive for us. We do not have to have mortgage and we're very specific. You'll notice a lot, we talk about the bank segment a lot. That bank segment actually had a pretty good year. And if you look at some of the numbers on the bank segment, again, a pretty good year there. And we would be certainly well in the top half of our peer group. It's probably top quartile on our peer group as a bank standalone. We had a significant â more than a $0.20 EPS close to a [indiscernible] $0.30 impact of mortgage negative this year. And we've made some changes there and we'll continue to make a few more. So, we don't have to have mortgage to be that 1.5% ROA, but with it, we expect to be actually higher than that. So that's the way that we view it. Okay. That's a lot of great color. And the other thing I wanted just to make sure I understood was you obviously linked quarter improve the liquidity, some extra cash on the balance sheet at the end of the quarter and you talked about managing it similar going forward. What can you maybe go into the interplay between the seasonal funds increase and how much that might come back down? And if you're expecting any other â I know it's tough in this environment and the other mix shift change to affect what you do with the balance sheet in the near term? Yes. Just â Michael, I'll let you come in. I'll make a couple of comments. So, we had some Federal Home Loan Bank borrows, actually 540 million at the end of the third quarter. We paid that down significantly by the end of the year. We subsequently, by the way, paid it off and so it's zero today. That's post the end of the year. And so, we expect to â we have always funded our balance sheet through customer deposits. And we intend to continue to do that. Public funds, they usually actually stay pretty robust through the first quarter and so it will be late second quarter when they start to pay down some and they'll pay down into the third quarter, but then start funding usually at the end of the year. And so, that's the cycle we see and we manage around that. Michael, [indiscernible]. I wanted to follow back around the funding costs a little bit and just, I'm curious, one if you could remind us kind of how much of the public funds deposits are more directly indexed and maybe more like a 100% made on those public funds versus some that are maybe longer-term or tied to different metrics? And then, kind of what you expect to see in terms of incremental interest-bearing deposit betas? I think you said Michael, we were looking at 40% cycle to date so far and just kind of where you think that can play out maybe on your core customer deposits in particular? Yes. On the public funds first and Stephen, I'm sure I don't have exactly how much of that is tied to an index, but I will say, it's a mixture. We have a mixture in there of even non-interest bearing some indexed a little bit of time and some that sits in a non-time instrument that is not indexed. And the bulk of it would be in the non-time non-indexed, as well as the non-time indexed would be the bulk of it. There's not a lot in, not a lot in time, but there's a loan that â and those are all negotiated over time. And frankly, that'd be the least. We will have a lot of time, but there's just a little bit. Soâ¦ Yes. And Stephen, on the go forward beta, I mean, the fourth quarter, obviously, with our deposit grade, there you saw betas accelerate significantly. There is a cycle if you look back through February where we came to that, kind of 40% range on interest-bearing and low 30s on total deposits. Yes, I would expect that we'll see in that mid-40 beta range, kind of as we look in 2023, but it is highly dependent on really what our peers do. We feel like we can maintain this level and recognizing deposit costs are going to go up. I will say on index, we don't have a whole lot of stuff that indexed 100% to any rate. So, just as Chris mentioned, not on that exact number, but it's not a 100% one for one Fed fund gives up, deposit cost goes up on the accounts. There's not, kind of that stuff. So, while it is a percentage, it varies and we have certainly seen deposit costs go up expecting to incrementally move higher, but definitely right type of [indiscernible] here with the Fed and we'll get a normal operating environment. Yes. Okay. That's helpful. And I guess overall, I mean, if I'm listening to your comments, kind of holistically, it feels like you guys think maybe you, you know growth maybe put you behind the curve on deposits to some degree throughout the year with really strong growth and this quarter may have put you ahead of the curve relative to peers for the rest of 2023, is that the right way to think about it? Okay. Great. Great. And thinking really briefly about expenses, I noticed other expenses were up a good bit. Was there anything notable to call out there or is that some of the regulatory costs Michael that you mentioned is kind of embedded in some of these numbers? Nothing too noticeable. I think the different third quarter versus fourth quarters kind of [indiscernible] franchise excise tax is well and through there. That was a major piece that it wasn't in the third quarter â in the fourth quarter. Got you. Got you. And then maybe just two quick ones left for me. One, on the participation side, sound like that was more about balance sheet management than risk management, but maybe a little bit of both. Are there particular categories you're trying to participate out more so than others? Maybe that C&D and CRE like you spoke to or is that indeed more just about controlling the pace of growth? Yes, it's total balance sheet management. If you think about it from a risk management side, the folks that we're going to participate to are going to be friends of ours. And so, we're not going to participate anything thatâs going to create credit risk. Well, let me â we're never going to knowingly participate anything. It's going to create credit risk for them. So, it's all about balance sheet management for us. And the bulk of that would be CRE. Occasionally, we can do some construction, construction is harder to do a participation on because it's lines, withdrawals against it and it's just a little more work on the patient side versus a CRE versus CRE. And we're usually participating with either peers that are our size or there's one or two that are quite a bit larger than us that are good friends that we would participate with regularly and the rest of them are smaller than us community type banks, and frankly, they love it if they can get that CRE when we own to sell it down. Got it. That's helpful. And then maybe last thing, just on the share repurchase, I know you said about 7 million in the quarter, you've had some insider buys as well. Stocks a little lower, I think, even in where you bought back that 7 million, if my math is correct, in the quarter, do you become more active on the repurchase at these levels or is capital constraint there? How do you think about that repurchase from here? Yes. We think about that very cautiously from here, but we'll think about it cautiously. I wouldn't say we â but we do have the capital to be able to do it if we need to do it. And so â it's a tool that we'll use. Good, thank you. We've had a number of questions on this, but I just want to think of â make sure I'm thinking about it the right way. So, the deposit growth was really a very accelerated effort in this past quarter. And then going forward, you expect â it's put you in a position that now you're expecting more deposit loan growth to be, kind of in-line and thus keeping the loan-to-deposit ratio roughly where it is. Is that correct? Yes. Kevin, you're thinking that correctly. When we ended â we were just over 91% of loan deposit ratio in the last quarter. We want to be in that 85% to 90% range. So, it doesn't bother us to get up to that 90%. So, you'll see it â we'll manage it within that range. And so, what that means is, we'll be growing loan deposits as we grow loan portfolio. It is â and so we'll be â but we â again, we do feel like we gave ourselves some room. And we also â I mean, because of that â we pay â we don't have short-term, I mean, we basically paid our â pay off any short-term borrowings and we feel like we're in a really good position. Okay. And as far as the margin, how to think that through, so I appreciate the color on the 3.75 December margin. And I think what was said was, you're probably going to hold the margin roughly at that level. If we're looking beyond that and just assuming we have a few more heights here of 25 basis points, is it reasonable to think about the margin just grinding lower from that level, but the balance sheet growth you alluded to before, still able to drive dollars of NII higher throughout 2023? So, as we move forward with our budget and look at â into the year â we've traditionally said, we'd be 10% to 12% loan growth organically, and for the year, we could be a little less than that, but we certainly anticipate a healthy â some healthy loan growth during the year. We've been getting a good spread on that. I do think loan growth is going to get harder as we get into 2023. And so, demand could become an issue with generating loan growth. We've typically led our peers in terms of that metric and that ability to generate that, but if you look at it that way, we don't see the NIM grinding significantly below this. It could give us a little bit of range there, but we're â as we look out in the year, we're going to try to â we're going to try to hold near at least where we are, again, with a little bit of flexibility â range for flexibility there. Got it. And just your comment before, Chris, about loan growth. So, really the [reining] [ph] in on loan growth was much more proactive in terms of participating out and letting some of that C&D and CRE runoff, but as far as core loan demand and the loans you want to book, you haven't seen a dramatic fall-off in that yet? No, we really haven't. We have seen it slow late in the year. We did see loan demand slow some. It's slower as we start the year as well. So, I do think all the things that the Federal Reserve has been trying to accomplish, I think some of them they are because we do see less demand than we did six months ago or even three months ago in terms of loan demand. Now that being said, like I said, if you take â if you add those participations back to the balance sheet, we have grown 14% in the quarter on an annualized basis. So, that's still pretty strong, but we were 20% plus the previous three quarters. So, just going to clarify one more time on your earlier point. It sounds like you're confident you can continue to grow deposits and manage loan growth accordingly. So, we really shouldn't see wholesale funding increase over the next couple of quarters, is that right? Well, let me put it this way, I think your premises is correct because our intent is to try to grow loans and deposits at about the same rate, okay? Now, we do have access to the wholesale funding, but we want â our view is, we wonât be able to use that to improve our profitability. We don't want to use that because we have to have the funding in order to fund our own growth. And so, we want to use it as a tool, not as something we have to rely on because we get over â couldn't get overextended. Got it. That makes sense. And kind of along that same line of questioning, as you're managing your earning asset growth, whether it's loans or securities, is [pluggability] [ph] of potential collateral to places like the Federal Home Loan Bank a consideration in terms of choosing what assets you decide to put on the balance sheet or do you already feel like you've got further enough collateral that that's not really as much of a consideration? Well, thatâs always a consideration because almost always because you like to keep yourself as lean and flexible as possible. And so, we do think about assets for pledging, how much free collateral we have. And that causes us, for instance â I made reference to us not keeping some public funds that required collateral because we knew we could go get the money at the same rate or cheaper from customers and just by increasing customer deposits. And so, we take the approach of, we'd like to have as much free collateral as possible, again, because we like to be in a position to be opportunistic when opportunities present themselves. And then one other thing, I haven't talked about this in a long time, back when we â going back three or four years ago, we used to talk about it all the time, our balance sheet is almost 100% direct customer funding and direct customer loans. We utilize â we have almost no brokered CDs on the books. We have almost no â only broker CDs and Internet deposits that we have on the books came through acquisition and are still there. And they're less than 2 million, I think. So, less than 2 million in time deposits. And so, we just don't utilize those broker deposits and deposits, we use direct customer assets and direct customer funding, which again, we think is how you build value in your franchise is by building customers. And so, when we think about wholesale, the terms that we're tapping those channels is, like I said, is just to improve our profitability, not because we have to do it. So... Got it. That's really helpful. And then just one last question for me. Just curious, in terms of deposit competition, in your markets are you seeing more from the bigger national competitors? Is it smaller local banks? Is it a mix of both? I was just curious whether one type of bank is a little more aggressive than another? Yes, it is the answer. So, I'd say, it comes in pockets. We've seen a couple of products â one particular product, I guess, from some of the big banks that has some attraction to it, but that's it, from, I'd say, from the bigger banks. And they're still not very reactive as you move money away from them. The regionals â and I would say they're â almost versus size of the bank, it's almost more profile of bank. Those banks that are, Iâm going to call them high-performing, rapidly growing banks are really competitive on the deposit side because they're in the same position that we are. They're growing their franchise and they're growing their business, and you can't do that without deposits. And so, they're aggressive. And so, I'd say it depends more on the profile versus the size, but the other thing I would say, and this is â just frustrates the heck out of us, is we see some crazy things from some small banks in some of our markets. I mean 3x a week, one of our markets is sending over an ad, I mean literally an ad, for folks running [5.25] [ph] CD campaigns, folks running a 5% money market. And it will be â I'll call it, a less than $1 billion bank that apparently needs funds, but we see â we do see quite a bit of that from small banks. You know, your asset quality has stayed really, really strong. I'm just curious, Chris, what categories in your loan portfolio concern you most as â if the economy weakens significantly here? Yes. So, I'd say three things. Construction and CRE would be the ones that would concern you most. Certain pockets of the CRE. I say construction because it's a risky asset and you can get surprised, but â I just go stick my head on the credit folks [indiscernible], especially often just go, hey, how we feeling, how's your day going. And so, and I ask about construction, and we know our construction customers well. And so, while I think that's probably a bigger â a concern for the industry, and I say all the time, every bank thinks their credit is great, and they're not going to be the ones. And I always say, I didn't come up on the credit side or the commercial side of the bank, so I don't say that. That being said, I know most of our big construction customers, and we've had them for a long, long time, and we feel really good about them. So frankly, I don't worry about it quite as much for our portfolio, as I do for the industry. I do worry about pockets of commercial real estate because there are things that can â office can get â again, we don't have a lot of office, but I think the office space could get soft. I think it has gotten soft in places. Our residential book, again, we can have some small â we could have some small stuff in there on construction or other residential, but again, the big stuff we have, we feel quite good about. The other one I think about is, remember, we have a specialty portfolio in manufactured housing. And so, I watch past dues on that quite a bit. I'll watch anything else from a nonaccrual standpoint. And again, it's performed as the [indiscernible] we've been â if you go back to the acquisition of Clayton, we've been in that business for 14 years. And before â you know the [indiscernible], they'll go, well, here's what's going to happen in the past dues and they've been calling it right. And so, past dues are up a little bit, but they're not out of line with where they were back in 2019 or so. So, those are the â but those are all the ones that I stay particularly vigilant on. Yes, there's a slide in the deck. On our CRE, we got â about 23% of our CRE exposure is office-related. We don't have any high rises in downtown Nashville, downtown Memphis or any other downtown right now, at least I don't think we do. I don't think we have that. We do have some smaller office buildings with really, really good clients that are sitting out there, but again, we feel pretty good about that. As I said, it's not â we don't have big â and we don't have pieces of $250 million office buildings. We just don't have those in our portfolio. It's going to be, again, direct to a customer that we know, we originated and it's going to be a manageable balance is what would be in that office portfolio for us. Okay. And one last question, if I could. What kind of economic scenario is assumed in your loan loss reserve as of the end of the year? Hi Jennifer. We actually have a mix between baseline and [S2] [ph]. It's about 75% baseline, 25% S2, but there's some [indiscernible] in there as well. The economic scenarios change pretty rapidly here between third quarter and fourth quarter. Yes, Jennifer, one thing that we haven't touched on, I don't figure any question on is, of course, we did have a [indiscernible]. If you look at our loans of HFI, we actually had a very small provision, which would have added again, a small amount to our ACL. We did have a negative provision â or a provision release related to our unfunded commitments and those unfunded commitments. Again, we've been managing those commitments down, particularly in the construction area, and that's what led to the small release. And we were comfortable with that even though we've tried to be absolutely as conservative as we could be in managing the loan portfolio and in managing that ACL, and we've kept it at â it's still at 1.44% of loans held for investment, which we, again, find to be quite high actually in terms of â if you look at it relative to loss experience. And so, we still â we feel pretty good about where it sits. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Holmes for any closing remarks. All right. Once again, thank you very much. We appreciate you being with us. We always appreciate your interest in FB Financial. And operator, at this point, we're finished. So, thanks very much.
EarningCall_1309	Good morning, everyone and welcome to the Conagra Brands Second Quarter and First Half Fiscal 2023 Earnings Conference Call. [Operator Instructions] Please also note todayâs event is being recorded. At this time, Iâd like to turn the floor over to Melissa Napier, Senior Vice President of Investor Relations. Maâam, please go ahead. Good morning. Thanks for joining us today for the Conagra Brands second quarter and first half fiscal 2023 earnings call. I am here with Sean Connolly, our CEO and Dave Marberger, our CFO, who will discuss our business performance. We will take your questions when our prepared remarks conclude. On todayâs call, we will be making some forward-looking statements. And while we are making these statements in good faith, we do not have any guarantee about the results we will achieve. Descriptions of our risk factors are included in the documents we filed with the SEC. We will also be discussing some non-GAAP financial measures. These non-GAAP and adjusted numbers refer to measures that exclude items management believes impact the comparability for the period referenced. Please see the earnings release for additional information on our comparability items. The GAAP to non-GAAP reconciliations can be found in the earnings press release and the slides that we will be reviewing on todayâs call, both of which can be found in the Investor Relations section of our website. Thanks, Melissa. Good morning, everyone. I hope you all are off to a happy and healthy start to the New Year. Thank you for joining our second quarter fiscal â23 earnings call. Iâd like to start by covering some key points for the quarter on Slide 5. Despite our most recent wave of inflation-justified pricing, consumer demand for our products in the second quarter was strong as elasticities remained muted and well below historical norms. The ongoing durability of demand is a testament to the strength of our portfolio and demonstrates how the Conagra Way playbook has positioned our brands to continue to resonate with consumers even in an inflationary environment. The successful execution of our playbook is clear in our second quarter results. We drove a significant increase in our top line. We continue to have solid share performance across the portfolio, especially in our key frozen and snacks domains and we made excellent progress recovering both gross and operating margin. Operationally, we made good headway on our supply chain and productivity initiatives. While we are pleased with what weâve accomplished to-date, our supply chain is not yet fully normalized. That will improve. And overall, we see a long runway of opportunity ahead. We also continue to prioritize strengthening our balance sheet while making strategic investments in our business and returning capital to shareholders. In short, Conagra had a strong quarter across the board. Given our positive results during the first half of fiscal â23, we have increased our expectations for the year, raising our full year guidance across all metrics, including organic net sales growth, adjusted operating margin and adjusted earnings per share. With that overview, letâs dive into the results on Slide 6. As you can see, we delivered organic net sales of more than $3.3 billion, representing an 8.6% increase over the prior year period. Our adjusted gross margin of 28.2% represents a 310 basis point increase over the second quarter of last year. And our adjusted operating margin of 17% represents a 237 basis point increase over that same period. Adjusted EPS rose 26.6% from last year to $0.81 per share. Slide 7 goes into more detail on our sales results on a 1 and 3-year basis. Given the timing when the pandemic and inflation began to impact our industry, we believe that the 3-year comparison provides important context to highlight the underlying strength of our performance. At the total Conagra level, we grew retail sales more than 10% on a 1-year basis and more than 26% on a 3-year basis. We are pleased with our solid share performance, including how our strong brands allowed us to largely maintain total company market share while taking several inflation-justified pricing actions, particularly during the past year. Notably, we have continued to drive robust share gains in key frozen and snacks strategic domains on both a 1 and 3-year basis. I want to spend a minute putting our sales growth in context. Slide 8 shows our performance over the past 3 years compared to our near-in peer group, including Campbellâs, General Mills, Kelloggâs, Kraft Heinz and Smuckerâs. We have a great deal of respect for our peers, all of which have been navigating the same macro demand and inflation dynamics over the past 3 years. Among this group, Conagra ranked second in dollar sales growth and first in unit sales performance. Itâs important to keep in mind that all of these peers have taken pricing actions to help offset inflation and Conagra is in the middle of the peer set in terms of the price per unit increases in this time period. Itâs clear that consumers continue to appreciate the quality, convenience and superior relative value that our strong brands have to offer, which has enabled Conagra to perform extremely well on both an absolute and relative basis. Letâs take a closer look at our top line performance during the second quarter by retail domain, starting with Frozen on Slide 9. We maintained our momentum, delivering strong retail sales growth on both a 1 and 3-year basis improving 9% and 26%, respectively. This growth was driven by a number of our key categories, including breakfast sausages and single-serve meals, which both experienced double-digit retail sales growth compared to last year. Turning to Snacks on Slide 10, you can see a similar story. We drove a 14% increase in retail sales compared to the second quarter of fiscal â22 and a 41% increase over the second quarter of fiscal â20. The continued momentum of our snacks business is broad-based across a number of categories. Compared to last year, microwave popcorn was up 21%, seeds was up 18%, and meat snacks and hot cocoa both rose more than 14%. We also accelerated growth in our highly relevant staples portfolio, increasing retail sales 10% this quarter compared to the second quarter of last year and 22% compared to the same period 3 years ago. This growth was led by pickles and whipped toppings which grew more than 11% and 10% respectively on a year-over-year basis. As I have mentioned, our strong top line performance was primarily driven by inflation-justified price increases, coupled with ongoing muted elasticities. Slide 12 details the relationship between pricing and volume over time. As you would expect, increased pricing does have an impact on volume, both for Conagra and the total industry. However, you can see how elasticities have remained steady even as we have continued to increase the price per unit of our products to help offset ongoing COGS inflation. And as we detailed a few minutes ago, Conagraâs 3-year CAGR on unit sales performance leads its near-in peer group. The relatively modest elasticities, both compared to historic norms and our peers are a testament to the strength of our brand. Now that we have unpacked the relationship between price and volume and the resulting net sales, Iâd like to spend a few minutes on the relationship between net sales and COGS and the resulting impact on our margin performance on Slide 13. Generally speaking, when a business has strong brands, strong processes and strong people, as Conagra does, it is able to navigate inflationary cycles in discrete, predictable phases. As we have detailed for some time, when unprecedented inflation increased our cost of goods, we took strategic pricing actions to help offset the rising costs. However, there was an inherent lag between when we implemented pricing actions and when we realized the benefits of those actions in our top line results. This pricing lag resulted in temporary margin compression. Furthermore, continued inflation extended this period of margin compression as new inflation-justified pricing actions led to additional lag effects. That is the dynamic we have experienced over the last several quarters as we continue to play catch-up by increasing price incrementally to account for the extraordinary extended rise in inflation. At the end of the first quarter, we reached a significant inflection point in the relationship between net sales and COGS, marking the end of the temporary margin compression phase in the beginning of the margin recovery phase. As you can see in the chart, inflation has begun to moderate in certain areas enabling our inflation-justified pricing actions to catch up to the rising costs. Slide 14 shows the impact this inflection has had on our gross margin results as continuously rising inflation weighed on our COGS throughout fiscal â22 and into the first quarter of fiscal â23, our margins were compressed. Now predictably, as pricing has finally caught up to COGS inflation, you can see the recovery of our gross margin to be more in line with pre-pandemic levels. While our gross margin can vary quarter-to-quarter due to a range of internal and external factors, the strategic pricing actions we have successfully executed, combined with moderating inflation and our strong brands, position us well to recover and maintain a healthy gross margin going forward. Of course, inflation remains elevated in many areas and we continue to closely monitor our costs, just as we have in the past. We will continue to take appropriate inflation-justified pricing actions as needed. Another key driver of our margin recovery is our supply chain performance shown on Slide 15. This is due to a combination of macro factors as well as the strategic initiatives we are executing to improve our operations. We made good progress on our supply chain during the second quarter, which benefited from improvements in the service we provided to our customers, continued headway on our ongoing productivity initiatives, which remain on track to achieve the targets we outlined at our most recent Investor Day, more moderate increases in commodity prices and improved inventory levels due to an increase in the availability of materials. The takeaway here is that we are pleased with the progress we are making, but industry-wide challenges do persist. There is more room for improvement as we advance our productivity initiatives and the macro environment continues to normalize. As a result of our strong performance this quarter and the first half of fiscal year 2023, we are raising our full year guidance for all metrics detailed here on Slide 16. We now expect organic net sales to grow between 7% and 8% compared to fiscal â22; adjusted operating margin to be between 15.3% and 15.6%; and full year adjusted EPS growth of 10% to 14% or $2.60 to $2.70 per share. Dave will provide more detail on the underlying assumptions behind these expectations. Before I turn the mic over, I want to summarize what I have covered today. Our strong performance during the first half of fiscal â23 was primarily driven by a combination of inflation-justified pricing actions and muted elasticities, reflecting the strength of our brands. Consumers continue to recognize the value our brands provide despite the higher prices, allowing us to gain share in key domains such as frozen and snacks. Our top line growth was coupled with encouraging progress in a number of different areas of our supply chain that enabled us to operate more efficiently. Together, these factors as well as improvement in the inflationary environment helped us recover our margins to near pre-pandemic levels. As a result of our strong performance, we are raising our full year fiscal â23 guidance for organic net sales, adjusted operating margin and adjusted EPS. Finally, we are looking forward to seeing everyone who can make it to CAGNY this year. We plan to host our annual kickoff dinner on February 20 and are scheduled to present the following morning. We will follow-up with more details on the event as we get closer. Thanks, Sean and good morning everyone. I will begin by discussing a few highlights from the quarter as shown on Slide 19. We are very pleased with our second quarter results, which reflect the ongoing strength of our business and successful execution of the Conagra Way playbook. For the quarter, we delivered organic net sales growth of 8.6%, primarily driven by inflation-justified pricing and muted elasticities. Adjusted gross margin increased to 28.2% and adjusted gross profit dollar growth was up 21.7%, benefiting from higher organic net sales and productivity initiatives. The increase in adjusted gross profit, combined with another strong performance from our Ardent Mills joint venture, contributed to adjusted EBITDA growth of 21.5%. Slide 20 provides a breakdown of our net sales. As you can see, the 8.6% increase in organic net sales was driven by a 17% improvement in price/mix, which was a result of inflation-justified pricing actions that were reflected in the marketplace throughout the quarter. This was partially offset by an 8.4% decrease in volume, primarily due to the elasticity impact from those pricing actions. However, the impact was favorable to both expectations and historical levels. Slide 21 shows the top line performance for each segment in Q2. We are pleased with the robust net sales growth across our entire portfolio. Net sales growth in our domestic retail portfolio remained strong, with our Grocery & Snacks segment and Refrigerated & Frozen segment achieving net sales growth of 6.8% and 10.5%, respectively. The difference between the organic and reported net sales performance in our International segment reflects the unfavorable impact of foreign exchange. Iâll now discuss our Q2 adjusted margin bridge found on Slide 22. We drove a 12.2% benefit from improved price/mix during the quarter, driven by the previously discussed inflation-justified pricing actions. We also realized a 1.3% benefit from continued progress on our supply chain productivity initiatives. These pricing and productivity benefits were partially offset by continued inflationary pressure with 11% gross market inflation negatively impacting our operating margins by 7.5% and a negative margin impact of 2.9% from market-based sourcing. As a reminder, as commodity prices rose quickly last year, we benefited from locking in contracted costs that were lower than the market. Even though we see commodity inflation moderating, we will not immediately realize a benefit to the P&L as our costs may remain higher than the spot market due to the timing of our contracts and when they roll off. Slide 23 breaks down our adjusted operating profit and margin by segment. As Sean detailed, our decisive inflation-justified pricing actions, coupled with improved service levels and productivity, allowed us to successfully navigate ongoing inflationary pressures and industry-wide supply chain challenges and deliver adjusted operating margin expansion in each segment during the quarter. We were also pleased that higher sales and productivity, once again, offset headwinds from inflation and elevated supply chain operating costs across all four segments in Q2. As a result of this continued strong performance, total adjusted operating profit increased 25.9% to $563 million during the quarter despite an increase in adjusted corporate expense during the period primarily due to increased incentive compensation. Slide 24 shows our adjusted EPS bridge for the quarter. Q2 adjusted EPS increased $0.17 or 26.6% compared to the prior year. This significant increase was primarily driven by higher sales and gross profit as well as a small benefit from a continued strong performance from Ardent Mills. Slightly offsetting these positives were higher A&P and adjusted SG&A compared to the prior year period as well as lower pension and postretirement income, higher interest expense and the impact of adjusted taxes. Slide 25 reflects the continued progress we made on our commitment to strengthening our balance sheet. Our net leverage ratio remained at 3.9x at the end of Q2, down from 4.3x at the end of Q2 in the prior year period. As we have previously communicated, Q2 is historically a heavier use of cash quarter from a working capital perspective. So we expect progress on our net leverage reduction to be greater in the back half of the year. With that in mind, we continue to expect to end the fiscal year with a net leverage ratio of roughly 3.7x. Year-to-date CapEx of $188 million decreased by $69 million compared to the prior year period, while free cash flow increased by $104 million year-over-year. We remain committed to returning capital to shareholders as evidenced by our payment of $159 million in dividends in Q2 fiscal â23 and $309 million year-to-date. The first half dividend increase of $27 million compared to the first half of fiscal â22 reflects the quarterly dividend rate of $0.33 per share. We also repurchased $100 million worth of shares in the second quarter and $150 million worth of shares year-to-date to offset most of the longer-term performance-based shares we estimate issuing. As we enter the second half of the fiscal year, we will continue to evaluate the highest and best use of capital to strengthen our balance sheet and optimize shareholder value. As Sean mentioned, we are raising our fiscal â23 guidance for net sales growth, adjusted operating margin and adjusted diluted earnings per share given our strong performance in the first half of fiscal â23 and expectations for a solid performance for the balance of the year. Turning to Slide 27, Iâd like to take a minute to walk through the considerations and assumptions behind our guidance. We expect gross inflation to continue, but moderate through the remainder of the fiscal year, resulting in an inflation rate of approximately 10% for fiscal â23. Additional inflation-justified pricing actions that have previously been communicated and accepted will go into market in Q3. However, the magnitude of these pricing actions will be smaller and more targeted than previous pricing actions. As always, we will continue to monitor inflation levels and price as needed to manage future volatility. We anticipate CapEx spend of approximately $425 million in fiscal â23 as we make investments to support our growth and productivity priorities with a focus on capacity expansion and automation. Approximately $200 million of the $425 million was spent in the first half of fiscal â23. Lastly, we expect interest expense to approximate $405 million and pension and postretirement income to approximate $25 million for the year, driven by the higher interest rate environment. Our full year tax rate estimate remains approximately 24%. To sum things up, we are extremely pleased with our strong performance in the first half of fiscal â23, especially the recovery of Q2 adjusted gross margins to near pre-COVID levels. This, along with our expected continued positive business momentum led to raising our full fiscal year â23 guidance. Our strong performance amid such a dynamic environment would not be possible without the hard work of our entire team and reflects the ongoing strength of our brands and successful execution of the Conagra Way playbook. Looking forward, we remain committed to executing on our strategic business priorities and generating value for our shareholders. That concludes our prepared remarks for todayâs call. Thank you for listening. Iâll now pass it back to the operator to open the line for questions. Great. Thanks very much. Happy New Year, everybody. Sean, obviously, you had expected and talked about sequential gross margin improvement as you move through the year. The 310 basis point jump certainly in gross margins is certainly far greater than investors were expecting. And I have to imagine greater than what maybe you were expecting internally. So I guess what was it that came in that much better in the quarter than you had anticipated? And I ask a sort of a view towards getting a better sense on really how sustainable these levels of gross margin are as we move through the year? Because as you have said previously you expected sequential improvement as the year progresses, so is this still the case from this new high level as we go through the back half of the year or are there any reasons to expect a step back? Thanks so much. Sure, Andrew. Yes, everything weâre seeing is very consistent directionally with what weâve expected precisely as things come in by month, by quarter, there is a little bit of variability there. But Iâd say, overall, I know these inflation super cycles are a complicated thing for our investors to unpack, which is why we always try to be instructive as to the predictable and mechanical way these cycles tend to unfold, if you have three things in place: strong brands; strong processes; and great people. So in a nutshell, the mechanics of this situation is, inflation hits, you announce price. The customerâs 90-day clock starts ticking. Then the customerâs 90-day clock expires. Elasticities exist, but they are, in fact, benign relative to history and consistent overall and margins recover. And sometimes, if itâs multiple waves of inflation, you rinse and repeat that whole process. And everything we are seeing, sales-wise and margin-wise is consistent overall with these textbook mechanics and therefore, entirely good news and not some negative surprise. So to come full circle, we donât see the margins that weâre looking at right now as a peak. We see them as the successful execution of our playbook. Dave, do you want to comment on that? Yes. No, I think thatâs a great explanation of the mechanics of this, Andrew. I think as you look at H2, we would expect that the gross margin change in the second half to be pretty consistent with what we saw in Q2 around that 300 basis points. And what Iâll point you to is â excuse me, you really need to look at the relationship of price/mix that we deliver each quarter versus the market inflation each quarter going back to the fourth quarter of â21. Conagra got hit with inflation earlier and to a much higher level than most food companies. And so we came out of the gate and it impacted our margin significantly, very quickly. So if you just look at fiscal â22, we had inflation every quarter that was 16% to 17%. And we never got to that level of pricing even in the fourth quarter. In fact, our pricing Q1 of last year was only 1.6%. So our pricing ramped up, but had not caught up to that significant inflation. Q1 of this year, our pricing was at 14%. Inflation was 15%, so we were getting close. This quarter, pricing, 17%; market inflation is 11%. So itâs the first quarter where weâve actually seen the flip. And now that, that flips there, Sean had a chart in his deck. Thatâs when you see the margin recover. So we saw it in Q2, and that delta is, we expect it to continue as we go forward each quarter. Now I will call out Q2 for Conagra is our highest sales quarter. So the absolute gross margin of 28.2% is usually our highest. But in terms of looking forward, look at the delta that we delivered in Q2 as being a proxy before going forward. Good morning. Thank you for taking our question. Two questions here. First one, you put up a slide showing how your unit sales on a 3-year CAGR basis are performing much better than your peers. What do you attribute that to? Well, as you know, Cody, we â going into COVID â at the beginning of COVID, we performed extremely well in the peer set. And I made the point then that, that was not entirely a function of just people being forced to eat in their home. It was in part due to the fact that weâve taken one of the largest portfolios of food in North America and completely overhauled it in terms of modernization and makeover during prior to COVID hitting. So that when COVID hit, we had many, many new households that weâre finding all these new innovations for the first time. And as I pointed out repeatedly over the last couple of years, our repeat performance and depth of repeat with those new households that weâve gathered has been remarkably strong. So you put all that together, along with the fact that a lot of these younger consumers that spend so much time eating away from home pre-pandemic are still eating in the home now because prices are so high away from home. That has conspired to lead to benign elasticities overall for our industry. And as we pointed out before, our elasticities not only remained low versus historical norms, but they are consistent and they are among the lowest, if not the lowest, in the entire peer group. So itâs always a function of your brand strength. And the other thing I would add is, recall, we spent a lot of time in the last few years exiting businesses that are more commoditized, where that were more susceptible to trade down and people â consumers shifting to private label. So cooking oil, peanut butter, liquid eggs, I could go on. Weâve done that. So weâve done a lot of reshaping of the portfolio to be more resilient for a cycle like this, and weâre seeing it in the data. Great. Thank you. And then I just want to follow up on gross margin here. You revised your inflation outlook down to about 10% from low teens, implying approximately 8% inflation in the second half. What gives you the confidence to lower your inflation outlook? Where are you seeing the most easing? Thank you. Yes, Cody. If you really look at this, you have to go back to the base, right? So when inflation started for us is similar to what I just said, inflation started hitting us in the fourth quarter of our fiscal â21. And then every quarter of fiscal â22, we were in the 16% to 17% range. So as we â as you look this year and weâre estimating 10% for the year, that may appear a little bit lower than maybe some others, but thatâs off of a much higher base than others. So thatâs just the percentages. In the quarter, we saw inflation in packaging. So our cans, and in some of the other packaging areas, some of the commodity areas like dairy and sweeteners and then vegetables, we do see inflation moderating in the protein area. You remember, particularly, poultry hit us hard. We are seeing that moderate. So as we go forward, we expect it to moderate, but itâs still off a very high base. And thatâs our latest call based on the way we call inflation as market by market, we go through. And then remember, and you see this on our gross margin bridge, we have the sourcing component, right? So we always quote inflation as gross inflation based on market. And then based on how we lock it in with contracts or our hedges, the actual cost nets out in that sourcing line. So right now, for the quarter, our sourcing was a little negative just because weâre locked into some higher contracts in a couple of areas where the market has dropped. Hi, thank you. Good morning. I wanted to dig in a little bit more toward the â or on the operating margin guidance. And thank you for the help in terms of how to think about the gross margin in the back half, Dave. It seems just back of the envelope math that to get to where your operating margin will be sort of that mid-15s for the year. And given that youâre talking roughly about a 300 basis point increase continually in the gross margin that youâre going to have to have a step up in SG&A as a percentage of sales. And Iâm just â a, is my back of the envelope math correct there? And b, what would cause that step-up as we think about going into the back half of the year? I assume, Sean, youâre not going to advertise a lot more given your history. Iâm just trying to get a sense of how to think about that? Let me â why donât I start and Sean, you can fill in. So Ken, from an SG&A perspective â and we had forecasted and guided at the beginning of the year that we expected SG&A to be increasing higher than sales and thatâs indeed what weâre seeing. So if you look at Q2 and the increase in SG&A, thatâs a reasonable estimate to estimate our H2 second half increase in SG&A. And thatâs basically investments that weâre making in automation and in our people. And there is some incentive compensation increase in there, partially from this year, but partially wrapping on last year. So they are really the big drivers of SG&A. We are expecting A&P to ramp. So we came in higher this quarter at 2.4%. And we expect that to continue to ramp up in H2 as well. Sean anything to... Yes, the only â yes, on that, I would say, we do spend A&P, Ken. So we donât do a lot of in-line TV because we donât think itâs particularly effective. But we do spend A&P, and it does vary quarter-to-quarter depending upon the programs that weâve got. As you know, itâs a lot of influencer type spend, digital spend, things like that. And so as weâve got new innovations unfolding, we do back them based on the windows where weâve got products coming to market. So there â you will see movements quarter-to-quarter in our A&P line, which syncs up â usually syncs up with the activity weâve got planned in the marketplace. And frankly, when we got business momentum like this, we want â and weâve got really exciting new innovation coming out that we will share at CAGNY. We do want to make sure we get those new products off to a good start with good awareness and good trial. Thank you. Thatâs helpful. Just a very quick follow-up to Daveâs comment about kind of extrapolating that 2Q SG&A out, Dave, are you talking about the absolute dollars that were spent in 2Q or the year-on-year change that we should kind of think about extrapolating? So two questions. The first one is a bit more of a take a step back. In my conversations with a lot of investors, people are commenting on the fact that youâre not getting â really getting a lot of valuation credit to your faster-growing Snacks business. And they also want you to get the leverage down, which I think you commented on in the prepared remarks. Surely one solution might be to dispose of some of your more mature categories. Iâm just wondering how youâre thinking about some of those slower growth businesses, the non-snack areas and whether you might think of that being a way into addressing some of those concerns more quickly? And then I have a follow-up. Yes, great question, Alexia. Weâve said, since I got here that, we are going to pursue consistent improvement in our sales rate and consistent improvement in our margins. And we will do it three ways. we will strengthen the businesses we own. we will acquire new businesses that fit. And we will divest stuff that is a drag on our sales and our margin. And if you look at the sheer amount of [indiscernible] down to last 8 years, itâs right up there near the top of the list in terms of activity. So thatâs part of our playbook. It will continue to be part of our playbook. We always look at that. And I always tell investors, if youâve got an idea as to how we might reshape in a way that unlocks shareholder value, you can probably safely assume that we, prior â already thought about it and looked at it. Now with respect to the specific concept that you put out there, the way we look at things like that, particularly, when youâre talking about more material divestitures, weâve done a lot of kind of one-off. But when you package up big chunks of the business, and you look at doing â started spending them out or selling them something like that, you have to look very carefully at what happens with stranded overheads. What happens with the fixed cost base of the company and does it flow back to that which remains and therefore, compress margins. Because youâve got to be very sensitive to ensuring that these kinds of actions create value and donât actually end up destroying value. And so thatâs one of the things we look at. The other thing we look at is we are basically U.S. company and we have tremendous scale and scope within the U.S. And we think that scale and scope works very well for us in terms of our relationship with our customers, the importance of our total portfolio with our customers, and the ability to leverage part of our portfolio to do very strategic things in other parts of our portfolio, whether that leverage the cash flow or just leverage the fact that itâs â these are important items to shoppers. So we look at all of that stuff. Weâre open-minded to anything that truly creates value. And thatâs kind of our philosophy on that. Itâs always in that way. Great. Thank you very much. And just a quick follow-up, promotional activity, are you seeing any shift in what retailers are expecting or is that all still very much business as usual at the moment, even though I think itâs a lot lower than it was before the pandemic? Yes. Thatâs a hot topic these days. Let me give you kind of our perspectives on that. First, let me say that from our vantage point, the competitive environment remains rational overall, and thatâs usually a good thing. Second, until supply normalizes further, I just canât see retailers pushing for deals that exacerbate out of stocks. Thatâs not good for retailers when their shoppers go over the store across the street to get the items that they couldnât find in their stores. And the third, we are not opposed to smart promotions. In fact, weâre already doing high ROI promotions already, thatâs kind of in line with our pre-pandemic levels from a frequency basis. At some point, we may be able to add a little bit more. But here, Iâm talking about surgical â really strategically valuable, high ROI and frankly, often seasonal promotions, often holidays, that are emotionally important to our consumers. And in those instances, we want our brands in those promotions. But through COVID, some of those promotions were cut back on, given obvious supply challenges. Going forward, that will get better and some of those quality opportunities will reemerge. But I think the big point is weâre not talking about a surge of deep discount promotions here. Thatâs not been our playbook for at least 7 years now. And I just donât see a lot of room for that. Thanks. Thanks guys. Slide 12, the one where you showed the price lag phase being followed by the margin recovery phase. I am wondering, how you think about the shape and the length of this recovery phase. It was five quarters or six quarters long on the lag phase. Do you see it playing out like a similar lines for the recovery phase? Yes. Itâs interesting, David. In my office up on my whiteboard for the last year, I have got this little handwritten analysis I have done of the earnings power of a cohort of 10 units and how the P&L unfolds when you are faced with multiple waves of price of inflation, which require multiple waves of pricing. And as I have said to Andrew earlier, itâs very predictable, itâs very mechanical. Whatâs been unusual in this cycle is the sheer magnitude of the inflation super cycle and the number of waves. So, the reason â the shape of that curve on that slide, you see it is, because it reflects multiple waves of COGS inflation and the follow-on pricing effects. The sheer number of those waves is now slowing down. And that is why you are seeing the sharp recovery and sometimes it slows down faster than you might expect, which is why the recovery might come in faster. But overall, the mechanics of it are very predictable. If we got hit with another 18 months of five waves, it would kind of â thatâs the rinse and repeat comment. The cycle starts all over again. I canât find a lot of examples of that happening in history after a super cycle like this. So, I think what you are seeing now is a reflection of good execution on our part and kind of the beginning of the sun-setting of the super cycle. And thatâs why we say we think we have got some runway from here as the supply chain continues to improve and productivity continues to ramp up. Dave, do you want to add to that? Yes, just to build on that. And David, back to something I said earlier, for H2 gross margins, we expect that delta of approximately 300 basis points to hold. So, that â translated to that chart, that just means that, that relationship for the second half will continue, right, where the sales per unit and the price per unit is above the cost because we are â we have already incurred that inflation. Our 3-year inflation number, when you use the 10% estimate for this year, is 33%. So, we have significant inflation thatâs in our base. We are now catching up to that. So, that drives that margin improvement for the second half. Yes. And just a follow-up on that, in the â I am looking at the volume numbers in Grocery & Snacks, for example, but those were a little weaker than we would have expected. I wonder just, if you back up a second and say, in prep â what is the big worry that people would think of? Is that perhaps, there would be a need for promotion give back to stabilize volume in your higher price elasticity categories out there. Is there something that you are monitoring that would tell you that perhaps there would be a slamming of a door and a quick end to this recovery phase? Are there things that you are really watching out for? And perhaps â just leading the witness a little bit on the Grocery & Snacks, is that volume concerning to you at all in that area? Yes. Letâs talk about it. First, no door slam, okay, so what we are seeing right now is very consistent with what we expect. And it was an excellent quarter. And things are unfolding the way we would expect. With respect to Grocery & Snacks volumes, Grocery & Snacks volumes came in right where they should have come in, given the magnitude of pricing we have taken in the first half of this year. Now, in terms of what you are observing, good eye, the shipment numbers look about 2 points worse than what you might expect given the elasticities that we have talked about. That does not reflect a Q2 phenomenon. That reflects strong shipments in this segment in Q2 a year ago. Why was that, because thatâs precisely when we came off allocation on a handful of brands in G&S. And our customers, as you can imagine, these are good strong brands, we are quite eager to replenish their inventories. So, thatâs â when I look at that number, I see about 2 points of what might look like an excess drop on in volumes. Itâs entirely about the year ago period, nothing about right now. So net-net, what keeps us up at night, itâs the stuff that we canât predict. Itâs like a return of some kind of new COVID strain or more unexpected friction and supply chain because you canât get materials from suppliers, things like that. As we have said, we are making good progress in supply chain, but itâs not perfect yet. We still have more junior people. Our labor situations got significantly better, but we have got newer employees who are still ramping up the learning curve. These are the things that drive the volatility. And itâs led us to have our year-to-go outlook stay in a range, I would describe as prudent given that we are making progress. But itâs not all the way back to right. Dave, you want to add to that? Yes. I would just add. I think David, when you start looking quarter-to-quarter and then at the segment level, because these are shipments and there is timing, you are going to get some dynamics. I would just pivot and say, if you look at our first half, we are shipping at 9%, and consumption is 10%. So, we have always said, we shipped the consumption. Thatâs whatâs happening. We feel good about where we are with retailer inventories. We feel good about our own inventories, the elasticities as we showed on the chart are at that sort of 0.5 level and they have been there. And thatâs the entire portfolio. So, you do get some dynamics quarter-to-quarter, which Sean, described. But generally, we are tracking in line with consumption. Yes. Before we go to the next question, I want to come back to volumes for a second, because this is a really important one for folks to get right as you think about assessing kind of where we are, is it a good guy or a bad guy. To accurately assess volume performance across a cohort of companies, you have to look at total scanned volume change over time for the whole peer set. And as you saw on Slide 8, Conagra ranks number one in our peer group in terms of volume and resiliency over the past 3 years, which is, obviously, a testament to our brand health. And as I have said in my prepared remarks, there is always some elasticity when you price as much as we have cumulatively, but those elasticities have in fact been relatively benign and remarkably consistent and they have been lower than our peers, lower. Thatâs the data. So â but in any given quarter and in any good segment, frankly, you may see more or less volume impact based on the recency of the pricing actions that you take. And as you know, we took a lot in Q1 and in Q2. But overall, we are in very good shape in the absolute and versus others. And donât forget, over â as we have said many times, over time, these elasticities tend to wane as consumers adapt. Hey. Thanks for the question. I am wondering beyond price elasticities, which can sometimes be a bit of a blunt measurement of the reaction of consumers to price increases, especially given the broad-based nature of pricing across the industry. I am wondering if you have seen any changes in the degree or ways in which consumers are trading down. For instance, from food-away-from-home to food-at-home, from branded to private label or to more value branded products or maybe between grocery categories? So, I am just curious what you are seeing on that front and how you would expect this dynamic to develop from here? Thanks. So, Max, I think itâs pretty simple. The first big trade down is the trade down from away-from-home to at-home. If you are looking at consumers over $100,000 a year income, you are still seeing they are going out to eat. But below that threshold, itâs not where it was pre-pandemic. So, one of the reasons â a big one of the reasons why you see muted elasticities across the sector on average is because there has been â there was a trade down into at-home eating during COVID. And that has not fully reverted to away-from-home because the prices away-from-home have gone up so high that itâs a better value to continue to eat in home as people are trying to stretch their household balance sheet. And we are the beneficiary of that. And it shows up in muted elasticities. When you double-click down from there, within grocery, what you see is there is trade down taking effect. And if you look at private label by category, you can see that in certain categories, they are making progress. Those categories almost, always tend to be categories that are more highly commoditized. So, things like in food, like cooking oil. And outside of food, things like ibuprofen. When a consumer knows itâs a single ingredient product and one is a lot cheaper than the other, the switching costs are lower. Itâs easier to make the trade down. So, that is happening. The good news for us is we donât have a lot of those categories. We have had them. We exited them. And now our private label interaction is lower than average in the space. And on a strategically important stuff thatâs really vital to our go-forward cash flow, things like frozen, our snacks categories, we have got very strong relative market shares, very little private label alternative, and thatâs one of the reasons we continue to thrive. Great. Thanks very much and one follow-up. It looks like you took your CapEx guidance down from $500 million to $425 million. I am just wondering whatâs driving that change? Thanks very much. Yes. Max, thatâs all timing. We are still prioritizing investing in capacity and automation in our supply chain, which we have talked about. So, thatâs all just timing for the fiscal year. Just had a follow-up to your last response, in general, it seems like the softer macro backdrop this year creates a favorable environment for your business and for food-at-home consumption. So, as consumers look for savings, can you just talk about how your categories and how frozen dinners have performed in prior recessions? And how are you leaning into this opportunity and highlighting the value to consumers? Yes. Our frozen business has been unbelievably strong. And I donât think you can compare it at all to the 2008 period, the financial crash because the category looked totally different. We started doing a massive overhaul of the frozen section of the grocery store, Conagra did in 2015, starting with frozen single-serve meals. And we completely changed the way those products show up to the consumer in terms of food quality, packaging quality, sustainability, etcetera, etcetera. And since then, we have driven a massive amount of growth for retailers in the frozen single-serve meals category. And Conagra has accounted for somewhere in the neighborhood of 90% of that growth. So, we have almost singlehandedly done it. What we are doing now is keeping the momentum in frozen, in single-serve meals where we have been so successful because there are structural things in place that have only furthered the opportunity there. Things like more people working from home during the week, that obviously contributes to more breakfast and more lunch, vacation at home where these products fit. So, we are capitalizing on that. The other part of our strategy is to continue to â we have got a great suite of brands, continue to extend them into adjacencies like multi-serve meals, appetizers, snacks, desserts, novelties, things like that. There are a lot of zip codes in the frozen space that still have opportunity to be overhauled, the way we have overhauled frozen single-serve meals. And thatâs a big part of our go-forward strategy. And one of the things thatâs going to help create value with this portfolio, along with this awesome snacks business that we have got. And we will talk about both of these very strong, attractive portfolios in frozen and snacks in quite some detail at CAGNY. Great. And just on the supply chain, it sounds like itâs getting better, but there is still room for improvement. Can you talk about where you still see supply chain challenges, and where there is room for improvement, where are your service levels today versus targeted, and how much gross margin recovery can those drive on top of the improvement that you saw this quarter? Yes. Let me â itâs Sean. Let me tackle that, and Dave, if I miss anything, jump in. But we were absolutely seeing meaningful progress in supply chain. But you got to remember that the industry has continued to see operating challenges, including labor across the end-to-end supply chain has not abated. You are hearing that from me. You are hearing it from my peers. So, it is possible for Conagra to make meaningful progress. But also to see â continue to see pockets of friction. In terms of specifically whether we think productivity is improving, and we are pleased with the progress on our supply chain initiative, service levels, and fill rates have continued to improve over prior year. In the second quarter, our fill rates were over 90% by the end of the quarter. On average, in some categories, frankly, were well above that and more back to normal, which is an awesome sign. Productivity initiatives remain on track. But the point we are making here and one of the reasons for our guidance is, progress isnât necessarily going to be linear. Productivity savings arenât fully offsetting input cost increases from commodities volatility, things like labor, transportation costs and other supply chain inefficiencies since the supply chain is not yet fully normalized. We â on labor, we have filled more positions. We are seeing less turnover, but because our labor force, as I mentioned a few minutes ago, is less experienced, itâs still efficient. But obviously, thatâs going to improve as these newer employees crash the learning curve. So, thatâs kind of what we are seeing overall. Dave, do you want to add anything or I hit it? Yes. I would just add to your question about margins. So, if you look at the Q2 bridge that we have in the deck, the operating margin bridge, you see the productivity and other cost of goods sold at plus 1.3% of margin points. And once we get to a more normalized supply chain operation, we would expect that to improve. We are not going to give specific numbers, but thatâs where you would see it in the margins. Hi. Thanks. Sean and Dave, one of the major concerns I hear from investors is that the top line trends are so robust right now, are going to dissipate by the end of the year, because you are going to lap the vast majority of the pricing actions that you have taken. But you did talk about more sequential pricing thatâs going on right now. So, I guess I would like to know, by the end of the calendar year, and I know itâs â you canât talk about fiscal â24, but by the end of the calendar year, do you think they will still be in kind of like mid-single digit pricing territory given where pricing is today in fiscal 3Q? And then lastly, maybe you can talk a little bit about the retail reaction to all the price increases. The rhetoric seems to be getting a little more combative on the margin. And I wanted to know if you thought there is any changes in those negotiations. Thanks. Alright. Let me try to hit each of those. And Dave, if I miss anything, jump in. With respect to dollar sales and the year-on-year growth, putting up 9%, whatever. Thatâs not just as a reminder. Thatâs not our long-term algorithm, right. That is a function of kind of where we are in this inflation super cycle. So, thatâs not going to be the go-forward run rate on sales forever and that goes without saying. In terms of the pricing that we have taken, we took price in early Q1. We took â thatâs pretty meaningful. We took price again in early Q2 that was pretty meaningful. And then we are taking price again, I would say, more surgically in January, call it, for Q3. Thatâs kind of whatâs been negotiated with our customers. Thatâs whatâs in place. There is nothing else beyond that to talk about right now, but pricing, again, isnât window-based, itâs principal-based. So, if we continue to see waves of inflation, reemerge, then we will do what we have got to do. In terms of retailer reaction, let me give you just a couple of thoughts on this. Number one, with respect to the margins, our margins and the good quarter we just had on margins, I think itâs really important to remind everybody, we are talking about margin recovery following a period of pretty meaningful margin compression. So, thatâs kind of point one. And point two is, we have been really clear with our retail partners that, a, all of the pricing we have taken is justified by COGS inflation. And b, margin recovery is as important to them as it is to us, because we need to recover our margins in order to sustain the innovation program that has driven category growth for these retailers in important aisles like frozen, as I mentioned just a minute ago. And then the third point I will make is, with respect to inflation from here, itâs still with us, right. So, we are calling 10% on the year. Itâs not deflation. Itâs sustained inflation. And thatâs just an important reminder that we are not looking at a deflationary period. So, thatâs got to factor into the retailer conversations as well. Dave, anything you want to add there? Yes. Rob, I would just say, we are not going to comment on calendar year. But if you just look at â again, it goes back to looking quarter-by-quarter in the prior year, and what our price/mix was by quarter. And as you look at last year, last fiscal â22, each quarter, our pricing ramped up, right. So, H1 last year, our price/mix was roughly 4.5%. H2 of last year, it was about 11%, right. So, as we look at H2 this year, we are wrapping on a much higher price number. So, you could expect that the price/mix component of our H2 to be lower because we are wrapping on an 11% versus 4.5% in the first half. So, thatâs the way to think about it, but itâs â thatâs the same thing happening with inflation as well. Thatâs why that margin increase â that gross margin increase I talked about earlier, we expect to continue. And given that you have revised down your inflation outlook, is there any discussion about also revising down some of the price increases? No. Because a revised down inflation outlook does not mean costs have dropped to below where they were prior to us taking pricing. In fact, itâs still a 10% full year outlook lower than that in the back half, but itâs still inflationary. And by the way, compared to the normal range for the industry of 2% to 3% inflation when you are talking 8%-ish inflation, thatâs a big inflationary year. So, to the contrary, it leads you to think more about future price increases than it does price rollbacks. In categories, there are true pass-through categories, when you get down to a true category level, we would just not â the category went, but coffee as an example. Coffee is one of those categories. Itâs a pass-through category. Pricing comes up, you take it up. Pricing comes down, you take it down. It canât be deflationary. We are not experiencing deflation on average by â across the board. So, thank you everyone. We are at time. Thanks again for joining us this morning. And we are looking forward to seeing you all at CAGNY next month. And ladies and gentlemen, with that, we will conclude todayâs conference call and presentation. We thank you for joining. You may now disconnect your lines.
EarningCall_1310	Greetings, and welcome to the F5, Inc. First Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Hello, and welcome. I am Suzanne DuLong, F5's Vice President of Investor Relations. FranÃ§ois Locoh-Donou, F5's President and CEO; and Frank Pelzer, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also on hand to answer questions during the Q&A session. A copy of today's press release is available on our website at f5.com, or an archived version of today's audio will be available through April 24, 2023. Visuals accompanying today's discussion are viewable on the webcast and will be posted to our IR site at the conclusion of our call. To access the replay of today's webcast by phone, dial (877) 660-6853 or (201) 612-7415, and use meeting ID 13735357. A telephonic replay will be available through midnight Pacific Time, January 25, 2023. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. Factors that may affect our results are summarized in the press release announcing our financial results and described in detail in our SEC filings. Please note that F5 has no duty to update any information presented in this call. Thank you, Suzanne, and hello, everyone. Thank you for joining us today. Against the backdrop of a continued tough environment, our team delivered first quarter revenue at the midpoint of our guidance range and earnings per share above the high end of our range. We came into Q1, expecting we would see deteriorating close rates and that the dynamics concentrated in EMEA and APAC in Q4 would spread to North America. In Q1, we experienced heightened budget scrutiny and more pervasive deal delays across all geographies. The dynamics are particularly challenging on larger transformational-type projects, which for us tend to be software focused. Like last quarter, new multiyear subscriptions were most affected. We noted last quarter that we were not planning on year-over-year growth from new software business this year. However, in Q1, it was down a double-digit percentage year-over-year. Based on customer feedback, we believe we are seeing the impact of financial decisions resulting from broader economic uncertainty, pervasive budget scrutiny and spending caution as opposed to technological, competitive or architectural decisions. In contrast to what we saw on new software business, software renewals performed largely as expected in the quarter. At the same time, improving supply chain conditions aided our hardware revenue, making it possible for us to ship systems to waiting customers. In addition, our Q1 maintenance renewals were particularly strong, which in the past, has correlated with customers' sweating assets. Despite the environment, we continue to expect 9% to 11% revenue growth for the year, albeit with a different mix than we initially forecasted. Given the demand trends of the last quarter, it is challenging to call our revenue mix with precision. However, with supply chain improvements and the benefit of our system redesign efforts coming to fruition, we continue to see a second half acceleration in our systems revenue. In addition, based on the solid maintenance renewals we experienced in Q1 and our forecast for Q2, we expect global services revenue will be stronger than we initially anticipated for the year. As a result, we expect the combination of stronger systems revenue and global services revenue to offset software headwinds in the year. We also continue to expect non-GAAP earnings growth in the low to mid-teens for FY '23. We remain to maintaining double-digit non-GAAP earnings growth this year and on an annual basis going forward, and we will continue to evaluate our cost base and take further action as needed to achieve this goal. In the current environment, customers are focused on minimizing their spend and optimizing their existing investments while also continuing to drive revenue. We are confident that we are well positioned to help them do exactly that. For instance, during Q1, we closed a significant multi-cloud networking win with a Tier 1 North American service provider. The customer selected F5 Distributed Cloud Services as the core for its next-generation managed service offering based on the platform's ability to deliver a scalable, agile and dynamic infrastructure. This is the second such win for the platform. F5 Distributed Cloud Services makes it possible for service providers to monetize their substantial network investment, including investments in 5G. The platform enables a managed service offering that solves critical challenges for enterprise customers like simplifying the deployment and operations of applications across multi-cloud and edge environments. In Q1, a healthcare customer selected our managed web application firewall and API protection solution after a proof-of-concept evaluation against both their incumbent CDN provider and a cloud-native solution. The customer selected FI Distributed Cloud Services because it proved more effective against threats while also being easier to manage. Our solution also met the customer's stringent regulatory requirements. Finally, customers are focused on total cost of ownership. As a result, we continue to drive good traction with our next-generation hardware platforms, rSeries and VELOS. These next-generation platforms can dramatically reduce customers' total cost of ownership by offering cloud-like benefits for on-premises systems. Clearly, the enterprise spending environment has changed from six months ago. That said, the breadth of our portfolio positions us well. The number of applications continues to grow, and those applications and the infrastructure needed to deliver, secure and manage them continue to get more complex. Customers need a partner like F5 who can help them simplify, reduce our cost of ownership and make the most of the budgets they have. Our broad solutions portfolio, combined with the consumption model flexibility we offer, squarely addresses these requirements. Thank you, FranÃ§ois, and good afternoon, everyone. I will review our Q1 results before I speak to our second quarter outlook and provide some additional color on our FY '23 expectations. We delivered first quarter revenue of $700 million, reflecting 2% growth year-over-year. Global services revenue of $360 million grew a strong 5% in part due to the high maintenance renewals FranÃ§ois mentioned and also reflecting previously announced price increases. Our revenue remained roughly split between global services and product, with product revenue down slightly year-over-year reflecting softer demand across all geographies and representing 49% of total revenue in the quarter. Continued supply chain improvements enabled systems revenue of $173 million, down 4% year-over-year. Q1 software revenue grew 3% to $168 million, against a tough comp last year. Let's take a closer look at our overall software growth. Our software revenue is comprised of subscription-based and perpetual license sales. Subscription-based revenue, which includes term subscriptions, our SaaS offerings and utility-based revenue totaled $129 million or 77% of Q1's total software revenue. Perpetual license sales of $38 million represented 23% of Q1 software revenue. Within our subscription business, as FranÃ§ois noted, new multiyear subscriptions performed significantly below plan in Q1, while renewals performed largely as expected. Revenue from recurring sources contributed 68% of Q1's revenue. This includes revenue from term subscription, SaaS and utility-based revenue as well as the maintenance portion of our services revenue. On a regional basis, revenue from Americas was flat year-over-year, representing 57% of total revenue. EMEA grew 14%, representing 26% of revenue and APAC declined 7%, representing 16% of revenue. Enterprise customers represented 62% of product bookings in the quarter, service providers represented 21% and government customers represented 17%, including 6% from U.S. Federal. I will now share our Q1 operating results. GAAP gross margin was 77.9%. Non-GAAP gross margin was 80.4%, in line with our guidance for the quarter and below where we expect to be for the year. GAAP operating expenses were $454 million. Non-GAAP operating expenses were $378 million, in line with our guided range. Our GAAP operating margin was 13%. Our non-GAAP operating margin was 26.5%. Our GAAP effective tax rate for the quarter was 24.5%. Our non-GAAP effective tax rate was 21.4%. GAAP net income for the quarter was $72 million or $1.20 per share. Non-GAAP net income was $149 million or $2.47 per share, above the top end of our guided range of $2.25 to $2.37 per share. EPS was aided in part by currency gains related to a weaker U.S. dollar in the quarter. I will now turn to cash flow and the balance sheet. We generated $158 million in cash flow from operations in Q1. Capital expenditures for the quarter were $13 million. DSO for the quarter was 62 days. This is up from historical levels, primarily due to strong service maintenance contract renewals in the quarter and, to a lesser degree, back-end shipping linearity resulting from ongoing supply chain challenges. Cash and investments totaled approximately $668 million at quarter end, reflecting the paydown of approximately $350 million in term debt remaining from our Shape acquisition. During the quarter, we repurchased approximately $40 million worth of F5 shares or approximately 263,000 shares at an average price of $152 per share. Deferred revenue increased 12% year-over-year to $1.76 billion, which is up from $1.69 billion in Q4. This increase was largely driven by particularly strong service maintenance renewal sales reflecting the trend of customers sweating their existing infrastructure while recalibrating budgets. Finally, we ended the quarter with approximately 7,050 employees. I will now share our outlook for Q2. Unless otherwise stated, my guidance comments reference non-GAAP operating metrics. We expect Q2 revenue in the range of $690 million to $710 million, with gross margins of approximately 80%. We continue to expect our gross margin will improve in the second half of the year for two main reasons. First, we expect some of the ancillary supply chain-related costs like expedite fees will begin to abate; second, with our engineering efforts to redesign around some of the more challenged components nearing completion, we expect to be less dependent on the broker market where cost for critical parts has been exorbitant. We estimate Q2 operating expenses of $368 million to $380 million, and our Q2 non-GAAP earnings target is $2.36 to $2.48 per share. We expect Q2 share-based compensation expense of approximately $64 million to $66 million. Given our Q1 results and our Q2 expectations, I also want to elaborate on our FY '23 outlook. We continue to expect revenue growth of 9% to 11% for the year. Given the demand trends we have seen in the last four months, we expect our FY '23 revenue mix will reflect revenue contribution weighted more towards hardware and services and less towards software than we expected a quarter ago. Our FY '23 software growth is likely to be lower than the 15% to 20% we initially expected due to budget scrutiny and project delays, pressuring new software contracts. This is offset by the probability of stronger systems growth given supply chain improvements and the benefit of our system redesign efforts coming to fruition. In addition, based on the strong maintenance and forecast for Q2, we now expect Global Services growth of mid-single digits, which is up from low to mid-single digits growth we forecasted previously. As FranÃ§ois noted, we continue to expect non-GAAP earnings growth in the low to mid-teens for FY '23. We remain committed to maintaining double-digit earnings growth this year and on an annual basis going forward. We will continue to evaluate our cost base and take further action as needed to achieve this goal. Thank you, Frank. In closing, I would ask you to take away three things from this call: Number one, that despite the environment, we remain committed to delivering double-digit earnings per share growth this year and on an annual basis going forward; number two, while we believe 9% to 11% revenue growth for the year is achievable, if we get demand signals that tell us it is not, we will exercise operating discipline and adjust our cost base in order to achieve our earnings goals; and number three, we have built a strong business model with nearly 70% recurring revenue, product revenue that is split 50-50 between hardware and software and global services revenue that has proven durable. The result is a diversified and resilient revenue base, which when combined with operating discipline enables us to drive revenue and earnings growth in this environment. All right. Thank you very much for the question or at least opportunity to ask questions. I have two. First one is, could we just decompose the services revenue growth? You mentioned price increases and then maintenance renewals. Could you kind of split that reported number into each -- like what was stronger? Was it more renewals, et cetera, if you can just decompose that? The other question I have is, clearly, the IT landscape has shifted. And I think the big question myself and other investors are asking ourselves is if there is incremental risk through the year as far as demand or demand signals changing unless just say they get worse, how will those signals manifest themselves into F5's business and results? And a good example, a question we get is, if things decay or deteriorates, does that mean that product orders sitting on your backlog get canceled? Is that the -- is that kind of the deterioration that would yield that kind of output? I mean to get your comments on those two questions. Sure, Sami. So I'm going to start with your first question, and then I'll let FranÃ§ois take the second. It's Frank. So we didn't give an exact split out, but I would say it's roughly even between the two. I think the renewal rates continue to go up, particularly on those services business, and we've seen less discounting, given the environment that we see of people continuing to sweat assets putting focus on that and taking the price increases that were put in place a couple of quarters ago, and we're starting to see the benefits of that come through to the services revenue. So I'm not going to give you the exact split, but I would think of them as roughly equal between the two, and I'll let FranÃ§ois refer to your second question. . I mean in terms of the overall environment, yes, the overall IT spending environment has deteriorated quite meaningfully over the last six months. And we're seeing that mainly in terms of softer demand than clearly what we were seeing six months ago. Now the way you would see that in our results, it's not in order cancellations because the appliances that our customers buy from us are typically mission-critical to deliver on applications that actually need the capacity. So we haven't seen any trend in order cancellations nor do we expect to see any of that. In fact, our customers have been pressing us to ship to them the backlog that we have built over the last couple of years and a lot of the orders that displaced that we haven't delivered on. And so we continue to work hard on our improvements in supply chain in order to be able to meet that. Where you are seeing this different environment in our results, and clearly, we're seeing a number of software projects that have been delayed, a lot more scrutiny on deals and that is actually affecting our software growth rate and you're seeing that in the results. And we've seen it, frankly, across the board in terms of softer demand in software, but also softer demand in hardware this quarter than we had a quarter a year ago. Two, if I could, sorry. Could you talk a little bit about the software businesses, kind of which pieces of it you're maybe seeing more of an impact than others? Is it some of the SaaS businesses or it sounds like a lot of the term deals? But anything you can split apart there to let us know on that. And then related to that, what -- why are we still talking about the distinction between hardware and software? I don't think you guys really sell the solutions that way. So could you just give us an update why we still need to look at that distinction? Thank you, Tim. I will take your two questions. So let me start on the question on what -- where are we seeing the softer demand on software. I think if we split the software between existing contracts that have renewals or to forward or expansion versus new contracts, the renewal business on existing contracts largely performed as expected and where we saw most of the softer demand was on new contracts and new projects, which we had said, we expected this year in the past three years, new software business had grown pretty significantly year-on-year. We expect it coming in the year that new software project would be flat year-on-year. And what we saw in the first quarter was more of a -- it was down double digits relative to last Q1. So this is where we saw more of the pressure. Whether it affected more of the SaaS business or the term subscription business, I would say, it was quite indiscriminate across product lines, what we saw. But of course, the most significant impact in terms of in-quarter revenue was really in this multiyear term subscription deals. That's really what was a bigger impact on Q1 revenue. In terms of the hardware software distinction, Tim, it's a good question. Look, I think this year, certainly, and there was also that effect last year that there is a dynamic around hardware where last year we had a lot of demand that we couldnât really ship because of supply chain issues and this year we are looking to improve on our supply chain and be able to ship all the orders that we've had in our backlog. And we've made a lot of progress on the supply chain to be able to do that. But it's true that a lot of our customers consume both hardware and software. We think that's going to continue to be a trend from our customers towards more software-first environment. And that's because of the way they want to consume the technology ultimately. But when we look at the total performance of the company, we focus less on that distinction than driving earnings growth and specifically double-digit earnings growth, and we're absolutely committed to driving that regardless of the dynamics between hardware and software. Great. helping you address a little bit about what your backlog in systems looks like. I think it was running 40% to 50% of four-quarter product sales in systems. And I was hoping you could give us some insights there in terms of what the backlog is at? And then second, obviously, getting the rSeries out in March of last year was an important milestone, but there was a lot of application functionality that you needed to get built into it in order to solve individual customers' needs in order to replace the iSeries. And I was hoping you could give us an update on where you are on that? And do you think that, that then creates post, say, the June quarter, a refresh cycle on the large installed base of iSeries? Yes. Alex, let me start with the backlog question. I'm going to turn it over to FranÃ§ois for your second question. So on backlog, what we've talked about is that we will disclose that once a year if it's material, meaning more than 10%, but we weren't going to talk specifics in any one given quarter. I will say similar to Q1 last year, where we talked about percent move up, we were down a bit more than 10% this quarter in backlog from where we ended in Q4, and that was largely a result of our ability to ship based off of some of the product redesigns that we were able to achieve. And so we were quite happy with seeing that reduction in backlog from a customer satisfaction standpoint. And then FranÃ§ois, I think we'll talk to your second question. So Alex, on the rSeries, there were -- there have been two factors that have sort of gated the ramp and growth of the rSeries over the last several quarters since we launched it. First is what you mentioned, the number of use cases and applications that rSeries could cover relative to the iSeries. And second was our ability to build and ship rSeries, which has been significantly constrained with some of the components. The good news is both of these factors are going away over the next couple of quarters. So on the supply chain factors, we are seeing better component availability and also access to broker markets where we are still constrained. We still have constraints on rSeries. We still had in Q1, and [we're still having] but a lot of the redesigned efforts that we have already done will be complete by the end of our second quarter. And so we are seeing lead times on rSeries will be improving in our second quarter and beyond. And then the second aspect in terms of the application, the number of use case that rSeries can cover will pretty much be at parity with iSeries, if not in the June quarter, in the September quarter. So in both cases, there's a lot of progress. There is a lot of demand for rSeries. And I think you should expect that rSeries will certainly grow into FY '24 to become the vast majority of what we ship in terms of appliances. I guess for the first one, if I can, FranÃ§ois, ask you to sort of share a bit more color on in terms of budget scrutiny, which regions as well as customer... Yes. So first question was really more about sort of FranÃ§ois' comments on the budget scrutiny that you're seeing, which regions and maybe customer verticals as well, are you seeing the most sort of scrutiny from? And where do you stand in relation to like as you sort of are in the early days of fiscal 2Q in terms of either quantifying it in terms of a sales cycle or conversion cycle? Are you continuing to see those sort of conversion cycles get extended or time line get extended? Or are you starting to find a sort of levels set to a longer duration in terms of the conversion cycle? And I have a follow-up. Thank you, Samik. So in terms of where we saw softer demand in software, it was across the board in terms of verticals and geographies. So if you remember in Q4, I said the international EMEA and Asia Pacific, in particular, were quite affected we actually did see that clearly in North America as well this quarter. And it was also, I would say, across most of our verticals. I think it was more pronounced in the technology sector, large tech companies going through substantial revisions of their budget and to some extent, I would say, financial services. These are perhaps where the effects were more pronounced. In terms of the rest of the year, it's too early to have full visibility on the rest of the year. I would say our expectation is that the dynamics that we have seen in our first fiscal quarter as it relates to software will largely continue in our second fiscal quarter. But beyond that, it's too early to speak to the visibility. Got it. Thanks for that, FranÃ§ois. And for the follow-up, I mean, you mentioned customers are sweating the assets a bit more, which is sort of you are recapturing some of that on the services side. But in terms of the systems demand, and there is obviously a supply chain piece here. But what -- how are you thinking about sort of the upside to system demand as some of the maybe software transformation projects get delayed and drives some level of sort of utilization of hardware appliances, which always had sort of great performance? So how are you sort of looking at the upside on the system side from that delay as well? What -- how would you quantify that? I think, Samik, the -- in terms of the system demand, as we said earlier, we also saw softness in systems demand this quarter. So this effect on budgets and scrutiny from our customers at large affected both the software and the hardware demand to an extent. The upside in demand, frankly, is -- sorry, in in hardware revenue for the year is we said at the beginning of the year, we felt our hardware revenue forecast was really a shipping forecast. And the upside and the stronger second half that we see in hardware is really driven by ability to ship more hardware. So you should see a step increase in our hardware revenue in Q3 and Q4 from the first half of the year because of the improvements we've made on supply chain. In terms of demand specifically, I don't think the pressures on software would necessarily create stronger demand on hardware at this point in time in the environment because I think our customers are really trying to sweat their assets and try and limit the utilization to not exceed the capacity that they already have in place to the extent they can. I think that can only go on for so long, at which point they will have to buy and add capacity. But I do think that -- the improvement in supply chains and as lead times improve, we will see some demand that is latent that has been gated by the fact that we're not able to ship. So a lot of customers because we haven't been able to ship orders that they place two, three, four, five months ago, and they haven't been able to project or implement our solution or not able to place the next order. And I think as we resolve that, we should see some improvement there in demand from these customers. I guess I have two as well. FranÃ§ois, maybe just going back to this product systems discussion a little bit. Yes, the risk of the fear folks would have is listen, if the macro remains soft and IT budgets remain under pressure, why wouldn't customers push out or sweat the appliances more. And so then maybe just about how do you have confidence that this appliance or systems business recovers in the back half if the macro remains challenging and the backlog can remain strong. Well, I would say, look, where we have strong visibility is for us to achieve the revenue forecast we have in hardware, we don't necessarily need a very strong fundamental recovery in hardware demand than we have today because of the visibility we have on revenue and our ability to ship, including our backlog. In terms of what I think -- there's a real question as to when do I think this recovers and demand picks up again. It's difficult to predict. But what I can tell you is that the fundamental drivers of what gets customers to buy hardware or software are still there. They are tied to the growth in applications and applications continue to grow the complexity of these applications. And the deployment models, the fact that these applications increasingly live in hybrid and multi-cloud environments. All of these drivers are fundamentally there. So demand can be suppressed for a period of time, a couple of quarters, three quarters, four quarters. But where we have a ton of confidence is that it is going to come back because the fundamental drivers of our business and what our customer is doing are still there and will continue, including, I should say, attacks on applications that drive demand for security for applications. So all of those things are part of what gives us a lot of confidence that it's going to come back. In this current environment, the fact that we've built the flexibility that we have built around our consumption models and our deployment models, plays very well because some customers have pressures on CapEx, others on OpEx and our ability to serve them one way or the other is one mitigant, if you will. And it's one of the aspects that we think provides the resilience that you're seeing in our business and operating model. Got it. That's really helpful. And then if I just touch on the software side. I know you folks talked about in the ability -- the growth will be sub the 15% to 20% range that you talked about previously. Is there anything about what the new range would be? Or what does the trajectory of software look through fiscal '23? And then does this alter at all what you're seeing your longer-term expectations you've had from the software business beyond just this year? Let me start with the last part. It does not alter our long-term view, Amit, because of the drivers that I've just taking you through. We think our customers will continue to deploy software in -- sorry, we'll continue to deploy our software in cloud and hybrid cloud environment. We think that the architectures are evolving to be multi-cloud architectures, and that absolutely favors that if I go back to where we were five years ago when we were hearing customers and why everything is going to go to a single cloud location, and we're not sure we're going to need an F5 ADC. Today, we are positioned where the architectures are going. They're going to multi-cloud. We're very well positioned in these architectural conversations. And so what we're not seeing is the shift away from F5 from an architecture perspective, we're seeing just financial decisions and pressure. So we're very confident that the drivers of long-term software growth for F5, security, modern applications and multi-cloud environment are going to be there and drive the 20% plus growth that we've talked about in the long term -- in the shorter term. Yes, we have said it's less likely that we will be in the 15% to 20% range we've mentioned. There is a path to get there. It's a narrower path than it was a quarter ago because it would imply a change in the second half in terms of the demand patterns that we have seen on software. And so whether things would rebound this quickly for us to be able to see that. That's unclear, and that's why we're saying that it's less likely that we would deliver 15% to 20% growth. You will note, however, Amit, that the -- I mentioned our business and operating model earlier. Part of the benefit of the balanced model that we have built is you're seeing the improvements we've made on supply chain allow us to have perhaps upside on the hardware revenue and also upside on the services revenue. So on balance, we feel our 9% to 11% revenue range is still achievable. Maybe two questions for me. One, if you could just kind of lay out maybe most often what some of these larger new software deals are associated with, are they tied to kind of cloud migrations or security upgrades or kind of thinking about hybrid architectures, that would just be helpful to kind of figure out what other indicators we could be looking at when thinking about the software -- new software growth coming back? And then maybe just on the second question. Product gross margins are staying depressed for a little bit longer. Just how are you guys thinking about kind of the progression of getting rid of some of these supply chain costs or broker fees throughout the year just to the time that it might take to get back to some of the product gross margins we've seen in the past? Thanks, Meta. I'll take the first one. Frank will take the second one on gross margins. The -- so the large software projects that are tied to all of the factors you mentioned, but typically infrastructure modernization or application modernization. So these would be companies that are -- that have had, say, our hardware in their environment, and they're deciding to move in a partially or wholly to a software-first environment. This could be a private cloud or it could be a public cloud implementation with lift and shift. More often than not, they are actually setting up the software environment whilst keeping part of their application estates on hardware. So they will pick a set of applications that we really want to modernize and move to an environment that's more automated, whether it's in a public cloud or even in their own private cloud whether it's higher levels of the automation that gives them faster time to market, better deployment time frames and cetera, et cetera. So that's the type of project for the large kind of multiyear subscription. We have also a number of other projects that are now with NGINX. There are just typically new applications, new modern applications that have been in test and development, and they're moving into production. And when they move into production, there is a need for strong networking and security capabilities that NGINX brings as a complement to, for example, Kubernetes orchestration. So we're seeing a lot of these projects. And now with our Distributed Cloud offerings, we're also offering SaaS solution, and that is, I would say, a missing part of our business, but it's a different model of deployment where typically, a long tail of applications that would not have had a traditional ADC in front of them in the past, customers are choosing to protect them with a SaaS security solution for F5. So those are, I would say, the three types of implementations. But of course, the multiyear sort of subscription are more anchored on the first model that I mentioned. Meta, in relation to gross margins, particularly product gross margins, our view of that for the year has not changed. And we talked about the supply chain improvements starting to benefit our product gross margins really in the latter half of this year, even all the way up into Q4. But the real benefit that we're going to see is going to be in FY '24 in terms of product gross margin improvement. We still had the purchase price variance and expedite fees that we're working through the components that make up our box builds through this year, and we still have got a few critical components where we are having to go in the broker market. So largely, we will start to see improvement in Q4, but more of it you will see in FY '24. On the software number, I don't get the reluctance to not give a number at this point. I get -- we're kind of missing the 15% to 20%, but it's the main question we're getting after hours. So any clarity on that would be helpful, Frank. And should we be assuming the kind of net new business, double-digit decline in new recurring software should continue for the remainder of the year? Or are you expecting this to kind of improve as that new business comp gets easier in the second half of the year? And just I have a quick follow-up after. Sure. And I appreciate the question, Jim. We -- again, as FranÃ§ois mentioned, a second ago, we are not updating our 15% to 20% guidance because we do still see a path to get there. Again, it's harder path. I think that we're not necessarily expecting to change in environment. And part of the reason why we're not updating the back half is because the visibility is cloudy right now in terms of demand. And with -- when we came into the year, we talked about over 50% of the revenue that we expected as part of that 15% to 20% growth was going to come from new business activity. And that we didn't expect that to grow, but we didn't expect to see the types of percentage declines that we saw in Q1. And so just with the lack of visibility that we've got right now, we don't have a new range to offer to you today. But we do feel like it's less likely that we will be in that range. Okay. And then FranÃ§ois, I'm surprised no one's asked about it at this point, but on the strategy side with this Lilac deal. Why Lilac? What's the competitive advantage? And is it hope more to align with product overlap against some of your kind of newer competitors like an Akamai or Cloudflare is it more to be able to offer that SaaS-like experience inside a customers' environment? And just trying to understand why couldn't this get done with NGINX and Volterra already? Thank you, Jim. So Yes. On the Lilac, let me start with -- we acquired Volterra a couple of years ago. and really launched the platform with our security offering about a year ago. And we've seen a very, very good traction with Distributed Cloud Services over the last 10 months. And so we want to build on that traction. We recently started with a CDN offering in the Distributed Cloud Services platform. That was based on an OEM agreement with Lilac. And this was essentially a talked acquisition to in-source that technology and the team, in order to be able to secure the offering for the longer term. And also work with this team to continue to improve on the offering and deliver increasingly innovative edge services on the Volterra platform. So we're pretty excited about the team joining us and being able to accelerate our innovation on that front. And it completes our offering in terms of web application firewalls, API security, DDoS protection, anti-bot and now CDN into the bouquet of services that we offer on Distributed Cloud. This is Victor Chiu in for Simon Leopold. You noted that the fundamental demand around F5 software is still largely intact. But are there specific factors that you can point to that gives you confidence that the slowing isn't a reflection of more secular headwinds like cloud migration versus the cyclical slowing that you're noting? Yes, Victor, I think it's interesting because I would say that migrations to the public cloud, if you want to call them like lift and shift tech migrations, we have seen that to be more of a tailwind to F5 than a headwind. But even more than that, what we have seen over the last couple of years is that customers are not migrating applications to a single cloud. Increasingly, customers are leveraging multiple different environments for their applications, multiple public clouds, private cloud and on-premise. And that actually is an architectural model that is ideally suited for the portfolio that we have built, which is essentially an infrastructure agnostic portfolio of application security and delivery services. And so we feel very strongly that as that trend accelerates in large enterprises and that multi-cloud and hybrid cloud becomes more and more the mainstream deployment way of that enterprises deploy their application portfolio. It is going to drive growth for F5 and specifically, for F5 software and SaaS services. So that's where our confidence comes and I mentioned those drivers earlier, multi-cloud environments, security, modern applications. All three will contribute to the long-term growth of our software, which is why we feel our views on that are absolutely intact. What we are seeing right now, again, it's not an architectural or a competitive issue. It is it is largely a macro-driven very cautious spending environment that is kind of indiscriminate across product lines. Well, I mean so prior to the kind of macro headwinds that we started seeing, do you see -- did you observe any of those trends that you mentioned regarding multi-hybrid cloud trends and did you see -- you observed those trends and that kind of gives you the confidence that, that will resume when things normalize? Yes, Victor. I mean, we saw them, which is why if you look at our software growth in 2021, I think it was around 37%. And if you look at our software growth in 2022, the first three quarters of '22 prior to the change in the environment, our software growth was also close to 40%. So we -- and it came from these three drivers, more deployment of modern applications that we serve with NGINX now with Distributed Cloud Services, more need for security in front of applications that we serve with all security solutions, Shape Distributed Cloud, BIG-IP and more deployments in multi-cloud environments with our large customers. I guess my first question is also -- or both questions are on software as well. The numbers you've given for us are -- you can kind of back into, I believe, strong double-digit growth in the renewal, kind of true-up business in the quarter. Is there anything onetime in that number? Or anything that kind of would lead us to believe that, that can't -- you don't have any visibility into that -- into fiscal '23, that growth kind of remaining? Yes. We did not experience any sort of onetime benefits, I think the -- however you want to think about the perpetual business versus the subscription business, but there was nothing unusual in the quarter. Yes. I'm sorry, I'm just focusing on the subscription business with regard to renewals and true-ups. And then as you mentioned -- sorry, Frank, go ahead. Okay. And then just on the perpetual side, you've been a little bit above trend line in the last couple of years -- the trend line over the last couple of years, where -- what kind of visibility do you have into this perpetual business line, in the pipeline there? Comments from FranÃ§ois, maybe. And maybe if you could juxtapose that with your comments about pause and a slowdown in spending just doesn't really jive with your kind of like beating the last couple of quarters pretty handily from a perpetual license perspective, that would be helpful. Yes. Tom, let me start with that, and FranÃ§ois wants to add, he certainly can. Again, we think some of the power of our model is the flexibility of the way customers want to consume. And in some cases, people have OpEx budgets and in other cases, they have CapEx budgets. And so in certain instances, I think they'd rather consume on a CapEx basis, and some of that will come through perpetual. It's not something that we try to spend a ton of time forecasting the split between the two. We're happy when revenue falls in either. And so for the last couple of quarters, you may have seen that tick up from what was sort of a low $30-ish million a quarter business to the upper $30 million, low $40 million. But generally, those are customer preferences and how they want to consume our solutions. Your commentary about the hardware being stronger especially with your outlook and such and the mix shift to more towards that, which will impact things. I understand it all, but the question is, is that impacted at all due to the supply chain issues during the past year or two in that maybe customers are absorbing some of the orders that they did and then this is going to face a headwind? Because normally, I would think about customers buying both the hardware and software kind of together. Jim, is it affected by the supply chain? The answer to that is yes, because we have a lot of orders that we were not able to ship last year, and we have made a lot of improvements in supply chain, both from our suppliers in the general environment and our own redesign of our platforms that give us better visibility on what we're going to be able to ship to customers over the next three quarters. And we've always said we wanted to be able to get all this these orders to our customers as soon as possible and reduce our lead times, which we believe actually will be a tailwind to demand when we're sale to reduce our demand. So yes, it is affected by that. But it is -- that's part of why we see the soft side in the hardware for the year. It's because our view today of what we'll be able to ship has actually improved from where it was three months ago. Okay. That makes a lot of sense. And then just given the macro cautiousness, how should we think about capital deployment, stock buyback, M&A, any changes there? Are you kind of holding, not holding up, reserving a little more for organic functions? Or how should we think about capital deployment versus maybe six, 12 months ago? Yes, Jim. So it really hasn't -- our outlook on capital deployment has not changed. We still expect to spend 50% of our free cash flow on share repurchase this year. And as you -- as we mentioned earlier, we did pay down the term loan debt associated with the Shape acquisition, which was a little over $350 million use of cash in the quarter. And so that reflects the change in our cash balance and the $40 million share repurchase we did in Q1. And we obviously announced Lilac, which was an undisclosed sum. It was a small acquisition that we did today. And so the balance of the activities and how we said we're going to use our capital has not changed, and we don't anticipate that it will change going forward. I want to revisit the software issues again. If you look at perpetual, it's growing fairly steadily. So can you maybe help us understand in terms of the renewals, what the net retention rate saw maybe anything cohort analysis that you said it was in line? So maybe if you can just elaborate a little bit more? And then furthermore, I guess the question also is how should we be thinking about your exposure to legacy applications versus new modern applications? And if there's anything you can share with us on how that mix is trending. All right. Let me start with the legacy and modern applications and how the mix is trending. I would say it's actually trending in line with the population of applications overall, which is that legacy applications are growing, I would say, in the single-digit percentage range in terms of the number of these applications out there deployed in the world. Whereas modern applications, we think are growing in the 30% range in terms of the number of them that are going into production on an annual basis. And so over time, there will be a lot more of the more than applications than the legacy applications. But where this gets blurred though, is that we're also seeing a number of legacy applications get modernized where folks are adding modern component to an application that is already in production has already been generating revenue. And this is where I think F5 has a specific advantage is that, yes, we play in modern applications with components like NGINX and excluding our Distributed Cloud Services. Yes, we play in legacy or traditional applications with platforms like BIG-IP. But for a lot of our customers, they want to have implementations that involve modernizing a legacy plate application and especially in an environment where customers are looking to consolidate vendors to simplify their operations, our ability to deliver on both of these requirements and actually deliver a single commercial vehicle where you can have both your modern and legacy application services is critical. And so that's one of the ways that we've positioned the company to be able to serve both needs. Over time, it will skew more towards modern applications as they grow faster. And we're not offering any new metrics on software like net retention rates. I will say that as we mentioned for the renewal side of the business, which includes the SaaS business is the true forwards associated with the business and some of the second terms of our multiyear subscription agreements as largely came in as we expected. The shortfall that we experienced was largely due to the new software business that just didn't drive growth in the way that we would have expected it in Q1. I have one more follow-up. FranÃ§ois, now that you've had a few years post NGINX, Shape acquisitions under your belt. Can you maybe give us an update on how the progress is in integrating these acquisitions into F5? Is it -- are you able to sell and integrate these acquisitions and upsell your solutions? Any update on how the integration of these assets have gone? And how do we think about next year -- sorry, fiscal '23? Yes, absolutely. So let me take them quickly in order. I would say on NGINX and Shape integrations are largely complete. And so on NGINX, you've already -- so they're complete both from a, if you will, product perspective in terms of capabilities, we have ported from F5 or BIG-IP onto NGINX, so we can offer, for example, security on NGINX. And increasingly, we're offering our customers a single pane of glass to be able to get visibility on both NGINX and BIG-IP deployments. And they're also complete from a go-to-market perspective whereby we have now enabled our mainstream go-to-market, marketing and sales resources to be able to promote and engage customers on NGINX. We've done the large thing on Shape, we're a little behind that, but I would say almost 80% there where we now have the integration complete. Shape is available in BIG-IP. Our customers who have BIG-IP can turn on Shape and tie more capabilities quickly. Shape is also available in our Distributed Cloud platform as a standard anti-bot defense offering. And we've also done a lot of the go-to-market integration. By the way, those integrations from -- when I say from a go-to-market, they are quite critical because they have allowed us to continue to drive better operating leverage from a sales and marketing perspective. So if you look at our sales and marketing expense, I think it was 31% or so of revenue in 2020, and it's 29% in 2022 despite the revenue pressures we had because of supply chain. So you see operating leverage there. And you look at our overall OpEx as a percentage of revenue has gone from roughly 54.5% in 2020, down to 50% to 51% implied in our FY '23 guidance. And then in terms of the -- I don't know if you asked about Volterra, of course, is newer. And so we're still going through that, but we've already done a chunk of the integrations by deploying all of our security capabilities onto that platform that we call now Distributed Cloud, and we're getting quite a bit of traction where all of that is going, is that ultimately, we are going to offer our customers a single console and a single pane of glass from which they can manage all their security policies from which they can get visibility to all their deployment with F5, whether it's hardware, software or SaaS and whether it's in legacy or modern environment. And in that regard, we're positioning to be quite a unique player that can cover all these models in a way that's agnostic to the underlying infrastructure. Just two if I could. I understand you're not giving any new software metrics right now. But can you talk about how contract duration trended on renewals? I understand you were selling three-year term license deals in that cohort. It's really the first cohort of renewals that you're seeing this year. Are you seeing any contraction of contract duration? And then the second question would be I appreciate the comment around double-digit EPS growth and the commitment there. But how should we think about cash flow growth and cash flow margins normalizing as you kind of lap the change towards more annual invoicing terms this year? Sure. Ray, why don't I take both of those? The first in terms of changes in duration of the contracts, we are certainly sensitive in monitoring that, but we have not seen any discernible change in contract duration on the second term renewals or on the primary contracts that we are putting in place. And so that has not impacted us at this stage. In terms of the commitment to our double-digit EPS growth and cash flow, we are -- we will see the benefits of some of the slowdown in the new flexible consumption programs that will then yield more actual cash in the back half because we're not adding on as much of the upfront revenue recognition in relation to the cash that we are receiving. So we will start to see the benefit of that and see that normalize out a bit. Part of the other benefit that we're going to see for cash flow is that the supply chain issues that we've had and the extra purchase price variance and expedite fees those will largely come out, and those will help our cash flow from operations. So both of those, I think, will start to see a normalization. But it is one of the more difficult areas to predict in the model going forward. Thank you. This concludes today's question-and-answer session. This is the end of today's conference. You may disconnect your lines at this time. Thank you for your participation.
EarningCall_1311	Okay. Good morning, and good afternoon, everyone. Welcome to Logitech's video call to discuss our Financial Results for the Third Quarter of Fiscal 2023. Joining us today are Bracken Darrell, our President and CEO; and Nate Olmstead, our CFO. As a reminder, during this call, we will make forward-looking statements, including with respect to future operating results under the Safe Harbor of the Private Securities Litigation Reform Act of 1995. We're making these statements based on our views only as of today. Our actual results could differ materially. We undertake no obligation to update or revise any of these statements. We will also discuss non-GAAP financial results and you can find a reconciliation between non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC, including our most recent Annual Report and subsequent filings. These materials as well as our prepared remarks and slides and a webcast of this call will all be available at the Investor Relations page of our website. We encourage you to review these materials carefully. And unless otherwise noted, comparisons between periods are year-over-year and in constant currency and sales are net sales. And finally, this call is being recorded and will be available for replay on our website. Good morning, Nate, and thanks, Nate, and thanks to all of you for joining us. As you saw in our preannouncement, our third quarter results were disappointing. Enterprise demand deteriorated versus last quarter, and consumer purchases were soft and more concentrated during promotional weeks than is typical. Those factors compressed our net sales and gross margins and resulted in a revised fiscal year 2023 outlook. I've discussed for the past few quarters the ongoing macroeconomic and geopolitical challenges impacting Logitech and the world. A strong dollar, global inflation and low consumer confidence continue. In the midst of these, we focused on what we can control: product innovation, a strong go-to-market strategy and disciplined P&L management. So what changed during Q3 that pressured our results? First, our enterprise demand declined. Our VC business had delivered consecutive quarters of 7% growth and fell 16% this quarter. You all have read the headlines. Google, Amazon, Microsoft, banks and other businesses have announced layoffs and cost containment actions. Initially resilient in the face of pressured macro conditions, businesses are increasingly cautious in their spending, given the economic volatility and uncertainty. And of course, that is impacting our enterprise business, too. The second change in this quarter was a shift in our consumerâs purchasing patterns. Consumer sales remained weak. And importantly, of those consumers that did buy, these purchases were concentrated in time with higher promotional intensity, resulting in lower sales and pressured margins. While current macroeconomic conditions and even the variables that changed in the third quarter aren't going away this quarter, they don't impact our view of the long-term potential of this business. We remain committed to the long-term growth trends, strong market strategy, the markets and the business models we have in place over time. I fully expect us to return to more predictable, less volatile economic conditions. And I believe this will support business investment, rising consumer confidence, sustained growth at Logitech. Because if we look beyond the whipsaw of the daily headlines, I'm actually struck by what hasn't changed. While the pace of return to offices remains uneven, hybrid work is inevitable. Company's approach to return to the office has been different across industries and geographies. I hear a familiar story from CEOs and customers across industries. They're still working to determine what hybrid model works best for their teams. Logitech is no different. We're relocating and redesigning buildings in the Bay Area and across the globe focused on a hybrid work environment. As companies settle out on their definitions of hybrid work, we should see investment in personal workspaces and collaboration rooms. This investment will happen. It's just a question of timing. Product innovation matters more than ever. The winners will have great products. That's why we keep investing. We're also diversifying the ASPs in our portfolio through innovation across our categories. Our oldest business, Pointing Devices, had ASPs 25% higher this quarter than four years ago as we've systematically expanded the category into new segments, with differentiated features. This is obviously by design. Making sure we have category defining products across a broad range of base fees is our goal. Innovation requires investment, and our R&D investment this quarter was up 50% more than we invested in Q3 2020. Few companies have the financial resources and the management discipline to sustain investment in product development during challenging times, while driving efficiency at the same time. We continue to press that advantage and are enhancing our product portfolio. The big durable trends we've been highlighting, video everywhere, hybrid work, the explosion of gaming and content creation, continue to move ahead. People today want to work, play and free from anywhere. And we believe that our products will be a great enabler of this trend. Let me provide a little more perspective on this quarter's performance. I mentioned consumer spending was weak in the quarter, and it was with sell-through, excluding currency, and our prior business in Russia and Ukraine, only declined mid-single digits. We grew market share in Gaming, Video Collaboration, Pointing Devices and Tablet Keyboards. In Video Collaboration, while the number of conference cam units declined year-over-year, we continued to drive ASPs per room higher. The mix of our conference room sales is skewing to higher-end cameras. And the attach rate of accessories and services to our conference room cam sales is growing, which drives our sales revenue per room higher, evidence that our strategy of developing integrated room systems is working. In keyboards and mice, we continue to gain share in the fast-growing high end of the market. So what can you expect from us in the near-term? You should expect us to operate in a conservative, disciplined manner, consistent with the last few quarters. Namely, we'll focus on decreasing our expenses. We plan to reduce operating expenses by $150 million, or 11% by the end of fiscal year 2023. We're on track to well exceed that goal. For Q3, OpEx was down 23%. You've watched us be aggressive on our OpEx as we saw the market weaken, and you can expect us to continue to manage our costs based on market conditions. We'll continue to invest in product development, though. Customer needs are evolving quickly. We have the engineering and design expertise, customer insights and financial flexibility to bring new products to market to meet this demand and to accelerate refresh cycles. And we will lean into our global operations and go-to-market capabilities. One final note before I hand it over to Nate. First, regarding our CFO search, our search is progressing well, though we don't have an update to share with you today. Second, I'm really pleased to announce that our current Head of Global Operations and Sustainability, Prakash Arunkundrum, has been appointed Chief Operating Officer here at Logitech. Prakash has been here for close to seven years and is a frequent presenter at our annual Analyst and Investor Day. So many of you already know him. In this newly created role, Prakash will be one of my key partners in making sure we are structured strategically and operationally for the short and long-term road ahead. Thanks, Bracken. Hello, everyone. Let me walk you through the quarter in more detail. Our Q3 results were impacted by a challenging macro environment. Net sales were down 17% to $1.27 billion. This reflects consumer purchasing concentrated in promotional weeks throughout the quarter and lower enterprise and consumer spending. Gross margins decreased versus last year to 37.9%. Versus the prior year, currency was unfavorable three points. Promotions were also unfavorable three points, and cost inflation was unfavorable two points. These eight points of headwinds were partially offset through our pricing actions and by driving down our use of expedited shipping. Operating profit was $204 million, reflecting lower demand and gross margin pressure, partially offset by reductions in operating expense. Cash flow from operations was $280 million in Q3, and cash flow is up $118 million year-to-date versus last year. Turning to results across our product categories. Gaming was down 10%. Growth in our simulation products was essentially flat and more than offset by declines in PC and console gaming. Asia Pacific was down only modestly, while Americas and Europe remain pressured. Despite these declines, we gained market share in nearly all Gaming categories. The largest negative swing in our portfolio versus last quarter was in Video Collaboration, which was down 16% after posting consecutive quarters of 7% growth. Video conference room cameras and peripherals declined single digits, but we gained share. And business-oriented webcams were down more than 40%. Pointing Devices were down 8% driven by pressure in the low end of our portfolio, but we grew market share in total Pointing Devices. Keyboards & Combos net sales declined 17% with gains in the high end of the market, offset by losses in the low end of the market, and consumer webcams were down nearly 50% year-over-year. Turning to expenses. Consistent with last quarter, we reduced our OpEx, which was down 23% versus last year. As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership. And while R&D was down modestly versus last year, the $63 million we invested in R&D in Q3 is more than 50% higher than our R&D investment level just three years ago. In Q1 of this fiscal year, we communicated our plan to reduce our annual operating expenses by $150 million versus last year, and we achieved that goal this quarter, one quarter ahead of schedule. I now expect that for the full year, we will reduce operating expenses by approximately $215 million or 15% versus last year. We will continue to focus on finding efficiencies throughout the organization as we manage our costs based on market conditions. We ended the quarter with a cash balance of more than $1 billion and continued a strong share buyback program, returning $90 million to shareholders in the quarter. We revised our financial outlook for FY 2023 based on three items: softer than expected third quarter results; enterprise and consumer demand, which may remain weaker than we previously expected; and uncertainty in supply availability related to the recent COVID outbreaks in China. Our outlook calls for full year revenue in FY 2023 to be down 13% to 15% in constant currency. The US dollar weakened versus last quarter, but currency still projects to be a roughly 5-point headwind to US dollar growth for the full year. Therefore, our outlook for full year revenue in US dollars would be down 18% to 20%. Our full year non-GAAP operating income outlook is now between $550 million and $600 million. Great. Thanks, Bracken. Thanks, Nate. [Operator Instructions] Our first question is from George Brown at Deutsche Bank. Good morning, good afternoon, George. Hi, guys. Good afternoon. Thanks for taking my questions. I have two, if I may. Firstly, in terms of product launches, you released quite a few products in Q2 out of the holiday season. Can you provide some detail on how they performed and in particular, I'm interested in how Logitech G CLOUD has performed and whether that's met your expectations or not. And I'll leave it at that. Okay. Yes. I would say overall, we announced 20 new products that we're launching in Q3 or sometime in the next six to -- three to four months after that. And I would say, overall, our launches are pretty well on track. The G CLOUD, in particular, is a very narrow launch. So we launched it only in the US. We're so far, so good. We're now expanding it into Europe and Japan. So, I would say, so far, it's on track. It's a new category for us. We're always very conservative on new categories, George, because we don't want to get kind of over the tips of our skis as weâd say here, but so far, so good. And generally speaking, I feel really good about our innovation in total. I mean, we continue to have just a really, really good insight-driven innovation with -- and I would say, our performance in all of our new products is pretty well on track. Perfect. And then just a second question. Just in terms of the level of discounting going forward, after there was clearly some pull forward of demand during the Black Friday and Cyber Monday period. What could we expect going forward into Q4 and beyond from a promotional perspective, given inventory stands at quite a high level? Yes. I don't think -- we're not in a position where I would say we're going to have it at a discount, because of the inventory levels. Our channel looks fine, and our internal inventories came down quarter-over-quarter, again, as you probably saw. But we're going to make sure we're responsive to the environment. So I wouldn't commit to you exactly where the overall promotion levels will be. I think they were particularly high as a percentage of our business this quarter, though, and I wouldn't expect that again. Yes, George, just TWO quick comments on your questions. First, I think from an NPI standpoint, I agree with Bracken, off to a good start. I wouldn't say there was anything in there that was financially really that significant in the quarter. So still ramping up there. And then on the discounting, as Bracken said, we definitely saw consumer preference towards more promoted products this quarter. I think there's some of that assumed going forward here in Q4. Too early to say what that looks like out into next year, I would say. But that seems to be the environment that we saw during the holiday with certainly the weeks with the higher promotions had the higher percentage of sales. Hey. Good to see you guys, too. Couple of questions. First on the VC side of things, where -- if you can give us any anecdotes about how your discussions with customers are going now? Clearly, the environment is still pretty gloomy out there as far as layoffs, but has there been any change since their reported quarter in terms of these conversations with these customers around demand for VC? And then secondly, I know in the press release, and Nate mentioned that as well, there were some supply concerns for your March quarter that you discussed in the press release with the pre-announcement. Can you tell us how much of that's really affecting the March quarter? And when do you expect those to kind of play out, or are you still expecting supply issues post the March quarter? Thank you. Okay. I'll take the first, and Nate, I'll let you take the second one. Yeah, I would say, overall, we just came back from CES. And I would say, generally speaking, the tone was about the same. Everybody seems very committed to the long-term, making sure they've got the right setups, and that I wouldn't say, there's any real change in the secular term from what I see. But I do feel â I do sense the conservatism. I think you could hear it in some of our salespeople, who were saying March, March, March. And I'm not sure that was the right date, but they were saying a lot of the companies are really pushing out spending into future quarters. So I think that's probably still out there. And we're certainly assuming that as we go into Q4, and it's reflected in our guidance. Nate, do you want to take the China question or I'm happy to? Yeah. No, I think â listen, I think the thing that we probably all learned over the last few years with COVID is it's a little hard to predict. So I've made some assumptions that, there could be some disruptions on supply in the quarter. We're working hard on those things. We may have opportunities through expedited freight, and so forth to recover some of that. But still a fluid situation, Asiya. So there's not really a specific number, I would say, we called out. We just tried to factor in a range of possibilities in the outlook. And so that was one of the things that caused us to adjust the full year outlook. Yeah, I would just add to that. I think we're in the â we're probably in the middle of the most uncertain period right now, because it's â the New Year just started. All of our factory people went back to their homes. And it's anybody's guess on what that's going to do to COVID rates, and whether we'll have a problem getting people back or some of our suppliers. So we're in this kind of uncertain period now. But I think, it will settle out over the next few months. It's not an unlimited risk. So we bracketed it pretty well, I think, in our outlook. I think the other thing that we've done certainly over the last couple of years through investment has been increasing the amount of automation in the factory. So, we can't fully offset the risk of labor disruptions and things like that. But we have improved the company's ability to do that versus a couple of years ago by driving up that automation in the factory, which has somewhat reduced the reliance on labor, but still something that we've got to really manage tightly. Great. And then just in terms of growth outlook beyond the March quarter, you guys obviously have a target model out there. Any indication on when we should expect that growth? Are we at a point where post the March quarter, we can return to kind of the growth rates that you guys have outlined just given the macro trends that you're so confident on will continue? Certainly, we're planning Analyst and Investor Day. We'll have the date out there shortly. I think, it's too early for us to tell you what next year is going to look like and â but hopefully, we'll have a clear picture of that when we come into March. I don't think â I can't imagine that, we're going to see a snapback in the macroeconomic picture in a quarter. So I wouldn't expect it to, our fiscal year to end and then things suddenly get better. But I think â I'm pretty optimistic about somewhere out there in the next â over the next year or so that you'll see the market come back, but I think everybody on this call has an opinion on how long this is going to last. Thanks for taking my questions. Just on gross margins, as we kind of think about a couple of quarters down the line, how do we think about pricing increases you've done kind of lapping some FX headwinds, lapping some component inflation and lower shipping costs. Can we rebound comfortably into your kind of target of 39% to 44% in a couple of quarters? I'll go ahead and take that one, Bracken. Yes, I mean, Paul, this quarter, we had eight points of headwinds year-over-year, very similar factors in the sense that we had currency was the largest. We also did have some headwind this quarter from the increased promotional mix, and then we also had the inflation. As I mentioned last quarter, I mean, I think we feel good about some of the trends on the inflation side, start to see some of the costs come down. Ocean freight, we continue to make some progress on the rates there. And currency looks a little bit more favorable than it did last quarter. So good trends, but we didn't really see any of that really flow through yet this quarter. And I think next quarter, I really don't expect to see a lot of that favorability yet. It takes a little bit of time with the inventory being a little bit higher. We've got to work that down to start seeing some of those benefits come through as well. But yes, I think into next year, I think some of these tailwinds could probably become -- excuse me, some of these headwinds could probably become tailwinds. I think I misspoke earlier. Those are obviously headwinds. Some of those headwinds could become tailwinds. And I think in terms of the pricing, I think it's good that we took action early this year to increase prices across a number of categories. That's helped offset some of these pressures. And we'll see with the promo environment, what kind of promo environment unfolds over the next few quarters and whether we can hold those or not. So lots of moving pieces, Paul. But I do think that we've been absorbing a lot of those headwinds this year, and I do expect some of those to begin to reverse into next year. Maybe, Paul, I'll add one more piece of perspective. I think the thing that makes me feel the best about this year is the incredible amount of headwind we're facing from a gross margin standpoint. Exactly when that reverses is a little unclear. I mean clearly, currency is on its way now. We're not seeing it yet, but it's caught on hedges and natural hedges and technical hedges, et cetera. But I'm super excited that we have 800 basis points of a headwind because that's going to come back out. Again, we're not going to see 800 basis points of improvement. But getting out of range again, I would sure hope we do it next year. Okay. And then just a follow-up on OpEx, pretty material cuts. Where do you kind of see it normalizing? I assume more aggressive cuts maybe in the near term. Do we get back to that 25% of sales, or where are you seeing further opportunities to kind of right-size cost while top line is challenged? Thank you. Paul on that -- real quick on that one, I think on a full year basis, you'll probably see the OpEx be around 25%, which is where it has been. And come back to your earlier comment on gross margin, those things go hand-in-hand. So if we get good confidence in line of sight to gross margin expansion that creates more room for investment if we see good returns available to us to drive growth. So that strategy remains unchanged. Moving away from promotion-driven strategy to one that's more full driven through increased marketing investments. Certainly, we're committed to the investment in product innovation, and we think that, that's key. Bracken, something you'd like to add to that? Hey, guys. Good morning. Thank you for taking my questions. I guess, maybe, first, if we take a step back and think about kind of your four major end markets, where do you think some of those are furthest along in terms of kind of facing the brunt of the challenges the world faces today? Meaning, we saw PCs correct earlier perhaps than consumer electronics, which perhaps is corrected earlier than enterprise. And so, just curious where you think you could perhaps see maybe a rebound first relative to other of your end markets? And then I have a follow-up. Well, that is a really good question. I'm going to hesitate to give you a definitive answer, but I'll give you kind of a feel. I think it could be that we see it first in Gaming. But it kind of depends, because the Gaming market has also seemed pretty sensitive to promotion this quarter. So that made me a little less -- it makes me a little more tentative to say that. I think the enterprise spending kind of comes in later and starts out later. And, I mean, it hangs in longer and then comes out a little later when you go into a softening of the economy, that's generally the view. And then our personal workspace business, its just somewhere in between. I reserve the right to completely reverse though, because to be honest, the visibility is not what we'd like. It's really hard for us to see. But I think, the good news on all three is I really feel good about the long term. I do think those secular trends are super solid. Okay. No, that's helpful. And then, just because you mentioned it, Bracken, I'd love to just maybe get some color from you guys on, maybe, why visibility is different than historically? Is it different purchasing patterns? I know you mentioned the purchasing during promotional-heavy periods in the December quarter. But maybe just taking a step back, are enterprises purchasing at a different cadence than they used to or consumer preferences for purchasing changing? Would just love some more color on just maybe how that visibility has changed and/or when it could improve, and why it might improve? And thatâs it for me. Thank you, so much. Absolutely. Thanks, Erik. I'll just put those two pieces. On the consumer side, I think you said it all. The consumer demand has been weaker. And in this quarter, we saw it really concentrated in promotion. Now, I hope that -- Nate was saying, we're assuming it could be more promotional as we go through the rest of the year. I hope that that starts to fade at some point soon, because normally, promotion is heaviest during a holiday quarter. Now we may see that in Q4, but we'll see. But we're prepared for that, but I hope that it will start to get better from a promotional standpoint. And that is not -- that would not be normal to have heavy promotion go on all the way through outside the holiday quarters all the way through the year. So we'll see. On the B2B side, it really just comes down to -- I think, there's such a -- turmoil may be too strong a term, but there's a lot of settling that's happening. And I can't remember since I've been in this job anyway when we've had the kind of layoff announcements that we've had in just the last 90 days. I think there's just a lot of construction of spending happening, and I think that automatically drops your visibility. What you think you have in visibility, suddenly, it's -- seems like it's been pushed out a quarter or two or something. So I think that's reduced it. I think I like the fact that it's actually a sharp reduction right now from a business standpoint, because I think that means it might be a faster exit back out again. And maybe that's my optimism booking its head up. But I would rather see that and see people kind of gradually easing into something. So I'm sort of feeling good that there's all this discussion around construction. I don't feel good about our business, don't get me wrong, but I feel good about the restriction. I think that suggests that people are making the right steps, and then the clarity will come as we go into next year. You asked what causes it to be different. I think we're transitioning out of, obviously, a unique period globally from shutdowns. And so the diversification that we have, again, I'll come back to this in the portfolio by product, by category, by geography, are all things that I love having in a time like this, because that transition is obviously different in those categories and in those geographies. We still see places that are doing better, that are growing a little bit. They maybe went into the lockdown at a different time. They've come out of it differently. So that diversification continues to be, I think, a really, really important thing. Obviously, this quarter, we're disappointed with the volumes. But the shape of the P&L held up pretty well. And I think we continue to manage well in this environment. We continue to do well from a market share standpoint. We continue to invest in our long-term priorities and continue to manage OpEx, I think, very well and do a good job with cash generation. So lots of things haven't changed. And again, I think the diversification in our business is really key to us being able to deliver a good strong quarter in what's the challenging macro environment. Okay. That's super helpful. I was just the last very quick follow-up was when you mentioned enterprise demand weakness, did it spill over into any other segments besides VC, or was it mostly concentrated in VC? Just wanted to touch that clarification. That's it for me. Yeah. So we see it also in CNP, mice and keyboards, mice and keyboards and traditional mice and keyboards and Video Collaboration, our two biggest areas in B2B. VC is a good proxy for it, because it's pretty much all B2B, but we also see it in mice and keyboards. By the way, I should say, it's not like people weren't buying any conference cams. They were. So we didn't suddenly go terribly negative. It was down mid-single digits. So â but that was after being up double digits before. Hi, there. So I just wanted to check on the channel inventory situation. So, maybe if we could go by division. I think Gaming was positive sell-through in the quarter. Is that a sign that the inventory levels there are kind of at reasonable levels, and perhaps the sell-in can match the sell-through going forward? And maybe, if there is any other specifics by different division, if you could add that, that would be great? And then second one, so on 2023, the calendar year, are you thinking about further price increases? And maybe if you could just share your thought process on price increases versus potentially prolonged promotion period as we â as you mentioned already? Thanks. Yeah. I think channel is in good shape. It's down year-over-year, which should be consistent with the overall trends in the business. I mean, I think â we continue to see our customers, I think, being pretty cautious and conservative around restocking. Same sorts of visibility challenges that we were talking about a moment ago, I think probably applied to them as well. So being a little cautious on reordering, but the channel is in good shape. As Bracken mentioned, Gaming was one of those areas that was more â seemed to be more promotional this holiday period. And so we did make some progress in reducing some of the inventory levels there. I'll just quickly say on the pricing side, and then I'll let you jump in there, too, Bracken. It's really a function of a lot of things, Adam. What happens with currency, what happens with inflation? So lots of elements there for us to consider. But Bracken, something you'd want to add on that? Yes, I'll be even more definitive. I mean, if something doesn't change, I can't imagine us raising price further. I think those 900 basis points or 800 basis points of headwinds that are going to eventually drop would suggest that we won't need to. Now, if something radically change again, who knows. But I don't think as long as currently keeps heading in the direction it is and inflation keeps heading in the direction we all think it's going to go, I don't think we would need to raise price again. Yes. Then on the inventory side, too, you asked about channel. Again, Bracken had mentioned it, I think, in his remarks. Third consecutive quarter where we've reduced our distribution center inventory sequentially. And we made good progress I think there this quarter. We'll be able to reduce that more into the fourth quarter and continue to normalize those levels. Not in a big hurry to do so. It's all good fresh inventory that I expect we'll sell, but it continues to be a focus for us. Yes. Hi. Good morning. Thanks for taking my questions. And the first one would be please on your implied Q4 outlook, which is targeting or guiding for sales being down around 25%. Can you really get us a rough indication, is one-third of this destocking, one-third consumer demand weakness and one-third China? Is this how we should think about it? Because it seems when you're saying sales-through for your key categories, ex Russia was only down mid single-digit in Q3. It seems a quite sharp deceleration. So if you can provide some more color here would be definitely appreciated. And the second question would be, please, just focusing on the freight costs, which they came down to pre-COVID levels for a couple of areas. Do you feel that this will be a very strong contributor to the scenario [ph] to your earnings growth in 2024? Maybe to start with these two questions. Thanks. I take the first one. Yes, and then I can hit the second one, too. I mean, the outlook for Q4 really implies typical seasonality, Joern, Q3 to Q4. So Q3 was weaker than expected. And off of that, you would get sort of a normal mid-20% decline sequentially into Q4. So that's what is what the guidance really implies. We've got one quarter left, but the full year guidance basically implies that for the fourth quarter. And then on the freight cost, the benefit we got this quarter was that we didn't use air freight to the same level by long ways versus last year. We were chasing a lot of supply last year. It's not the case this year. So we were able to reduce our air freight. So we got some year-over-year benefit there. We're still -- and ocean rates are getting -- are coming down, but they're still higher than what they were pre-pandemic. They've come down month-on-month, starting to look more positive there, but still have a ways to go before we get back to pre-pandemic levels. Okay. And then maybe the last question, if I may, on your OpEx. When we look in 2024, I mean, after you take -- take out $250 million OpEx in fiscal year 2023, is this now enough? Is this done? Are you lean enough, for example, to cope with a flattish 2024? Is this for you feel good about? Is there more to come now in the next couple of quarters regarding your plans? Yes, 215. And we're going to keep up with the OpEx, Joern. We're not letting up. When we look at the top line, we feel like we need to take -- we're going to continue to take more out. And so you can count on that we'll keep aggressively taking it out. We're going to respond to market conditions, and you see what they are. So you can imagine how we feel about our cost. Yes. Hi, everybody. Hope you are well. I have two questions. One is, really, can you say something about the Chinese sales in the quarter? And do you expect that the impact from the lifted restrictions going forward, is that the benefit or not? And then, probably, also the status. I mean, you mentioned something in your own production facility. Are you completely 100% operational right now? And what's there the status basically? Yes. On China sales, I mean, China, unfortunately, was negatively impacted this quarter from a sales standpoint due to the infections, the rising infections. I think we probably had about a 1 point headwind this quarter, Andreas, from sales in December that didn't occur. I think longer term, I mean, I think it's a positive. It's potentially a positive. But like I mentioned earlier, I mean, I think COVID is just unpredictable. And hopefully, this was sort of a one-time event, but I think that's not for me to know with certainty. So -- but I think it's a positive to see a more open position by the government. I do, but to -- way ahead in this quarter. Yes, I'll add to that. I do think -- I think, opening -- China opening is positive. And I think you asked about our production facility related to that. Right now, our production is still exposed, because Lunar New Year. So that's one of the things that has given -- gave us a little pause was what happens during Lunar Year. Everybody comes home, how many come back. And I'd say, we'll see. I mean, I think we'll manage whatever it is. But that is what it is. But I'm actually -- I hear so many negative headlines about China. I feel like the optimist in the room on that for sure. I feel good about China. I think as China opens, it's going to be good for us. It's our second biggest market. It's always been a good market. As long as I've been here, it's been good. We've had very few times we had a long period of slow growth there. So I'm excited about China. We've got great market shares. We've got a great brand there, and we're really learning a lot about the Chinese consumer there. So I'm optimistic. Okay. Then I have another question about your priorities. When you go through your portfolio, do you see a need for changing some priorities for some categories with the downturn, maybe to earmark also a category as non-strategic one more besides a mobile speaker and earnings buds, for example? Yes. We've kind of done that, and we always redo it, and we do it on a very regular basis. So, as you mentioned, we picked out a couple of categories that we said were non-strategic, which means we're reducing our investment, and we've stayed true to that. I don't see any immediate changes in our current -- the last time we updated you, but we'll update you again at the Analyst Investor Day. I think our portfolio, I'm really excited about that kind of 80% of our portfolio that we've angled forward and put our investment into. We're gaining market share across those. We're investing aggressively from an engineering standpoint into them. And yet, we're managing costs really well across the company in the middle of this current economic kind of storm. And so I think that bodes well for the future. But we'll update you again regularly. We'll keep you updated on where we're deemphasizing categories. Hey, Bracken. Yeah. First question is maybe you can give more color just in terms of the latest B2B consolidation in terms of the go-to-market kind of sales force? And how are you guys applying learning's from the consumer vertical kind of innovation there to apply to the B2B vertical? Okay. Well, first, I would say, we're trying to unlearn our consumer vertical into the B2B because I think our strength in consumer is something that really doesn't lend itself too much to the B2B side right now. We've taken â we leverage as much of that as we possibly could have during the first five or six years in the business. And now we're building new muscle, which is how to be a B2B company. And I'm excited about our potential there. We have a long way to go to really be, I think, first class in that space, but I think that's the upside here is how do we become a great execution engine in B2B. So I think it's still early days in that path. We've got the right resources in place. We've got the right capacity. And we're putting step by step, process by process, compensation plans, everything into place to really become stronger in B2B. So keep asking us about that. I think it's more of the hot spots of our business and one of the areas where as we improve, I think we can improve our performance. Maybe you can unpack a little bit in terms of the installed base refresh/kind of upgrade cycle kind of against the macro, if the economy will slow further, how do you think this installed base refresh going to play out? Do you think that it's going to be delayed, or do you think it's just a more temporal kind of headwind there? I think, if there's a dramatic slowdown that goes on for a long time, it's certainly â it is going to delay the installed base refresh across almost every category you can think of in the world, including probably ours. But I think ours are â if you look at our products, whether it's personal workspace or video, they kind of are required for the new world we're in. So I'm not sure that you can â on the â in the office, for example, Video Collaboration. While there may be a delay, it feels like there is short term, it's really hard to imagine that lasting a really long time, because in the hybrid world where you're doing so much video like we are all right now, it's really hard to imagine not to enable many rooms. So I think that's â I think, I'm pretty positive on that. Yeah, it could be â there could be some kind of a delay in that. It looks like there was this quarter, but I don't know how long that can go on. We'll see. On the workspace side, this is so central to what we do now. Everybody on this call is sitting in front of a desktop with some stuff in front of them. And I would guess 90% of you don't have really exactly what you need, even if you don't realize it quite yet. So I think that upgrade cycle is coming, and it's already started, and it will continue for a very long time. And maybe if you're really an optimist, then I'll stay away from going too far on this, but I think you can imagine it's become more central to our lives as part of our homes and things. So the upgrade cycle could even accelerate. But I think regardless, I think there's a good strong upgrade cycle ahead of us. And could it be slowed down a little bit? Yes. Will it be stopped? No. Yeah, I'd like to squeeze in my last question, if I may. Can you kind of give more color and impact a little bit in terms of the recent market share gains across key categories? They're super encouraging. It seems that largely is outgrowing the industry. Is there any sort of levers and the kind of differentiation you guys have to -- for this to sustain the current market share gains? We announced last quarter that we had launched 20 -- or announced 20 new products, and it's kind of a reflection. Numbers don't tell the whole story, of course. We're actually trying to do fewer bigger. But I think it's kind of a reflection of our investment. We started nine or 10 years ago really focusing on design, which means putting the user in the middle of the action. And we've really matured that approach. Meanwhile, we've kept investing in engineering over 50% in four years in our total spending on engineering. And certainly, the -- that's happening across all of our categories. So I feel very, very good about the innovation engine here, and it's the primary driver of growth, but it's not the only one. The go to market on the B2B side is a big opportunity, too, and we're going to keep investing there. Maybe just one other. You started to mention the go-to-market. I think some of the things the teams have been doing around analytics and in e-tail or on Amazon, I think have also continued to be really impressive. In-house share numbers look really good at Amazon in across the categories. So I think it does start with the products, and you look at the ratings on the products, and you can see those are quite good, George. But I also think that you have to tip your hat to the go-to-market team with their -- what they're doing around analytics. Two questions from my side. If you could give some more color on the appointment of Prakash to the CEO -- COO position, sorry. And sorry, what sort of gaps do you think you need to fill there? What improvements you're seeing on the operations side? And the second question would be regarding your thoughts on the creator economy. As we go into recession, do you see particular dynamics developing there and how you position yourselves to harness those opportunities? That's a really interesting question. And on the -- on Prakash, Prakash has always been -- I mean, he's been here for seven years. We recruited him right out of a consulting firm, and he's just grown and grown. And a lot of what you see from a sustainability standpoint we're doing in this company, you can point right up to Prakash's leadership. He's got a tremendous team. And my entire staff right alongside and have been part of this drive to be better for the world from an environmental standpoint. But make no mistake, Prakash has led that from the heart and the hands and the head. But I think the next step for him and for us is to give him a larger role, not only in the overall operating execution of the company, but also in the structure and the cost of the company. And so this is another -- this is -- we're-- we've evolved very quickly structurally, very quietly behind the scenes. We've changed our structure, and we're going to keep evolving it going forward. It will just keep evolving. And he's going to be a real partner for me and for the CFO and for the whole team in helping think through that. So think of him as overseeing the overall operating cost of the company. He also has responsibility for the overall M&A strategy worked out. So he's got a big chunk of responsibility now. Now there are others who have huge chunks of responsibility. I don't want to only focus on Prakash, but we did announce this move today, so it's a big one. On the greater economy, a recession and had what are our prospects going forward, the creator economy is touching so many things. I think it's one of the quiet drivers of interest in the personal workspaces. We're not calling the mice, keyboards, webcam, et cetera. It's one of the quiet drivers of that business. And I think it's here to stay, the growth of all the things we read about, including the new world of ChatGPT and what that can unlock. I think all these are fuel for that creator economy. Now, I do think if you go into a deeper recession, I think the greater economy will -- a lot of those people will end up in full-time jobs if they weren't already in them or trying to get full-time jobs. But they're going to keep going alongside that in this creator economy. And I think the other thing about the creator economy that's exciting to me is that, I think more and more people are going to be selling to their friends directly. And we're experimenting with that. Lots of companies are. I think there will be more and more of that kind of selling. It's probably not going to be significant in the short term, but I think in the future, there will be more and more of a network of activity to drive sales through the creator economy, and that will be part of it.
EarningCall_1312	Our next speaker is going to be Scott Thompson. Maybe we can have him come up to the stage, please. Hi. Okay. So, why don't we start right away, because we're trying to keep track -- kind of keep on time here. So, thanks Scott for joining me this morning. Before we begin -- and I should have said this with Royals, but this does apply for the entire conference. Scott, your comments today may include forward-looking statements. Actual results could differ materially from forecast, projections or conditions in the statements --conclusions in the statements. Listeners can find additional details on public filings of Scotiabank and Royal. You took over as President at Scotiabank on December 1. You've been on the Board for six years. And we know there's still about a month or so before you're officially the CEO. You are known to a lot of investors that are in this room. You've had time at BCE, Thalesman and Finning, of course. But why don't we take this opportunity -- because this is actually only the second time I've ever seen Scott, so why don't you take this opportunity here to maybe let us get to know you a bit better, maybe focus on your experiences and sort of how it's shaped you and prepared you for this new role. Great. Thanks, Darko, and welcome, everyone. And I feel very honored and privileged to be here today, and humbled to the ability to step into this role and build on the great work that Brian has done and the legacy that he's left. So, look forward to working with all of you going forward. As you mentioned, Darko, I've varied experience set across a large number of industries. And I think there's two themes across those experiences set. One is the ability to step into complex organizations at a senior level and build teams, lead teams, motivate teams, with success. So, that would be one theme. The second theme across those experiences would be customer. As you think about my financial industry's experience, I learned the importance of relationships, importance of advice, and then, most recently, in a customer-facing organization, with Finning, we spent a lot of time on that -- over that nine years thinking about the customer, developing solutions and insights for that customer to get, obviously, a great outcome for the customer, but also a great outcome for the company and for the shareholders. And then, lastly, from the customer lens, I've also been a customer. So, I have a good sense of what my expectations are from a customer perspective. Why do I think I'm the right person for this job at the right time? I guess a couple of things. One is, I've got a track record of success leading teams, building, retaining, developing, attracting talent in a collaborative fashion and in inclusive fashion to deliver a great outcome. Two, capital allocation. It's been a forefront of how I think about running businesses. And I think we have an opportunity here from a capital allocation perspective to really make a difference. Three would be operational excellence. I've seen the power of operational excellence around execution, and building good businesses and seeing the returns that come with building those businesses. And then, lastly, I've been a CEO of a global organization, with an emphasis in Latin America, and, obviously, not only through my Finning experience, but also with the Talisman experience. I've been in these markets for 15 years and I know them well. Okay. It's a lot to -- that's a lot for me to work with. You've been there for a month. What have you seen? So, I guess, first, it's been a little bit more than a month. So, the announcement was in September, and I've spent a lot of time around the banks since then. So, the focus has primarily been internal and primarily been with employees. And what I would say is I've been really impressed with the passion, the enthusiasm, and the openness with which the employee base, 90,000 Scotiabankers have accepted me. So, that would be the first and foremost. Two, I think, there is a lot of competitive strengths with this platform, and Brian deserves a lot of credit for it. But the strengthening of the earnings quality across the platform has been very successful. The strengthening of the core, the functions that allow the business to be successful has been a real achievement. Addressing the technology deficit has been an achievement as well and places us well for success going forward. And then, I do believe we're a leader in ESG, and I think that will become increasingly important going forward. So, I think there's a lot of checks along the way that Brian should be really pleased with. As I look at two areas -- I guess three areas that I'm digging into and I think there's opportunities for. One is on this deposit and funding franchise. And I do think we have an opportunity -- our loan to deposit ratio is high. We have an opportunity to continue to build out the deposit franchise for this business. And I think that helps from two perspectives. One, obviously, funding, less reliant on high-cost wholesale funding, and that helps in the short term, obviously. But I think if you take a longer-term North Star view, that importance of the deposit, importance of that customer relationship is extremely important as you move from a product orientation to a relationship orientation. So, that would be one first impression. The second first impression will be around business mix. And business mix would be both at the enterprise level in terms of geographies and then within the business lines. So, from an enterprise perspective, we spent a lot of -- deployed a lot of capital into the international markets over the last 10 years, and that -- the returns on that capital have not been commensurate with the risk that we've taken. And there's a lot of reasons for that, and we'll come back. I know you're going to want to talk about the international business. Lot of geopolitical reasons, a lot of macro reasons, a lot of execution reasons, but that's something that we need to be really thoughtful about going forward. And then, within the business lines, I think there's a business mix opportunity as well. I think, we're evolving from a product to a customer orientation. So, we've got a heavy emphasis, for example, in our Canadian business on mortgages and autos relative to our peers. And then, even in the corporate business, heavy orientation to loans rather than ancillary businesses. So, as I think forward, the great opportunity here is the team that's around me gets it. As I think about what Dan Rees is doing in Canada, and he's been in that role now for two years, building out the SCENE platform, which thinks about getting a more holistic relationship with the customer; thinking about cross-sell wealth in our Canadian core franchise; thinking about the under penetration we have in commercial and small business, which comes with great deposits; and then, also thinking about the under penetration we have in Quebec and BC. That's all leading us to a better business mix outcome with a less focus on the product and more focus on the customer. Similarly, as I think about Jake and what he's doing in the GBM business, we're making great progress not just leading with the loan, but also tying up that ancillary revenue around that loan, so moving less from the product and more to the customer focus. Those evolutions were early in stage, right? I mean, both of those leaders, as an example, have been in the roles for two years. So, we're early in that evolution and there's a lot more to go. But the great thing is the team is on it and understands the opportunity. Okay. More stuff to work with there. Thank you for that answer. In your previous answer, you mentioned that one of the things -- one of your strengths is really about capital allocation. And here we are today in a world where the regulator has increased the domestic stability buffer, widened the range. When I look at Scotiabank, your capital ratio relative to the other companies that I cover is on the low end. So, maybe a three-part question. First, as I think about it, at 11.5%, how do you see your capital evolve -- maybe what Dave McKay gave is a bit of a waterfall. I'm not necessarily saying -- pinning you to a waterfall, but how do you see it sort of evolving this year? Are you at risk of potentially raising equity? And what levers are available to you to prevent an equity raise? So, obviously, capital is very important topic of the day. And as I think about our capital and how I want to run this business, optionality is important, right? You want to have enough buffer, so that you can execute on not only organic, but if anything outside of the organic came up, you'd be able to have that optionality. And that's not going to be the focus necessarily, but it is trying to give you a sense that I do believe optionality on capital is important. We ended the year at 11.5%. And as I look forward, we're going to build to 12% by the end of the year. And we feel comfortable that we're going to get there through a combination of slowing RWA growth, internal capital generation, and then, we have the same Basel reform benefit that all the other financial institutions, I assume, will have into the second quarter, and that's going to be meaningful. So, we feel very comfortable on internally getting to that 12%-type level by the end of the year. So, I don't see the need to issue equity. And as I think right now, there's two banks out there that don't have a drip in place. We're one of them. From what I see today, we don't -- that's always available to us, but that's not a tool that we need to use right now, from what I see today. So, I mean, Darko, I feel pretty comfortable of getting that 12%-type level by the end of the year, and I think that's appropriate for the environment we find ourselves in. Yes. So, then you start to think about higher buffers and whether you need higher buffer or lower buffer. My expectation is that will take some time, but that will result in getting to that kind of 12%-plus range, which I feel comfortable in us getting to. I also share the view that Dave had highlighted before is that if you are in a scenario where we have a recession that's a little bit more problematic than, I think, we're all forecasting right now, then I think what you'll hear from Peter today at lunch is that he'll be open to actually reducing the capital requirements, because that's actually makes sense, right, in terms of how you want to run the economy. So, the 12%, slightly higher, is the right place to be from our perspective and that's what we're going to shoot for by the end of the year. And then, so, maybe just switching from capital to credit, but sort of building on it, I guess, in a way, I mean, one of the things that we can worry about is, what if there's a mistake along the way? What kind of -- what if credit costs spike on you? How do you think about the balance sheet? And similar for me, when I look at Scotiabank's reserves, you're Stage 2 -- Stage 1 and 2 performing allowances, they look about the same to pre-pandemic. So, it doesn't look as though the balance sheet is actually positioned for a worse environment. Maybe you can talk a little bit about some of these trends? Sure. And I should have mentioned this in my opening impressions. I've sat on the Risk Management Committee of the Board. I have watched Brian manage the company over the last nine years through a risk lens and now in the guts of the business. That's been one of the areas I've gone to first, given some of the risks on the horizon, and the credit quality of this bank is strong. Full stop. And I think it's a great credit to Brian on what have he's run this bank, but we do have great credit quality. If you think about the Canadian book, 95% of the book is secured. If you think about the international book, we had some challenges in the unsecured international portion through COVID, and that has been adjusted. And so, the security of that book has now gone up 70%, 72%, 73%. A lot of the dispositions along the way have been Brian's view of de-risking that area of the bank. And as you look at the corporate side and the PD bands where we play, we play at a very high corporate investment-grade credit. So, I do think the credit quality of the bank is strong. Now that being said, there's different views on where we're heading from a recessionary perspective. And we're going to be very thoughtful about our pessimistic scenario, the options and the emphasis that we put into that. I think what you'll see is -- or what the guidance was, it was kind of mid-30s basis points PCLs for next year. That seems to make sense, a normalization of the PCLs, and probably more emphasis on performing as opposed to non-performing loans. So that's the type of framework that we're thinking about for next year, Darko. And by the way, ACLs have gone up. As you think relative to pre-pandemic to where we are today, ACLs have gone up. So, I think there's been a business mix issue, less secured to more secured, plus an ACL build, which gives us comfortable about our provisions. So, what about the vulnerabilities that are facing -- I mean, the Canadian consumer, your mortgage book, how should we think about that if we enter recessionary scenario? And what comfort can you give us that your mortgage book is well positioned? It was interesting because I listened to Dave's, I mean, I would share the same view on that Dave has around the vulnerability of the consumer. I mean right now, we have a lot of liquidity in the system with our consumers. 40% of our book is variable, and I think they have about 30% more deposits than they did going into the pandemic. And as you know, our variable book resets. So, unlike the deferred amortization of some of our peers, ours is continually resetting, which I think is helpful to continue along the journey with your customers. And then, 60% of our book is fixed, with 8% renewing in next year and another 8% in 2024. So, we're really looking at the 2025 issue, where a lot of our customers see the impact of that. We also look at the vulnerable customers, so those customers that have higher LTV, lower FICO, lower deposits in their checking accounts, and then also house prices that are seen vulnerable, and we have about 20,000 of those. So, as you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5%. So, I think Dave had mentioned low single digits, we'd be about the same. 2.5% of our mortgage book would be vulnerable. And so, that is a manageable-type situation for us on mortgages. I think the first place this is going to go, if it does go, is areas like credit cards, right? And that is -- again, we're not seeing signs of that yet. We're seeing actually people not reduce their -- sorry, not build their revolver level, they're actually starting to reduce it. So, you could argue that that's a kind of a leading indicator. But again, from a Bank of Nova Scotia perspective, we're underway in credit cards. So, for us, I think that's competitive advantage, if you are looking at it solely through a credit lens. And then, lastly, on the auto book, you're starting to see used prices come down a bit in the US. I think that's a precursor of potentially being very careful about used, and we have a very small $3 billion Near-Prime book that we're watching very closely. So that's the areas that I think you're going to see at first before the mortgages. And so, when I sit back and I think about 2023 for Scotiabank, we've got a situation where PCLs are normalizing, earnings per share is declining, and part of that is also a non-expansion of the NIM. So, maybe we can talk a little bit about: a, where you see if there's any potential areas where net interest margin, net interest income can grow your current positioning on net interest income? And think about -- is it just simply in the cards that you're going to have negative EPS growth this year just because PCLs are normalizing? Or is there somewhere something that help offset and at least create some EPS growth this year? And can it be through the net interest margin or net interest income line item? Yes. So, when I think of 2022, we benefited from abnormally low PCLs, and we benefited from a very low IB, International Banking, tax rate, and we benefited from strong loan growth. So, as we think about 2023, you're going to see a normalization on all of those accounts; so higher taxes, higher PCLs, and slowing loan growth, as well you're going to see the full year impact of inflation come through in 2023, which we had part of that in 2022. And then, I look at the NIM commentary that you've highlighted. We are -- as I've mentioned, we're very dependent on wholesale funding. The cost of that funding has increased significantly. And so that is also going to be a headwind in 2023. So, as I think about 2023 earnings, I am very cautious on the outlook for 2023. As I think a little bit longer term into when rates stabilize, and I think that's an important kind of pivot, rate stabilization, I think we look relatively better in that environment. So, the combination of rate stabilization with asset repricing, which starts to accelerate in the back half of 2023 and 2024, then I do think we get into a better situation. But 2023, I'm cautious until those rates stabilize from an earnings perspective. Well, I think rate is falling, and that's -- probably based on what we're seeing, we're going to be in a little bit of longer term of kind of rates lower, higher or stable for as longer, and then falling, but that's a great place for us to be relative. I mean, it doesn't take our focus off the North Star vision of the deposits and the importance of getting that from a funding perspective and a customer intimacy perspective. But I think given our liability-sensitive balance sheet right now, in rates falling, we will perform relatively better than some of the other banks that are positioned for the rate rise scenario. Is there anything you'd change with respect to that? I mean, the one thing that we've noticed with Scotia is maybe a slightly more active treasury department, maybe actively positioning the balance sheet for rising or falling interest rates. Is that something that might change now underâ¦ Yes. Listen, I think there has been an approach to extend duration. You heard Dave talking about it from a Royal Bank perspective. I think we did some of that as well, maybe a quarter or two early. From my perspective, I think we need to be really careful on hedging. I think hedging to protect downside risk, that's important part of overall Banking 101. But I do think going forward, focusing on the fundamentals, how you run a bank with strong deposits, great customer relationships, which then leads to profitable NII and NIR growth, that's going to be an important facet of what we're going to do going forward. Okay. I may have messed up in the last, so apologies to the audience, because there may have been questions to Royal and I was just staring at the wrong screen. So, apologies to everybody if you had asked the question on Royal. I'll see what I can do. But I do have some questions here from the audience at Scotia. Listen, I think the -- as you think about building out the deposit franchise, in my view, this doesn't happen in a quarter or in a year, it happens with the North Star view, if this is really important, and pivoting the organization to doing that, and it's again this move from a product orientation to customer orientation. And what I like so much about what Dan Rees and his team are doing in Canada is trying to do that organically, right? I mean, the SCENE program, which you've heard the team talk about, is an attempt to actually create a deeper relationship with our customer and get multi-product relationships. So, more relationships with more of our customers which builds a very healthy customer interaction. We can do more for our customers. We can create value for our customers. And as a result, we'll actually create value for our shareholders as well. So that work is in process, but it takes time. And you definitely don't want to shift the pendulum too far too quickly, because then you actually have too high deposits. You want it this to be sustainable. You want it to be really creating value for your customers, and also that will ultimately create value for your shareholders. So, there's ultimately a way to do this, but it's not quarter-by-quarter, it's year-by-year. And it elicits some few questions of my own on the deposit franchise. First, are there any targets you can share with us? I mean, is there some level of deposit growth that you're looking for deposit mix? Is there some sort of target that you got on your mind? Yes. I mean, one of the things I think a lot about is matching loans to deposits, thinking of how did you grow your loan book? You should be growing your deposit book in conjunction with that. Loan to deposit ratio for us right now is too high, and we're an outlier relative to the other banks. And so that's something that you can fix both by really focusing on profitable growth, profitable sustainable growth on the loan side, not just growth for growth sake, and then also focusing on that customer relationship -- that intimate customer relationship with the deposits, which will ultimately result in a great outcome. And you mentioned a couple times the work that Dan Rees is doing. What about International Banking? And what about the work -- what do you see there first, in your first impression there? And secondarily, does this also extend this discussion of deposits into the IB? Absolutely. So, international, one, start with I'm really supportive and pleased to see what Brian, Nacho and the team have done over the last nine years, strengthening that portfolio, narrowing that portfolio, and building up the earnings quality. And it has been a rough 10-year period from a macro perspective, from a geopolitical perspective. And right now, we have strong platforms, with 95% of the earnings in those CCAU countries, or CCAU. However, I'll come back to, the returns there have not been commensurate with the risk. And therefore, there's an opportunity to improve the ROE in those businesses. I take Mexico as a shining example of where we should try to get to. You've got a great franchise there; 8% market share; loan to deposit ratio of 100, so loans matching deposits; ROE of greater than 20%; scale 8% of the market; great cross sell with GBM and our retail franchise; and great cross sell with wealth and our franchise there. So, there is an example of a great platform that we should aspiring to have, and then great connectivity back to the Americas, right, when you think about Canada and the U.S. So that's an example of what we're trying to do. I think Nacho and the team have done a great job coming out of COVID. If you take at -- look at the ROE improvement in that business over the last two years, it has been fantastic, but there's more to do. There's a gap relative to best in class, and there's also not enough -- big enough of a gap relative to our other businesses here where we can allocate capital, too. So, work in process, but great work to date. So, you mentioned Mexico as an example of what you'd aspire to do. Give us an example of what needs work in the International Banking business? So, one of the things that we need to make sure we're clear on is international -- I'll give one example, international unsecured retail. So, now to put this in perspective, 25% of the bank is International Banking, 40% of that -- or 35% of that 25% is retail. So, now we're down to 10% of the overall bank's NIAT is retail. And of that, the only really unsecured exposure is in Peru and Colombia. And so, what I'm really talking about here, and it's really important that people focus on this, because our International Business gets so much attention for sometimes the wrong reason. 2.5% of the bank's NIAT is in unsecured retail in Peru. But given what we've gone through, through COVID, given the secured to -- the unsecured to secured mix, we're selling one of the businesses there to reduce the unsecured mix further. We really need to align on how we're going to run that unsecured retail business. And I do think there's an opportunity to make that important in the context of it only being 2.5%, but you can get higher rounds in that business if it's done right, if it's focused on the affluent, if it's focused on the cross sell, if you bring the deposits with it. Our loan to deposit ratio in South America is actually higher, meaningfully higher than our Canadian business. And so, again, opportunity to make sure you have the deposits along with the loans in that International Business. Okay. I think we have more time for maybe one more question. Please -- so, this is the upvoted. Please describe your credit quality bias? So, we do not think you have had much experience underwriting or managing through credit losses. Should we expect -- and I apologize, the rest of this question is not visible to me, it's really -- should we expect you to be conservative and tell your team to build reserves? Or will you sit back and let your team manage reserves underwriting and so on? So, it's more like a tone from the top kind of question. Yeah, tone from the top. So, one I think, as I mentioned, the credit quality of the bank is good. And if you look at the bias, we've had a really strong focus on investment grade, I'm talking about the corporate book now, probably the commercial books as well, but strong focus on investment grade corporates. And I think if the top two PD bands were at 90% of our books there, where the average for the rest of the banks would be about 70%. So, the credit quality is strong. Similarly, in our Canadian business, 95% of the book is secured. When you look at 90% of the business is either mortgages or autos, so it's 95% of the business is secured. What Dan and the team are doing is trying to sell more of our products to more of our customers, right? That's what we're doing in the Canadian business. And what Jake and the team are doing in GBM is trying to wrap around that loan ancillary businesses, right? And if we can do that, we know those customers well. We know those credits well. If we can sell more products to those customers and create a real customer orientation, I think that's a great way to impact the business mix over time, not impacting credit quality or exposure, and getting to a better outcome on returns for our shareholders, and a better outcome, frankly, for our customers in terms of the value we add to our customers. And if you can combine that, creating more value for your customers and better returns for your shareholders, that's a great opportunity for us. So, Scott, I really appreciate you coming to our conference, being on the job for just a little over a month. And maybe to get us back on track for time, this is a great opportunity for you to sort of lay out I think for everybody here, in the last few minutes here, what your key messages are for investors and what it is that you want them to take away under what your stewardship will be for Scotiabank for the years to come? So, over to you to give us a sort of a key break down. Yeah. Thanks, Darko. So, I'm going to start where I started. I'm really feel honored and privileged to take on this role, and I feel like Brian has left a great legacy on which we can build. And so that's important comment to start off with. Second, for me, if I could leave you with three messages, it's around culture, capital, and execution. And on the culture front, it's about building teams where we're collaborative and inclusive. And if we can improve the employee engagement, drive the employee engagement, I'm a big believer, and that actually results in a better customer engagement as well. And then, from a customer culture perspective, moving from this product orientation to the full customer orientation, which allows us, again, to build more value for our customers and also build more value for our shareholders. So, that would be under the culture bucket. Under the capital budget -- bucket, we have a great opportunity in front of us around capital allocation. We've done a lot of geographical repositioning. We've had a lot of transactions in and out. We've got good platforms. But now we have an opportunity to take an enterprise-wide view and prioritize where we allocate that capital. Our returns have been lagging relative to our peers on almost every return metric. And that has translated into lower TSR over one, three, five and ten years. And we're committed to change that. And we can do that through very disciplined capital allocation to address the business mix issues that I just talked about earlier today. And then, third, from an execution perspective, execution, operational excellence, I've seen the power of what we can do with operational excellence at Finning. Nine years of operational excellence where you set us next North Star, you're disciplined, you're relentless, you focus on building out the platforms that we can, and you focus on profitable, sustainable growth, not growth for growth sake. So, those three buckets are what I'm focused on right now. As I think about my management style and what you can expect from me, one, I'm going to be very transparent. I'm going to listen. I'm going to listen to all stakeholders, listen to everyone in this room. We're going to be decisive, but we're not going to be impulsive. We're going to base our decision on facts and data, and we're going to be accountable. And we recognize that our results will be judged by the success we have. But I can guarantee you the team around me understands the challenge in front of us, and we're going to get after it.
EarningCall_1313	Good morning and welcome to Johnson & Johnsonâs Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. [Operator Instructions] Good morning. This is Jessica Moore, Vice President of Investor Relations for Johnson & Johnson. Welcome to our companyâs review of business results for the fourth quarter and full year of 2022 and our financial outlook for 2023. Joining me on todayâs call are Joaquin Duato, Chairman of the Board and Chief Executive Officer; and Joe Wolk, Executive Vice President, Chief Financial Officer. A few logistics before we get into the details. As a reminder, you can find additional materials, including todayâs presentation and associated schedules on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. Please note that todayâs meeting may include forward-looking statements related to, among other things, the Companyâs future financial performance, product development, market position, and business strategy and the anticipated separation of the Companyâs Consumer Health business. Youâre cautioned not to rely on these statements, which are based on current expectations of future events, using the information available as of todayâs date, and are subject to certain risks and uncertainties that may cause the Companyâs actual results to differ materially from those projected. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. A further description of these risks, uncertainties, and other factors can be found in our SEC filings, including our 2021 Form 10-K, which is available at investor.jnj.com and on the SECâs website. Additionally, several of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Moving to agenda, Joaquin will open with the comments highlighting his first year as CEO and his priorities for 2023. I will then review the fourth quarter sales and P&L results for the corporation and highlights related to the three segments as well as full year 2022 results for the enterprise. Joe will then close with additional business commentary before sharing an overview of our cash position, our capital allocation priorities and our guidance for 2023. The remaining time will be available for your questions. We anticipate the webcast will last approximately 75 minutes. Thanks, Jess. Good morning, everyone. Iâm pleased to be here today to review our 2022 results and highlight my priorities for the business. Iâm excited for the future of Johnson & Johnson. For over 135 years, people have counted on Johnson & Johnson to be at the forefront of healthcare innovation. This remains as true today as the day we were founded. And Iâm honored to continue this legacy. In 2022, despite macroeconomic challenges, we delivered full year operational growth of over 6%. This is the result of the dedication and focus of our employees around the world, as well as the breadth and diversification of our business. There were many business achievements last year. Let me share some highlights. Our Pharmaceutical team achieved its 11th consecutive year of above market adjusted operational sales growth, excluding the COVID-19 vaccine, delivering nearly 7% growth as we continue to advance our innovation pipeline. Iâm particularly excited about the progress made across our multiple myeloma portfolio. This includes the launches of CARVYKTI, our first cell therapy; and TECVAYLI, our BCMA CD3 bispecific antibody, along with the recent filing of Talquetamab, our GPRC5D CD3 bispecific. In terms of innovation, we accelerated the cadence of new product launches and significantly enhanced the quality of our MedTech pipeline, including more than doubling the number of programs with over $100 million of net present value potential. Notably, we completed the acquisition of Abiomed, which positions us as the global leader in heart recovery and immediately enhances MedTech revenue growth. This transaction will become accretive to earnings in 2024. Finally, we made significant progress towards the separation of Kenvue. We have begun operating our consumer business as a company within a company, and we filed our Form S-1 with the SEC, giving us the option to pursue an IPO as a potential step in the separation. Looking ahead, while we expect some of the headwinds that impacted 2022 to continue, we have proven that Johnson & Johnson is resilient in times of macroeconomic challenges. In this environment, our approach to 2023 can be best described as prudent, and our priorities for the year are clear and remain consistent. First, we are finalizing our plans for Johnson & Johnson to operate as a two-sector company, dedicated to competitive performance, both in Pharmaceutical and MedTech. This change will enable us to become simpler, faster and more focused. In Pharmaceutical, we will continue delivering top line growth annually, while driving towards $60 billion in revenue by 2025. We believe we will be able to achieve our market growth in 2023 for the 12th consecutive year, even in the face of the STELARA loss of exclusivity and macroeconomic challenges. Growth will be driven primarily by our existing portfolio, including DARZALEX, TREMFYA, ERLEADA, INVEGA SUSTENNA and UPTRAVI, and also continued uptake from new launches, including SPRAVATO, CARVYKTI and TECVAYLI. In MedTech, with the acquisition of Abiomed, we now have 12 platforms with over $1 billion in annual sales. We expect to continue to build on 2022âs momentum. We will do this by maximizing the commercial opportunity for recently launched innovations, continuing to advance the Abiomed pipeline and prioritizing investment in higher growth segments of our markets. This will be a transformational year for Johnson & Johnson, which brings me to my next priority, completing the successful creation of our new Consumer Health Company, Kenvue. We remain on track to complete the separation in 2023 as indicated in our initial announcement in November of 2021. As we look forward, our track record gives us the confidence that we can grow ahead of our peers and cement the foundation for long-term success. Following 2021, a year where we substantially increased R&D investment, we continue our commitment to organic innovation. We invested nearly $15 billion in R&D during 2022. Also, we increased our dividend for the 60th consecutive year. We instituted a share repurchase and we deployed over $17 billion in M&A, including the acquisition of Abiomed. Very few companies have the capability and the balance sheet to take such significant actions concurrently, especially in a year like 2022. Iâm confident that we are well positioned for 2023 and beyond. In closing, I am energized about what is to come. As the largest and most diversified health care products company in the world, we will continue to use our scale and breadth to drive innovations, deliver for patients and shape the future of health care around the world. Starting with Q4 2022 sales results. Worldwide sales were $23.7 billion for the fourth quarter of 2022, a decrease of 4.4% versus the fourth quarter of 2021. Operational sales growth, which excludes the effect of translational currency, increased 0.9% as currency had a negative impact of 5.3 points. In the U.S., sales increased 2.9%. In regions outside the U.S., our reported sales declined 11.5%. Operational sales outside the U.S. declined 1.1%, with currency negatively impacting our reported OUS results by 10.4 points. Excluding sales from the COVID-19 vaccine, operational sales growth was 4.6% worldwide, 4.7% in the U.S. and 4.4% outside the U.S. As you will find in our supplemental sales schedule, acquisitions and divestitures had an immaterial impact on our results in the quarter. Turning now to earnings. For the quarter, net earnings were $3.5 billion and diluted earnings per share was $1.33 versus diluted earnings per share of $1.77 one year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $6.2 billion, and adjusted diluted earnings per share was $2.35, representing increases of 9.5% and 10.3%, respectively, compared to the fourth quarter of 2021. On an operational basis, adjusted diluted earnings per share increased 15.5%. For the full year 2022, consolidated sales were $94.9 billion, an increase of 1.3% compared to the full year of 2021. Operationally, full year sales grew 6.1%, with currency having a negative impact of 4.8 points. Sales growth in the U.S. was 3%. In regions outside the U.S., our reported year-over-year sales declined 0.6%. Operational sales growth outside the U.S. grew by 9.1%, with currency negatively impacting our reported OUS results by 9.7 points. As you will find in our supplemental sales schedules, acquisition and divestitures as well as sales from our COVID-19 vaccine had an immaterial impact on our results for the full year. Net earnings for the full year 2022 were $17.9 billion and diluted earnings per share was $6.73 versus diluted earnings per share of $7.81 a year ago. 2022 adjusted net earnings were $27 billion and adjusted diluted earnings per share was $10.15, representing increases of 3.2% and 3.6%, respectively, versus full year 2021. On an operational basis, adjusted diluted earnings per share increased by 9.2%. While not part of our prepared remarks for todayâs call, we have provided additional information and backup for our full year 2022 sales by segment, consolidated statement of earnings and adjusted income before tax by segment, which can be downloaded from our website. I will now comment on business segment sales performance highlights for the quarter. Unless otherwise stated, percentages quoted represent the operational sales change in comparison to the fourth quarter of 2021 and therefore, exclude the impact of currency translation. Beginning with Consumer Health. Worldwide Consumer Health sales of $3.8 billion increased 1%, with an increase of 10.9% in the U.S. and a decline of 5.8% outside the U.S. Excluding translational currency, worldwide operational sales growth increased 6.4% and outside the U.S., operational sales growth increased 3.2%. Results were primarily driven by strategic price increases, growth in OTC due to a strong cough, cold and flu season, and growth in NEUTROGENA as well as strong new product introductions in Asia Pacific and Latin America. NEUTROGENA growth contributed to the second consecutive quarter of 5% operational growth for Skin Health/Beauty. Growth across the portfolio was partially offset by continued, although reduced supply constraints in the U.S. COVID-19 impacts in China, portfolio simplification and the suspension of personal care product sales in Russia. Moving on to our Pharmaceutical segment. Worldwide Pharmaceutical sales of $13.2 billion decreased 7.4% with declines of 0.6% in the U.S. and 14.9% outside of the U.S. Excluding translational currency, worldwide operational sales declined 2.5%, and outside the U.S., operational sales declined 4.5%. Excluding the COVID-19 vaccine sales, worldwide operational sales growth increased 3.9%, U.S. operational sales growth increased 2.4%, and outside the U.S., operational sales growth increased 6%. Pharmaceutical growth, excluding the COVID-19 vaccine, was driven by our key brands and continued uptake in our recently launched products, enabling us to continue to deliver above-market adjusted operational sales growth for the 11th consecutive year, including 7 assets with double-digit growth. Growth was driven by DARZALEX, ERLEADA, STELARA and TREMFYA, and was partially offset by REMICADE and ZYTIGA, due to loss of exclusivity along with a decrease in IMBRUVICA sales. Within our oncology business, DARZALEX and ERLEADA continued to drive strong sales growth, with increases of 33.9% and 48.6%, respectively. ZYTIGA sales declined 43.6% worldwide, predominantly due to loss of exclusivity in Europe in September. IMBRUVICA sales declined 12.3% worldwide due to competitive pressures and a suppressed CLL market due to COVID-19. Despite competitive pressures, IMBRUVICA maintains its market leadership position worldwide. In our immunology business, STELARA grew 6.2%, driven by market growth and share gains in Crohnâs disease and ulcerative colitis, with gains of 4 points and 5.4 points in the U.S., respectively, as well as a favorable prior period adjustment impacting worldwide results by approximately 460 basis points. Results in the quarter were partially offset by unfavorable patient mix and rebating in the U.S. as well as austerity measures in Europe and shipment timing in Asia Pacific. TREMFYA grew 12.5%, driven by share gains in psoriasis and psoriatic arthritis, with gains of 1.4 points and 2.9 points in the U.S., respectively, along with market growth. Q4 growth was partially offset by a net unfavorable prior period adjustment impacting worldwide results by approximately 1,150 basis points, unfavorable patient mix and a challenging prior year comparison. Beginning in Q1 2023, we anticipate that CARVYKTI, currently reported in other oncology, and SPRAVATO, currently reported in other neuroscience, will meet the threshold to be separately disclosed. Iâll now turn your attention to the MedTech segment. Worldwide MedTech sales of $6.8 billion decreased by 1.2%, with growth of 7.1% in the U.S. and a decline of 8.6% outside of the U.S. Excluding translational currency, worldwide operational sales growth increased 4.9%, and outside the U.S. operational sales growth increased 2.9%. Excluding the impact of acquisition and divestitures, worldwide adjusted operational sales growth was 4.4%. Q4 growth was driven by commercial execution, strong new product introduction performance as well as COVID-19 procedure recovery in many parts of the world. Partially offsetting growth in the quarter was the impact of value-based procurement, COVID resurgence in China as well as supply constraints predominantly envision. Strong growth continued in the U.S., with dollar sales sequentially improving each quarter throughout 2022. OUS performance was adversely impacted by dynamics related to COVID-19, especially given our strong position in China. The Interventional Solutions franchise delivered another quarter of worldwide double-digit growth at 15.1%, driven primarily by strong new product introductions performance, commercial execution and continued market growth in electrophysiology. Abiomed sales are also reported in Interventional Solutions, and financial results were reflected as of December 22nd, the date the acquisition closed. Contact lens global growth of 7.7% reflects strong performance of our ACUVUE OASYS 1-Day family of products, including the recent launch of ACUVUE OASYS MAX 1-Day, strong commercial execution and market appropriate price actions. Growth was tempered by continued supply challenges. In the orthopedics franchise, digital and enabling technologies reported in spine, sports and other continued to accelerate and drive pull-through sales in areas like hips and knees. For additional context, selling days had approximately a 60 basis points positive impact on results in the quarter. Now turning to our consolidated statement of earnings for the fourth quarter of 2022. Iâd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. Cost of products sold deleveraged by 70 basis points, primarily driven by onetime COVID-19 vaccine manufacturing-related costs, unfavorable currency impact in the Pharmaceutical business, inflationary pressures as well as unfavorable mix with the enterprise, with a lower portion of sales coming from the Pharmaceutical business. Selling, marketing and administrative margins leveraged by 150 basis points. This represents a 9% reduction versus the prior year, driven by phasing with higher spend earlier in the year as well as proactive management of costs given the current inflationary environment. We continued to invest strategically in research and development at competitive levels, investing 16.2% of sales this quarter. The $3.8 billion invested was an 18.6% reduction versus the prior year, driven primarily by phasing with higher spend earlier in the year. Interest income was favorable to prior year by just over $100 million, driven by higher rates of interest earned on cash balances. The other income and expense line was an expense of $1.2 billion in the fourth quarter of 2022 compared to an expense of $9 million in the fourth quarter of 2021. This was primarily driven by onetime COVID-19 vaccine manufacturing-related exit costs, higher Consumer Health separation-related costs, higher costs related to the Abiomed acquisition and lower gains on securities. As we announced in Q2 2022, we continue to have commitments and obligations related to the COVID-19 vaccine, including external manufacturing network exit cost and required clinical trial expenses, associated with the Companyâs modification of its COVID-19 vaccine research program and manufacturing capacity to levels that meet all remaining customer contractual requirements. Regarding taxes in the quarter, our effective tax rate was 16.2% versus 2.1% in the same period last year. The increase was primarily driven by more income in higher tax jurisdictions versus the prior year. Additionally, the Company benefited from onetime tax items in the fourth quarter of 2021 that did not repeat in the current year. Excluding special items, the effective tax rate was 16.2% versus 10.4% in the same period last year. I encourage you to review our upcoming 2022 10-K filing for additional details on specific tax matters. Lastly, Iâll direct your attention to the box section of the slide, where we have also provided our income before tax, net earnings and earnings per share adjusted to exclude the impact of intangible amortization expense and special items. Now, letâs look at adjusted income before tax by segment. In the fourth quarter of 2022, our adjusted income before tax for the enterprise as a percentage of sales increased from 25.6% to 31.3%. Pharmaceutical margins improved from 33.9% to 38.2%, primarily driven by SG&A and R&D phasing, with higher spend earlier in the year, partially offset by the negative impact of currency and cost of products sold. MedTech margins improved from 18.1% to 25.3%, primarily driven by SG&A and R&D phasing, with higher spend earlier in the year, favorable portfolio mix and supply chain efficiencies, partially offset by inflationary pressures. Finally, Consumer Health margins improved from 18.6% to 22%, driven by brand marketing phasing with higher spend earlier in the year and supply chain efficiencies, partially offset by inflationary pressures. This concludes the sales and earnings portion of the Johnson & Johnson fourth quarter and full year 2022 results. Iâm now pleased to turn the call over to Joe Wolk. Joe? As Jess shared, we reported solid results with competitive growth across our business segments in 2022. While macroeconomic challenges and lingering COVID-19-related impacts tempered our fourth quarter sales growth, we prioritized our top investments, while managing costs to yield slightly better margin performance than guided in October to meet our earnings expectations. The business is resilient, and we should be positioned well entering 2023. We are particularly proud of the advancements in our pipeline and portfolio to solidify the long-term, including the launch of TECVAYLI, the filing of Talquetamab in the U.S. and Europe, FDA clearance for our TELIGEN digital supply solution, the closing of the Abiomed acquisition and the tremendous progress made on separating our Consumer Health business. Letâs delve into the financials, beginning with our 2022 year-end cash position and execution against our capital allocation priorities. We generated free cash flow for the year of approximately $17 billion. And at the end of 2022, we had approximately $24 billion of cash and marketable securities and approximately $40 billion of debt for a net debt position of $16 billion. Despite macroeconomic uncertainty, we had a strong year deploying capital against all of our capital allocation priorities. These priorities remain unchanged. This past year, we invested more than 15% of sales for a total of nearly $15 billion in research and development. This investment has enabled the advancement of important programs, including strengthening our MedTech pipeline and progression of our multiple myeloma portfolio, which Joaquin referenced. Investment in R&D remains a top priority to support long-term growth and value creation. Our second priority is our commitment to dividends. 2022 marked the 60th consecutive year in which we increased our annual dividend. We know investors value our dividend. And as a part of the Consumer Health separation, we intend, at a minimum, to maintain that dividend. As you can appreciate, we will need more clarity on the type of separation to determine how that is best achieved. Our third priority is strategic acquisitions, which is intended to complement our organic activities. In 2022, we closed the acquisition of Abiomed, strengthening MedTechâs presence in higher growth segments, as well as more than 100 smaller early-stage acquisitions, licensing deals and partnerships. Finally, our Board authorized a $5 billion share repurchase program in the third quarter. And as of the end of the year, weâve completed approximately 50% of that program. In combination with our dividend, we returned over $14 billion to shareholders in 2022. Iâll now provide our full year 2023 guidance. As we are still in the process of the Kenvue separation, our guidance represents the current Johnson & Johnson businesses, inclusive of Pharmaceuticals, MedTech and Consumer Health segments. We expect operational sales growth for the full year 2023 in the range of 4.5% to 5.5% or $96.9 billion to $97.9 billion. This guidance is provided on a constant currency basis, reflecting how we manage business performance. We estimate a favorable impact from net acquisitions and divestitures associated primarily with the Abiomed acquisition, and thus, are comfortable with your models reflecting adjusted operational sales growth in the range of 3.5% to 4.5%. Our sales guidance continues to exclude contribution from the COVID-19 vaccine, which, as your models already correctly anticipate, will decline in 2023. As you know, we donât speculate on future currency movements, but utilizing the euro spot rate relative to the U.S. dollar as of last week at 1.08 as well as other currencies, we estimate there would be no impact from foreign currency translation on reported sales for the year. Regarding other items on our P&L, we expect 2023 adjusted pretax operating margin to be flat driven by continued inflationary pressures and cost of goods sold, offset by continued operating expense leverage. Regarding other income and expense, the line on the P&L where we record royalty income, the return on assets and actuarial costs associated with certain employee benefit programs as well as gains and losses related to items such as investments by Johnson & Johnson Development Corp., litigation and balance sheet write-offs. On an adjusted basis, we expect this to be $1.9 billion, $2.1 billion for 2023. The majority of this income is associated with our employee benefits programs aligned with accounting disclosure requirements, rising interest rates, return on assets and program actions the team has implemented to derisk the plans have lowered our projected future benefit obligations. And based on current trends, we expect this benefit to continue through the next couple of years. We are comfortable with you modeling net interest expense between $250 million and $350 million. These figures include increased financing charges versus 2022 associated with the Abiomed acquisition. Finally, we are projecting an effective tax rate for 2023 in the range of 15.5% to 16.5% based on current tax laws and anticipated geographic income mix across our businesses. Considering all these factors, we are guiding adjusted earnings per share in the range of $10.40 to $10.60 on a constant currency basis, reflecting operational or constant currency growth of approximately 2.5% to 4.5% or 3.5% at the midpoint. While not predicting the impact of currency movements, assuming recent exchange rates I previously referenced, our reported adjusted operational earnings per share for the year would be favorably impacted by approximately $0.05 per share, resulting in adjusted reported earnings per share in a range of $10.45 to $10.65 or $10.55 at the midpoint, growth of 4% versus the prior year. While we do not provide guidance by segment or on a quarterly basis, Iâd like to provide some qualitative considerations for your modeling. Some segment remarks, starting with Pharmaceuticals. We expect to again deliver above-market growth in 2023, driven by key assets such as DARZALEX, ERLEADA, TREMFYA, INVEGA SUSTENNA and UPTRAVI as well as continued uptake of recently launched products, such as CARVYKTI, SPRAVATO and TECVAYLI. This growth is despite lower Pharmaceutical market growth than experienced in recent years and considers the STELARA loss of exclusivity, which we anticipate occurring in late 2023 in the U.S. While we continue to expect volume growth for STELARA in the U.S. up to the LOE date, we expect this growth to be offset by pricing pressure. Further, we continue to expect a 2023 impact from other post-LOE products as well as potential increased austerity measures across Europe. In MedTech, we expect continued competitive growth fueled by market recovery and continued commercial uptake of recently launched products. We anticipate a relatively stable recovery in procedure volumes with health care staffing constraints remaining the most significant limitation on the pace of recovery. Specific to China, we anticipate continued pressure into 2023 related to the easing of the zero COVID policies as well as impacts from volume-based procurement. As weâve said, weâre excited about the Abiomed acquisition, which accelerates our sales growth in 2023. In Consumer Health, we anticipate continued growth in line with the markets that we compete in. We also expect to continue to utilize strategic price increases across the portfolio to minimize the impact of ongoing inflationary pressures within the supply chain. Regarding quarterly phasing, itâs best summed up with a general theme that we expect the second half to be stronger than the first half and likely the second quarter is stronger than the first quarter. We are assuming the following to support these statements. In Pharmaceuticals, the first half of the year will be impacted by continued declines from LOE products in Europe that impacted Q4 2022 results, namely ZYTIGA and INVEGA SUSTENNA as well as continued pricing pressure. Also, we expect the ramp of new product launches will occur more prominently in the second half of the year. In MedTech, we expect second half operational sales growth to be higher than the first half of the year as we anticipate ongoing procedure recovery to improve as the year progresses. We also believe that some of the COVID impact felt in China in Q4 will carry over into early 2023. And similar to Pharmaceuticals, uptake of new product launches is assumed to be more pronounced in the second half. Given we are in the registration process, regulations limit what we can currently discuss around the planned Consumer Health Company. On the P&L, we also anticipate operating margin to be better in the second half than the first half. This is attributable to inventory built in 2022 at higher costs driven by inflation that will flow through the P&L in the first half of 2023 and a second half that accounts for cost leverage driven by mitigation efforts and higher sales reflected in the comments I just made. And finally, while we donât speculate on future currency movements, utilizing the euro spot rate relative to the U.S. dollar as of last week at 1.08 as well as other currencies, foreign exchange would have a negative impact on our results in the first half of the year, but potentially a favorable impact in the second half. Turning to key events in 2023. As mentioned, we are limited in the information we can provide around the planned Consumer Health separation. We publicly filed a Form S-1 on January 4th with the Securities and Exchange Commission, giving us the option to pursue an initial public offering as a potential first step in the planned separation, and we have started to operate Kenvue as a company within a company. Consistent with our initial announcement in November of 2021, we continue to expect to complete the separation in 2023. And we expect that any interim steps, such as an IPO, would be consistent with that timing, subject to market conditions. We are estimating $1.8 billion to $2.1 billion in after-tax Kenvue standup costs, with $1.2 billion having already been incurred through the end of 2022. These estimates are in line with industry average for transactions such as this one, given Johnson & Johnsonâs market cap. In terms of dissynergies to be incurred following the completion of the separation, we are estimating between $500 million and $750 million of annual after-tax impact. We are already executing on plans to address these dissynergies and expect to have them fully mitigated by the end of 2024. As we separate new Johnson & Johnson, weâll also continue to reevaluate the level of ongoing financial information provided based on discussions with investors. While our financials will become simpler as we move from a three-segment company to a two-segment company, we will continue to look for ways to enhance our disclosures, such as providing quarterly R&D by segment and a patent expiry table in our Form 10-K. We also expect 2023 to be an important year of scientific innovations and readouts across our segments. In our Pharmaceutical business, some examples include the potential approval of Talquetamab, our GPRC5D CD3 bispecific antibody in relapsed/refractory multiple myeloma. Potential clinical data from CARTITUDE-4, a trial studying CARVYKTI, our BCMA CAR-T in patients with 1 to 3 lines of prior therapy. The potential for an interim analysis of the MARIPOSA study of RYBREVANT plus lazertinib in frontline non-small cell lung cancer with EGFR mutations versus Tagrisso as well as potential clinical data from the PAPILLON [ph] study in frontline non-small cell lung cancer in combination with chemotherapy. Early clinical data from the Phase 2 SunRISe-1 study of TAR-200, our drug eluting device in non-muscle invasive bladder cancer. Starting Phase 3 clinical program for milvexian, a Factor XI anticoagulant in partnership with Bristol-Myers Squibb. Potential Phase 2 clinical data from nipocalimab, our FcRn antagonist in rheumatoid arthritis and hemolytic disease of the fetus and newborn, potential Phase 3 clinical data from TREMFYA in Crohnâs disease and ulcerative colitis. And finally, TREMFYA, our IL-23 inhibitor, was recently added to the National Reimbursement Drug List in China, which will take effect later this year. In MedTech, we look forward to providing information on significant innovation programs across the business, including expansion of our digital solutions in orthopedics, our digital robotic solution, Ottava, our pulsed field ablation solutions for cardiac ablation and advancements in our pipeline and clinical studies for heart recovery associated with Abiomed. Overall, our approach to 2023 financial guidance should be viewed as responsibly cautious given the many external uncertainties. We are focused on delivering competitive growth for new Johnson & Johnson, while also completing a successful Consumer Health separation. We are confident that our current plans position us for long-term growth and value creation for shareholders. That concludes our prepared remarks. I am now pleased to open the line for your questions. Kevin, will you please provide the listeners with instructions if theyâd like to ask a question? Maybe a two-part question for me. I guess, Joe, first on the guidance, you mentioned it should be viewed as responsibly cautious. Just wondering any areas youâd call out in terms of conservatism as we think about the year? And then, on the pipeline side, obviously, myeloma -- sorry, excuse me, myeloma an important area for you guys. Just wondering if you can confirm the timing of the CARTITUDE-4 study and what youâre hoping to see from that readout? Thank you. Good morning, Terence. Iâll handle the first question, and then Iâll kick the question of CARTITUDE over to Joaquin. With respect to guidance, I would say, just given all the macroeconomic uncertainty, geopolitical uncertainty, we thought this was the right approach at this point in time to come out with guidance in the ranges that we did. I wouldnât classify it as conservative per se. What I would say in terms of our outlook for the P&L, is that weâre assuming a lot of carryover, quite frankly, of the inflationary impact that we had in 2022. As you can imagine, the way the accounting would work, we built inventory at higher cost in 2022. Thatâs set on the balance sheet at year-end and will flow through mostly the first half of 2023. If thereâs any element of conservatism, I would say, it probably resides in the fact that weâre not assuming any deflationary relief as we go throughout the year. So, we do think these costs will be at a higher level for some time. But as you saw with our fourth quarter results and really the outlook for 2023, weâre doing everything we can responsibly to prioritize our top investments for the long term as well as manage costs in the interim. Thank you. And with respect to CARTITUDE-4 and CARVYKTI, our multiple myeloma portfolio, Terence, is the most important driver of growth for our Pharmaceutical group moving forward. Itâs about DARZALEX continued progression in first line; CARVYKTI, our best-in-class BCMA cell therapy; the recently approved TECVYLI, our BCMA CD3 bispecific; and also, we are excited about the filing of Talquetamab, our GPRC5D CD3 bispecific. So all in all, this portfolio enables us to do something very significant, which is changing the treatment paradigm from treating to progression to treating to cure. And weâll see these medicines being used in combination and in different sequences in order to achieve this treating to cure. Specifically, what you mentioned, CARTITUDE-4, which is the study that evaluates CARVYKTI in patients who have received one or three prior lines of therapy, itâs very important in achieving that goal. CARTITUDE-4 is an event-driven study, and we look forward to have some results of CARTITUDE-4 in 2023. We cannot give you the specific timing because itâs an event-driven study, and it will be very important in our ambition to move CARVYKTI into earlier lines of therapy. So, first of all, congratulations on the performance. I was hoping that you could please discuss the longer term prospects for the Pharmaceutical business. In the past, J&J has targeted $60 billion in Pharmaceutical revenue in 2025. Iâm wondering if thatâs still the target. And if so, what you believe consensus is under modeling because consensus is projecting sales below the $60 billion figure for 2025? Thank you. Thank you for the question. And turning to what you mentioned, our 2025 targets. We continue to work towards accomplishing our previously stated goals of on one hand, delivering growth every single year in our Pharmaceutical group through 2025 despite of the loss of exclusivity of STELARA, at the same time, continue to advance our differentiated pipeline and achieving $60 billion in revenue by 2025. So, we continue to work towards these goals. As we have discussed multiple times, the growth by 2025 is going to be driven mainly through the strength of our currently marketed portfolio as well as new indications of this marketed portfolio. Some examples, continuous growth of DARZALEX in first line, TREMFYA, which is gaining share, both in psoriatic arthritis and in psoriasis, and we expect a readout of our IBD studies in ulcerative colitis and Crohnâs in 2023 will provide a significant additional leg of growth for TREMFYA; ERLEADA, which is now in different indications in metastatic and non-metastatic prostate cancer will have some readouts of studies in high-risk localized prostate cancer in 2023, providing an additional leg of growth; our INVEGA SUSTENNA franchise in the U.S. as well as our pulmonary arterial hypertension franchise with UPTRAVI and OPSUMIT has been affected by COVID-19, but that we expect that will continue to deliver growth. So, that is the mainstay of our growth prospects towards 2025. And I will go later about the disconnect. Then connected with that, we are also excited about our new product launches, specifically growth of SPRAVATO, growth in CARVYKTI that I just mentioned before and also TECVAYLI, which we got the approval very recently; and as I commented, the filing of Talquetamab, everything in multiple myeloma. At the same time, we continue to make significant progress in some of the key products in our pipeline. Some of them we commented that were opportunities of more than $5 billion. Example of them, milvexian, our oral anticoagulant, the combination of RYBREVANT plus lazertinib in non-small cell lung cancer, our TARIS platform in bladder cancer. And finally, nipocalimab in autoantibody-mediated diseases. So, those are the key drivers of our growth moving into 2025. If I think about the main disconnect between our forecast and the Street forecast, itâs our multiple myeloma portfolio. As I commented earlier, we see our multiple myeloma portfolio helping treat into cure rather than cannibalizing each other. And as a matter of fact, some of the studies that we have now in place show that ambition of combining our therapies. I mentioned CARTITUDE-4, moving CARVYKTI into earlier lines of therapy; TECVAYLI and Talquetamab, our two bispecific antibodies are being studied in combination with one another, and TECVAYLI or Talquetamab are also being a study in combination with DARZALEX. So, I see that as the major source of disconnect with the Street. Then further to that, I continue to see disconnects in SPRAVATO, our treatment for treatment-resistant depression; significant disconnects also in ERLEADA because of the indications in high-risk patients with localized prostate cancer that will read in 2023. We see a disconnect, as I commented in our pulmonary arterial hypertension franchise with UPTRAVI and OPSUMIT, which have been impacted by the pandemic, but we see strong growth moving forward. And then, finally, in the expectations for Xarelto loss of exclusivity, which we see that in the back half of this decade. So, those are elements that I have reflected as disconnect. So, as I said, we continue to drive towards our 2025 goal of $60 billion and posting growth every year. I think itâs a reflection of the strength of our current portfolio and how well we are executing in our pipeline. Just a 2-part one for me. Joe, can you provide a little more color on the cadence of operational sales growth in Pharma and devices? How much lower do you expect the first half to be versus the second half? And what are you assuming for market growth in each of the segments in â23? And Joaquin, just to follow up to Davidâs question there on the $60 billion, it implies a 6% CAGR between 2022 and 2025. How should we think about the ramp to $60 billion? 6% do you expect it to be more back-end loaded? Thanks for taking the questions. Good morning, Larry. So, let me start by -- as you know, we donât provide guidance by quarter, but let me talk a little bit about market growth. With respect to MedTech, we anticipate pretty much what we typically see in any given year, 4% to 6%. As some of my earlier comments in the prepared remarks reflect, we anticipate that there will be a little bit of, Iâll call it, carryover from some of the COVID surges that we saw in the Asia Pacific region in the fourth quarter. But, other than that, a normal cadence of steady procedure recovery. The biggest challenge that hospital administrators are facing right now is really the staffing concern, but theyâve done a wonderful job in getting some sense of normalcy to that. With respect to Pharmaceuticals, again, we enjoyed our 11th consecutive year of above-market growth. We anticipate 2023 will be a 12th year, but it is off of a lower base. If you happen to see some of the IQVIA data from last week, theyâre calling global and actually U.S. growth somewhere in that 2.5% to 4% range, depending on what region youâre looking at. So, while we will beat the market, we think it will be a lower number just by the dynamic of the market overall. And thatâs kind of how weâre thinking of it. In terms of some of the cadence, maybe to elaborate on the comments that I had prepared earlier, we will see some of that generic erosion that we experienced in the fourth quarter in Europe with the long-acting injectables as well as ZYTIGA having a much more pronounced impact in the first and second quarter, bleeding over from the fourth quarter. And pricing measures likely will be consistent throughout the year. So hopefully, that helps give you a better sense of how weâre looking at it. But again, the general theme of second half stronger than first half and probably second quarter stronger than first quarter seems to hold intact based on top line as well as bottom line performance, given our expectations. And regarding to your question, Larry, as we have discussed and commented, we see above market growth in 2023 for our Pharmaceutical group, which would be the 12th consecutive year of our market growth. And we continue to see positive growth in 2024 despite the loss of exclusivity in STELARA. And then we would see again pick up our growth above market in 2025. Thatâs the sequence that we will see. Certainly, the actual growth rate will be impacted by the FX and we donât anticipate and we donât project FX. And when we were establishing our $60 billion goal, we were thinking about the FX at the moment. We donât change the $60 billion because we donât know what the FX would be by 2025. But for purposes of you understanding how we see that, we see above market growth in 2023; we see positive growth in 2024; and then, we see a pickup of growth, a significant one, in 2025 above market. Just one question and one quick clarification. I guess, on operating margins, and this is a question maybe beyond â23. Iâm just trying to think through the balance of, I guess, on one hand, some of the inflation headwinds potentially decreasing as you work through some of this inventory, I guess balanced against the STELARA LOE and some of the dissynergies from the spin. So, I guess, as something kind of bigger picture about operating margins, is 2023 a decent proxy going forward, or could we see either modest erosion in margins or expansion, or is it too early to call? Iâm just trying to get just some sense of how that plays out. And then my second question, which is just maybe a clarification on some of the immunology comments you made regarding 4Q. I think you mentioned unfavorable mix and rebate dynamics as headwinds. Should we expect those dynamics to continue in â23? And I guess, are they getting worse, or is this more just a continuation of what youâve seen in the last few years that rebates are just kind of like gradually going up for that franchise as a whole? Thanks so much. Great. Good morning, Chris. Iâll tackle the operating margin question, and then Iâll turn it over to Joaquin for some of the immunology references. So with respect to operating margin, I think, while we donât give multiyear guidance, I think this year does portend to have a considerable achievement in terms of managing cost by the organization in addition to inflationary pressures. And again, thatâs not combated with an assumption that weâll see deflationary relief. We also have the dissynergies that come along with the consumer separation itself. As the comments indicated, we plan to address all of those, and weâve already started in mid-2022 to mitigate some of those. Theyâll be fully mitigated by 2024. So, I would think just looking out now qualitatively, â23 and â24 may look similar because youâve got some different dynamics playing out, and weâll certainly have to see how inflation plays out over the course of this year. And then, getting back on a more normal cadence, I would say, you would expect from Johnson & Johnson, you know that we like to grow income a little bit faster than sales growth. And you do that by improving your margin profile. We have $60 billion of resources in a given year. So, weâve got a responsibility, we think, to continue looking at our prioritization, and our processes and technology to make sure that we are being not only as effective as we can be but also as efficient as we can be. Thank you. And Chris, regarding the dynamics in the immunology market, overall, what we see is that the patient mix is changing, putting more pressure in our overall net price by having a higher participation of some channels, we are lower priced. We see those situations continuing into 2023, but not getting worse. Simply the situation that we are now will continue into 2023, but will stabilize from where we are. So, I had just one on -- a follow-up on guidance. Joe, if you could talk a little bit about following up on some of the conservatism and maybe the bright spots, the China assumptions that youâve made for procedure disruption and maybe VBP, if you could give us a sense of how long into â23, you expect that to go? And then what you assume for the STELARA LOE? And then, on this sort of conservative side on the bright spot, I think you just kind of covered, I guess, the ortho trends. I understand you aim at this mid-single-digit range for performance, but you had a very, very strong back half in the U.S. And Iâm just wondering does that kind of strength in ortho and the spine, for example, which is kind of well above sort of historical ranges. Does that kind of continue into â23, or are we assuming that we went into in some comp challenges there, or how -- what sort of elements are contemplated in your guidance, that would be helpful? First of all, I guess let me follow up to Terenceâs question with respect to how he positioned, conservatism. I probably did miss an opportunity to speak about some of the things that maybe could go better on our behalf. And some of that could be a quicker rebound in China, whether that be in both MedTech or Pharmaceuticals. Right now, weâre assuming there is some carryover effect from the COVID surges we saw in the fourth quarter. The teams on the ground seem to indicate that itâs still persistent, but if that rebounded a little bit quicker. I think also looking at the multiple myeloma portfolio, and the performance of CARVYKTI or TECVAYLI could be significant and opportunities or pockets for upside. Weâre obviously excited by the Abiomed acquisition and what that could possibly mean. And bringing the capabilities of Johnson & Johnson, both in terms of scale and reach, presents some opportunity that maybe isnât in the current projections. So, there are some opportunities for outperformance. Right now, we like where the number is at with respect to that. China and VBP specifically, I would say that is a dynamic thatâs not really a new phenomenon for us. We had won a number of tenders at the end of 2021 that were persistent throughout 2022, and we continue to win tenders. And we think over time that the volume and the opportunity to help many more patients will be persistent with that. So, we are -- itâs part of the guidance that we see today that weâve offered today, but itâs not really much more pronounced in terms of the impact it has on the business versus what weâve experienced already. Just a question on STELARA erosion expectations. So, I was hoping you can give us some thoughts about the cadence of biosimilar products that are going to be coming along this year. None are approved yet. But, can we expect the first company to enter with exclusivity for six months, something weâve seen with HUMIRA, and then the rest coming in 2â4? Or should we expect all the players to come at once? So, any color on this patent answer would be helpful. Thanks. Thank you for the question. And itâs difficult for us to comment on some of your topics there. Thereâs no approved biosimilars at this time, and we are going to continue to monitor the situation. As we have commented, we expect the erosion curve of STELARA to be likely steeper than that of REMICADE, given the evolution of the biosimilar market and the fact that STELARA is a self-administered product, as well as potentially to your point, potentially interchangeability in the label. So, thatâs how we see the STELARA loss of exclusivity. In 2023, when we think about the STELARA in the U.S., we see the sales of STELARA flat to declining, obviously, given the price pressures. That will be offset also by continuous volume growth that we see in STELARA. So, thatâs the perspective that we have for STELARA in 2023. Overall, we have a very strong immunology franchise. I commented on TREMFYA before, the continuous progression in psoriasis, psoriatic arthritis, the readout of our ulcerative colitis and Crohnâs disease studies, which is exciting. And also, in 2023, we may have some data from our Phase 2 study of our oral IL-23, which we think itâs a very exciting underappreciated opportunity in our pipeline, too. The multiple myeloma franchise, obviously, very central to your objective for 2025. Between the CAR-T sort of gradual launch that you have based upon supply and the bispecifics, can you talk about what that interplay has been since the approval and launch, and what youâre expecting through the year in 2023? Thank you. As far as the demand for CARVYKTI, we see very strong demand for CARVYKTI and also for TECVAYLI. Thereâs a significant need for new therapies in this relapsed/refractory patient population. So, the demand for the products, the physicians and patient adoption has been really strong. So, that is really encouraging and pertains the unmet medical need for these types of patients. With CARVYKTI, we continue to scale our production capacity and expand our network of providers, and we are doing that in a phased approach. With TECVAYLI, we are off to a successful start and the early indications for this of the self-option are very, very positive, too, connected with the high unmet medical need that we see there. Moving into 2023, key elements of that would be, from a data perspective, the reading CARTITUDE-4, which would give us the opportunity to move CARVYKTI into earlier lines of therapy. Also the filing of Talquetamab, which will give us another line of therapy, because some of the studies of Talquetamab are done in patients who have failed BCMA, either cell therapy or bispecifics, and the continuous data that weâll continue to provide to guide how to use this incredible portfolio in multiple myeloma. I wanted to ask you about the timing of data readouts first half or second half and your expectations for a few products. First one is nipocalimab and rheumatoid arthritis. And then, your oral IL-23 I saw that a trial was finished and what your next steps are here and when you might have some data? And then lastly, just on your RYBREVANT and lazertinib, are you still expecting a potential interim readout for lung cancer here? Thank you. So, regarding the main data readouts that you could expect in 2023, I mean, I commented already on CARTITUDE-4, which is a key one for us. Again, this is an event-driven study, so itâs difficult for us to give you exact timing, Louise. Importantly, we have the potential for an interim analysis on the Mariposa study, which is the study of RYBREVANT plus lazertinib in frontline non-small cell lung cancer with EGFR mutations in this study versus Tagrisso. And this is an important study for us. And also, we have the potential clinical data from the PAPILLON study, which is in frontline non-small cell lung cancer in combination with chemotherapy. So, those are important ones in non-small cell lung cancer. And then, staying in oncology, we also have the data for the -- from the Phase 2 SunRISe-1 study of our TAR-200 platform, our drug-eluting device in non-muscle invasive bladder cancer. And we continue to work on our high-risk localized prostate cancer with ERLEADA. So, thatâs key elements in our oncology side. As far as nipocalimab, we are expecting data from our Phase 3 studies in RA, in rheumatoid arthritis, which I know has created significant attention from you and also in hemolytic disease of the fetus and the newborn. It will be towards the later part of the year. Thatâs when you can expect those data to come up. And then, keeping with important date targets next year, weâll also have the data reads in our 2 IBD studies, ulcerative colitis and Crohnâs disease with TREMFYA. Finally, important progress in our pipeline is that we will be starting our Phase 3 clinical program with milvexian, our Factor XI anticoagulant with our partners at Bristol-Myers Squibb. So, I would say, a very important year for us in terms of data read. That will also include our Phase 2 study of our oral IL-23. Itâs difficult for us to give you an exact time line, but we fully expect that to happen in 2023. So, many important data reads for us that will showcase the good execution that weâre having in our pipeline. Thank you, Louise, and thanks to everyone for your questions and your continued interest in our company. We apologize to those that we couldnât get to because of time, but donât hesitate to reach out to the Investor Relations team with any questions that you may have. I would now like to turn it over to Joaquin for some brief closing remarks. So thank you, everyone, for your questions and interest in Johnson & Johnson. While we have highlighted some of the challenges that we have in the macro environment, we think that 2023 is going to be another exciting year for innovation, for patients. And you can rely on us on delivering strong financial performance for both, the near and the long term. Thank you very much.
EarningCall_1314	Good morning and welcome to the WNS Holdings Fiscal 2023 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, we will conduct a question-and-answer session and instructions for how to ask a question will follow at that time. As a reminder, this call is being recorded for replay purposes. Now I'd like to turn the call over to David Mackey, WNS's Executive Vice President of Finance and Head of Investor Relations. David? Thank you and welcome to our fiscal 2023 third quarter earnings call. With me today on the call, I have WNS's CEO, Keshav Murugesh; WNS's CFO, Sanjay Puria; and our COO, Gautam Barai. A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.wns.com. Today's remarks will focus on the results for the fiscal third quarter ended December 31, 2022. Some of the matters that will be discussed on today's call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include but are not limited to, those factors set forth in the company's Form 20-F. This document is also available on the company website. During this call, management will reference certain non-GAAP financial measures which we believe provide useful information for investors. Reconciliations of these non-GAAP financial measures to GAAP results can be found in the press release issued earlier today. Some of the non-GAAP financial measures management will discuss are defined as follows: Net revenue is defined as revenue less repair payments. Adjusted operating margin is defined as operating margin, excluding amortization of intangible assets, share-based compensation acquisition-related expenses or benefits and goodwill impairment. Adjusted net income, or ANI, is defined as profit, excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, goodwill impairment and all associated taxes. These terms will be used throughout the call. Hey, thank you, David and good morning, everyone. In the fiscal third quarter, WNS continued to invest for the future while executing well and delivering solid financial results. Overall, our business continues to show both strength and resilience, despite the challenging macro environment. Net revenue for Q3 came in at $292.0 million, representing a year-over-year increase of 12.2% on a reported basis and 19% on constant currency. Sequentially, net revenue increased by 1.3% on a reported basis and 2.3% on a constant currency basis after adjusting for foreign exchange. Our acquisitions added approximately 3.6% to growth, year-over-year and 0.7% sequentially. In the third quarter, WNS added 11 new logos and expanded 24 existing relationships. Sanjay will provide further details on our third quarter financial performance during his prepared remarks. As many of you are aware, in mid December, WNS announced the acquisition of two tuck-in strategic assets, in line with our stated criteria for M&A, we believe that these companies still gaps in our capabilities, our strong cultural fits, meets or exceed our financial objectives, and were fairly valued. At a high level, the additions of OptiBuy and The Smart Cube elevates WNSâs offerings in digital solutions, procurement, supply chain, and advanced analytics while helping expand our European footprint. These all represent identified areas of strategic focus for the company. Based in Poland and founded in 2010, OptiBuy helps companies leverage the worldâs leading digital procurement and supply chain platforms by providing consulting, implementation and integration solutions, deploying third-party technologies including Ivalua, Jaggaer and O9, OptiBuy is able to deliver significant benefits to clients across the procurement value chain, including cost reduction, improved cash management and streamlined supply chain performance. The companyâs focus on designing and building optimized digital processes is the perfect complement to WNSâs existing expertise in running procurement functions. In addition, OptiBuy brings front-end digital strategy and consulting services to the WNS portfolio and helps expand our geographic procurement footprints in the whole of Continental Europe. The Smart Cube is a platform-led analytics firm focused on procurement, supply chain and commercial sales and marketing. They have a unique on-demand digital market intelligence platform called Amplifi PRO that helps generate actionable insights and improved decision-making. This technology accelerator combines artificial intelligence with human intelligence to scan the competitive landscape, benchmark costs, measure KPIs, identify trends and manage risks for clients. In addition, the Smart Cube has a seasoned team of approximately 600 research and analytic experts including more than 400 with masterâs degrees. These resources possess deep domain expertise in procurement and supply chain and technical skills including data engineering, data visualization, artificial intelligence, as well as machine learning. For procurement and supply chain, the Smart Cube delivered analytical market intelligence across category management, commodity management and suppliersâ risks including expertise in ESG sourcing. In commercial sales and marketing, they help drive revenue growth management, consumer and market insights and pharmaceutical marketing effectiveness. Both OptiBuy and the Smart Cube bring strong domain leadership, highly specialized teams and proven track records of performance across the revenue growth, operating margins and customer satisfaction. They also serve blue chip client rosters that present significant cross sell and upsell opportunities. While these firms have niche areas of vertical expertise including retail CPG and healthcare, WNS views both assets as horizontal in nature allowing us to easily take their offerings across our verticals as well as geographies. These services are highly complementary with our existing offerings and with each other and will enable WNS to provide differentiated end-to-end solutions to our global clients. As I mentioned earlier, procurements, supply chains and analytics are strategic areas of investment for WNS. The global procurement space is rapidly growing and evolving as clients shift their attention from transactional processing to tactical buying to strategic objectives including risks and compliance, e-sourcing, category management as well as sourcing innovation driven by digitally led solutions with integrated analytics and deep domain expertise, clients are looking for their BPM partners to help reduce supply hazards, increased agility, drive sustainability, streamline capital and improve cash flows for them. Since our acquisition of Denali in March of 2017, WNS has consistently been recognized by the industry analysts as a leader in procurement BPO. Over this time period, our procurement revenues have grown by more than 25% compounded and now represents approximately 10% of total company revenue. And while we are happy with the progress we have made, we believe our new acquisitions will help accelerate WNSâs leadership position and business momentum by enabling WNS to better compete for large global multi-tower transformational deals. Looking forward, we remain excited about the current demand environment for BPM and WNSâs differentiated positioning in the markets. We continue to invest both organically, as well as inorganically in creating solutions with combined state-of-the-art technology with best-in-class talent. Despite the weak macro, our new business pipeline has never been healthier and the company is delivering solid top-line growth while maintaining industry-leading margins. Additionally, we are making steady progress on our key ESG and corporate sustainability goals. This past quarter, WNS was named to the Forbes 2022 list of Worldâs Best Employers highlighting our success in creating a globally collaborative inclusive and rewarding organization. In addition, the company signed our commitment letter with the science based targets initiative or SBTI to reduce our emissions in line with the latest climate science. Combined with our financial and operational performance, we believe our ESG initiatives will allow WNS to deliver maximum value to our customers, our employees, shareholders and the communities we work in. I would now like to turn the call over to our CFO, Sanjay Puria, to further discuss our results as well as the outlook. Sanjay? Thank you, Keshav. In the fiscal third quarter, WNS net revenue came in at $292.9 million, up 12.2% from $261.2 million posted in the same quarter of last year and up 19% on a constant currency basis. Sequentially, net revenue increased by 1.3% on a reported basis and 2.3% on a constant currency basis. Acquisitions contributed 3.6% to year-over-year revenue growth and 0.7% quarter-over-quarter. Our sequential revenue growth was driven by broad-based momentum with both new and existing clients and a half month impact of our acquisitions of OptiBuy and the Smart Cube. This benefit were partially offset by currency depreciation against the U.S. dollar, hedging losses, travel seasonality and a reduction in short-term revenue. In the third quarter, WNS recorded $0.7 million of short-term revenue. Adjusted operating margin in quarter three was 21.9% as compared to 21.4% reported in the same quarter of fiscal 2022 and 20.6% last quarter. Year-over-year adjusted operating margin increased as a result of operating leverage on higher volumes, improved productivity and favorable currency movements net of hedging. This benefit more than offset the impact of annual wage increases and costs associated with our return to office. Sequentially margins increased as a result of higher volumes and improved productivity. This benefit more than offset increased wages and return to office costs. The companyâs net other income expense was $1.2 million of net expense in the third quarter, down from $0 million reported in quarter three of fiscal 2022 and down versus 0.7 million of net expense last quarter. Year-over-year benefit from higher interest rates were more than offset by lower cash balances resulting from share repurchases and acquisitions and increased interest expense associated with long-term debt taken in quarter two and quarter three. Sequentially, reduced interest income on lower average cash balances and higher interest expense driven by long-term debt more than offset a $0.3 million non-recurring benefit from a settlement of an insurance claim. WNS' effective tax rate for quarter three came in at 19.8%, down from 20.6% last year and the same percentage as last quarter. Both year-over-year and sequentially, changes in our effective tax rate are largely the result of shifts in our geographical profit mix and changes to the mix of work delivered from tax incentive facilities. WNS also received a one-time benefit of $0.3 million in quarter three as our liquid mature fund investment shifted from short-term to long-term statement. The company's adjusted net income for quarter three was $50.6 million, compared with $44.4 million in the same quarter of fiscal 2022 and $47.2 million last quarter. Adjusted diluted earnings were $1.01 per share in quarter three versus $0.88 in the third quarter of last year and $0.94 last quarter. As of December 31, 2022, WNS balances in cash and investments totaled $249.8 million and the company had $179.4 million in debt. In the third quarter, WNS generated $70.3 million of cash from operating activities, incurred $11.4 million in capital expenditure and took out $100.9 million term loan for our acquisition of the Smart Cube. In addition, the company paid net $168.7 million towards our two acquisitions, as well as new captive carve out with a large North American insurance company. DSO in the third quarter came in at 34 days as compared to 30 days reported in quarter three of last year and 30 days last quarter. With respect to other key operating metrics, total headcount at the end of the quarter was 57,994 and our attrition rate in the third quarter was 28% as compared to 36% reported in quarter three of last year and 41% in the previous quarter. In the quarter, attrition reduced across most skill levels and geographies, including significant reductions in voice-based CX services in the Philippines and entry-level work in India. The company expects attrition will normalize over time in the low 30 percentage range, but could continue to be volatile quarter-to-quarter in the current labor environment. Build seat capacity at the end of the third quarter increased to 37,611 including organic growth and the addition of infrastructure from OptiBuy and the Smart Cube. In quarter three, WNS continued our progress towards in-person operations averaging 60% work from office during the quarter. In our press release issued earlier today, WNS provided our revised full year guidance for fiscal 2023. Based on the company's current visibility level, we expect net revenue to be in the range of $1,146 million to $1,158 million representing year-over-year growth of 12% to 13% on a reported basis and 17% to 19% on a constant currency basis. Our three acquisitions are expected to contribute approximately 3% inorganic growth to fiscal 2023 and our top-line projections assumes an average British pound to U.S. dollar exchange rate of 1.21 for the remainder of fiscal 2023. Consistent with our guidance approach in previous years, we currently have over 99% visibility to the midpoint of the range which does not include any uncommitted short-term revenue or improvement in travel volumes beyond quarter three levels. I also wanted to once again call out that our guidance includes the ramp down of a large healthcare process in fiscal quarter four. Full year adjusted net income for fiscal 2023 is expected to be in the range of $193 million to $197 million based on a INR 82.5 to U.S. dollar exchange rate for the remainder of fiscal 2023. This implies adjusted EPS of $3.82 to $3.89 assuming a diluted share count of approximately 50.6 million shares. As noted in our press release, acquisition-related expenses have been excluded from our A&I definition effective quarter two of this year. With respect to capital expenditures, WNS currently expects our requirement for fiscal 2023 to be up to $42 million. Hi guys. Good morning, good afternoon. Thank you. I wanted to just start with a high-level demand question. It sounds healthy, but would you say demand is broadly consistent with what you've been communicating over the last couple of quarters? Anything to call out there? Any changes in decision-making or areas you are seeing clients lean into more or less? Yes, Bryan, so I'll take that. Yes, it's more or less consistent with what we have been communicating. But I think one of the positives we are starting to also see is that as a number of clients, as well as prospects keep hearing all the messaging around a looming recession and things like that, we are starting to see them get a little more aggressive I think, about looking at their options, taking decisions a little faster and looking at potentially how WNS can help them. So in fact, I would say that it's starting to look a little healthier from our point of view at this point in time, more salutary in terms of how they are responding and reacting and that also includes their starting to feel their toes around whether they should take any decisions on their captives that they are holding. So, it's also potentially a stage where we're starting to see some more conversations now on captives. So I actually think that this whole recessionary talk, as well as the potential demand contraction that everyone is talking about is actually playing in very well to the sector and definitely to WNS. Okay. Thatâs good to hear. A follow-up on the client cohorts. So just looking at the growth performance between top 10 versus your non- top 10, it looks pretty solid with growth being driven in that non-top 10, which is good, but the top 10 are moving a little bit slower. Can you talk about your expectations and your opportunity among that larger client base as you think out over the next year? Sure. Let me take that Bryan, and if Gautam or Sanjay want to chime in. Happy to hear the comments as well. But I think this is not to be â and this is not unexpected. When you look at our top ten, we do have a handful of clients there that are extremely mature that have been with WNS for a while that have been aggressively pursuing transformation and automation agendas, which pressures their ability to grow. Now we have been able to continuously nudge the revenue that we get from these clients forward. But obviously, when we manage multiple processes with them, in that environment it's difficult to grow, right? The good news is, I think we still have significant opportunity for growth with the vast majority of our top 10 clients, but we should consistently see in our business that the growth in those next tiers of clients given the opportunity to expand the scope of what we do for them is much, much greater. We should continue to see that the growth with those clients accelerates at a more rapid rate. And maybe I'll just add that other than the top 10, based on the new clients what we have been continuously adding, it gives a much larger opportunity for us because after the initial ramp up or the transition, the farming, the upsell, the cross-sell opportunity is much, much larger with them as we move onward. And that's what historically we have seen and that's what we are excited about. Hi thanks. It's Jesse on for Maggie. Congrats on the good results again. So, I first had a question on guidance. You previously set expectations for a sequential decline in revenue in the next quarter, but you've also updated guidance, as well. So, how would you say the implied decline compares to your previous expectations? So, if you know, when we last time provided the guidance specifically, we did spoke about a ramp down from one of our client in the healthcare process and accordingly, it was sequentially down. But now we are updated based on two parameters: one, further organic growth of almost 1% to our guidance and the two acquisitions what we have done, that has further contributed to another 1% to our guidance from an overall year perspective. Yes. So I think just, the good news is when you look at whatâs really happened, we obviously had stronger growth in Q3. We expect better growth organically in Q4 and we have added the acquisitions as Sanjay mentioned of Smart Cube and OptiBuy, which are now included in our guidance. So, itâs a combination of both organic and inorganic improvement from where we were a quarter ago. Got it. That's good to hear. I had a clarification question. So when is that healthcare process expected to finish ramping down? I believe that's a single process for a single client, correct? Yes, the new baseline run rate for revenue should be set here in Q4. The ramp down was, like you said, one client, one process and it was effective January 1. So we will see the full impact of that in fiscal Q4. Okay. And then my last question was more about demand. So, are you able to provide a sense of how large or comprehensive the new deals are? Are any processes jumping out to you? Let me take that question and I'm sure Gautam and Sanjay and Dave may want to add a little more. First and foremost, I would like to say that broadly we are seeing more and more clients want to jump on the bandwagon first. I think that's the core, want their transformation agenda to be driven, those who were bystanders over the past year or two have actually now got a little more aggressive, fearing that they are going to miss something that if there is a full-blown recession, that they have not actually embarked on that project. So that's the first thing. The second is we are seeing with a lot of existing clients the move from just transformation to one of also resilience, so which means we're also seeing a lot of them add more to the table in terms of cost reductions, more efficiency gains, things the traditional model has always stood for. In addition to that, we are starting to see a number of new prospects who are now excited by the new offerings that we have created, some of the new acquisitions that we have brought to the table, as well as the fact that some of the clients that have now come in through these acquisitions already starting to interact with us in terms of the broad base of offerings that WNS can bring to all of them. So I think the combination of this means that people are looking not only for the transformation agenda now, but also the resilience and add to that, the fact that people running captives are also starting to say that, is this the right strategy for me, should I not been focused on my core business and maybe WNS is a better company to manage some of that. The combination of all of that means the pipeline looks healthy and we think will get healthier. Just to add to what Keshav mentioned, both in the U.S. and U.K./Europe, we continue to see that both these countries face labor shortages and along with that, what we are seeing is clients requiring more digital intervention, we are able to sell â cross-sell quite effectively and newer clients, the decision-making has shortened significantly, so the ability to ramp up, the requirements to ramp up is increasing more and more. So all this bodes quite well for us as our demand pipeline continues to increase. Thank you. Congrats on the quarter. Maybe, Keshav, just given your comments around the healthy demand climate and the asset decision-making, is this the time then to more aggressively ramp up your sales engine? Or just given the uncertainty, you might want to hold back? Just any thoughts around your sales force investments going forward. Yes. Thanks, Mayank, actually, great question. So I'll tell you, actually, we have never stopped investing in our sales force. So I just want to mention once again that I think we have one of the most experienced sales force in the industry at this point in time. We have kept making sure that we are rightsizing, adding wherever required and most importantly, focusing a lot on driving the productivity of the sales force, right, rather than just increasing numbers. I am delighted to tell you that while we will not step back in terms of sales investments, as well as marketing investments, we will also position the new people coming in through some of these acquisitions to broad-base WNSâs positioning and footprint in the marketplace. So I just want to say that at this point in time, we think that we must continue to invest in the area, but that does not mean having to take up numbers. We are looking at each one of our businesses carefully, looking at each area of demand carefully and where it is needed, we will keep investing. That could be in the form of more sales feet on the ground, or it could be in terms of more training, it could be in terms of other things as well. But not necessarily just taking numbers up. Yeah, and just add a little bit of color to Keshavâs comments, Mayank. We closed December with a 142 sales people in the organization, which is up almost 20% from where we ended fiscal 2022. We ended fiscal 2022 with 121. So we have built the sales force out and as Keshav mentioned thatâs a combination of WNS hires, as well as the three acquisitions that we've done. But essentially, when you look at a 20% increase in the sales force and you look at the time it takes to close deals in the BPO, BPM space, the reality is, you have not seen the benefit in our revenue growth from the hires that we've made over the last six to nine months. So, we have made that investment. We've continued to make that investment. And as Keshav mentioned now, the real focus at this level is to make this next â this last step function that we've done in sales more productive. Thatâs helpful to know. Thank you so much for that. Just one quick follow-up, in terms of pricing and more specifically around productivity benefits that you typically pass on to your clients, I think historically, if I am right, it's been somewhere in that 5% to 7% range. Given some of these market dynamics today, any change in your expectations on that as we look forward, especially into the next fiscal year? Yes. Traditionally, what we had was about 5% to 6% and what we are seeing is about a couple of percentage points increased requirements by the clients to drive the TCO benefits. And again, that's quite sustainable for us and especially this is helped by our recent acquisition of Vuram through which we are able to drive increased digitization and transformations and increased productivity. So just to be clear, in other words, are the benefits or the impact to your P&L going to be less or more, I am sorry, I missed that, going forward. Let me take that, Mayank. So, essentially, what's happened now is because of digitization and automation, the productivity headwinds that we give to clients are greater than they've been in the past. And we talked about that walking into this year that we expected an additional 1% productivity hit for this fiscal year as a headwind versus prior years. But from a P&L perspective, what you have to also understand is that the movement to leveraging technology and automation provides margin opportunity, margin leverage, right? So, while it may be pressuring the top-line, itâs creating better opportunity to expand margins and deliver on the bottom-line. The other thing I want to make sure, we hit here is, is just to make sure that you understand that while the productivity on a given process may be higher. The reality is in order to deliver the kinds of benefits the clients want, in many cases, we have to expand the scope of what we are managing for that client in order to deliver it. So while same-store sales, if you will or same processes may be facing a 1% bigger headwind than previously, what it's also doing is opening up opportunities for us to expand the scope of the relationship and add new processes for WNS to manage. Hey thanks. Let me add my congrats on very solid results. So I have two follow-ups. First, as we continue to see this pivot in the pipeline towards, I guess, cost optimization and I don't know some people are talking about vendor consolidation as well, how different is it going to be for WNS in terms of the economics of the new â maybe the new nature of the projects that are coming on board? Is there any difference there? And then, when we're in India early December, we heard some conversation about captives, which is something that keeps on coming on and off throughout â during the past 15, 20 years. Maybe you can talk a bit more about the captive opportunity here for WNS because again, that's kind of something that we haven't heard people talk about for a couple of years now. Thanks a lot. Sure. Maybe I'll start and have the others add on. But like I said, the opportunity actually is continuing to sound very, very positive and therefore, again, it will be different things for different people and different companies. So we are very, very confident about the fact that the way we have invested in terms of first and foremost, domain, in terms of technology, in terms of our transformation agenda, in terms of our innovative models, engagement models with clients, as well as the kind of people that they want to interact with, we will definitely be the beneficiary of any exercise that is being undertaken by clients, as well as prospects, right? And that's actually resulting in a larger pipeline and yes, we are actually seeing in some cases, some players talk about consolidation. But as of now, we've actually been benefiting from those trends because people really want to interact with companies that have all of these capabilities and can surely take them in the path of resilience, as well as transformation. That is one. The second is, while all of this happens, obviously, companies on the other side are also looking at making sure that their transformation agenda is not disturbed, so they have to make the right choice of the partner. But beyond that, they are also looking to make sure that these companies can help them with their cost take out challenges, so that they can continue to be relevant and not create any negative impact with their end-customers. So again, again I think companies like WNS are seeing the statements of that as well. Now in terms of captives, there have been two trends that have been happening Moshe, one is as with the successful management of COVID-19 by this sector generally and some countries in particular, there has been a move towards many companies wanting to create certain captives in India and other countries, right. Now that is one sign and these are normally captives created in areas which is very close to these customers, and they don't want to really hand it over to a third-party kind of a player. But what we are also seeing very quickly is that smaller captives, 100, 200, 500-persons kind of captives that are being created, already are starting to face issues that go beyond just management of the cost and the resilience, it becomes HR problems, the management of attrition, things that we are extremely good at and that is causing new heartburn and new heartache for these people who actually own these captives and that is, again, driving this discussion at a new pace. While decisions may not have been taken yet, all I can tell you is the quality of conversations that we are having has dramatically increased. You would have seen that in one particular case, we actually helped a very large global insurance player with the problem that they had and that's actually very large and very salutary to WNS and we think this trend will continue to progress. Also just to add to what Keshav mentioned, besides the challenges that the captives would face, one of the bigger advantages that we bring on the table is cross-industry transformation and digitization benefit, which most of the captives struggle with and that's where we are seeing an increased level of conversations where we are being asked to come in to help drive digitize and transform. Yes, and just to further add to that, Moshe, I think interestingly enough, when you look at the questions that were asked earlier about ongoing productivity commitments and improvements, I think one of the reasons that clients aggressively look at potentially getting rid of captive units is because if you can find a partner who will commit to productivity improvement, why do you want to try and run this yourself and hope you can deliver productivity improvement. So I think that level of visibility, certainty to being able to manage your cost structure going forward is something that's very appealing to clients. The big challenge, obviously, for these companies is determining what they believe is core and mission-critical to their business and they need to keep in-house and what they believe is less core or they are not good at, that they are better off finding a partner to help them manage and that's something that every client is going to have a different opinion on. That's really helpful. And just if I can just sneak in a last one here, clients continue to ask about the UK business. The UK has been resilient in the past few years, given what's going on in the UK from a regulatory perspective, but obviously the economy has not been doing that great. But maybe some color on what you are seeing in the UK market? Thanks a lot. Yes. What we are seeing is, of course, what we are seeing is not much of a difference in terms of the client demand, because where we are seeing an advantage within the UK is, as companies are preparing for a weaker macroeconomic scenario, the increased demand for digitization for them to align their cost base in line with the potential in terms of where the demand is going to come from is leading them to drive increased need for companies like us and that's where we are seeing our UK pipeline, in fact, is as strong as ever and the decision-making cycle in fact in the UK for clients to take the decision in terms of giving the go ahead is much, much more aggressive and at the same time, the ramp-up cycles are shorter. And I just want to add one further aspect. I think UK clients and prospects who engage with our sector and us in particular over the past few years have prepared to some extent for Brexit and the kind of impacts that go with it. So, I think they have always realized for quite a while that they may not be able to get the talent that they will need from a tech point of view to transform their own agendas. And therefore, they have allowed companies like us to lead them in terms of dramatically transforming how they go to the market, right? So, while UK as a whole may have a problem of not having the talent to take care of different services, the reality is, we have helped insurers, fintech companies and others to completely transform their business models through Insurance-in-a-Box, FinTech-in-a-Box kind of solutions, which are solutions which were unheard of in the past, right? And therefore, we have actually helped them prepare for tough times, but more importantly, gain market share as a result of these new offers. Yeah, and just to add a little bit of color to that from a financial perspective, Moshe, when you look at our numbers, obviously, year-to-date, the UK is up about 4% year-over-year which certainly doesn't look that encouraging. But it's important to remember that that 4% growth is with a 12% currency headwind. So, what we have seen in our business is healthy, healthy growth on a year-over-year basis within the UK on an organic constant currency basis. Hey guys. Thanks for doing this. Let me start with a two-part question, just back to the economic environment, first, if you could remind on volume sensitivity, should there be a slowdown or air pocket? I just want to outline downside risk. And then the second one is, it seems, Keshav that you are saying digital transformation objectives that actually still impact for clients thatâs consistent with our own checks. But any color on how the nature of digital initiatives might be changing? Sure. So let me kind of take the first part of that and I'll let Keshav talk a little bit about digital and kind of what we're seeing from a client perspective. But looking at the exposure, if you will, to our business, I think there are really four different pockets where we could see pressure, right? And most importantly, I think what I want to highlight upfront is that we have not seen these to-date, right? But the reality is, certainly, we have the potential for volume pressures with certain clients, certain verticals, certain processes and obviously, for everybody who follows the WNS story, travel comes to mind, is something that's front and center. But we also do have the potential for volume exposure in certain verticals like shipping and logistics or financial services. The second area where we could see pressure would be what we've been discussing here, which is productivity pressure, total cost of ownership pressure from clients. And we've seen that steady and rational as we've moved across through this year and across the years. The second would be â the third would be where clients have structural or strategic changes to their business and this would fall into the category of what we've seen with this large healthcare process that we've lost in Q4, where the client has made a strategic decision to move in a different direction. And the last would be delays and cancellations, where we have not seen any of that to-date. So, I think just to kind of highlight where we could potentially see exposures, those would be the areas. But I think what's more important, Ashwin, is that we understand that we believe in this weak macro environment, the opportunities for our business as things get challenged more than outweigh these risks. So, we believe this is a great environment for BPO, BPM. And also â hi, Ashwin, this is Gautam. And just to add to your â or answer your second part of the question, what we are seeing with clients is firstly in terms of the digitization journey is to change the target operating model, taking into account the end-to-end process and especially in the banking financial services, insurance and healthcare clients what we are seeing is these are companies or industries that clients are actually playing with legacy systems and infrastructure the need for smart, non-invasive workflow engines that can actually drive an end-to-end process. So, what we are seeing is not just discrete process efficiencies, but an end-to-end process efficiency that gets driven and that's being driven quite upfront rather than in later stages of the deal. So that's where the digitization journey is starting to impact more and more. Got it. Got it. And then on M&A, youâve obviously done couple deals here, but is it still a good pipeline what should appetite in the current environment do you see the need to maybe maintain a level of net cash on your balance sheet? Any thoughts in that direction? So let me start, I am sure Sanjay will want to add a little bit more. So, first and foremost, as you know that we've, for a long time, had this focus on constantly looking at assets that are capable of adding new capability, while being accretive also to WNS models overall over the past few years. It's just that in the past few months, we have had the opportunity to actually complete three deals which are bringing very strong capability and playing in extremely well with where the market is headed in terms of some of the new demand areas. So really delighted with what has happened there. At the same time, I want to again underline that our approach to M&A will continue to be disciplined, focused and we will continue to look at assets, particularly capability-led assets in a very disciplined fashion and if there is something that ticks the box and which makes sense to us and if it is coming in at the right valuation. We will look to do it considering the fact that we believe that in this kind of an economy, as well as in the â in terms of just how the markets are moving and the business is moving and the demand from clients, we have a right of way in terms of leveraging all of these assets and creating these new capabilities in order to deliver impact, as well as impact for clients and growth for ourselves. So whatever we do will be around capability, as well as will be accretive and in terms of the capital allocation, you want to talk? So I'll just add that Ashwin, yes, we do have a healthy pipeline, but the philosophy absolutely doesn't change from a M&A perspective, is all going to be around tuck-in capability acquisition and we'll be opportunistic to keep on adding those capabilities and including the captives opportunity what we keep on looking for. And from a cash perspective, what you just mentioned, I think 15% of our revenue is good from a working capital perspective and we believe we have stable, healthy cash generation. So that's going to â it will be good enough from a growth prospect perspective. Yeah, hi. Thanks for taking my question. Can you talk about sustainability of your attrition rate at these levels? I understand December is seasonally easier quarter, but is attrition, can it sustain at these levels on a going-forward basis? And are Philippine issues completely behind you now? Hi Puneet. The continued reducing attrition over the past two quarters has been largely driven due to stabilization across most job families and especially over the last few months that has been led by our customer services agentsâ requirements in the Philippines and a lot of the entry-level requirements in India. We do expect a little bit of volatility across certain niche job families but by and large we expect this to be stabilizing around the early 30s is what I see. So maybe I'll just add, Puneet, if you recall, we did spoke about that when the regulations got changed in Philippines, specifically from April 1 and where employees were really â were asked to come, to work from office 100% and that is where it all spiked and specifically around at the agent level. And we did mention that still that's not impacting from a delivery perspective. So it took a couple of quarters for us to stabilize, and it started normalizing, adjusted, but having said that, it's too early to talk about it and we believe it will still take a certain time to normalize and maybe it will go back to those 30%. But I think it was more around at junior level, at the middle management and all it's pretty normal, what we used to see pre-COVID level. Got it. And it seems like your answer to prior Ashwin's question, it seems like you are going to be more acquisitive near term, focused on acquiring tuck-in deals. But on the other side, like how should we think about your current portfolio? Are there any businesses assets that could be deemphasized or you could look for some alternatives there? Yes. So, first let me clarify. So at this point in time, we have done three acquisitions this year. So right now, we are digesting, right? And we will focus on digesting these acquisitions, welcoming all the people from these three companies, as well as the capabilities in a very excited manner, take it across all our client base and welcome many new prospects. I just want to mention that we'll do that. But at the same time, we will also be opportunistic in terms of continuing to look at what is available out there. And if we need to do something that is small and accretive at some stage, we will look at it later. So I just want to set that expectation. We are not out there to just put our cash out to acquire. That's not our approach. It's always been a disciplined approach. Now in terms of our businesses, generally, all the core businesses that we operate in continue to do extremely well, right? All the horizontal offerings that we have gone to the market with and we have positioned with you, we will continue to invest strongly in. As we have mentioned in the past, the auto claims part of our business that we have historically kept deemphasizing continues to be on that journey and it is not an area of significant investment other than taking care of existing customers. But every time we look at a business, we are constantly evaluating the impact of that business, the growth potential of the business, as well as the ROI from the investments that we make in that business before we make progress. So I am really comfortable with the businesses we have at this point in time and their potential for the long-term. Thank you. No, I was thinking about auto claims as well, when I asked that question. So thanks for the answers, Keshav. Yeah, hey guys. Just I guess, a couple of quick things, a nice job too. So, on the travel vertical, it looked like revenue was down a bit sequentially. I know that it's a little choppy it's still growing a lot year-over-year. But anything to that, just a little bit of sequential decline? Hi Dave, the Q3 decline that you see has historically been led due to softer volume during this time of the year, which is generally driven due to reduced leisure bookings. And also just to draw your attention, nearly 50% of our revenue comes in from the OTAs especially driven by B2B or B2C leisure travel. So that's where we are seeing. That's where the sequential drop has been for this quarter. But for Q4, we are already seeing moderately increased volumes, cost due to the recent weather events and also with increased bookings, but these numbers have still not been factored into our forecast that we have provided. Yes, so Dave, let me just mention one thing. When we talk about recession, when we talk about all the impacts that we said we will have, I think a lot of people start voting with their feet in terms of their holidays and travel programs and blah, blah, blah. And therefore, we also see, therefore, customers of ours on the other side go soft in terms of their projections. So I think some of this is also a factor of that. But as of now, as we look at how the sector is actually behaving, we are continuing to see a slightly more bullish positioning as opposed to the kind of numbers that they have given us in the past. So let's hope that people's faith in travel and having a nice holiday visiting their offices across the globe and potentially the revenge tourism comes back and it will benefit us. And I just add that the bigger opportunity for us still arise that the volume was not still not at a pre-COVID level and thatâs the opportunity from a forward-looking is there which is still below pre-COVID level, volume was still below almost like a 1.6% of the company's revenue. That's where the opportunity still lies ahead for us. Gotcha. Yes. Thanks for all that. Thatâs good. And I guess the one just follow-up, you had remarkably consistent margins. I think this year, you're trending to, I think, 21.5% or so. The last two years were right about 21.5%, which is impressive given rupee movements, revenue volatility, just all the different things. So, I guess I'm wondering, is there anything one-off in this year that we should just think about as we kind of think about next year or is this a pretty normalized year? It's a pretty normalized margin at this stage. There has been no one-off right now and we expect to continue with this margin as we move forward. Yes, and I think as it relates to FX, David, it's important to remember that we've now seen 10-plus years where our hedging strategy has been extremely effective in protecting our margins and smoothing the impacts of currency over a two to three year period. So, not only does the hedging strategy give us the stability in the margins, but it also gives us the visibility to allow us to guide you guys properly. I also want to just add one thing, Dave, and that is, I must give full credit to our teams across the globe, our operating teams who have created this new WNS, as I call it, in terms of just creating all these new innovative solutions, the new digital interventions, the new platforms that we have created and the new offering sectors the result of which, in spite of all the uncertainties outside, WNS is able to drive those efficiencies in order to maintain those margins. And as I tell you, it's not an easy task, right, to make those investments, manage all those kind of problems that are out there, yet deliver those numbers. And I think it comes from our superior execution, but most importantly, also the new offerings that we have created over the last few years. Yeah, Keshav, another question on travel. Curious with the awful airline issues recently in terms of â on the operating side, is that opening opportunities for the company? Yes, absolutely and that â and with some of the problems that the airlines and the airports have been facing over the past year or so that's led to an increased demand across all our lines of services, whether it is our industry-specific offerings or our baggage handling offering and at the same time, our reservations and change management offerings. So it drives volumes across all these areas and I would also say that as airlines actually increase capacity by introducing new aircrafts over the next number of months, we do see that the volumes also start increasing from there. And I must mention that with all this talk of recession and the kind of stress people are facing in the markets, we are also seeing the airports also start moving with discussions and potentially decisions on transformation and the cost agenda, as well. So I actually think that all of this is going to be very positive for WNS in the short order. And then, one more, any large clients facing financial challenges retail comes to mind and if I remember correctly, I think your exposure to traditional retail is pretty low. I think thatâs safe to say, our exposure to peer retailers is extremely low events. I donât think looking at our customer roster today, I donât think we have any significant clients that we believe are at financial risk, but obviously this â in this environment things can change quickly. Yes. Really important too, to remember that over the last couple of years, Vince, while we have had some recovery of the travel volumes we lost during COVID, when you really look at what's driven the health of our travel vertical, it's been the expansion of our existing relationships and new logos coming to the table looking for transformation, automation, digitization to be able to better compete. So, I think the more difficult things consistently become for the airlines, the more they are going to look externally for help to change our operating models to be able to compete better. Yes, I think that's safe to say. Our exposure to pure retail is extremely low, Vince. I don't think, looking at our customer roster today, I don't think we have any significant clients that we believe are at financial risk. But obviously, in this environment, things can change quickly. At this time, we have no further questions in the queue. This will conclude todayâs conference call. Thank you for your participation. You may now disconnect.
EarningCall_1315	Good day and thank you for standing by. Welcome to the WM Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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 at Ed Egl, Senior Director of Investor Relations. Thank you, Josh. Good morning, everyone, and thank you for joining us for our fourth quarter 2022 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; Devina Rankin, Executive Vice President and Chief Financial Officer; and Tara Hemmer, Senior Vice President and Chief Sustainability Officer. During their prepared comments, Jim will cover high-level financials and provide a strategic update, John will cover an operating overview, and Devina will cover the details of the financials. Following comments, Jim, John, Devina and Tara will be available to answer questions. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. In addition, we have published a supplemental presentation with additional information about our multi-year plan for investments in our renewable energy and recycling businesses, and it is also available on our Form 8-K and our website at investors. wm.com. The Form 8-K, the press release, the supplemental presentation and the schedules of the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K. John will discuss our results in the areas of yield and volume, which unless otherwise stated, are more specifically references to Internal Revenue Growth, or IRG, from yield or volume. During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the fourth quarter of 2021. Net income, EPS, operating EBITDA and margin and SG&A expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operation. These adjusted measures in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today. To hear a replay of the call access the WM website at investors.wm.com. Time-sensitive information provided during today's call, which is occurring on February 1, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of WM is prohibited. Thanks, Ed, and thank you all for joining us. 2022 was another very successful year at WM. Coming into an uncertain 2022, I wouldn't have predicted that we would grow adjusted operating EBITDA by more than 9.5% for the year, and 8.8% for the fourth quarter, all while recycling was down $59 million for the year on a sharp drop in commodity prices. That's exactly what happened. Strong operational execution and an unwavering commitment to our strategic priorities led to our full year adjusted operating EBITDA growth of $480 million. We achieved this tremendous growth in the face of elevated inflation, a tight labor market, and a downturn in the recycled commodity price market. So, we're very proud of our results. Our robust operating EBITDA translated into record cash from operations of more than $4.5 billion, which allowed us to return more than $2.5 billion to our shareholders through dividends and share repurchases. As 2023 kicks off, we're confident that our long-term focus is on sustainable growth, transforming our business through technology and automation are setting us up to meet the changing needs of our customers, our people, and our business environment, while leveraging our competitive advantages. Turning to our high-level outlook for 2023. We expect to deliver adjusted operating EBITDA of between $5.825 billion and $5.975 billion in the year ahead, representing growth of just over 7% at the midpoint, which continues the trend of robust operating EBITDA growth that we've delivered since 2019. Since then, we've grown operating EBITDA almost 26%. And at a time when the economic outlook is increasingly uncertain, we're pleased to be anticipating another strong year of earnings growth in 2023. The essential nature of our service, our diverse customer base, and recurring revenue streams provide stability in times of economic uncertainty. Much of the growth in our 2023 outlook comes from deliberate steps that we've already taken to grow revenue and efficiently manage costs. Overall, we're anticipating between 40 and 80 basis points of adjusted operating EBITDA margin expansion in the year ahead, driven by our collection and disposal business. Moving now to our sustainability growth investment. Let me give you an abbreviated overview of the supplemental deck that was posted to our Investors website. The investment in our renewable energy business is a unique opportunity that we simply couldn't afford to mass. You're all aware that since the passage of the subtitle B and associated air quality regulations in the 1980s and 1990s, landfill has been required to install gas collection systems. Historically, we've been collecting our landfill gas, converting much of it into electricity, which provides an earnings stream for us. Fast forward to present day, with landfill gas designated as a renewable resource, we are increasing the value of the gas that's an inevitable byproduct of most landfills. These RNG plants are simply taking gas that's naturally produced from the landfill and converting it into a cash-generating machine with a three-year projected payback and a far better environmental outcome than the status quo. And our returns far surpass those of our competition by virtue of our CNG fleet, which today represents 74% of our routed vehicles. As a result, we're better positioned to close the loop and capture extremely valuable regulatory RIN credits. At the same time, the recently enacted Inflation Reduction Act will provide tax credits and benefits that served to amplify the value creation of WM's renewable energy business. The supplemental presentation to the earnings press release provides details on the investments and our projections for cash flow and operating EBITDA growth. But suffice it to say, we view this as a very strong positive for shareholders. We have a number of attractive options for our renewable energy portfolio. Internally, we said there are three possible outcomes from this opportunity, good, really good or great. And we're heading down the great path by owning the landfill gas and renewable energy facilities, generating RINs through our CNG fleet and maximizing the value of new tax benefits to increase the resulting earnings and cash flows. We're also advancing our planned recycling investments and have provided more details in the supplemental presentation on our website. Our portfolio of projects to automate existing and build new material recovery facilities have three key financial benefits; reduced labor costs, improved product quality that commands a price premium and capacity growth. In the fourth quarter, labor costs per ton at our single-stream automated MRFs improved by 35%. The automation of these plants enabled us to reduce 137 positions through attrition in 2022. And in 2023, we expect to reduce labor dependence by another 200 positions. By the end of 2023, we're anticipating about a 15% increase in processing capacity from our automated facilities and new markets. We will host a virtual information session for investors on April 5th to provide even more insight into our recycling and renewable energy growth plans. Devina will discuss our 2023 capital allocation plans in more detail, but I want to emphasize our confidence in our ability to continue to allocate capital to all of our priorities, including investing in these high-return sustainability growth projects, returning cash to shareholders through dividends and share repurchases and acquiring accretive businesses. In closing, I want to thank the entire WM team for another fantastic year. We look forward to 2023 as we continue to execute on our operating plans and progress our investments in renewable energy, recycling and automation to drive growth. Thanks, Jim, and good morning, everyone. Jim described our fantastic results in 2022 and that all begins with our collection and disposal business. In the face of some of the highest inflationary cost pressures, our collection and disposal business delivered double-digit in adjusted EBITDA for the full year. During the fourth quarter, collection and disposal results were even more impressive as adjusted operating EBITDA grew more than 11% and margin expanded 40 basis points. This momentum sets the stage for continued growth in 2023 and strengthens our conviction that the investments we're making in our people in automation and in differentiating our service offerings are the right decisions. The growth in our collection and disposal business starts at the top of the income statement with robust organic revenue growth. Full year core price was 7.8% with collection and disposal yield of 6.7% and volume of 1.8%. As we work to keep pace with decades high inflation, our revenue management teams delivered record core price in 2022 in every one of our lines of business, led by 10.5% in our commercial line of business. We talk often about our focus on generating appropriate returns in our residential and post-collection lines of business. And in 2022, we delivered core price of 6.5% in the residential line of business, 6.4% at our landfills and 5.9% at our transfer stations. Our revenue metrics demonstrate that our customers' receptivity to our pricing remained favorable through the fourth quarter. Our rollback percentage was almost 400 basis points better for the full year, while new business pricing increased more than 6% in our commercial line of business. The results clearly demonstrate our ability to manage cost pressures through continued pricing discipline and momentum, while maintaining our focus on customer lifetime value. As we move into 2023, our disciplined pricing programs combined with the strong momentum from 2022 and are expected to deliver core price of between 6.5% and 7% with yield approaching 5.5%. Our expectation is for strong rollover of 2022 price performance. Given the acute inflationary environment in 2022, we increased certain fees that we don't expect to step up again at the same level. We remain committed to securing pricing that outpaces our cost inflation, which is demonstrated by the operating EBITDA margin expansion that we're anticipating in 2023. Shifting to volumes. In the fourth quarter, event-driven volumes remained strong with special waste and C&D volumes growing double digits. Our commercial and industrial volumes were positive for the full year. However, we saw some softening in the fourth quarter. Given these recent trends, we are tempering our volume expectations in the year ahead. Our guidance includes 2023 collection and disposal volumes that are relatively flat with 2022. We continue to see the rate of labor increases easing in our business, and we remain focused on managing our operating expenses and flexing down costs, flexing costs down with the changing volumes. In our collection and disposal business, we are seeing improvements in our labor costs as inflationary wage pressures are easing. Turnover trends are improving and the investments that we are making in automation are showing benefits. These improvements were on display in the fourth quarter â in our fourth quarter results as we saw operating expense margin improved by 30 basis points despite still stubbornly higher maintenance and repair costs. For the full year of 2022, operating expenses increased 50 basis points as a percentage of revenue, but that was largely driven by negative impacts from higher fuel costs and recycling commodity prices that together impacted the measure by 80 basis points. This increase was partially offset by lower labor and related benefits costs in our collection and disposal business and improved risk management costs. Putting it all together, when you combine our pricing efforts with our progress on cost containment, we expect 2023 operating expense as a percentage of revenue to improve between 30 and 50 basis points for the full year, with those improvements beginning in the second quarter of 2023. In the fourth quarter, our recycling operating EBITDA remained solidly positive even with the sharp decline in commodity prices to about $47 per ton. Over the last several years, we have intentionally taken steps to shift the business to a fee-for-service model that has reduced our sensitivity to commodity market changes. When we started this journey in 2017, commodity prices were 60% higher than what we are anticipating in our 2023 outlook, yet 2023 operating EBITDA is expected to be about 13% higher than in 2017. This clearly demonstrates that our business model is profitable and generate solid returns in any economic environment. As we look to the future of recycling, we remain focused on advancing automation across our MRF network, which we have proven can lower the cost of process material, achieve better quality while enhancing recycling profitability. Our employees delivered strong results in 2022, and I want to thank the entire WM team for their commitment to providing the best customer service while focusing on improving our operations. The team has done an exceptional job, and I know that this will continue in the year ahead. I'll now turn the call over to Devina to discuss our 2022 financial results and 2023 financial outlook in further detail. Thanks, John, and good morning. Once again, our solid waste business was at the center of WM's strong quarterly results, capping off a great 2022. Our team delivered strong organic revenue growth with a diligent focus on leveraging core price to offset cost inflation, while prioritizing customer service and customer lifetime value to minimize customer churn, all resulting in record high yield. When combined with strong cost control, these efforts delivered an 80 basis point expansion of operating EBITDA margin in the fourth quarter. Importantly, we achieved these excellent results while investing in technology and sustainability growth that will benefit WM for years to come. Full year adjusted SG&A was 9.6% of revenue, a 40 basis point improvement over 2021 as we achieved back-office operational efficiencies through standardization and process improvement that enabled us to reduce more than 600 positions through attrition. You can clearly see our strong performance and the record cash flow from operations that we achieved in 2022, which grew 4.6% to $4.536 billion. The increase in cash allowed us to accelerate investments at year-end, which brought full year capital spending to the high end of our expectations. 2022 capital expenditures totaled $2.587 billion with $2.26 billion of that related to normal course capital to support the business and the remaining $561 million related to the strategic growth of our recycling and renewable energy businesses. Putting these pieces together, 2022 free cash flow was $1.976 billion despite an increase in cash taxes of $370 million. During 2022, we returned a record $2.58 billion to shareholders, paying $1.08 billion in dividends and repurchasing $1.5 billion of our stock. In addition, we spent $377 million on traditional solid waste and recycling acquisitions to grow our business. We accomplished all of this while accelerating our sustainability and growth investments and achieving our targeted leverage ratio of about 2.75 times. Our balance sheet is well-positioned for growth through capital investments in our business or strategic acquisitions. Moving to our 2023 financial outlook. As John mentioned, we anticipate organic growth approaching 5.5% from yield. Given an expectation for a little more than 1% revenue growth from acquisitions, and a decrease in revenue contributions from recycled commodity sales and fuel surcharges, we anticipate total revenue growth of between 4% and 5.5%. When combining our plan to deliver strong organic revenue growth with a focus on optimization and cost control to drive 40 to 80 basis points of operating leverage, we expect to generate adjusted operating EBITDA of $5.825 billion to $5.975 billion in 2023. We expect to allocate $1.1 billion to capital investments in recycling and renewable natural gas growth projects in the coming year and 2023 is expected to be the peak investment year for each business. While these investments are reported as a component of our capital expenditures, and therefore, reduce our traditional measure of free cash flow. We view these investments as better than an acquisition dollar as they will produce even higher return growth as a strong complement to our existing business. Our normal course capital to support our business is expected to be between $2 billion and $2.1 billion in 2023. And free cash flow is projected to be between $1.5 billion and $1.6 billion, including the impact of sustainability growth investments. Our outlook anticipates an increase in cash interest and taxes of $175 million to $215 million and about an $80 million headwind from working capital due in large part to the timing and amount of incentive compensation payments. As Jim discussed, even as we step up our investment in high-return recycling and renewable energy growth projects, we remain well positioned to allocate our cash among all of our capital allocation priorities, including returning cash to our shareholders. Given the Board of Directors intended 7.7% increase in the 2023 dividend rate, we expect dividend payments to total about $1.1 billion in the year ahead. We also expect to continue our share repurchase program in 2023, as the Board recently provided authorization to repurchase up to $1.5 billion of our stock. While our guidance does not specifically include acquisition growth, we will continue to be opportunistic in pursuing the right deals at the right price. In closing, we are proud of what we achieved in 2022, and we're excited about the opportunities that lay ahead for 2023 and future years. I want to thank our hard-working team members for all of their contributions to our success. I'm wondering, if you could just talk about the puts and takes around the guidance. If recycled commodity prices remain tough over the year. That should be about a $ 50 million drag to EBITDA, give or take. And in that scenario, I'm wondering if we should be thinking about yield that's above the 5.5% target that we're laying out here this morning as we think about the potential for the yield number to move higher over the year as we've seen over the past couple of years? Jerry, let me tackle the first question first on recycling, and then I'll touch on yield overall. Recycling, obviously, fell off the table there at the end of the year. I think a lot of it had to do with China itself, even though China isn't a big customer of ours anymore, they still affect the overall market, particularly when we think about OCC. And their zero COVID policy certainly destabilize the market. I think as they've reopened, we've started to see some stabilization there. So that should help, and that's part of why we are a bit more optimistic in '23 with pricing starting to climb back up. It did climb up a bit in December, and we think it will continue to climb, albeit not back up to where it was for the year in 2022. To your question about yield in general and 5.5%, yield is doing exactly what we thought it would do. It's doing exactly what we said it would do last year. I kind of felt like we yield and cost, we're in a fistfight for the last 18 months with really no winter. And what we said was that we hope that when inflation moderated, which it is, that we would start to be able to use yield to not only cover costs, but also put a few points on the board in terms of margin. And that's exactly what's happening. So, we think that 5.5% yield number is absolutely the right direction. We're sensitive to customers. I mean, some of our yield numbers last year were double digits. And when inflation comes back down to 4%, 4.5%, I don't expect to take commercial increases at the 11.5% range. So I think we're pleased with the projection, and we're pleased actually with the fact that costs are starting to moderate and we can actually apply a little bit of our yield to the margin line. Super. And Jim, maybe just to expand on that last point, given the margin cadence over the course of the year to get the margin expansion that you're targeting for 2023, it looks like you're going to be exiting the year with margins up maybe closer to 100 basis points year-over-year in the fourth quarter, just given the seasonality and cadence. Can you just comment on that and whether that momentum could continue into early 2024? Yes, Jerry, I think that that overview that you provided is spot on in terms of how it is that we're looking at margin for the year ahead, 60 basis points of margin expansion at the midpoint indicates our confidence that the momentum that we saw in the back half of 2022 should continue into 2023. We expect some of the margin pressure from the recycling part of the business to continue in the first half. So we are seeing strong fundamentals in the solid waste part of our business that should help to offset that as they did in Q4. That being said, some of the cost execution, we really are laser focused as a management team on what we're doing on the cost side of the business. And that's not just looking at inflation and responding to it but being proactive in terms of what we can do to manage it appropriately. And truck delivery trends are favorable now relative to where we started 2022, and that should give us some relief both in repair and maintenance and in truck rental costs. Our frontline retention efforts are showing really strong benefits, and we expect that to continue in 2023. We're managing down professional fees, particularly in our SG&A. And then on the SG&A front, we're also leveraging technology to automate our processes, which is improving the customer experiences and reducing our cost to serve. So all of that gives us confidence that it's our strong execution on the cost side of the equation that will complement the yield that Jim just spoke to in terms of delivering that margin expansion and exiting 2023 with 100 basis points above kind of this current run rate feels like the right target for us. Super, Devina. Thank you. And can I just sneak one more in. I really appreciate the landfill gas disclosures. I'm wondering, Tara and team, can you just give us an update on Offtake Agreements. A quarter ago, you were at one-third of your Offtake Agreements were done. Can you just give us an update on where that stands today and whether the pricing point on Offtakes in the market is still in the 20s or if that's come in, given the pullback in Henry Hub gas. Thank you. Yes. So Jerry, in 2022, we were at 30%, and we're projecting in 2023 to be at 40% of our Offtake in fixed. And I think what's important to note here is we really took a look at this back in early 2022, looking at the volume ramp of our R&D, and we were pretty intentional about thinking through how to tap into those voluntary markets. So those markets today, we're seeing them be quite robust. If you think about large public utilities and industrial end users. This is a great way for them to tap into a low-carbon fuel and we're not seeing any price back at the moment. We'll give a bit more detail in April on what it looks like longer term as well. Thanks so much. Wanted to start out on renewable energy. Thanks for all the details in the supplemental presentation. I know you had previously talked about 2023 as an elevated year for investment. But it seems like maybe you decided to accelerate it and expand even more. So, I guess what sort of -- why is this the right time? And maybe just cadence of the investment during the year. And maybe just -- does this mean that M&A will be lower this year versus last year? Thanks. We didn't really give guidance on M&A. Historically, we've said $100 million to $200 million, so it's likely going to be kind of in that range. But the reason to your point that we've decided to accelerate some of this is just simply the opportunity itself. I mean I mentioned it in my prepared remarks, but it really is part of our solid waste business. This is gas as a result of Subtitle V and Air Quality Regulations that's coming to us anyway. About half of that gas has been monetized over the last, I don't know, 20 years, but we still have half left and we're certainly not monetizing the full amount when you look at that deck, but that, that we are monetizing we're effectively paying kind of a three times multiple instead of what you might pay for an acquisition, which would be kind of eight to 12 times. So, that's why we're feeling so good about it. And we've modeled these at very conservative numbers. Right now, we're well above those. So, I think the opportunity just started to present itself through the designation of this gas as being renewable. The markets themselves opening up and now with an opportunity which Tara can go into about electricity. In those cases, we don't even have to add capital if we already have electric facilities generating facilities out there. The only other thing I would just add to what Jim said regarding the acceleration of the investment is the investment tax credit and the fact that, that is a really strong pathway for us to get some tax credits on our investments and there's a timeline associated with that. And we feel really positive about where we are in our ability to capture those tax credits. We've modeled about $300 million, which you see in the deck. Regarding our broader portfolio, I mean, this is one of the reasons why we talk about this opportunity being so great because we preserved so many options for WM because we own the gas. We own our projects. We announced 20 projects. There's a whole pipeline that can come after that. And then with the e-RINs [ph] pathway, if you look at our legacy landfill gas to electricity projects, we can create an earnings stream with no incremental capital, and that's not in our numbers today. So, that's upside long-term. So, we're really optimistic about what we have in front of us here. And one -- maybe one last point here that I did mention also, but I'll mention it again. That differentiates us from our competition, and that is that CNG fleet. I mean 74% of our fleet is CNG and the way RINs works is you have to burn the fuel before you can monetize the RIN and having a fleet that is three quarters natural gas gives us a potential stream there, earnings stream that our competition who might be at 15% to 30% CNG, they simply don't have that or at least don't have it to the same potential that we do. Super. And I wanted to ask about volume. You mentioned the softening in commercial and industrial in the fourth quarter. Maybe just a little bit more color there, the magnitude, how quickly how it -- like was it early in the quarter or throughout the whole quarter, et cetera? And if you're expecting any softer volumes in the remainder of the business implied in the guide? Thanks. There were a few moving parts in the volume that was down slightly for Q4. Some of it was by design, residential specifically. Some of it was a couple of lost contracts in the commercial line of business and that was typically going to be in our national accounts group. And then, some of it is maybe softness showing up in the roll-off line of business. I guess, if there's any good news there, and it is that when we just looked at our January numbers this morning, they were actually better than Q4 on the volume front, particularly C&D, although some of that C&D might be coming from the hurricane cleanup in Florida. But MSW was a positive sign for January. So even with that, we felt that a negative 0.5% to a positive 0.5%. So a flat volume with last year, as John mentioned, was appropriate. And I guess, as we look at the tea leaves for the economy -- there are a few factors that are concerning out there; the housing slowdown, for sure. I mean, that's been widely discussed and that housing slowdown. While our C&D volume has been very good and continues to be good. We think that C&D will come back a bit. It almost has to with the housing slowdown. Special waste continues to be a strong point for us and the pipeline is good there. But I think as you think about, whether it's the housing slowdown or whether you think about the consumers saving at 7% in 2020 and now down to almost zero, because inflation has eaten up that savings. That's going to affect the consumer. But the good news for us is that our strategy is really not built around the volume aspect. It's built around cost controls, it's built around building out this sustainability strategy, and it's built around pricing. And so, we're pleased with being able to come in at the top end of the range on EBITDA at 7% for 2023. Hey, Jim. Thank you for the supplemental deck. But I do kind of want to get to the heart of it. So is the idea here that the contribution in 2026 between RNG and recycling, maybe it's now expected to be $740 million, I think, if my math is right, and that was upsized, is that right? Okay. But you're also in the midst of a labor automation effort. And I just want to make sure that I'm not double counting, because some of that is probably in recycling. But how much additional EBITDA are you expecting by 2026 from that effort as well? So there is a bit of the -- when we automate in the recycling piece in the deck, there is a bit of that in the $260 million, I think, was the number, but... But there are other areas where we're automating away positions and that are not captured in that deck at all, that really have nothing to do with RNG or recycling. Tyler, I would tell you that it's too early for us to predict the impact of that to 2026 and beyond. What we're really emphasizing in our 2023 outlook is that we're starting to see some of the benefits. Yes, recycling is a piece of that. But beyond the recycling line of business, we're seeing back office to 600 headcount attrition that I mentioned in customer experience, specifically is a strong example of that. And the leverage we've gotten in SG&A margin is in large part due to some of that success. So the 40 to 80 basis points of margin expansion really is all solid waste. And so that strong performance in 2023 is an indicator of future value that we think will come as we start to see, in particular optimization efforts in the collection line of business take hold. Some of that is delayed because of truck deliveries as well as some of our efforts to take that across additional lines of business. We started in the industrial line of business intentionally, and we're seeing strong success in some of those pilots. And we're happy with where we are, but too early for us to predict how much efficiency gain we can get across all lines of business in 2020 and beyond. But I think taking the 40 to 80 basis points accomplished or predicted for 2023 is a strong indicator of the strength of those initiatives. Tyler, let me expand so quick on what she just said about the 600 position, because that will become close to 1,000 positions just in customer experience. And we've talked a lot over the last couple of years about automation. But we haven't really given you kind of the numbers and where it's benefiting the bottom line. This is a good example. I mean, what we really did there was used a turnover number that was close to 50%. And customer experience, took advantage of that attrition. And at the same time, we automated the customer experience, which every other industry, by the way, has done over the last 20 years, and we hadn't. It was -- ours was still kind of a person-to-person experience. We haven't eliminated the person-to-person experience, but we've just made it available, made a self-service option available to our customers. And as a result, our call volume is down close to 25%. That's a huge drop in call volume. And hence, our ability to take advantage of attrition to the tune of 600 positions in 2022 and another close to 400 positions in 2023. Okay. Yes, that's extremely helpful. A lot on to come there. Okay. Devina, kind of coming back to 2023 margins, though, and I don't want to be super -- I do want to be specific. Can you just talk about first half and second half margins? So are margins going to be a little bit more flattie in the first half and then up quite a bit in the second half? I just want to make sure that we all kind of get the shape of the year right and could margins actually be down in Q1 year-over-year? Margins could be backward in the first quarter of the year. The pressure from the recycling line of business is the most acute. And while drop in commodity prices is typically something that we see benefit our margin in that part of the business, because of the pass-through elements of some of it. We have seen some pressure. So we are predicting some flatness, I would say, in the first quarter, with expanding margin in the second quarter, particularly on the cost side of the business and starting to see the pricing parts of the business really contribute as they did in the second half of 2022, as we anniversary some of those impacts from the recycling line of business I mentioned. So first half, second half, I would say you'll see more muted margin expansion in the first half, stronger margin expansion in the back half. That being said, I wouldn't expect the minus 100, plus 100 that we saw in 2022 because we've overcome so many of the operating cost headwinds that we were experiencing this year and really starting to see some strong momentum there. Okay. Perfect. That's extremely helpful. And my last one, just real quick, you kind of went through quite a bit on the free cash flow puts and takes. But can you kind of go back over what the expectation is year-over-year for cash taxes, cash interest and then maybe working capital? Just trying to help build that bridge. Sure. So EBITDA growth at the midpoint is $390 million, and so that will be the driver of free cash flow growth, cash flow from operations growth next year. Unfortunately, with this interest rate environment, we're going to have to give some of that back because our cost of debt is going up. As you can see, when you look at our fourth quarter results, our weighted average borrowing rate in the fourth quarter actually went up 80 basis points. And so that was an increase of $26 million in the quarter. We were virtually flat all year long in advance of Q4. And when we take that Q4 impact and extrapolate it to 2023, that's what's going to be driving our interest costs higher. So that in and of itself is a little over $100 million of impact. And then we do expect our debt balances to increase in the year ahead. Our debt balances are going to increase because we are seeing such strong growth, and we are going to be investing in all elements of capital allocation with that strong balance sheet. So not pulling back any on our allocation of cash to share buyback in the year ahead, is our current plan. We may moderate it some, but we'll give you more color on that over the course of the year. So with the higher debt balances and the higher interest cost that really is all of the $175 million to $215 million that I mentioned in interest and taxes. Taxes are actually going to be essentially flat. So while we would have expected some moderation in that, because of the one-time payment that I mentioned of $100 million, we're really seeing that offset by two things: one, higher pretax income; and the other being the expiration of a piece of bonus depreciation and the asset mix that we're putting in place. So those are the interest and tax pieces. The $80 million headwind I mentioned on working capital, we had an $88 million contribution to working capital in 2022. So we're essentially saying that, we think we might give some of that back. Some of that is a moderation in DSO, just because of the recessionary environment that we're predicting. But a large contributor is timing and amount of incentive compensation payments. Good morning. Thanks. D&A stepped up in 4Q. Can you first provide a little color on that and then give us what should be D&A for 2023? Sure. So the color there is really inflation in our landfill costs. And it's both from normal inflationary cost pressures, as well as the regulatory environment, that's driving some of our costs for closure, post-closure higher. So the charge that we took in the fourth quarter relates predominantly to our closed site part of the portfolio, though some of it is also representative of changes we're seeing in management of the active landfills, too. In terms of next year's DD&A, we're not predicting another step change from this current level, but we are expecting DD&A levels to reflect better delivery of trucks in the year ahead. So you'll see some increased depreciation in the first half of the year rather than waiting to see all of that impact in Q4. Net-net G&A is going to be moderately higher just with the capital expenditure deliveries, but it's not going to be another step change from this level. Yeah. Okay. And then just on pricing, I guess, Jim, listening to your comments around some of the softening in the commercial sector. How do we think about the cadence of price growth expectations? It seems hard to sustain double digits in C&I as we go through the balance of the year. There is some math on that, of course. But how do we think about pricing? And what elements of the business may see the greatest sequential price declines on a cadence basis? Well, I think we think about it -- I mean, we're thinking about pricing because there are -- there's a two-fold exercise here. One is combating cost increases or inflation, which was why the last 18 months have been so challenging, because we really felt like it was almost all, in fact, in many cases, all of it was going towards combating inflation. And then a second piece is adding a few margin points for us. So as we look at this through our price group, particularly for commercial since that's where your question was, we think that pricing will moderate a bit, because inflation is moderating significantly. And that ends up being a good thing for us. If you look at collection and disposal yield for last year versus our guidance for this year, last year was $6.7 million this year guidance is 5.5%. So there is some moderation in yield there. But significantly, we're projecting at least a significantly different cost picture. So we think the price starts to contribute to margin again, whereas, it hasn't for the last probably three years. I think the only one I would make there, Jim, is the residential line of business, specific if you look at our volume loss there, clearly, we continue to make deliberate decisions. We mentioned some of the franchises that we've parted ways with. And even if you look at the 4.5% or 4.7% negative volume, our revenue was still up over $50 million for the quarter in residential. And as we've said, we're going to continue down that path until we get acceptable returns and margins for that line of business. And so we're happy with that progress. We don't like intentionally shedding that business but under these conditions, like Jim said, the inflation is what we're combating and it's been most acute in residential, partly due to the labor intensity there. Yeah, I think maybe one place where it might not moderate as much is on the landfill side. I mean, we have a differentiated product there and so not that we don't have a differentiated product on the collection side, but landfill in particular, the yield was 6.2% MSW last year. I think that's probably the highest annual yield for MSW maybe in our history. And I don't expect that to come back to at a lot. Good morning and thanks for taking the question. I understand free cash flow will get near-term. But do you think WM can emerge from this investment period with structurally higher free cash flow conversion from EBITDA than you had in 2021 and before, it seems like these investments will be highly cash generative once ramped and can potentially exceed where you were before the investment period. Yes, Brian, you're spot on there. Our ability to convert revenue and EBITDA dollars to free cash flow with the sustainability investments will be heightened as we come through the investment period. Fundamentally, that's because there's a different capital outlay model for this part of our business than there is for the collection and disposal business, where you're having to spend capital dollars effectively each day that you service the customer. So with maintenance capital levels meaningfully lower in both recycling and renewable energy, we're optimistic that cash flow conversion will be stronger after this investment period. Got it. Thanks for that. And last question for me. The press release called out investment in plastic recycling infrastructure. Maybe just from a high level, is it possible to say what makes that such an enticing market for WM longer term, do you have any thoughts on how the margins or returns could compare to your existing business? Sure. The investment we made in Natura PCR, this is really about taking film and film plastic and mechanically recycling it. Film has very low recycling rates today. And on top of that, if you look at -- all of the brands out there, CPG companies have very strong commitments to use more recycled content products. So it's a market where there is a very strong need and we have a strong fit. Also, if you think about the plastics that we collect on the brokerage side of the house, so it felt like a natural fit for us. What you're seeing in the press release are some capital dollars to invest in building out that plant portfolio in Houston and also in the Midwest, and we'll be providing a bit more information on that in April. Hi. Thanks for taking my question and thanks for the supplemental information here. If I look at your pro forma earnings contribution from these sustainability investments of -- and if I do kind of a quick back of the envelope math, it seems like you'd get to something like 15%, maybe even upwards of 20% of your earnings coming from recycling on RNG. And then the payback looks phenomenal. ROIC is obviously very big. But I guess how do you think about the underlying earnings volatility of the business now that it becomes more commodity exposed once these investments are completed? Yes, I can speak to the commodity volatility on both sides of the business. So on the RNG side of the house, we've talked a lot and I mentioned it today that we have 40% of our volume that's really tied into fixed price markets. And then we also have the ability on the transportation side of the house to leverage WM suit and tie it into ERINs [ph]. We're really -- sorry, RINs, conventional RINs, we're really being thoughtful about how our ramp looks long term and how to tap into those fixed versus transportation markets. And so we'll give a bit more information on that in April. But suffice it to say that, it's something that we're tracking very closely, and we have a whole host of options to ensure that we can navigate that. I think there's very strong fundamentals. If you look at what the EPA did with their announcement on the renewable volume obligation and setting a three-year pathway. So it really shores up where we're headed on the renewable natural gas side of the house. On the recycling side of the house, I think what's interesting is, if you look at the $240 million in EBITDA, 60% of that is really independent of commodity prices, and that really speaks to the fact that a big piece of it is coming from labor and labor improvements. 35% exiting the quarter in labor cost per ton improvements at our automated facilities. And then revenue quality, and a great example of that is how we're able to take mixed paper and remove cardboard from those bales and sell it at a higher price premium. And that's independent of market prices. So a lot of what we're doing will help us inflate ourselves from those wings. And I might add one thing because in your question about adding volatility, I mean, I guess you could say that. But look, as I said, and Tara has mentioned as well, this gas is coming to us regardless. I mean, this is gas that is produced by these landfills as a result of MSW going into them. And about half of it is monetized in some form today. All we're doing here is taking advantage of a situation that was presented to us, but also taking advantage of our natural gas fleet and turning that 50% that isn't monetized into some value add for shareholders. Does it add some volatility? I guess it adds some, although Tara has gone through a part of her answer to question earlier was to -- that we are looking to take some of that volatility away by fixing some of the pricing. But I think there's this view that why would you add a volatile business here? And the answer is, we're just taking gas that's being produced by these sites and turning it into a very, very profitable revenue stream with very, very strong paybacks. That's great color, Jim. That's very helpful. Maybe just my second one just maybe on some of the automation you were talking about on the customer service side. It sounds like, obviously, some huge wins there. Just wondering what you're seeing from -- I guess, the labor cost savings -- would you track, I guess, like a Net Promoter Score or like a customer churn, as you roll that technology out and maybe do some of the friction that some of your customers might have had calling into call centers. Are you seeing other benefits, whether something that promoter score or churn rate that you'd be tracking alongside just the labor cost savings? Yes, that's a good question. A few things are happening on that front. One is we've digitized a lot of the customer-facing elements of sort of these transactions. So customers have the better ability to transact with us when and how they want to from a digital perspective. We're seeing that translate to NPS scores, not a surprise that we in the beginning of the year had some dips in our NPS scores as we were challenged on some of the labor and asset fronts that Devina and Jim commented on, but that started to improve in the second half of the year, which has also helped our service quality. So, we're seeing our NPS score start to move the right way in the back half of the year. And we're also, at the same time, seeing the benefits from some of the labor arbitrage. As Jim mentioned, these are not jobs we're moving out. These are jobs that we're not replacing because they're because they're high turnover. And I think Tara and Jim gave good color on what's happening with the recycling and the recycling front with respect to automation benefits. And we've touched on the other big bucket is moving from sort of the traditional manual rear load system to the ASL system, that's another element of automation where we're clearly seeing benefits. Yes, thanks very much Jim. And just following up on Kevin's question there regarding -- and to your point, Jim, it is fluctuation, but it's something that can be managed and it looks like you're doing you're setting up for a great job managing some of that fluctuation. But I guess investors are -- and you touched on it on your pricing, right? In the solid waste sector, investors are accustomed to price never going down. Yes, it might go up less and the volatility is really just how much more does it go up one year to the next. But with some of the renewable energy fluctuations and recycled commodity prices as you pointed out. I mean, you're getting EBITDA going down this year as a result of those. My question, I guess, is that as you build these out more, is this something that you would you would consider spinning off while retaining a stake as to kind of separate the two so that investors who desire that volatility, want that volatility and willing to pay for the volatility can do so and then those that are -- prefer the more steady EBITDA stream that your company has delivered so well in the past, can focus more on. Is that something that is in the cards in the future? How much have you thought about it? Just curious in that regard? Well, a couple -- I think you're making a couple of points here. Just to maybe correct one thing. Price isn't going down if that's what you were implying. It's not going down. It's just going up by slightly less than it did last year. And to your question about whether we would consider spinning off the RNG business. I mean, first of all, there's a lot of options for us and we would never take any options off the table. But what Tara said earlier, which I think is important is we -- part of the value for us is that we like owning the gas, we like owning the facilities. And so for the time being, the answer is we're going to develop these ourselves. We're going to -- and we're going to see the full benefits come to ourselves. And we'll do everything we can to try and mitigate the volatility -- but we like owning the gas itself. We like being in a position -- I've been in a position in the field where I managed the landfill where we didn't own the well field. And that was not a great position to be in, having been there a number of years ago. So, we like being in a position where we manage the well fields that produce the gas. Not to say we wouldn't consider that down the road. But for now, we're kind of in our infancy and we're going to own and develop on our own for now. I was just going to add on the recycling side. If you look at that separately from the RNG comments you made, if you went back five or six years ago and looked at the commodity price versus what their earnings stream was out of the recycling facilities was much different. But in my prepared comments, you earn at $47 a ton. We're still seeing strong earnings and returns in our -- in all of our MRFs, not to mention the fact that when you were to carve out the automated plants, which is only a small portion, we're going to add to that next year, as Tara mentioned, those margins are even higher. So I would argue that we've taken out a lot of the volatility in the recycling business, and that's why you continue to see our conviction in those investments going forward. Yes, I'm glad you made that point, John, because we did change a lot of these contracts from four years ago, and I think that's your point. Yes. No, that's absolutely -- that's clear that you've done a lot of good work in terms of restructuring those contracts to produce some of that volatility. Just curious in terms of the spinout, but addressed that question. Appreciate the time. Hi, team. Thanks for taking my questions. First one, I just wanted to reconcile the -- there was a 35% labor costs per ton reduction on the recycling footprint mentioned, also a headcount reduction of, I think, 127. Just trying to reconcile those two data points. Yes. So John mentioned in his remarks, the 35% reduction on our automated plants on labor cost per ton, and that's what we saw in Q4. And then that 137 number is related to the headcount attrition related to automation in 2022, and we're expecting 200 in 2023. Okay. Helpful. It's impressive. And then, the other one is just kind of nitpicking here, but the some of the inputs on the guidance for this year, $70 OCC, $2.30 RIN price. Could you just tell me where those numbers are today? And if you can, just how to think about sensitivity to the extent we don't climb up to those numbers? Yes. So $70 a ton number for 2023, exiting December of this year, just north of $50 a ton. And we're seeing some signs on the plastic side, is a great example, where we're seeing plastic pricing increase a bit. And we've seen that uptick related to, again, CPG companies trying to meet their sustainability commitments on using recycled content. So we expect, if you look at that ramp through Q1, Q2, Q3, we'll start to see that ramp over the quarters when you look at how commodity prices will move on the recycling side of the business. And then, on the renewable energy side of the house, that $2.30 RIN price, exiting 2022, RIN prices were higher. We've seen a bit of a dip on RIN pricing that definitely recognizes what we're seeing in the market today and where we expect it will hedge throughout 2023. Just remember, 40% of our off-take is fixed. So the other 60% is exposed. And I would just say the midpoint of our guidance anticipated the commodity values that Terra just went through, the downside has contemplated some of the downside risk should those values be less than what we are currently predicting. Good morning. I just want to make sure this is very clear. You are not seeing unit prices come down, the rate of change in price is narrowing options coming down? Okay. So then I want to dig into â I think there's more power in the solid waste business than maybe everybody's understanding. Are you about 80% of your EBITDA, 80%, 85% is solid waste and then 15 to 20 is sustainable investments in recycling. Is that about the right proportioning? The way that, I would answer the question, Michael, is if you look at our outlook for the year ahead, we're implying growth from the solid waste business of about $475 million and that rivals the highest levels of growth that we've ever seen in our history. And so what we focus on in terms of measuring solid waste performance is our ability to fundamentally grow that business over the long term, both in terms of the pricing execution and our strong focus on operating cost efficiency and those things are what are driving that $475 million target. I would tell you, Michael, I think with Devina and I can share this â we all do on OpEx. But I think to Jim's point, we were kind of arm wrestling with it, I forget the phrase used, Jim. I think the efforts that we undertook last year and what happened in the last two quarters, in particular, the fourth quarter make us feel really good about what's happening on the solid waste side and some of the commentary was about price and yield and the movement. But when you see OpEx, our guidance on OpEx moving the way it is for next year and the EBITDA improvement in Devina said what the strength of the solid waste business is we feel really good about how we're entering 2023. And I agree. I'm trying to get there by backing into numbers a little more precisely. That's why I was asking about the mix. If I'm right, and you're in the 80%, 85% is solid waste, you're going to end up with a 9% to 10% growth in solid waste in 2023 in EBITDA. And like 90 basis points, maybe even 100 basis points in the solid waste business and then you give a little bit of a back because of the other stuff, right? We are predicting that strong solid waste growth coupled with some SG&A margin expansion. Those are really the two levers for next year's overall EBITDA growth. Okay. Okay. Well, I tried. I would â would you all consider starting to segment where you show us recurring core solid waste versus the alternatives? So we start to be able to track this better? We always focus on making sure that you guys have the best information available, and we'll continue to try and meet that goal, and we'll step back and look at our disclosures and ensure that they're appropriately robust. We think that they are today, but we know we can always get better. Okay. Baseline capital spending at 2 to 2.1 comes out at 9.9% of revenues, which is below your long-term average. And it's a little surprising given the vendor side of the world is talking about a lot of inflation in their side of the business still. So I'm trying to understand why that baseline â and it's essentially flat, sequentially in absolute dollars. So what â I don't think you're under investing in your business. I know, you're not doing that. But can you talk me through why that's settling the way it is? I think, Michael, if you look at the inflationary pressure and the performance on the revenue side related to that, we've been also very sensitive to the fact that capital shouldn't just necessarily go up because revenue is. We're looking at it by line of business and what's happened from a volume perspective. And I think that's what you're seeing part of the leverage there. On the supply side, Michael, I would tell you, this was a challenging year in terms of juggling CapEx mostly because of the truck-related issues that we had. So 2023 will be more balanced, but I think you're seeing the sub-10 number as a result of our discipline around capital dollars. The other thing I would point out is we did pull ahead some capital into the fourth quarter. And as a result of our ability to do that, we moderated our outlook for 2023 capital slightly from our original expectations. Should we see a need to adjust that further as we get into the year and perform well as we expect to do, particularly in the solid waste business, we might take some steps to accelerate capital that much further. But this is about strong execution on capital discipline, combined with our ability to ensure that our price isn't just addressing the operating cost side of the business, but also capital inflation. Right. Last two for me. Tara, the $500 million of EBITDA in RNG in 2026, how much of it is fixed versus spot? Today, we have 40% fixed based on the roughly 4 million MMBtu, and so that is what is fixed today. We're working on fixing more of that longer-term. But -- so you don't have a goal for that $500 million? I guess that's what I'm trying to ask. What how much of it. Yes. We have a goal. We'll give you more information on that in April, Michael. We have a pathway to have a portfolio mix longer-term. Yes, yes. I mean in the supplemental document, we have the EBITDA and the free cash, but they don't have revenue. So we're all guessing what that means to our model. Suffice to say, itâs the margins on this business, Michael, and whether you're looking at margins on the EBITDA side are 70%-ish maybe 75%. I mean, we'll get -- as sheâll still give more detail on in April. And then as Devina went through, the cash conversion is tremendous, too. So it's why this business -- why we're so excited about it. And nobody has asked a question about M&A, but I did mention that I'd rather do a three times EBITDA investment than a 10 times EBITDA investment where there's some uncertainty about integration. So we'll talk about revenue and what it means. But these are hugely high margins on the EBITDA line with these RNG plants. Last question for me. In 2019, you told us that the solid waste business would compound at 5% to 7% EBITDA free cash. When I add in the $740 million by 2026, will that new baseline still compounded by the aggregate number, 5% to 7%, or does that 10% increase dilute that compounding, the aggregate compounding? It's a great question, Michael. And what we're doing is working to segment these parts of the business very clearly so that we can articulate the level of growth that each of them is expected to have. The solid waste business has outperformed that 5% to 7% target that we established, and we couldn't be more proud of those results. In terms of what's happening in the RNG and recycling businesses, we're talking about a new step level change in our free cash flow generation for the business. Our ability to grow that, I think done a great job of articulating the fact that this opportunity and what's outlined in the supplemental deck is just a starting point for us. Our portfolio provides tremendous upside opportunity from here. Our ability to say whether that's 5% to 7% or some other number, that will come as we further articulate our plans for building out the total addressable market that we have across our landfill network. Thanks, everyone. I know we're over. So I'll just keep it short. Tara, apologies if you touched on this, but why has RINs rolled over in the beginning of this year? And any policy actions that we should be monitoring that helps get that RIN recovery to that 230 for the full year? Yeah. I think the important thing to remember here is that earlier in -- really in December of 2022, EPA came out with their that rule, which on the positive side, set a three-year framework for renewable volume obligations, which for us for the long-term is positive because at the end of the day, it really sets the standard for the program and the RIN pathway for us. I think there's been a little bit of speculation in the marketplace around whether or not those were the right numbers that EPA issued. We're confident that come June when EPA issues their final rule, there'll be more clarity. So I think that's a little bit of what you're seeing. But long-term, strong fundamentals on the price side related to RINs. Thank you. And just, Devina, the last four to five years, I think your EBITDA margins have been in the tight range of 28% to 28.4%. You are now guiding for 40 to 80 bps, so moving up there. Just can you quantify how much of a headwind is there on the margin for RNG and OCC in 2023 based on the guide? Hi. Thank you. We'll keep it brief. And, kind of, just a continuation of the last question. Just wanted to talk about what you're seeing from a pricing standpoint in your renewable energy business. I know that does include RINs, but it does include some other factors as well within your business. And then longer term, I know near-term, Devina, you just kind of discussed with the EPA standards and RIN pricing. But is there any kind of risk of maybe a supply-demand in balance with more supply at some point as more and more of certainly you guys but also your competitors also bring these renewable natural gas facilities online, just what that can mean for pricing, not necessarily this year or next, but longer term? Thanks. Sure. I'll speak to the price side, and this is a footnote in our press release, but we did see pricing come down in the three categories, slight decline on the power side. And as you can imagine, we saw some record power prices related to some of the dynamics in 2022 related to weather and whatnot. So that's reflected on the power side. On the natural gas side, natural gas pricing has come down. We were north of $5 in 2022 and now coming in and around 360, that's what we're guiding to. And then on RIN prices, again, 230 is what we have in our guidance. And I think I just went over a little bit of the dynamics there. As far as the supply and demand dynamic, I think what's really important to note on the renewable natural gas side is there are two markets, and they're quite robust. The first is on the transportation side, which is where we generate D3 RINs. And for us, we're in a unique position. Jim has mentioned this before, where we own our own fleet, so we're able to capture more of the value, and we have robust discussions with obligated parties. So we're able to trade those RINs and have a long history with that. At the same time, you have this voluntary market that exists where many, many public utilities have come out with announcement where they need to decarbonize their own portfolios and the fastest way for them to do that is to buy renewable natural gas and buy renewable natural gas at a price premium. And again, we'll give you more information on this in April, but we feel really positive about the options that we have for each of those. Hi. Thank you for taking my question. I just wanted to come back to the 2023 guidance overall, and just ask whether you're assuming a recession in the guide or maybe just a slowing economic environment. And I guess you could probably see this most reflected in the volume guidance range. So is the low end of the range at kind of negative 1.5%, embed some conservatism on the economic environment. I wouldn't say that any of us are macroeconomists. So whether we're projecting a recession or not is hard to say. But we are projecting some softness for sure. We saw some softness in our volume numbers, as I mentioned, probably particularly in roll-off for Q4, and that's continued a bit in January, albeit -- our numbers were a little stronger volume-wise in January. I think if we try and read those tea leaves ourselves, and we're all reading as much information as we can, it feels like there could be some type of slowdown, especially as the consumer eats through all of their savings. But I am -- the last thing I am as a macro economist. So I can't sit here and tell you, yes, we're going to see a recession next year. We're just having to manage our business to â to our own best abilities. And that's why we have taken cost control on very seriously. That's why pricing is still an important aspect of this. And then at the same time, for the long-term, these renewable natural gas facilities and automation of a number of these positions makes a lot of sense. So that really is affected by â by any downturn in the economy. Thanks. Good morning. I suspect we'll get more color on April 5, but could you provide a framework for how meaningful Erin could be from a WM perspective? So, the important thing to remember is it's a proposed rule and EPA will be coming out with our final framework sometime over the summer. I think from our perspective though, you got to look at the 66 landfill gas to electricity plants that we have, that we own. And this, we believe, will be a significant revenue stream for us long term. It's a great example of our ability, where we have owned these facilities and invested in them and retained the value. Now, we're in a position to optimize the value with this pathway. So, really waiting for a bit more color from EPA on what their final framework is going to look like, but really optimistic. Again, no incremental CapEx on that potential revenue stream. Good color. Okay. So maybe on the same thread, do you think, Erin's even could impact the development pipeline for landfill RNG projects, or do you still expect RNG to be the most desirable landfill gas project, assuming the site is suitable for it? Yes, great question. I think we're -- first and foremost, we're really confident on the path that we're on with the 20 projects that we have in the deck. And we're actively looking at our portfolio. We're going to make the best economic decision, the best environmental decision. And the good news is, we have a lot of options here. I mean, that's something that Jim said earlier on, good, really good or great. We view these frameworks as great for WM. So we're going to evaluate what makes the most sense for us long term. Okay. And then maybe just one kind of more detailed question. But in Q4, we saw that core price and yield in the collection and disposal business, they really converged, which is great. But it was a much tighter spread than we've seen in recent quarters. And then the 2023 guide suggested would widen back out again. Just can you provide some color on some of the factors that impacted that spread in Q4?. Yes, it's a great question. And when we wish we had a specific science towards being able to predict the Q4 results were best ever in terms of the difference between core price and yield. And in large part, that speaks to the strong churn that John mentioned during his prepared remarks, the 400 basis point improvement there is a really strong indicator that price is holding with our customers and that we're doing -- I'm sorry, the comment was on robot on churn, but our churn has been really strong as well. And our ability to hold on to every core price dollar and convert that to yield really was the best we've ever seen. In terms of our ability to predict that we'd still see those levels in 2023, I think it actually goes back to Stephanie's question earlier about the macroeconomic outlook. We used our long-term averages of converting our core price dollar to yield, rather than the fourth quarter launch pad. Because we view the macroeconomic environment is a little more uncertain than it is today, though we are seeing those signs of self-antigen done a good job of articulating. We do think that all indicators point to a soft recession in '23, and we didn't want to overpredict our ability to convert core price to yield in the year ahead. Thank you. And Iâm now showing any further questions at this time. I would now like to turn the call back over to Jim Fish for any closing remarks. Okay. Thank you. Well, we ran a bit long today, but we have a lot to cover. Thank you for your patience. Thanks for joining us and we will talk to you next quarter.
EarningCall_1316	I have the pleasure of hosting Austin Russell and Tom Fennimore from Luminar here for the next session. And I think what we'll do is maybe start off with the announcements that you had yesterday in which you provided some updates on the business. I was mentioning to Trey here, you said a lot without saying much, but hey, looks like you had strong momentum ending the year. So, maybe talk about some of the parts of the announcement, including momentum ending the year. Yeah. So, I mean a lot of different things going on and a lot going on here at CES. So, first and foremost, we got the North American debuts of both the new SAIC R7 vehicle. It's from the new electric brand Rising Auto. SAIC is the largest automaker in China and it's already starting -- well, the SOP milestone. We had the SOP milestone with them. It's now in consumers' hands driving around across China. So that's a great start to the year, and â or I should say maybe a great finish the end of last year that was in Q4. But in addition to that, we did announce that we did successfully complete our four key 2022 milestones and targets to be at set forth. I think a lot of people thought they were pretty ambitious, which they were, but we actually were able to execute against that obviously, with the start of production with the SAIC vehicle, but also releasing the beta version of our Sentinel software stack, which you can actually see here live at CES. We'll talk a little bit more of that. There's four different things that are going on there. In addition to that, in terms of major commercial program wins, we originally forecasted 40% growth, increased that to 60% growth. It's a target. I'm proud to say that we have exceeded that for the past year. And in addition to that and getting embedded on more production vehicle models from automakers, we have also -- when it comes down to the financial standpoint, for the forward-looking order book exceeded that 60% growth target that we had. And that's not just 60% over a given year, that's actually 60% more than the entire cumulative order book and same with the major commercial wins. So, there's really just a lot being added to the flywheel, so to say, continuously with this as we give this huge momentum. But when it comes down to and in addition to that, meeting those milestones during the SAIC launch out here, we're also launching, doing the North American debut of Volvo EX90. So that's something that you could actually already order today off of Volvo's website, and we'll start shipping to consumers before the end of the year. So that's something that's pretty exciting to be able to get wrapped around. And I think it's cool to see thereâs a huge vote of confidence that -- I mean, I'm sure as many here in the room are familiar, I don't think you'll ever see another example where OEMs will actually do car launches for regions or anywhere in conjunction with a supplier to them. So, it's something that I think we've sort of broken out of that category as part of a new class of leading automotive technology companies that are able to drive the future of what's possible and change the driving experience as opposed to just an incremental feature. So, all of that's really coming together. And the one other kind of major update that we have is as it relates to maps and mapping, that is something we've been working on very heavily for the past year very quietly. So, we did announce that yesterday that we acquired a company, which is one of two leading companies in this space for HD 3D mapping. And actually, it was the only remaining company that was there after the other one was acquired. And they've got a great incredible technology foundation to be able to build these live HD 3D maps that we were able to build up and productize over the course of the past year. And now for the first time -- well, for anyone in terms of being able to show a live crowdsource 3D map, we actually showed it as an example from a couple of different vehicles that we're driving around Las Vegas that morning, and they're actually continuing driving around. You can even see in our booth if you take a meeting there, too, with some of the team members, we have on the screens that are showing that 3D map being constructed. So, the overall vision of what we have for mapping is to be able to create the most up-to-date comprehensive view and world view of map that's -- well, ever been created. And it will be a first of its kind considering that you take a look at like the largest fleets of vehicles out there today the way that people collect maps now is for -- between folks like Google and Apple and other stuff, Google has like 1,000 cars, Apple has 250 cars here in TomTom in the order of 75 cars each. They pay drivers to go and kick up these huge rigs to the roof to constantly drive around collecting data to be able to create these 3D maps. But the thing is, is that there's a huge amount of limitations to what you can do when -- and it's not going to be very up-to-date or instantaneous by any means when you have to be constantly driving these around the world. You're talking usually on average is the cycle times as long as years by the time it actually gets successfully updated. So, with this, proud to be able to say that in Luminar case here in the coming years and by the second half of the decade, we expect to have over 1 million Luminar-equipped vehicles out of the road. And that's going to enable a completely different level of comprehensive view of what's out there. And part of the whole reason why something like this makes a lot of sense for us to really get into is because we control and build that LiDAR technology that enables all this to be possible. It's very, very difficult for these companies to actually truly survive on their own like in this kind of market environment and condition out independently. So, absorbing that into Luminar just made a ton of sense and something to -- I mean, even the mapping -- the TAM for HD mapping there, too, I think is some estimates on the order of $1.5 billion today and expanding up to $16 billion, $17 billion by the end of the decade, which is a subset of the overall mapping market that I think by many estimates is a multiple of that, but it's growing significantly as a percentage of that mapping market for obvious reasons. So, it's an essential part of the autonomous vehicle stack, and I think something that's very -- and not just for autonomy, also for ADAS, but something that can be very overlooked in terms of the capabilities of what's out there. So that's the last piece of the puzzle that we really wanted to have from a software standpoint to be able to provide that comprehensive solution. And that's really what you can start to see out by the booth and out in the parking lot a lot it out here. Okay. So, maybe just a couple of follow-ups there as I sort of hear your vision on maps. Firstly, is this going to be tightly integrated to the hardware? Or are you going to be open to selling it as a pure software in the future? Secondly, if I'm hearing you correctly, you're saying the update on sort of the map itself can be done by the point cloud that you collect through the LiDARs. Or do you need integration with the other sensors on the car as well to populate and keep updating the map? Yeah. So, we don't need any other centers. We don't need anything else. That's just to say that you can't use it. It's -- GPS can be helpful and certain things like that. But when it comes down to it, the -- you don't need Luminar -- well, one interesting point actually that you bring up, technically, you don't actually even need Luminar on your car to be able to utilize these 3D maps. In fact, one thing that I think I can -- I actually don't think we mentioned this there too before, but I can say today is that we're actually already selling mapping data, for example, to customers thatâ¦ Yeah, are not even automotive using the LiDAR there, too, there's actually huge applications for mapping that extend even beyond that. So that makes a huge difference because this -- but you do need the LiDAR to actually collect the data in the first place to get that 3D map. Now, of course, it's obviously very valuable. When you have a LiDAR in the car, generally speaking into one -- a single forward phase in LiDAR there, too. So it's still very helpful to have a map of everything going on around you for either accuracy, redundancy and get the 360 view. But â¦ The way that I would say it is you need our LiDAR in order to collect the data and build the map and maintain the map. You don't need our LiDAR to benefit from that HD map. As Austin mentioned, we've already started to monetize that. I think one of the reasons why we've been working on this for a year and only start talking about it now, it's two reasons: one is we wanted to show that this is a commercially viable product, and we're already getting revenue from it; and then two, we also wanted to get the product to a point where it was ready for prime time to show off to our customers and others, which is what we're doing here at CES. And so, it's a great extension in terms of this ecosystem that we're creating. All the maps out there today are two-dimensional maps, even the HD maps. And there's a lot richer value you can get from these maps in the 3D world. And what we're doing here is you need our LiDAR to collect that data. And because our LiDAR is going on a lot of vehicles here that are going to be on the real world, we believe that we are very well-positioned to be at the epicenter of helping to create and maintain and ultimately monetize this 3D mapping data. Okay. The second part of that in sort of the announcements that you had is obviously the strong 4Q that you had in terms of helping you meet your -- with your order book targets, your commercial wins. And I know one of your competitors has said that most of the wins on the LiDAR with major automakers are going to be decided within sort of by the end of 2023. So, how do you sort of compare that to where the investor sort of sentiment is today where 2023 is perceived to be a tough year? A lot -- there are sort of this underlying expectation that automakers will push out decisions given the tough macro. So, maybe compare -- help us think through that. Yeah. And we're going to talk more about these wins in the near-term here. We -- because we set out these four major milestones for 2022 and 2022 now over, we wanted to be in a position that we met them. What I would say is these wins that we have, these were non-RFQ processes. These were when we were in there working directly with the OEM. They didn't do a marketed process to other LiDAR companies. So, it doesn't surprise me that other companies were unaware of this. And we can -- I think once we unveil who they are, we can go in a lot more detail on why that is the case. But I'd also say this is that when it comes to, like, I mean, the obvious answer is Luminar is the clear -- I mean the reason why I didn't run a process is, frankly, like even if there were other solutions, I think, for multiple other reasons, it wouldn't be viable in terms of being able to implement from both a practical standpoint, economic standpoint, economies of scale standpoint, data standpoint, et cetera, that there are. But when it comes down to it, I think there is â youâre addressing the question around the expectation for 2023. I do think there is something to be said about a somewhat dramatic disconnect between this perception around what's going on to some broader economy like actually having material impact, much less a huge material negative impact to the kinds of economics of what we would ultimately realize or like for a company like us or for a lot of other folks in the space. I think the reality is the vast majority of the value of what we have, contracted value and everything is like in the second half of the decade. It's not even necessarily -- like I mean, don't get me wrong, like yeah, sure, we're able to get some business and get some revenue and get some other stuff like more than pretty much any other 3D company, so to say, for the near-term. But like the value -- these are like 15-year type arrangements with automakers there, too, than what you have to -- for how long you have to support. It's not a year-to-year thing. So, I think that when it comes down to it, we still -- even with -- even having more major wins than everyone else in the industry combined probably tons or multiple, it's still only a tiny, tiny, tiny slice of the overall market and market opportunity that's there. Like, I mean, we're talking what probably on the order of 1% of the market that's there in terms of, I mean, global auto sales and whatnot in terms of what you get to. So, I think the opportunity is still to try and actually be able to leverage and expand within that, like how much car sales fluctuate on an annualized basis by plus or minus 5%, 10% or even 20% is almost like irrelevant to the bigger picture scheme of things for how we actually realize and materialize the business over the long-term. And it's really all about, from a commercial standpoint, how many vehicle models are you getting embedded on? And are these -- is it trending more towards not just the super high-end selective models, but actually more mainstream vehicle models? That's how you get the huge volume. That's how you get those multiplier effects. So, I think that's the perspective that I think is obviously one that we have. But when you actually zoom out a little bit there, too, I think thatâs where you end up seeing what really matters most. Yeah. Just moving to sort of another part, which is you are one of the first companies to get to series production or probably the first company to get to series production amongst the newer sort of LiDAR companies here. What were the learnings? And firstly, getting to series production, what does that give you in terms of competitive advantage because one would assume that now you're on a series production vehicle, the engagements with automakers should sort of dramatically accelerate [ph], but just help us through sort of what are the implications that you're seeing? Are you seeing sort of that on the ground or not? Yeah. The answer is we've learned a lot so far. We're learning a lot more every day. This is tough, right? Our team has worked around the clock to industrialize this product and now focusing on scaling this product. We had the former President of a major OEM down to visit us in Orlando. He's been advising us a few weeks ago when he took us out to dinner and he goes, look, here we walk you through, here is the issues I'm seeing with you guys, but I've done over 100 automotive launches and they asked me how many of them went without any difficulties. And he said they were not -- like they were all hard. They're all difficult. You work through the issues. What you guys encountering is nothing new in the industry. Now that we have real vehicles on the road, we're learning a lot from that as well. What I would say is -- when we do this the next time, we've learned a lot, and we're going to be more efficient, and we're going to be a lot better at this. Building these complicated optoelectronic device is extremely difficult. We figured it out. There's a lot for us to learn, but this is a way for us to continue expand our competitive moat, right? We're the only LiDAR company of the newer ones that can actually show vehicles that are out on the road there with us. The cars that are booths are not ones where we've kind of duct-taped our LiDAR to. These are real cars that our customers are making today or will make later this year that is going to have our technology on them. No other LiDAR company can do that. I'll tell you, it's not easy to do this. Taking it from a PowerPoint slide to actually putting it on a car in the real world and meaning all those tough automotive standards and building in scale, it's tough. Or even digging in from -- there's PowerPoint product and then product to industrialized series production, which is that's -- I mean even with the best experts on the planet what we've been able to leverage and achieve, I mean, it's still on the order of $1 billion that are part of a decade worth of time to be able to actually -- and hundreds of some of the most specialized engineers plan it to actually see this through and make this happen. And I think that process is key. But to Tom's point on that too, and I think what's interesting is that we've generated a ton of incredible -- we've converted those learnings into incredible amount of IP and know-how when it comes to not just the technology itself, but even the process for how you build this technology that we've learned a ton about over the past few years. And that has really been incorporated into generation of product in the future -- I'd say, initial generation as an initial series production generation and then future products as well. So that's being highly leveraged, thus you continue to optimize the margin. But I think the key thing is, is that after you hit SOP is the momentum keeps building. I mean, if you take a look at it, it took us, what, seven years, eight years to get our first series production win. And then now we have, what, a dozen major commercial wins that all happen in the following 18 to 24 months. So, it kind of -- again, it kind of snowballs in terms of that effect. It's just a ton of upfront work and investment. So, anyone that's trying to do this today, I mean, basically, you're talking about closer to a 2030 timeline by the time you could have some kind of industrialized product that's scalable, that implements all of that. Like there's -- I think that's one thing that is just - can be very tough to appreciate with these kinds of new technologies. They need to really get it on to a vehicle. It's very, very, very hard. So... We've also been able to attract a lot of new talent, particularly in this environment. Luminar is an attractive place to work. As a lot of the traditional automotive companies are coming back on their autonomous business and investment as other technology companies or either dying or cutting back as well, we're continuing to grow. We're going to do it at a much more disciplined and moderate space. And as we bring on the new talent, we're able to identify significant improvements. Our new Head of Manufacturing came in, and he's made a lot of improvement. So, 18 months ago at our events advanced manufacturing line in Orlando to produce one of our Iris units, you would probably need a manufacturing footprint about the size of this room with maybe not quite as many people, but a lot. He was able to develop in an automated line that we're going to be rolling out soon to our contract manufacturing partners. It's about the size of this table. It only requires two people to operate. And so, over the last 18 months, we've required about the size of this room in our events manufacturing line and a lot of people to make an Iris now it down to about the size of the stable with two people highly automated. We're learning a lot, takes cost out of it. It improves the efficiency. It improves quality. And being in that real-world environment, these are lessons that we're learning that nobody in the industry has learned. Yeah. Let's maybe talk about you have the series production now that you're obviously ramping on. In terms of then where the industry is today as ADAS, largely sort of ADAS features being rolled out on vehicles in getting from there to where you have high vehicle autonomy, what are the sort of process -- processes you need to figure out? What are the sort of hurdles that you need to clear? How much of that is technology? How much of that is regulatory? How do you think about that? Because with Volvo EX90, for example, you have sort of outlined plans to rollout highway autonomy at some point based on sort of how the testing, et cetera, goes in certain cities. So -- but how do you think about how much of it is a function of where the technology is, what you need to fine-tune in terms of hardware or software versus how much of it is regulatory? Yeah. Yeah. Totally. So, when it comes down to it, I would say that there's no question there's going to be a huge amount of for autonomous upgrades, features on the vehicles. And I think this is where you get to realize these benefits at the same hardware that you get to use for next-generation ADAS is the same hardware that you can also use to enable highway autonomy highway -- as advanced highway assist, type functionality. And that's generally the business model that most of the automakers are planning for is that leverage a LiDAR with us to dramatically improve the kind of the base ADAS safety case there and then expand beyond that. And at the same time though too, I think it should not be underestimated or understated about just the dramatic improvement that you can make from an ADAS standpoint. That's part of what we're showing out here with proactive safety. If you guys haven't seen it, it's out in the parking lot right in front of the West Hall. You can see how you pick -- you actually have a setup where you can pick pretty much what some of the bestselling vehicles in the market there too to be able to show as a comparison to drive towards just a static pedestrian dummy that's right in the front of the car. And virtually, every time it doesn't come to a safe stop. It will just load the pedestrian over. Whereas when you have that LiDAR equipped and you know the exact distance of what's ahead of you, it can come to a safe stop. And that's something that isn't even like -- that's technically not a Level 3, 4 or 5 feature that's actually -- if you go by the strict definition, that's actually a Level 0 feature. So, the problem is, is that everyone thought that these things were solved problem. And it's really not cars still got -- all the time even with the most advanced technology on it today. So that's where we see that huge step function advancement. Of course, the autonomy stuff is absolutely fantastic, and that's going to come more and more over time. Of course, the highway environment is what we've been focused on because believe that for urban autonomy, that's -- I mean orders of magnitude more difficult. That's actually what virtually every autonomous vehicle company has been focused on. But that's more of a decade long plus problem, whereas focusing on highway scenarios is much more straightforward. And with the LiDAR that can see it long distance to operate at high speed is very, very useful. So, I mean that's -- that will be continuing to rollout and continue to improve over the years now with SAIC, Volvo, with other automakers that we're working with. And it's the same reason why, for example, Mercedes even made switch over to us. Like they actually have a system and they start out with a really basic first generation LiDAR that can get it to work up to -- on the order of 30 miles an hour, and it's like now they're expanding it. So, you can operate at full highway speed and being able to enable that advanced functionality from safety standpoint and from an autonomy standpoint. So, all of that's really coming together, and I think it will be a key part of the holistic value proposition to be able to get additional software upgrade features that are had on vehicle beyond the safety case. Yeah. Absolutely. And I can talk a little bit more about that. I will say a couple of things that are interesting is that I think -- and I think it's a pretty solid viewpoint in the overall competitive landscape more holistically. And -- but I want to preface it by -- I think there's oftentimes an overemphasis actually on details of how much companies sort of compete with each other or whatnot, particularly at such an early stage of the industry. The reality is, is that any opportunity for this kind of technology get embedded on a vehicle is great and is fantastic because, like I said, it's still such a tiny, tiny slice of the industry. Like to meet our -- what -- to get -- I mean even for our long-term financial target like for the end of the decade, if you want, $5 billion revenue, $2.5 billion EBITDA and a $60 billion forward-looking order book, I think you estimated that was like 3% to 4% of the overall vehicle market. It's very tiny. So, I think seeing that growth is great. Now listen, I'll say from a Luminar standpoint is that we really dominate when it comes to the technology of dialing that in of -- having this chip level up and develop, so not using off-the-shelf parts that's enabled us to get this extreme level performance with the economics that can make sense, and at the same time, cover those -- both of those use cases for both the safety case as well as sort of enabling these advanced autonomy features and even future proofing it for what's beyond so that you can continue to update software alongside and with it. At the same time, we're pretty uniquely positioned. We're the only company in this space has actually done both the software and the hardware together as part of holistic solution. That's been incredibly valuable on a number of fronts. But I'd say why are we seeing this traction here? I think as you rightfully point out, I think it's very rare -- and I don't even think there's any other example a company outside of China, most as a U.S. company actually being able to make headway in such a major way in capacity into some of these major Chinese operations. I think that's largely just -- it's because of the technology and the breakthrough that we had in the first place. It's the same reason why I was kind of half joking, but serious about it is that when people are asking like how on earth did OEMs actually start working to you in the first place? I kind of they do that? I know I was saying, I think, well, honestly, we last company that they ever wanted to work with in the early days of this too to like bet the future of their whole business on like a startup for what's there. Obviously, we had to do a lot to be able to successfully prove ourselves out. And now we're in a completely position, but those initial wins make all the difference. But I would say this is that we still have by far the strongest technology that's in the industry and are continuing to lead in that dimension. But having that combined value proposition and solution and continue to expand into things like maps and other things that's going to -- it only solidifies that moat more and more and more and more. I think the important part is as well from an economics and cost standpoint. It's very easy to be able to have a low-cost LiDAR. You can go down the street to Best Buy 10 minutes away and get a $50 LiDAR. It's a golf rangefinder, and you will see 200 meters, but only one point. So, the question is, how do you make a high-performance system that can actually accommodate it? This is like 1 million times the performance of that golf rangefinder. So, it's all about finding the right balance. But the thing is, is that at the end of the day, this is a technology and capability where people's lives are at stake. And trying to be able to compromise by having an auto grade system that maybe kind of work some of the time and only has some incremental benefit with it is not something that we really see automakers adopting ultimately. So... Yeah. Let me give you some data on China. So, about half the market in China is foreign brand. So Volvo, Mercedes-Benz, GM, whatever, selling into China. What we're seeing now for the advanced technology decisions, those decisions are made by global purchasing and are typically global decisions. And we're going to get that part of the China business, you win Volvo, you win Mercedes, you win the global brands, you got that half that market locked up. The other half is the local brands. And then if you dissect that there, some of them are going to be low priced vehicles. If you're selling a $10,000, $15,000, $20,000 China vehicle, you're more likely to use the 300 LiDAR than our LiDAR, which is more premium. However, the higher end of the local brands segment, which is where SAIC R7 is, that's about a $45,000 price tag vehicle. That's area where they want to distinguish themselves from a technology perspective. And so, we're open to that market. So, you're right. There's going to be areas of the Chinese market, particularly the low end that are more likely to go with a "cheaper" LiDAR. That really isn't our market. And -- but over time, as the Chinese consumer continues to develop and move to price point, they're going to naturally move towards technology. And then the other half of the market is the global brands, which will win as we kind of win the non-China part of the business. Going to your Mobileye point, my understanding is after the Mobileye IPO that -- LiDAR that Mobileye was working on is actually being retained by Intel. So, my understanding is like Intel is still developing that LiDAR for Mobileye. Right now, Mobileye is using our LiDAR for their mobility as a service system. I think they said publicly that, that LiDAR may be ready by 2025. Look, we're not sitting still. Our LiDAR is continuing to develop. As we said before, making LiDAR isn't easy, and we're also building their -- Every tech company, every Tier 1, every OEM throughout the years, they've all tried to build a LiDAR. Like this is not -- I mean it's not like they just gave up on this without a fight, right? Everybody was fighting like no tomorrow to be able to try to win this out. And it's just really, really, really challenging to try to do it. And it's a completely different kind of thing that you have to develop than any other kind of chip or system like -- when we're developing chips, it's like custom indium gallium arsenide, special three, five material chips that have these very specific parameters that only five people in the world know about. And of course, we make sure they all work for Luminar, but... My understanding is Mobileye was working on both the -- their own radar and their own LiDAR. They took the radar with them after the IPO, but left the LiDAR with Intel, so read into that. But ultimately, I think I would maintain I do think that this is going to -- this industry is going to have a natural tendency towards a winner-take-all type system and solution. And I think we saw that successfully happen in the Mobileye case for the E&S market or winner-take most. And I think that's happened all over again LiDAR with us. Well, we're out of time, but thank you for coming to the conference and thank you to the audience as well.
EarningCall_1317	Welcome to the Royal Philips Q4 and Full Year 2022 Results and Creating Value with Sustainable Impact Conference Call on Monday, 30th of January 2023. During the call, hosted by Mr. Roy Jakobs, CEO, and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded and replay will be available on the Investor Relations website of Royal Phillips. [Operator Instructions] Hi, everyone. Welcome to the Philips' fourth quarter and full year 2022 results webcast. I am here with our CEO, Roy Jakobs, and our CFO, Abhijit Bhattacharya. We're also joined today by Shez Partovi, Chief Strategy and Innovation Officer; Wim Appelo, Chief Operations Officer; and Francis Kim, Head of Quality. I would like to first go through the agenda for today's webcast. We will start with a discussion of our fourth quarter and full year 2022 results. We will then talk about how we will create value with sustainable impact with presentations about our focused organic growth and scalable innovation strategy and our three execution priorities: Patient safety and quality, supply chain and operating model simplification. We will wrap up with our value creation trajectory. We will have a session of around 70 minutes, followed by Q&A. The press release, slide deck and frequently asked questions on the Respironics recall were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be available on the website as well. Before we start, I want to draw your attention to our safe harbor statement on screen. You will also find the statement in the presentation published on our Investor Relations website. Let me start with our group performance and profitability in the quarter. Comparable sales growth was just over 3%, driven by improved component supplies in particular, in hospital patient monitoring, Image-Guided Therapy and Ultrasound. We delivered growth of 5% for Diagnosis & Treatment and Connected Care businesses on a comparable basis, which was partly offset by a decline in Personal Health due to China and Russia. Although the component supply situation is improving, the situation remains challenging, as we anticipate gradual improvements during the year. Adjusted margin was 12%. We continue to see a significant component and wage inflation, which had a 370 basis points impact on our margin. This was in part offset by our pricing and productivity actions, which contributed a further 260 basis points. As I've explained before, the positive impacts -- positive pricing impacts on our health systems businesses, that is Diagnosis & Treatment and Connected Care, will be reflected in the profit and loss account during the second half of 2023. The adjusted EBITA margin was 11.3% in Diagnosis & Treatment, 12.6% in Connected Care and 17% in Personal Health in the fourth quarter. In the quarter, our operating cash flow was â¬540 million and free cash flow was â¬301 million. Accounts receivables increased in the quarter, driven by the strong sales in the month of December, which we expect to convert to cash in 2023. We won a further 35 new long-term strategic partnerships across our regions, bringing the total to close to 100 in 2022. This is a core part of our growth strategy and improves the quality of our recurring revenues. Now, moving on to the segment highlights from this quarter. In Diagnosis & Treatment, comparable sales increased 5% in the quarter, driven by high single-digit growth in Ultrasound and Image-Guided Therapy. Order intake declined by 7% on the back of double-digit growth in 2021. The decline was due to the cancellation of a few orders with lower margins in order to improve our order book margin profile. In Connected Care, comparable sales increased by 5%, driven by strong double-digit growth in hospital patient monitoring. Order intake fell 10% due to the normalization of demand for COVID-19-related acute care products, but continued to run above pre-COVID levels. We see a fundamental demand shift in adoption of our patient care management solutions and expanding market shares in Connected Care informatics and in the patient monitoring business. Finally, in Personal Health, comparable sales declined by 4%, with double-digit growth in North America and Western Europe, more than offset by double-digit decline in China and Russia. The impact of the COVID crisis significantly affected our sales in China in the quarter. Now, moving to our order book. Our order book coverage is significantly higher than in 2020 and 2021, in particular, in magnetic resonance imaging, which is 30% higher and in Image-Guided Therapy and Monitoring where coverage is around 20% higher. And in absolute terms, at the end of 2022, the order book was 30% higher than the end of 2020 and with the improving margin profile as we proactively canceled some low-margin orders that I just told you about. Turning to our performance for the full year 2022. In 2022, results were impacted by operational and supply challenges, inflationary pressures, the COVID situation in China and the Russia-Ukraine war. As a result of these ongoing headwinds, comparable sales for the group declined by 3%, and our adjusted EBITA margin decreased to 7.4%. Component and wage inflation had a significant negative impact of 300 basis points, which are pricing and productivity measures only partly offset. We also saw a negative 390 basis point impact from the lower volume during the year. For the full year, Diagnosis & Treatment sales declined 1% with an adjusted EBITA margin of 8.4%. Connected Care sales was down 11%, mainly due to strong double-digit decline in Sleep & Respiratory Care. The margin for Connected Care was 2.1% as it was impacted by Sleep & Respiratory Care. Excluding this impact, the margin for the year was 8.3%. Personal Health sales were flat with a margin of 14.8%. Excluding the impact of Russia, Personal Health sales grew by around 3% in 2022. We recorded a loss in our income from operations of â¬1.5 billion largely due to the previous disclosed â¬1.5 billion non-cash goodwill impairment for the Sleep & Respiratory Care business and the R&D impairment charges. In the full year, we had a free cash outflow of â¬961 million as a result of lower earnings, higher inventories and cash costs related to the Respironics recall. We will talk more about our actions to drive higher cash flow generation later in the presentation. We will submit a proposal to the Annual General Meeting of Shareholders to maintain the dividend of â¬0.85 per share to be distributed in shares. Now, looking ahead, we expect to deliver mid-single-digit growth in Diagnosis & Treatment and Connected Care in 2023, supported by our strong order book. Slow consumer demand is expected to result in low single-digit growth in Personal Health. Our guidance of low single-digit growth at group level in the year reflects uncertainties in the external environment. Adjusted EBITA margin is expected to improve to high single digits this year, driven by productivity and pricing actions across businesses, partly offset by a 3% impact from component and cost inflation as well as additional investments in patient safety and quality and supply chain improvements. We anticipate a slow start to the year as solid growth in Diagnosis & Treatment and Connected Care is offset by a decline in Personal Health in the first quarter. I would like to remind you that Personal Health grew 8% in Q1 2022, and we had the sales in Russia in the first quarter of last year. We aim to deliver a free cash inflow between â¬700 million to â¬900 million this year, driven by improved earnings and a lower inventory, partially offset by cash out related to restructuring charges resulting from further reduction of workforce announced this morning, which we will explain in more detail in a few moments. Please note that the 2023 guidance excludes the impact of the ongoing discussion on the proposed consent decree beyond current assumptions as well as ongoing litigation and the investigation by the U.S. Department of Justice related to the Respironics field action. The current guidance assumes a compound sales growth rate of 10% for the Sleep & Respiratory Care business comparable sales for the period 2023 to 2025. Restructuring charges are expected to be around 300 basis points, driven by further workforce reduction that I just mentioned and the rightsizing of our Sleep & Respiratory Care businesses in 2023. Acquisition-related costs are expected to be around 50 basis points and Respironics field action running remediation cost between the 50 basis points and 70 basis points for the year. Financial income and expenses are expected to be a net cost of â¬270 million in 2023, excluding incidentals, if any. This is â¬70 million higher than in 2022 due to higher debt and interest rates as well as a fair value gain on the value of Philips' minority participation of â¬30 million in 2022. We expect an adjusted EBITA loss of around â¬70 million in the segment Other in 2023. At EBITA level, we expect a net cost of around â¬200 million for the full year in this segment. For Q1, we expect a net cost of around â¬45 million at the adjusted EBITA level and around â¬80 million at the EBITA level. With that, we will now move to our next section after a short video when Roy will present our plans on creating value with sustainable impact. Thank you, Abhijit, and thanks, everyone, for joining us this morning. I'm Roy Jakobs. And as you know, I was appointed as President and CEO of Philips last October. I'm honored to have been given the responsibility to lead Philips, and I look forward and commit to a transparent and constructive engagement with you and all our stakeholders. There is no denying, 2022 was a tough year here at Philips, and that is also reflected in the financial performance that Abhijit just presented. As you all get to know me better, you will see a few things. First, I'm a realist. And right now, it's very important to lead with realism. I'm also a great believer in knowing where I want to go and having a clear plan to get there, a plan that people can understand and have confidence in. Right now, Philips needs a clear strategy and a clear plan focused on execution. And thirdly, you will see, I like to take on a challenge. Right now, I could not be more excited about the future of this company as we not only face down the tough challenges, but also face up to the enormous opportunities for all of us at Philips. And I'm very passionate about working in a company that serves patients and people. Like many of you, I've been a patient. For several years, at a young age, I experienced first-hand the importance of good health and good health care. I understand the need to improve the outcomes for patients, and that's a huge motivator for me. Since taking up the role in October, I've spent every minute, exposing, examining and exploring our challenges and opportunities. To tackle these challenges and opportunities, Philips must change. And making that change is what excites me and will demand all my realism, my energy and my passion. Before I take you through what we will do, I wanted to share an insight from my first 107 days. I've been part of this organization for a number of years. However, now, in the role of CEO, I can see things from a different perspective. I can see all the moving parts, what works, what needs to be changed, what we are not doing and what we have to stop doing, what makes a difference, and what's actually sucking energy and power out of the organization. So, if we are to live up to our purpose, to make a difference to the lives of billions of people, a purpose that motivates all of us at Philips and especially me, then we have to take firm actions, make changes and improve performance urgently. We have to regroup. We look at what we do and renew for our future of value creation and sustainable impact. Philips has been refocused with a business portfolio that operates in attractive, growing health tech segments. We have built leading positions in the majority of these segments with deep customer relationships, a purpose, a trusted and valuable brand, leading innovations and a strong ESG DNA. But the reality is we have not taken advantage of these strengths. Why? Because we have not executed well. And today, we face multiple challenges as a result. We have to deal with the Respironics recall. We have not lived up to our customers and your expectations in recent years. So, we must change and we must change now. Today, we will bring you through a plan that will address our operational challenges and drive progressive value creation through strategy, focused organic growth with people and patient-centric innovation at skill to get maximum value out of our business segments, creating value with sustainable impact. There is no magic bullet here. Execution will be the key driver with three priorities: first, patient safety and quality; second, supply chain reliability; and third, a simplified, more agile operating model. This will be supported by a culture of accountability and empowerment and strengthened health technology talent and capabilities. This all means making deliberate choices about how we are organized, our size, where accountability lies and what our priorities are. Taking these steps will result in progressive growth in revenue and margins. Let's now go deeper into the elements of our plan. As I said, we operate in growing market segments where attractive margins provide a foundation for sustainable value creation. This market is going through fundamental shifts, and we are well positioned to capture the opportunities this offers. Demand for care is growing, costs are increasing and massive staff shortages exist. This drives greater demand for improved outcomes, productivity improvements, care outside of the hospital and for insights from growing health data. We also see increasing consumer demand in the area of health and care. The opportunities are clear. And, we have significant strengths to build on. Over 70% of our sales comes from Number 1 or Number 2 positions in their segments. We have leading innovation hardware, software and services in the hospital and in the home. We are the preferred strategic and innovation partner for many customers to provide imaging, therapy and monitoring solutions. 40% of our revenue is recurring. And we have the largest multi-vendor enterprise informatics business in the industry. As I mentioned, we are all very clear about the need to address recent performance shortages, including the recall, driven by a lack of focus on strategy implementation, a technology-driven innovation model and poor execution. Now, let's go through how we will drive change in each of those areas. In recent years, we have transformed our portfolio to become a leading health technology company with strong positions across Diagnosis & Treatment, Connected Care and Personal Health. We have market-leading capabilities, integrating platforms, informatics and services, but we are not extracting as much value out of these segments as we could. When you look across our core businesses, the opportunity for focused organic growth is crystal clear. But we need to change how we manage these businesses in order to realize these opportunities and maximize their value. We must make choices, shifting from spreading our resources too thinly over too wide of a portfolio towards a sharper focus on what it takes to create growth and value in our segments and markets. In each segment, we must play to win according to the rules. We need to adapt our strategy and where we concentrate our resources, including cool new products and what countries we operate in. We must ensure that each segment and each region has the best strategy to drive the greatest value creation. We will prioritize and drive growth across Image-Guided Therapy, Monitoring, Ultrasound and our Personal Health businesses. These are businesses where we can accelerate growth and margins more quickly, given our strong leadership positions. At 70% of sales, you can imagine this will have a material impact at group level. We will create a new enterprise informatics business, leveraging and integrating our unique ability to integrate vendor-agnostic data from various imaging modalities and monitoring devices. For example, through remote nursing, remote radiology or remote pathology. Scaling of these platforms will increase our margins. In Diagnostic Imaging, we will drive better margins through differentiating innovation, such as helium-free MR, supply chain improvements to reduce our lead times and convert our strong order book, as well as increased services pull-through. And of course, we will continue relentlessly to work on the Respironics recall so that we can restore our position as the leading provider in this market over time. I will address this important matter in more detail in a few minutes. We also have a tailored approach to address different customer needs across the regions in the world. This is particularly important given the current geopolitical dynamics, which I expect will continue. The principle of leveraging our leadership positions will guide us here, too. So again, we have to make choices where we play based on the attractiveness of the growth opportunities. We can't and won't be selling everything, everywhere anymore. North America is likely to be a softer market in the near term. As health care providers are consolidating, we are well positioned to serve customers with long-term partnerships to support their outcomes and reduce operating and staffing costs. Our multi-vendor informatics offer is a clear differentiator, and we need to further strengthen regulatory relationships. Across the international markets, notably in Western Europe, we expect an opportunity to [tap into] (ph) the government investments to support with digitalization of health care, and by providing care in hospital and home to deal with the continued increasing patient volumes. We're also very well positioned with our strong consumer franchise to tap medium-term spending increases. In China, where we have been for a very long time with a strong brand and have a strong position with significant manufacturing innovation footprint, we are adapting to the changing local environment across both the consumer and the health systems market. Innovation is our core strength and will continue to be our core differentiator. But we need to get more impact and more return from the investments we make in innovation. As such, we will shift our innovation model from being corporate and more technology led to a more patient- and people-centric model driven out of the businesses. A significant step will result in a shift from R&D resources being closer to where our customers are and to improve patient safety and quality, impact and returns. In the businesses, we will focus our efforts and resources on fewer, better, bigger projects. And we will prioritize innovation that has a bigger impact on patient outcomes and help care providers with their productivity and sustainability based on our unique portfolio, sustainability products and design experience. Patient safety will be central to all the design of all our innovations. You will hear more on innovation from Shez in a few minutes. You will get it by now that I see effective execution as the key value driver and a key driver for change. First, we will put patient safety and quality at the heart of everything we do. Across the company, we will anchor patient safety and quality in the core of our innovation approach to avoid future issues. We will step up accountability for patient safety and quality, for example, by giving all employees dedicated patient safety and quality objectives. We will further invest in our systems, capabilities and in trading and education. And I'm elevating patient safety and quality to the executive committee by creating a new leadership position to drive this priority across the whole company. Secondly, we will reshape our supply chain setup to urgently improve our operations and to deliver on our strong order book. We'll move away from being organized around central functions to a structure where we organize procurement and supply chain in our businesses, a structure that works effectively even with the volatile conditions that we have been experiencing over the past few years. We are also pruning our product portfolio, which includes a long tail of smaller product lines, including of older generations of our latest products. And we have a targeted team redesigning products and components to increase our resilience to more volatile demand. You will hear more from Wim on the topic. Finally, we will simplify our operating model by putting prime accountability into the businesses, supported by lean functions and strong regions. Over the past years, the organization has become too complex with a matrix of multiple layers, leading to a lack of clarity and a lack of accountability. We will reduce the size of central corporate functions and simplify internal processes with fewer KPIs and more focused targets. This was also the strongest area of feedback from our employees as the key reason holding them back. I will come back to this topic later in the presentation. Let me now provide an update on the Respironics recall. We understand how important these sleep therapy devices and ventilators are to the patients, and how they improve their lives every day and night. Resolving this for our patients and customers has been and remains the highest priority. A complex and difficult task, but we are making encouraging progress. Heading into 2023, we have reached, as promised, 90% production for the delivery of replacement devices to patients. Last month, we also provided an update on a completed set of test results for the first generation DreamStation sleep therapy devices, which were reassuring. The tests are run by independent international laboratories, who use a rigorous methodology, including various external parties, using very conservative risk assessments to assure confidence in the results. The completion of the remediation as well as the testing program remain our highest priority. As you already know, various civil complaints have been filed in jurisdictions across the world, alleging economic loss, personal injury and the need for medical monitoring related to the devices subject to the recall. While the litigation is progressing, it's too early to speculate about any potential impact or exposure. We are dealing with the investigations and reviews from the competent authorities and the U.S. Department of Justice. We also still in discussions with the DOJ on the proposed consent decree and cannot provide details at this time. We've also taken actions to ensure that the Sleep & Respiratory Care business can operate with full authority and end-to-end necessary competencies from the 1st of February to swiftly respond and deliver on the commitments to patients, regulators, and customers. It remains our clear intention to resolve all of these issues comprehensively and to restore Philips' position in this market. I'm confident that the learnings from this recall will inform how we position patient safety and quality at the heart of our business and at the heart of our business and innovation strategy. Francis will talk about that today as well. Our strategy, innovation and execution plan is all about progressively creating value with sustainable impact. We will do this with a balanced capital allocation policy. Abhijit will talk about this in more detail. But you can see here what we realistically expect to deliver in 2023, 2025 and beyond. This year is about further addressing the challenges in the business and laying the foundations for growth and value. As we move through the simplification process, implement the strategy and increase our innovation impact of this year and next, we're looking to see revenue and margin growth accelerate. And we are targeting to reach our full potential beyond 2025 with strong mid-single-digit growth and with adjusted EBITA margin reaching mid- to high-teens. This guidance excludes the impact of the ongoing discussions on a proposed consent decree beyond the current assumptions, as well as the ongoing litigation and investigation by the U.S. DoJ related to the Respironics field action. This planned strategy lays out how we will manage Philips through this next phase of the company's journey to create value with sustainable impact. Now, we will go deeper into some of the areas I've covered, and we start with the exciting area of innovation. So, let me hand over to Shez. At Philips, we have a long heritage of leadership in innovation. Our plan is to build on that strength to achieve even greater impact for patients and customers. For years, Philips has had a large corporate research function that has led to the launch of historically successful new products. In the past, when the life cycle of health care transformation was slower, a functional approach to innovation was reasonable. In that model, innovation was mostly technology forward. Innovative ideas emerge from corporate research and move from one function to the next in a step-wise fashion until it reached the end customer. However, recent industry trends have accelerated technology adoption life cycle within health care. As a leading health tech company, we are embracing this trend and shifting how we innovate to deliver impactful outcomes in an industry with rapidly changing end customer expectations, innovation must start with the end customer and work backwards. In other words, we must innovate on behalf of patients and customers. To do that, we will move innovation into the heart of the business by bringing all components of innovation to the same leadership roundtable under one accountable leader, and focused on patient safety and quality by design. In this new model, innovation is business-led and closer to the customer segments we serve. In addition to bringing patient and customer centricity to our innovation model, we will also focus on fewer, better resourced, more impactful initiatives so we can scale them. We will sustain our significant R&D commitment, but retarget efforts towards high-impact areas that align with our strategic objectives. Practically speaking, that means pruning products and projects that are not aligned with our scaling ambitions and instead doubling down on our strengths in the customer segments we lead. This plan will be supported by an R&D investment of about â¬1.7 billion in 2023, which is roughly 9% of sales. Now while this is reduced compared to prior years, it is deployed more effectively and efficiently, and it remains significantly above our industry peers. Another key enabler of scaling is tailoring innovation processes to match the operating model of the business, so that businesses are empowered to move with speed and scale. The best way to tailor innovation to a business operating model is to actually move R&D directly into the business itself. And so, we will deploy 90% of our R&D talent directly in the businesses, whereas previously it was about 70%. These are the innovation shifts you will see at Philips. Innovation will be patient and people centric. It will be business embedded and business-led, focused on products with greatest impact in the segments we lead and with the aim to scale. So, let's look at some of our innovations that will drive our growth and in doing so, let's start from care at home and then move to hospital. With the aging population and increasing demand for remote care, Philips' BioTelemetry helps physicians monitor patients' heart rhythm while they're at home. Today, thousands of U.S. physicians refer patients to Philips' BioTel, resulting in five times better diagnosis of post-stroke atrial fibrillation. Philips' BioTel can detect abnormal heart rhythms much earlier, not only speeding up time to diagnosis, but also reducing cost of care by eight times. In addition to helping monitor patients at home, we are also innovating to satisfy increasing consumer interest in self-care. In our Personal Health franchise, our Sonicare Prestige 9900 is the most advanced AI-supported electric toothbrush for personalized oral care. Prestige senses pressure, motion, tooth coverage and other brushing actions and then automatically adapts in real time to those consumer behaviors. Prestige 9900 enjoys 4.7 star rating globally and removes 20% more plaque than manual brushing. Now, moving to the hospital. Patient monitoring is the cornerstone of acute care delivery. And as aging patients develop more complex medical conditions, AI-powered patient monitoring is increasingly critical to care delivery. Our IntelliVue patient monitoring solutions are based upon superior hardware and predictive AI-based software that together monitor patients throughout their hospital stay. IntelliVue is so easy to use that hospital staff report a 40% improvement in satisfaction plus over five minutes time savings during patient transport between surgical cases. Another key industry trend is a move towards less invasive procedures to improve patient recovery and reduce cost of care. Now, Azurion is our next-generation platform for Image-Guided Therapy that's supports less invasive procedures. Azurion helps physicians deliver outstanding patient care by combining clinical excellence with workflow automation. Azurion platform allows data to be collected from every aspect of a procedure, simplifying the task of the physicians and enabling 17% reduction of time spent per procedure and a 28% reduction of post-procedure activities. Simply put, the Azurion platform allows physicians to focus on what matters most, the patient. Now, health care organizations all over the world are becoming increasingly concerned with their carbon footprint, and are demanding environmentally more responsible medical equipment. To that end, one of our industry-defining innovations is our BlueSeal MR scanner that doesn't require any helium refills. This MR scanner has a breakthrough design where the magnetic components are completely sealed and only need seven liters of helium over its lifetime instead of roughly 1,500 liters. Our helium-free MR uses 53% less power per patient and is an environmentally-friendly MR scanner supporting our commitment to sustainability. The workhorse of medical imaging in a hospital is CT scanning, where it is critical to arrive at a correct diagnosis quickly and not have to bring the patient back for rescanning. To solve that challenge, Philips introduced the world's first and only Spectral CT, delivering enhanced tissue characterization far beyond what a conventional CT scanner can do. Studies have shown that Philips' Spectral CT results in a 34% reduction of time to diagnosis and a 26% reduction in the need for follow-up scans. In other words, Spectral CT helps physicians deliver first-time right diagnosis, improving the quality of care and reducing cost. Ultrasound is a unique modality where the technician interacts heavily with the machine. And so, user experience is critical to adoption and business growth. Our Compact 5000 ultrasound is a compact unit, but without compromising performance or image quality. It has a host of features that improves the operator's user experience, such as real-time collaboration with the remote expert; real-time remote training, wireless connectivity and a streamlined and automated user experience. These innovations resulted in a 42% reduction of button pushes, which significantly improve the operator experience while at the same time delivering a 22% increase in diagnostic confidence. Now, all these leading Philips' innovations that I just reviewed for you generate large quantities of imaging data and patient monitoring data. And our customers are asking us to help them manage all this data and unlock clinical insights so that they can deliver superior patient care. That's exactly what our informatics solutions do. We have the largest multi-vendor enterprise informatics business in health tech, helping our customers unlock insights from combined data pools of medical imaging data, patient monitoring data and even third-party systems. Since our enterprise informatics propositions are vendor-agnostic, they can be scaled beyond the Philips' installed base. For example, our Philips capsule interoperability solution can connect over 1,000 third-party medical devices, bringing all that data together for our customers. Our Philips medical image management platforms offer over 70 AI-powered applications and help increase staff productivity by 50%. Finally, Philips has been offering remote care management solutions for over 20 years. Our solutions for the intensive care unit are used by health systems all over the world. We have helped customers remotely monitor over 15,000 ICU beds, helping reduce complications in remote hospitals. Now going forward, we have combined our informatics solutions into one single vertical end-to-end Enterprise Informatics business, and we project this business will achieve â¬1.5 billion revenue by 2025 with a growth rate roughly double that of Philips itself. Well, this wraps up our discussion on focus, scalable innovation, and we will now turn to discuss execution as a value driver starting with Francis Kim on patient safety and quality. As Roy said out earlier, patient safety and quality is our highest priority. Today, I'd like to explain how this translates into changes we have made and we'll be implementing to our personnel, structure and approach. Firstly, we're enhancing patient safety and quality by continuing to drive a cultural shift, ensuring a greater level of accountability within the business. We are elevating leadership to the executive committee and holding all business leaders directly accountable for patient safety and quality within the businesses they run. This involves continuous and deep engagement with quality, regulatory and clinical functions. Moreover, patient safety and quality is now a KPI for all employees structurally embedded into the performance appraisal process. We continue to strengthen our competencies to ensure we have the best team in the industry. This includes recruiting more quality regulatory clinical and medical device experts across the enterprise. We are making progress, however, we fully acknowledge there is still much more work to do, which is why we view our efforts as a multiyear journey and have expanded our patient safety and quality program. Our next major area of focus is to ensure that all product design starts with a patient safety and quality in mind to avoid further issues. Technology has been one of our core strengths at Philips. Going forward, as Shez has mentioned, we need to make sure that our great product innovation starts with a patient-centric lens. Over 70% of the issues we faced in the past few years have been design-related. Therefore, our primary task has been to ensure the design process is extremely robust. This means, linking product development from inception with a patient view and the highest product performance requirements embedded throughout. The result will be innovative products with highest safety and efficacy. We are catalyzing innovation by simplifying and upgrading critical systems and data integration for faster and better decision-making. We have also hired significantly more medtech experts who know how to operate in this highly regulated space. This allows us to undergo more robust product design, development and validation. Moving to compliance. We are running ongoing regulatory and compliance reviews to increase standards across the portfolio. And we are making sure we prioritize higher risk areas to better risk manage as well as deploying supplemental resources in the most sensitive areas. This transformation will be supported by an investment of â¬350 million over three years. Let me highlight some of the progress we have made. In the last two years, the quality and regulatory leadership team has been 90% renewed with a broad range of experience, predominantly from other high-performing medtech companies. We have reduced our number of quality management systems by 30% to significantly simplify and standardize the way we work. Around 30,000 employees have received a role-based training to ensure our skills base is fully relevant. We have standardized 75% of our ways of working for managing complaints. This translates into more reliable customer and data insights, which prioritizes risk identification and enables us to make better informed decisions. The data insights will also provide a great platform for identifying areas of future innovation. We have also reduced a number of major findings per audit by 50%. But let me emphasize rigor within our processes. For example, if we look at corrective and preventive action system, we are proactively identifying more issues and we're increasing the number of investigations by design. It will take time to address the root causes and implement fundamental actions. We are, of course, focused on this number improving dramatically as we fully implement our plan. I am proud of the journey Philips has been on and the progress that has been made while knowing there is more to be done. We are confident that through our expanded program with a focus on patient-centric innovation, we will uphold the highest standards within the industry. Thank you, Francis. Hello, everyone. I'm Wim Appelo. I've recently joined Philips and taken on the role of Chief Operations Officer. Before this, I held several roles in the medtech industry and before that, in the technology industry. Let me give you an update on the current supply chain situation. Five years ago, in the context of a changing business portfolio, Philips centralized a functional supply chain organization at the enterprise level. Over the years, the structure [delivered] (ph) value by creating common practices and capturing cost efficiencies for Philips. It created multimodality manufacturing sites, shared innovation and excellence, standardized product development and processes. However, in recent years, our industry has seen a number of extraordinary headwinds, including significant disruptions due to COVID, markets that are becoming more and more volatile, global supply chain disruptions and, in particular, e-component shortages and supplier decommits. These headwinds severely challenged our internal functional structure and led to an accumulation of issues, impacting our agility and resilience, suboptimized information flows, compounded by a broad and complex product portfolio. As a result, the delivery of our health systems has suffered delays, increased backlogs and inventory levels, and thus, our customers have been negatively impacted. To ensure reliability of delivery for our customers going forward, we have taken a close look at our supply chain and have concluded that we need to change on three fronts: our end-to-end supply chain setup; our products and processes; and third, our supplier management. With respect to supply chain setup, the current environment requires agility and resilience in each individual business. Therefore, as of April this year, we're moving to a customer-centric end-to-end supply chain teams. These are going to be closely aligned to the different businesses we operate and with dedicated leaders for each individual business. It will help us to step up capabilities tailored for specific business requirements such as enhanced data transparency, digitization of the information flow and improved procurement and ordering practices. This will further enable our businesses to grow and deliver quality products on time and in full. With respect to our products and processes, we plan to reduce the complexity and, where appropriate, develop more fit-for-future modular platforms, as Shez talked about earlier this morning. Given the rapid changes in technology and e-component shortages, we have started the redesign of electronic subsystems and printed wire boards, of which the first 200 are well underway. And finally, to make sure we deliver our products when patients and consumers need them, we will improve our planning and forecasting processes, considering the specificity of each business. In terms of supplier management, our base has become too broad in recent years with well over 5,000 suppliers and has been hampered by significant decommits and visibility challenges, resulting in increased material supply risks. To respond to this, in the short term, we are strengthening our relationships with suppliers and driving better visibility deeper into our supply base. We are also continuing to improve resilience and re-evaluating dual sourcing initiatives. The next stage is to reduce the number of suppliers and develop long-term strategic partnerships, which we strongly believe will improve quality, consistency and delivery. If there is one thing we have learned this year, it is that we need to be capable of navigating volatile market conditions better in the future. As such, we have started on our journey towards a more predictable, reliable and efficient supply chain that we are confident will better serve our customers and the patients around the world, even under the kind of challenging external conditions we've experienced recently. It is clear that this will be a multiyear effort, but we know what changes we need to make and have set our targets to ensure this program remains on track. We will significantly improve service levels for our customers and partners, and plan to take around â¬400 million to â¬450 million in cost. On supplier resilience, we target zero high components by the end of this year. And to get back to a superior supply chain, we plan to invest â¬200 million to â¬250 million in the next three years. We are committed to share our progress on this, rebuilding the trust of customers and patients and of our employees. Let me conclude by highlighting a few examples of our progress so far. 2022 marked the start of this program, and we have already seen proof points of success in the last quarter. We reduced our backlog by delivering more systems than planned, contributing to patient monitoring sales being up 22%. We also had record production of IGT Systems with sales up 7%. And in Ultrasound, we supported revenue growth of 8% by overachieving our expected output in equipment. We also made progress in accelerating redesigns of components by completing the first 56 printed circuit boards, and we have continued to diversify sourcing of high-risk components, and are now at over 700 compared to 400 at the end of quarter three. With this programmatic structure in place, a customer-centric organization with talented leaders in key roles, we are confident that we will deliver on our 2023 revenue commitments and accelerate growth. We know how important our devices are for patients and customers, and we are committed to ensuring predictability, reliability and efficiency going forward. Moreover, progress on our slide chain improvement program will be a catalyst to deliver on the quality program Francis just walked you through earlier, which is our highest priority. I want to give additional color on the simplification of our operating model that I explained earlier. Our goal is to remove complexity and become much more focused on strategy and innovation execution. We will organize around our business segments, supported by strong regions and leaner functions at the center. These businesses will have end-to-end accountability, including sales and services, direct supply chain support and more integrated patient and people-centric innovation resources. This will also include the difficult, but necessary further reduction of our workforce by an additional 6,000 roles globally by 2025. 3,000 will be implemented in 2023. This is in addition to the reduction of 4,000 roles announced in October 2022. This change and these reductions will help make Philips more agile, more competitive and ultimately result in supporting better outcomes for our customers, and a simpler, more productive and more engaged workplace for employees, motivated and attracted by our purpose. To enable this, a renewed culture will be built at Philips, focus on our core purpose, transparency, being patient and people-centric and where we have all clear capabilities and feel fully empowered. We are also strengthening our teams with new technology talent, including seasoned leaders with deep domain expertise and will include changes to our executive committee. I mentioned that we have elevated the patient safety and quality function to the executive committee level. Steve C. De Baca has been appointed as new Chief Patient Safety & Quality Officer, a member of the Philips Executive Committee effective February 6. Steve brings more than 30 years of quality and regulatory affairs experience in the health technology industry. Additionally, Jeff DiLullo, a leader from within Philips, has been appointed as the new Chief Market Leader of Philips North America. Jeff brings fast experience in customer and service delivery, enterprise account management and government relations to drive growth in this very important region for Philips. Jeff will succeed Vitor Rocha, who has decided to leave Philips. We also expect to announce the new leaders for Precision Diagnosis businesses as well as the Connected Care businesses in early 2023. With that, I would like to call back Abhijit to the stage to take us through the financial details of our value creation plan. Let me now take you through our value creation path. And as Roy mentioned earlier, you saw on this slide, it's a progressive part in three phases. 2023 is when we lay the foundation. You'll then see an improvement and an acceleration in performance during the period '24 and '25, and then moving to the full delivery on our full potential in 2025. For this year 2023, as I guided earlier, you will see low single-digit growth, high single-digit EBITA and a free cash flow of between â¬0.7 billion and â¬0.9 billion, that moves in the 2025 phase to a cash flow above â¬2 billion moving to the higher range of the mid-single-digit bandwidth and moving profitability to the mid- to high-teens. What I'll do now is take you a little bit more in detail on each of the segments. So, if you look at Diagnosis & Treatment, you see that the growth rate will be in the mid-single digit, but progressively increasing over time. You see the same for Connected Care. And Personal Health, as I mentioned, will have a low single-digit growth this year, returning to mid-single-digit growth over the period from '24, '25 and onwards. You will see across all clusters an improvement in the EBITA margin, and you will also see that Diagnosis & Treatment moves from the low-teens to the mid-teens, and then Connected Care moving also from low teens to the high teens. Personal Health is already in the high teens and will improve this year over last and continue in that journey in the high-teens. This will -- this improvement in profit trajectory will be driven in a big part with productivity initiatives that we have taken. And we have stepped that up from the â¬1.5 billion to â¬2 billion. A big part of those savings, about â¬1 billion of that comes from the change in the operating model, the simplification that Roy just spoke about and the reduction of the 10,000 roles that we have spoken about earlier today. Procurement savings still forms an important part of the reductions that we have been planning. You see that it will be between â¬550 million to â¬600 million. We have a strong team that now is adequately staffed and working as we de-risk our supply chain but also drive lower cost as a result of that. And then, there are a string of other productivity measures including the rightsizing of Sleep & Respiratory Care. Our business has been impacted. It now is at a lower base. We will need to rightsize our costs so that we bring the business back to profitability as soon as possible. We will continue on our price reductions in the service domain as well as in R&D, as Shez just highlighted a short while ago. So, if I sum this up, how do you see the profitability improving from 2022? We get about 4% to 5% from growth, a similar range from pricing as well as the improvement in the cost of goods sold. Cost reductions that will happen will drive savings of between 3% and 4%. We have taken inflation, about 6%, starts heavier in 2023, but gradually tapering. And we have built for certain risks and unforeseen circumstances to get us to the low teens. That's how you see the profitability improving. A big part of our progressive journey in value creation is the improvement in cash flow and a big part within that cash flow is the improvement that we need for inventories. Now, you'll see here that over the last three years, we have been building up inventory. That's a -- two primary factors. One is the Sleep recall, where we had to have significantly more inventory to be able to build the material that we need for the recall that will be wound down as we come to the end of the recall. But also, we have a lot of incomplete inventory, right? 90% of an MR or 95% complete because we cannot complete the coils and ship. And as the supply situation is remediated, you will find more of this going into revenue and, therefore, we will bring down apart from the other measures that Wim just highlighted in his part of the presentation. Let me then tell you how the cash situation will improve over time. We start this year with a poor cash flow, as I mentioned, a negative of â¬1 billion that had two big things: the earnings of this year, the cash cost on the recall as well as what we had to do in terms of additional inventories. Now if you look at next year, we have better cash earnings, so that helps to get from negative â¬1.400 billion improvement. And the big element is the working capital. So, the receivables as well as the inventories we have will help next year get to a much better level. So, then we get to the â¬0.7 billion to â¬0.9 billion. And then, going further to 2025, you see that we will further improve our earnings as in the trajectory we just shared with you. Our one-off costs will come down as we get towards the 2025 period. And of course, once we return to growth, there will be some more investments in working capital. With that, we expect the 2025 cash flow to be in the range of about â¬1.5 billion. Let me now take you through what we want to do in terms of our capital allocation policy. It's a balanced capital allocation policy, as we always say. And the primary focus of this plan is organic growth. So that's our first priority. We also stress dividend stability. So, we have a payout ratio of 40% to 50% of our net recurring income with stability as we showed this year. M&A will be on a reduced basis. It will be a few bolt-on acquisitions if we find necessary in our stronger businesses, which are going to be the beachheads for growth. And finally, we have an ongoing share buyback program for â¬1.5 billion. And then, as and when the cash situation evolves, we will make a call on whether we do further share buybacks or not. Let me now tell you a bit about what we are doing to ensure that we are adequately funded. We have made quite some improvements this year. Our actions on liability management have led us to improving the debt repayment profile over the next two years. We've brought that down from â¬3.2 billion to â¬2 billion. So that gives us some room. In addition, we have increased the maturity period of our bonds by about 20%. So that goes up now close to eight years. And I think a very important point to understand is that none of our financial instruments have financial covenants on them. So that gives us a certain amount freedom to operate. So, what does this -- all of this tell us? So, let me try to capture what I just told you in a nutshell, right? So, our comparable sales growth will be in the mid-single-digit territory moving from the lower end to the higher end of that range between 2025 and onwards. The adjusted EBITA will move from a range of low teens to mid- to high-teens. The cash flow from a range of â¬1.5 billion to the â¬2 billion range. The adjusted EPS growth over the period will be in double digits. The organic ROIC will grow from low-teens to mid- to high-teens. And through the period, we will maintain a strong investment-grade rating that is critical for us. We will also maintain dividend stability as well as the payout ratio. In the short term, we see the tax rates being between 24% and 26%. In the longer term, that will be determined by how tax rates change around the world. But this picture should convey to you that we have a strong financial plan to create the path to value that we talked about. Thanks, Abhijit. So, let's move to conclude, and let me summarize where we are and where we are going. Then, we will have time for your questions. When I spoke earlier, I said that it's important to lead company with realism right now. The approach we have taken and presented to you to the strategy and plan is to be realistic. And with the team around me, I am both confident as well as excited for the roadmap we have laid out for you to deliver the change and to create growth and value. We have the determination and we are and I am committed to improve the performance and fully capture Philips' potential. So, let me remind you how we will create value with sustainable impact. Philips operates in attractive, growing markets and holds leading positions in key segments. Our portfolio is very well positioned to take advantage of the growth and margin opportunities in the segments where we operate. The combination of strong customer relationship and established trusted brand and purpose gives us a compelling platform to build on. But the opportunities can only be realized if we confront the structural challenges facing us. And we are ready to do that. Our strategy and plan to focus on segment leadership positions, adopt a patient and people-centric approach to innovation, radically simplify how we work and execute patient safety and quality, top of mind are the ingredients that will drive change and create value with sustainable impact. And the oil that will lubricate this process is operational excellence and disciplined execution. We look forward to being a force of innovation and change in a world where making a difference has never been more important. I would like to thank you for being with us. We will be back to take your questions in a couple of minutes. Thank you. We will go to our first question. And your first question comes from Ms. Veronika Dubajova from Citi. Please state your question. Hi. Good morning, and thank you guys for taking my questions. I have two, please. One, Roy, would just love you to hear a bit more from you on the operational and organizational changes that you're making within the company. In some ways, as a long-term follower of Philips, it strikes me like we're moving a little backwards in terms of what the organization looks like and the supply chain and R&D sitting more within the individual businesses. Just would love to get your thoughts on why that's the case. Maybe some of the risks that you see to the business as you kind of implement this plan and to what extent they're reflected in the guidance in '23 and '24, and just conceptually kind of how you're thinking about this change? And then, my second question is, please, if you can just give us an update on where you are with the consent decree and DoJ discussions? And to what extent you'd expect or when we might expect an update from you on that? And how much longer you think that process might take? Thank you so much. Thank you, Veronika. Let me start with the first question. So, when we look at the simplification of the organization, we're responding in first place, also to what we have heard from our employees. We have become too complex both in terms of how we have been setting up as well as the processes that we run. So, there's a real need and opportunity to make it simpler for all of us to work. And what we do actually will make very clear single accountability and bring that to the businesses. And they will be supported by leaner functions and strong regions where we have the customer-facing interactions. So, we're moving from a phase where we have been functionalizing quite strongly towards actually going more integrated about winning in specific segments and making sure that the segment is set up to win. Take an example, in the exciting area of Image-Guided Therapy, which we have a leadership position, we actually have strong plans to grow further. Now that means that you really need to focus on how do you serve those customers the best. Therefore, actually, we bring the innovation forward into the business to more closely where the customers innovate. Secondly, IGT has also its own supply chain demands, because it's very different if you orchestrate your supply chain to deliver a complex system in cath lab like in Azurion versus if you, for example, deliver a toothbrush to a consumer. So, we're actually making sure that the supply chain is integrally organized around the specific demands for that segment. We're also putting patient and people-centric innovation in that business and making sure that the quality norm is exactly for what you need to do. And again, there are differences across the different that we serve. So actually, where we're moving towards is really winning in all these strong portfolio elements that we have, but doing it with the rules of the game of that specific segment. And then, your second question on the consent decree, we are in continued dialogue with the regulating that. So therefore, it's too early currently to disclose what any outcome could be. Of course, we know how important it is for all of you and also for us. So, when we have news, you will be the first one to be updated on that. In a similar fashion, actually, it's about the litigation. We're also there, still in the early phases. There is nothing that we can say currently about any quantification of potential impact. We also know that that's something that you are very eager to learn about, as do we. But in the process of the discovery of the litigation and actually then leading up to the consequences, we are not yet in a position to disclose that. But we will hope to do that in the second half of this year. Understood. Thanks, Roy. And maybe just as you've done the structural review of the company, I kind of wonder what your commitment remains to the Sleep & Respiratory business, and how you think it fits into the broader portfolio at Philips, and is this something that still makes sense for the business to retain? Yes. As you saw earlier in my presentation, so when looking at Philips, actually, we have refocused the portfolio. And the portfolio we have actually, I think, is a very strong and compelling portfolio, and that is including the Sleep & Respiratory Care business. If you look to the fundamentals of that business, we know that actually sleep apnea, as a disease, as something that needs to be treated, is still growing in size. Patients still are in need for more treatment and we are in that segment, the second player. We are still the second player. So actually, we see a role for us when we work through remediation of the recall work also through potential consequences that [the CD] (ph) might bring to restore our business position, because this is something that really fits what we are good at is bringing innovation to patients in the home but also in hospital settings. Thank you. We will now go to our next question. And your next question comes from the line of Hassan Al-Wakeel from Barclays. Please go ahead. Your line is open. Good morning. Thanks for the presentation and taking my questions. I have a couple, please. Firstly, on the outlook for 2023, could you talk about how you are thinking of the year in terms of supply constraints, particularly given a strong exit rate in Q4 2022? Is it fair to assume that this is not a stretch target in the way that Abhijit has guided and talked about in the past, but maybe a more conservative or realistic one? Secondly, could you talk a bit about the Sleep & Respiratory Care assumptions for this year in terms of revenues and margins? And whether you are assuming a consent decree that is broader than just systems and encompasses all of Respironics? Thank you. Thank you. Let me maybe start with the first one. So, as I presented today, we are and I have put out a realistic outlook, and that's what you see reflected in the plan for 2023. We were happy to see what happens to order book conversion, like in Q4 if we get more supply. And we will work very hard to get more supply so that we actually see that continued in 2023. And that's also what we have built into the plan. But it's also fair to say that we are not yet at a point that we can count on that all the time. That's so reliable and so predictable that we already have the full year outlook on our supply chain and the supply chain availability to underpin an even stronger plan that we have presented. So, we go in with a realistic plan. We will take our measures to improve the supply chain and also the other measures that we presented. And then, actually, we'll come forward step by step in terms of how we deliver on the plan. Secondly, if you talk about the SRC assumptions, you have seen that what we included in the guidance is that we said for SRC, we have taken the base assumptions that we also took last year in terms of the outlook that we currently hold, which is a 10% CSGR. And in that, we have a modest assumption of low single-digit growth and a breakeven assumption for 2023. So that's the grounding of the plan, also as we don't know yet what the constant degree will have as a potential further impact to this. Roy, it's very helpful. And if I can squeeze in one other on the order book. Could you talk about the rationale for canceling orders and which modalities these were for? Given the order book was flattish, excluding this globally as well as in the U.S., are you concerned about the state of U.S. hospitals? So maybe two answers to that. First, we have been looking at the quality of the order book and where we have been going in is especially in all orders that have and were older, because they were actually contracted at earlier pricing as well as the lead times for them are long. If you look into specifically where it was and good area, as an example, is the MR. We have a lead time that is over a year. So that means that actually also in this area, we have long lead times for our customers, as well as then if you take the pricing that we had from the past, that actually has a negative effect. So, we combined both and said, okay, if we go back to the customers, but then also work on the quality of our order book, actually, we take lower margin orders out, strengthen the order book in terms of what we can deliver and when, and therefore, we have a better strength of the overall order book that we have. If you look at the American hospital system, and I think you have seen how they have been trending, we do put a bit more cautious outlook on the spend profile for 2023 that they will have. We believe that they are under tremendous pressure. They have huge staff shortages. They are also dealing with the inflation. At the same time, they also still need to catch up from the technology that they need to kind of invest in that they did not invest in during COVID. So, there are multiple trans playing, but therefore, we are cautious on the immediate outlook. We do think that mid-term, it will pick up again. And also, if you look to the order book that we have, we can still actually generate an attractive growth there, but we do -- we are mindful of the state of affairs in the U.S. Thank you. We will now take our next question. And your next question comes from the line of David Adlington from J.P. Morgan. Please go ahead. Your line is open. Good morning, guys. Thanks for the question. Just also on the orders, I just wanted in terms of cancellations, what customer reaction to those cancellations was and where they were going in terms of trying to source those canceled orders? And then, secondly, just in terms of the dividend, I just wonder what your plans are on turning to the cash dividend, why put in place a full scrip dividend? Thanks. Yes, I can. I think also following up on what Hassan was asking, this is largely in the domain of Diagnosis & Treatment, where we have -- I think we have had good dialogue with the customers because these orders were taken long back. They were not at the margin generation that we were expecting. So, it has been done in collaboration with the orders. Regarding the scrip dividend, I think given that last year, in 2022, our cash flow was negative, and for a number of reasons, which I just explained in the presentation, first, we had a lower income, the buildup of our inventories, as well as the one-off costs related to the Respironics recall, it puts us in a position where we don't want to further pay out cash in terms of dividend for this year. So, we have, therefore, taken this plan to make it a scrip dividend. And then, as we see how it develops during the course of the year, we will see how we decide on this going forward. Perfect. Thanks. And then, just a follow-up. Just in terms of, I think, it was â¬60 million litigation in the fourth quarter, I just wonder if you'd tell us what that related to? Yes. It's not related to the Sleep recall. It's an old litigation that was on and we have -- we expect to come to a settlement of around that amount and, therefore, we have provided for it. But it has nothing to do with the Sleep recall, if that was type -- intent of the question. Thank you. We will now go to our next question. And the next question comes from the line of Graham Doyle from UBS. Please go ahead. Your line is open. Good morning. Thank you for taking my questions. It should be two for me. So, just firstly, on sort of phasing, I suppose. So, you obviously had a really high conversion rate in Q4 '22, given revenues were up and order book down. But you're pointing towards a sort of a slower Q1 and then order conversion improving through the year in '23. So, is it reasonable to assume that there is a slower or weakened order conversion in Q1 versus Q4? Is there any reason there was some pull forward of revenue there, I suppose? And then, second question relates to ozone testing. You've been pretty helpful in the detail you provided in the past. And obviously, today, you've given us a bit of a timeline for testing results. But one of the things you disclosed in December 21 was the level VOCs being measurable at cycle 200, I suppose having run through it again. Is there -- you did the same cycle and I presume the same testing at the cycle 500. So, it'd be good to know what happened beyond cycle 200. So, that VOC level, did that change once you went past cycle 200? It would be great to know that given the test should have been run. Thank you very much. Maybe let me take the first one, Graham. So, the conversion rate, what we have also said on Q1, with the slow start, we have indicated that the health systems businesses, so Diagnosis & Treatment and Connected Care, which are built off the order book, they actually start also with good growth. The issue is in Personal Health, we start with a decline, because last year, we had a strong growth of 8%. We had a 17% growth in North America. So, there is a bit of that comparables that play. And of course, the China situation does not improve in Q1. So, we have lower sales in Connected Care, and we have lower sales in license revenue, and that is causing the kind of slower start that we have indicated for Q1. Yes, let me take the testing. So, indeed, we have shared encouraging testing results in December, including the details that also part of the deck that we shared. The ozone testing is still due. As we shared earlier, we hope to disclose the data in due course early 2023. Actually, we are also there positive on what we are seeing, but we need to run through the full cycle. And most importantly, we also want to do it in, again, good alignment with the regulator before we bring out the data. So, we are testing all the cycles, so including indeed the 200 and beyond. I do not want to pre-empt the results, because we will disclose them when we also have discussed that and in alignment with the regulator. But I can tell you that we are positive on it and kind of we will come back to you when we are able to share. Okay. Thank you very much. Just a quick follow-up on the order book, actually. Just the sort of trimming that was done in order to, I suppose, reprice and improve the quality of your order book, is there any more of that to do or do you feel like you've kind of gotten through that? No, we have done that. So that is done. It was a onetime cleanup that we did, and that's the end of it. Thank you. We'll now go to our next question. And your next question comes from the line of Falko Friedrichs from Deutsche Bank. Please go ahead. Your line is open. Thank you very much. Good morning. My first question is whether you can update us on your latest thinking about your return to the market in your Sleep Care business? And when you think you can be back to your previous market shares? And then, my second question is on the definition of your low-teens adjusted EBITA margin target. Does that mean 10% to 13%? I'm asking because for some people, low-teens are starting at 13%. So, would be great to clarify that. Thank you. Okay. Let me take the first and then probably Abhijit can take the second. So, as we shared, the first priority for the Sleep & Respiratory Care business is finalizing the recall. So, we have all our efforts on that. And we were encouraged and also, as you saw, as promised, we got to the 90% produced in end of 2022. We now want to bring that to 100% for sleep therapy devices by end of Q1 so that then we can ensure all patients will get the devices, whilst we also then need to work through the respiratory side. Now that, in combination with the dialogues that we currently have with the regulator, will determine when we can go to market. As these dialogues are ongoing, we don't want to kind of get ahead of us and get ahead of that in terms of coming out with any specific detail around that. As shared, whenever we have that outcome, we will immediately come back to you. For the moment, the first priority is really finalizing the recall, and we have all our efforts and resources focused on that, as well finalizing the testing, as you have seen, because we know how important that is for patients, and then also working through any other consequences so that we can restore in full the market position that we had. Now, I think it's realistic to say that this will take a bit of time because of the position that we are in, but we are really determined to get back to where we were. Yes. And on the second one, we have taken 11% to 13% as the low teens range, just to clarify, Falko. Thank you. We will now go to the next question. And your next question comes from the line of Sezgi Oezener from HSBC. Please go ahead. Your line is open. Hi. Thanks for taking my questions, and thanks for the presentation. The first one is on the 4,000 plus now 10,000 -- plus 6,000 now 10,000 of personnel that you have decided to reduce. We see that in the last quarter since you've announced the 4,000, the number came down roughly by 2,000. So, what's the timeline for the rest of the 4,000? I know for the 6,000, you said 3,000 will be reduced in 2023. So, the rest of this, and also the breakdown from the different departments, where do you expect this reduction to be more? And post this reduction, what kind of wage inflation are you calculating? And my second question relates to the insurance payoff for the product liabilities. You mentioned in the past that you had some insurance on the products. I know that you don't have an estimate of the legal liability or the other legal costs that come with the recall, but do you have an estimate on the insurance liability, and how that adds up for you? And the last one will be, you mentioned that you've shifted the R&D more from commercial to the business sides. Could this have a negative impact in terms of reducing the synergy that you extract from this? Thank you. So, let me be very clear on the reduction of force. And let me also again stress how painful it is but how necessary it is, and that we will, of course, execute this with the most respect and also with best care for our people, trying to get them to other workplaces, and we need to give them a plan that goes with it. Now, if you look to the numbers, I announced in Q4 that we would reduce 4,000. Of those, we have executed 3,000 in 2022. Then, today, we announced another 6,000. Of that 6,000, we will do 3,000 in 2023. If we then take the remaining 1,000 of 2022, it will mean that we have another 4,000 that we will have to reduce this year. It also means that of the total, we have 3,000 remaining, which we'll do in '24 up to '25. There is a phasing that actually relates to the first interventions that we are taking now as announced in 2022, it was a generic reduction across the organization. We're now going very targeted with the shift of model. We indeed take on the functions, in particular, to lean out the organization and bring more into the business, but also strengthen the regions. And then, we have a shift in innovation model that also plays part, but that's also a big part of shift of resources more into the businesses. And that ties into your second question. We were doing 30% of our investment in research or in R&D in corporate research. Now, we are shifting that to doing 90% in the business. We still will have â¬1.7 billion of investment in innovation. So, innovation is the core of what we do, will remain core to what we do. But we want to get it closer to the customer so that we increase the innovation cycle and make it as patient and people centric, but also, we want to get better returns by doing fewer projects and scale them more. So that's actually what we intend to achieve with this different approach to innovation. So, we expect actually to have even more relevant and impactful innovation to deliver to our customers, to our patients and our consumers, but doing it in a more efficient manner while still spending above industry on innovation. Yes. On the liability insurance, we have mentioned earlier, we have a coverage, which would be between the â¬500 million and â¬600 million. Now, of course, if you don't know the liability, it becomes more difficult to settle with the insurance companies. So that's a dialogue that will still continue. And once we have, let's say, clarity on that, we will again come back to you and make it clear. And maybe on the third question, let me give you a concrete example how this will work. So, if you think about one of the very exciting areas that we are operating in is the Image-Guided Therapy business segment. This is an area in the hospital where actually a lot of development is still taking place. Minimally invasive surgery is a surgery of the future. Actually more therapy areas being developed where this can be applied. So actually, to develop that, you do a lot together with customers. So, if you look to our IGT business and the platform that we have developed, the Azurion platform, which is the leading system, more than 40% market share, actually, that's a very close collaboration with our customers. So, we have developed that out of the business, and we continue to develop that. Now we put the best in that solution from hardware, from software and from services. So, actually, we pull from across Philips the best of technologies to actually then make it the most useful, impactful application for the practitioners to use every day, but then also for the hospital to do in an efficient way. That's in IGT. But the same we can say for hospital patient monitoring, another very important business where we have a lot of opportunity where we develop the next generation of platform [MX] (ph) 7500, together with the surveillance solution, that actually has developed a lot in collaboration with our customers. So, yes, we will still do some breakthrough out of the corporate research, but more we will do in the businesses to gear up that it's really specific for the segment that we play in and therefore yield more impact and more return. Thank you. [Operator Instructions] We will now go to our next question. And your next question comes from the line of Ed Ridley-Day from Redburn. Please go ahead. Your line is open. Good morning. Thank you. First question, a follow-up on the order book. If you could give us the year-end book-to-bill, that would be helpful. And how are you thinking about order book progression this year that was also coming off the 8%, obviously, decline year-on-year in the fourth quarter? And so, the related second question there is, can you actually define how much of that year-on-year decline was due to the one-time reorganization of the order book? I think that would help everyone if you could give that clarity. And I also had a follow-up on the 10% '23 to '25 Sleep & Respiratory growth assumption. Not so much for this year, but what does that really assume for '24, '25? Are you assume -- what -- are we in a position to make an assumption there given that we do not know the full outcome of the consent decree? That would be helpful if you could speak to that. Thank you. Yes. So, let me start first with the book-to-bill. It was about 1.14, so again, more bookings and billings. The overall cancellation impact is about slightly more than 8%. So, if you take out the impact of the cancellation as well as the normalization due to COVID, because in the Connected Care segment, you see the 10% decline, and that's principally because of the COVID demand that came in last year. So -- the impact of both of these put together is more than the 8%. So, it would be roughly a kind of 1% growth. I think we have a lot of questions on the order book, and I'd like to clarify what we also showed on the slides earlier, that we start the year with a very, very good coverage for sales in 2023. You've seen in MR, we have 30% higher coverage in IGT and patient monitoring, and we didn't have it on the slide. But also in Ultrasound, we have more than 20% better coverage. So, the coverage for this year is actually in a very good space. Then, coming to your question on the SRC assumption, you kind of had answered the question a bit. Till we know the outcome of the consent decree, putting a year-by-year guidance becomes a bit premature. So, I think as Roy mentioned at the start, we are assuming a low single-digit growth this year, and then we will come with more clear guidance on the intermittent years as we have clarity around the consent decree. Thank you, Abhijit, for that. And just a quick follow-up on the capital allocation. You highlighted, obviously, some thought around the buyback. Can you confirm whether you're going to go ahead with that? Or when might we hear some further thoughts on the buyback commitment, obviously, considering the broad cash demand that you have this year? Yes. So, the existing buyback, we have, as you know, executed in the -- through forward. So, those will get due this year, and we will execute on that. So, there is no change in the commitment there. So that's basically where we stand on that. Thank you. We will now take our next question. And your next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead. Your line is open. Yes. Thanks for taking my questions. My first one was just on, I think, your bridge you had for 2022 to 2025. So, you had in amongst -- I think it was pricing mix in COGS of 4% to 5% increase. Just be curious there, how much of that is underpinned by what you can see in your current order backlog versus what you're intending to put through effectively in your book-to-bill part of your business? And then, my second question was just around the Personal Health, just around the consumer outlook there. But just curious in terms of what you're seeing in -- I know you mentioned sort of more difficult comp moving into the first quarter, but just on an underlying basis, just be curious to see how customer behavior is sort of feeding into growth trends there through the early part of the year. And then, on the last one, was just around the sort of post 2025 outlook. So, you put sort of mid- to high-teens. In simple terms, how do you get there? I mean that's obviously well above anything Philips has done before. And I think probably, if anything, the margin targets have always been a bit more stretched than the growth targets for Philips. What would need to change really between now and '25 to turn this into a mid- to high-teens margin business? Thank you. So, for the pricing mix, actually, if you look, most of that is underpinned by the plans we shared with you. Part of that is pricing. And I think I also explained that the pricing that we are seeing now in the order book will start flowing into the P&L from the second half of this year. There is, of course, some assumptions on the savings that we will do in our bill of material. That is always an outlook that we take. But we do see that, let's say, in the medium term, the huge spike that we saw in prices in the last couple of years, that will start easing. So, I think most of that we have taken in. Is it 100% underpinned? Obviously not, because a lot changes between now and 2025, but it gives us a good level of confidence on the basis of which we have presented that plan. Yes. So, if you look to the consumer demand, we -- and we saw it also in Q4, there is still quite some pressure on consumer demand globally given the macroeconomic environment consumers have to deal with. Also, we saw some particular pain in China. Now we expect that in the -- especially early part of 2023 to continue. We do expect that it will ease towards more in the back of 2023. So, we also expect a return to growth in Personal Health, as we have shown to you in due course of this year, will be not yet as strong as the health system side, but we expect a gradual recovery as we work through the global crisis and then also the inflationary impact on the consumer side. So that's the outlook there. Then in terms of your post-2025 question, I think that also really goes to the heart of what we present today in which we say, actually, we have a very compelling and strong portfolio. But we need to go and differentiate it with our approach to actually extract the maximum value. Now, if you saw to the four buckets that I presented, the first bucket, accelerate growth and profit is a bucket that consists out of IGT, Ultrasound, HPM, PH, all of those businesses have been already in the range that you allude to, are 70% -- close to 70% of our sales and actually dialing them up fast actually will get us very strongly into that range. Now then, it's also about how we can scale informatics, where we have been investing. It becomes a really very interesting differentiator for us also with our customers. And we have the plan that we presented to you in which actually you see informatics really starting to contribute. Then we know that we have to improve our margins in imaging. Now that's very much on conversion of the order book, so supply chain, operational excellence, but also serves as pull-through. And then, ultimately, it's the SRC part where if we get back into restoring our business and indeed, that is also what we expect beyond 2025, that, in totality, actually should allow us to get into that range. So, actually, we have been, releasing in our plan, looking at the strengths that we have across the portfolio and what needs to be done in each segment, in particular, to actually attract the most value. Okay. Then, let me thank you for being with us today. It was a bit of an extensive session, but it was an important session, because we presented to you how we will bring back Philips where it belongs. I want to close in saying that we are realistic in the situation that we are facing. But we are very confident in the plan that we presented to you, and we are extremely excited about the future that Philips has with all the actions that we are undertaking. So, I want to thank you again for dialing in and look forward to talk to you soon when I'm on the road with all of you. Thank you so much, and wish you a great day.
EarningCall_1318	Welcome everybody to the Zscaler fireside chat that we're going to do here at the Needham Conference. It's great to have Jay and Remo here to provide the great content. Let me start off by saying, we have made Zscaler our single best idea in the security space for 2023. We strongly believe that they have the right mix of relatively seamless and easy to deploy upfront technology that in a tough environment, they can deliver that customer growth still, which is the Akram's Razor I think in terms of where the pressure is on a lot of the security companies. We also strongly believe that this is a time when investors are going to be looking for that quality company that can both deliver growth and strong profitability and cash flow and that certainly fits the description and the valuation compression we think is finally started to bottom out even with the downgrade over at Brand X this morning. One last thing, if you have questions, I'm more than happy to pass them along. There's a box that you can type them into. I'll keep my eye on that all through the fireside. And any â at any time, please feel free to throw questions in. With that, guys, so the obvious question here is, how macro sensitive is Zscaler against this environment? And I actually think that there's some interesting data that that I was looking at. Let me just roll this by and see if this is something that's predictive. So, it seems pretty clear that the contagion in the economy started off in Europe and is gradually defining its way to the U.S. Most companies in the security space that have had issues saw it in Europe first and then saw it show up in the U.S. But when I look back over the last three years and last three, four quarters, there's zero evidence that that happens in your business. In fact, you guys accelerated from 40% to 45% growth to 46% growth sequentially accelerating in Europe as this pressure has developed. So, is that an indication, a proof point that, in fact, you guys grow well across increasingly pressured macro environments. So, Alex, first of all, thank you for the opportunity. Yes, Europe has felt some pressure and Ukraine war has also played a role in it. But overall, here is what our European story is. First of all, we are very well penetrated in Europe. I mean, take some of the largest companies in France. About 30 of the 40 largest companies are Zscaler customer. Central Europe, UK, it's the same story. These large companies, they need to make sure that cyber is in good shape. It is true. There is more pressure in Europe. There's more scrutiny in Europe than in the U.S., but there are two things that are helping us: One, like U.S. companies, Europe also has to worry about cyber. Europe actually is more worried about cyber than U.S. is because they are sitting right next to Russia. Number two, they have lots of pressure to reduce cost. And our solution as a platform can actually reduce cost significantly. Now, everyone likes to say, we reduce cost platform, this and that, but think of Zscaler and contrast it with some of the other solutions. Endpoint or identity. These guys, they are focused good products, but they don't replace a bunch of foreign products out there. When we go in, the entire outbound DMZ goes away with ZIA. This is a bunch of products. When ZPA gets deployed, a bunch of products get removed. So, combination of great savings and good ROI, combined with still interest in cyber, is helping us in a better shape than many of our peers out there. So, in fact, it does suggest that you've already demonstrated what people are fearing is going to happen in the U.S. economy as the economy has decelerated month to month to month. You've actually seen that deceleration in Europe and powered right through it. And they stopped with those facts, right? I mean, that's empirical evidence. So, let's talk a little bit about the reason that happened. So, one of the things we're hearing very clearly from the VAR community is there are some categories that have significant nut upfront that you've got to digest in order to get to the savings. So, I have to decommission something, I have to put some engineering skill into it, I've got to actually spend some money on some other hardware or whatever. I mean, that's part of the problem I think with the vulnerability management space in particular as an example. They're having trouble getting new customers. Talk about what happens, the mechanics of winning a new customer for Zscaler in this environment. And deploying it, because you talked about deployment, right? If you go back to pre-COVID, that customers wanted to go through network changes and deploy Zscaler from branch offices and then the customer moved on to protect remote users who work from home. If there's one thing COVID did that is good, it showed CIOs and CTOs that the network - in network security you got in place in the data center and network connecting various branches is not needed. It's not relevant. During COVID, we start, we flipped our deployment model. Don't even touch the network. Go and deploy this endpoint agent on a laptop. It simply comes through us ZIA, ZPA, happen seamlessly. So, we were able to see the deployment that took five or six months could be done in actually two, three, four weeks. So, our deployment model has fundamentally changed. It's helping us do much faster deployment. And once they see it, eliminating some of the network and all the stuff becomes a lot easier. But once traffic starts flowing through us, look at the outbound BMZ, what ZIA does. All of those products can be decommissioned, and a lot of them can be decommissioned in a â probably in a two, three, four months, okay? ZPA, it starts with VPN replacement, then it starts looking at doing the rest of the displacement. Our customers are asking us, say, just don't, I don't just trust you. Show me business value assessment. Show me quarter-by-quarter. What can be rolled out? What can be removed and whatnot? And that's what we're doing. So, the extra scrutiny is actually asking us to do that kind of stuff. We have been doing business value assessment for now several years, but no IT environment is asking us to do more granular, do it more precise. A year ago, we would do business value assessment, ROI, year one, year two, year three. Today, we actually bought quarter one, quarter two, quarter three, and quarter four and so on. Our business value is strong, ROI is strong, and that's really what's helping us get our deals done. So, in that context, can you talk about the â some of the other platforms, for instance, the ZDX product, how's the uptake of the nascent products to the existing customer base? Yeah. ZDX has taken off faster than we expected. It has taken up even faster than ZPA. Now why is that? If you think about what companies need to do in today's cloud and mobile world, ZIA gets them secure and fast access to Internet and SaaS. ZPA provide access to any internal applications in the data center and factories or public cloud, like Azure, AWS, without doing anything special or networking. That two together is what we have been now selling for quite a while. The only thing missing in this equation was if thereâs performance issue along the way, the user is sitting somewhere, teaching some applications, what do you figure out? There's no meaningful product out there to do so. We are sitting in between. So, ZDX was a natural thing for us to do. We're using the same endpoint agent. We turn on telemetry, we start collecting those telemetry, and we can tell them what's going on. So, now we are packaged fee services, ZIA, ZPA, and ZDX into one bundle called Zscaler for users. That feed together is all you need for your users, and that's what we are selling more and more. And ZDX is naturally benefiting from it. Yeah. All of these things, we possibly learn about 15 months ago, we start to sell more and more ZIA, ZPA, and ZDX, but they were separate SKUs. Once we see enough traction, we create a bundle build. The bundle got enters the larger market, what, a few quarters ago. So, I do have a couple of questions that came in from the audience. And I thank you guys for that. I love when it's not me asking the questions. Even they pay me that. Just repeat them. It's great. Any case, the first one was, can you talk about the competition with each of the two prime competitors that they note here, Palo Alto and NET, Cloudflare? And I love to start off with Palo Alto. What's going on relative to have they improved what they're doing? Do you see them more? Do you see them â how's pricing playing out some of those metrics on Palo. Yeah. So, if you think with a high-end market, these folks understand security. They understand what's really zero trust, what's a firewall. We, actually, I would say, the firewall companies have become less there. They used to show up, tell a story, everyone knows what their story is. And I would say the less competition from them on the high-end space. In fact, I talked about a large bank that probably has spent well over a $100 million with this firewall company. And when they looked at securing their users, there was no backhaul, okay? They told us that they has the Palo Alto vendor came to us and say, we got a grade zero trust solution. We can do better than Zscaler, and we'll give you at half the price. Okay. The customer said, sorry. You build great firewalls. We love your firewalls. We'll have you in the data center, but when it comes to user protection, it's a different architecture, proxy was the requirement, scalable proven proxy, and then the real cloud native stuff. So, I think there's â there may be some noise more with investors than it is in customers. When you come to lower-end of the spectrum, and probably the enterprise, low-end enterprise 2,000, 3,000 and kind of numbers, we do see a number of vendors there. Firewall company show up, even Cisco Umbrella shows up there as well. And that's where we had limited presence. In the past two years, we increased our presence significantly. So, do I think these firewall guys could be real affecting computation for us? Not really, unless they change the architecture. It's like trying to say that, do you think a traditional car company by bolting on an electric engine becomes a real competition. Not really. No. Eventually, if they wake up and say, I need to invest and build in real electric engine and go with that, that could be â that's something for us to worry about and see how do we keep on innovating and get ahead, but good to our benefit. Traditional companies keep on bolting things more and more because they think it's an easier and faster way to get there. Building something from scratch takes a long time. So, no worry about the firewall front. You talked about this cloud â what's either cloud something? What is it cloud thing? So Cloudflare has put out a lot of press suggesting that they are much faster than Zscaler. And to be fair, Cloudflare is focus as a cross WAN Internet accelerator, does give them some advantages in rapid communication across the WAN. When I hear that, my response to it is that, okay, but the comparison isn't between Cloudflare and Zscaler, it's comparison between Cloudflare, Zscaler and hairpinning over the traffic back to the data center and a difference of a couple of milliseconds one way or the other when you're doing the 3 ops instead of 30 ops, is it meaningful? So, it's really a functionality problem. So, can you [solve that] [ph]? Yeah. I think these guys make a lot of nonsense noise. Even last year, once they told investors, we replaced Zscaler at a very large oil company. Really? And the name of the company, you kind of said, because I know them well. So, I called the CIO and said, well, what are they talking about? Do you have them? They said, we, in one of my business units, I am using CDN and DDoS. That's it. Now that funky little thing became [indiscernible], okay? Some companies like to stretch. Some companies go too far beyond stretching. That's one. I had one other conversation with someone and they said, wow, these guys have lots of experience and selling large enterprise. I said, do the following, rather than all of these debates. Ask them. Show me 10 large enterprise customers that are actually using Equinor ZIA or ZPA, okay? I bet you'd struggle to find even one. Okay. So, it's easy to make a lot of noise. So youâre putting on all the stuff, they're trying to bait us to respond and get into â they want credibility, they want some coverage. They're not going to get burned into that stuff, leave it alone. It's sometimes I think they're trying to do, they have a better [indiscernible], and lots and lots of little things in it, but everything is two-inches deep. Right. So, from a future parity perspective, it's nowhere near there. Even if there's some a speed advantage, that's the measuring the wrong thing, right? So, okay. Not even quite there. Okay. When can they have the speed advantage? If the traffic, say, coming from Singapore to New York needs to come on a Wide Area Network. Yes. They can do acceleration. But our goal is not to backhaul traffic. The goal is that applications are getting set up everywhere. Why is Microsoft putting its data centers in every part of the world? So, no backhauling is needed. So, the advantage of doing some funky tests to show that I can bring on my backbone to do something is not a real thing. My traffic, my customer traffic in Singapore goes to Singapore data center. Then it gets on Microsoft network to get to where Microsoft is. In Microsoft in Singapore, it's one hop away for me. So, all of these papers are trying to get attention. We'd rather focus on our customers, so do you think I even worry about Cloudflare thing? Not really. My worry is to make sure we keep on executing with our focus, our sales team fully enabled, and we don't get complacent. We don't let success go to our head. And with that, we are focused on customer obsession. That's why our NPS is sitting way up it's sitting. That's why our score, promoter score is sitting at very good. Over a 125% net retention rate. We are proud of those numbers. And we keep on driving. So, another question came in on the competitive front. The question is specifically, have you seen any changes in the win rates against NetSkope and Cloudflare? And I think you already answered the Cloudflare. So, let's [Technical Difficulty] on the NetSkope piece. Look, NetSkope is still a by and large a [capacity vendor] [ph]. If you ask them, how many Fortune 500 companies do you have as a customer? You know, they'll give you a big number. And actually, that number will be technically right, probably, there are a couple of dozen CASB customers who fall in that bucket. If you said, how many of these companies are actually taking all the traffic like ZIA or ZPA? I bet you'll struggle to find companies out there. So, becoming a CASB is one thing, setting a line to inspect all the traffic without increasing latency and having a cloud that works, you ought to make sure it has availability is much, much harder task. What's making things worse for private companies? There's no â CIOs are looking for more and more consolidation and simplification. Do you think they'll consolidate with a private company they don't even know what the financials are? Or if they check an audited financial statement, they'll find that these folks are losing tens of millions of dollars every quarter? So, I do believe that most private companies will be struggling in today's market. Our position as a public company with focus on cloud security with the best architecture is putting us in a much better position. We aren't even competing on our main segment of Enterprise [and a major] [ph]. On the low-end, we do see them like we see firewall companies and Cisco as a wall, once we engage, we almost [solved this thing] [ph]. Great. Another question coming up from the audience is, does your contribution margin construct of 60% still hold in a slower macro environment and with more products on the menu? The answer is yes. The answer is yes. I mean, it's â we typically do, you know, three-year contracts, but, yeah, the no change in contribution margin. Yeah. No change at all. Still 60% plus for years two and three. So, while we're on the subject of the business model, clearly, there's been a shift in sentiment on the streets relative to what investors want to see. They want to see maybe a little less growth and a little more profitability. I think with almost any very high growth company, they can print substantial profitability improvement. All I have to do is, slow down the growth of their OpEx. I mean, you can mint money for quite a while if you choose to do that. Harder to balance it. And so, can you talk a little bit about the balancing act that you're doing between continuing to drive that long-term opportunity and the growth and the value of being the scale player with producing maybe some more margin and cash flow in this environment given the uncertainty around the economy? Yeah. I mean, it's a great question. You know, every company is different. You know, every, you know, the market that we're addressing, it's an early stage. We're the leader in that market. We have the product, you know, that addresses the market. And so, I feel that we're, you know, from a company perspective versus other companies, we're more resilient, you know, related to the downturn. Not immune, but more resilient. Then the question comes down to, you know, and again, we've been growth oriented and we still are growth oriented, but, you know, the thing about it is, is that because of the large market opportunity that we have, do you want to really start pushing operating profitability and free cash flow? Free cash flow, we've been over 20% in the last two years. That's outstanding. So, from my perspective, the biggest value we can give to our shareholders and to ourselves is to continue to focus on growth. Having said that, we hear, you know, our investors, some investors talking about increased profitability. So, we did increase our guidance on operating profitability. And as you mentioned, Alex, in a SaaS model with 80% gross margins, with the growth rate that we have, it doesn't take much to get to your operating profitability targets, and our targets are 20%, 22%. That would be a disservice for everybody, you know, in this market. We're the market leader. We feel that we can exploit this market with our technology. So, again, we'll be more mindful of operating profitability. We'll balance it, but again grow. What we also talked about is that, you know, in the second half, we're going to moderate hiring. So, the moderation in hiring, basically, is that we're still prioritizing quota carrying reps, you know, revenue generating salespeople, as well as R&D. From a company perspective, I can tell you for, you know, for our revenue generating reps, we have not changed it from our initial plans. So, again, why are we doing that? The reason is that it's a huge market opportunity. And the model that we have gives us the ability to make these decisions. In times like this, you know, major significant downturns. The risk is you don't want to overreact. You know, in the model that we have, business that we have, the engagements we have with our customers, you know, gives us the ability to really, I feel, you know, get through this and become a much stronger company on the way out â as we come out of this. Just [indiscernible] on that comment, do you think the Street is overreacting in terms of the amount of pressure that they're anticipating? And in fact, your business has actually smoother than the streets thinking it? I'll respond. I think yes. Look at two years ago in the past year or two. All these investors were so bullish. I mean, it's like, come on. You're so bullish, you're investing everything, raising valuations to the sky. And then suddenly noticing everything is [gloom and bloom] [ph]. Okay. Remo and I have always been prudent. In those crazy times too, we were investing very carefully. We were still delivering 20% net cash flow. Okay. We don't [like business] [ph]. In this environment, we are not going to over pivot. Okay. But we know that our model is good. And from what makes â what gives us more flexibility is our 80% plus gross margin. If you think about the, kind of business we are intaking, so much traffic, inspecting and enforcing policy. And still being able to do that kind of margin is a good starting point and that's the barrier to entry for us. People can't just change gross margin. Our gross margin gives us more flexibility to invest in the rest of the money and whatever we need to do. And some of those things are there because we decided to really build our own TCP stack that gives us great throughput. We invested in building our own cloud web and running on somebody elseâs cloud because it is fundamentally meaningful. It actually gives you far better margins. Sometimes, I hear of these firewall companies say, well, our margins are very good running on a hyperscaler. Well, wait till you really have traffic on it. You're just talking about it without much traffic. If a hyperscaler wants to have 70% to 80% gross margins, do you think can you get 70%, 80% gross margin for your services on proper [70%, 80%] [ph] gross margin? No. The math doesn't work out. We've done it right then the other strategic thing we did years ago. While we said we don't put all these functions in India and some of the other lower cost countries. India, Poland became pretty important for us. Engineering, half of the engineering team is in India. If we had all the engineering team sitting in the Bay area, our cost of R&D won't be 15% it'll be probably 10 points higher. They give us flexibility to invest more and still return some good cash flow, have good cash flow investments. So, that's why we really don't kind of jump and say, let's freeze everything. We think we are doing the right thing. We're moderating stuff, but we are putting growth ahead of profitability, but we are making sure we have pretty good profitability. So, Remo, when I look back in the rearview mirror, you exited the July time frame, your fiscal year-end with a very significant increase in your sales organization. I think it was in excess 50%. You can correct me if I'm wrong, but I'm pretty sure it was. And you continued to hire in the first quarter. So, when you say here, you're moderating, hiring even as you're continuing to prioritize reps, it sounds like there is significantly more than enough capacity to deliver the more modest growth targets, which slow down into the 30s pretty quickly, you know, in the headlights. So, is there any change, you know, in the productivity of those salespeople? How do we think about the impact of larger deal sizes and longer closure rates against sales productivity or are we just being very conservative in the forecasting guide? Yeah. I mean, a lot of questions there. So, we didn't comment what our, you know, quota carrying rep growth was in the fiscal 2022. So, 50%, like, I'm not going to comment on. Regarding, you know, building up the, you know, the sales organization, you know, I now like to look at, you know, this year. I'm also thinking about next year. You know, I'm thinking about want to make sure that we've got the capacity, you know, for our internal plans for fiscal 2024. So, I've got that in mind. Regarding deal sizes, they are getting bigger. Deal, you know, closing deals taking longer. We talked about, you know, things that you look at, your close rates are increasing, which is the sign of the macro economy. And also, linearity. It's more back-end loaded sign of the macro economy. The expectation related to productivity is it will be flattish to down in sales productivity in fiscal 2023. That's primarily a function of the growth in the sales organization. Also, you know, the broader macro, you know, environment. Having said all that, we are, you know, the entire world, basically, you know, economy is going through a really, you know, a tough patch, you know, I've gone through, you know, 2 or 3 back in 2001 and 2008. This feels different. You know, this feels that it's going to be tougher. The advantage that, you know, Zscaler has is that, you know, if the world's changed that basically how companies conduct business has change, where applications are in the cloud and users are in mobile. Zscaler revolutionize basically how you do security and networking. You do it through the cloud. And if you think about it, is that the way companies are doing their business has fundamentally changed, but the architecture is still primarily predominantly the architecture, which was developed back in the 1990s, which doesn't work because basically you're bringing things onto your network. You're exposing your network. We're zero trust. So, we fundamentally changed it. So, from my perspective, you know, because of that, because of the need, like I said, we're not immune, but we're more resilient. We just got to get through this period. And I feel, as I mentioned, in times like this with companies like Zscaler who are continuing to develop and really grow their business, including increasing headcount. We have an opportunity. This is the time when companies really can take a big leap forward. Jay has mentioned it before. It comes down to one thing as far as I'm concerned at this point. It's execution. It's the people we have in the company. It is the culture that we create, you know in the company, but we're all going after the same thing. And that's the key thing. It's execution getting the right people, and that's what we're doing. So, in the crucible of macroeconomic pressure, the companies are forced to address the inefficiencies and vulnerabilities in a more efficient way and Zscaler wins in that environment. Yeah. Of course, that's from my perspective because a lot of companies, what are they doing? They're laying people off, right? They're freezing hiring. What does that do, you know, to the morale in your company? What does that do related to investments that you can make? I can tell you that from a Zscaler perspective, the two areas that, you know, we're going to invest in, and not moderate is R&D and basically revenue [generating heads] [ph]. So, that puts us in a very unique position to really come out of this pretty strong. So, you've done a lot more bundling in this environment. You're seeing bigger deal sizes. How does that translate into price sensitivity. And I mean, certainly, we're hearing price sensitivity across most companies. And to what extent do you feel like you can pull the line against that? So, I'll answer. There is definitely price sensitivity, but is far more focused on cost savings and auto. If I can show here is the next four quarter, six quarter plan that shows that I can save you money and I can improve my [indiscernible] simply by my infrastructure. It goes through. So, we are able to do bigger deals. At pretty good per user pricing when we show that things can be taken out. The good thing is that CIOs are actually focused on simplifying and cost reduction. In fact, they actually open up and share with us some of the old legacy technology they have that can be taken out. So, we end up doing some pretty good business case studies of business value assessments. That help us do well. So, we have actually benefited from some of this stuff because we have the way to address this. So, is that an answer that you're able to hold the line on providing price abatements to customers to get the deals or how do we think about â your willingness to hold the line? While there is negotiations, there is no undue pressure on pricing. There's far more pressure on show me the [sales] [ph]. Right. So, a question from the audience, you know, do you have six month quota cycle to steer large deals into 2Q and 4Q or is it an annual quota pushing more large deals towards the fourth quarter fiscal? Our quotas are annual. We don't do six-month quotas, but there are incentives. No one wants to wait till the fourth quarter to do the deal. There are things in place. These are measurements in place. So, yeah. I've seen some companies try to [divide up] [ph], but I think when it comes to large enterprise business, it's hard to try to really sunk in into two quarters at a time. Another question from the field, how are you thinking about M&A opportunities over the next few years? Obviously a lot of private companies [indiscernible] as you noted earlier might make some interesting acquisition opportunities. But I also think you have a tendency to want to stick to your architecture. So, how do those sit together? Yeah. So, we are getting so many inbound calls on the M&A front. Okay. I mean, there's a day and nights difference between six months ago versus today. As you've seen over the past three, four years, we have selectively done five to six small tuck-in acquisitions that can fit into our platform that can be integrated. I think most of the time you keep on seeing us doing some of those because having an integrated platform is important. Otherwise, we'll become like, some of these are a big company that go on a buying spree. They seven companies at seven consoles and everything is separate. My customers don't like them. Now, having said that, we are open to look at some of the sizable acquisition if that makes sense, but it has to be compelling. And we don't really buy for revenues. Unless there's a technology that's meant for the new world, we stay away from all technology. So, are we going to see some tuck-in acquisitions? Yes. If I don't do it, I'll be missing out on something because, Iâll tell you, I look at a falling way. If I need to add this functionality, for example, we added Browser isolation. I probably cut probably 4 months to 15 months trying to introduce [that all] [ph] feature set in the market. So, it's good for us. Big smokescreen, the Honeypot technology. We saved over 10 months, 12 months. So, you're going to see some of those to really increase our platform, but by getting them early stage, they're not that expensive, and they can be easily integrated. Quickly, is there any high priority categories in, kind of very quick answer here that you're watching or focused on? Because I do want to ask Remo about [SPC] [ph]? Yeah. Makes sense. I didn't think you would answer the question to be honest with you. Remo, stock-based compensations obviously come to the forefront, people are sharpening their pencils and knives, you know, what's your thoughts there? It'll come down as a percent, you know, of revenue as we go forward. You know, typically, when you're starting out as a company, you know, public company, your stock based comp as a percent of revenue is going to be high. As you mature, you know, that stock base comp goes down. Cash comp becomes more important. And also, basically, you know, the lower level ranks of the company don't get stock. So, as we mature as a company, you know, you'll see that with Zscaler. There hasn't been a lot of churn at Zscaler historically, but I would assume churn is even improving in wage rates becoming less of a pressure point as the competition for talent seems to be lessening. Yeah. I mean, when you're, you know, there's a lot of reasons that, you know, someone want to come to Zscaler. Certainly compensation, you know, and again, people getting stock. And right now, you know, the, you know, the stock is down. So, if you believe in the company, you know, if you've got the right type of attitude and thought, you know, you could do well. That's one reason. Another reason is culture. The culture we have at Zscaler is unique. I've never seen anything like it in my career, which was great. You know, the other thing is that if you are an employee, you want to be associated with a winner. That winner basically carries with you in your career. And if you're with the company and you're able to basically, you know, move up the ranks in that company then â and you're with a company that's really, you know, a real marquee company. It's really going to help you down the road from a basically, you know, professional basis. So, there's [indiscernible] you know, the market, you know, a year ago, we couldn't get people in. Now, there's just a lot â there's a very high demand where people want to come to Zscaler. Well, we've kind of run out of time, let me stop with that great comment. Just to remind people, we strongly believe in the outlook here and really strongly believe that this is a company that's going to power through it. It's been our position from day one when this was a $25 stock that this is a company that you want to own for the long-term, and I â we reiterate that point, making it our single best idea for 2023 punctuates that. Remo, thank you so much. Jay, it's awesome to see you. I have been â youâre one of my favorite people to spend time with. So, I really appreciate you coming on with us. And I know you're lurking out there, Bill. Thank you so much.
EarningCall_1319	Good morning, ladies and gentlemen, and welcome to Nokia's Fourth Quarter 2022 Results Call and Group Progress Update. I'm David Mulholland, Head of Nokia Investor Relations. And today, with me in Espoo is Pekka Lundmark, our President and CEO; along with Marco Wiren, our CFO. Before we get started, a quick disclaimer. During this call, we will be making forward-looking statements regarding our future business and financial performance, and these statements are predictions that involve risks and uncertainties. Actual results may, therefore, differ materially from the results we currently expect. Factors that could cause such differences can be both external as well as internal operating factors, and we've identified such risks in the Risk Factors section of our annual report on Form 20-F, which is available on our Investor Relations website. Within today's presentation, references to growth rates will mostly be on a constant currency basis, and margins will be related to our comparable reporting. And our Q4 report and results presentation are both published on our website, and they include both reported and comparable results and a reconciliation between the two. The progress update portion of today should be considered as part of the regular series of progress update events we've been doing. The presentation for that will be available online after the presentation is finished. In terms of the agenda for today, Pekka and Marco will give a quick overview of our financial results for 2022 before moving into the progress update. We will be aiming for the call to last for around 90 minutes, but if the presentation runs slightly longer than planned, we will make sure to allow some time for Q&A. Thank you, David, and hello, everyone, and thank you very much for joining us today. So as you have seen in the results, fourth quarter was a solid end to a year of acceleration. We pretty much delivered what we promised at the beginning of the year. For the full-year, we had â¬24.9 billion sales, which was 6% growth year-over-year, and great fourth quarter, which ended the year â¬7.4 billion, 11% growth year-over-year. And this is really important because we said in the beginning of the year that this would be a year of acceleration. We had declining revenue in 2020, 3% growth in 2021, and now we had 6% growth in 2022. In terms of profitability, first of all, full-year comparable gross margin, which is not here on the screen, increased by 100 basis points to 41.4%. The full-year operating margin was stable at 12.5%, which was a very strong result, considering the 150 basis points of one-offs that we benefited from in 2021, as we reported a year ago. Q4 was strong. Comparable operating margin was 15.5%, up from 14.2% year-on-year. This was partly due to Nokia Technologies, which I will turn to in a moment. So in summary, this chart here show the progress we made through the year. When we talk about the acceleration, here, you see for each quarter, our topline growth compared to the same quarter the year before, and you can certainly see acceleration here. Then down here, I hope this is readable, first of all, you have here four quarter rolling comparable gross margin for the whole group. And then this curve here is basically the same trend line without Nokia Technologies. And then here, you have the same graph for comparable operating margin. What I do want to note is that if you zoom into â I mean, technologies is, of course, one case that we will talk about, then there is group common where we have Nokia Ventures. If you take the product businesses, which are Mobile Networks, Network Infrastructure and CNS on a full-year basis, these three businesses expanded their comparable operating margin by 120 basis points, which is, of course, part of this very good development that you see here. In terms of cash, we had a net cash balance of â¬4.8 billion, which was slightly up year-on-year. Free cash flow for the full-year was â¬840 million. Conversion was negatively impacted by net working capital growth, which is due to the accelerating growth. This will continue to be an issue also this year. Marco will cover this part in more detail. Cash generation is, of course, of critical importance for us also going forward. So then let's quickly look into HBG, and I start from mobile â no, sorry, from Network Infrastructure. And what you see here is the four divisions of Network Infrastructure: IP Networks; Optical Networks; Fixed Networks; and Submarine Networks. And these colors here represent the growth in each quarter. So IP Networks at 11% and Optical Networks is 21% growth in Q4. Fixed Networks is 8% and Submarine Networks is 32%. Why is this important? Because so far, as you remember, the NI growth, which has been very good growth has been very much driven by Fixed Networks and Submarine Networks. But now, what was extremely pleasing to see, and this was partially behind the very good margin development in the business was that also IP Networks and Optical Networks who had that slightly lower growth in the year accelerated their growth. Overall, we had for NI significant margin expansion. Gross margin in Q4, this is cumulative gross margin for the last four quarters. But if you isolate Q4, we had 560 basis points expansion in NI gross margin and for the full-year 160 basis point expansion. Also on the operating margin side, which you see here, this is also four quarters rolling, there is a significant expansion. First of all, Q4 isolated margin was almost 16%, 15.9% to be precise, and the full-year was 12.2%, which is 200 basis points year-on-year. And remember, when the year started, we gave a margin target range of 9.5% to 12.5% Network Infrastructure. So we almost hit the upper end of that range at 12.2%. So great year for Network Infrastructure. Then moving on to Mobile Networks, what you have here is quarterly growth compared to the same quarter last year. Q4 last year, we had actually declining topline. Now we had â both in Q4 and also for the full-year, we had 3% growth, which means that the declining topline that Mobile Networks had been suffering from for some time has now been turning into growth, albeit still, at this stage, a fairly slow growth. Four quarter rolling gross margin, you can see here, an operating margin here, slight dip in Q4, but on full-year basis, we had 90% expansion in Mobile Networks operating margin to 8.8%. And also here, if you remember what we had guided in the beginning of the year, we said 6.5% to 9.5%. So we landed at 8.8%. So Q4 came in pretty much as we expected, lower margin year-over-year because of regional mix shift. Basically, North America was front-end loaded in 2022. India growth accelerated in Q4, and this mix shift impacted margins pretty much as we expected. And now when we look into 2023 in Mobile Networks, we expect greater seasonality in our operating margin in 2023, with a slightly softer start to the year. But for full-year 2023 Mobile Networks, we target operating margin to be largely stable year-over-year. The range we are now giving is 7% to 10%. CNS work is gradually paying off. We had a decent growth in Q4, 5%, 2% only over the full-year. But what is very important in this business is that since we've been working on the product portfolio and the product mix, the positive gross margin trend has continued. It continued in Q4. The reason why it's not yet turning to more than 5% to 6% operating profit is simply that we invest. We have added significant investments in areas like private wireless campus networks, both product side, R&D and go-to-market. And these are investments into the future. They are paying off in terms of faster topline growth, especially in campus wireless at the moment. And also when, as you can see, in good gross margin development. So the work to refocus investments and rebalance the portfolio is paying off. Full-year margin was 5.3%. And also here, you remember, we said in the beginning of the year that the year would be between 4% and 7%, and we landed at 5.3%. And then last, but definitely not least, Nokia Technologies, which had an interesting quarter in many ways, net sales was up 82% in Q4. The reason is that late in Q4, we received notice from a long-term licensee that wanted to exercise an option to extend their license indefinitely. This meant that all outstanding revenue for this license had to be recognized in the quarter, which amounted to â¬305 million, which we are highlighting here separately. Even excluding that, there was actually revenue growth between Q4 2021 and 2022. This recognition did not have cash impact on the business, but it meant as â again that operating profit was largely stable in 2022. Still maybe one final comment on technologies before I hand over to Marco. We remain in two litigation/renewal discussions. Several court rulings have validated our position in these litigations in Nokia Technologies, giving us confidence in our approach to prioritize the value of our portfolio over achieving specific time lines. And then finally, on a positive note, we renewed our patent license agreement with Samsung on a longer-term basis earlier this week announced. This underscores Nokia Technologies' strong patent portfolio and supports our ability to deliver stable operating profit in Nokia Technologies over the long-term. Thank you, Pekka. Good morning from my side as well and I will briefly go through some financial performance bridges and cash flow and then also touch upon our targeted addressable market and outlook. So starting with growth, just like Pekka mentioned, we had a very good growth in quarter four, 11% in constant currencies. And if you look, you can see that most of the geographies actually had a very good positive growth. And North America, just like we expected because of the very front-end heavy load investments in our CSP customers, we expect that the quarter four will be a little bit muted and exactly what happened. Just a couple of words about a few regions. Starting with Europe, you can see a very good growth, but as we report the whole technologies here. So even excluding that, you can see that we had a 13% growth in Europe, and this is actually coming both from NI and MN had double-digit growth in Europe. When it comes to India, this is, of course, propelled by the heavy deployments of 5G. And here, we see a very heavy growth in Mobile Networks. But I must say that also Network Infrastructure had a very high double-digit growth rates in India. And in Asia Pacific, actually, all businesses had a good growth. Then looking to our comparable operating profit bridge from quarter four last year and seeing what has happened. And of course, you can see that Nokia Technologies had a very big impact in quarter four. But also I want to highlight the 560 basis points improvement that network infrastructure had in quarter four compared to same quarter in 2021. And Mobile Networks, of course, this regional shift, but also the fact that their OpEx increased slightly because of R&D mainly, you can see that it was slightly below a year before. And then in Group Common, I just want to mention that the venture fund is reported here, and they actually had a minus â¬90 million negative impact in operating profit in quarter four. And last year, we had a plus â¬60 million. And this â¬90 million, I would say that a big part of that is actually currency fluctuations because of the funds are reported in USD. And if looking at the full-year now, so Pekka mentioned the 150 basis points one-off that we had in 2021. So the starting point for 2022 was actually 11%. And here, you can see that both Mobile Networks and NI had a huge contribution in the development towards 2022 operating profit and margins. And we had some headwinds in FX and the reason is that we hedge our operating profit. So while in 2022, we saw increase in USD, and that boost our topline, but keeps the operating profit intact. So that's why there's a negative impact on our margin. And then turning into cash flow. And you can see here that we had some negatives in our cash flow development during the year. We will build up net working capital, and this has been the reason that, first of all, growth is tidying up more net working capital, but also inventories because the lead times in supply chains has been very long and we want to secure that we have the products that we need to deliver to our customers. So this is the reason I'm driving it is. In Nokia Technologies, just like Pekka mentioned, the â¬305 million was non-cash. So that's why actually the difference between operating profit and cash flow was â¬800 million in technologies. And the cash conversion ratio ended up at 27%, and this is in the low end of the guidance that we had between 25% to 55%. In total, the full-year cash flow was â¬841 million. And just like Pekka mentioned as well, the net cash ended up at â¬4.8 billion. And looking forward now in 2023, you can see the different parameters here and how they are impacting our cash flow, what do we expect that conversion ratio will be between 20% and 50%. And again, net working capital due to the big growth that we have and also the regions we were growing, is actually tidying up capital â in net working capital. The another issue is that we see that taxes are actually higher â cash taxes. And this is based on the legislative change in U.S. where you have to capitalize R&D costs. And this means that cash out in those early years are increasing. But looking beyond 2023, we believe that 2024 cash flow will be significantly stronger than 2023, and while we are working towards our longer-term targets between 55% to 85% conversion. And then a couple of words about the market estimates from our side. And we believe that in Network Infrastructure markets, and this is now excluding Submarine, that our growth will be about 4%. When it comes to Mobile Networks and this is now excluding China. So we believe that growth will be about 5%. And of course, this is also heavily impacted by the rapid growth in India. And then Cloud and Network Services, you can see a 4% growth expectations on that market. And before turning back to Pekka, about the progress update, I just want to give you some color on our guidance. Net sales between â¬24.9 billion to â¬26.5 billion. And this means that we expect the growth to be between 2% to 8% in constant currencies. And of course, the range is a little bit wider than normally and there's some macroeconomic uncertainties as well, and this is the reason for the wider range here. When it comes to operating margin, we guide between 11.5% to 14%, and free cash flow, I already mentioned, between 20% to 50% conversion ratio. And here, as I mentioned, we believe that the accelerated growth that we have and the regions where we grow, are tidying up more net working capital. So this is the reason. All right. Thanks, Marco. As you saw, we went through the Q4 result pretty quickly this time because we want to leave time for the main part of this call, which is really to give you an update on where we are in our different businesses, what are the key strategic drivers that are going to be guiding and informing their growth and development over the coming years. I will briefly summarize the progress we have made since our 2021 CMD, talk about our purpose a little bit, how it combines with our technology and the ESG strategy. And then, of course, I will, after that, zoom into the technology strategies and business strategies of each of our business. And finally, I will then go through some of the aspirations, including financial aspirations we have across each of the businesses. And then after that, Marco will update you on the progress we have made with implementing our operational model, our capital allocation policy and give you some pointers and things to consider in modeling Nokia for the long-term. So let's first take a look at our longer-term financials history. As this slide shows, the key trends have all improved. So first of all, three years ago, back here, this is our annual sales growth between 2017 and 2022. Here, we have several years of either negative or extremely low growth, then 2021 3% growth and 2022 6% growth. So that's really a great achievement. And it again just shows that our goal to accelerate sales growth has been successful. So when we move to the margin side, you can also see that we have been able to turn the gross margin development to the positive actually from the bottom here in 2019, we now have 500 basis points improvement in our gross margin. And then, of course, the same thing can be seen here on the both operating profit and operating margin. Back here in 2019, 2020, we were a company of around â¬2 billion comparable operating profit. Now last year, 2022, we actually already exceeded â¬3 billion, around â¬3.1 billion, and the margin development also good. If you exclude the 150 basis points of one-offs, which we reported in 2021, the margin would have been 11%, which would have meant that this development would have been extremely steady. So overall, when you look at the main kind of group numbers. I don't have EPS here, but it has also developed very positively. We can be pleased with the development. This gives us a good foundation also now in the future to grow faster than the market and achieve an operating margin of at least 14% as our long-term target is. As you remember, at our Capital Market Day in March 2021, we introduced a three-phase plan to transform Nokia, reset, accelerate and scale. We did declare a year ago that the reset phase, and I will not go through all these details, you will have all this information on the deck that we published on our website. The point is that we declared that in â after 2021, we had completed the reset phase. Now we are very much focusing on acceleration. And as you have seen, we have been pretty successful. We have grown our market share. We have accelerated our enterprise sales. We have improved both not only topline, but operating margin as well. We have continued to work on many fronts and technology in digitalizing our own operations and overall creating new growth opportunities. So the accelerate phase has been going pretty well. It's not over yet. Acceleration will continue towards then the final goal, final phase, which we call scale. And there, the goal is that once we reach there, we want to be an undisputed technology leader in all those segments where we operate. We will have higher market share with the service providers. We want to become market leader in targeted, not all, but in targeted enterprise opportunities. Obviously, we want to have higher operating margins. This is the foundational phase where we will get to that at least 14% operating margin. We will have meaningful partner-driven revenue streams, not only direct sales through operators or enterprises, meaningful, strong partner network, helping us to grow. And very importantly, we will have implemented new business models such as a service, annual recurring revenue base for software that we deliver as a service. So some of these would be, in a way, definitions of what we will have wanted to achieve once we get to the scale phase. I mentioned already Enterprise, and this is really important because again, one of our key strategic objectives is to diversify our customer base so that we would not only be relying on service providers. And these efforts are paying off. Here, you can see the development of our Enterprise sales between 2017 and 2022, excellent growth, we were around â¬2 billion last year, 21% growth from 2021 to 2022 and a really, really good 49% growth in Q4. So now after this growth, Enterprise represents about 8% of our sales. And our goal is very clear. We want this trend to continue. We want Enterprise to grow double-digit going forward, and we wanted to reach 10% of our sales as quickly as possible. Those numbers are important, but perhaps strategically even more important is this slide here â Is this graph here where you can see the development of our active partner network. The green color here represents partners for campus networks, and then the blue graph represents the number of partners that we have for wide area Enterprise networks. For example, a wide area utility network, so wide area authority networks. So this is looking pretty good at the moment. If I park that Enterprise question, I move then to the next theme, and that is our purpose. We launched in 2021 our new purpose. At Nokia, we create technology that helps the world act together. We achieved our purpose by ensuring close alignment and collaboration between our ESG strategy, our technology strategy and technology vision, along with our core product development within the business groups. This way, we believe that we can make ESG a competitive advantage for Nokia. This is one of our key strategic objectives to make ESG a competitive advantage for Nokia. Then I move to the next theme, which is our technology strategy. And this is not business group specific. This is across the board. This is the foundation of Nokia Group Technology Strategy. And you can see a very high-level summary on this slide here. First of all, if we look at the foundational technologies that you have here, I start from sustainability, which I already mentioned. I will talk about that shortly. It is an absolute cornerstone in the strategy. Then there is semiconductor technology, where we continue to develop SoC, System-on-Chip across our portfolio and cross leverage our expertise, a fundamental part of the competitiveness of the system, performance of the system, energy efficiency of the system comes actually from silicon. And we want to maintain a significant own development position there. We do not only want to rely on Merck and Silicon. We want to have own IP in the silicon development as well because it is driving a significant part of the competitiveness. Then security is really foundational to critical networks. Our target is to deliver highly secure systems with multiple levels of defense, which, in some cases, even go all the way to the chipset level. Our new routing platform is one example of this, where actually defenses against distributed denial of service attacks has been implemented all the way to the chipset level. So these down here are in a way the foundational technologies. So then if we move up here and look at transformational technologies for the future, first of all, no surprise, artificial intelligence and specifically then machine learning, it's really going everywhere. And it is going to transform in a fundamental way, many, many parts of the network and including our deliveries. We are already applying it in many places. We have launched AI-based product and services like Nokia AVA, which is a service for energy efficiency in the network. It goes into the radio interface. It goes into various customer service platforms, network performance management. It's going to be persuasive, and it's going to be everywhere. Software. Again, absolutely no surprise. Cloud is a wonderful technology. And what cloud really does is that it simplifies applications. The whole application architecture and the way how applications can be deployed on top of the network platform gets a significant simplification through cloud. At the same time, it introduces more complexity into networks. So we are handling that complexity with sophisticated software. And then the ultimate target of all this is consumability. Traditionally, Nokia has made networks by experts for experts. But to target a larger market, including the enterprise and industry vertical developer ecosystem, we need to make networks by experts, but networks that can be easily consumed through APIs for everyone. So these are our transformational technologies in a very, very quick summary. Then I already promised that I would zoom a little bit deeper into ESG. We launched a new ESG strategy recently, which is aligned with the topics that are important to Nokia and our stakeholders. And this strategy is built around five focus areas. Number one, environment, where we aim to be the leader in energy efficiency and circular practices. We target 100% renewable electricity in all our facilities by 2025 and look to have net zero emissions in our entire value chain by 2050, which is not a piece of cake, by the way because most of our emissions are in Scope 3, i.e., when customers are using our products. Number two, here is industrial digitalization, where we provide connectivity and digital solutions that sustainably transform physical industries. Number three, security and privacy, where we are working to ensure a common security baseline for products and services and accelerating our security offering. These are the cornerstones of our reputation and product proposition. Then number four, bridging digital divide. As you can see here, we are a bridge for digital inclusion through our connectivity and digital skill building solutions for many, many developing countries in the world. And number five, very important, responsible business, take proactive and values-driven role in driving responsible business practices internally and in our value chain. With this, we believe that ESG is a driver of value creation. We believe ESG can be a competitive advantage and drive new revenue streams for us. There truly is no green without digital. Then if I move to R&D. When we bring our technology and ESG strategies together in our product road maps and R&D, you may recall that when I gave some of my first presentations in the fall of 2020, after I had joined Nokia, I said that we would invest whatever it takes to regain leadership in 5G. Over the last two years, we have increased investment across various areas of the portfolio, not only in 5G, by the way, but also in some other parts of the road maps. And as a result, I believe that we have put ourselves on a much better footing. Here, you can see our R&D investment. It was â¬4.4 billion last year. The interesting thing is that even though we have significantly increased R&D from 2020 into 2022, the R&D intensity, when you look at the kind of long-term development here, it has not grown. It is around 18%. And of course, here, it's very important to get the topline growth like we had 6% last year, because that makes it possible for you to continue to invest R&D and perhaps even increase it without increasing the R&D intensity. We have a lot of achievements which I will not go through this, material is in your deck. You can see that we have pulled out just a small number of innovation first on this slide product launches, technology advances that we have accomplished across each of the different businesses. But again, I will not go into more details on this one now, please study the material on the deck that we have provided. So now we have covered how we operate. So let's turn to our long-term targets. Today, we reiterated the targets we introduced last year. We target to grow faster than our addressable market, deliver a comparable operating margin of at least 14% and deliver free cash flow conversion of 55% to 85% of our comparable operating profit. Those were, however, only group level targets. So next, I want to give you some visibility on the bottom-up opportunities that we see across the business. And I start from Network Infrastructure. And I do want to show you this first before I go into the different segments of Network Infrastructure. First of all, here, you see topline development of NI, how strong it has been. We have become a â¬9 billion business from 2020 where we were still below â¬7 billion. And equally, if not even more importantly, there is a significant expansion in gross margin and consequently, then obviously, gross profit. And perhaps the most impressive one is this one here. Comparable operating profit in Network Infrastructure was â¬457 million in 2020, â¬457 million here. And here in 2022, it was â¬1.1 billion. If you remember what we said, it's up there on the slide, what we said in the Capital Market Day in 2021, we said then that our target for 2023 would be 9% to 12% margin. Now we achieved already last year 12.2%. And now we have a new target for 2023, which is 11% to 14%. So excellent development here. The Network Infrastructure business consists of four segments or business divisions, as we call them. First is IP Networks, which accounts for 34% of the business with high teens operating margin, high teens operating margin. Second is Fixed Networks, which is 32% of sales and which has been a really exciting year in recent years and now generates after a very good development, it generates mid-teens operating margins. Third is Optical Networks, which is 21% of sales with a low single-digit operating margin. And finally, Submarine Networks, which is 13% of sales in NI, which has also grown substantially in recent years and is now low single-digit operating margin. It used to be loss making by the way. Now we've been able to turn it to profitability. And I'll talk about the future targets in a moment. So this is the structure of Network Infrastructure. In terms of the trends worth calling out. You see some of them on this slide. Trends that are influencing the business, there's a number of new applications and changes in work patterns that will require higher capacity and higher speed networks, meaning simply that operators need to continue to invest, and we need to continue to innovate. Things like changes in working patterns, the importance of home connectivity is driving the need for fiber deployment, growth in 5G infrastructure base station backhauling how industries are digitizing and how companies are increasingly reliant on public cloud. All this is driving the need for the basic connectivity that NI is providing. So having given you a little flavor of the broader trends. I now want to touch on our right-to-win in each area of NI and opportunities we see. And I start from IP Network. Technology leadership is key to the competitiveness of IP, and we have always focused on quality. We rely on three foundational elements to sustain our position. And the first one is silicon and systems. With both in-house developed industry-leading FP4 and FP5 routing silicon along with the off-the-shelf solutions, we have a broad portfolio to meet our customers' requirements. Second is through software excellence where our quality focus and proven predictability gives our customers' confidence. And third, through automation, where we simplify network operations using insights from network analytics. The IP Networks business is a space we entered as a start-up around 20 years ago, but that focus on product quality and delivering what we promised, mean this business has grown to become a market leader, a market leader in service provider edge routing, which has been our main segment. When you look at this market share graph, you may notice the slight dip. This is market share development until Q3 last year. But when you keep in mind what we just published about Q4, we expect that this actually is going to be trending upwards than once we see the Q4 numbers. So promising development here, both in terms of market share and also profitability. When we look to the future for our IP Networks business, the focus is really on growth. We see our addressable market growing 3% CAGR through to 2025. With our recently launched FP5 IP routing products, which are now ramping, we believe we have scope to continue expanding our share in service provider edge routing and very importantly, gradually also expanding into core routing. We also expect to maintain the good momentum we have in our target enterprise verticals, which we see growing double-digit. And finally, we want to take a meaningful market share in the web scale and data center market, which we are just starting to penetrate with our wins at the likes of Microsoft this year or in 2022. We see meaningful opportunities for our IP Networks business to grow faster than the market and still maintain the high teens operating margin we have been generating. Then over to the next part of NI, which is Fixed Networks, which is primarily being driven by ongoing fiber deployments. And when you look at fiber deployment, there's a couple of things to note. First of all, is the current penetration. Here you can see in the different regions, Middle East and Africa, North America, Latin America, Europe and Asia Pacific, the green color representing the percentage or the share of homes connected as a proportion of the number of total homes. And then the light blue color represents homes passed. There is only one conclusion to make, there is still a lot, a lot market to cover, which is still untouched. But this is not the only one that is driving this business. The other aspect is that in addition to the growing penetration, even within the existing penetration, there is a lot of need to drive for faster speeds. And technology development is really an element here. And this is really our sweet spot in this whole thing. Today, most deployments are still GPON or XGS-PON, which is now the fastest-growing segment, which is 10 gigabits symmetrical, but we offer a very strong upgrade road map for customers all the way through our recently launched Lightspan MF-14 platform, which you can see there on the slide being the first platform that supports 10G, 25G and 50G and even 100G. We have demonstrated 100 gigabits per second already for some customers. And we believe that we have an 18-month lead over the competition here. So in Fixed Networks, it's two things going forward. It's the penetration, which is still low. It will continue to grow. But within any penetration, there will be the continuous need to upgrade capacity. A significant part of those existing customers that are running broadband at home are still running on fairly low speeds, and they will get to be upgraded in the coming years. This is a segment where we have probably the highest market share of all our segments in the whole of Nokia. 42% market share in optical line terminals, which is the central office side of the fiber connection, 42%. Just asked not to forget, now I've been talking about fiber and passive Optical Networks. Our Fixed Network business also covers copper solutions, which still are on the market. There is demand in some parts of the world for copper as well and very importantly, fixed wireless access, which I will not discuss more at this call. If we look to the future, again, our Fixed Networks business is really focused on growth as it already generates good profitability with a mid-teens operating margin. When we look into the future, we see addressable market growing 4%. With this strong technology leadership, we believe that we have scope for further market share gains. So without repeating what I just said about the development trends, I will now move to the next segment of NI, once again, as you can see on this slide, our goal in Fixed Networks is to sustain mid-teens operating margin. And of course, we expect the growth to continue. And then to the next segment, which is, of course, Optical Networks. In this business, our aim is to help our customers scale, but do so easily. So we have focused on developing our portfolio of products to ensure we have a range of solutions that really hit the performance and capacity levels needed in different applications. We have a broad family of solutions from large long-haul and subsea networks through to more compact metro or access solutions, even pluggable solutions as we see some level of IP optical conversions in some shorter distance connections. This is something we are very well placed to manage with our strength in both IP and Optical. If we look at our market share in Optical, we currently hold around 15% market share, excluding China, but this is a highly fragmented market. We are actually the number three player excluding China in the world and number two in Europe. And then if you look to the future and the opportunity ahead, we currently forecast the addressable market growing at 2% CAGR. And with the investments we have made into our technology in recent years with PSC-5 and the momentum we are seeing with customers, we believe we are putting ourselves on a strong path to now improve our scale and also gain market share going forward. As we gain share and improve our scale, that would really help to improve our operating margins going forward. In a way, I would say that the Optical is a story similar to the one we achieved in our Mobile Networks business. We have already been making the R&D investment in recent years, so we believe those benefits will come soon. Our operating margin in this business was low single-digit in 2022, but we aspire to expand that to double-digit over time. And then the final segment of NI, I will touch on our Submarine Networks business, where we deploy subsea communication cables. These cables are critical to the functioning of the Internet and about 99% of the Internet traffic touches a subsea cable at some point in its journey. The dynamics of the market have changed in recent years with a significant increase in involvement from hyperscalers who are now building their own subsea networks. This has led to a meaningful increase in the backlog we are executing against in the business. And it's also an area where we have strong leadership. We are the market leader with significant experience and delivery and project implementation capacity. Going forward, we see the market growing with a single-digit CAGR through 2025, and we aim to grow in line with the market. We also aim to improve the operating margins in the business from low single-digit to high single-digit as we have improved our execution in the business, but there are obviously some fairly long-term contracts, which always need to be kept in mind. Then I will move â now I have covered the Network Infrastructure in the four businesses. So now I move over to Mobile Networks where we can say that we are now back on track from a technology perspective. Again, the same structure on the slide, as you saw for Network Infrastructure, we have restarted growth, which is very important, we had 3% growth both in Q4 and full-year, encouraging development on the gross margin side, and the same can be also said about comparable operating margin, which was, as I said earlier, 8.8% in â not in Q4, but in full-year 2022, it was up 90 basis points. The aspirations that we have for Mobile Networks should not come as a surprise, as we've been talking quite openly about them for some time. We look to grow faster than the market and to expand Mobile Networks operating margin into double digits from the current 8.8% level. We are well on our way, but there is plenty more work to be done. Also here, if we compare to what we said at the Capital Market Day in 2021, similar to Network Infrastructure. At CMD 2021, we set a target â 2023 target to be at 5% to 8% comparable operating margin. Now the assumption we have for this year is 7% to 10%, so 200 basis points higher. Looking briefly at how we see the Mobile Networks addressable market over the coming years, we see the market growing at a 1% CAGR through 2025. Actually, quite strong growth in 2023, but then a slight, slight decline in 2024 and 2025. We continue to believe that we will see an extended peak in 5G. This is our estimation on the 5G market size all the way to â until 2030. We continue to believe that, as I said, an extended peak in 5G market because, number one, there is still plenty of coverage and gradually more and more capacity to be built out around the world. And then on top of that, if that's for operators, then we have the private wireless growth, which is starting to be meaningful and that is helping to keep the whole market elevated. So putting all these together, and you can see that 6G is expected to start to grow in around 2028, 2029 when the 5G starts to decline. Summing up all this together, you can see what we have been talking about earlier that we expect more or less a plateau on the market for the coming years, not a significant dip in any way. And then when 6G starts around 2028, then there is actually the potential that the market would start growing from the levels where it is today. So that's our market estimate. And just one additional point on this one. When we look at our 4G to 5G conversion rate, this is a KPI that we have been reported early â we have reported earlier. I just now want to highlight that now with the recent wins and market share gains that we have in regions like India, right now, actually, the latest conversion rate, 4G, 5G conversion rate is 110%. So this is an evidence of our success in when we have said that our goal is to start taking back some of the market shares that we did lose in early stages of 5G. That is clearly happening now. So I would say that Mobile Networks has clearly turned the corner in the last year, and market share data is starting to confirm this as well. You can see here that as of Q3 2022, which is this one here, both the quarterly and the rolling four quarter trends are moving in the right direction for 4G, 5G share, excluding China. The trend line here is rolling four quarters, we were at 24% at the end of Q3, but as you can see, the isolated Q3 was actually much higher, somewhere around 28%, 27% or something like that. So it is trending to the right direction at the moment. The advances Mobile Networks has made from a technology perspective gives us confidence in our ability to expand margins over the long term to the double-digit range, which is our target. This will be done through increased scale. For example, through market share wins in India and continued growth in private wireless. Through product competitiveness, we will again have new products coming out in 2023. And as the cycle matures, there are opportunities for margins to improve as more capacity is added to the network, all while we continue to maintain an efficient cost base and improving R&D productivity. Moving then on to the next business, which is Cloud and Network Services, where we have been working to rebalance the portfolio to best position for the future. And you can see some proof of their efforts in the first two parts of this slide. We did have net sales growth in 2022. And very importantly, this gross margin trend that we've been talking about when we've been working on the portfolio and restructuring the portfolio, the gross margin trend has been promising. The reason why the gross margin is not yet turning to higher than 5% to 6% or something like this, operating margin is really the investments that we are making. Investments in private wireless, investments in many of the targeted growth segments in Campus Networks and in other parts of the portfolio. So this is why CNS is still a bit below where â compared to where it originally intended to be in 2023. At the Capital Markets Day, we set the target for CNS to be between 8% and 11%. Now we forecast 5.5% to 8.5%. So while NI and MN are clearly ahead of our thinking back at the Capital Market Day, CNS is slightly behind that. But again, Part of that is because of our own decision to accelerate spending and investment in Edge Networks and Campus Wireless. You can see that we have clear aspirations going forward to grow faster than the market and to expand to double-digit margins in the future. CNS continues to focus on the six areas of growth that I have talked about in the past, building technology leadership in each area. Underpinning the growth areas is the SaaS, software-as-a-service business model, which improves the consumability and consistent delivery of use cases, such as security-as-a-service or very importantly, our recently launched core network-as-a-service offering. CNS will focus on key SaaS use cases to support the growth areas in 2023 and beyond. We are creating a new value with the network monetization platform, which you can see up here. We previously called this network as code, and by expanding our Campus Private Wireless leadership into the broader Enterprise Campus Edge, which is a new business unit that we have started inside CNS opportunity, especially in mission-critical industries. CNS has also codified its autonomous operations strategy and will strengthen our position in operations, analytics and security, both for CSPs and Enterprise. And finally, the CNS strategy and portfolio allows it to engage the broader digital ecosystem with new services capabilities and tools. This includes expanded engagement with CSPs, hyperscalers and enterprises and new engagement with developers, especially in the area of network monetization. As we look into a bit longer term at the potential for CNS, we see a few key areas to disrupt and create new value. The Campus Edge Networks has code monetization and the transition to Software-as-a-Service business model. SaaS, for example, which is measured by annual recurring revenue, or ARR, we believe could represent, as you can see here, more than half of CNS net sales by the end of the decade. We have already introduced 10 services through this model and are starting to build up our ARR, annual recurring revenue base, and we will continue to scale this up in the coming years. And then the fourth business, Nokia Technologies which has a proven track record when it comes to patent creation and licensing. We were, first of all, delighted to announce the renewal of our Samsung license earlier this week as well as Huawei back in December. We are also focusing on expanding our licensing coverage and have had success recently in the consumer electronics and automotive spaces. We will continue to invest in our patent portfolio and standards delivering tech innovation to existing and emerging customers. In terms of our aspiration, we target largely stable operating profit in the business, and it should be noted that now despite having no contribution from a long-term license we discussed in Q4 that will no longer contribute revenue going forward. So of course, there can be some volatility year-to-year depending on progress on deals. But as Jenni stated back in September in her update, we are in the midst of a smartphone renewal cycle. And we will focus on continuing to renew those and also signing new agreements in our growth areas of automotive, consumer electronics, IoT and multimedia. It's also good to note that some of the recent deals we've been signing are of a longer-term nature, which should give confidence in the longevity of our Nokia Technologies business. On this chart here, just as a summary, you see some of the deals that we have made. And this line here, which starts from here in 2005 and ends here at where we are today, this represents the net sales growth of Nokia Technologies up to the level of around â¬1.6 billion, where we were last year. Finally from me, and don't even try to read this slide. You have this in your package. This is, in a way, a summary of the key messages per business, including the financial aspiration. I hope this gives you confidence in our ability to grow and particularly to grow faster than the market along with expanding our margins to at least 14%. Thank you. Hi, again. I will give a short update on the operational model and then also capital allocation policy and then finally give you insight into long-term modeling assumptions that we have. So starting with some key enablers that I believe were extremely important when we started the transformation of the company and securing how we can perform financially going forward. And the main thing that I want to highlight there is the new operational model. And this was quite a big difference in Nokia actually, we had a quite complex matrix organization, and we wanted to change that and make it more simple, so it's easy to work with us from our customer side. And that's why we created these four individual fully accountable businesses, as you can see here as well, and each of them have very clear responsibility for their own success. And this means accountability for strategy, growth, profitability and portfolio. And portfolio, of course, they have to continuously assess, what is the best offerings, where do we have the leadership position, where we aim to be the leader and take actions based on that. Then also, I must say that I'm extremely proud of my colleagues how fast Nokia adopted this new model. We did it basically in six months. And many companies, it takes actually a couple of years to do this. Another area that I want to highlight is as well that we were very clear on that we want to be a technology leader. And I remember when Pekka said this, it wasn't only towards our customers. It was all important internally that we do whatever it takes to secure technology leadership, and this was in Mobile Networks side, but this is valid for the whole company. And that's why we started to move our spending from SG&A to R&D to be able to fund this technology leadership aspiration, and at the same time, we secured also that we have very lean corporate center. So the responsibilities should be in the businesses. Then also when it comes to value creation. I talked about this already in the Capital Markets Day that we had and the approach remains the same. So we are extremely focused on driving a strong fundamental business performance and this is done by empowering our businesses and securing the technology leadership. As you can hear, technology leadership is extremely vital for Nokia. And also when it comes to our internal capital allocation principles, these are based on where can we create the best value for our shareholders. And we believe that with technology leadership, you can get a better market share, market position but also higher margins. And that's why it's so important that when we do internal resource and capital allocation decisions, these are always based on where we believe that we create value. And that's why it's so important that we do the continuous portfolio assessment, ensuring that we invest in the right areas continuously. So this is no one-off exercise, this is something we have to do continuously and always prepared to take the right actions to secure that we will get to the value creation. And then all of this, we are monitoring and following up with the rigorous performance management system with very clear actions as well. And I'm very pleased that we have started to deliver also improving returns. And another key point we have had always that we have to have a higher return on capital â on invested capital than our weighted average cost of capital. And which we also you can see here on the chart that we have been delivering the past couple of years. Another area which is important, especially for our customers to secure that when they make deals with us, it's not now, it is a longer term. They want to see us to be their â as a partner in a very long-term, and they want to secure that we can really invest in technology, to be the leader, to pushing the edges going forward as well. And that's why we have ambition to have a good net cash position. And you can see here as well, the green bars in the diagram that we have had very good net cash position the past years and continue to have that. And this is very important that they understand that we can continue to invest in R&D to be the technology leader in the future. Then a couple of words about our capital allocation policy. And of course, the first priority that we have is that we will invest in R&D, again, to be the technology leader. And this could be done both inorganically and organically. So we're looking to always whatever is suitable for us. And the second priority in capital allocation policy is securing and providing capital returns to our shareholders. And if you look at our dividend policy, it's the same as we introduced in the beginning of 2021. So our ambition is deliver recurring and stable and over time growing dividends, of course, always considering what is the financial position of the company. And I'm pleased also to see that Board of Directors proposed now an increase of our dividend to â¬0.12 per share from the â¬0.08 that we had a year before. And of course, this is reflecting the progress that we have made. But going forward, increases would likely to be more measured and considering the progress and also the dividend policy. And â then we continue also with the second tranche of our â¬600 million share buyback that we started in early 2021. And then a couple of words about our long-term assumptions. First of all, in Technologies, we have said that we expect largely stable operating profit development. And when it comes to Group Common and others, and here also, we have, in addition to venture of funds, we also have the RFS business studies in our company. So we expect to have about a minus â¬300 million, â¬350 million. Of course, this could vary based on, as you've seen, especially the venture funds can go up and down. So there might be some variation year-by-year. Then when it comes to financial income and expenses, we expect them to be between zero to minus 100. And here as well, it is important to understand that interest rate fluctuations and FX has impact here on that figure. Tax rate, we expect to be around 25%. And when it comes to cash taxes, we assume now that there would be around â¬700 million outflow. And of course, this is influenced by the regional mix, but also the uncertainty in the international tax legislations that will come. And finally, when it comes to CapEx, we believe that â¬600 million is about the approximation that we have here. And there might be some small volatility year-by-year. So now with that, I would like to go back to Pekka for a brief summary. Yes. Thank you, Marco. Now I will be very brief because I want to leave time for your questions. Only one message, this is a quick summary slide on the cornerstone. So six pillars of our strategy to deliver our targets. Number one, grow CSP business faster than the market. There's a lot of opportunities to take market share with the help of technology leadership that we now have. In many cases, the geopolitical development in the world is actually helping to us achieve that. Number two, expand the share of Enterprise to double-digit. Number three, take leadership position in every area where we compete, technology-driven target. Number four, secure business longevity in Nokia Technologies. Number five, build new business models such as software-as-a-service, network monetization platforms; and number six, develop ESG into a competitive advantage. Thank you, Pekka thank you, Marco, as well for the presentations. Before we move into the Q&A session, I just wanted to give you a quick overview of some of our plans through 2023. We do hope to see as many of you as possible at Mobile Congress at the end of February. We will have an event on the Sunday. We hope you can join us. And then we will resume our progress update series with our business groups in the second quarter most likely in May with Network Infrastructure. So stay tuned, and you'll get the invite too about that as soon as possible. With that, let's start the Q&A. As a courtesy to others in the queue, if you could please limit yourself to one question, and with that, Alice, could you please give the instructions. Yes. Thank you very much for the very illuminating presentation and congrats on the results. Quick question on the sustainability of your Infrastructure business. Can you help us understand how sustainable the impressive growth is that you've been showing? You gave some great color in your presentation on investments and focus areas for improving products and you also talked about some penetration opportunities in areas like fiber. But historically, this has been a relatively cyclical part of the business. So what do you think are the most important factors giving you confidence that the recent strong performance is not just about leapfrogging competition temporarily, especially given the challenging macro backdrop? Many thanks. Yes, thanks. Well, first of all, I do not believe that the market share gains that we have had are in any way, temporary. On the contrary, as I explained in the deep dive, I do believe that there is potential to take more market share going forward. So that's one. I think then the question is that how will the overall market develop. You're absolutely right that fixed taxes, especially in the history has been to some extent, cyclical. It is prudent to expect that, that growth rates would normalize in that business. But again, when you look at the facts and the development that was started by the pandemic, which is clearly increasing and continuing to increase the need for connectivity, permanent shift in working habits where people will not commute every day to their work. There is a lot of kind of underlying demand. This is one comment on the fixed access. And then if I talk about the other two segments, Optical and IP. What we have seen in the past is that actually first come an access wave investment. And now we have seen both fixed access and mobile 5G access investment. Then when there is more penetration, more users who start to add data traffic to the network, then the next wave is then going to happen in the IP and optical layer, which is more in the core part of the network to be able to deal with all the traffic that these new access networks generate. So this is something that could very well be driving the IP and Optical markets going forward. So I mean, it's impossible to give you a scientifically correct 100% answer, but we have reasons to be optimistic about the market development despite the fact that, of course, we recognize the overall macroeconomic uncertainties in the world. Hey, good morning and thank you for taking my question. Congratulations to the strong results across the board. I just like to understand in Mobile Networks, how the year will shape out. There's obviously some margin pressure from the geographical mix changes here. So presumably, you will see a better second half than the first half. If you could comment on that a little bit. And then just today briefly, if you could also tell us if in 2024, 2025, you think you can still marginally grow revenue in mobile networks despite what you see being a market contraction in those two years? Thank you. Well, first of all, the market contraction that we had on that slide if you take into account the overall 2022, 2025 market expectation, which is 5%, it is actually quite small. So then it comes all the way back to the market share question. We do believe that Mobile Networks can grow this year, we believe that it will actually be our fastest-growing business group this year. But it's too early to give any guidance on topline for 2024, 2025 other than we have a general ambition to continue to grow. Then the margin pressure, it is likely that when we look into 2023, that we will, in Mobile Networks, go back to earlier type of seasonality where the first half of the year is weaker and then the second half of the year is stronger. So we are, of course, expecting the full-year to be largely stable, weaker first half, stronger second half. Remember that we did say after Q3 last year, that we are still keeping the 6.5% and 9.5% guidance for the full-year despite the fact that we were ahead of it after three quarters. So we saw this coming. It was not a surprise and we have built all this into our assumption for 2023 as well when we are giving this 7% to 10% assumption for the full-year. Yes. Hello and thanks for taking the question. On the thorough business update earlier, so a couple of my questions have been answered. Let me see here. Yes, I think a key question for me is really on the margin side. I mean, do you see any â do you expect to be able to offset the inflation pressures that we're seeing, especially on the salary side short-term now and going into the medium term? Or do you need to â with just ordinary measures? Or do you need to potentially take new measures to sustain the kind of cost efficiency and productivity momentum that you had? Thank you. Yes. Thank you. We â first of all, we believe that to be able to mitigate inflation, and there's several different parts of that, cost productivity and cost â and on products improvements there. We are working continuously on those. And in this new operational model that we have, so it is very important that, as we said, that responsibility lies in different businesses as different businesses and their end markets are developing quite differently in different times that each business have to look into their end market development and what actions and measures they are taking to secure that they can continuously create value and perform in a better way. Precisely, Marco, and then maybe to add one additional point is that, of course, when we talk about things like inflation â inflation, we have taken that into account in our guidance, when we estimated that this year's margin would be between 11.5% and 14%. Of course, it includes all our inflation assumptions as we see them. Thanks for taking the question. Just first, I wanted to get a quick clarification on your outlook for technology, given the one-off elements in the fourth quarter. I think when you talk about stable, should we be assuming that full-year technology revenue in 2023 is similar to full-year revenue in 2022? And let me just pivot to the question because that's easing it up. There have been some indications that the U.S. operators have been absorbing some inventory of network equipment, and I think that was pretty evident in the fourth quarter. I want to get a sense of what's your view of this situation, particularly the duration of any kind of potential pause in their purchases as they burn down inventory and what products might be affected by that in your business? Thank you. Yes, I can start with the technology part. And in our guidance, as we said, that's largely stable, of course, there might be small variations, as I said, also in the longer-term as we guide larger stabling technologies. But this is our guidance what we see today. And in our guidance as well for the full-year for the whole company, we have assumed that we will also settle those two outstanding litigations that we have right now. Then when it comes to the U.S. market and the inventory question, we, of course, saw a couple of years of heavy investment in North America. So after this, yes, it is natural to expect some level of digestion in 2023. And it could also include some inventory digestion. But this is actually also built in our assumptions for 2023 when we said that the first half of the year would potentially be weaker in Mobile Networks than the second half. It's also important to consider that our relative position in the region in North America with the major service providers is not only with major service providers, we have larger base there. We are working with Tier 2 and Tier 3 operators. We are working with enterprise customers, and we have the large network infrastructure business, which in this situation may be a bit less vulnerable. We also need to remember that when you look at the three large carriers in the U.S., their CapEx announcements that they have made, it's not that different from what they said two, three years ago. They increased investments in 2022. There may be a slight change in the plans for 2023 as they have now announced, but the big picture is still very much the same as it was. And we have to remember that the need for new capacity will continue also in North America. So after the dip, there will be a need for new investments again. So that's why we are not expecting anything dramatic to happen in that market. But as we have said, in Mobile Networks, there will be a regional mix shift where, in relative terms, North America will be slightly lower and India will be the fast growth market. And that is then also going to be reflected in margins though so that we expect to be able to compensate that mix change with scale benefits, with normalizing supply chain and very importantly, technology development that is driving down the cost of the product. Thank you, Simon. And just a reminder, if you could please stick to one question, please. We'll take our next question from Sami Sarkamies from Danske Bank. Sami, please go ahead. Hi. Thanks for the presentation. I want to dig deeper into your Enterprise aspirations. You mentioned a double-digit share as an interim target, but what could be the level in the long run? Are you planning to make acquisitions in order to strengthen your offering in this area, and can you please provide guidance on how long growth investments will go to margins? And what could be the level in the long run relative to CSP margins? Thanks. Well, the margin question, Enterprise versus CSPs, we are not opening up at this stage. We are reporting the numbers in our businesses because Enterprise is not a full P&L as such. It is a customer segment, which has its own sales teams, but it's not a full P&L. In terms of the ambition level, it is very clear, we want to continue double-digit growth. The market looks promising in terms of being able to support that. We have now increased to 8%, then we want to go to double-digit. And once we are there, then it's the time to discuss the next steps. But of course, we want that to continue. We do not want it to stop at 10%. So after 10% comes 15% and then comes 20%, but how long that will take, I'm not going to speculate on right now. In terms of priorities, the number one priority is organic development. Then if that is not enough, then bolt-on type of acquisitions would be the second priority. That's really what we are focusing on in terms of this business. Thank you very much, Pekka and Marco, and thanks for the business deep dive. A question on gross profit. It was down 1% in Mobile Networks in Q4, still up 13% year-over-year for the full-year. And obviously, we see large changes in the mix in 2023. And you do expect some 5% growth at constant currency for the Mobile Networks side. But my question is really with regards to â what do you see as triggers for gross profit for Mobile Networks in 2023? And also if you can comment on 2024, 2025 time frame, when we see even lower growth for the Radio Access Network market, should we pencil in a decline in gross profit? Or can you work with other issues, so you can get the gross margin and gross profit growing again? Thanks. Well, we are, of course, not giving specific guidance on gross profit, but it is clear that the regional mix development will put a pressure on Mobile Networks gross margin in 2023. But as I said, we do expect that we will be able to mitigate that drop with scale benefits, technology development and normalizing supply chain. So the drop will not be that dramatic as if we only took the different â the price differences between different regions. So there are mitigations that we can use. And we have taken all this into account when we have then put together this 7% to 10% operating margins. So once again, gross margin, we are not guiding. We do expect that Mobile Networks will be the fastest-growing one of our four businesses this year. So that obviously is a supporting element to the gross profit that you asked, lower gross margin is then taking some of that away. But the overall result is that we expect 7% to 10% comparable operating margin. Then when it comes to 2024 and 2025, we are not commenting at this stage other than confirming that our aspiration in the Mobile Networks business is to get to double-digit profitability. And then just building over what Pekka said that also in the aspiration slide that we showed earlier, we have an aspiration to gain market share in the longer run. So even if markets are going up and down, so the market share gain is definitely in our aspirations. Thanks folks. If limited to one question, I wanted to ask Pekka. One of the challenges in the last few years has been visibility both on component supply and also in customer demand. I'm wondering if you can talk a little bit about how â whether your raised margin targets in NI and MN are a function of having a clear picture or visibility of customer demand? And can you comment a little bit on your book-to-bill ratio ending 2022 and what you expect in terms of development? I think you mentioned a bit about seasonality, but do you now have a good view of what you expect for the full-year of 2023 with operator spend? Thanks. Okay. Thanks. That's a great question. We actually start this year in relative terms with a stronger order book than what we started last year when you compare the order book to the stated target. So that gives us confidence on this year's outlook. We had a good book-to-bill in our businesses in 2022, which then helped to build this order backlog for 2023. Now what will help, of course, is then the fact that the supply chain has more or less normalized from availability point of view. Then of course, I do not want to get into details on pricing on semiconductors. There's a lot of negotiations going on. People try to understand where the prices will go. But availability has normalized. What has not normalized is lead times. And that is one of the reasons why we have a lot of inventory. We need to maintain a higher buffer inventory than normally because of the lead times. Will that change during the year? Hopefully, it would gradually start changing. That would then start helping on the networking capital side. When it comes to prices and cost of the supply chain, we have seen some good development on memory prices. But then when it comes to logic and analog, we have not really seen that yet. So that all remains to be seen where the markets will take us. Thanks very much, David. Yes, just one question. Sorry to return to Mobile Networks margins. But as you said, near-term dilution from the changing mix, but still expect a stable margin for the full-year for this year, which would suggest quite a strong finish to the year. Can I just ask, when you talk about the offsetting factors and you highlight scale benefits, is that margins in India that will ramp up significantly towards the second half of the year? Thank you. Yes. I had a little bit difficulties to hear the question. But if I understood it correctly, you asked about â especially about the scale and benefits as a mitigating factor. And you mentioned India. Absolutely, India is the key driver there, but it's not the only driver. We have also other places where we have growing volumes. So overall, we are â as I said, MN, we expect it to be the fastest growing business in Nokia with a lot of additional scale benefits due to the fast growth, especially in India. Yes. Hi. Thanks for letting me on. Quick question on network infrastructure. Clearly, you've seen a very good trend in the fourth quarter, and you laid out a good plan in the long term. I'm trying to understand, but historically, the optical business was loss-making and the new chips, et cetera, has turned the growth trajectory around. What, I mean, is it new customers that you're getting on board? Is it the technology that is driving it? Or is it a geopolitical trends that are driving it? I try to understand the longevity of the turnaround in the optical business, given that this has been such a difficult business to turn around over the last decade? Thank you, Sandeep. That's an excellent question, and you actually highlighted the three key levers there quite correctly. It used to be a loss-making business. And when we look into the history, there was one silicon generation that we missed, which we have been recovering from. Now we are in a significantly stronger position. We have excellent feedback from customers in terms of PSC 5. I believe that, as I said, that this is a story that has similarities to mobile networks in many ways. We increased our investment substantially in 2021, 2022. Now we start to be there in terms of technology. And of course, the development does not stop. I mean there is â of course, there is more to come. But now the basic technology competitors now starts to be there. We have excellent feedback from customers. We are accelerating now in terms of the pipeline for new deals, and yes, we are also getting, in some cases, help from the geopolitical situation. It has not been as pronounced as we have seen in Mobile Networks, but gradually, these factors seem to be creeping in into the Optical Business as well. Yes. Hello, everyone and thanks for taking my question. How do you see the 5G core projects ramping up right now? Do you see any kind of acceleration in the deployment going forward? Or do you still expect some soft environment there? Thank you. Okay. I mean different trends in the core network business. Obviously, the 5G stand-alone is now the name of the game because you need 5G stand-alone in terms of getting the full benefits of 5G. So there is going to be a lot of investment in 5G core and operators will be implementing some critically important services like slicing which require investments in the 5G core. That is also a market that has been through a lot of changes, and there are different parts of the core, and they are a little bit different stages of development. But overall, when we talk about the core network, it is the key part of CNS. In our case, it's highly profitable, and it is something that we are investing significant amounts of money and the highlight of probably of what I talked about in the deep dive, also is really that we are not only making that core network software that we have cloud native, but we have started to offer it as a service as well, which I believe will be really interesting for Enterprise customers and for smaller operators and then gradually expanding to larger operators. So it is an interesting market. Obviously, that business is much smaller compared to the radio network part. But strategically, it is an important part of the portfolio. Yes. Hi. Thanks for taking my question. I just had a question on India. It looks like it's about perhaps more than 10% of your Mobile Networks business now. I just wanted to ask about the peak because Ericsson is saying that the peak for 5G in India will be in the second half of this year. I just wanted to check if you share that view or do you think it will continue to grow from the second half into 2024? Thanks. I mean the investments obviously will continue well into 2024. And then, of course, like in 4G, I mean, there will be a certain peak when operators are really, really scrambling to get coverage as fast as possible. Most likely then after that, there will be some kind of a leveling off and then it becomes a steady business where you have gradually an opportunity to improve margins, which is exactly how 4G also went. Look, without revealing what our customers have told us specifically, and it's a highly competitive situation in India right now, I'm not going to speculate when exactly the peak will be. But it is absolutely true that there is going to be a very quick ramp-up. And of course, on that level, the investments cannot continue for many years. Yes. Hi and thank you for taking my question as well. So I would like to ask about network infrastructure and basically growth outlook for this year within different subsegments. So where do you see the best momentum currently? And whether do you expect also basically four businesses to grow this year in constant currencies? Yes, Artem, we do see growth opportunities in all four businesses this year. We expect the overall market to grow this year, and we see opportunities for taking market share through the levers that I discussed in the deep dive. So we continue to have a positive look on the prospects of that business. Thank you, Pekka. Thank you, Artem, and thank you, everyone, for joining us today. Apologies to those in the queue that we didn't manage to get to, but that does conclude today's call. You'll find the presentations that we used in today's event published on our website, and they should be available now. I would like to remind you that during the call today, we have made a number of forward-looking statements that involve risks and uncertainties. Actual results may, therefore, differ materially from the results currently expected. Factors that could cause such differences can be both external as well as internal operating factors. We have identified such risks in the Risk Factors section of our Annual Report on Form 20-F, which is available on our Investor Relations website.
EarningCall_1320	Good morning, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostics team from JP Morgan. I'm joined today by Marc Casper, CEO of Thermo Fisher Scientific. So today will be a 40-minute presentation. We'll start off with 20-minute presentation from Marc. And then after that, we'll shift into Q&A. Just like all the other sessions that you've been to this week, we'll have mic runners throughout the room. So if you do have a question, please raise your hand. But wait until you have a mic in your hand to ask your question. Otherwise, for those of you joining us online, feel free to answer-and-question via the webcast. Good morning, everyone. It is great to be back in San Francisco. Rachel, thank you for having us. I thought about this conference. It's just great to see so many people. And yesterday, it was just a great day with customers and so many familiar faces in the standing room only crowd here at the Westin. So what I thought I would do is every year past is remind you of our Safe Harbor and the use of non-GAAP financials, the reconciliation can be found in our website under the investor relations section. When I thought about this conference, I thought about 2022. And what the world was like for investors not the most pleasant of years, I thought that I would maybe share some perspective before getting into the presentation. This is I think, my 15th JP Morgan conference. And what I wanted to do is just kind of reflect a little bit right, as I think about Thermo Fisher Scientific, the company is consistently focused on value creation for all of our stakeholders, right. And we do that in a way that creates a sustainable strategy that allows us to be able to build value for the long term while delivering great short-term performance. As a company, we're proud of our track record of setting ambitious goals. I love getting questioned about are they too ambitious, and then going out and consistently achieving them. And that's how we measure our success. When I think about the company, nobody has a crystal ball to what the future holds in terms of the macroeconomic environment, geopolitics and those things. But what I do know is that we're uniquely positioned to navigate whatever environment is thrown out as, because we have built over many years, a deep trusted partner status with our customers. They rely on us to help them navigate whatever the world is for them and make them successful in the environment. We have an experienced management team. We've seen a lot and in each period of the different environments we've managed through, we've been able to exit those periods, a stronger industry leader, and proud of what we've accomplished to set the company up for long term success. We obviously have the benefits of our leading scale and depth of capabilities, which positions us well. The company, as you'll hear has a proven growth strategy and drive share gain is powered by our PPI Business system. We have a disciplined capital deployment strategy that has created significant value for our shareholders over the years. And we have an outstanding track record and a sustainable formula for success, right. So when I think about the environment, our end markets are good, right? There's lots of challenges in the world. But what I think about it is we're going to navigate them extraordinarily well, deliver results that all of us can be proud of and create value for our stakeholders. So the presentation today, I'm going to have in two parts, I'll refresh the company for you. Just give you some of the key facts, figures and a little bit about our strategy, then I'll update you on the non-financial goals of 2022, lay out the goals for 2023. And on February 1, we'll give you all the numbers so that and that's been the practice we've had for all of the years past and because we'll have complete information and can answer all the questions at that point in time. Key takeaways from the presentation. â22 was awesome. We delivered an outstanding year and positioned the company very well. We serve good end markets, are very attractive, the fundamentals of them are strong. Our track record is great, our outlook is strong, and our long-term outlook for growth is high single digits, right. That's what we signed up for and our long-term financial objectives. And we felt confident in our ability to deliver that. We did a large acquisition in December of 2021, the acquisition of PPD. We've had a little over a year of ownership. It's been awesome. The business is performing incredibly well. Synergies have been realized. And the business is very well positioned. And we're excited about the contributions that it's making and how it's made the whole company stronger. And we couldn't be more excited, which I think you can tell from me today about what 2023 will bring to Thermo Fisher Scientific. So the company, the world leader in serving science, right, we serve our customers, our customers know us for our leading brands, which is at the top of the slide, our industry leading scale with over $40 billion in revenue, 125,000 awesome colleagues, and we spend on our product businesses about a $1.5 billion on research and development. We have unmatched depth of capabilities, and we create value in a sustainable way. So we have a positive societal impact, we're focused on ESG priorities, and I'll talk about some of those as well. And all of this becomes a reality, because of the strength of our PPI Business system. And I'll talk about that also. All of our company's focus starts with our mission, we enable our customers to make the world healthier, cleaner and safer, right. Sounds good. But it's actually what we do. Right? When you walk through our facilities, when you talk to our colleagues, they can talk for hours about how they've helped a client advance a breakthrough medicine, how they've helped a pediatrician with a new diagnostic, how they've brought something to a government regulator to ensure that the air that we breathe is clean, or the food that we eat is safe. And all of those things are what inspires all of us to bring our very best every day. We have a rich set of opportunities to enable our customer, success pharmaceutical and biotech is our largest end market represents about 60% of our revenue. The other three end markets that we serve are all roughly the same size, academic and government where we push the frontiers of science, in diagnostics and healthcare. We enable more cost-effective diagnostics and better patient care and industrial and applied, we facilitate both quality control as well as advancing research, particularly in the Material Science Applications. Our market is about $225 billion, long term market growth is 4% to 6%. And our ability with that kind of market growth is for us to deliver 7% to 9% or better growth. Our segments create value for one another. They're related, they're linked, and they are able to help our customers do things that nobody else can provide for them. Our Life Science solutions business is a leading portfolio of life science research tools, as well as bio production technologies or analytical instruments. We have leading technologies for solving tough analytical challenges, specialty diagnostics, improving patient care, and our largest segment laboratory products and biopharma services, we have a leading CRO CDMO. And extensive laboratory products capabilities that include our channel business. We do the clinical research, we do the development, we do the manufacturing, we equip the labs, basically take everything from a scientific idea all the way through an approved medicine for our clients. Our formula for success, right, it is well ingrained in the company we've been executing for a number of years, and it's delivered really fantastic impact. We have a proven growth strategy, that drive share gain, we have a PPI Business system that enables outstanding execution. And we have a proven capital deployment strategy. I'll highlight each of them. And what that formula allows for is consistently delivering exceptional financial performance. When you look first element our share gain strategy, right? How do we grow the business? A high level of commitment to high impact innovation, each year very strong, relevant products to push science forward, enable the impossible that our customers couldn't have done in the past because of the technologies we bring forth. We leverage the benefits we have of the scale and the high growth in emerging markets. It creates a superior customer experience that allows us to drive share gain in those markets. And we have a unique value proposition which I'll highlight as well, which has allowed us to build a unique trusted partner status with our customers. And that combination of those three elements drive 7% to 9% core organic growth in the long term. Obviously in 2022, our guidance is 12% core. So we don't limit ourselves at this rate. But that's a good rule of thumb with 4% to 6% market growth, that we can grow sustainably faster than that, for the long term. The PPI Business system is been ingrained in the company for 20 years. We celebrated its 20th anniversary in 2022. And what that allows us is to engage every colleague every day to find a better way every day. It's the culture of the company that every colleague is empowered to make Thermo Fisher Scientific a better company that improves our quality and improves our productivity and improves our customer legions and that methodology of improving the company and never being satisfied with the status quo, allows us to accelerate organic growth, expand margins, and deliver great cash flow. The third element is our proven capital deployment strategy. This slide is one that we've used with the exact same words for many years. But it's a good reminder of what it is, right. And it starts with from strong cash flow generation and a very strong balance sheet. We focus primarily on M&A, strengthen the company, leveraging our track record, to be able to create value through that. The fragmented industry that we serve with us having about 20% total market share gives us ample opportunity to deploy capital, we do return a lot of capital. Last year, we bought back over $3 billion worth of shares, we returned about a $0.5 billion in dividends. And we consistently do that. And we'll continue to be focused on both growing our dividend and returning capital to share buybacks. And every year, it might mix a little bit, the mix might vary a little bit. But nonetheless, it's an important part of how we deploy capital, we have substantial firepower, right in our long-term model that we presented in May. We have about $50 billion of firepower over the next three years in terms of the ability to deploy capital and will continue to be active and generate strong returns for our shareholders. That formula has delivered great results and positions us to continue to deliver outstanding performance. When you look at it, we've delivered over the last 10-year period 13% growth in revenue, 17% growth and adjusted EPS, 15% growth in free cash flow, a very strong track record, and you can cut the data and whatever years you want, and you get to be very similar results so just very strong financial performance, whether it's a five-year period, 10-year period, 20-year period, we have a demonstrated track record there. And I'm super excited about what â23 will hold. ESG is ingrained in the company, right? It's a source of competitive differentiation. We're focused on it because it's the right way to run the company, is the right way to have a sustainable long-term strategy for success. From an environmental perspective, we're focused on safeguarding the planet, we're focused on helping our customers achieve their sustainability goals. From a social perspective, we have a diverse and inclusive culture that brings out the best in our colleagues. We support our communities, we're active in our communities and volunteering or active in our communities through philanthropy. We're a good neighbor in the many places we work around the world. And we're focused on good governance, we have an awesome board. They hold a management team accountable. And we report our results with transparency so that we can hold ourselves accountable to great performance and that all of our shareholders and stakeholders can understand how we're performing. So let me turn to a year ago, we were together at the JP Morgan conference, I think virtually but together nonetheless. And these were the goals exactly the slide from the presentation that we set out for 2022. Revenue growth, successfully integrate PPD, enable the societal response to the pandemic, execute on our ESG priorities, drive margins and below the line performance and effectively deploy capital. Those are our goals. It was a great year, I'll hit some of the highlights. But really, when I look back at â22, one of our best years ever. Great product launches, right? When I think about the growth strategy, I wanted to highlight just we increased our investment in R&D during the pandemic, we generated significant revenue from the pandemic response and we were able to accelerate R&D and we're seeing the benefits right of it, whether it was in genetic analysis with our SeqStudio Flex, whether it was the products, we launched the next-gen sequencing, whether it was in our analytical instruments business, whether it's chromatography, or mass spectrometry just great launches, as well as in specialty diagnostics and our bioscience reagents, really strong year in 2022. We advance our customer value proposition, right, we've, you can see some headlines on the chart. One that I'm particularly proud of is with Moderna, right. They got to work with a number of players during the pandemic, they selected us for their pipeline of activities going forward, right, the activities of what's in their therapeutic pipeline, long standing relationship, leveraging our capabilities in Greenville, North Carolina, to do the sterile fill finish activities for them going forward is an example of customers recognizing the performance that they had seen from us but many other highlights with universities around the world collaborations to advance the value proposition that we have. The second expectation for â22 is to deliver on PPD, we did an incredible job I thank the team and all the colleagues for their relentless focus on customer success, achieving the integration goals and delivering great financial performance. The business is on track to deliver 14% core growth during the course of 2022, generate just under $7 billion of revenue, contribute over $2 to adjusted earnings per share, we were able to leverage those relationships that grow the business very strongly, create significant revenue synergies and the integration now is largely complete, we will achieve the $175 million of synergies by year three, $100 million from cost, $75 million or greater from the operating income from the revenue synergies. So really, really strong performance on the PPD acquisition. PPI Business system, while you think about what year that was like, in a way, for the society broadly and for the economy broadly, what a nightmare, right? You think about right supply chain, labor shortages, you think about inflation, all these things that were new. Right, and you didn't hear us talk about that at all during the earnings calls. The PPI Business system allowed us to effectively navigate that, because of our supply chain resiliency and our ability to adjust the challenges, the ability to drive incremental cost management in a more inflationary environment. And to be able to appropriately price and use the analytics and the customer relationships, we have to be able to navigate the inflationary environment very effectively, while increasing our customer legions with our customers. And then ESG, a very strong year, we increased our carbon reduction goals for this decade, to 50% reduction for Scope 1 and 2. And we're on track to achieve that. By next year, we will have 50% of our US energy based on renewable sources. And we continue also to invest significantly in our colleagues and our communities. From a colleague perspective, as you know, we were able to recognize the colleagues contribution to our success through additional payments. Because of that, during the pandemic, we also were able to do payments to help offset the impacts of inflation in terms of one-time payments. And it really is about creating a sustainable business model for the long term. So really a very strong year from an ESG perspective. So we give ourselves a green checkmark and but most importantly, all of that hard and smart work positions us with incredible momentum as we enter 2023. So our goals for the year, nothing here is going to surprise you. Right? We're going to go out and gain share. Right? That's our goal. That's how we measure success. Right? We're excited by it, we have momentum, we're going to continue to do that. We have a proven track record. We're going to leverage our PPI Business system to effectively navigate the dynamic macro environment. Right, our end markets have been good, the economy has many risks. We continue to see strength We'll navigate whether it's strong or different. We'll come through it with great results and well positioned for the future, we'll continue to effectively execute our capital deployment strategy, we will deliver the PPD synergies, we will successfully integrate the binding site, which we closed on January 3, I'll give you a highlight on that in a moment. And we'll continue to execute our M&A and return of capital strategy. We'll make progress on our ESG priorities as well. And we look forward throughout the year to report the momentum we have across all of those dimensions. We acquired the Binding Site. So we announced it in the beginning of the fourth quarter. We closed it on January 3, it brings a leading company in specialty diagnostics for the management of blood cancers and immune system disorders, it is a great company with incredible technology, that together we'll be able to continue to push the science and the medicine forward to be able to help those that are struggling with multiple myeloma, it's really is incredibly compelling. It'll contribute about $0.07 to our adjusted EPS this year. And we're excited that we're able to get started on the first business day of 2023 with this acquisition, and we'll update you on our progress during the course of the year. So I'll end where I started with the key takeaways of the day. â22 was special. We're even more excited about â23. We're incredibly well positioned industry leader serving attractive markets. We got a great financial track record and outlook. Our largest acquisition in the company's history is performing incredibly well. And â23 will be another special year for Thermo Fisher Scientific. Thank you for your support and we look forward to your questions. Perfect, thank you, Marc. [Operator Instructions] Maybe so just to kick it off here, you guys have had a really impressive year across the portfolio, but notably biopharma, PPD. And also instruments strength. So can you just walk us through how were you able to do that, despite all the macro noise? How much of it was market acceleration versus really true share gains from Thermo? Yes, I was start, Rachel, with the markets were good, right. The markets were definitely strong. And the industry benefited from that for sure. It's clear as you look at our results, and the long-term targets and even the 12% guidance that we gave in third quarter that we've set a higher bar in terms of what good looks like from our perspective or versus others. So I feel very good about that. When I look at biopharma, it was clear that the value proposition that we have really resonated, right in terms of you saw in our PPD results, you saw it across the portfolio, very strong growth. So that's the trusted partner status. It sounds good in words, but the reality is, it's driving very meaningful share gain for the company. The instrument's business really benefited from the acceleration in R&D in 2020 and 2021, as we had some of the financial benefit of COVID. We reinvested in the business; you saw very strong product launches. And you saw in a good market set of conditions in the instrument businesses for the industry, we were able to deliver very strong growth. Helpful. And then maybe just on the topic of biopharma, bioprocessing, destocking. So it's been a dynamic that many of your peers have called out, Thermo so far, hasn't really called out any of that softness that other players have been seeing from orders perspective. So can you just walk us through why have those issues not translated to Thermoâs portfolio? Is there something, is it your ability to have that services component? Or what makes Thermoâs portfolio more resilient when it comes to any of destocking concerns if there's called out? Yes, so I think when I look at bio production, right, I think it's always good to put things in context, right? It represents about 10% of our company's revenue. And if you look back over the last 15 years, it would be our fastest growing business on average, right? So very strong market. And in the good years, the challenging years, it typically is always in the same spot as being the fastest or one of the fastest growing businesses. When I look at last year, and looked at the performance of the business, and through the third quarter, and when I looked at it, if pharma and biotech, was growing for us about 15%, right, for that whole end market. The bio production business was growing meaningfully faster than that, right. So we delivered very strong performance. And I feel very good about that. When I see a lot of the industry commentary, I think a lot of it has to do with COVID. And what percent of a company's portfolio was COVID related? Right. And, on a relative basis within bio production, it wasn't a very large percentage of our portfolio. So I think a lot of the stocking dynamics is probably related to that. And I'm sure there are customers that may have more inventory that the work done, and they want, but we've continued to deliver very strong growth and feel good about the outlook. Great. Helpful. Maybe just sticking on that trend of pharma biotech during your Analyst Day in May, you noted that you expect this end market to grow above that 7% to 9%, long term growth that you've laid out. So can you just talk about your confidence in pharma and biotech today? Obviously, we had some of the biotech funding concerns earlier in the year and there's been, broad discussion on is that going to slow the pipeline the next few years. But then biosimilars hitting the pipeline, also this weight loss drugs, Alzheimer's. So walk us through those puts and takes. Do you feel like the biopharma and pharma end market has really slowed down or is it sped up in your opinion? Yes, the end market has been very strong. And while there's clearly lots of noise in the investment community, customer activity is very high. Right. So if I look at, authorizations in our clinical research business, if I look at bookings, if I look at the pipeline of activity, for the statement, think about what I'm hearing from customers in the meetings they have, customers are advancing their pipelines, that's what they're focused on. Right. So the end market continues to be very strong. We serve certainly a period in 2020-2021, where, if you had a good PowerPoint presentation, you could get funding right, and I'm not sure that's not necessarily the best environment, that has shaped -- shook out and but that's not having a material effect on the end market. Right. And when you think about some of the potential blockbusters, whether it's Alzheimer's or weight loss, so that bodes well also for what the industry's future is. Helpful. Maybe shifting gears here to China. So during 2Q, Thermo was able to grow over 20% in China despite some of the lockdowns. But also some of that outperformance was really due to COVID related instruments sales. So can you walk us through, first off, what are you're seeing in China right now? You've had a lot of peers speak about lockdowns and just the broad outbreaks that we've been seeing in recent weeks. So what's the environment there? And then can you compare and contrast that with your performance during 2Q? Is that replicable? Or it was a lot of that just one time related due to the COVID? Yes, so China, again, setting the context, China will continue to be one of the fastest, if not the fastest growing geography for the company in the long term, right? Just the demographics, the focus on a healthier China, those things will drive strong growth, right. And we feel good about that. There'll be geopolitical tensions, there'll be categories in this industry that you sell less or you don't sell because of it. But the fundamentals are going to be positive. When I think about last year, and you think about the first three quarters of the year, what you saw was controlled lockdowns, right in the country, and effectively the government's and local governments wanting the industry to continue to operate, right. So we were able to basically have business as usual in terms of activity. Our colleagues did a remarkable job, there was nothing usual about the environment, but many colleagues live their factories and all of those things to ensure that customers were served because those customers are doing such important things. When -- what you saw at the end of the year was very different, right, you saw widespread COVID infections, as opposed to lockdowns, you saw it. So the economy was disrupted. So I would expect that the China feels more of the impact in the super short term, but it also gets it behind the country. And therefore China, which has had a rough go from an economic standpoint, should actually rebound in terms of growth. So kind of a little bit more of a short-term pain for midterm better environment. That's my take on it. Helpful. Maybe just since we're talking in geography is Europe. Can you talk about what you're seeing there from a capital budget standpoint, just as the region has been facing, geopolitical issues, energy costs? What are you hearing from your customers in that market? Yes, so when I think about Europe, Europe actually has strong performance last year, right. And for the company, a lot of our business, the majority of it is related to pharmaceutical and biotech, which is less economically sensitive. And so that's done well, interestingly enough that the EU has really focused on academic and government spending, or they've actually really committed to science investments, lessons from the pandemic. So I actually think the academic environment should be reasonable in Europe going forward as well. So clearly, there's recession challenges. Clearly, there's inflation challenges, there is many challenges in Europe, but in our industry, actually end markets been reasonable. Helpful. While we're talking about capital budgets, I need to bring up instruments. So what have you been seeing from the instrument market? We've all been trying to discuss. Is this market acceleration? Or really what's happening in that instrument piece? And how sustainable is it? Analytical instruments where you guys grew 16% during 3Q, it's been robust throughout the entire year. So how are you thinking about instrument market heading into 2023 especially given some of these difficult comps? Yes. So one of the things that I always like to remind all of our shareholders is, we like difficult comps, right? Actually, that's what we're paid to create. Right? We're not creating, we're definitely not paid to create easy comparisons, right. So that's the -- we're used to that. When I think about the instrument business, you had good funding, good industry backdrop. And the science is good. The science is good in the pharmaceutical industry, the science is exciting in terms of where the academic community is pushing. And we as a company specifically benefited from our commercial initiatives. And from the acceleration of R&D investments, right, we had very strong year launches, which I highlighted some of them in the presentation. And that combination allowed us to deliver really great results in the instrument business. What's very important on the forward-looking side is orders were very strong, right? We built backlog during the year, right? So we enter the year with a strong order book. And that's a very encouraging sign. Helpful. So how should we think about pricing heading into next year? Obviously, you did roughly 300 basis points of pricing this year. That's almost three times of what you normally do on that 50 to 100 basis points average on an annual basis. So how do we think about pricing heading into 2023? Can you sustain these level of pricing increases? Or should we expect a more normalized level? Yes. So when I think about pricing, this is a great industry. And, every year you see positive price, and that might vary by 50 points, or 100 points. The way that we thought about last year's environment is to be able to have very clear discussions with our customers about inflation is real, we're going to drive incremental productivity to help offset as much as we can, we're going to pass through higher pricing. And our customers accepted that, right. And that's really about the discipline of our PPI Business system, we were able to really do that well, we had about three points in price last year. What our belief is for this year, is price will not revert back to normal, but it won't be as elevated as it was in 2022. It'll be somewhere in between those. Helpful. Maybe can you just help us walk through the puts and takes heading into 2023 from a top line perspective, you've talked through some of this instrument, capital budget standpoint, China being maybe a near term headwind here, but could recover in the back half. So net-net, how are you thinking about 2023 through that framework of 7% to 9%, on a top line perspective? Can't wait to February 1. And that will give you all of the details. So the things that we have talked about for the year, which I think are helpful is on COVID testing, we said that we were assuming an endemic level of testing volumes or about $400 million. And that the pull through on the reversion to the $400 million is around 40%. So that's the one factor. Foreign exchange, when we gave it the end of October was about $1 billion headwind about $0.75 per share. FX rates have moved more favorable to that, they're still headwind, but they're less of a headwind. So we'll get the most up to date number at the end of this month to reflect in our guidance. But that's more positive than it was back then. And we'll look at the orders and all of those things to determine the appropriate range. And given that the economy is been similar to what we've seen, then I would say that market conditions continue to be good. Perfect. Helpful. Maybe shifting over to PPDs. That was a highlight of your presentation today, to continue to crush everyone's expectations, you raise the guidance for that asset to be 14% organic this year. So can you just walk us through what is driving this outperformance for PPD? Especially when you've seen some of the peers in the CRO space just be much more volatile this year? Yes, great execution by the team, right, our colleagues literally spent a nanosecond saying, okay, ownership of the company change. Okay, we have customers to serve. And that was the psychological aspect of the integration. And the team has been awesome. Right? And the customers got it like right away, like in some of the previous acquisitions, the customers have deep trust in us. But it was a lot more about show me. This was like, yes, you've earned the right to expand in this area, and you bought a leading franchise, right. So the amount of new wins, whether it's small biotech or large biopharma, it's been very substantial. And that creates great momentum for the business, we were able to do that in a way where we were able to reduce our costs to the cost synergies that we outlined. So the profitability has been very strong and will generate over $2 per share of profitability last year and enter the year with great momentum. It's fantastic. We had set our expectation for high single digit growth for the business, which is very strong performance in the CRO industry. And our latest guidance was 14% growth for last year and very strong authorizations performance. So the business is performing at a really high level. So going off that, obviously, none of us really expect you to go to the CRO space, but it's done way better than anyone as expected. So can you talk about other parts of the value chain? Would you ever get into a preclinical CRO? Are there any more assets that you can kind of add around PPD to expand this work flow even more? Yes, so when I think about our CRO capabilities or clinical research capabilities, I think of them in a way very analogous to what we did with our pharma services capabilities, right, we bought a leading franchise, we invested in the business to improve its competitive position. And then we did select the bolt-on acquisitions to add capabilities. We weren't trying to add scale. So the way we would think about it is there's some interesting things going on in real world evidence and technology and those things and over time, you may see us add some capabilities around that. Or we may do it organically. That's how I would focus it but the business today in its -- constant way its constituted, is incredibly well positioned. Helpful. And then maybe just on the manufacturing side of things, can you just talk about what trends you're seeing? Also, you've had a few peers with some quality concerns on the fill and finished side of things. So what does that mean from an opportunity perspective for Thermo Fisher, especially given the trusted partner status and the quality that you focus on? Yes. So you have to do a good job every day. Right, you're producing essential medicines. And that is the priority, right? There are other things we want to do you have to do with the quality side, but you got to do that right every day, right? That's the priority we have. And when we saw some of the industry challenges that redoubled our focus to make sure that we're that no complacency seeps into the organization. So it's an important reminder, not that we needed it. But you always, you just got to do great work every day. And what we've seen is very strong interest from the large pharmaceutical companies to work with us and leverage our pharma services, manufacturing capability. What has changed over the last few years, and I certainly think the pandemic brought that out, as well as one of the large molecules that failed in the industry is that even the largest companies don't want to have to build 100% of their capacity in house, they want to be able to partner a certain percentage, they want to build redundancy into the manufacturing network. And when they do that, they're going to go to the highest quality trusted partners, and there's a couple of companies they're going to choose from and we're benefiting from that changing environment. Helpful. Maybe shifting over to diagnostics now, respiratory season has been much stronger than anyone really anticipated with flu coming much earlier than nearer than typical. So can you walk us through is that $400 million still the right starting point for 2023 from a corporate perspective? Or should we see upside to that number? And then also, as we think about the shift from â22 to â23, how are you thinking about a, the pooling testing going forward? And then overall impact emerges from that COVID roll off? Yes, so in terms of testing in the respiratory season, the way we thought about guidance around testing, we did that, I think, late 2020 is just picked a de-risk number, that, there's not 100% guarantee, but it was highly certain. And then we just flow through anything incremental to that. So I think the $400 million is a good assumption for 2023 on testing, I think the various nuances of pooling versus non pooling, I don't think it's materially going to affect that $400 million number. So I feel good about that. And the flow through on the margins on the degradation should be about 40%. And the $400 million should contribute at about the company average in terms of margins. Perfect. And then we have a question from online here. And just on business mix years ago, it was more balanced. And now pharma biotech is nearly two thirds of the business, which just makes sense, given the strength. But just given the weakness in some of the diagnostics names that we've seen in recent months, given the market, particularly in liquid biopsy, would there be any desire to focus M&A outside of biopharma? And potentially in some of these diagnostics areas to return to more of a balanced set of end markets? Yes, we do like all four of our end markets, right, and they're related. And we did obviously a meaningful acquisition in specialty diagnostics in the year actually closed on January 3, so we definitely look at that and we look at the different spaces. And if the right opportunity comes up, we certainly would go out and capitalize on those. Great. Helpful. And then, can you talk about Binding Site a little bit deeper? You mentioned it briefly in the presentation, how does that really fit within that specialty diagnostics portfolio? How did this deal come into fruition? And then, from an integration standpoint, what are the key milestones that we should be looking forward throughout the years you integrate the asset? Yes. So Rachel, it's a company that we've been following for a decade, right and have had dialogue with them on and off over that period of time, right. So it's not a new idea, or, it was more of a moment in time, where funding costs went up for private equity. So where that asset may have traded to another private equity firm competition, from that group of potential competitors kind of moved away. Because it's a UK pound denominated business, we were able to leverage the moment in time there on exchange rates also, to be able to buy the business. So we moved in very quickly. We had done diligence over a long period of time, so and we were able to then bring the transaction to fruition, and we're super excited about it , right. It is a standard of care for blood cancers. And what we're going to do is help push the science forward, right and it's a great team and together we're going to be able to bring out, new diagnostics that make a difference. We'll update you on the growth. It's a high growth business, accretive to company margins, and we're excited about what the contribution will be.
EarningCall_1321	Good morning, and welcome to Procter & Gamble's Quarter End Conference Call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures. Good morning. Joining me on the call today are Jon Moeller, Chairman of the Board, President and Chief Executive Officer; and John Chevalier, Senior Vice President, Investor Relations. We're going to keep our prepared remarks brief and then turn straight to your questions. Execution of our integrated strategies continued to yield good results in the October to December quarter, growing organic sales in nine of 10 categories, holding global aggregate market share, continued productivity savings, improving supply efficiency, sustained investment and superiority of our brands across all five vectors: product, package, communication, go-to-market and value, continue to pay benefits for our consumers and retail partners and in turn, for P&G shareholders. Progress against our plan fiscal year-to-date enables us to increase the guidance range for organic sales growth and maintain ranges for core EPS growth, free cash flow productivity and cash return to shareowners. Moving to the second quarter numbers. Organic sales grew 5%, pricing at a 10 points to sales growth and mix was up 1 point. Volume declined 6 points driven by a combination of market contraction, trade inventory reductions and portfolio reduction in Russia. Growth was broad-based across business units with each of our 10 product categories growing or holding organic sales. Personal Health Care grew high teens, Feminine Care, Fabric Care and Home Care were up high single digits. Hair Care was up mid-single digits. Baby Care, Family Care, Oral Care and Skin and Personal Care were each up low single digits. Grooming was in line with prior year. Focus markets grew 3% for the quarter, with the U.S. up 6%. Greater China organic sales were down 7% versus prior year, as the market continued to be impacted by COVID lockdowns and weaker consumer confidence. We continue to expect a slow recovery as consumer mobility increases over the coming quarters. Long term, we expect China to return to strong underlying growth rates. Enterprise markets were up 14% with each of the three regions up 10% or more. Global aggregate market share was in line with prior year with 27 of our top 50 category country combinations holding or growing share. In the U.S., all outlet value share was in line with prior year with seven of 10 categories holding or growing share. U.S. volume share is up 0.5 point versus the prior year quarter, delivering sequential improvement from quarter one. Recent innovations like Downy Rinse and Refresh in fabric enhancers and Dawn Powerwash in hand dishwashing are extending superiority advantages and driving value and volume share growth. Innovation also serves as a catalyst for pricing across our other brands and forms in their category segments. On the bottom line, core earnings per share were $1.59, down 4% versus prior year. On a currency-neutral basis, core EPS increased 5%. Core operating margin decreased 170 basis points, primarily due to gross margin pressure from commodities and foreign exchange. Currency-neutral core operating margin decreased 70 basis points. Productivity improvements were 110 basis points help to the quarter. Adjusted free cash flow productivity was 72%, primarily due to a temporary reduction in payables. We returned $4.2 billion of cash to shareowners, approximately $2.2 billion in dividends and $2 billion in share repurchase. In summary, considering the backdrop of a very challenging cost and operating environment, continued solid results across the top line, bottom line and cash for the first half of the fiscal year. Moving on to strategy. Our team continues to operate with excellence, executing the integrated strategies that have enabled strong results over the past four years, and that are the foundation for balanced growth and value creation. A portfolio of daily use products, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice. Ongoing commitment to and investment in irresistible superiority across the five vectors of product, package, brand communication, retail execution and value. As discussed during our Investor Day in November, we are renewing our superiority standards to reflect the dynamic nature of this strategy. Productivity improvement in all areas of our operations to fund investments in superiority offset cost and currency challenges, expand margins and deliver strong cash generation. An approach of constructive disruption, a willingness to change, adapt and create new trends and technologies that will shape our industry for the future, especially important in this volatile environment. Finally, an organization that is increasingly more empowered, agile and accountable with little overlap or redundancy, flowing to new demands, seamlessly reporting each other to deliver against our priorities around the world. Going forward, there are four areas we are driving to improve the execution of the integrated strategies, Supply Chain 3.0, digital acumen, environmental sustainability and employee value creation. These are not new or separate strategies. They are necessary elements in continuing to build superiority, reduce cost to enable investment and value creation and to further strengthen our organization. We expanded on each of these at our Investor Day in November. If you weren't able to attend or listen in remotely, I encourage you to review the materials on our IR events website. Our strategic choices on portfolio, superiority, productivity, constructive disruption and organization are interdependent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales and profit. We continue to believe that the best path forward to deliver sustainable top and bottom line growth is to double down on these integrated strategies starting with commitment to deliver irresistible superior propositions to consumers and retail partners. Now moving to guidance. We continue to expect more volatility in costs, currencies and consumer dynamics as we move through the second half of the fiscal year. However, we think the strategies we've chosen, the investments we've made and the focus on executional excellence have positioned us well to manage through this volatility over time. Raw and pack material costs inclusive of commodities and supplier inflation are still a significant headwind versus last fiscal year, though we have seen some modest sequential improvement. Based on current spot prices and latest contracts, we now estimate a $2.3 billion after-tax headwind in fiscal '23. Foreign exchange is also a significant year-on-year headwind. But like raw and pack materials, we've seen modest directional improvement. Based on current exchange rates, we now forecast a $1.2 billion after-tax impact for the fiscal year. Freight costs remain higher versus prior year, and we continue to expect the $200 million after-tax headwind in fiscal '23. Combined headwinds from these items are now estimated at approximately $3.7 billion after tax, $1.50 per share, a 26 percentage point headwind to EPS growth for the year. For perspective, recall that we began the year expecting approximately $1.33 of cost and FX headwinds. So despite some modest relief since last quarter, our current outlook is still $0.17 worse than our ingoing position. We are offsetting a portion of these cost headwinds with price increases and productivity savings. We are continuing to invest in irresistible superiority, and we are investing to improve our supply capacity, resilience and flexibility. As we've said before, we believe this is a bottom line rough patch to grow through with continued investment in the business and underlying strategies. As I noted at the outset, our solid first half results enable us to raise our organic sales outlook and confirm our guidance ranges on EPS and cash. We are increasing our guidance for organic sales growth from a range of 3% to 5% to a range of 4% to 5%. Within this company-wide range, we -- there are many puts and takes. As I mentioned, we expect to see some modest improvement in China, but European markets have softened as high inflation affects consumer spending. The U.S. remains relatively strong to date, and most enterprise markets remain resilient. On the bottom line, we're maintaining our outlook of core earnings per share growth in the range of in line to plus 4% versus prior year. The significant headwinds from input costs and foreign exchange keep our current expectations towards the lower end of this range. This guidance also reflects our intent to remain fully invested to drive our superiority strategy and increase investments as opportunities are available. We continue to forecast adjusted free cash flow productivity of 90%. We expect to pay around $9 billion of dividends and to repurchase $6 billion to $8 billion of common stock, combined a plan to return $15 billion to $17 billion of cash to shareowners this fiscal year. This outlook is based on current market growth rate estimates, commodity prices and foreign exchange rates. Significant additional currency weakness, commodity cost increases, geopolitical disruptions, major production stoppages or store closures are not anticipated within these guidance ranges. To conclude, we continue to face high year-over-year commodity and transportation cost inflation in the upstream supply chain and in our own operations, headwinds from foreign exchange, geopolitical issues, COVID disruptions impacting consumer confidence and historically high inflation impacting consumer budgets. These macroeconomic and market level consumer challenges we're facing are not unique to P&G, and we won't be immune to the impact. We attempt to be realistic about these impacts in our guidance and transparent in our commentary. As we've said before, we believe this is a rough patch to grow through, not a reason to reduce investment in the long-term health of the business. We're doubling down on the strategy that has been working well and is delivering strong results. We continue to step forward towards our opportunities, and we remain fully invested in our business. We are committed to driving productivity, improvements to fund growth investments, mitigate input cost challenges and to deliver balanced top and bottom line growth. So just a couple of questions on the full year guidance. Obviously, you didn't change the earnings guidance despite FX and commodities each being a little less negative than you originally thought. Is that more sort of making up for some of the sequential moves that we saw in Q1? Is it more you assuming reinvestment in the back half? Or is there something else in the back half? Just help us understand the reasoning there. And basically, the same question on top line. I don't want to get into a 10-part question, but there's a bunch of sort of back and forth here. You raised the low end of the full year org sales range, but Q2 decelerated a bit versus Q1, the back half in theory implies a deceleration and volumes were a little weaker in the quarter. So maybe just taking a step back, how do you feel about the business in terms of looking at retail takeaway in fiscal Q2 and thoughts on the back half of the year? All right. I'll give it a try, Dara. So on the total year forecast, I think with half one results in, we are on track, very well on track to deliver the year and the guidance ranges that we're communicating. When you look at our EPS delivery for the balance of the year, we are assuming, as we always do, current spot rates on commodities and foreign exchange. And given our desire to reinvest, we would not assume that every dollar that we see in commodities and foreign exchange immediately flows through to the bottom line. We see significant upside for us to continue to invest in superiority across all five vectors. And if that upside is available to us, we will do that in the short term and the midterm. We have -- also, as we said in the prepared remarks, we are still above ingoing assumptions. So $0.17 worse than we had at the time when we provided the initial guidance. So that leads us to continue to be pointed towards the lower end of the core EPS range. But as you say, with more help coming, that probably is increasing our confidence to deliver that range or hopefully slightly better. On the top line, again, when we look at the half one results, we feel very good about our standing here to deliver a higher -- the higher end of our initial top line guidance. So that's why we raised to 4% to 5% organic sales growth. And the fact that we see low volumes in the current quarter really is important to understand in more depth. So the 6% or 5.8% negative volume on the quarter, when you dissect it about half of that is not really consumption driven. So we have 1 point related to our portfolio choice in Russia, where we cut the portfolio by 50% to focus on essentials versus the full portfolio we were operating before. We have about 2 points related to temporary inventory reductions, which we saw in China with the market heavily impacted by COVID lockdowns and O&D. And especially on the offline side of the market, we see retailer inventories reduce reserve cash. We saw some inventory reduction in power Oral Care and Appliances in Europe. And we have seen in late December, very strong consumption in the U.S., where retail orders haven't quite kept up with that consumption. So if you strip that out, the actual consumption-related volume decline is about 3% on the quarter, which is in line with what we've seen in quarter one, which is in line with our expectation and elasticities that we would have expected, given the amount of pricing that is in the market. What is encouraging to us to raise the top line guidance is that our volume shares are holding globally, our value shares are holding globally. And when we look at the U.S., our biggest and most important markets, we actually see an acceleration of volume share by 50 basis points over the past three months and even 80 basis points over the past one month. Again, all of that gives us confidence to raise the top line guidance while we want to preserve the flexibility to continue to invest in superiority to drive more sustainable growth. And honestly, that's going to be our job here over the next few quarters, continue to drive household penetration to reinvigorate overall volume growth in the category. Dara, this is Jon. I would just add a couple of pieces of perspective at a macro level. The world seems to want everything to be better as do I. That's really not reality though. There's an incredible amount of uncertainty that remains. None of us, I think, globally really understand what the recovery rate in China is going to be as an example. And nobody really understands what the new policies and practices are going to mean in terms of consumer confidence in that context. You have the war in Eastern Europe. You have the highest inflation rates in 40 years. You have continued volatility in both the currency markets and the commodity markets. And importantly, that currency exposure for us is not a simple dollar exposure. There's a lot of cross rate exposures within that, which I realize makes it difficult to penetrate. But for example, the cross rate between the British pound and the euro has a significant impact on our bottom line. So all that put together, while I'm extremely happy with the progress the organization is making I'm extremely confident that the strategy that we have is the right one that's going to continue to serve us well. It's just not an easy time to be taking up guidance to the top range of possibility. You covered a lot in that answer. So I'm going to switch gears a little bit and maybe talk about capacity investments. I think one of the big drag to gross margin this quarter was this capacity investments. I know there have been some particular areas like Fem Care, Oral is a big focus. So if you could talk a little bit maybe about anything -- Fem Care, beyond Fem Care where you're putting incremental capacity in to what degree you expect that to remain a drag to profitability over the next couple of quarters? Or is it a multiple year dynamic? Because that would also speak to some pretty healthy expectations around longer-term volume trends. And I think that's particularly relevant also as we look a little bit beyond the next quarter or two. Yes, Lauren. We are -- the short-term effect that we are describing here is indeed Fem Care related. We see on the top end of the portfolio, very strong growth. We have seen very strong growth over the past two years. And we are just need to catch up in terms of overall capacity to demand ratio, both on the top end of our pads business, which is the Radiant or Infinity business. And as you well know, we're still not up to full demand levels on tampons, which we will install -- are in the process of installing new capacity in the back half. The investments across businesses to catch up to the very significant increase in terms of business size is underway. So we have capacity investments across most businesses. I wouldn't expect it to be a significant drag on the bottom line. In fact, the growth that we anticipate will more than outweigh the cost of investing in capacity, and that's the plan, obviously. So we have high confidence in our growth potential and that's really what's triggering these capacity investments. Just in the U.S., for example, the last quarter was the first quarter we've reached $40 billion in sales, up from $30 billion in sales just four years ago. So -- and again, our growth rate continues to look very positive. Volume shares are up and better than the market, our volumes are trending to positive numbers year-over-year. So we need to keep up with that. The net of it is all positive. Yes. Just one quick clarification there. The $40 billion that Andre is referring to is a annualized run rate number. So it was $10 billion in the quarter, which translates to $40 billion, [Indiscernible] 4, just so people don't get too carried away. Lauren, the point that you made and the point Andre made, there's a lot of upside here as we bring this capacity online. We indicated we're not meeting full demand in some of the protection segments. We have opportunity, as you said, across the board. So we're investing pretty significantly. I think as he said and you've said the bigger impact will be in our ability to accelerate the top line. It should not be a significant bottom line drag. I just -- I had one clarification and one question. The clarification, just I think in response to Dara's question, you cited 3-point hit the volume from basically Russia and shipping behind consumption. So if we add that back, organic sales would have been closer to an 8 versus a 5. I just want to make sure that, that was the way we should be thinking about it? Okay. And then as we look into the back half of the year, I guess, just if you could comment on two things. One is, has anything changed in terms of your view of the macro setup? So just as the operating environment the same, better or worse than what you were expecting? And then also, just would we expect maybe to rebuild some of the inventory, the under shipment that occurred in the second quarter or the first half, would we get any of that back in the second half? I would say the operating environment continues to be difficult, and we expect it to be difficult in the second half. While I think the U.S. is holding up very well. Enterprise markets are holding up very well. As John said earlier, recovery in China will be very hard to predict and probably not a straight line. We expect China to be difficult in the second half as it was in the first half. The European markets will continue to have to work through very high inflation numbers I think we've seen a little bit of help via a warmer winter season that has helped energy prices. But Europe is not through, I think, inflationary pressures and consumers are still to see many of the consequences in terms of the eating builds as we are entering February and March. That doesn't change anything we do. I think the best way for us to get through all of this is to continue to invest in the business and to continue to execute with excellence, which the organization is doing and which is driving these good results. Our ability to carefully balance pricing and productivity to offset the inflationary pressures is critical. Within pricing, careful execution and combining pricing with innovation and sufficient investment to drive superiority of our brands is critical. So that's why we want to preserve some level of flexibility to do those investments as we get through the second half. And just a little bit of color on the inventory piece, which has been accurately described a couple of times here. This is a fairly simple dynamic that's occurring. When there is supply volatility and uncertainty, it causes retailers to build higher inventory levels. When there's demand volatility, it does the same. So we've been through a period where inventories have been a little bit higher than normal in some of our retail channels. Supply assurance is increasing, demand volatility is decreasing. So those inventories are understandably being brought down. And so Bryan, I don't expect that there's a significant swing here quarter-to-quarter. I think this is the system normalizing itself. Yes. I think Jon is exactly right. Our on-shelf availability is getting better. We're up now to 95% on-shelf availability, up from 93%. We make sequential progress. So as the supply chain is stabilizing, I wouldn't expect immediate return of those days on hand. I think some of it will come back, but it will take a longer period of time. I wanted to go back just to the topic of reinvestment for a minute. It was a big topic last quarter, and I think you convinced us then and through your commentary at Investor Day that you were actually pretty fully invested in your prior outlook enabled by productivity. So as you think about the reinvestment that you're implying incrementally in the new outlook. I'm just -- is that -- should we interpret that as elective and opportunistic for kind of greater medium-term returns? Or is it more necessary in the near term given more concerning consumer competitive realists? Just how you'd frame that reinvestment would be helpful. And then if you could also just -- you talked about strength in the enterprise markets, your resilience. Just if there are any pockets of particular strength you could call out, that would be great. And any areas where you're more watchful, that would also be helpful? I would characterize our current media spending and support spending for our brands as sufficient, which we are paying a lot of attention with each of the businesses. John pays a lot of attention with each of the businesses to ensure that is the case. And sufficiency is defined as sufficient reach, sufficient frequency. It's not defined as dollars spent. So again, I want to come back to the fact that, yes, we view the current business as fully funded, sufficiently funded in order to continue growing our brands, their top-of-mind awareness and their equity. When we reinvest because there is a positive return in the short term, and we can further strengthen our brands or specific innovation that is out there. In the most recent quarter, for example, we've increased quarter-over-quarter, our total ad spend by $140 million. And that is a function of innovation timing. It's also a function of merchandising support and core timing advertising with that retailer support. So we -- you see us adhere to that principle of fully supporting our brands if there are opportunities to create short-term ROI, will continue to double down. And one other opportunity that we've talked about a little bit this morning, as additional supply comes online, there are often opportunities to increase support for the business to take advantage of that additional capacity. So we'll be looking for those, as Andre said, positive ROI opportunities to drive the business. You asked about enterprise markets. When you get down to a country level, of course, it's very variable. But 14% growth on the top line, all three regions growing at over 10%. So the strength is pretty broad there. Yes. And if you look at L.A., 21% growth, for example, so that will be the top end of the growth and fairly consistent here. So enterprise markets continue to deliver very strong results. Last point maybe on the media investment. The synergies we're able to create are a real and not insignificant. So if you look at Baby Care, for example, that business has grown 10% last year. They have completely shifted the way they run their media. They've increased reach by 20%, increased top-of-mind awareness by 26%. All of that while they saved 15% of their media spend. So the equation here really allows for sufficiency at lower cost. And that, again, just for clarity, is a U.S. dynamic that Andre has just described, the 10% growth. And I'll leave it there. Great. If memory serves me right, much of the pricing actions from last year will start to lap in the March quarter. So in your view, is the December quarter the one that has the biggest spread between price and volume? And could you talk about where your elasticity stand relative to historical view? And if -- and how price and volume tracked at the end of the quarter versus the minus 6 versus plus 10 average for the quarter. Hey, Olivia. The -- let me start with elasticities. The overall view has not changed. We continue to see more favorable elasticities than we would have expected on historical data pretty much everywhere, but Europe focused markets. And you can see with 10% pricing flowing through. And when you strip out the non-consumption-related volume effect, a 3% reduction in volume, that is a very benign elasticity that we're seeing in aggregate and allows us to hold volume share and value share as the pricing flows through. So we feel good about, again, the strategy, doing what we wanted to do and the execution being very diligent in each of the markets. Europe is the one place where elasticities have returned to what we would have expected more on historical data, and that is driven by the increased pressure on the consumer. We're also seeing a little bit of price lag here. So private label, for example, is pricing slower in Europe, and that increases temporarily the price gap versus private label. Nothing we didn't plan on, but that explains part of the higher elasticities. In terms of peak pricing, you're right, many of the large price increases get left this fiscal year. But that doesn't mean that we're not putting more pricing in the market. So for example, we have a number of price increases that go into effect in February. So there's two components here. One where lapping price increases were executed last year, but we're also still passing through some of the cost pressures via incremental pricing around the world. I just wanted to come back to Steve's question on investment priorities. If I take your fiscal year outlook, you're clearly implying better margins in the back half of the year. But if I just walk through a gross margin bridge of what perhaps makes sense, it does seem to imply you'll need to see leverage on the SG&A line in the back half of the year to drive margin expansion potentially notable SG&A leverage despite sales decelerating. So again, if you could just help me frame overall SG&A and whether you think you'll be ending the year with appropriate levels of spending? Or if you expect investments to maybe grow progressively over the next 12 to 18 months as, for example, your capacity continues to improve, as Jon just said. I wouldn't expect a structural shift in SG&A spend. I think what you're seeing in the run rate is about what we expect to need in order to be sufficiently funded and the gross margin -- and most of the margin expansion will come from gross margin expansion as we ramp up productivity, pricing continues to flow through and that builds gross margin period-over-period. So that will be the bigger contributor. And we're not counting on any major reductions in SG&A beyond what productivity allows us to deliver again, at current sufficiency levels, and we are very carefully looking at what can we reinvest actually and still deliver within the range that we want to deliver. Good morning. Your commentary, I guess, just now on taking further pricing, it's obviously appropriate given we have a series of costs that are still coming through. But can you maybe just talk a little bit about the response from retailers and is that changing in any way? Not that long ago, it seemed across all of CPG, it was maybe easier to get some pricing through. And I'm just curious if that's changing in any way. Yes, Kaumil. The environment continues to be constructive. We don't see much change in retailer conversations. It's focused on how do we best play the role that we need to play as a category leader in many of the markets by combining pricing with innovation, executing pricing in a way that consumers can appropriately choose from different price points, different value tiers. And how that plays out at retail shelf, both virtual and physical shelves in the best possible way, so we can help them grow their category grow foot traffic, et cetera. Those are really the majority of the conversations I would characterize this quarter or next quarter as any different than the previous quarters, where really it's about how do we do this, when is the best time to execute. It's not should we or must we take pricing. I think everybody still understands that we are recovering costs after we recover as much as we can with productivity. And as Andre said, the conversation, much more constructive for all concerned when we focus on improving consumer value holistically defined. And that's exactly what Andre was talking about in terms of the combination of innovation and pricing. And when that's the conversation, it takes on a very different nature than a more transactional discussion. Also don't forget, our retail partners are the owners of the private label brands that we compete against. They're facing many of the same dynamics in terms of their cost inputs that we are. So just to reconfirm what Andre said, it's been a generally constructive discussion. I don't see anything in my interactions with our retail partners that causes an inflection in that discussion in the near term. Just first a quick follow-up and then my main question. So one, in terms of follow-up, is the volume headwind in this quarter from Russia and sort of the one-offs? Is that just a quarter issue? Or is that going to linger on the following quarters? And then my primary focus is the market share data that you gave us in terms of the U.S., I think, was very impressive, particularly given some of the lingering supply issues that are going to be resolved soon. So can we expect perhaps accelerating improvement in market share as the year goes the supply comes on and maybe give us a little bit more sense of what the drivers were for the encouraging market share momentum in the U.S.? Yes. Robert, on the volume side, I think the Russia effect will be with us for one more quarter before we annualize. And on the inventory side, as we said before, we believe this was a onetime adjustment. I wouldn't expect this to come back immediately. I wouldn't expect a significant further reduction in inventory. When we look at the U.S., for example, where we have good data in terms of retailer days on hand, we believe we are at pre-COVID levels, which is about the level that we've proven to operate reliably with our retail partners. So I would expect that to be a one-timer with potentially some help coming in back over the next few quarters. The volume share dynamic in the U.S. is driven largely by Fabric Care coming back into supply. We have talked in the fourth quarter of last fiscal year and also in the first quarter of this fiscal year, that we had some supply constraints on our Fabric Care business that we had to address. We also reinstated merchandising support in the U.S. We've reinstated media support and that is playing out in volume share accelerating on the Fabric Care business. The other dynamic is family care sequentially improving from a volume share standpoint where we have seen a very high base when private label was in less supply and didn't have merchandising in the July to December period of last calendar year. That is being annualized. So those two will continue, hopefully, to be a tailwind to our share position in the U.S. But as John said, it's hard to predict and look around the corner here, there are many, many variables that we don't control, but those two businesses explain the strength and hopefully, should have more upside going forward. And just one attempt at changing maybe a little bit some of the semantics from supply issue to supply opportunity. Our supply organization has done a terrific job. If you look at the last 15 quarters or so, our organic sales -- the amount of organic sales end of period to beginning of the period is up 80%, 90%, which is a really good thing. And they've done a tremendous job of trying to keep pace with that. And as we talked about, there's just additional upside to fully meet and satisfy that demand. Thanks, operator, and good morning, everyone. I hope you're doing well. So I wanted to ask about the change in the commodity outlook, which for the first time in quite some time, the outlook has actually moved lower sequentially, understanding that there's a lot of moving pieces, but can you just help us understand what's driving that? Is it broad-based? Or are there particular inputs where you're starting to see inflation moderate more substantially? Peter, it really varies period-over-period, month-over-month. We've seen pulp was holding relatively steady. It has come down a little bit now on different grades. Propylene, polyethylene has come down a little bit. But it's really broad based and it's changing month over month, week or week. In general, what we're seeing is -- as you would have known, the supply situation is easing a little bit, and that's obviously helping the market dynamic, both on commodities as well as on transportation and warehousing. There's no guarantee that, that will continue. We don't know what China reopening will do to the commodity market. That's a significant variable that nobody really understands at this point, I would argue. So we're watching this closely, and we continue to forecast based on what we know today, which is spot prices. I think the other dynamic we can't forget is that our suppliers are still working through their input cost inflation, their labor inflation, their energy cost inflation. So there are two opposing forces here. One is the desire of our suppliers as contracts roll over to pass that through to us. And the other one is input costs easing in the short term. So we have to take both into account when we think about our ability to pass through cost helps. I have a clarification and a question. Andre, in your response about the destocking that should be over in the next quarter, is that also applicable for China? And how are you seeing China consumption rebounding as you exit the port and obviously, with the reopening? And if I can squeeze up your question, can you comment on how you're preparing your portfolio in Europe for potential recession? As you called out, things may -- and the bills -- energy bills may be kicking up now as we enter your third quarter fiscal. Hey, Andrea. Yes, the China destocking, I think, will largely depend on the China reopening and that's very hard to predict. I think if consumer mobility returns to normal levels quickly, that will be a tailwind for every retailer with real estate on the ground. And that's really the major issue that off-line retail is facing. So if traffic returns to normal levels, that will be a big help, and obviously, no further destocking required. I'll leave it at that because I have no good way of knowing not as anybody else. We expect consumption in China to reaccelerate to mid-single digits over what period is hard to predict. But in the midterm, that's where we see our China market and it continues to be an important investment market for us. We have a very capable organization on the ground, and they are spending their days and nights to get ready for that. Fine-tune our innovation, ensure we have the best possible marketing programs, both digitally and with our retail partners on the ground. I think on the European portfolio, we have prepared, like everywhere else, our portfolio for a recession. And it comes back to the basic strategies on the categories we play in. We are in nondiscretionary categories to a large degree that people won't deselect easily. They continue to wash their laundry, they continue to wash their hair. So that's number one for recession proving our business model. Step number two is investment in irresistible superiority. When consumers see the benefit our brands can deliver, the value will be clear to them and our ability to communicate that value clearly is critical, and that's why we continue to invest in both the performance as well as the communication. And then the last part is just accessibility of the portfolio, both in terms of brand tiering, so having premium brands but also value brands and price points across different channels, be that discounters or other retailers. So I think the portfolio proofing has been done, and I think it's showing results in a very difficult environment that we think speak to the strength of the strategy. We've covered a lot of ground. I want to try to connect the dots here on the 8% organic sales growth if we exclude the items that Andre called out, with comments in the press release around market contraction. So in the release, you mentioned market contractions in Hair Care, Grooming, Fabric Care, Baby Care, Family Care, across much of the portfolio. But as Andre talked about, the org sales in the quarter was closer to 8%. And if we look at the comp, it was actually an acceleration on a two-year stack basis. So what I really want to do is just -- I know we've covered a lot of ground on this call, just to make sure I'm kind of clear on how you're seeing category growth, how you're seeing elasticities and consumer behavior coming out of the quarter. Because it seems to me that the quarter is actually on a like-for-like basis, possibly even better than The Street had modeled. And setting aside China, you sound pretty constructive on demand dynamics. You sound pretty good on elasticity sort of relatively unchanged. And I just want to make sure that's the messaging for investors. Yes. And I would characterize, obviously, the Russia element will be with us, and that's real. I think the market growth has been around 5% to 6% with a negative volume component and a very positive price component. I would expect that in the midterm to moderate to 3% to 4% overall growth and still have a negative volume component with offset by strong pricing that we continue to flow through the market. If you look at overall market size over the past three months, that has been the case, and that's where we expect it to be going forward. And that's pretty much in line with how we model the balance of the balance of the fiscal year. Our job here is to be ahead of that. And that's why we're investing that we will continue to double down on the priority investments everywhere. Jon, I don't know if you have anything to add. Yes. It's a repeat, but it's worth repeating. It's a bit of a rain drop on the fray, Kevin. But I just want to highlight so that we don't get ahead of ourselves, how uncertain, for example, China is. Andre said it several times, we don't have visibility. We have, within our own operations, offices, innovation centers, plants, our current estimate of the infection rate is up to 80%. And we're sitting here in the week before Chinese New Year when all the traveling occurs. At the same time, we have a government and a populist who desperately wants things to get better. It's just very hard to say, hey, we should assume that as we go forward, China comes back like a tire. Certainly, we all hope that's true. I hope for China, that's true. But just you really need to understand how uncertain things are. I wanted to move from that rain drop question to a bit more funny question and just ask about whether the resilience of the U.S. consumer has surprised you all sort of what's embedded in guidance from here? I know what you said, Andre, about the category, but that was, I think, on a global basis. So how do you generally think about U.S. trends from here? And within the portfolio, have there been any surprises relative to historical expectations, meaning things that have performed better than you would have expected? And kind of what are you watching from here from a portfolio standpoint, all within the context of the U.S. business? Mark, I wouldn't expect the U.S. to fundamentally change. If you look back over the past six months, private label shares in the U.S. have been relatively steady. We've seen 20 basis points to 30 basis points of increase in private label share, which is a metric we're watching closely. But if you look at sequential share, absolute shares of private label, it continues to hover around 16%, past three, six and even 12 months. So there hasn't been a significant shift in consumer behavior in terms of trade down. I think the way that our pricing was executed with great support in innovation and great support in terms of marketing spend has helped. Our strategy isn't shifting. I don't see the market shifting significantly. All of that with a caveat that who knows what the next six months are going to bring. But if past behavior over the last six months, nine months is any indication, I think the consumer is relatively steady in the U.S., which gives us great confidence. It's our biggest market. We do well, expanding volume share, as I said, and hopefully have a bit more upside here as Family Care and Fabric Care continue to gain momentum. And this continues to be a market, the U.S. market that is very responsive in a positive way to innovation that improves performance, both for the product and the package. And we have many examples, Dawn Powerwash as an example, introduced at a premium price. The brand has grown at 50% since that introduction and Dawn has driven 90% of category growth in that situation. Down Powerwash, again, a premium priced item that was introduced largely during difficult economic times as a standalone brand would be the third largest brand of the category. So I just used that as an example for the continued positive responsiveness of U.S. consumers to innovation, and we've got a lot of innovation coming. Great. I wanted to come back, please, to the brand spend dynamic. And Andre, I think the example you gave to Baby Care is quite powerful. If you can increase so meaningfully while simultaneously cutting dollar spend. I guess that's probably driven by digital and better targeting there versus traditional media. My question is, do you think these benefits are sustainable or over the longer term, are we not likely to see some of these digital ROIs come back down as digital ad pricing goes up and some of your competitors start to catch up with your capabilities there? I believe that we believe that we're just at the beginning actually of our productivity curve. And it's driven by two things. I think Baby Care was one of the -- U.S. Baby Care was one of the more aggressive ones and one of the more obvious ones when you think about the consumer target, it's very narrow, right? You're looking for households with babies and diapering age. So going from mass TV where you have a lot of ways to hitting that target, which is about 3% to 4% of the population, provided the most obvious opportunity to drive synergies here. But we've learned also in other businesses, the opposite works. When you think about Fabric Care, everybody is doing laundry. So you've got a very wide target that you need to reach. And the Fabric Care team in the U.S. has brought their media planning and buying in-house, developing proprietary algorithms to better place ads during the TV programming, for example, and that in and of itself has allowed $65 million of savings in one year, while increasing frequency. So both models work and both models are still not everywhere. So we've got two examples in the U.S. There are many categories in the U.S. that are still building their own approach to drive these synergies and there's the whole world outside of the U.S., which is still building on the capabilities that we are developing. So we see this as a area of continued investment in terms of our own capabilities with a great ability to drive productivity for years to come. Apologies for carrying on the inventories question. But Jon, you mentioned you were looking at a normalization. But in the Investor Day, you showed obviously a significant improvement in your supply chain efficiency. Do you think you're in the position over the next couple of years where U.S. retailers could operate at even lower inventories and improving your relationship with them is working capital part of the conversation that you have with them in sort of helping form share of shelf. And then thank you for the color on the international business. Could you share with how fast your Indian business grew in the period because it looks like the India consumer there is recovering and whether you're seeing a sustained double-digit recovery there as well? Thanks for the question. I do think that there's a significant opportunity for the entire supply system to operate at lower levels of inventory. And one of the enablers there in addition to supply dependability is increasingly looking at the supply chain across we historically looked at it as our supply chain and our customer supply chain as we're beginning to have conversations about this was one supply chain, would we do things differently? And the answer is almost yes. And the opportunities that are resident within that discussion are significant. So I do think we will continue to have that conversation and try to make progress in a way that benefits both ourselves and our retail partners and ultimately the consumer with higher on-shelf availability. And then go ahead, Andre, you want to talk about India? Yes, sure. The India business continues to accelerate. We saw Q1 growing 12% organic sales; Q2, 13%. And India is a good example of those capabilities that we were just talking about actually rolling out and being very effective. So the digital infrastructure we've been able -- the team has been able to create in India is quite impressive and that's contributing to our ability to drive disproportionate growth there, both from a sales capability standpoint and from a media capability standpoint. Congrats on that sales milestone and the market share progression this quarter. I've got -- I'm going to cheat and like many, jam a few questions into one. So first, what geographies are you taking the majority of the incremental pricing in? Second, you're signaling more reinvestment on the com as supply improves, what shape do you expect it to take, i.e., product, advertising promo, et cetera? And lastly, I don't know if I should read much into this, but you've made substantially more references to volume share rather than value share this quarter. Does this reflect a shift in prioritization and focus for you? Thanks, Jason. On the geographies, I would not see any disproportionate tilt towards one or the other. If you look at the cost structure, the implications, they are pretty similar across the different regions. Timing might shift. Category is, obviously, shifting. Yes. There's one exception to that, I agree totally as it relates to pricing related to commodities. But there are some markets, of course, where currencies are devaluating massively. Correct. So if you look at the enterprise market, thatâs where we generally take higher pricing in line with overall inflation in the market. So to Jon's point, that will be -- that will continue to be the case. There are other markets where pricing is notoriously more difficult to think about Japan, think about the G7 in general. So that's where you see less pricing impact. But that's not different from what we would have seen over the past few quarters. Look, our desire to reinvest is across all vectors of superiority. So it is product package innovation. It's in communication, it's in go-to-market execution. So all of those are relevant. They differ by region, by category, obviously. The reason why we're focusing more on volume share is we believe that it is our job and opportunity to continue to drive penetration of our brands. We have a huge runway when you think about our ability to continue to drive consumption and even the most developed categories. So we want to focus our team on driving -- continue to drive household penetration, continue to create jobs to be done, continue to drive consumption opportunities. A world in which all of the market growth is driven by pricing is obviously not sustainable. And so both elements need to come back in balance, and that's why you see us talk both elements here between value and volume share. Just for clarity on this point, though, I am not interested in volume share at the expense of value share. Volume share is a way to deliver value share. So at least we not be clear, it's both that are important, not a shift in emphasis between one or the other. The other reason that I wanted to make sure that we talked a little bit about volume is that it's a natural concern when we're taking this pricing as to how your volume is holding up and how -- particularly how is your volume share holding up. So we just wanted to be transparent on how we're seeing it, which is very attractive so far. I want to ask a simple question that's really complicated. When you look -- when you talk -- at the time you gave us the initial commodity guidance for the fiscal year '23, rough numbers U.S.-based spot costs for freight and energy composite for your company, you're down something like 9% since then. And you have lowered your expectation for commodity inflation. Simple question is, can you -- are your experience costs for this quarter below their peak? Like I see the year-over-year was 380 basis points of cost push headwind to gross margin versus 510 last quarter. So there's a -- can you confirm there's been a sequential step down? And secondly, could you -- in what quarter would we expect costs to no longer be a headwind like be all in the base? Would that be the June quarter, the September quarter? Or is that just impossible to say? I know there's a lot to unpack with cross-currency exposure and things that I don't see in U.S.-based spot. But it does seem like your costs are down from their peak. Well, on the second question, I don't know. It's just a very simple answer. On the first question, yes, we see sequential progress on the cost side. But as I mentioned earlier, it's important to understand the two opposing forces. We don't buy commodities. We buy pack material. We buy super absorbers. We buy films, et cetera. And our suppliers are still in the process of passing through their own inflation. So while their input costs via commodity helps is certainly easing, they also haven't fully caught up to their cost structure hits that they have experienced over the past few quarters. So we'll continue to work with them to find the right solution here. But when exactly that balance is going to occur, hard to predict. Yes. And just one additional piece of detail on that. It's not that they're slow. It's that we have contracts that cover, as Andre said earlier, cover a period of time. And in many cases, prices are fixed for a period of time. And then it's time to enter into a new contract. And that's what's going to continue to happen for the foreseeable future, not forever. But that's why it's difficult to look at, and I know you acknowledge this, look at U.S. spot prices as the holistic indicator of the direction of things such as not -- that's not sufficient. Okay. I want to thank you for joining us today, and thank you for your patience and unpacking all of this. John is going to be -- John, Andre and the team will be available the rest of the day to continue helping with that. My own unpack, I am very, very proud and thankful for the efforts of our team to grow 5% organically to do it across all categories to continue to hold share in the U.S. build volume share, to be able to increase our sales guidance all against the backdrop of significant deceleration of the market in China, the situation in Eastern Europe, the highest inflation rates in 40 years. This team has done an incredible job of executing our integrated strategy to continue momentum through all of that; and similarly, on the bottom line. We talked about the impact on the quarter of commodities, foreign exchange and transportation. If you look at the last fiscal year, plus our forecast for the current year, you're talking about 50% of profit being eliminated as a result of headwinds in those three areas. We grew earnings per share last year. The team did. We're forecasting to grow earnings per share modestly this year. It speaks to two things, I think, that are very, very important. One is the quality of the team; and two, is the relevance, the continued relevance of the strategy. So for what it's worth, that's my unpack. And if you want to call on and discuss that further, I'm happy to do so. Thanks for your time.
EarningCall_1322	Good afternoon everyone and welcome to Tesla's Fourth Quarter 2022 Q&A Webcast. My name is Martin Viecha, VP of Investor Relations and I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives. Our Q4 results were announced at about 3:00 P.M. Central Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the Q&A session portion of todayâs call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. Thank you, Martin. So 2022 -- just going through the 2022 recap. It was a fantastic year for Tesla. It was our best year ever on every level. Team did an amazing job. It's an honor, of course, to work with such an incredibly talented group of people. So, in 2022, we delivered over 1.3 million cars and achieved a 17% operating margin, the highest among any volume carmaker, I think maybe among any carmaker. While doing so, we generated $12.5 billion in net income and $7.5 billion in free cash flow. Importantly, the Tesla team achieved these records, despite the fact that 2022 was an incredibly challenging year due to forced shutdowns, very high interest rates, and many delivery challenges. So, it's worth noting that all these records were in the phase of massive difficulties. [Indiscernible] credit to the team for achieving that. The most common question we've been getting from investors is about demand. Thus far -- so I want to put that concern to rest. Thus far in January, we've seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production. So itâs hard to say that will continue twice the rate of production, but the orders are high. And we've actually raised the Model Y price a little bit in response to that. So, we donât -- we think demand will be good despite probably a contraction in the automotive market as a whole. So, basically, price really matters. I think there's just a vast number of people that wanted to buy a Tesla car, but can't afford it. And so these price changes really make a difference for the average consumer. Itâs sometimes for those -- for people who are well -- who have a lot of money, they sort of forget about how important affordability is. And it's always been our goal at Tesla to make cars that are affordable to as many people as possible, so I'm glad that we're able to do so. And yes, so I think it's a good thing, all things considered. We're also making very good progress on cost control and we're seeing the cost production in Berlin and Austin drop commensurate with the growth in production, as you'd expect, so yeah. With respect to Autopilot, as of now, we deployed full-self driving beta for city streets to roughly 400,000 customers in North America. This is a huge milestone for autonomy as FSD Beta is the only way any consumer can actually test the latest AI-powered autonomy. And we're currently at about 100 million miles of FSD outside of highways. And our published data shows that improvement in safety system -- stuttering here, safety statistics, it's very clear. So we would not have released the FSD Beta if the safety statistics were not excellent. Regarding batteries, production rate of 4680 cells reached 1,000 cars a week at the end of last year, and we're increasing capacity for 4680 cells by another 100 gigawatt-hours as announced at Giga Nevada yesterday. Our long-term goal is to get to well in excess of 1,000 gigawatt-hours of cells produced internally and continue to use the self cell providers. So to be clear, we will continue to use other cell providers. Just that the demand for lithium ion batteries is quasi-infinite and will be for quite some time. So we feel we can scale a lot faster using both suppliers and internally produced cells. And we've got an amazing plan for making the 4680 cell low-cost and high energy density. So, energy storage also saw record growth and that is continuing to accelerate. That's always worth remembering that the three pillars of a sustainable energy future are obviously electric vehicles, solar and wind, and then the third key item is stationary storage to store the energy from solar and wind because obviously, the sun doesn't shine all the time and the wind doesn't blow all the time. So you have those three things, you can convert all of it to a fully sustainable situation many times over, actually. So, I would like to just make it clear that there is a path to a fully sustainable future for humanity, and our goal at Tesla is to accelerate progress on that path as much as humanly possible. So yeah, so we were obviously ramping up Megapack production. And we expect it to grow at a rate quite a bit faster than our - the goal output. So in conclusion, we are taking a view that we want to keep making and selling as many cars as we can. We believe we can keep pushing for strong volume growth while retaining the industry's best operating margins. As we mentioned many times before, we want to be the best manufacturer. But really, manufacturing technology will be our most important long-term strength. And we'll talk more about our upcoming plans at the March 1st Investor Day. And lastly, I want to once again thank all of our employees for delivering another record-breaking year. Congratulations, guys. Yes. Thanks, Martin. So as Elon mentioned, 2022 was a terrific year for Tesla. I also want to congratulate the Tesla team and also say thank you to our suppliers for your support during quite a volatile year. On a full year basis: revenue increased over 50%, operating income doubled, free cash flows increased over 50%, and our margins remained industry-leading. Additionally, we continued to make progress on overhead efficiencies as non-GAAP OpEx as a percentage of revenue improved further. For Q4 specifically, sequential and annual margin was impacted by ASP reductions, as we are managing through COVID impacts in China, uncertainty around the consumer tax credit in the U.S., and a rising interest rate environment. Note that in 2022, rising interest rates alone had effectively increased the price of our cars in the U.S. by nearly 10%. Additionally, COGS per unit has increased on a year-over-year basis, driven primarily by three factors. First is raw materials and inflation led by lithium prices and discussed at length in previous calls. Second, we are working through the early ramp of inefficiencies of our Austin and Berlin and in-house cell production factories. Third, our vehicle mix over the last year has moved more heavily towards Model Y, which carries a slight cost premium to Model 3. Partially offsetting these impacts, we've continued to execute on Tesla controllable cost reductions, in line with the progress we've made in prior years. These improvements include our continued work to gradually move towards a regionally balanced build of vehicles. The Energy business had its strongest year yet across all metrics, led by steady improvement in both retail and commercial storage. While much work remains to grow this business and improve costs, we believe we are on a good trajectory. As we look towards 2023, we are moving forward aggressively leveraging our strength and cost. There are three key points I wanted to make here. First, on demand, as Elon mentioned, customer interest in our products remains high. Second, on cost reduction, we're holding steady on our plans to rapidly increase volume, while improving overhead efficiency, which is the most effective method to retain strength in our operating margins. In particular, we're accelerating improvements in our new factories in Austin, Berlin and in-house cells, where efficiencies are the highest. But we are attacking every other area of cost and unwinding cost increases created for multiple years of COVID-related instability. This includes logistics, expedites, accumulation of material buffers, part premiums, productivity and overheads as an example. As the world transitions from an inflationary to deflationary environment, we expect a strong partnership with our suppliers on this journey as well. In that, we've priced our products with a view towards a longer-term cost structure. Thus, there will be an impact on operating margin in the near term. However, we believe our margins will remain healthy and industry-leading over the course of the year. Third, we are continuing to ensure funding is prioritized for our long-term road map. This includes expanding in-house cell production, bringing Cybertruck to market, development of our next-generation vehicle platform, expansion of our manufacturing footprint and growth of the energy business. We're looking forward to discussing these plans in more detail on our Investor Day in a month. Thank you. Thank you very much, Zach. Let's now go to investor questions. The first question is, some analysts are claiming that Tesla orders, net of cancellations, came in at a rate less than half of production in the fourth quarter. This has raised demand concerns. Can you elaborate on order trends so far this year and how they compare to current production rates? I thinkâ¦ Thank you. The second question is in a similar vein. What has the initial reaction been to global price reductions in early 1Q 2023, specifically in terms of order intake levels? We've answered that one as well. So let's go to the next one. The next investor question is, will Tesla be able to take full advantage of advanced manufacturing production credits for battery cells packs? So $3,700 per long-range Model 3 and Model Y, it's $45 a kilowatt-hour for autos and energy products and how much does Tesla expect to earn in the coming year from these credits? I'll say a little bit about it, then I think Zach will add some. Long term, we expect these -- the value of these credits to be very significant. You can do the math if we were to get anyone your 1,000 gigawatt-hours a year of production or even a few hundred gigawatt-hours, it's very significant. So -- but the credits do rely upon domestic manufacturing. And in the case of Panasonic domestic manufacturing, we're splitting the value of the credits. So it -- the value of credits this year will not be gigantic, but I think it could be gigantic -- we think it probably will be very significant in the future. Yes, just to add and input some boundaries on what we're expecting in terms of impact to Tesla for this year. So different products, we think, will get different amounts of credit. The regulations here are still influx and there continues to be updates so this is just our best understanding at the moment. But we think on the order of $150 million to $250 million per quarter this year and growing over the course of the year as our volumes grow. And part of the work we're doing here, which is part of what this incentive package is trying to incentivize is, as Elon mentioned, to move more manufacturing onshore in the United States, which is Tesla's plans anyways. And so I think we're pretty well positioned over the coming years to take advantage of this. But then also part of what the goal of this incentive package is, is to improve adoption from our customers. And so we also want to use these incentives to improve affordability as we think about what the price points are in our products going forward. And so as we're thinking about our pricing changes in the US, a couple of weeks ago that we announced, we were looking at what the credit benefit to Tesla would be to make sure that customers are able to receive the benefit not only from this that were received to some extent but also on the consumer-facing side, which is currently $7,500 per car of tax credit, assuming that -- subject to the MSRP caps and the income caps. So we want to use this to accelerate sustainable energy, which is our mission and also the goal of this bill. Thank you very much. The next question from investors is, after recent price cuts, analyst released expectations that Tesla automotive gross margin, excluding leasing and credits, will drop below 20% and average selling price around $47,000 across all models. Where do you see average selling price and gross margins after the price cuts? Yeah, I'll jump in on this. So there is certainly a lot of uncertainty about how the year will unfold, but I'll share what's in our current forecast for a moment. So based upon these metrics here, we believe that we'll be above both of the metrics that are stated in the question, so 20% automotive gross margin, excluding leases and rent credits and then $47,000 ASP across all models. And so two other comments I want to make on this. Just tactically on sequential ASP changes from Q4 to Q1. And just as a reminder, the ASP reduction is not as large as the reduction in configurator prices. As in Q4, we had backlog customers that we're delivering cars to at a lower price book, given that backlogs had been so long for so much of 2022. But then also, there are various programs in place that we used in Q4 that lowered ASPs. The second comment I wanted to make here is that as a management team here, we're most focused on what our operating margin is. And so as other areas of the business become more important, particularly the energy business, which is growing faster than the vehicle business and as we're heavily focused on operating leverage here, improving efficiency of our overheads, we think the right metric for us to be focused on is operating margin. And so I wanted to make sure that I shared that with the investor community as well, because that is what we're primarily managing to now. Yes. Something that I think some of these smart retail investors understand, but I think a lot of others maybe don't is that the -- every time we sell a car, it has the ability, just from uploading software to have full self-driving enabled and full self-driving is obviously getting better very rapidly. So that's actually a tremendous upside potential because all of those cars, with a few exceptions -- I mean, only a small percentage of cars don't have Hardware 3. So that means that there's millions of cars were full self-driving can be sold at essentially 100% gross margin. And the value of it grows as the autonomous capability grows. And then when it becomes fully autonomous, that is a value increase in the fleet. That might be the biggest asset value increase of anything in history. Yeah. Thank you. Let's go to the next investor question. Since Elon started political influencing, polls from Morning Consult and YouGov showâ¦ â¦show Tesla brand favorability declining in 2022 and division among partisan lines. Such brand damage can impact demand. Does Tesla track favorability? And how will any brand image be mitigated? Well, let me check my Twitter account. Okay, so I've got 127 million followers. It continues to grow very rapidly. That suggests that I'm reasonably popular. It might not be popular the way with some people, but for the vast majority of people, my follow count speaks for itself. I'm the most interactive account, social media account, I think, maybe in the world, certainly on Twitter, and that's actually predated the Twitter acquisition. So I think Twitter is actually an incredibly powerful tool for driving demand for Tesla. And I would really encourage companies out there of all kinds, automotive or otherwise, to make more use of Twitter and to use their Twitter accounts in ways that are interesting and informative, entertaining, and it will help them drive sales just as it has with Tesla. So the net value of Twitter, apart from a few people are complaining, is gigantic, obviously. Thank you. Let's go to the next question. Please provide a detailed explanation of where you are on the 4680 ramp. What are the current roadblocks? And when do you expect to scale to 10,000 vehicles a year -- a week? Yeah. Thanks, Martin. First, I just want to say congrats and thanks to the Tesla 4680 team for achieving 1,000 a week in Q4. It was no small feat. Definitely a result of more than a couple of years of hard work. As far as where we stand in Texas, one of four lines are in production, with the remaining three in stages of commissioning and install. Really, our 2023 goal as a 4680 team is to deliver a cost-effective ramp of 4680s well ahead of Cybertruck. Focus areas are dialing in and improving the quality of the high-volume supply mechanical parts and driving factory process yields up as much as possible. Between two of those things, if we had achieved those key goals, we'll be well set up to -- for a major 4680 year in 2024. Thank you. Next investor question is Elon said previously that FSD Hardware 4 will most likely come first in Cybertruck. Is that still the current plan? Do you expect there to be an upgrade path for Hardware 3 cars to Hardware 4? Yes, Cybertruck will have Hardware 4. And to be clear, for 2023, Cybertruck will not be a significant contributor to the bottom line but it will be into next year. So it's an incredible product. I can't wait to drive it personally. It will be the car that I drive every day. I actually just I'm wearing the T-shirt with this matched glass. And it's just one of those products that only comes along once in a while, and it's really special. So yeah, so with respect to upgrading cars on Hardware 3, I don't think that will be needed. Hardware 3 will not be as good as Hardware 4, but I'm confident that Hardware 3 will so far exceed the average -- the safety of the average human. So what we're aiming for is like how do we get ultimately to, let's say, for argument's sake if Hardware 3 can be, say, 200% or 300% safer than human, Hardware 4 might be 500% or 600%. It will be Hardware 5 beyond that. But what really matters is are we improving the average safety on the road. But it is the cost and difficulty of retrofitting Hardware 3 with Hardware 4 is quite significant. So it would not be, I think, economically feasible to do so. Thank you. The next question is for Zach. Zach, when do you think Tesla Insurance will become big enough revenue source to warrant providing more details in the financials of the business so investors can compare it to other insurance companies? Yes. I think it's probably going to take some time before this business is large enough for specific financial disclosures. But I'm happy to provide an update on where we stand in the business. So, we're currently at a $300 million annual premium run rate as of the end of last year. We're growing 20% a quarter, so it's growing faster than the growth in our vehicle business. And in the states in which we're operating, on average, 17% of the customers in the states are using a Tesla Insurance product. And that number continues to tick up as we spend more time in markets. And we see most of the adoption occurring when folks take delivery of a new car, as they're setting up insurance for the first time as opposed to going back and switching when they already have insurance set up. So there's an inherent stickiness in the Insurance business. No, I was just going to say, just as a broader reminder on kind of the motivation for starting this business, it was to improve and still is to improve the total cost of ownership of our cars, given that we're seeing high premiums of insurance from third-party companies. And that remains our priority here. We'll obviously run this as a healthy business, but we want to make sure we keep our costs low and insurance stays affordable to our customers. Yes. And so there are two really important side benefit to our Tesla Insurance that are worth mentioning, one of which Zach alluded to, which is that, just by Tesla operating insurance for our cars at a competitive rate, that makes the other car insurance companies offer better rates for Teslas. So it has a bigger effect than you think because it improves total cost of insurance costs even when they don't use Tesla Insurance, because now the guy [ph] goes up to the world have to compete with Tesla and cannot charge outrageous insurance for Teslas. So it's great. So it has an amplified effect, very important. Then, it is also giving us a good feedback loop into minimizing the cost of repair of Teslas, for all Teslas worldwide, because we obviously want to minimize the cost of repairing at Tesla if it's in a collision and for Tesla Insurance. And previously, we didn't actually have good insight into that, because the other insurance companies would cover the cost. And actually, the cost in some cases, were unreasonably high. So we've actually adjusted the design of the car and made changes in the software of the car to minimize the cost of repair, obviously minimize -- first, the best repair is no repair, avoid the accident entirely, which since every Tesla comes with the most advanced active safety in the world, whether or not you buy full self-driving, you still get the intelligence of full self-driving or active safety, active collision prevention. So it's giving us this really good feedback before, again, reducing cost -- total cost of ownership and also just figuring out how to get -- if somebody's cars in an accident, most accidents are actually small. They're like a broken fender or scratched side of the car or something like, the vast majority of accidents. But we're actually solving how to get somebody's car repaired very quickly and efficiently and back in their hands. And like I said, those improvements actually apply then to old cars. And we're making just to emphasize another key point, because some of these points might be like, so I apologize for being repetitive. But it's remarkable how small changes in design of the bumper and improving -- obviously improving the logistics of spare part or providing spare parts needed for collision repair, have an enormous effect on the repair cost. So, if you're waiting for a part to get repaired and that part takes a month, now you've got a month of having to rent another car. It's extremely expensive. And of course, you're missing the car that you love and the one you actually want to drive. So, this has actually a very significant effect on total cost of ownership and customer happiness. We do expect production to start, I don't know, maybe sometime this summer. But, I always like credit downplay at the start of production, because the start of production is always very slow. It increases exponentially, but it's always very slow at first. So I wouldn't put too much stock in start of production. It's kind of when does volume production actually happen, and that's next year. Thank you. That's great Elon. Like just to emphasize on that, we've started installation of production equipment here in Giga Texas, castings, GA, general assembly, body shops. We built all our beta vehicles, some more coming still in the next month, but as you said the ramp will really come 2024. It's a good question. It's not something we -- I think we'll provide an update about that in the future, but it is something we're thinking about very carefully. I really kind of like what is the fastest path to 1,000-gigawatt-hours a year of production. And you'll see announcements come out later this year and next, that answer that question. Thank you. Okay. And now let's go to analyst questions. The first analyst question comes from Rod Lache from Wolfe Research. And Rod, feel free to unmute your mic. Okay. Thank you. Just firstly, it sounds like your 1.8 million unit volume indication for this year is somewhat more supply constrained than demand constrained. Then I have a follow-up on cost. Is that an accurate statement? Well, okay. I mean, our internal production potential is actually closer to two million vehicles, but we were saying 1.8 million, because -- I don't know, it just always seems to be some force majeure thing that happened somewhere on earth. And we don't control if there's like earthquakes, tsunamis, wars, pandemics, et cetera. So, if it's a smooth year, actually, without some big supply chain interruption or massive problem, we actually have the potential to do 2 million cars this year. We're not committing to that, but I'm just saying that's the potential. So â and I think there would be demand for that, too. Yeah. Thanks for clarifying that. And on the cost side, the numbers that we just saw from you, as you pointed out, were weighed down by the 4680 ramp, the Berlin, Austin, Giga castings, processes, not at rate. Can you give us a bit of an indication of the headwind that you're absorbing from those things like you did last quarter? And then lastly, on cost, do you think that we can tease out an interesting data point from on where battery costs are headed from this announcement that you just made last night? If I'm correct, it looks like the investment cost per kilowatt-hour is less than half of what I've seen anywhere else, maybe $30 a kilowatt-hour for that capacity? I don't think we want to say the specific number, but it's interesting, if you look at the size of the â of Giga Nevada that is allocated to make 100 gigawatt-hours, is a small fraction of the size that currently makes about 35. Yes. I mean, the goals we've outlaid at Battery Day on using the investment required to deploy cell manufacturing, I mean, that's been a key focus of ours and the team is doing a good job hitting the marks on that focus. Yeah. And it goes back to the point, I was making. I said, it several years ago, I think Tesla's really the competitive strength that will be, by far, the hardest for other companies to replicate is Tesla being just damn good at manufacturing and having the most advanced manufacturing technology in the world. And if you've got that sort of advanced manufacturing toolbox, you can apply it to many things and we're applying it now to battery cells. I should also say that, there â we have other products in development. We're not going to announce them obviously, but they're very exciting. And I think we'll work for those clients when they â when we reveal them. Tesla has the most exciting product of any company on Earth by a long shot. And we'll continue to, I think, be in that position. We've got more great ideas. I mean, we know what to do with. So the future is very exciting. As I said in the last call, there's going to be bumps along the way and we'll probably have a pretty difficult recession this year, probably. I hope not, but probably. And so, one can't predict the short-term sort of stock value, because when there's a recession and people panic and the stock market then prices of stocks, worth value of stocks can drop sometimes to surprisingly low levels. But long term, I'm convinced that, Tesla will be the most valuable company on Earth. Yeah. I mean, our weighted average COGS for the company, if you were to assume Austin and Berlin were at the cost structure of our other factories, it was on the order of 2,000 to 2,500 of headwinds. So I think from there, you can back into margin impact of those factories as of end of Q4. Excellent. Zach, actually, I'd like to follow up on the data point you just gave on cost. If I look back at the COGS per car, you guys bottom close to $36,000 in the middle of 2021. And then the number went up as you had to face with inflation in input costs and the ramp of Berlin and Texas. And this quarter, I think we are close to $40,000 and we peaked maybe close to $42,000 at some point last year. And so my question from here is, how much time do you think it takes you to get back to this kind of $36,000, which would mean Berlin and Texas and those input costs, all that stuff is normalizing, is that like -- and that would be like a kind of like a 10% decline in the COGS per car? Is that something we can hope to see this year or is that too optimistic? The Austin and Berlin ramp inefficiencies in 4680 will make a substantial amount of progress on that over the course of the year, and that's within Tesla's control. We're doing a lot of work on cost reduction outside of that. And we talked about supply chain costs, expedite, logistics, attacking everything. On the raw materials and inflation side, where lithium is the large driver there and this was a meaningful source of cost increase for us, we'll have to see where lithium prices go. And we're not fully exposed to lithium prices, but I think in general, is what we've seen from our forecast here, cost per car of lithium in 2023 will be higher than 2022. So that's a headwind that would have to be overcome to return back to those levels. So, I don't think we'll get there this year, but I think we'll make progress. And we'll continue to find ways to offset these raw material costs that we don't have control over. [Indiscernible] is there anything on that? Yes. Like on the non-cells raw material, we begin to capture benefits of indexes tapering out, but due to the length of various supply chains, it does take time before this is reflected in our financials. And while alumina is down like 20% year-over-year, steel is about 30% down year-over-year, the global non-cells raw materials market continues to be influenced by geopolitical situations in Europe, high production cost due to labor cost increases and energy spikes and disruptions due to natural disasters like typhoon in Korea four months ago, pandemic lockdowns. So, we believe that meaningful price corrections will ultimately come, but it remains uncertain exactly when. In the meantime, we continue to redesign supply chain to make it more efficient and work with our supplier partners to find more efficiencies, streamline logistics and transportation to reduce costs. I was going to say, we're also -- our fleet is starting to mature, the 3, Y fleet. And we're gathering a lot of data out of that fleet to understand how we can sort of bring some margin that we didn't know we had out of the product. So over the course of 2023 on the powertrain side, we're actually going to go after sort of some materials where we're paying for more performance than we need, or we have more content than we need, without impacting reliability at all. And that will actually add up to a pretty significant cost reduction on the powertrain side over the course of 2023. So we're not just sort of relying on supply. We're also doing design actions to bring cost out. Yes. My guess is, if there is -- if the recession is a serious one and I think it probably will be, but I hope it isn't, that would lead to meaningful decreases in almost all of our input costs. So we expect to see deflation in our input costs most likely, which would then lead to, yes, better margin. I'm just guessing here. So, this is -- that would be my guess. Thank you, so much. So as a quick follow-up, Elon, I was thinking about like FSD, and when you look at like the situation today compared to a year ago, it's -- like the progress has been, like, amazing in the quality of the product, but also its rollout. And so, I was wondering, how much is this like impacting the take rate of FSD today? So do you already see that people are getting more excited by FSD, because they see it around them on 400,000 cars and they see the value of the service already, or is that too early to really see like, to expect like an uptick in the take rate? The trend is very strong towards use of FSD. And as you alluded to, with each incremental improvement, the enthusiasm obviously increases. And -- so, I think something that still a lot of people out there don't quite appreciate is that Tesla -- of course say like, Tesla is as much as a software company as a hardware company, but Tesla is really one of the world's leading AI companies. This is kind of a big deal with AI on the software side and on the hardware side. With the Hardware 3 inference computer, still the most efficient inference computer in the world despite being, at this point, five years old from the design point. And Hardware 4 coming and then Hardware 5 beyond that, where there are significant leaps. And the Dojo computer, we expect to be using that operationally at Tesla later this year. And we're seeing just a lot of world-class AI talent join the company. There's also the long-term potential of Optimus where we're able to use our expertise in electric motors and power electronics, batteries and advanced manufacturing to be able to make a humanoid robot that is actually useful and can be made at high volume with exceptional capabilities, because of the -- or robot AI that, where we take the -- because the car is like a robot on four wheels and Optimus is a robot on legs. But the -- as we get closer and closer to solving real-world AI, and we don't see anyone even close to us in achieving this, the value -- I think, you appreciate this and a few others do, but most don't know what I'm talking about. And so -- but it's -- this is the thing that has order of magnitude potential market cap improvement for Tesla. Okay, great. So a quick one on FSD. This, I guess, for Zach. Obviously, you unlocked some deferred revenue in the quarter that will translate presumably into higher margins on every incremental sale going forward so long as people opt in for FSD. But was wondering if you're able to disclose the percentage of the $15,000 price that you're not going to be able to recognize as revenue upfront rather than deferred? Yes. I mean, the way that we've structured this is a full self-driving package has two components. There's enhanced Autopilot, the price of which is listed on the website. We fully recognize that. Then there's an incremental, which is for the additional features of full self-driving offers and we've released a portion of that. And then there's a minority of the total package that's remaining that will be released over time as software updates are there. And in our shareholder letter, in addition to disclosing the dollar amount of the deferred revenue release, we also included in there the dollar value of the balance of unreleased deferred revenue that will be released over time with future software updates. Okay, great. And then maybe 1 additional question here on the incremental capacity in Nevada, the 4680s that you're planning. That's a lot of batteries obviously, and presumably, you won't be putting all of those in Tesla Semi. So I guess, two questions about that incremental capacity. First, is it correct to assume that all of those 4680s are going to be more or less fungible and usable in your entire range of products? And if the answer is yes, then if you had to guess, how do you think that 100 gigawatt-hours would be allocated between your various end markets? But -- yes, Yes. I mean, you're right. Not all of the 100 gigawatt-hours are going to go into the Semi trucks, that is correct. Let's say like -- I alluded to a number of future products. Those future products would use the 4680. Hi, everyone. Thanks for taking my question. So you recently adjusted prices and that may have put many of your competitors in the back foot. In addition to that, capital markets have recently gotten a lot tougher. So with those factors in mind, I'm curious how you see the current competitive landscape changing over the next few years. And who do you see as your chief competitors five years from now? Five years is a long time. As with the Tesla order part, AI team, until late last night and just we're just asking guys like, so who do we think is close to Tesla with -- a general solution for self-driving? And we still don't even know really who would even be a distant second. So, yes, it really seems like we're -- I mean, right now, I don't think you could see a second place with a telescope, at least we can't. So, that wouldn't last forever. So, in five years, I don't know, probably somebody has figured it out. I don't think it's any of the car companies that we're aware of. But I'm just guessing that someone might be right out eventually, so yes. I mean, beyond that, Elon, like in the vehicle space, even though the market is shrinking, we're growing and EVs have doubled almost year-over-year. So, like it ever keeps up with the trend of EVs is going to be our competitor. The Chinese are scary; we always say that. But like a lot of people always look at the EV market share, but we always look at it is how much of the total vehicle space do we have, and we're just going to keep growing in that space. There's 95% for us to go get. Yes. And I don't want to say like -- I think we have a lot of respect for the car companies in China. They are the most competitive in the world, that is our experience and the Chinese market, it is the most competitive. They work the hardest and they work the smartest, that's so for the China car companies that we're competing against. And so we would guess, there are probably some company out of China as the most likely to be second to Tesla. We are -- the Telsa China team is winning in China. And I think we actually are able to attract the best talent in China. So, hopefully, that continues. So, yes, so we're fired about the future and well, it's going to be great. Just as a follow-up, the Inflation Reduction Act has created huge tax incentives for commercial vehicles. You mentioned an incredibly interesting product pipeline. Are there maybe some plans to accelerate commercial vehicle form factors outside of the Tesla Semi to help accelerate EV adoption? Well, I was basically saying that, yes, but I'm not going to give you details because this is -- nice try, nice try. Yes, of course, of course. So, we actually look at like, what is the limiting factor for new vehicles because if the -- for the longest time, we've been constrained on total cell lithium-ion production output. And so people said, like, why not bring this other car to market or that other car to market? Well, it doesn't really help if all you're doing is shuffling around the batteries from one car to another. In fact, it hurts because you add complexity, but you don't add incremental volume. So, it's sort of pointless, in fact, like counterproductive to add model complexity without solving the availability of lithium-ion batteries. So, as we get -- so we want new product introduction to match where the cells are available or that new product to use those cells without cannibalizing the cells of the other cars. That's the actual limiting factor for new models, not anything else really. Great. Thanks for taking my question. You started to answer this earlier, but I'd like to ask this question about the AI elements of your business and ask if you could comment on progress around Dojo and Optimus and your anticipation for the likelihood, for example, for the company to disconnect the GPU cluster in favor of Dojo and to have some market achievement an Optimus? Yes. I mean, obviously, with -- just we're still at the early stages, there are big [indiscernible] in any predictions. It's like -- I think, easy to predict long-term, but hard to predict the time in between now and then. But it's -- we think Dojo will be competitive with the NVIDIA H1 at the end of this year and then hopefully surpass it next year. And the key there is -- I think what's the energy usage required for a given amount of -- if you're training a frame of video, how -- what's the energy cost required to do that training? And we think probably -- we said this already actually at AI Day, so it's not new information, but we do see potential for an order of magnitude improvement relative to GPU, what GPUs can do for Dojo, which is obviously very specialized for AI training. It's hyper-specialized for AI training. It's not -- wouldn't be great for other things, but it should be extremely good for AI training. So just like if you do an ASIC or something, it's going to be better than a CPU. This is sort of, in some ways, like a giant ASIC. And we're able to -- since we're operating one of the biggest GPU clusters in the world already, the -- we've got a good sense of how efficient the GPU clusters operate and what Dojo needs to do in order to be competitive. But we think that it does have a fundamental architectural advantage because it's designed not to be -- the GPU is trying to do many things for many people. We're trying to do graphics, video games. It's doing crypto mining. It's doing a lot of things. Dojo is just doing one thing and that is training. And we're also optimizing the low-level software too. So it had a various sort of, ground middle level so it's just insanely good at efficient training. And the intra-communication between the Dojo modules is extremely high. It's not going across an Ethernet cable. It's like -- so anyway, the -- we see a path to an order of magnitude improvement in the energy efficiency or per given unit of training. But we also have to achieve that. And so when will it be achieved? It's hard to say, but we do see a path to get there. And then also on inference, like once you've got something trained, well, if you want to have a product that's a consequence of that training, that product may not be anything to do with cars. Then the efficiency of inference is extremely important. And we also have, by far, the most efficient inference computer at the -- with the FSD computer in the car. This has potential for products that are in car even really in automotive. Yes. It sounds like the 1.8 million units you expect this year is supply, not demand limited supply, it sounds like by the lithium batteries. If you were to become demand limited, can you talk to us about your propensity to use price and your relatively high industry margins to grow units and share? Yes. To be clear, the 1.8 million is not cell supply limited. And I mean, we did address that number earlier in the call if you want to answer. Yes. It's roughly -- cell supply is roughly matched with that. And this 1.8 million cars, if we get lucky, it could be more. And then the rest would go into stationary storage, the Powerwall and Megapack. So, yes, so true. Hi. Elon, first question is, is it time for Tesla to significantly expand the captive finco? I mean, you only have like $4.5 billion of receivables. It's basically nothing compared to other big auto companies. And then I have a follow-up. Yes. I mean, the way that we've been using captive financing so far is to plug what we believe to be gaps in the market of existing third-party products. And so we have a couple of offerings in Europe. We do loans for our energy business, retail energy business here in the US. We do leasing and we do a small amount of U.S. loans that are very targeted. And so we're using captives to support market caps, as I mentioned. So basically, it's a vehicle to support vehicle sales, make sure customers have access. I do think there's opportunity here to continue to grow this. We are growing it slowly here. It is a consumer of cash, so we're being cautious on how we do that. But the plumbing is in place to do a lot more here. And I think we'll have to see how things unfold over the course of the year and make decisions real time as to how much we ramp it up versus ramp it back. I think if we see a severe recession this year, which like I said, hopefully, we don't, in severe recessions, cash is king big time, because it's in such short supply. So we want to be cautious about using cash for loans and that sort of thing for cars. I feel we're in a very strong position to get through a recession, because we really don't have any debt. And we've got over $20 billion of cash, which is great. The cash is earning a ridiculous return, a good return. So it's like nontrivial. And the interest rate actually in the $20 billion is earning like quite a good amount. And I've made this point on Twitter a few times. I'm sure a lot of people on this call understand the fact -- the basic value of a security is a function of the risk-free rate or we'll see how risk-free it really is but the T-bill rate. So if you've got -- I think the -- I recall correctly, the S&P 500 has a long-term rate of return of roughly 6%. And so I think that needs to be very cautious about having Fed rates that potentially exceeds 6%. Like, if we see deflation, and I think we are seeing deflation then you would add the deflation number to the 'risk-free rate' from the Fed. And as that starts to exceed 6%, now you're starting to exceed the long-term return of the S&P 500 and starts to become questionable as to why don't just put your money in a savings account essentially instead of in the S&P 500, if the S&P 500 is variable and the bank interest rate is not? This is -- so basically, the Fed is the risk of crushing the value of all equities, which is quite a serious, danger. Thanks Elon. And just a follow-up, I don't want to steal thunder from March 1st and in Austin, but how close are we to that step change improvement in BoM cost where you could sell an EV for under $25,000 or $30,000 and actually generate a profit, that kind of real moving assembly line moment in manufacturing? Again, I don't want to steal the thunder but just if you wanted to kind of wrap-up with thoughts there that would be helpful. Thanks Elon. I mean, I'd love to answer -- I'll probably be asking the same question, but we would be jumping the gun on future announcements. Fantastic. Thank you very much, everyone, for all your good questions. And we will see you again in three months' time.
EarningCall_1323	Good morning, everyone, and welcome to Sandvik's presentation of the Fourth Quarter and Full Year Results 2022. I am Louise Tjeder, Head of Investor Relations here at Sandvik. And beside me, I have CEO, Stefan Widing; and CFO, Cecilia Felton. We will, as we always do, start with the presentation. Stefan and Cecilia will take you through the highlights of the quarter and some full year. And then we move on to the Q&A session. Thanks, Louise. And also I, again, would like to welcome you to this Q4 report for Sandvik in 2022. The quarter was a good quarter for us. We had stable overall demand for the group and strong revenue growth. If we look at the order intake, they were up 3% at fixed exchange rates, down 2% organically. Revenue up 11% at fixed exchange rates and 5% up organically. If we take out our Russian business that we had in prior year to look at the underlying development for the rest of the world, we see organic growth of 2% and 9%, respectively. So stable order intake and positive growth on the sales side. We also had record profits in the quarter. And one of the main highlights, I would say is that we have now caught up with our pricing. So the cost inflation in the quarter was fully offset by pricing, meaning it's margin neutral in this quarter. There are some mixes between the different businesses. We'll come back to that. The adjusted EBITA increased by 27%, and we had a margin of 20.6%, up from 19.9% in the prior year and well within our target range of 20% to 22%. We also had some items affecting comparability, mainly related to the structured program that we launched in May of 2022. Adjusted profit, SEK 4 billion, up 17% from prior year. If we look at some of the highlights, the really main highlights from the quarter as well in our shift to growth, strategic execution. We continue to see an accelerated demand for both our battery electric mining equipment and our automation solutions and we go into 2023 with a really strong pipeline. So we are very optimistic about that going forward. We're also very happy to have been able to announce the acquisition of Polymathian. Polymathian is the software and services company in the mining industry working with mine optimization based on machine learning technology. It's a really good complement to the mine planning software we have in Deswik, and this is a company that actually is acquired by Deswik and will be a part of Deswik. A unique offering in the industry, and we're really happy that they choose to be part -- and become part of Sandvik. Of course, another highlight is that we closed the acquisition of Schenck Process Mining, or SP Mining. This gives us a more full solution offering in the crushing and screening space. And it also strengthened our aftermarket business in rock processing in a very good way. I always show one slide on innovation. And this time, we choose to highlight our Cambrio software company that we acquired in 2021. Cambrio consists today of 3 different software packages in the industrial software space. All of them have released new exciting versions. GibbsCAM have launched a version now where they have integrated with Sandvik Coromant's unique tooling technology Prime Turning. It's a good step forward, both for Coromant and for GibbsCAM. SigmaNEST, which is in metal sheet fabrication, they have a complete software suit for the connected workshop, a new version with some really good features. Cimatron something we don't talk -- have talked too much about. They are market leaders in CAM software for die and mold, which is an important segment for us. Also here some good interesting new features in the related software package. And overall, we see good growth in our CAM software space, slightly above the market overall. Many of you, when I talked to you, you asked about where we are in mining automation in relation to our competitors. I have often said what I always say that we are the leading provider of mine automation in the underground space. And that's actually quite well known in the industry. Even despite that, I sometimes get pushed back where you say that, well the competition stay the same, they say they are the leading provider. So I think it's interesting. We now have a third-party report from global data, but it came in December, where they have looked at -- they have mapped the underground space for autonomous load and haul equipment. And their conclusion, the report is available for you if you contact them, of course, shows that Sandvik has a 68% market share in underground mining automation, 68%. And the closest peers, you can also see in the pie chart here. And the closest peer is actually not the one you might expect. So interesting reading there. Going into the market trends that we have seen, starting with the main regions, Europe, stable to positive actually, despite everything that's going on and North America positive, strong North American market. Asia for the group is actually up in the quarter. But if we look at what might be more interesting, the underlying industrial production point of view, it's been a weak market, driven by a dynamic coverage situation in China. The other Asian markets are up. So it's really China on the industrial production side, that's been the weakness here. But you can see on the arrows that besides mining and energy, Asia is basically down across the board, driven by China then. If you look at the various segments, on the mining side, we would say that we are now stable at a very high level. And the fact that we managed to basically meet the order intake in SMR, it's minus 2%, but it's positive, excluding Russia; it's positive, excluding major orders; is a very good guide for the strength of the mining business as it stands. General engineering is the segment where we have seen weakness. It was actually good in North America, but it was down in the rest of the world. Automotive, a positive development, strong high single-digit growth in automotive. And as we have said, we expect automotive to be supportive for us going into 2023 based on the production forecast and based on coming from low levels. Energy also continues to be positive, maybe not so surprising. Infrastructure, flattish and weak in Europe, something we also said in the previous quarter. And then aerospace has been continued strong underlying sentiment. In terms of actual reported number, aerospace was actually a bit weaker in Q4, but it's related to timing of orders. Aerospace is one of the few areas in SMS, where we might actually get a little bit bigger orders of frame orders for a full year and so on. The underlying development is positive, and we expect it to continue to be so in 2023. Summarizing this, order intake of just over SEK 30.7 billion. Revenues, just over SEK 31 billion. So it's a book-to-bill of slightly below 1. A normal year, this is how it looks like. We typically ship quite a lot of equipment, especially in Q4. So we typically have slightly higher revenues in Q4 than order intake. So it's nothing alarming in that sense. Looking at this, splitting out organic and structure. We see then that order intake was slightly negative, minus 2% on the organic front. But with our acquisitions coming in, even at fixed exchange rates, then we have a positive order intake growth. And revenues, same contribution from structure, but also positive organic development by 5%. So we can see the order intake graph starting to flatten out at a high level and revenues, of course, with a strong order backlog lagging that order intake curve. EBITA development has been strong. Margin of 20.6% in the quarter, up in absolute terms by 27%. And we can see the development in the graph, the bars shows a steady progression with improved profitability, basically since Q2 of 2020. Absolute numbers, profit of SEK 6.4 billion, first time ever above SEK 6 billion for the company. We had leverage that was not as good, though. We do fully compensate inflation by pricing, as I said, and Cecilia will go through it more in detail later. But the main negative impact we have had has been -- that we are taking some provisions for obsolescence in the inventory in SMR. This is mainly a mechanical consequence of higher inventories. And after a while, we start putting some reserves for it. For the full year, rolling 12, we ended the margin at 20%, which is then in line with our financial target, which I will say we are very happy about a year like this. Going into the business areas then, Mining and Rock Solutions. As I mentioned, stable demand at a very high level. So despite the major orders last year, we more or less managed to meet the same level this year. Also all-time high revenues as we continue to ramp up and deliver on our very solid order backlog. And as we stand right now, orders we are taking is primarily for Q4 in '23 or even into '20 -- Q4 of '23 and also going into '24. So a very solid position to enter the year from. At fixed exchange rate, growth was minus 1%; organic, minus 2%; and then if we exclude Russia, we can add back 4%. So then it's a positive 2%. I mentioned the major orders. We had 2 ones this quarter but not at the level the ones we had in the prior year period. EBITA was strong at 22%. SMR is fully offsetting cost inflation in absolute terms and slightly more than that, but it's still slightly dilutive to the margin for them, but good sequential progress quarter by quarter. Also positive is that we see the share of air freight coming down and that has a positive effect as well on the profitability and I already mentioned the acquisition of Polymathian. Going then into rock processing. Here, the order intake growth was driven by the aftermarket and acquisitions. Revenues were at record high levels as well. If you look at fixed exchange rates, the growth was 18% on the order side. But if you look organically, it was negative 6%, excluding Russia, it's negative 3%. Here, we see some softness on the equipment side, especially driven by infrastructure in Europe. We should also note that some of the businesses here have very solid order backlogs. Attachment tools, for example, have a backlog that is basically already full for 2023. So they are a bit cautious with taking orders too far into the future. So this is a combination of some softness on the infrastructure side and being careful with taking orders too far into the future. Margins at 16%, same as last year, and SRP is still lagging a bit on the -- in terms of cost inflation. The pricing has come through as we expected. They still have some more deliveries lagging with not as good pricing that we have to work through. Some dilution from acquisitions, but of course, very happy to see SP Mining coming into the business now in Q4. And then finally, Manufacturing and Machining Solutions, where we again see stable order intake levels, positive in North America, not as positive as North America and Europe, but still good and both driven by strong performance from automotive. At fixed exchange rate, we have a growth of 5%. And in terms of organic number, that's minus 1%. And if we exclude Russia again, it's plus 2%. Here, we should also say we have a negative working day impact of 140 basis points. We also have some impact, even though we haven't quantified that. We talked about that in Q3. We had some pre-buys in Q3 ahead of price increases that impacted the beginning of the quarter a bit. We had the same thing now in the end of the quarter where we normally we have price increases early in Q1, might come a bit later this time. So we didn't see the pre-buys that we usually see in December. Difficult to quantify, but still some impact in the quarter from that. In January, we have seen the daily order intake being stable compared to the average of the fourth quarter. Margin stable, very good at 22.2%. Here, it's really good to see that the leverage in the cutting tool divisions are back at normalized levels, meaning above 50%. Solid price execution and good cost control. So really happy with the execution in the cutting tool divisions on that side, really good -- really well done by them, I have to say. We have some dilution from acquisitions in SMM as well. But overall, a very solid margin. Yes. Thank you, Stefan. All right. So let's start with the table at the top right-hand corner. And here, you can see that organically, order intake was down 2%. If we exclude Russia, it was up 2% and revenues grew organically by 5%. Structure contributed positively 5% and currency with 12% and that brings total order intake growth to 15% and revenues grew by 23% in total. Adjusted EBITDA, as Stefan mentioned, increased 27% to SEK 6.4 billion. Margin came in at 20.6% and net financial items increased year-over-year. This is driven by higher debt volumes. Tax rate came in high 27.7% if you exclude items affecting comparability. And I will come back to the reasons for that in a few minutes. Net working capital came down slightly sequentially. We're still above our informal target of 25%. Free operating cash flow, strong in the quarter, SEK 6.2 billion, corresponding to a cash conversion of 99%. Returns, 16% and adjusted EPS increased to SEK 3.22. And if we continue with the bridge then and start with the organic column. Here, you can see that revenues grew by SEK 1.2 billion. Leverage was 0, as Stefan mentioned, and that brings a dilution of 0.9 percentage points. Currency continued to have a positive impact on the margin and accretion of 1.6 percentage points. Our acquisitions contributed with SEK 1.4 billion of revenue, SEK 271 million EBITDA, and that was margin neutral in this quarter. And all in all, that brings us from an EBITDA margin of 19.9% last year to 20.6% this year. If we continue down the P&L then and the net financials, starting with the most interesting row here, the interest net. Here you can see it increased year-over-year to SEK 416 million, and this is due to higher borrowed volumes. When comparing year-over-year interest rates are still lower as we've had some expensive debt that's matured. Sequentially, of course, rates are going up. Then at the bottom here, you can see FX and other asset classes. This, as you know, are the temporary revaluation effects of our hedges. This was positive SEK 213 million in the quarter, and this is mainly driven by the currency hedges. Tax rate then. So reported tax rate at 28%. If we exclude the one-offs, mainly the restructuring provisions, we came in at 27.7%, so still high. There were 2 reasons for that. First, we had a tax charge related to prior years in the quarter. And secondly, we also hedged the purchase price of Schenck, and there was a gain on that hedge. And the gain goes into the balance sheet as a reduction of the purchase price. But it is a taxable gain and that tax charge goes into the P&L, of course. So if you exclude those 2 effects, normalized tax rate was 25.4%, and that is high due to periodization within the year. If we look at the full year, normalized tax rate came in at 24.1%, so just in line with guidance. Net working capital. Then here, we were happy to see that both in absolute and relative terms, we saw a slight decline sequentially. Inventories increased in volumes a little bit in the quarter, but actually came down in December, which we were also very pleased to see. And as I mentioned, a strong cash flow. You can see that in the graph on the left also when you compare to prior fourth quarters. Cash conversion for the quarter at 99%, 56% for the full year. And if we look at -- if we compare free operating cash flow this year versus last year in the table, you can see that earnings were up with a positive impact from net working capital and CapEx was higher compared to last year. And that brings us to a free operating cash flow increase to SEK 6.2 billion. If we continue then looking at net debt. Financial net debt, you can see that in the dark gray bars, increased slightly sequentially despite the positive cash flow, and that is driven by the acquisition payments that we've had in the quarter. You can also see here in the graph, if you look carefully, that also capitalized leases and the pension liability increased slightly sequentially and that brings us to a net debt of SEK 44 billion. And financial net debt over EBITA, our balance sheet target was relatively stable sequentially at around SEK 1.3. So still some headroom to our target to be below SEK 1.5. Outcome versus guidance. And if we start with currency, you can see that we came in a bit lower than what we expected, so SEK 1.1 billion. CapEx, we guided SEK 4 -- or approximately SEK 4 billion for the year, we came in at SEK 4.2 billion. Interest net came in higher, SEK 0.9 billion and the normalized tax rate then just in line with guidance for the year. And looking ahead, we've increased CapEx guidance to around SEK 4.5 billion for 2023 and this is mainly driven by capacity investments in BEVs, I mean the BEV manufacturing and also some large IT projects that we have ongoing. We expect currency effects to continue to be positive, SEK 600 million in the first quarter. Our best estimate for the interest net is SEK 1.7 billion for the full year. And the normalized tax rate here, we've increased guidance by 1 percentage point to 23% to 25% for the full year. Thank you. I will conclude then. If you look at the full year, we believe we have seen very solid execution by the company in 2022 in what has been a very challenging environment. We have seen favorable demand and a solid contribution from our acquisitions. And at fixed exchange rates, we have seen an order intake growth of 17%, which I think is a very good number. We also have good backlogs also coming into this year. We have managed the supply chains in a good way. Also good performance from our acquisitions. So revenues at fixed exchange rates has grown by 20% in this year. On the margin side and EBITA, it's all-time high, both in the quarter and for the full year, and we landed the margin then for the full year within our target range. We have also made some really important steps forward in this year in our strategic execution around shift to growth. We have announced 8 acquisitions in the year. Some of them like Schenck, fairly significant. We have continued at a good innovation pace. We have launched some really exciting products, just making 1 example. Our unique 65-tonne battery electric truck, the largest in the industry. We have successfully distributed Sandvik Materials Technology as Alleima, putting in into a quite long process and almost decades of internal discussion around that. So a very good milestone. And as we also mentioned, we see really good interest in our automation and battery electric solutions which is really good to see in terms of transforming that business into the future. We also think that we have a very solid foundation for continued successful execution. We have an enhanced offering and a higher share of aftermarket and software business than we have ever had before. We have strong backlogs in our long-cycle businesses going into the year. We do see supply chain as -- and the issues we have seen there starting to ease up. We go into the year with cost inflation being fully mitigated by pricing. That will, of course, continue to be a topic to work on. But coming into the year in that position is very positive. We have a structured program already ongoing. We launched it in May. It was not related to sort of an economical cycles. But now we see it will start to deliver effect now in '23. So the timing was really good now with hindsight. We also have a higher share of variable costs than we have had in the past. We have been working on that for the several years now. And in our decentralized setup, our divisions have their contingency plans ready and some of them are also already partially in motion. So the macroeconomic situation is what it is going forward. We feel we entered the year from a strong note. Thank you. Thank you, Stefan. Thank you, Cecilia. Yes, it's time for Q&A. I remind you again to try to keep your questions to a couple each so that everyone has the possibility to ask their questions. Firstly, on the volumes in general engineering. Can you comment on how much those were down year-over-year for Europe and up for North America? And then secondly, when you say accelerated demand for battery electric, I assume that is underlying, so not actually growing quarter-on-quarter given the North haul we had in Q3. Is that correct? And can you say the percentage of order intake for Q4? I'll start with the second question first. Yes, I mean, it's not a comment on the specific order intake in the quarter. It's more the underlying customer demand we see, how we see the pipeline is building or evolving and what we see might happen in '23. So that's correct. I haven't broken out the number of BEV orders specifically in the quarter. I don't know if Louise can come back on that. But as we have said before, we have a full year outcome of between 10% and 15% for load and haul, which should be compared to low single digits only the year before. So it's -- I would characterize '22 as sort of the year a breakthrough year in many ways. Not only the bigger orders we received and have announced, we're also starting to see repeat orders. So I mean, major customers that are demanding in their operations that have placed their first order maybe a year ago, and now they come back with repeat orders. This means that the machines are working and that they see the benefits and the productivity gains. So I think it's really positive. In terms of general engineering. As we said, it was positive in North America, volumes single digits and the same on more than negative side in Europe. Klas at Citi. So I want to come back first on the regional trends and focus on general engineering. So solid North America down in the rest of the world, but it still feels when I back this out, like this is very much linked to this hang out from the pre-buy that will eventually level off from the price hikes, particularly in China. I'm trying to understand China better against your comment of stable demand into January here it stays on for SMS. So looking at the data out there, still feels like China is still pretty weak at the start of the year. So the stable demand comment, is that still with -- Europe relatively stable, solid U.S. again still weak China. I'm misunderstanding the mix at the beginning of the year. No, I think we don't comment specifically on the regions, but I think it's the -- I would agree with what you're saying. I mean it's not like we suddenly see China now coming up in a strong way. I think that the development in China in terms of what happened in Q4, I mean, in the beginning of the quarter, we saw issues because of lockdowns. At the end of the quarter, there were issues because they opened up, but they got a lot of cases, so there was sick leave. And I mean we had to close down some operations towards the end of the quarter. That has now improved again. Now we're coming up against the Chinese New Year and all the dynamics around that. So I think we should probably not expect too much in Q1 because we still have some issues to get through. But the fact that they have opened up, I think, after the Chinese New Year, I don't know what will happen, but at least I have a hope that then they will come back and sort of kick start again. We'll see what happens. But I think I'm more optimistic about China into the year now than I was when they were constantly going into lockdowns. So I think that's the main comment. In terms of general engineering. My earlier comment was related to volumes, I want to emphasize that. In terms of if we add price to it, then as Louise said, the end engineering was actually stable but with a negative contribution from China. Yes. And I think we specifically pinpointed China in Q3 in terms of the prebuying dynamics, which is important to recognize. You had that in your question. So yes, of course, there is a dynamic related to that. And it was more -- much more in China than the rest of the world. But it's also difficult to put numbers on it. So that's why -- there is an impact. That's why I mentioned it earlier, but I don't want to read too much into it because how should I face this. I mean we have prebuys or an impact of that coming, many times during the year. So what is a plus and what is a minus, sometimes difficult to say, but it was definitely a negative in Q4 overall for us. Okay. No that makes sense. Then my second one is on the drop-through just to clarify, you're fully compensating looking at price cost now. But I thought when I caught up with you guys in the morning that there is still a little bit of a difference between the different divisions. You're fully compensating on SMM. You're moving in the right direction, SMR, SRP quarter-on-quarter, but you're not there completely year-over-year yet. Is that the correct understanding? Yes, that is correct. So for SMM, as you said, price versus inflation is slightly positive. For SMR, there, we had a dilution of 100 bps in the third quarter. We see a sequential improvement from that, so slightly dilutive. And for SRP, we still see a dilution of more than 100 bps. So just to clarify, it means that at group level, we are fully neutral, but SMM is actually slightly ahead, and that's a timing thing. I mean, we cannot change prices every month. They are anticipating a quarter or two quarters ahead. So in Q4, they were actually slightly positive. I mean we can also say for all business areas, price increases are coming through as planned. So it's a timing difference for SMR lesser. Exactly. That's what I thought. And then just the final point then when you think of the pricing out of the backlog in SMR and SRP against the cost you see today, do you think you can fully compensate SMR, SRP now in the first quarter? Or will it take longer? Not in the first quarter, we are expecting to see a gradual improvement during 2023. But we do expect them to be also margin neutral during the year. If I may ask two questions. First, can you talk a little bit again about the obsolescence costs that you've mentioned earlier? Sort of can you size where the hit was bigger by division. And I guess where are you in terms of where you want your inventories to be? Will this still be a recurring thing that you have to book through in the next few quarters? And my second question, I think you mentioned briefly that the price increases in SMM will happen later than usual this year. Can you just tell us sort of like why sort of what's the dynamics behind that decision? Should I start with the inventory questions. So the obsolescence reserve that -- or the impact of that was in SMR. And as Stefan said, this is part of our normal accounting procedure. So once an item has been in stock for at least 12 months, we start to make these provisions. Part of this, though, we think we can potentially get back in 2023. The impact on SMR year-over-year was about 80 bps. And in terms of inventory and networking capital levels long term, there, I would say, the buildup that we've had is driven by the supply chain and logistics challenges that we've been facing during the year. We see this slowly easing up but we expect this to be a gradual improvement back to more normalized levels during 2023. And I think it's also important to understand that structurally, nothing has changed in the business that would make us more net working capital intensive. If I may follow up, just to make for the accounting clarification there. So that means that this year, we should expect a more back-end loaded sort of margin profile, let's say, because in the first half, you're still doing obsolescence cost? And then as things recover later on, you compensate for that? Is that the way to read your comment? I don't want to give too much guidance into the first quarter and what to expect. Not necessarily. I think part also -- I mean this is a sort of mechanical provision that we're making. Part of what we also provided for it Q4, if we sell those parts, we get that -- we get a negative impact in Q4, we get that back. So not necessarily. I should also answer your question on the pricing in SMM. And you're correct. I mean, normally, the price increases are Jan-Feb for the cutting tools. Now because of 2022 was a very special year. We had to do several price increases in the year. And I think as you know, we did some then also around September, October time frame. And that changes then the timing of the next one, so to say. We cannot come too often with the price increases. So that's why the divisions have delayed them a bit compared to what they normally do. And that's also what I said is giving a slightly different dynamic than on pre-buys in December, where especially distributors typically buy a bit more -- place a few more orders before the price increases, and that didn't happen this time. But that's the reason. It doesn't mean anything in terms of changed ambition. It's just a timing thing. I'm going to stick to the tooling business, SMM. A couple of questions, if I can, Stefan, on end markets. Your organic orders are down 1%. There are a bit if we exclude Russia and adjust for working day impact. If I understood your Investor Relations earlier correctly, your auto end markets and the end markets are up double digit. General industry flattish. That would imply aerospace down 25%, 30% obviously, on a big comp from last year. I just want to understand. A, if that's right; B, if that's specific to the Boeing supply chain; and C, whether that was -- we should expect that to continue into the early parts of this year. I appreciate your aero market development in North America. It's obviously up, but it looks like you're being hit by some supply chain constraints, particularly in that supply chain if you'd comment on that, please. I didn't really follow or I didn't follow the math, so to say. So I'll just comment on aerospace. No, it was not down 25%. It was in sort of PV terms, it was flattish for the quarter, which implies then maybe slightly negative volume. Though we should say aerospace is actually one of the industries where pricing is lagging because we typically have full year contracts and things like that. So it's not as much pricing there. But you are right in terms of what impacted it. Europe was positive. It was strong. China was negative. North America was weaker this quarter, but it was a pure timing. Pure timing in how we get orders in that business. In terms of looking ahead, there has been some let's say, push outs or delays in some of the ramp-up in the production forecasts among customers, driven by their supply chains. But for us, it means that the growth contribution from aerospace in '23 might be slightly lower than we had expected, but still a positive contribution in '23. Auto was up double digit in Europe and North America, but it was down in Asia. So high single digit in automotive, which we have also talked about earlier. So you're right in double digit, but for -- in North America and Europe. Okay. Maybe I can revert back. Secondly, if I can, just on the bridge, I wonder whether as to if you give a bit more color on the EBITA bridge for SMM. I know you guys don't want to talk about pricing. Kennametal does. I'm going to assume pricing up, call it, 6%, 7% in the quarter, so volumes down mid- to high single digit. I'm assuming, therefore, there's a negative volume leverage, which is then more than offset by pricing and as you say, cost control. Help me a little bit, if you would, please, on the sort of the moving parts of that organic bridge in SMM. Yes, sure. So as we said, price versus inflation slightly positive. Volumes had a negative impact of more than 150 bps. Then we can also say that in SMM, we had some dilution from our powder businesses, both in SMF and also the Wolfram business. Those are the key components. I've got 2. I just want to -- at the risk of sounding particular on the daily order intake comments that you make for the Q1, the first 2 weeks of the Q1 and obviously, with the caveat of not extrapolating that as a comment on the quarter as a whole. But just to understand, is that a volume comment? Is that a constant currency comment? Just to try and, I guess, sort of pitch what the implied run rate is there. Well, it's basically the same in this -- I mean because you relate back to Q4 and the pricing component will not change much. So it's -- but to answer straight, it is a PV comment, but it doesn't change much if you go to volume. So if I take the sort of -- again, just trying to really simplify, if I take the Q4 run rate that we can see as a headline number, that's a pretty good indication of what we see in the first 2 weeks. Yes. But remember, we talk about dailies. So you have to maybe do some adjustments for working days as an example. Yes. No, that's very helpful. And secondly, I just wanted to get, I guess, a sense of we've obviously seeing super strong mining orders, I guess, in both businesses over the last couple of years. Are you getting any -- with a positive or negative, I guess, indications or commentary from your customers with regards to orders in 2023 or demand in 2023. Conscious of -- you talked about the cover that the orders provide for revenue. But I guess I'm interested, we've seen what it feels like mining CapEx numbers, for example, moving around quite a lot. Just interested if you're getting any indications in terms of customers in either direction. No, not really. I would say continued positive -- general positive sentiment. Of course, if you talk now, okay, so what will you see in orders that can always fluctuate. And if some customers will suddenly get a bit more cautious with placing orders into 2024, can always have an impact on the order figure in a specific quarter. But overall, when we look at our expectations, we expect demand to stay at a high level. And yes, then major orders and so on can mean that individual quarters move a little bit up or down. But still, I would say, we are positive also going forward. Just my first question is around China. Would you be able to give us just for the total 2023, what your China business did year-over-year in Machine Solutions. And when you think about that sort of going into 2023, do you see it as more of a catch-up just because your factories will be running normally, you had disruption around sort of from lockdowns? Or do you think actually there is a genuine kind of demand uplift for your business as the economy opens? And what specifically do you see that as coming from? Yes. On the first question, I don't have that figure. Do you have it, Louise, the full year, China? Otherwise, we'd have to come back. Yes, let's come back on that, sorry. On your other question, I think both is my speculation. I put it like that now. We should definitely see an improvement just from the fact that we had -- take in Q2, we had -- it was horrible in terms of lockdowns. Our Shanghai operations was quite significantly impacted as an example. Now in Q4, we have seen impact as well. Q3 was better, sort of a temporary sort of reopening effect and so on. But just us being able to run our operations and disturbed will have a positive impact. Then, as I said earlier, I'm more positive now than I was only a month ago, the fact that they have now opened up. We'll go through some short-term pain because of that. But I've seen some early leading data on economic activity, and they seem to open up quite quickly. And coming back from Chinese New Year, I hope that we will see some kind of kick start, which should also then be positive from a demand point of view. But that's pure speculation from my point of view. But I hope that we will see both. And maybe my second question, and I know we kind of don't want to ask about the Sandvik manufacturing parts every quarter. And by that, I mean the bit that's related to your SEK 6 billion revenue target. But I was wondering given kind of we're at the full year, would you be able to give us an update on how that business kind of has grown within Machine Solutions this year and also where profitability has got to relative to that 20% target that you have for 2025. It would be helpful just to have an update a little bit on how that business is evolving from a growth and margin standpoint. The growth has been solid. And as I mentioned on the software side, which is if you think capital allocation, that's where we have allocated the most capital, the software companies have a really robust and good performance. If we look at versus the market, they have had a growth or a CAGR that is slightly above market growth in those areas. So that's positive. Also the powder business has been strong. Margin development, it's a positive margin development but I don't want to go into specifics. We have talked broadly around, we want to reach the 20%. I think we are on track to do that, but it's still quite far below that. My -- where our ambition is that we should give you a much more -- let's say, much more view into this and the development at our CMD later this year. Two remaining questions from my side. One is on the electric vehicles underground, mining vehicles. Could you provide us an update again on the gross margin potential, EBIT margin potential and also servicing potential of that business I recall that you expect Battery as a Service as a very large contribution, but that was, I think, before the management change of that division. I was wondering if that still your view? That would be my first question. On the margin for BEVs, we expect them to come in at similar margins as for the current diesel equipment. It's not something we have a detailed spreadsheet that leads to, but -- it's also in our own hands to manage it in that way, so to say, with pricing and so on. Today, we can say it's dilutive because -- we are still early in the ramp up. As Cecilia mentioned, we have some investments ongoing now. We will basically -- yes, we're building new production lines, even a new factory to meet the demand there. Meanwhile, it's more of a 0 series production type build. So which obviously impacts our margins from an industrialization point of view. So today, it's dilutive. During the next few years, it should gradually come up to become at the same level as normal equipment or diesel equipment. On the service side, yes, I mean, the potential there didn't change with management. So everything that was said that CMD is still fully valid. And we are seeing basically all the orders we get at this point is with battery as a service. We have said we don't expect it to stay like that forever. Long term, maybe 50% will be Battery as a Service as some customers will want to monitor that themselves. But at this point, they see the value proposition with Battery as a Service and they all go for it. Yes, okay. That was one. And then another question on cost inflation into 2023. What is your current assumption for staff cost inflation? What is in your budget at this point? That I don't have actually. But it was -- 2022 was fairly normal still. We have a lot of our workforce in countries that are unionized and that have collective bargain agreements. We did see higher numbers in the U.S. some Eastern European countries and so on. So it was probably slightly higher than historical, but we expect the main impact to come in 2023. I have one on SMR and the report that you pointed to talks about the 2% CAGR outlook for the underground mine equipment market 21 to 25. I just wanted to check your kind of broader view on that. Is that an agreement with how you see this market? 2%, probably not. I think we're seeing higher numbers, as you can see. But I don't want to give a specific figure as a guidance, but 2% sounds low. I have a much, much broader question about the kind of structure of Sandvik Group of the 2 very distinct parts there. If we look 3, 5 years forward, do you envisage a set of circumstances or state of maturity of the businesses that would warrant maybe Sandvik becoming some of 2 that equals more than just 1 plus 1? I think it does today. I think it equals more than 2, 1 plus 1, but, no, I mean I get this question from time to time. And I mean the group as it stands today is a group that we think is really good. We like the company as it is. And our focus is to execute on the strategy we have in all our 20-ish divisions. Then are we ruling anything out for the future? No, we should always keep. All options open, that should always be the case. If I may, just to ask a slightly different way. Do you think the Machining part of the business with the transition that you've enabled there already shift towards software and powder. Do you think that can stand on its own 2 feet, if it was a stand-alone business? Yes, absolutely. Well, I think we have about 300 reporting entities, I think you can probably create 100 companies out of Sandvik. I mean we buy companies that could be stand-alone. So it's not a matter of what can be stand-alone or not. There are many quality businesses in Sandvik that could stand on their own, if that's what we wanted. But then we shouldn't do acquisitions. No, that's of course, fair. Sorry to kind of plow in on this. Just more from kind of equity market and not just purely operational perspective, of course, operationally, they can. And the reason I'm obviously asking is that is something that we get coming quite regularly on very simple to run some of the parts on Sandvik and see that there's a consistent discount to pure plays or kind of to peers. So why not undertake this when the whole industrial world is going through this process of degovernmentalization? Yes. Why not? I mean from my point of view, you can do the summer parts and values. I mean there -- I don't believe such thing as the term hidden value. They are there, you can see them. And then it's up to you and others in the market to put the value on it. That's not something I want to speculate in why it is the way it is. But again, we believe that we will create value and have a fair value of the group if we execute on our strategy and consistently develop -- deliver the results and grow the company. And then it all -- when you do the summer parts, I mean, it's all up to you to choose your comparison and your peers and the assumptions and what multiples you put on things. I have to assume that the market is valuing us at the level you think we are worth. That's fair. Yes. I mean, just not to kind of invite a further comment, but just your holding discount that stands up happening because of the 2 uncorrelated parts, but thank you very much for your time. I understand that dynamic, so to say. Then it's always a question on how big it is and what kind of actually, let's say, synergies or benefits do we have of being 1 group in various aspects and putting numbers on those things at the end of the day, I think, becomes a theoretical exercise. I don't think there's anything today that is holding back the performance on any part of the group, while we have benefits from being together in various aspects. So that's our focus today. Then as I said, we should never rule anything out in the future because we don't know how things will develop in the future. Thank you. I think we conclude with the question from here, and it's from Mattias Eriksson at PAM Capital. It's a question we answered quite a lot this year, but let's end with that, and that's how large share total cost is energy for the group. Please, Cecilia? Thank you. So with this, we end this webcast, and we thank you for calling in and from all of us, we wish you a nice rest of the day and of course, a very nice weekend. Thank you.
EarningCall_1324	Good day, and welcome to Cogeco Inc. and Cogeco Communications Inc. Q1 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrice Ouimet, Senior Vice President and Chief Financial Officer of Cogeco Inc. and Cogeco Communications Inc. Please go ahead, Mr. Ouimet. Thank you. Good morning, everybody, and welcome to this first quarter conference call, which Philippe JettÃ© and I will present as usual. Before we begin this call, I'd like to remind listeners that the call is subject to forward-looking statements, which can be found in the press releases issued yesterday. Good morning, and thank you for joining us for this first quarter results of fiscal 2023. But before we start, on behalf of Cogeco's management and myself, we would like to extend our warmest wishes to all of you for the upcoming year. So let's now start the conference call. Cogeco's financial performance was in line with our expectations in the first quarter despite the more challenging economy and competitive environment in the United States and Canada. Nonetheless, our reliable high-speed network, innovative digital product offering and local customer service have enabled us to connect new homes and customers as part of our network expansion projects. On the radio side, our radio stations remain at the top of the ratings, confirming once again our leadership position in this market, even if we are operating in soft advertising markets. So let's start with our U.S. operations. During Q1, we pursued our fiber-to-the-home network expansion where we added more than 17,000 homes passed during the quarter. This expansion is part of a program expected to grow homes passed by 5% in fiscal 2023, which is in addition to the 4% we added in fiscal 2022. In Ohio, all the issues encountered for the transition to Breezeline's brand and systems have now, are now behind us, and customer service is back to our quality standard. As we said in our last conference call, we expected a loss of customer in Ohio during the quarter following a rebranding and systems migration. And while net customer loss improve in Q1 versus Q4, it remained high. So we still have work to do, work on our plate to grow our customer base in this market. We also pursue the second phase of Ohio's integration by launching our IPTV product in the region to new video customers in December and will make it available to existing customers this month, which is in part, which is part of our focus on increasing ARPU in this market. As of network expansion projects in New Hampshire and West Virginia, we are making good progress and we have intensified our marketing efforts. Moving on to the Canadian operations. We accelerated our construction efforts to connect more homes in unserved and underserved communities in Quebec and Ontario, where we added about 20,000 homes passed during this quarter. We remain on target to add about 3% home pass in fiscal 2023, which is in addition to the 2% added last year. These fiber-to-the-home expansion projects are primarily done in partnership with governments and deployed in area, which do not currently have high-speed Internet providers. For mobile, we remain determined to launch a service in Canada as we now see less risk and greater clarity with strong government support for the new CRTC MVNO framework to be able to create sustainable wireless competition where we already operate broadband networks. As the last regulatory details and the final wholesale terms and conditions are becoming available, we are preparing our own commercial plans and we will have more to share before the end of this fiscal year. Now let's discuss Cogeco Media. In the ratings competition, our radio stations are again at the top of the ratings for the numerous audience surveys. While the market remains challenging, we continue to expand our multi-platform audio content options with an emphasis on digital ad tech solutions. Thank you, Philippe. So during the first quarter, revenue at Cogeco Communications was up 2.3% and adjusted EBITDA up 1.8% in constant currency when compared to the last year, which reflects organic growth at Cogeco Connexion and stable revenue at Breezeline, partly offset by higher operating expenses in both segments. Capital intensity was at 25.8% compared to 19.6% last year due to increased activity related to network expansions in both countries. Excluding those network expansion projects, capital intensity was 17.2%, which is approximately the same level as last year. Free cash flow decreased by 20% to $105.7 million in constant currency due to higher capital expenditures related to the network expansion investments and interest expenses, partly offset by lower acquisition and integration costs, higher EBITDA and current income taxes. Excluding network expansion projects, free cash flow and constant currency would have increased by 10.6%. In the first quarter, Cogeco Communications continued to be active in its share buyback program at the faster pace than the previous quarters based on the low stock price with the purchase of 512,000 shares for $37 million. And in November, we amended our buyback program to increase it to 10% of the public [indiscernible]. A dividend of $0.776 per share was declared for the quarter, which is an increase of 10.1% versus the prior year, reflecting confidence in our growth strategy. Let us now look at the performance within the segments. In the U.S., Breezelineâs revenue and constant currency remains stable in the first quarter, mainly as the benefit of a high value product mix and rate increases were offset by the impact of a lower customer base in Ohio. EBITDA decreased by an expected 3.4% in constant currency, reflecting stable revenue and unusually low spending in marketing and advertising and less staff last year in Ohio, while the assets were still operated under the previous owner's brand. As expected, we had an elevated number of Internet customer disconnections. This was driven primarily by the remaining impact of our rebranding and customer management and billing systems migration in Ohio in fiscal 2022. And to a lesser extent, due to the impact of the high inflation on customer spend and the resulting increase in competition notably, for entry level products. The product mix improved with a greater proportion of new connections, taking faster Internet speeds, and therefore driving our higher average revenue per unit. Overall, the number of Internet customers decreased by 14,000 during the quarter with 10,000 related to Ohio. The video and phone customer losses reflect cord-cutting for some customers, which was slightly more impacted by the high inflation environment. Turning to our Canadian operations, Cogeco Connexionâs revenue increased by 4.8% in constant currency relative to the same quarter last year, mainly due to the cumulative effect of an increased Internet service customer base and higher average revenue per unit driven by good product mix and rate increases. EBITDA increased by 6.4% in constant currency, mainly from revenue growth and efficiencies, resulting from a restructuring made in the fourth quarter of fiscal 2022, partly offset by higher marketing expenses to drive future growth. The 2,500 Internet customer additions in the first quarter were lower than last year, reflecting a slower activity in the industry and a strong quarter last year in the context of the pandemic. The Canadian business is also improving its ARPU for the Internet product by having an improved customer product mix. The video and phone customer losses reflect cord-cutting for some customers, especially in the context of a high inflation environment. As it relates to Cogeco Inc., in the first quarter, revenue increased by 2.4% and EBITDA increased by 2.3% in constant currency. Radio operations revenue increased by 2.5%, while the advertising market remains soft. As for buybacks, Cogeco Inc. acquired 28,000 shares during the quarter and subject to the approval of the TSX, the Board of Director has approved the renewal of the NCIB program for up to 325,000 shares for the coming year. Dividend of $0.731 per share was declared for the quarter, which is an increase of 17% versus last year. Now, let's discuss the financial guidelines. The lower-than-expected customer base in Ohio and to a lower extend, increasing macroeconomic pressure on customer spending and a resulting competitive environment have led both corporations to revise the financial guidelines for revenue, EBITDA and CapEx, which were originally issued in July. Free cash flow projections remain the same as previously disclosed. On a constant currency and consolidated basis, Cogeco Communications expects to grow its revenue and EBITDA in a range of 0.5% to 2%. We are now expecting to spend from $700 million to $775 million in CapEx, still including $180 million to $230 million in growth oriented network expansions, resulting in a capital intensity of 24% to 26%, or excluding those expansions 17% to 19%. At Breezeline, we now expect low single-digit growth in both revenue and EBITDA on a constant currency basis, reflecting a higher value product mix and growth in the Internet service customers outside Ohio for the full-year, partly offset by lower customer base in Ohio. If it were not for the Ohio impact, we would have expected a mid single-digit growth in the U.S. as we were expecting originally. Revenue and EBITDA at Breezeline under the new guidance are anticipated to be higher in the second half of the year than the first half. In terms of quarterly cadence, we anticipate a mid single-digit decline in revenues and EBITDA in the second quarter of the year due to elevated EBITDA we recorded last year as we had less cost in Ohio prior to the migration to our brand and our systems. This is expected to be followed by sequential growth in revenue and EBITDA in Q3 and Q4. At Cogeco Connexion in Canada, we continue to expect low single-digit growth in revenue and EBITDA, reflecting stability in our traditional operations and growth in our newly built expansion areas in Quebec and Ontario, partly offset by video and phone cord-cutting due to the current high inflation environment. On the quarterly results, Cogeco Connexionâs EBITDA growth in the second half of the year should be more neutral as we've had price increases at different moments last year, as well as some year end adjustments in Q4. As for the Q2 results, we do expect modest year-over-year growth in revenue and EBITDA in Canada. Thank you, Patrice. As we pursue our journey for sustainable growth, Cogeco was pleased to become a signatory to the Corporate Knights' Action Declaration on Climate Policy Engagement during COP27. The declaration aims to promote effective climate policies consistent with the Paris Agreement through ongoing engagement with governments and key industry associations. In addition, we were once again delighted that our corporate governance practices have been recognized by the Globe and Mail Board Games as among the best within Canadian family-controlled, dual class public corporations. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Maher Yaghi at Scotiabank. Please go ahead. Thank you for taking my questions. I wanted to just maybe start with your U.S. operations and try to really understand maybe if you can break down what is causing the elevation in churn. You mentioned the Ohio business as the main culprit here in terms of the results for subscriber losses in the quarter. Can you explain or let us know what is the main culprit of this decline other than your current continued integration of the brand. I suppose there are also other reasons like increasing competition, who is acting in your marketplace to take share from you? And outside of Ohio, are you seeing also increased pressure, if so, on which service, who is the competing companies that are coming in and trying to take share. Especially, I'm trying to understand the impact of fixed wireless as well as potentially other cable operators trying to take share from you in the U.S. I have a follow-up question after that? Good morning, Maher. Yes. So in Ohio, as you know, it's a three-player market for wireline services. So there's two formerly cable companies and one phone company. That's mainly in DSL. And basically, when we â because we had to rebrand, obviously, it was a carve-out business. When you do this, you change the name and you change the systems, the bills also. It provides customers an ability or a moment to think about their services. And basically, in this market, again, it's a three-player market. There is also fixed wireless, which is new. I would say fixed wireless in general is not something we're seeing across the board. It's a bit more prevalent in Ohio in our networks. And that's one additional source of competition in the region. We did expect to have less customer losses in Q1 in Ohio than in Q4, and that's what happened. This will be true in the future as well. We do expect those losses to significantly reduce over time as we go throughout the year. But there will be some in Q2, and we'll see about Q3 and Q4. In the rest of the business, I would say the â overall, there is a bit more competition in the industry, not necessarily where we operate, in particular, but this is driven partially by what's happening with FWA, and it has had some impact on the pricing and the acquisition activity of some players in the U.S. So there's a bit of that. So we did have a small loss in our customers in Q1 outside Ohio, as you saw. But we are expecting that this will turn for the balance of the year. And I complement this â just adding that in Ohio, remember that it's not just a carve-out and a change of system. We change brands. So we had lower marketing activities last year. We didn't want to market the previous brand in the market. So we awaited our brand to be launched â and therefore, now we're more active on marketing than we were and we're still ramping up. So we just expect that we will be even more present in the market in Ohio. Okay. And how should we look forward to Q2 in terms of trends in the U.S. for Internet loading. You mentioned that things are expected to improve, but are we looking to grow Internet subs in the U.S. in Q2 or continue to see losses? And my second question was on wireless. I see that you continue to â you have been adding staff and executive and employees in your wireless project. Can you maybe give us an update on any changes or any advancement on that project that could be noteworthy at this point? Sure. So I'll take the first one. So for Q2, obviously, we don't guide specifically on PSUs because this is more volatile. And also, it's always a trade-off between ARPUs and volumes, and we tried to strike a balance there. But we do expect from what we're seeing so far that Q2 will provide a positive number outside Ohio because it was a bit unusual to have it as a negative number in Q1. And in Ohio, we do expect a loss of customer, but it will be normally quite lower than what we've seen in Q1. And in Ohio, I just want to mention also, as we had planned all along, we're â we have introduced an IPTV product on schedule. So this will help for a portion of customers. It will also help with the infrastructure investments we're making as it will provide an ability to optimize the network. So this was planned all along, and it's part of the future activities. For mobile, I know it was frustrating to waiting so long for the terms and conditions they took time to be released by the CRTC. We have now an understanding. It's a good thing. We were waiting to see the full details. The CRTC have inserted in there, another requirement to meet which is to be commercially operational somewhere in Canada. It's not very stringent, but we will adapt our plans in the coming weeks and months to revise our strategy. We have to wait for the Ts and Cs to be final, final, final. We think we're very close to that, but we need to give the CRTC closure to this process, start negotiations under the MVNO framework with the MNOs as well as some parallel commercial conversations and agreements that will take place as we firm our plans. We have a good team in place today. They've been working hard in the past two years as we prepare our capabilities and experience. We are going to continue to add to this team. And as I said, before the end of the fiscal, when everything will be known, we will have more to say on commercial launch plans. Philippe? Maybe I could just simply add on this, maybe you noticed too, but we have spectrum to cover 91% of our operating broadband footprint today. So that condition we were expecting, we largely meet today, but we need spectrum as well. So we continue to work getting the appropriate amount of spectrum in our portfolio. Thanks very much. Good timing for my question to segue off where you're just talking about there, Philippe. Can you just clarify on those terms and conditions that you only have to own some amount of spectrum anywhere that you want to be in MVNO, there's no requirement to have a certain amount of it? So I mean you already have enough to qualify all you need is an operating wireless network in some region to fully qualify for the current rules. Is that correct? That's correct. We have the same understanding. We need to own spectrum, obviously, to gradually shift from leasing capacity on the incumbent network to moving to our own network. If you don't have enough capacity there, it will be difficult eventually to transition. But for the first year, I expect that we are going to lease capacity and operate mostly focused on the market to take shares in the market to welcome customers on the Cogeco network. And down the road in a very â in the most capital-efficient manner, we'll build our network, build enough coverage and capacity and transition gradually the subscribers to our network. So we still have time to ramp up our spectrum position. There is no minimum but well, there you need to have some spectrum to be eligible, but there's no minimum requirement just to enter the MVNO framework. Cool. The second question is on the rural expansions and the sub adds. Can you give us a little bit more â youâve mentioned the homes passed, but I'm curious in terms of actually connecting subscribers and how much of a lag effect there is. Did you add some rural customers in these new regions in the first quarter? And would you expect that to ramp up in any meaningful way in Q2? Yes. So we did have some. So we're getting started in Canada and the U.S. is even newer. So we had a almost a very small amount in U.S., but it's starting. In Canada, we had some in Q1 as part of the numbers. And we do expect that, yes, it will ramp up as we add more homes throughout the year. The financial impact of this will be more next year as we're able to then generate revenue and EBITDA from it. And ramping up in Q2, Patrice, like are we talking like a couple of thousand potential adds in these new territories? And my last question, Bell has recently notified customers in Ontario and Quebec of a $5 price increase for Internet in January. Just wondered if you could remind us what your potential schedule is for rate increases? Good morning. Thanks for taking my questions. You mentioned that it's unusual to see Q1 net add losses in the U.S. outside Ontario. Just hoping you could dig a little bit deeper into the regions where you saw the most competitive pressures in Q1 and the levers you're pulling as you return to growth and or expected return to growth in Q2 in those regions? Sure. So we operate in 12 states. So we do have different variables in different states. So in some areas, we are â we have competition that's only DSL, some areas where you have a bit of fiber. Actually, the fiber count is not that big, and it hasn't changed actually recently in the U.S., which is often a question I have. It's at 15% approximately of our â based on the number of customers we have in the U.S. outside Florida. And there are some areas where we have three player markets even outside Ohio. So I would say it's a bit spread out. Yes. Okay. Thanks. And the press release also mentioned several cost optimization initiatives. Just curious if you can walk us through what those look like and the materiality of them? Well, in general, we always work in optimizing our operations, customer-facing operation in the field. There's also the back office optimization. These are ongoing quarter-over-quarter. So there's a component to create innovative products and services. It is optimizing by releasing some legacy system. There's also as we have a very, very strong focus on broadband, the talent and the teams and the company are focused on building more broadband than the older legacy product and services. And then the back office with a lot more efficient systems that were rolled out in the past four, five years, we now are at point where we can extract significant benefit from BSS, OSS and ERP platforms. And we will continue to add on a quarter-to-quarter, year-over-year improvement in operations. Great. Thank you. And just final one for me is on capital allocation. I know you recently increased the NCIB. Just curious how you're thinking about the uses of capital between dividends, buybacks and M&A here? Sure. So on the dividends, we try to have stability. So we've been growing psychological communication. We've been growing the dividend at about 10% per year in the last five to seven years. So we just did that last quarter. So I would say this one is fairly simple, and we try to keep the same rate for the full-year. In terms of the buyback, this is something we can ramp up or down. We did see an opportunity as the stock was quite low to ramp it up. The M&A is something, obviously, that's more long term. So we â when we bought Ohio, we added more debt coming from this. So right now, we're slightly above our target of 3x of debt-to-EBITDA on a consolidated basis. So we have capacity to do more. But obviously, we have to find the right targets. At the same time, given where we are, the size of the transactions we would be looking at right now would be more on the smaller than the larger side. Thanks for taking my questions. First one is on the reduction in the CapEx plans. We have seen the guidance update from last night. The release in the case, there's no change on the network expansion projects. Can you comment on the nature of the CapEx reduction then, please? Well, on the â we have a significant expansion program in Canada and the U.S. There's a number of external dependencies from governments to utilities. So we are rolling out incurring here and there some delays, they could be permitting. They could be construction related. So we're adjusting the capital outlay. But in the end, we're also â we have intention to keep the cash flow guided previously in line. So we are going to continue to build and activate as close as possible after the build â the sales of these new home pass to generate revenue and EBITDA. But there's always an opportunity even if construction costs are on one side, increasing opportunity to optimize our construction work and be more efficient. So all in all, altogether, we felt we could reduce the capital outlay not impacting too much EBITDA and not cash flows. Okay. Great. And then second question for me. We've seen a few updates on the potential cost of the DOCSIS 4.0 migration during the quarter. I don't expect you to jump the gun on the migration there. But I wonder if you have an update on these costs, or maybe on the numbers that we have heard from some of the peers if you think these estimates could make sense in your context as well. Well, DOCSIS is a standard that is developed by CableLabs. CableLabs is actually owned by the industry of cable codes in North America and abroad as well. There are lots of members part of CableLabs. So what's true for â in terms of cost for most players is also true for the others. What's more important here is really what the market needs. So DOCSIS 4 is the tool in the toolbox. We knew it was coming long ago. And we are first and foremost focused on where is our offering at, what is the market demand and from a â from that point of view, we know and we want to stay ahead of the market curve. So we have a very powerful platform with DOCSIS 3.1 today. A significant portion of the activations are â went from more than 200 megabits now to closer to 400 and 500 megabit. DOCSIS 3 supports that very well. And we are more regional and rural in our footprint. So the number of homes passed per node is to our advantage in highly dense areas and footprint. They have more density, but they need to adopt newer technology faster than we will in our regional footprint. Yes. Thanks. A couple for me. One question on the Canadian operations. It certainly appears that Bell has ramped up the promotional activity and really trying to play to the marketing of fiber strands. I am wondering if you can comment on that and if you're seeing that in the month-to-month kind of market activity. And second, back to the DOCSIS migration topic. Are you fully committed to DOCSIS? Or are you prepared to â or would you consider a variable approach with respect to fiber based on a particular market's density or economic standing, you think would fiber be part of a solution or you completely committed to hybrid fiber coax plant? Thank you. These are two good questions, Tim. Thank you. So the first one is for what Bell is doing in the market. Again, we have to look at this from the demand and the offer. So, they are introducing obviously very high speed, but to be able to attract customer attention, they need to discount them very, very low. We've seen price points of $60 to $80 in the market. So that already suggests to you that there is not a large number of segments in the market that are awaiting these speeds to be sold at a reasonable price. So they have to discount them fairly heavy. So that's for the Bell part of your question. The DOCSIS part of your question, it has been â it will be always a mix of fiber and other technology. We have a large tool kit. There's a number of different scenarios in the marketplace from the residential market to the bulk market to small business, medium business, industrial and large enterprise. They all require different solutions. We have always for example, in the [indiscernible] commercial and enterprise market, delivered fiber to the premise or fiber to the customer for more than 10 years. So there is a lot of fiber in our network and year-over-year and even week-over-week, we calibrate the network using the right mix of coax and DOCSIS, where it's HFC. And everything new is fiber all the way to the customer. And there are some places where demand actually moves a bit faster, and we adjust the network with more fiber, if not fiber to the end â to the end point. So DOCSIS 4 is not a blanket solution. It will be part of the toolkit, and we will calibrate all the solutions to meet the demand and stay ahead of the demand curve. Hi, good morning. Thanks for taking the question. First off, I just wanted to return to the wireless question, if I could. Do I understand like your positioned correctly, if I kind of paraphrase it out, you're going to have to build the network wireless network somewhere within your footprint first. And then you have to go to the incumbents to start negotiating rates that would apply for the kind of MVNO usage while elsewhere, while you build out that footprint, I mean is that the path that you're currently on? So the new eligibility requirement is to have something commercially available somewhere in Canada. We'll define down the road what that really means to us. But we will certainly meet that requirement from the CRTC. Now the negotiations among different partners, there were conversations and previous years, they will continue. What the CRTC really means is that we can not benefit from the regime until we've launched something somewhere, and we're going to meet that. But the discussions or conversations don't need to wait until we have the light on somewhere to start. Okay. So you can negotiate rates have clarity on what your economics potentially would be and then take the next step to proceed if it makes sense. And if by some chance it doesn't make sense, then your build decision could be altered. Is that correct? That's correct. It's more just a tiny bit more complex than that because there are many players in the market. There are three dominant MNOs and there are combinations, different things. So it's not just a binary consideration. Right. Okay. No, that makes sense. Thanks for that clarity. And then just on the U.S. market, the broadband market in particular, I see projections of what the sell side is expecting for broadband net ads in the U.S. which is really a de minimis number for the next couple of years. Is that in line with how you see the markets? And particularly, you're like a sliver of the U.S. market. So do you feel as though that applies to you equally? Or do you see a different outlook for the regions you operate in? And does that factor into your comments about broadband net ad growth as we go through the year? Thanks. Well, the existing markets are calmer than they used to, we see very, very low churn rates in our legacy footprint. So there is less movement in the market and new ads come from hedging out to our addition population, demographic changing. But the core of the market is more calmer than it used to be. So as long as this will remain true, I think we should expect low churn and light growth. Yes. Thanks very much. Good morning, two for me. Maybe for you, Patrice, on margins down in the U.S., you've obviously always had a pretty healthy margin here. It seems like we're kind of into a little bit of a new era here, whether it's pricing, marketing mix, all the moving parts of the U.S. telecom market, wondering just if you can provide some kind of outlook for margins from Breezeline? And then second, on the M&A playbook, I think in the past, you've alluded to obviously your due diligence on any asset you acquired in the U.S. adjusting a purchase price for all the different kind of moving parts on a very local basis with respect to competition and market structure, et cetera. But at a high level, relative to maybe two or three years ago, do you see your M&A appetite or playbook evolving at all? Or are you just intending to adjust what you're kind of willing to pay for some of these assets? Any color there would be great. Thank you. Sure. Good morning. So we, in terms of margins in Breezeline last year, we generated 46.3%. And one of the reasons, by the way, why it's lower than Canada is the video content cost. So the structure of the deal is a little different in the U.S. This year, we are expecting a slight increase versus what we did last year. So obviously, they will change from quarter-to-quarter, but that's our current expectation. In terms of M&A, obviously, when we look back, especially when we announced the Ohio deal, this was prior to the war in Ukraine and the high inflation and the ramp-up in FWA. So there's a lot of things that have changed in the market since then. So we had to integrate during this new environment. In general, we're looking forward to continue to grow organically to grow through footprint expansions, which we're doing right now, and there might be more in the U.S. with the new BEAD program, which is similar to what we're doing in Canada with rural expansions. And as for M&A, we will continue to be actively looking. That being said, this will take into account the new environment, which means that we might well pass on certain things that we would have done in the past, or as you said, adjust the pricing. But definitely, we have to reflect the current and expected future competitive environment in the specific area we're looking at. And one thing to take into account also, obviously, there's the demographics, number of players and everything, but even what we're buying in terms of network and fiber count. And so there's a lot of things we have to look at. I think these things are becoming even more important than before in our acquisitions. Well to our capacity to execute. It's great. Right now, we have a lot of governments interested to help the industry find the way to connect all the unserved or underserved areas, that is taking not only capital expenditure, but a lot of human capacity out of organization. So that time also to be accounted and balanced against M&A. M&A takes time, integration, sometimes can be long and you come up with a plan and things don't always go exactly as planned, and you need a human capacity to interact and fix that, which we're doing right now in Ohio, plus all the new projects we always maximize our capacity. So really, to me, it's â there's a fixed capacity with the organization, and we use all of it. Yes. Thanks for taking the follow-up. I just want to clarify that I understood that well. But Philippe, I think, I heard you say that the Cogeco will certainly meet the requirement from the CRTC, does that mean that you will have a home wireless network in the foreseeable future, maybe before the negotiations. And if we can clarify that this is included in the updated CapEx expectations. I appreciate we don't have the final conditions, but just want to clarify that I heard that well and that this is within the guidance. Okay. Well, first, for the guidance, they include in the OpEx and CapEx are wireless ambitions. It has been true for the past two years. Now in terms of meeting the CRTC requirements, the first part is really to have the CRTC really clarify all the details they are expecting industry to meet, thatâs in process. I think it will take until April before that first phase is doing is ongoing. But that doesn't preclude or prevent any commercial negotiation to go on and continue and new ones to be developed, either under the MVNO framework or outside of the MVNO framework. So we could have parallel things going on while we understand exactly what the CRTC wants us to. And we will meet those conditions to benefit from the MVNO regime. Okay. Well, thanks, everyone, for being on today's call. So we'll be disclosing our second quarter results in mid-April, and feel free to call us in the meantime. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
EarningCall_1325	Greetings, and welcome to the Fastenal 2022 Annual and Fourth Quarter Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Welcome to the Fastenal Company 2022 annual and fourth quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer; and Holden Lewis, our Chief Financial Officer. The call will last for up to one hour, and we'll start with a general overview of our annual and quarterly results and operations, with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until March 1, 2023, at midnight Central Time. As a reminder, today's conference call may include statements regarding the company's future plans and products. These statements are based on our current expectations and we undertake no duty to update them. It is important note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully. If you -- some highlights on the quarter. I'm on Page 3 of the flip -- of flipbook. So our daily sales grew 10.7% in the quarter, eased a bit from what we've seen in recent quarters, primarily because of tougher comparisons to what we were seeing in the fourth quarter last year, but also some moderating demand. I'm pleased to say that our fourth quarter operating margin remained stable at 19.6% and our ability to generate cash. So we're looking at our cash conversion, it returned to historic levels. And that's really a sign of moderation and the level of inflation that we're seeing in the marketplace. But also a more stable supply chain and the ability to not need -- that for a double negative, not need to expand our stocking levels to ensure a reliable supply line for our customers. So it gives us some flexibility as we go into 2023. Very pleased to see that. 2022 was a year of milestones and they all centered on $1 billion. So in October, our e-commerce revenues surpassed $1 billion for the first time ever. Our -- and that's on an annual looking at annual milestone. Our international sales exceeded $1 billion. We hit that milestone in the month of November. And as noted in the release this morning, our company-wide net earnings topped $1 billion for the first time ever and that was for calendar 2022. When I look at that chart on the upper left, it's hard to decide where do you start explaining all the the noise you have really over the last 3 years, as we went through COVID, as we emerged from Covius, as we went through supply chain disruptions and inflationary period. So I chose to not and just compare to 2019 from the standpoint of what was our cumulative sales growth in each of the quarters of this year because I think it tells a more stable story and talks about the things that we've built. So in the first quarter of 2022, we were 28.1% larger than we were in the first quarter of 2019. This expanded to 30% in the second quarter, expanded to about 31% in the third quarter and in the fourth quarter, we're about 35% larger than we were in the fourth quarter of 2019. Now you shouldn't conclude from that, that, Geez, that expanded 7 points from Q1 to Q4. Because in all -- in full disclosure, 2019 was weakening a bit as we went through the year. I would see this as ignoring COVID, ignoring supply chain, ignoring inflation, we're 30% bigger than we were 3 years ago, and I think that's a testament to the business model and to the team executing the model and the marketplace, recognizing Fastenal for what it is, a great supply chain partner to their business. If -- and I'm pleased to say, I think we're exiting the pandemic stronger than we entered. The -- we experienced margin pressure in the fourth quarter, and Holden will touch on that in more detail later in the call. Fasteners were challenging, but we understood what's going on there, and we knew what was coming. The safety, I would say the same thing, it's challenging like anything is challenging, but we knew what to expect there. And I think on these first 2 buckets of fasteners and safety, we understood it, and we managed through it quite well. The remaining clients, a lot of those products, aren't as prevalent in the recurring pattern, the planned spend component of our business, whether it be through the vending portion of FMI or the BIN or the FASTStock portion of FMI. And so it takes different tools and different means to manage that. And we had some challenges there. And again, Holden will touch on a little bit more later in the call. When I look at the final piece and the reason we were able to maintain a stable operating margin, we've done a really nice job with headcount. We did add a few more people in the fourth quarter than I would have liked to have seen. I suspect some of it is after a period of being really difficult hiring and as it eased throughout the year, there are some spots that we needed to fill, that were filled. But I look at it in totality for the year. We've really done a nice job. And I'll touch on it a few more -- a little bit more in a few minutes, but we've done a nice job in the last 3 years as well. Flipping to Page 4 of the foot book, the -- Onsite, we had 62 signings in the fourth quarter and finished with 1,623 active sites, so up about 15% from a year ago. The -- if you ignore the sales at transfer over when we opened an Onsite, where it's an existing customer, we grew our Onsite-based revenue in the high teens and reiterate our goal for 2023, our intention is to sign 375 to 400 Onsites next year. And I'm pleased to see, for us, we often talk about participation inside the organization. Just over 80% of our district managers signed an Onsite back in 2019, and when society closed up and folks weren't as excited about us moving in to stay with them during the day, our -- that participation dropped dramatically as our Onsite dropped in both 2020 and 2021. And I'm pleased to say in 2022, 80% of our district managers signed at least 1 Onsite. Now would I prefer to see that go to 85% or 90%? Sure, I would. But 80% is a nice threshold to get above again because we have done it once before, and that was in 2019. So my congratulations to the team. FMI Technology. We signed 4,730 weighted devices in the fourth quarter, that's 76 per day. A year ago, we were signing 64 per day. And the activity through our FMI Technology platform represented almost 39% of sales in the fourth quarter. That was 35% a year ago and 27% 2 years ago. For 2023, our goal is to sign between 23,000 and 25,000 MEU devices, whether it be FASTBin or FASTVend. E-commerce, the next piece of our, what we call, digital footprint, daily sales rose 48% in the fourth quarter. Again, incredible traction in that area. We've really seen that traction move in the last 3 years, partly a function of COVID, and I think a lot of people are seeing those kinds of patterns, but also -- we've gotten better as an organization and our ability to execute on e-commerce, and that's times through the numbers as well. So EDI and punched out catalogs and really large customer-oriented e-commerce was up 45% and our web sales was up almost 60%. Looking at our digital footprint. So that's looking at FMI plus the piece of e-commerce that doesn't come from FMI was 52.6% of sales in the fourth quarter, and that was 46.5% a year ago. Our goal is 65% of net sales going through our digital footprint next year. In the interest of full disclosure, that's an aggressive goal, but it's our goal nonetheless. If I flip into Page 5, we put this table in the release last January as well. And it's really intended to show over time what's really happening to our network. And that is, as FMI becomes a bigger piece of our business, as our mix of customers changes, as e-commerce becomes a bigger piece, you rationalize your footprint because you need for a footprint change. So you can see in 2013, we peaked out, and I'm going to start at the bottom of this set of bullets and work my way up. So in 2013, looking at our data, we had a 30-minute access to about 95% of the U.S. manufacturing base. And this is just looking at the U.S. branch network because the Canada follows a similar trend as far as what you've seen in the number of branches, whereas the rest of the planet are continuing to open locations because we're quite young there. Looking at the 1,450, which we think is the ultimate number we get to for branch count, the -- in the U.S. and Canada, the U.S. piece of that where we have really good data, we think that 95% drops to about 93.5%, which we think is incredible coverage and puts us in a great position to be a great local supply chain partner and still have a really efficient network. And you're seeing that in our operating expenses over the last few years. If you look at our headcount numbers -- and I touched on it earlier, and I thought I'd share a different view rather than the year-over-year view you have on Page 5 of the earnings release. And that is, again, a 3-year view of what's happening. So our in-market locations from an absolute basis since 2019, our headcount is down about 567 people in the branch and Onsite network, which is about a 4% drop. And again, things like FMI and rationalizing locations have really allowed us to leverage that. However, our sales headcount is up because every headcount we've reduced has moved into some type of sales role supporting the branch and Onsite network. So I'm pleased to say we were able to realign our resources in that time frame and really be a better growth-driving organization for the long term that aligns with our strategy of a branch and Onsite network. The other thing that should stand out is a year ago, we had 377 more branches relative to Onsite. So we had 1,416 Onsites. We had 1,793. So 377 delta between the 2. At the end of 2022, that delta has contracted to 60. So we have 1,623 OnSites. We have 1,683 branches. I don't know what quarter that flips. But it won't be too much -- too far into our future that we'll actually have more Onsites than branches which has been very much a planned thing within our business over time. Again, the FMI digital footprint helped us leverage our headcount and our rationalization of branches. The other piece that's an important and growing component, we've talked about our LIFT initiative, and we ended the year with just over 17,000 of our vending machines being resupplied out of our LIFT facility, which really allows us to operate more efficiently, ultimately allows us to rationalize some working capital, and our sales team can focus on selling more than managing some of the back-office items in a branch. The final thing, if you look at our headcount over the 3-year period is we've been able to really rationalize our support labor. So we have added folks in the distribution because of LIFT. However, in the -- if I look at DC and manufacturing, we're up 98 people in the last 3 years. So again, that team has done an incredible job of managing their headcount. And if I look at our support areas in general, 51% of our headcount increase in the last 3 years has been focus going into IT. That's how we're able to do things like FMI, how we're able to do things like LIFT and build the technology to support it. 35% has gone into either a growth driver or into our international team or supporting our sales team and 14% has gone into all other categories combined in the last 3 years. I think that's an organization that dramatically improved itself in the last 3 years as we prepared for the future. One last item -- when you see our release in February, I usually don't get ahead of myself on what's going to be in a future release. One thing to note is in 2022, our team in India added approximately 50 interns, and we ended up hiring 54 of them because a number of those interns told their friends about Fastenal, and they joined the Blue team and they added to our IT group. We saw such great success with that. It's a very efficient way to add folks. Here in early January, we added 96 -- or 98, 1 of the 2. So you're going to see the number grow by about 100 in the month of January in our support infrastructure. Don't conclude from that Fastenal is not managing its headcount. Conclude from that Fastenal is investing in resources to support its technology side. Great. Thanks, Dan. Starting on Slide 6. Total and daily sales increased 10.7% in the fourth quarter of 2022, which included an up 8% reading in December and represented further deceleration from prior quarters. We attribute this deceleration to slower industrial production, which shouldn't surprise anyone that tracks the purchasing manager index and more difficult growth and pricing comparisons. But even so, significant elements of our business continue to perform well. For instance, manufacturing, which was roughly 73% of our sales in the fourth quarter of 2022, grew 16% and slightly exceeded normal quarterly sequentials. In addition, our largest customers, as reflected by our national accounts program and which approximated 59% of our sales in the fourth quarter of 2022, grew 15%. We believe continued healthy performance in these areas reflect our investments in Onsite and changes to our branch structure and sales roles. Feedback from our regional leadership on the outlook entering 2023 remain constructive and largely unchanged from the third quarter of 2022. There are a few areas where we have seen incremental weakness, however. For instance, a handful of our large retailer customers tightened their belts regarding facilities and labor and our non-North American sales softened on a strong dollar and geopolitical events. Now we've made significant investments and seeing enormous growth in these areas over the last few years and the current weakness in our view relates to market-specific factors. Construction revenues were also softer, which reflects the conscious decision we have made to position our branches to focus on larger key accounts, which is contributing to better labor leverage. These 3 areas, large retailers, non-North American markets and construction together, represent more than 15% of sales and went from double-digit growth as recently as the first quarter of 2022 to declining in each case by the fourth quarter of 2022. As always, we have limited visibility as it relates to future demand. However, we do believe that our sales initiatives continue to gain momentum and expect good outgrowth in 2023. Now to Slide 7. Operating margin in the fourth quarter of 2022 was 19.6%, flat from the prior year. We continue to manage operating expenses effectively, producing 120 basis points of SG&A leverage in the fourth quarter of 2022. Occupancy costs are being restrained from strategic branch closures, while initiatives such as digital footprint, LIFT and the changes we've made to our brand strategies are contributing to improved labor leverage, which accelerated in 2022. As Dan indicated in his opening remarks, we were a bit more aggressive with headcount adds that might be prudent given the cloudy manufacturing outlook heading into 2023. However, we think that can adjust quickly, and it is likely annual FTE growth peaked in December or will peak in January before decelerating through the first half of 2023. Although the ultimate level of growth in the marketplace will have it say, we do believe that we can continue to leverage operating expenses in future periods. SG&A leverage was offset by a matching 120 basis points decline in gross margin, which was greater than anticipated. Certain factors were familiar. The drag related to product and customer mix widened as non-fastener growth began outpacing fastener growth, which was expected. The price cost drag widened slightly, which is a little more than expected, reflecting some improvement on the fastener side but incremental challenges in other products offsetting this. In fact, we experienced broader product margin pressure in our non-fastener and non-safety products. These categories tend to have a less centralized supply chain and the spend tends to be more unplanned, which when combined with slower demand and a better stock marketplace resulted in broader discounting. We believe this relates more to our actions than the state of the market and have plans to address it in the first quarter of 2023. On the positive side of the margin ledger, we continue to have healthy freight revenues and narrower losses related to maintaining our captive fleets. We had a higher tax rate, reflecting the absence of certain favorable reserve adjustments that benefited the fourth quarter of 2021 than higher nondeductible payroll and state income tax expenses in the fourth quarter of 2022. Our fully diluted share count was also down 0.8% from share buybacks for the last 2 quarters. Putting it all together, we reported fourth quarter 2022 EPS of $0.43, up 7.1% from $0.40 in the fourth quarter of 2021. Now turning to Slide 8. We generated $302 million in operating cash in the fourth quarter of 2022 or approximately 123% of net income in the period. This reflects a typical fourth quarter conversion rate in contrast with the preceding 5 quarters where our conversion rates lagged. This is due to comparisons in the second half of 2021, we began to finance significantly more working capital to navigate supply chain constraints and inflation. We do not expect to have to make a similar incremental investment in 2023, which should produce better cash flow. Year-over-year, accounts receivable was up 12.6% on higher customer demand and an increase in the mix of larger key account customers, which tend to have longer terms. Inventories rose 12.1%. The supply chain has largely normalized. Inflation is moderating. And our fulfillment rates are at healthy levels, which is causing our inventory growth to align more closely with growth than was true earlier in the year. Our days on hand was 161.5, more than 4 days better than the fourth quarter of 2021 and more than 13 days below the fourth quarter of 2019 despite the challenges in the last 18 months. We continue to identify sustainable efficiencies in how we manage our inventories. Net capital spending in 2022 was $162.4 million, a bit below the $170 million to $190 million anticipated at the end of the third quarter, mostly related to project and equipment deferrals. Those deferrals, combined with higher spending on hub investments, fleet equipment and IT equipment, resulted in an anticipated net capital spending range for 2023 of $210 million to $230 million. We finished the fourth quarter of 2022 with debt at 14.9% of total capital, up from 11.4% in the fourth quarter of 2021 and unchanged at 14.9% in the third quarter of 2022. Though we had strong cash generation in the fourth quarter of 2022, we were also, again, more aggressive in returning cash to shareholders in the form of $177 million in dividends and $93 million in share buyback. Last night, we announced an increase in our quarterly dividend from $0.31 in the first quarter of 2021 to -- I'm sorry, of 2022 to $0.35 in the first quarter of 2023. Now before the questions, one quick note. This week, we released our inaugural ESG report, which is accessible through the ESG link found at the bottom of fastenal.com. This report highlights the strong alignment of FAST culture and mission with the environmental and human capital objectives of our stakeholders. I want to congratulate and thank the community of Blue Team members that work to pull this outstanding piece together. Before we start Q&A, my adder to the Holden's comment on the ESG report, I encourage to focus on this call to read it. Don't wait for the movie. It's a -- I think it's a well-written story in the context of how Fastenal tell its story about how our business and our team have addressed this topic really throughout our history, but communicated in a way that is conscious of the formatting in the structure that society has grown more accustomed to. The other piece that I wanted to highlight is another announcement went out last night, which was, we announced that our international team has surpassed $1 billion in revenue for the first time during 2022. My congratulations to everybody listening to this call as part of our international team that spans the Americas, Europe and Asia. And to our team in China, where -- your society has opened a bunch more in recent months, recent weeks, I would like to wish you a Happy Chinese New Year. I believe it's the year of the rabbit. And I hope you since I -- sincerely hope you have a nice opportunity to visit with family as the socities opened up a little bit more. So Holden, as you might imagine, I'm getting a few questions on gross margin this morning, obviously, a few moving parts. Should we think about, for '23 a typical 30 to 50 basis points of pressure from mix? Or could it be a little bit greater, just given this price cost dynamic, lower rebates, any other pressures? Yes. Well, from a mix standpoint, 30 to 50 is probably a low number now versus where it was in the past, primarily because our strategies have changed, right? I mean we have shifted towards really prioritizing key and larger accounts. Now that might be a larger regional account at a branch level. It might be national accounts. But I mean we've shifted our strategy to prioritize those, as you know. And so I think that you've probably seen a bit of a widening in the expected mix impact from gross margin. Again, there's nothing that's surprising about that. And I would again point you to the improved labor leverage that we've been seeing in the last few years has been the flip side of those decisions, right? So that's deliberate. So I wouldn't be surprised if the type of leverage that we're looking at from a mix standpoint is more in the 50 to 70 basis points range. But again, as I said, I think that's expected. And I think that it's offset by the labor leverage that we get from the and strategy. And I think that we're product -- where mix is concerned, you have to balance both what's happening at the gross margin with the offsetting impact on operating margin. Right. Got it. Okay. And then next, moving to incremental margins, your kind of exit 4Q at about 20%. Is this a level you think you can achieve in '23 on mid-single-digit sales growth? It sounds like FTEs will be down. You'll have the incentive comp that's down. Anything you can add there would be helpful. Yes. I think that you're hitting on important elements from an OpEx standpoint, and we do continue to expect good leverage there, right? And I think we've seen on the labor side, wage inflation has moderated a bit. You're right, incentive pay. Look, I'd love to be paying greater levels of incentive pay. But if the market slows down, that wouldn't happen. So you wouldn't see that kind of growth there. And I think we'll continue to control headcount and the mix will shift as well, where a lot of the headcount that we add will be part time as we rebuild those ranks or -- so the mix will shift that way. So I think that there's still good opportunity to leverage labor in 2023. And I think the same for occupancy. End of day, the question though, is what's going to happen on gross margin. And if we can limit the decline in gross margin to our mix, I expect that we'll be able to grow our operating margin year-over-year, which would get you more than that 20% incrementals and would get you, I think, solid into the 2025. I think the question, and I'm sure there'll be additional questions coming up, but I don't want to just leave this hanging out there, ultimately, is how do you think we execute some of the pressure that we've seen in the other product side and any level of deflation that may occur down the road if it occurs? And I think those are variables that are harder to sort of judge. And I think get down to whether or not you believe that we're going to execute effectively on some of the things that we cited that pressured the gross margin this quarter. And obviously, we believe that we're going to execute effectively that we're going to find ways to kind of offset some of the pressures that we saw in 4Q. And when we do that, I think that in a mid-single-digit growth environment that we can defend or improve the margin. But I think there's some -- there's probably more variables or questions on the gross margin going into 2023 than we have answers to right now. I have one 2-part question on OpEx. The first part is related to labor. The initiatives that you put in place have clearly driven better labor efficiency overall. But I'm wondering, in general, is the Fastenal cost structure more or less variable today than it had been in the past because of some of those structural changes? And then the second question is related to branch rationalization. By the chart you show here, where you're extending it out to 2025, it appears that you're materially complete with that transition. And I'm just wondering, are there any costs related to that transition that you've eaten over the past many years that will go away in 2023? And what I'm referring to is any sort of rationalization costs that a less conservative company might have flagged as nonrecurring or restructuring? Maybe moving backwards and to your first question. I do think that we will have additional closures this year as we move towards that target. And I think beyond this year, you'll begin to see those closures begin to moderate, right? And so I think part of your question is how long does this -- the sort of this closure process go? And I think we have another year of it before it becomes a little bit less part of the story. But one of the things that we've done in closing the branches is, on top of that, we've sort of shifted the priorities of the branches, which ultimately make those branches more scalable in the future than I think they have been in the past. And so as we grow as a business, I expect that we will -- even if we're not closing branches, I think that as our average branch size grows, we're going to get good leverage out of that. To your point of, are there some expenses that were in there regarding closing? Sure. There's branches that we may have closed where the lease wasn't up and there's a buyout. We haven't scrutinized that spend meaningfully. It's been within the overall results for the last 5 or 6 years that we've been doing this. But there'd probably be some of that, that would also taper out of the model as we move from a branch closing mode to sort of a branch sustaining and leveraging mode 12 to 18 months from now. So there'll be something in there. But again, I don't -- it's not a massive number. If we were prone to breaking things out, which we're not, I don't know that necessarily would have been that big a number to begin with. So I wouldn't make too much out of that. Yes. So you talked about more variable, less variable. That answer will change over time, Dave. If I think of 2022, a big chunk of our compensation programs, whether that be to our district leadership, the leadership in a lot of support areas, our regional leadership, our executive leadership. If you look at all those groups, a big driver of pay is growth in pretax. And if you think about that from the context of -- you look at it from the last -- the 5 years prior to 2022, we're growing our pretax ex. And in 2022, we grew our pretax ex x2. So there was a very sizable increase in incentive comp that was paid out in 2022 versus the prior years. And that actually aid into quite a bit of our efficiencies during the year if you look at it just from a P&L perspective and a labor efficiency because that's a meaningful payout. Depending on what you conclude our earnings growth will be in 2023, I suspect it will be a smaller number than 2022. And that will cause in the 2023 time frame variable to actually be higher than it had been in the last few years because of that swing. If I look at things that we have done historically in the model, if you're opening branches every year, you're adding a fixed layer of expenses every year. If you're adding people into those branches, you're not getting a lot of revenue and gross profit dollars for those ads. There's a fixed layer that you're adding. That really isn't part of our model anymore. And -- because when we're adding labor into new units, it's going into an Onsite, and we're going into Onsite because we're -- we have an understanding with the customer of what's going to ramp up, and that ramps up a lot faster than historical branch network would. So from that standpoint, in 2023, more variable. As we move out over time, it's going to depend on what the economy is doing, and is it pulling us up or pushing us back as far as our ability to grow our earnings. And -- but I think you also have our ability to manage headcount in a much different way today than we could have. If you're adding 100 branches, you need 200 people to go into those branches on day 1. And that element has changed. And so it gives us the ability to manage the P&L in a fundamentally different way. The other piece is, while this doesn't tie right to your variability question, as we're growing things like LIFT, it allows us to create efficiency, the leverage that Holden talks about. And that's going to keep building over time because we're at about 17% of our devices today are supported through LIFT. That was about 5,000 a year ago and that's going to continue to grow over time. And that just allows us to either remove a layer of expense as well as a layer of assets or invest in selling energy faster or accommodation of the 2. So I hope that answers your question, and -- but it's about the year you're asking it to, but in 2023, there's a little bit more variability. Yes. But I would say looking over the course of the cycle, Dave, I don't think our variability has changed. I think what we've done is we've reduced the level that our SG&A as a percentage of sales over time can decline to without impairing our levels of service, our ability to grow, et cetera. So I think we've reduced our floor of operating expenses to sales. I don't think the variability of our cost structure has changed much. This is actually Gustavo for Josh -- earlier on the gross margin front and mix headwinds heading into '23. I think just looking a little bit more near term, can you sort of quantify the margin impact from price cost, maybe the improving supply chains? And then how does that sort of trend from here from what you saw in the fourth quarter? So price cost, the -- I think last quarter, we talked about it being about a 30 basis point impact. This quarter, that was probably more like 40 basis points. So it widened a little bit more than I expected. I will say though, one of the reasons we expected that it would be flat to better this quarter because we expected the dynamic around fasteners to improve. And we, in fact, saw that happen. The drag from a price cost standpoint on the fastener side was narrower than what we saw last quarter, where we saw the more than offset was when I alluded earlier to sort of the other product side, I think we saw a greater impact on the other products that sort of moved that number from where I would have expected it to be to about a 40 basis point drag. Got it. Thatâs helpful. And then I guess just sticking with fasteners. And obviously, itâs been a margin headwind here in the fourth quarter as well. I guess with steel deflation coming into the fold now, how should we be thinking about P&L impact from fasteners deflation over the next couple of quarters? And maybe any historical context on what youâve seen previously would be helpful? Iâll take historical context first, and Iâll -- yes. So I mean, thinking about the current, as you know, I donât have the same historical context that Dan does. But the â this is one of those variables on gross margin next year where it comes down, Gustav, to your belief in our ability to execute, right? I mean the -- we do expect that at some point in 2023, there will be requests to adjust fastener pricing down based on the cost of steel. Now you have to -- Or the cost of transportation. Now certain costs are still higher labor, things of that nature, right? And so we have to balance that. But in the end, itâs the same question during a period of inflation is can we time the reductions in the price of our product with the lower cost coming through our P&L? And as we have had conversations with customers, thatâs been the message that weâve conveyed is â we understand when our cost is going to come through and these conversations will sort of occur in lockstep with that. And to the degree that we execute that effectively, then we would target neutral from a gross margin standpoint in terms of price cost. But it comes down to your belief in our ability to execute it effectively. I think that with the new tools that weâve put in place the last few years, I think our ability to manage that process has improved significantly. And I think you saw that during a period of a fairly aggressive inflation. And â so we feel good about that prospect. But our goal would be to really time the cost and the price effectively so that price cost is neutral in 2023. But it comes down to your belief in our ability to execute that effectively. From a historical perspective, and Iâll use an extreme time frame because, quite frankly, over the years, there hasnât been a lot of significant inflation or deflationary periods. In the late 2000, so 2008, 2009 time frame, you saw a period of pretty heightened inflation followed by not only deflation, but the economy getting pounded pretty hard in that late â08 and â09 time frame. So what you saw is if you think of our business in 2 components, large production-type environments and and then maybe some of the smaller customer base departments, you â the one is driven more by conversations with customers about pricing. And there, we tend to do a pretty good job over time of maxing it and some you get a little bit ahead of it depending on the turn of that product. But our fasteners turn a lot slower than our â turns slower than our overall inventory. So generally speaking, on the way up, you get a little bit of margin profit in there. And youâve see an expanding gross profit margin. You saw that back in â08, and thatâs over that turn of inventory. In â09, it was amplified obviously because the economy was weak, but you saw the inverse of that, and weâve got squeezed pretty hard. But again, it was for a turn. So itâs about understanding whatâs happening in the turn versus whatâs happening in the long term. Whatâs changed in todayâs environment is that piece that is the more the production center element is a larger component than it would have been back in 2008. And so that piece where the marketplace is raising prices affects a smaller piece of our inventory, and itâs more of these direct conversations. And so â and I think we have better tools to manage through it and have a more sophisticated conversation with our customer on the way up and on the way down. But you know it is itâs easier to slow things down on the way up because your customers arguing that direction, then it is to slow things down on the way down because your customer actually has a different incentive there. So you have those challenges. It will be challenging in the cycle of this turn of inventory, but I believe our team and our tools, we have a means a disciplined way of managing through it. Wanted to start off with some of the end market -- end market commentary you offered, particularly around what appears to be continued strength in manufacturing tied to industrial capital goods. At the same time, I think, Holden, your word characterizing the outlook for this year on manufacturing was cloudy, obviously, PMI is sub-50 now. Have you seen any softening there? Or would you characterize that end market is just as strong as it was, say, a quarter ago? Still feels pretty strong. And again, I tend to try to rely on the regional Vice Presidents and kind of their feedback to me. And honestly, the feedback over the last 2 or 3 quarters really hasn't changed that much. We clearly down shifted from first quarter to second quarter. But since then, it's kind of been the same kind of feedback from the RVPs. They still feel good about what we're doing. They feel constructive about the cycle. Their customers are constructive, but nervous. And RVP might cite something that's worrisome, but on the other hand, another one might sort of change their tune quarter-to-quarter. And that's why I look at it net-net, the overall tone and tenor of what the RVPs are describing to us about the marketplace, frankly, it hasn't changed a whole lot as it relates to that manufacturing and the dynamics are fairly similar. So if we look at the same stuff that you do and I've always had a tremendous amount of respect for the PMI and its ability to sort of point directionally to what industrial production is doing. I think if you look at industrial production, that's still growing, but it's -- but that growth has moderated. But we still feel pretty good about what we're doing with focusing on this customer set and really being able to spend more time and grab wallet share at a faster clip. And I think a lot of things that we're doing is making us feel pretty good about a market that, as you pointed out, there's a lot of signals that are suggesting it should be softer than it feels to us right now. So I have the opportunity throughout the year with 240 district managers. And throughout the year, I'm having conversations with 4, 5 or 6 DMs every week. And our conversation with each one going through learning a little bit more about them, learning about their business, where they think their business is going and just hearing about what they're saying. And we were stuff on our chart sleeps. If you feel like -- if you're nervous, that anxiety manifests itself and how you think about stuff. I think a couple of things are going on. And again, put that in the category, this is from talking to a lot of people and this isn't from studying a lot of numbers. I think what's helping manufacturing is a really healthy backlog that existed through much of 2022. So let's just say you're a manufacturer and your backlog is 100 units and whatever that revenue is because, say, it's 100 units. And because of supply chain constraints, because of just demand in the marketplace from the last several years, maybe some deferred maintenance, whatever it might be, that backlog goes from 100 to 150. And then we get into the latter third of 2022. And let's say that backlog goes from 150 to 120. It's still a really good backlog. And the question is, is the PMI reflecting the 120? Or is it reflecting the concern, the angst that comes with, well, the backlog went from 150 to 120? And is the PMI giving us a head fake or is the PMI really telling us what's going to happen? We honestly don't know. But to Holden's point, the activity we're seeing feels okay. But we are -- we, like everybody else, are a bit nervous about where things are going. The last 3 months and for the next 6 months, I'll be pushing our leadership pretty hard on what we're doing as far as adding headcount and being really thoughtful about it. I feel good about -- set aside the economy for a second, I feel good about the fact that we have 350-plus new Onsites that will be given us juice as we go into 2023, and we didn't have that kind of number coming into 2022 or 2021. And so there's some positives there. But as far as the underlying economy, we're not really sure if the PMI is right or wrong, but we're playing it, assuming it's right. Very helpful. As a follow-up, I wanted to pivot to pricing dynamics in gross margin. I guess this is a 2-parter. Holding on gross margin, is there anything quantitative or qualitative you'd offer just to bridge us from 4Q to 1Q? And then more broadly, I forget which one of you referenced the broader discounting in the non-fastener, non-safety SKUs. Is this an early sign of a trend that may bleed over into some of your more core product categories? Or any context you could offer on that discounting dynamic would be helpful as well? We'll have to put our heads together and decide if a 2-part or second question is actually 3 questions. We'll get back to you, Tommy, on that. The -- so the -- the other products, I think, was the second question that you asked. And the -- there's not a lot more, I think, that we can add to kind of why we think it occurred. We just think that those products tend to be less planned. They tend to be a little less centralized in sort of the supply chain. And when markets change and shift, and we've seen some, right? I mean you go back 6, 9, 12 months ago and the availability of products in the marketplace was fairly sketchy. It's gotten much better. Inflation conditions have changed. Demand may be softening a little bit sort of under the surface. I don't know. But in the end, I think that the weakness that we're seeing has a lot more to do with things that we've done. And the good news in that is having identified that, there's things that we can do to sort of mitigate those effects. And those are things that we intend to do over the next quarter or such, right? And so we have a lot of belief, and this is another element of gross margin for next year. It comes down to your confidence in us and our ability to execute sort of the measures we need to to mitigate that effect. Now what was your question about bridging from Q4 into next year, it probably does mean that if you look at traditional seasonality around gross margin, it's probably a little weaker in the first part of the year and a little stronger in the second part of the year as we get our arms around the things we need to do to sort of mitigate the issue around the other products. So hopefully, that gives you a little bit of color you can use. On a totally different topic. I feel like that international $1 billion revenue level seems to have snuck up on us and it's certainly been one of the fastest-growing parts of your business. I'm curious, what your longer-term aspirations are there? Because as far as I can understand it, it grew kind of organically out of the domestic business that you built in North America. But clearly, it's getting to a pretty sizable level. So is there a path to further expansion beyond that traditional legacy model, if you will? Yes. So first off, yes, it's -- that growth has been all organic as has most -- 99.5% of our growth as a company in general over the last 50-plus years. The -- you milestone, I think, has made ever more impressive by the fact that you look at our international business outside of North America, I mean, talk about a year to get your teeth kicked in. You have the chaos that's going on in Europe between the hostilities in Eastern Europe in Ukraine and the energy situation and all the uncertainty and stuff that's been shut down in Europe because of this high energy consumption, et cetera, and moved to other places. You have Asia where the bigger part of our business is in China. Again, these are both relatively small pieces to Fastenal. But to international, they become more important. And so that milestone is ever more important. In China, they've been enduring lockdowns for an extended period of time, and it makes it really difficult to conduct business. So I think it's really impressed with what they've done throughout this time frame, and I touched on it in my head count numbers, we've continued to invest in the team. I had the opportunity after not being over there for a number of years, obviously, because of COVID, I was over traveling in Europe in the fall in September, October time frame, spent time with our team in Northern Europe. I spent time with our team up in the Netherlands, really impressed with what I'm seeing from a growth perspective, not top line growth, but from the underlying customer acquisition perspective and the team I met with. And what's exciting about that business is you're seeing examples of customers we're signing and Onsites we're signing or branches that customers that were creating relationships with that aren't strictly an extension of North America. There are businesses we're signing up contracts with that know nothing about our business in the U.S. or our business in Canada, or our business in Mexico. And they were introduced to Fastenal in our team because of our contact on the ground, whether it be in Europe, whether it be in China or down in Southeast Asia. That's the exciting part because it tells me the team there has -- is creating a market presence for themselves and they're being recognized in the supplier community, which makes life a lot easier because when your supplier community is in North America and you're operating in Europe, that's a challenge. The other piece is the -- if you think about the economy, and I'm not telling you anything you don't know, there's more business outside North America than there is in North America, and we're very conscious of that long term. So depending on what your time horizon is, if your time horizon is the next 5 or 10 years, most of the growth element of the business is going to come in North America from a pure magnitude perspective. But beyond that, what's exciting is, I think we're unique in our space and that we've found tremendous success moving beyond the traditional geography that your business operates in. And the model works. We go in these new markets. We find great people. We ask them to join. We create an environment where I think they want to be. And I think the comment earlier about our experience with interns in India is indicative of what we're able to do. I think people like this style of decentralized organization, where we respect people for their opinions. And we challenge everybody to be vocal about what you think can make us better. That's how we get better as an organization, and I couldn't be more pleased. In fact, at our April Annual Meeting, I've asked Jeff Watt, who leads our international business, to speak to the group this year. And he was going to do it a couple of years ago and then couldn't make it because COVID hit in the spring of 2020. We had virtual annual meetings for the next couple of years. So it wasn't quite the same. We just kept it to the facts, so to speak. And last year, we had the opportunity to let Terry Owen talk about the distribution and investments we're making on the sales side of the organization, and this year, Jeff is going to cover international. But it's a wonderful business for us because we're finding a whole bunch of folks that are getting exposed to the Blue Team and our supply chain capabilities. I wanted to talk about the ability to drive operating leverage as Onsite activations ramp. And I understand that a fully mature Onsite can be accretive to operating margin despite being materially lower on the gross margin side. But I guess my question is how long do you think it takes? Or how long should we expect it to take from Onsite to reach that level of maturity and how should we think about that dynamic into 2023 as Onsite activations are ramping? Functionally, I think it's less about a function of time and more a function of scale. And that being said, it really -- well, on an individual on-site basis, you're going to get a certain degree of variability, right? I don't believe that a $600,000 a year on-site is necessarily margin accretive. But if that $600,000, we believe can lend itself to $1.8 million to $2 million a year, then it's certainly worth being in that setting and that environment and that relationship for the potential upside. And that's part of the point of the exercise. But if it's a function of volume, what I've always said is prior to Onsite becoming an initiative, and we just looked at 215 on sites that have been there, somewhere between 1992 and 2014, they were mature not as a function of time, but a function of scale. On average, those Onsite were doing between $1.8 million and $2 million a year in revenue. And that is when you achieved a margin north of 20% on that group. And what I can tell you is during the period of COVID when our signing slowed down, you had a certain maturation of existing on sites that became a faster percentage of the whole than we would have expected to see in the absence of COVID. And one of the byproducts of that was we actually saw a pretty good increase in the overall operating margin of our Onsite business. And I believe that, that increase was to the tune of a percentage point a year between 2020 and 2021 and '21 and '22. Now we signed a lot of Onsite last year. We're targeting signing a lot of Onsites this year. Assuming we're successful with that, and we believe we will be, then you'll sort of see the inverse of what happened during COVID, where you're going to see those newer units kind of stepping up a bit in the mix again. And that might make further progress in 2023 on margin at the Onsite level, a little bit more difficult to achieve. You might see a little bit of a step back, but you're not going to step back to where we were pre-pandemic. We've seen the mix of mature units go up. And I think we'll continue to see that. And our expectation is that right now, your average unit is probably between $1.6 million and $1.7 million. If that steps back a little bit in 2023 because of all the new implementations that we're doing and the greater signings, that's fine. But we do expect that, that average size is going to continue to trend towards that 1.8 to 2 and that those margins will trend towards 20% plus. That's the expectation. We've talked about over time. It's going to add to Holdings. We've talked about over time how we expect the operating margin of our business to continue expanding. And there's really 2 dynamics going on there. One is we can absorb a greater mix, even if they're below company average operating margin, we can accept a greater mix because the branch network isn't stagnant. The branch network is continuing to grow because we're adding revenue every day, and we pulled some units out over time, as we talked about. So if I look at our oldest regions that have the highest concentration of Onsite, their average branch isn't doing $150,000, $140,000 a month. It's doing $210,000, $220,000. Our operating margins are higher in those areas even though our Onsite revenue might be 50% of revenue. And so it's really a case of the network matures, even if the mix is beating you down, your branch network is actually becoming more profitable. The other thing is elements inside our business, and I see we're almost at talks, I'm going to cut it off with this when we're done, I apologize for that. But the elements of our business are becoming stronger. Now I use vending as an example. Five years ago, I sat down with the fellow that leads our vending business. And if you look at vending as a discrete business within Fastenal, it had operating margins between 13% and 14%. So it doesn't take a lot of math to figure out, hey, you keep growing your vending business, that's not friendly to your operating margin. And my comment to Jeff at the time was, Jeff, here are the pieces we need to work on over time. increased revenue per machine, increased the mix of our exclusive brands, increased the mix of our preferred providing brands lower the cost of our devices. All these things need to occur over time. I'm pleased to say when I look at vending as a discrete P&L, we just looked at it last week, it broke 20% for the first time. And Onsite never had the benefit of organizational investments in it to make it better. Didn't have FMI. It didn't have a point-of-sale system that was built for Onsite. It had a point-of-sale system that was built for a branch network. We're investing in those tools today. That helps the efficiency of the Onsite network, too. So it helps defend the math, but the network is getting better, and we have demonstrated proof that, that occurs already. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
EarningCall_1326	Ladies and gentlemen, thank you for standing by. Welcome to the Navient Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host for today, Jennifer Earyes, Head of Investor Relations. Please go ahead. Hello, good morning, and welcome to Navient's earnings call for the fourth quarter of 2022. With me today are Jack Remondi, Navient's CEO; and Joe Fisher, Navient's CFO. After their prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. So listeners should refer to the discussion of those factors on the Company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjustable tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. We will also refer to adjusted core earnings which are measurements derived from core earnings and adjusted to exclude one-time expenses related to regulatory and restructuring costs. Our GAAP results and description of our non-GAAP financial measures can be found in the fourth quarter 2022 supplement earnings disclosure, which is posted on the Investors page at navient.com. You will find more information about these measures beginning on Page 18 of Navient's fourth quarter earnings release. There is also a full reconciliation of core earnings to GAAP results included in the disclosure. Thank you. Thank you, Jen. Good morning, everyone, and thank you for joining us today, and thank you for your interest in Navient. We completed 2022 with another quarter of strong financial performance. We delivered adjusted core earnings of $0.85 for the quarter and $3.43 for the year and a core return on equity of 17%. These results demonstrate our ability to deliver solid financial performance even in disruptive economic environments. The business environment ended 2022 very differently than it started. For example, inflation pressured operating expenses, rising rates and the CARES Act extensions virtually eliminated current demand for student loan refinancing and rule changes impacting the management of defaulted federal loans ended our portfolio management business earlier than anticipated. A strength of our franchise is our ability to adjust to both expected and unexpected events to deliver for our customers and investors. For example, in-school originations grew 52% this year, with our growth outlook increasing. We are leveraging our client relationships to win new business processing contracts. We successfully reduced operating expense in a high inflationary environment, and our hedging strategies and efficient funding programs mitigated the impact of rising rates to our net interest margins. Your management team is focused on delivering exceptional results by executing our strategy, delivering on our growth potential, maximizing our loan portfolio cash flows, continuously improving our operating efficiency and prudent and consistent capital management. In Consumer Lending, we are focused on growing originations of high-quality loans with attractive risk-adjusted returns. In 2022, rising rates and zero interest federal loans reduced our opportunities in refi to $1.7 billion in new originations. We rapidly adapted to these conditions to slash marketing spend and focus on our in-school products. Here, we grew new loan volume by 52% over last year to $321 million, an estimated 10x market growth. We also continued to build relationships with students planning to go to college, adding over 700,000 new students to our Going Merry platform. Here, we help students and families complete the FAFSA, compare financial aid award packages from schools and apply for scholarships. We see these products as important ways of helping students and families throughout their going to and paying-for-college journey. In our Business Processing Solutions segment, we grew non-pandemic-related revenue by $25 million or 11%. It's also worth noting that our pandemic-related contracts extended longer than the original award, and we have been able to leverage this [FAFSA] to win several new contracts in 2022, both strong statements on the value we provided to our clients. Our large and profitable portfolio of student loans is a key contributor to earnings. Our goal has and continues to be to maximize the performance of this portfolio. This includes helping borrowers navigate repayment options and avoid default and innovative funding and hedging strategies to maximize net interest income. Our funding and hedging strategies helped deliver a stable net interest margin, despite the rapid rise in rates this year. Since our founding in 2014, we have clearly excelled at maximizing the value of our portfolio, and we will continue to do so. We are also continuously improving our operating efficiency. In 2022, operating expense declined by 21% or $205 million. We delivered improved efficiency in our operating segments, and we continue to take action that reduced our risk profile. In the final area, we seek to be excellent stewards of your capital. Our goals are to be efficient and prudent while delivering attractive returns. Here, our priorities remain unchanged, invest capital and attractive and relevant growth opportunities, support our dividend and return excess capital to you via share repurchases. This consistent and transparent approach supports our business growth, our debt investors, our corporate ratings and enabled the return of $491 million via dividends and share repurchases last year. Our financial and business success last year positions us for another year of strong performance. For 2023, we are focused on the same four objectives: profitably growing our loan origination and BPS revenue; maximizing the performance of our loan portfolios; improving operating efficiency; and prudent and consistent capital management. In Consumer Lending, we expect to double in-school loan originations, building on the progress we made in 2022. We expect that demand for refi loans will continue to be suppressed, but we are prepared to move quickly when market conditions change. We will also continue to grow and build long-term relationships with students and families as we support their going to college journey. In BPS, we are well positioned to deliver 10% growth in revenue from our traditional clients. With this growth, we also expect to earn a high-teen EBITDA margin, and new contract wins in late 2022 and expansions of existing contracts have created a clear path to these goals. As a result of our ongoing focus on operating efficiency, we will reduce operating expense by an additional 10% in 2023. And in capital management, our plan is to complete approximately $310 million in share repurchases. Our results this quarter capped a strong year for Navient. They reflect our commitment and ability to generate high-quality, high-value products and services and deliver solid financial results even in volatile and changing markets. They also reflect our ongoing commitment to simplify our business model and reduce our risk profile. More importantly, our efforts have built a solid foundation from which to create and deliver value. Our guidance for 2023 reflects our confidence in our ongoing ability to grow new business, maximize portfolio performance, deliver better margins through operating efficiency and deliver attractive returns on capital. I want to thank my colleagues for their efforts and commitment to success. And together, we look forward to delivering another great year of results in 2023. Joe will now provide a more detailed review of our results. Thank you for your time, and I look forward to your questions later in the call. Joe? Thank you, Jack, and thank you to everyone on today's call for your interest in Navient. During my prepared remarks, I will review the fourth quarter and full-year results for 2022 and provide our outlook for 2023. I'll be referencing the earnings call presentation, which can be found on the company's website in the Investors section. In 2022, we successfully met or exceeded our original full-year guidance targets. Key highlights from the quarter and year, beginning on Slide 3, includes fourth quarter adjusted core EPS of $0.85 and full-year EPS of $3.43. We achieved an ROE of 17% and an overall efficiency ratio of 52% for the year in the face of a challenging inflationary environment. FFELP NIM of 94 basis points and full-year NIM of 101 basis points, private NIM of 287 basis points and full-year NIM of 281 basis points. Grew in-school originations by 52% to $322 million for the full-year and achieved total originations of $2 billion. Reported BPS revenues of $70 million in the quarter and $330 million for the year while achieving full-year EBITDA margins of 16%, increased our adjusted tangible equity ratio to 7.7% while returning $491 million to shareholders through dividends and repurchases. I'll provide additional detail on the quarter and our 2023 full-year outlook by segment, beginning with Federal Education Loans on Slide 5. In the Federal Education Loan segment, we achieved a net interest margin of 101 basis points for the full-year, exceeding our original mid-90s guidance in a volatile interest rate environment. The quarter's results continue to be impacted by an incremental level of consolidation activity from previously announced loan forgiveness proposals. The incremental prepayments that were processed during the fourth quarter represented 3% of our portfolio. This activity reduced FFELP net interest margin by 11 basis points to 94 basis points. There has since been a significant decline in consolidation request to historical levels. Our expectation for full-year 2023 FFELP NIM of 100 basis points to 110 basis points assumes that prepayment speeds remain at historical levels in 2023. FFELP delinquency rates decreased to 15.6% from 18.6% in the third quarter, and charge-offs declined by $1 million, resulting in a net charge-off rate of 13 basis points in the quarter. We anticipate a net charge-off rate between 10 basis points and 20 basis points for the full-year 2023. Let's turn to our Consumer Lending segment on Slide 6. Net interest income in the quarter was $147 million and resulted in a net interest margin of 287 basis points, an improvement of 11 basis points compared to the prior year. We are seeing a slowdown in prepayment speeds in the overall portfolio as borrowers with fixed interest rates have less of an incentive to refinance in the current environment, which is benefiting net interest income. We anticipate our full-year net interest margin for 2023 to be between 280 basis points and 290 basis points. Our credit trends continue to perform as expected as net charge-offs ended on the low end of our original guidance of 1.5% to 2% with 156 basis points for the quarter and 159 basis points for the full-year of 2022. The $17 million of provisions in the quarter included $3 million related to new originations. We feel confident that we are adequately reserved for the expected life of loan losses given the well-seasoned and high credit quality of our portfolio and anticipate net charge-offs to remain in the 1.5% to 2% range for 2023. In the quarter, we originated $169 million of private education loans. This was comprised of $35 million of new in-school volume, representing a 52% increase compared to the prior year. The expected decline in refinance loan origination volume to $134 million was primarily driven by the higher rate environment and delay in Department of Education loans entering repayment. We expect that the higher rate environment continues throughout 2023, and the extension of the CARES Act will result in lower quarterly originations for our refi product. Let's continue to Slide 7 to review our Business Processing segment. Revenue from our traditional BPS services increased 27% from the year ago quarter, partially offsetting the expected wind down of revenue from pandemic-related services. Fourth quarter revenues totaled $70 million and earned an 11% EBITDA margin. The 11% margin was below our targeted levels due to wind down costs associated with pandemic-related services in the quarter. We anticipate the benefit of recent efficiency initiatives to increase the margin in this segment as we progress throughout the year. We expect to see continued fee revenue growth of 10% in our traditional services in 2023 with full-year EBITDA margins in the high teens. Turning to our financing and capital allocation activity that is highlighted on Slide 8. During the year, we reduced our share count by 15% due to repurchase of 24.8 million shares. In total, we returned $491 million to shareholders through share repurchases and dividends while increasing our adjusted tangible equity ratio to 7.7% from 5.9% a year ago. Our 2023 guidance includes the repurchase of $310 million of shares while building our adjusted tangible equity ratio to a range of 8% to 9%. Turning to GAAP results on Slide 9. We recorded fourth quarter GAAP net income of $105 million or $0.78 per share compared with a net loss of $11 million or a loss of $0.07 per share in 2021 for the same period. In closing and turning to our outlook for 2023 on Slide 10, the success of 2022 and steps we have taken to simplify the business, improve efficiency while building capital positions us well for 2023. As a result, we expect our 2023 adjusted core earnings per share to be $3.15 and $3.30, reflecting our continued efforts to improve efficiency. Our outlook excludes regulatory and restructuring costs, assumes no gains or losses from future loan sales or debt repurchases, reflects a continued rising interest rate environment and no meaningful impact from an expiration of the CARES Act in 2023. Thank you. [Operator Instructions] And our first question coming from the line of [Matthew Hurwit] with Jefferies. Your line is open. Hi, there. I'm on for John Hecht and thanks for taking our questions. Our first one is just about funding markets. If you can provide a bit more detail on puts and takes for NIM over the next few quarters, that would be helpful. So from a funding perspective, we feel we're very well positioned. We have $1.3 billion due this coming year, of which $1 billion is actually being paid off today. So we have $1.5 billion sitting on our balance sheet at the end of the year. So we're well cushioned for the remainder of 2023. And also we feel we're well placed for entering into 2024. We certainly think that the securitization market overall is starting to move on. We're starting to see benefits here over the last month. And for us, while we expect to do fewer securitizations compared to prior years, that's primarily driven just by the growth of our refi business. So we do anticipate that there will be less originations on the refi side compared to prior year. But if that market potentially picks up, if you see a change in the interest rate environment or the expiration of CARES Act, I would anticipate that you would see further securitizations from us. Okay. Great. Thank you. And the second question would be mix of business in the Business Services segment and what's growing or shrinking? You mentioned COVID services slowing down. Could you provide more detail on mix otherwise? Sure. So during the pandemic, we picked up a number of contracts with various states and municipalities to deliver â to help them deliver our COVID relief initiatives. Some of that would be things like unemployment insurance, contact tracing, vaccination, awareness, et cetera. Those naturally do run off, and that's a good thing, right, that they're running off because it means we â as a country, we don't need them any longer. What is growing is our traditional services. So these would be things that we do for states, in municipalities, toll authorities and in healthcare institutions. We're pretty excited about the growth opportunities in these areas. Some of them were certainly suppressed during the pandemic, and they're starting to rebound. But more importantly, and as I mentioned in my comments, we've been able to leverage the work we did for a number of entities during the pandemic and translate that into new more permanent contracts. This is what we do, handling communications for these entities, both inbound and outbound, and kind of omnichannel types of directions, processing forms, completing applications, things of that nature. So it's really right within our wheelhouse of the years and years of experience weâve developed in loan servicing. So this is â as we said, we expect to grow that revenue by 10% next year on the traditional side, so that excludes all the pandemic-related revenue we generated, and we are forecasting a high-teens EBITDA margin in that business. Thanks and good morning. A couple of questions. First, to start off with, there's been some proposed changes in IDR and debt forgiveness in the Federal Register. I wonder if youâve taken a look at it and maybe give some initial thoughts about how it might impact your business. It seems like the administration is trying to do an in run around the debt forgiveness program. Thanks. That's just the first question. Sure. Thanks, Bill. So on the first â on broad-based loan forgiveness, this is in limbo right now, a number of states filed lawsuits against the proposed administration, and it is now scheduled for hearing at the Supreme Court sometime later this year. Briefs are just being filed kind of as we speak. So we'll learn more about where that goes in the next couple of weeks and months. As you pointed out, the administration also announced broad changes to the income-based repayment programs that they offer to students in the federal â on the federal program side of the equation. These are proposed right now. They're open for comments and questions. They are pretty significant in terms of their reach compared to what was in place before and what Congress had initially established as the guidelines for income-based repayment plans. So we have to â we'll wait and see here what those comments are and what kinds of challenges might arise. But to some extent, you're looking at what's the impact on the private loan originations business. I think in the area that probably is going to have the greatest impact would be on the graduate school side of the equation, graduate school demand and how that is financed. I think the bigger questions that we would have as a taxpayer might be how do these programs release pressure on schools to kind of control the cost of education just to make it more likely or not that college costs increase faster. Those are some of the policy issues that we'll be watching. Thanks. And just as a follow-up, it looks like you kind of bumped up your adjusted tangible equity ratio target from what it had been historically, and that's reflected in the buyback. Is that in anticipation of growing the in-school loans, which have higher capital requirements? Or is there something other type that you might be looking at? Yes. So that's a good question. So in terms of the 8% to 9% guidance, that is purely a function of what we anticipate our book to look like over the next year and beyond. So as the refinance loan originations, as we anticipate shrinking for this year, we hold 5% capital against refinance loans and we hold closer to 10% for our in-school. So it really is benefiting the overall capital ratio that mix shift of growing the in-school volume, which brings us above our levels that we had guided last year of about 6% to that range of 8% to 9% for this coming year. Thanks. Good morning. Jack, could you provide us an update around the loan forgiveness plan? I think it's with the Supreme Court right now. Maybe also just to the extent that it's an adverse ruling, how you intend to proceed going forward? Sure. So as I mentioned, it is at the Supreme Court, briefs have been filed from the Department of Education. The states or the plaintiffs briefs are due this Friday. Hearings will be scheduled sometime I think in February when the Supreme Court will issue their opinion is somewhat unknown. But obviously, we expect it before they recess in the June, July time frame. Right now, the proposal from the administration is only for direct loans. So FFELP loans are not eligible and borrowers cannot become â FFELP borrowers cannot become eligible via loan consolidation. So it's not clear how that would necessarily impact on perception versus reality. But as Joe mentioned in his comments, last year, we saw a significant increase in consolidation activity of borrowers as they were hoping to qualify for various forgiveness initiatives from the administration or announced by the administration, that stopped and returned to pre-pandemic levels in December and January so far. So we expect more of that. However, I think the politics of this make it an area that we will continue to watch very closely and be able to manage our portfolio and react to changes that maybe announced â future changes that maybe announced by the administration down the road. Okay. Great. And then maybe just a question on economy and how you see your customers behaving? I think you added a little bit to the reserve this quarter. I mean, what are you guys assuming inside your economic forecast? And are you seeing any potential weakness of any kind? Yes. So we â earlier last year, we began to be concerned about changes in economic outlook and reflect a more conservative position in terms of rising rates and potentially a significant or a mild slowdown in the economy. We're still positioned for that. We look at our reserve and really see it is the hedging strategies that we've been able to employ those have helped mitigate the rise in rates that took place in 2022. So our NIMs were relatively stable. Our reserve levels, we believe are adequate for the economic outlook that we see in front of us. You're definitely seeing some rising delinquency and charge-off rates in both our FFELP and private loan portfolios. These are consistent with what we were â well, they're actually better than what we expected. During the COVID â during the pandemic, we offered a number of different payment relief options and as those ended, some borrowers that were previously on a path to default slowed down and didn't. And now they're kind of jumping or bundling together, and you're seeing some rise in delinquency and default rates. We expect those to return to more normalized levels next year. So the outlook for delinquencies and defaults remains pretty consistent with what we saw last year. But it does take into consideration a belief that we will have an economic slowdown here. We would not in terms of the generic default rate. So our portfolio, when we look at what drives delinquencies and defaults in our portfolio, it's really a function of where the borrowers are in their life cycle. So students who are graduating from college or leaving college early, that's where we have our greatest exposure and where unemployment rates tend to have the biggest impact on delinquencies and defaults. We have a relatively small exposure to that right now. For borrowers that have been in repayment for extended periods of time, have high levels of income, high levels of employability. These are generally people who graduated, earn their degree and have an established career. We see less sensitivity to changes in unemployment rates. And that's been consistent for years and years or decades in the student loan space. Unemployment rates for college graduates typically run about half the national average. So while you might see those numbers spiking in different areas, they tend to impact college graduates â they definitely impact college graduates less than they do the rest of the populations. Yes. Thanks. Just wanted to clarify some of the comments around the FFELP NIM and the guidance. Joe, did you imply that there was about an 11 basis point drag in the quarter from elevated prepayment speeds? And if that normalizes, that gets you to about 105 basis points kind of the midpoint of your guidance range for 2023? That is correct. So the incremental activity was above what we were anticipating as we entered into this in the third quarter. So absent that impact, we would have been at 105 basis points. Okay. Got it. And can you give us any sense of how kind of rate sensitive your guidance is for both the FFELP and private student loan NIM? If you got a 100 basis point rate shock kind of up or down, what might that do to your expected NIM? So from a FFELP perspective, keep in mind, it's really the pace at which it increases. So the assets themselves are resetting daily and our liabilities typically lag. So they're resetting either monthly or quarterly. So as you've seen over the last year, you get a benefit as rates continue to increase. So for the first half of the year, where the expectation is that those rates continue to increase, you would see a little bit of a pickup before that levels out. So that 100 basis points shock upwards would be a benefit to us. Any downward movement that we would see in terms of where we are, we would start to benefit from a floor income perspective. So we feel pretty confident just based off of where the forward rate curve is today within our guidance of that 100 basis points to 110 basis points. And then we provide the ultimate shocks in our Qs and Ks. So you can take a look at that of what that impact is for the overall earnings. Similarly, on the private side, the impact there is, again, you have the lag of assets that are earning off of prime and funded through LIBOR. So you have the reverse where there is a drag from the rate environment increasing. And then again, as we anticipate that leveling out in this back half of the year, you would get a slight benefit there. Okay. So just in terms of cadence over the course of the year, should we expect â for FFELP, it's a little more front-end loaded and then for private, it's a little bit more back-end loaded in terms of where the NIM averages out to? Yes, I'd say just overall, it should be fairly consistent throughout the year within that bands, but that's a decent way of thinking about it. Thank you. [Operator Instructions] And our next question coming from the line of Moshe Orenbuch from Credit Suisse. Your line is now open. Great, thanks. Maybe just, Joe, a little further clarification kind of on the guide. You mentioned that on the FFELP, you expect kind of normal prepays. I mean it's hard to know exactly what normal is given and especially since they've been elevated and elevated beyond your earlier expectations the last couple of quarters. And same sort of thing is like what's the assumption in the guide for the consumer loan or private loan, given the level of originations now are kind of low? So our overall prepay assumptions for the FFELP portfolio for [indiscernible] loans, we tend to think about that as 8% CPR, for consolidation 5%. On the private portfolio, you see our assumptions are 15% for the refi and 10% for our legacy book. Obviously, if you go back a year on the refi side of the equation, it was much higher than that in a lower rate environment. So we are benefiting from the fact that, for our refi portfolio with less incentive to prepay, you are seeing a slowing of those CPRs. And similarly, on the FFELP side, to your point about the last two quarters, we've seen a dramatic drop off at the start of this year in terms of just overall consolidation requests. So we would anticipate that, that remains at these historical levels going forward. Okay. Yes. I mean, I guess, the real question is going to be how the borrower perception is with respect to the rule changes in response to the earlier question on IDR and other sorts of things. On the business services, I guess, the 10% growth, what base is that off? Could you just be a little more specific and maybe what actions you have to take to get the margins from where they are to the guidance level? I mean that base is off of $247 million that we achieved for this year in terms of the non-pandemic-related revenues. And just to compare that to 2021, we had $222 million, I would say, more traditional services. I'm sorry, the second part of your question, just the actions that are taken, so this is just some investment in technology that we've taken on in the third quarter and fourth quarter in terms of new phone systems, the efficiency initiatives. And some of the restructuring that you saw in this quarter, we would expect to benefit us into 2023. Thank you. [Operator Instructions] And our next question coming from the line of Richard Shane with JPMorgan. Your line is open. Thanks guys for taking my questions this morning. Look, you guys have done a really good job managing expenses. You've done a really good job of managing capital in the face of a shrinking balance sheet and revenue declines. When we look at the different business units, should we expect this year to by year-end see loan balances in the Consumer Lending segment up on a year-over-year basis? Should we see that inflection this year? Or what would need to happen for that to occur? So yes, itâs from a private side. We would continue to expect a slight decline year-over-year. Just if you think about the CPR assumptions that I just provided in the last question, that book is running off on the legacy side, greater than 10%, on refi 15%. So our originations overall that Jack cited would not make up for the overall just decline in the book. Got it. And when we look at the contour of that runoff, as we moved into the beginning of 2022, you were starting to show growth there and then that obviously decelerated with the inflection in rates. Is the big variable there to ultimately sort of drive that growth going to be the opportunity on the consolidation side of what type of rate environment would you need to see that inflection? Well, I think it's a combination of both the refi opportunities in the in-school side of the equation. Refi obviously is â well, historically, has been a greater opportunity in terms of immediate impact because you're addressing all loans outstanding, whereas in-school, you're only addressing that students who are actually in-school and borrowing in the private loan segment. So it's a bit of a smaller opportunity set year-over-year. The difference â the other big difference between the loans is the in-school portfolio has a much longer average life. And so a lower prepayment fee compared to refi, which has typically been about a three-year average life portfolio. We are getting closer to the inflection point. No question about it on the private side of the equation, and it will be a function of what our overall originations are and to your point, how quickly the refi marketplace rebounds. Right now, with the rise in rates, we saw about an 80% decline in what we would say is the addressable market size, which means borrowers that have a coupon higher â an existing coupon on their student loans higher than what we would be offering today. Most of that's in the federal space. In the private loan side of the equation, a significant portion of outstanding inventory is variable rate, and there is an opportunity for us to be able to offer a refinance product to those customers. We made some changes to our products to allow, for example, a cosigner on a refi loan, that would give us the opportunity to target undergraduate in-school borrowings that have a variable prime rate, for example, even in this high rate environment. So we are working to address some of that and create additional opportunities for borrowers to save money through the refinancing activity. We like this product for what it is. We've always said that the two biggest risks in student lending are will the student graduate and will their income upon graduation support their debt levels and refi those risk factors are known are the answers to those questions are known, I should say. And so we continue to be highly focused on driving volume in that area when the opportunities exist. Okay. Got it. And if you would indulge one last question. I'm trying to see where the green shoots will be in terms of growth. And clearly, it's going to be on the in-school consumer lending. Can you talk a little bit more about your go-to-market there? Is it traditional being on preferred lending list? Is it omnichannel? And when you think about the growth in 2023, is it a function of higher penetration for the existing institutions or adding new institutions? And I apologize for such a long question. Sure. But this market is definitely the marketplace and how students and families secure financing for paying for college has been changing. So it has moved from almost universally through the financial aid office and a requirement to be on their preferred lender list. Two, some online activities, some referral activity, the in-school â the financial aid office continues to be an important channel. So our go-to-market strategy is really driven by those different segments. And we try to target our marketing activities and the outreach that we make, whether it be digital, mail or financial aid office with different approaches for those different market segments. One area that we see as a significant new opportunity for us is working with high school students and their families and the guidance offices of high schools through our Going Merry products by building relationships with those consumers, helping them complete the FAFSA, helping them compare their different award letters that they received from college on acceptance, helping them lower their need to borrow through scholarship opportunities is an opportunity for us to build those relationships. And if and when they do need private student loans, be there for them with that additional product as well. So these are different ways we're kind of targeting our opportunities in the in-school marketplace. And with the doubling of originations next year, we expect to continue to grow our market share in that space. We mentioned we grew 52% this year, which we think is 10x the market rate. So it's a very high-growth opportunity for us, albeit just starting off a relatively small origination base. Good morning, and thanks for taking my question. One thing I was curious about was when we look at the FFELP NIM outlook, the 100 basis points to 110 basis points implies 105, and that's roughly, call it, 10 basis points above the original outlook when you guys are going into 2022 â for 2022. And there was a discussion, I believe, in the last two quarters about how you guys were able to hedge out some of your floor income during the lows from a rate perspective and if that was having a benefit on a flow-through basis. I'm curious how we should think about that impact? And if there's any kind of duration to those hedges that might roll off in a higher rate environment and how that could impact FFELP NIM as we move throughout 2023 and into 2024? Sure. So two of the things here in terms of benefits. So one, we're completely hedged for 2023 as it relates to the floor income. On the benefit that we've seen that I've been talking about the last several quarters, that has to do more so with the fact that we have increased our fixed rate funding in 2021 compared to what we have done historically. So that benefit will continue to offset the component of the unhedged floor income that has declined over the last, call it, four quarters here. So we've seen the benefits from that funding environment continued throughout this year. We expect that benefit to continue into 2023. As we enter into 2024 and we look at our interest rate assumptions, we'll see if there's opportunities there to swap the floating. But otherwise, we feel very confident based off of the current curves of achieving that 100 basis point to 110 basis point range. Thank you. And our next question coming from the line of [indiscernible] with Bank of America. Your line is now open. Hey, good morning guys. Thanks for taking my questions. I know you mentioned that you're paying off the $1 billion of notes due in January with cash today. I guess, you guys still have the $1.2 billion of unsecured maturities through the first half of 2024. Can you just talk about your appetite and kind of the attractiveness of refinancing that in the high-yield market currently seems to have opened up a little bit? And then can you remind us of how much capacity you have to refinance a portion of that in the ABS market? Sure. So we have â as I said before, we have $1.5 billion of cash on hand. We provided our cash flow projections on the private portfolio and the FFELP portfolio in our earnings deck. So you can see the cash being generated there to meet upcoming maturities as well as we have $1.6 billion of unencumbered FFELP and private assets that we have the ability to tap into an additional $5.2 billion of over collateralization. So we have a number of funding mechanisms available to us to address maturities in 2023 and 2024 and beyond. Your comment about the unsecured markets starting to come back positively, that's certainly something that we keep an eye on. And as we've done in the past and you can look at it more recently in 2021, we've been opportunistic. So should there be an opportunity available to us in an attractive market, we may refinance that through unsecured debt. Otherwise, we'll look at the other options that we have available to us, whether that's cash on hand or the other elements that I just mentioned. Hey, thanks. And then, I guess, given the delay in the CFPB resolution, as the judge entered senior status last year, have you guys had conversations with the rating agencies on potential upgrades? I know that lawsuit was kind of a point for some of the rating agencies. But just wondering now that, that's kind of been delayed if there's been an ability to kind of get beyond that or the conversation has been a nonstarter given the current regulatory environment? So we have very frequent conversations with the rating agencies certainly as recently as just yesterday just in prep for this call today. So that dialogue has continued. Unfortunately, there's no update to provide to the agencies on the path of that court case. But I do think from a quantitative perspective that we should certainly be rated higher across the board in terms of elements within our control. Our capital ratios are increasing, reduced our debt stack. I think we've done everything that we can do in terms of meeting certainly fixed income investors questions, beating their expectations and positioning ourselves well for the remainder of this year as well as 2024. Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Jennifer Earyes for any closing remarks. Thank you, Olivia. We'd like to thank everyone for joining us on today's call. Please contact me if you have any other follow-up questions. This concludes today's call. Thank you.
EarningCall_1327	Good morning, everybody. I'm Chris Schott at JPMorgan, and it's my pleasure to be introducing Teva this morning. From the company, we have the company's recently appointed CEO, Richard Francis; as well as CFO, Eli Kalif. Eli is going to make an initial presentation, then weâre to move over to some Q&A with both Richard and with Eli. Thank you, Chris. Welcome, everyone. And just before I start, I want to thank Chris and JPMorgan team to have us presenting here. It's really nice to come back and now after three years, really more exciting. So today, we're going to review a few elements. We're going to talk about Teva today, and we're going to elaborate on how we are progressing with our current financial targets, with swift shift around the debt. And then also, I will elaborate more about what we communicated in the third -- in the second quarter last year about our financial targets beyond '23. Before I begin, please refer to our forward-looking statement on Slide #2. Additional information regarding this statement is available on our SEC Forms 10-K and 10-Q under Risk Factors. But first, please let me welcome Richard Francis, our President and CEO. The old management and our teams globally are really excited to have Richard with us. And what I can tell you, 11 days in the job, we're already up to speed with a lot of processes, onboarding and helping Richard to get up and running. And I'm sure Richard will elaborate on all of these in the coming session with Chris. Teva today. We're committed to be the world's largest leader in generics. And the most critical element for us is how we're managing our footprint in order to allow us to have a better access for medicine for patients. Teva is the largest supply chain manufacturing company in the entire pharmaceutical industry. Across 37,000 employees, with 53 manufacturing sites, we're working around the clock to make sure that we're able to support our mission. And most important is also to enable to have access to around 60 countries across six continents. Every hour, there is around kind of -- we're saying, one plane in the air, or every hour you have kind of ship in the seas or truck in the road just to make sure that we are able to deliver to all the pharmacies and hospitals around the world. As an integrated, innovative generics R&D organization, Teva global R&D organization really uniquely positioned to support our mission. And we are always continuing to find new ways on how we're able to innovate and to explore synergies across our existing processes. Or if you like, really redefining how pharmaceutical industry should look on innovative development programs. When I'm saying uniquely positioned, what we did in the last several years, we were able to build the right structure in order to give us the right agility to be more flexible on how we are shifting and prioritize projects in order to support our ongoing growth pipeline. This slide is kind of summarizing more about those strategic focus that we have at Teva: continue to be the leaders in generics; and as well, building and accelerating our capabilities and our capacity around biosimilars. We stay committed to make sure that we can be more competitive around cost, on healthcare related to biosimilars. And if you look on the third one, it's around the innovative products. We're keeping -- fueling our pipeline with more innovative projects that kind of having a certain level of preclinical or depends on the phase. But I will elaborate more about our existing products, mostly about AUSTEDO and AJOVY and how we're further penetrating them in the market. Now if we just try to look a bit back on what we did in the last five years. So we set for ourselves kind of a target that started end of '17, and it was accepted with the management and with the Board. And when we started it, opioid actually kicked in somewhere early 2019, and this come grow and become more complex. But I'm really happy that today we have agreement. And as we announced Monday this week, we're actually seeing ourselves moving to the next stage when we're expecting to see the same, more or less, level of participation with the cities, counties and the subdivisions. So doing that one and enable us, hopefully, midyear to put this one behind us and keep our focus on how we are able to serve our patients. What we also did in the last five years; and as we committed, we serve the debt. We look on any assets that we are able to monetize. We look on anything that we're able to optimize in order to contribute cash and totally allocate it in order to serve the debt. So all in all, we're able to pay around $18 billion, this is including the coupon interest, to our bondholders. And we're going to continue to do so. And one of those elements that enabled us to do it is actually looking on how we're able to optimize our spend base, which is part of it is related to the revenue and the mix in terms of the COGS, cost of goods sold, but it's part of it is how we're able to put the right network in order to support our existing revenue. And in '17, when the restructuring was announced, we had around $16 billion, and it was planning to go to $13 billion. And what you will see in the further slides and here as well, that we're able even to take it below, so we can call it around $5 billion. And Teva, it's actually aggregation of around 20 acquisitions that this company grow in the last 20 years. And we have so much acquisitions, you're actually bringing a lot of complexity into your footprint, but complexity also giving you capabilities. And what we are doing in the last four years and what we'll keep doing is looking on those capabilities in how we can actually leverage on them, to understand how each one of those capabilities enable us to build our competitive advantage and to make sure that we are really cost effective. One of these examples, you can see on top, we're able to take the entire network from 80 sites to 53 manufacturing sites. So just to kind of recap and understand where we were, end of '17 until '19 when we actually come to the bottom with the COPAXONE patent expired and with the U.S. generics competition and price erosions, we're in a position that we need to take some actions in order to enable us to expand our ways to repay the debt. Now when we put that plan, we put around to top in 350 basis points. Remember that number, I will come back to it very soon. And as you can see us now at least based on the Q3 year-to-date earnings that we announced back in November, we're actually yielding to that target. Now to get a bit more focus and just try to understand what our team and our global employees did here in the last five years, I want to mention three things here that really have a nice view here. First of all, we always actually look on our top line and now we're able to make sure that we have the right support and the right capacity and capabilities to manage our expansion on the OP. The second element that you can see here, that up to Q3 year-to-date, we already topped 250 basis points from that 350 basis points, and we are on the way to actually meet our targets by end of '23. We're really positive that we're going to do that one. Now another element that we can see here is on top, how the ratio on the net debt-to-EBITDA went from 5.3 to the 4. So you will say 1.3 turns on more or less EBITDA of [4.8] (ph), you understand that this is around $6.5 billion actually went in order to reduce that one. And this is what you see in the bottom line. That's free cash flow generation year-over-year at the level of $2 billion to $2.2 billion, this is what allows us to do it. Now we just need to remember one thing is that when we set those targets, we didn't really rely on top line growth or kind of a mix in terms of top line. If you look on 2020, the mix in between, AUSTEDO, AJOVY and COPAXONE was at the tune of around $2.2 billion, $2.3 billion. We guide to be by end of this year on all those three by $2.1 billion. And that means that the acceleration of the erosions on COPAXONE when we were able to catch up with others, this in-between mix enable us to actually mitigate that one, but we never actually took that advantage. And you can see it, and it's very obvious. Another thing we need to remember that around 50% from our top line is in non-denominated U.S. dollars. So any movements on currency is really sensitive in our world, and it's actually flow through. Now this is the trajectory in terms of the net debt. And as I explained, our capital allocation method in the last five years were strictly in order to serve the debt. I hope that in the next two years, we'll have some more opportunities to accelerate on some other surplus on cash and hopefully, to come to a normal debt rate so we can support the business and our growth. Now in order to do that one, we need to actually looking on our debt [stake] (ph). And we went to the market in '18, in '19, during the refinancing. We also did in '21, a $5 billion SLB refinancing, where in November '21 we addressed the maturity of '22, '23 and '24. We're coming back to the market this year in order to address the '25, '26, '27. And on paper, what you can see here with around $3.5 billion to $4 billion in order to refi those debt [stack] (ph), in order to allow us to keep running our operation and to get our free cash flow run rate to support our debt. You can see here also, it's the euro and the U.S. dollars. This is kind of a mix of 40:60. We're doing what we call a natural hedge. And we make sure that our debt is really aligned to our revenue mix in terms of the currency in order to support our manufacturers and collections worldwide. Now when you're actually looking on what we did in the R&D area and how we're able to position ourselves, what we did in our network on the manufacturing, it's really also, I think, interesting to see, and this is IQVIA data that we actually spoke about in the second quarter when we introduced our new long-term financial targets about how we have this kind of a gradual shift between in the mix of small molecule and biologics. In the last five years, it was turning like a 25% or total $100 million you see here. And this one is actually growing, but the shift here is like more about the large molecules and the biological, which is coming into kind of 50%. So how you actually really position yourself and leveraging those capabilities that I spoke about and leverage your R&D organization in order to react to that element. And we really believe that according to that data, and in according to what we see in the market, we have a lot of opportunities on revenue growth. Now shifting a bit to our two innovative products, we start with AUSTEDO. As you all know, there is around 750,000 to 800,000 people in the U.S. that's suffering from tardive dyskinesia; and currently, if you think about the data, diagnosed around 15%. And also like less than 6%, around 50,000 treated, which mean that there is a really unmet need here that we need to address, and this is our mission here. Now if we just look on Q3 year-to-date versus a year ago, it's like 20% increase. Q3 by itself versus Q3 '21 was 30%. So we are really on track on that element. The other element is AJOVY, which is really progressing nicely. And this one is yet unlike AUSTEDO, it's more globally. So it's around all the three markets: International markets; Europe; and of course, North America. And what we can see here is actually all in all, that we see ourselves at least 1/3 of the market in terms of market share. And we're not going to stop here. We are looking actually to grow that piece. But what has really excited me in the last two years when I'm with the company, with all this restructuring, with all the efforts that we did in the network, and people are really busy on optimizing and do a really remarkable job, is to see those assets. And you need to remember, we launched AUSTEDO in the second half of '17. We launched AJOVY in '18, which means that, that muscle of that capabilities to grow innovative products same as we did in COPAXONE back in the years, it's still existing here. And this is really a huge DNA that we have in the company, and I'm really excited about it. Shifting to our innovative and medicine biosimilars pipeline. Of course, I will not go through all those elements. But you can see here how we are building our capabilities on biosimilars. We have around 13 assets on biosimilars, 5 of them is with partnership with Alvotech. You can name Humira and Stelara. Last week there was an announcement about the BLA on Stelara. And as we -- as far as related to Humira, we're still actually positive about launching in early July this year. Another element is Lucentis with a partnership with Bioeq. We already launched it in the first half of the year with two countries in Europe. Now another interesting element is about Risperidone. We actually resubmit back in November this year, and we are actually expecting to get the FDA response by end of the first half of the year. So I believe that somewhere this year will come back to the market with kind of a sort of Capital R&D Day that we'll talk about more assets and our R&D organization, our executive management will come and tell everyone more about our capabilities and our assets. ESG, it's really something that we developed with Teva in the last several years. And as a company that you consider to become like from the search until the distribution A to Z, you need to actually look how you're able to embrace and to penetrate ESG across all those activities that we have. Of course, there is a lot of details here behind. But what I will mention it is where we have the focus. Everything is starting with how you're able to make the right government in terms of the executive management, the steering committees that we have in terms of how we're working with the Board on ESG. And another element is how you're able to make sure that you have the right measurement and the right disclosure when you move on. And we are really, really progressing in that area. Also, I spoke about debt and I spoke about refinancing, we actually match our refinancing strategy into our ESG strategy. So we issue sustainable-linked bonds, about $5 billion with actually two main KPIs, those one related to the environmental as well on the access. And the access to medicine, it's really something that's exciting us. It's really mainly dominated with our international market segment. And it's really about, what I would say, how you actually accelerate on regulatory approvals in low, mid-income countries based on the worldwide bank list, as well how we able to penetrate on more volumes. So this one is really actually moving very nicely and we're progressing. And also, we take our 1.8 revolving credit facilities into certain KPIs as well. So as we move forward, we'll keep refinancing. I believe that around 50% from our debt by two years from now will actually tap with ESG KPIs. So really exciting about it, a lot of work here by the team. And just to kind of elaborate a bit on those long-term financial targets beyond '23. We came to the market on the second quarter. And a few things I wanted to mention here. First of all, you saw very clearly that we are underway to reach the 28%. We are not stopping. We'll keep working and optimizing as much as we can in order to make sure that we have the right competitive advantage, and we are really cost effective, across all our manufacturing footprint, across all our R&D offices and the sites. Now another thing is about the cash conversion. So what we did in the last several years, and we keep doing it, it's not only the ability to translate $1 of earnings into free cash flow. It's also how you match your working capital into your revenue trajectory, the mix inside, how are you able to have more control on your shipment patterns and make sure that you actually less finance your working capital. This one is really progressing very nicely, and that will enable us to do beyond this 80% cash conversion. Of course, on the debt, as I mentioned, we are committed to serve the debt and to keep deleverage until we get to kind of a normal debt ratio that enable us to keep and grow the business and reallocate sources from our capital allocation that we have today. And then all of this one should enable us to really support growth. And I would just have kind of meaning my time pass, I'll take another 10 seconds from you. That's my last slide. I just want to leave you here with three messages. The first one, as I mentioned, we'll continue to optimize our business and continue to expand our margin. The second element is that we continue to serve the debt, and we continue to deleverage. And the third one, we're actually looking for growth. Thank you very much. Great. Thank you for those comments. So I think we're going to pivot over to the Q&A section here now. So maybe as that folks can see here. Maybe Richard, just obviously a few days into the new seat, but would love to just hear how you're thinking about kind of top priorities and maybe just some of your high-level views on some of the -- both the opportunities and challenges at Teva as you kind of move into the new seat? Yes. Well, thank you for invitation. And so firstly, I'm very excited to join Teva. Everybody seems to ask me that question. I'm excited because I think there's a lot of opportunity at Teva. I think the company has done tremendous work to get the company back on a footing and a solid foundation. And I think there's an opportunity to get the company back to growth. What are those opportunities? Well, I think Eli has highlighted a few. I think we have a world-class generics business. And I think we've got a great pipeline there, which allows us to think about that business and particularly how we can drive some growth there. But I think some of the major growth drivers around biosimilars and around the innovative portfolio that Eli touched upon there, where there's still significant unmet need that can be addressed. So I think there's a lot of positives. You said the negatives. Obviously we have debt, and that gives us some capital constraints. And so as we think about the plan going forward, we need to take that into account. But as you saw, it's heading in the right direction, and so we've got to start to plan for that. The focus for me is to make sure with the management team, we can come back to the market midyear with a clear idea of the future of Teva, where it's heading and the specifics of how to get there. And can you just elaborate a little bit in terms of your background and how that prepares you for kind of the next steps for Teva here? Well, I think what's interesting in the last 19 years in my career, my #1 competitor has been Teva. So I spent 13 years -- over 13 years at Biogen, where I was obviously competing against COPAXONE. And then the last, sort of five years, I was at Sandoz competing against Teva there. So I think I know the company very well. But also, I think that experience that I've had in specialty, the biotech side with Biogen I think, I'll be able to leverage that with the innovative pipeline. And then with Sandoz, obviously, I think coming into Teva, that knowledge will be really helpful in understanding how we can maximize the business, both generics and biosimilars. And then the last two years, not to forget, I've been in gene therapy and a cardiology small company, where I've seen really how exciting some of the new modalities are as well as some of the sciences out there, which I think creates an opportunity for companies like Teva as well. So I'd like to think that's going to help me, but time will tell. Okay, great. I think as discussed in the presentation, Teva has made a lot of progress the last few years in terms of integrating, in terms of addressing some of the debt structure. I guess with where we see the company is today, does there come a point where the company has to think differently, I guess, about as you look towards driving towards growth about maybe thinking about investment levels differently or how they run the business differently. Have you any kind of initial thoughts on that? Yes, I do. Look, and I think it's a good question, obviously, we have limitations with regard to the debt we have. But I think, first and foremost, I think we've got to make some choices about what we want to invest in, and that means what we're going to have to stop investing in. Because I do think we need to keep control on cost to make sure we can keep servicing the debt in the way we are and we have been. But I do think we've got to make some choices. Now very quickly, this is going to change. The landscape is going to change. We're going to get to this -- led this ratio that Eli talked about. And so I think we've got a plan for that, and we're going to plan for how we're going to move the business forward, where we're going to invest more aggressively, both from organically and inorganically, and we're starting to think about that now. And that's something which, once again, we'll reiterate more clearly in midyear. But even in the short term, I do think there's an allocation of resources that can be decided upon pretty quickly. Okay. And maybe on that kind of topic. I mean, if I look in a bigger picture at the pipeline, how do you think about the balance right now of what Teva's spending on, let's say, more innovative assets versus biosimilars, versus traditional generics? Is that the right balance, do you think, for the company going forward? Or is that an area that we could think about there being some evolution? Well, it's a good question. I can't really answer that because 10 days in, I haven't got my head around that one yet. In fact, I'm working with Eric and his team next week on that. What I -- I can't answer that question. What I can say is that I'm really impressed with some of the capabilities that Teva has on the research side, which I think are underappreciated. And were definitely underappreciated by me from the outside in looking. So good question. I think it goes back to what is the strategy of the company? What are we trying to do long term? And based on that, every function and every dollar should follow that strategy. And so once again, I think it's another thing that we'll create clarity on midyear. But yes, I can't give you the specifics right now Fair enough. Just a couple of more big picture ones. On capital deployment and business development, totally acknowledging that there's some constraints now. Just your general approach towards kind of partnerships versus acquisitions, small versus large. What's your bias of how in terms of the best role Teva can play or the best approach to build the business out? Yes. Look, I don't think I have -- I think they all should be considered. I do think, obviously, capital constraints mean that I think in licensing and doing relatively small targeted deals is the best way to move forward. But I also go back to what I think is happening in the industry right now in the last five years is an explosion of science. And I think that's everywhere. It's not contained in big pharma anymore. Research is moving fast everywhere, and I think we've seen that. And so I think that creates opportunities for companies to partner with Teva because of our global capability. I think you've seen what we've done with AUSTEDO and AJOVY, and I think that's something which I want to leverage. And I think for us, it's about finding the right assets, the right partners that we can create long-term relationships with. And that's something which I think, historically, we've shown we're good at. But right now, we've been a bit constrained and that's something which I want to maybe push a bit more over the next couple of years. We had the 2027 guidance the company recently gave, a new CEO coming on board. Should we assume those kind of top line growth targets, margin targets, leverage targets should still apply? Or is that going to be something that as you think about kind of where Teva wants to invest and how they run the business that you want to take a look at? Okay, great. Maybe last big picture question. When you think about the evolution of Teva, should we think of this as maybe more an evolution of the strategy? Or could there be a bigger shift in the approach as you consider the options of what you could do? So look, what -- I'm just started, I've obviously done due diligence from the outside in. But now it's time to sit down with the executive team and really understand what options we have at Teva, what capabilities we have, look at externally how we think the segments we operate in are going to evolve over time. And they're going to -- we're going to come back and we'll communicate what that strategy is. And so I'd say we're going to wait until then. But I have some perspectives, but it's about doing the work now over the next few months, we're going to move quickly. And that will define what that looks like. Look, I think to get back to growth and to maximize the opportunities that I see in the marketplace and some of the capabilities I see with Teva, I think it's going to be a purposeful strategy that has real intent behind it. I wouldn't say that's a revolution, but it's also not something that is going to be marginal. Okay, great. Very helpful. Shifting to the core business. Maybe just first talking about the biosimilar market. I know that, as you highlighted in the charts, it's a big component of how we think about growing the business over time. How are you thinking about the durability of some of these franchises? So I think what we've seen in some of these markets, some tend to be durable, but a lot of them, it seems like we've got a nice ramp. And then as competition comes in, revenues can drop fairly quickly. So talk a bit about how healthy of a market overall that is for you? Okay. So look, obviously, I'm a big believer in biosimilars. I was a big believer at Sandoz. And -- but I think you're right. I think there is an approach where you launch, you reap the rewards of that and then competition comes and it starts to decline. So that means you need to have a deep pipeline. You need to have a pipeline which allows you to come to market very early on to reap those rewards, but you've got to keep replenishing it. But what Eli also showed on the chart is there's a lot of biologics coming off patent over the next five years. And so for us, it's about to make sure we have a pipeline, we execute on that pipeline. We get it to the market and we maximize those opportunities. Yes, there'll be some bumpiness in it, but the opportunity is massive. It really is. And I truly believe that both in Europe and in the U.S. Great. And maybe a question for Eli. Could you give us an update on biosimilar, Humira and your kind of confidence of your ability to get to market by, I guess, mid this year now? So we actually have partnership with Alvotech, right? And we're constantly having with them all those reviews and the readiness around it. We are supporting as much as we can. So according to the data that we have with them, we're actually positively that it's going to happen in that date. Time will tell. Okay. Can you talk a bit about how you see the Humira market evolving? And that I think it's obviously the largest market out there, but it seems like it's also a pretty broad competitive suite of entrants coming in. Yes. So we have Amgen here in January starting, right? Already yesterday, it's going to become more gradually. And there are kind of at least nine, I think, in the line, most of them end of June and as early in July. And I think it really depend what the commercial strategy. It's really dependent about the commercial strategy that each one of the companies will actually look, if you're really looking on the consumer element, if you're looking on more institutional. I think this one is really something that we'll play there. I think what I can tell you from our experience, and you can -- we demonstrated very clearly with TRUXIMA in the last several years, where actually, we were able to get a very nice share and to actually demonstrate that we're the first big biosimilars that we're able to accelerate. So I think if you take those capabilities and our ability to negotiate with the PBMs and to structure ourselves with our contracting capabilities or things that you can find a good spot. Not sure if you look on all those competitives that the full value will come in '23, most likely it can come in '24, but more or less that's a view. How important is -- are these initial contracts in '23? I think working a lot of this kind of theme that seems like with the way AbbVie's contract this may be a smaller market this year and then the opportunity is more '24, '25. Is it important to be there day one and get some of those initial contracts? Or is this something you can kind of build your access over time? I think it's evolving, and it's evolving and it's really depending on how the PBMs able to pick, because they need to make sure that you have the sufficient capacity. You need to make sure they're actually fulfill commitment. And so I think it really depends on how it's going to evolve. And we'll see it in the next few months and on those one that's starting to accelerate. On the traditional generic market, I would love to just get your sense of just the health of that overall opportunity. I guess we've seen a number of companies that kind of narrow their focus and portfolio. And I guess, have we reached a point that we can think about there being a more stable outlook? Or is the dynamic is that this is a market that will just be under some pressure over time, and opportunities like biosimilars, will just kind of naturally replace that? So I guess maybe Richard -- to either Richard, that oneâ¦ Well, I mean, I think we always talk about the generic market if it's one market with one dynamics, and it's not. I think a lot of what you're referring to is about the U.S. If you look at the European market and the rest of the world, it's stable and it's growing, and it's a good business for Teva in all of those markets. So I think that's the one thing I'd say to clarify, generics outside the U.S., if you have a good pipeline and a good go-to-market model is predictable, it can drive growth. The U.S. is a different story. And so will stability come to the U.S. I think my view on that is the U.S. was reset in 2014, and it's still the same as it was then, which is you have huge buying power and you have huge competition. You have a lot of people supplying the products, and that allows the purchaser to have some real power. That's just fact. That's not going to change. I don't see that ever changing. So the question is, what is your business model to approach that market, to make it less turbulent and more profitable? And I think that comes down to portfolio and portfolio of choice. And so I think that's what -- I think the American market is still attractive. It can be still very profitable. But I think you have shorter durations of revenue growth with products that are easier to make versus the ones that are more complex. So I think it's about creating portfolio selection for the U.S. to create some more stability, which I'm sure is something you've heard. So I think that's something which you would have to look at here at Teva. But once again, I encourage you to look at the businesses outside the U.S. in generics, which are performing well. And a question for Eli, maybe as we look at 2023, are there any notable opportunities we should be kind of paying attention to. I think we kind of always watch of this, in the past, you talked about $1 billion run rate as maybe a normalized level for that North America business. Is there opportunities this year that could kind of get us to that run rate? Yes. So we're going to the market with earnings in early February, and we're going to elaborate on that one as well. Okay, great. Shifting over to some of the branded products on AUSTEDO. Where are we in the product's growth trajectory? And I guess, what are the biggest opportunities to continue to expand the franchise? Yes. So my view when you look with some data there on that slide, is that if you look both on the prescription run rate, in both of our volume and revenue run rate, those one are actually yielding to be plus 20%, and it's kind of a run rate that you normalized, I would say in the last, I would say, six months, regardless of Q4 because we don't have the data now front of us. And I think that the fact that this unmet need is in about 6% just, I would say, treated versus that 15% that we mentioned, is a huge opportunity. And the tardive dyskinesia, it's kind of a side effect for the schizophrenia. And it really depends on how the physicians really able to write those scripts and are they actually going to -- looking on finding solution on the schizophrenia or are they actually going to find solution on this side effect. So it really depends on how this one is going to ship. But we're really positive about it, and we're sure that when we keep our focus, we will be able to grow this asset to really high levels. Great. Just in the last minute or so here, just to continue on the branded side. On the pipeline, I know we got -- you're highlighting Risperidone LAI coming to market this year. How big of an opportunity could this be for the company? I think we're all trying to struggle to size up what this means for Teva? Yes. So we never provide any big sales because no one remember those assumptions. But I can tell you, it's one of those products that really demonstrate our capabilities on the complexity and how it's actually shifting. It's long-acting, it's self-continuous, and it's also have kind of a very nice PK profile. And if you look on what is out there now in terms of how easy it actually to use with that treatment, it's actually a game changer. And we believe that, that will accelerate. And it's actually providing us with more penetration on a few other indications that actually in the pipeline related to that capabilities. So it's going to be promising, but again, we're not providing this level now. Great. Well, I think we're just out of time here. Really appreciate the comments, I appreciate making these comments so short into the tenure. I look forward to the communication as we get along.
EarningCall_1328	Good day, everyone, and welcome to the Cintas Second Quarter Fiscal Year 2023 Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Paul Adler, Vice President, Treasurer and Investor Relations. Please go ahead, sir. Thanks, Russ, and thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer; and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2023 second quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. Second quarter total revenue grew 13.1% to $2.17 billion. Each of our businesses increased revenue at a double-digit rate. The benefits of our strong revenue growth flowed through to our bottom line. Operating income margin increased 70 basis points to 20.5% and diluted EPS grew 13% to $3.12. I thank our employees whom we call partners for their continued focus on our customers, our shareholders and each other. Uniform Rental and Facility Services operating segment revenue for the second quarter of fiscal '23 was $1.71 billion compared to $1.54 billion last year. The organic revenue growth rate was 11.3%. Revenue growth was driven mostly from increased volume. Our sales force continues to add new customers and penetrate and cross-sell our existing customer base. Businesses prioritize all we provide including image, safety, cleanliness and compliance. Challenge with labor scarcity and rising costs, businesses continue to turn to Cintas to help them get ready for the workday. Additionally, price increases contributed at a higher level than historically. We believe such a mix of revenue drivers, volume and price is healthy and supportive of continued long-term growth. Our First Aid and Safety Services operating segment revenue for the second quarter was $236.0 million compared to $202.2 million last year. The organic revenue growth rate was 15.1%. This rate reflects the continued momentum of our First Aid cabinet business, which continues to grow more than 20%. Whether it is COVID-19 or influenza, the health and safety of employees remains top-of-mind. We provide businesses with access to quick and effective products and services that promote health and well-being in workplace. Personal Protective Equipment or PPE, while still elevated compared to pre-COVID levels, declined slightly on a sequential basis. The revenue mix-shift benefits our financial results because the cabinet service is a more consistent revenue stream and has higher profit margins than PPE. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All Other revenue was $228.9 million compared to $184.9 million last year. The Fire business organic revenue growth rate was 18.0% and the Uniform Direct Sale business organic growth rate was 33.9%. Before turning the call over to Mike to provide details of our second quarter results, I'll provide our updated financial expectations for fiscal year. We are increasing our financial guidance. We are raising our annual revenue expectations from a range of $8.58 billion to $8.67 billion to a range of $8.67 billion to $8.75 billion, a total growth rate of 10.4% to 11.4%. Also, we are raising our annual diluted EPS expectations from a range of $12.30 to $12.65 to a range of $12.50 to $12.80, a growth rate of 10.8% to 13.5%. Our fiscal 2023 second quarter revenue was $2.17 billion compared to $1.92 billion last year. The organic revenue growth rate adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 12.8%. Gross margin for the second quarter of fiscal '23 was $1 billion compared to $885.1 million last year, an increase of 15.5%. Gross margin as a percent of revenue was 47% for the second quarter of fiscal '23 compared to 46% last year. Energy expenses comprised of gasoline, natural gas and electricity were a headwind, increasing 10 basis points from last year. Strong volume growth from new customers and the penetration of existing customers with more products and services helped generate great operating leverage. Gross margin percentage by business was 47% for Uniform Rental and Facility Services. 50.5% for First Aid and Safety Services. 47.4% for Fire Protection Services, and 37.2% for Uniform Direct Sale. Operating income of $444.9 million compared to $381.2 million last year. Fiscal '23 second quarter operating income increased 16.7% and operating income margin increased 70 basis points to 20.5% from 19.8% last year. Our effective tax rate for the second quarter was 22.1% compared to 18% last year. The tax rate can move from period-to-period based on discrete events, including the amount of stock compensation expense. Net income for the second quarter was $324.3 million compared to $294.7 million last year, an increase of 10.1%. This year's diluted EPS of $3.12 compared to $2.76 last year, an increase of 13%. We had to overcome higher inflation, interest expense and tax rate, therefore we are especially pleased with these financial results. Cash flow remains strong on September 15th, 2022. We declared dividends and pay them on December 15th, 2022 in the amount of $117.4 million in quarterly dividends. To provide our annual -- Todd provided our annual financial guidance related to the guidance. Please note the following. Fiscal '22 included a gain on sale of operating assets in the first quarter and a gain on an equity method investment in the third quarter. Excluding these items, fiscal '22 operating income was $1.55 billion, a margin of 19.7% and diluted EPS was $11.28. Please see the table in our earnings press release for more information. Fiscal '23 operating income is expected to be in the range of $1.75 billion to $1.79 billion compared to $1.55 billion in fiscal '22 after excluding the gains. Fiscal '23 interest expense is expected to be $113 million compared to $88.8 million in fiscal '22 due in part to higher interest rates. Our fiscal '23 effective tax rate is expected to be 20.7%. This compares to a rate of 17.9% in fiscal '22 after excluding the gains and their related tax impacts. Please keep the following in mind when modeling third quarter versus fourth quarter financial results. The number of work days in the third and fourth quarter of fiscal '23 are unchanged from fiscal '22. There are 64 days in the third quarter and 66 days in the fourth. Less work days results in less revenue to cover certain fixed and amortizing costs. In last year's third quarter, First Aid and Safety sold about $15 million in COVID test kits. We don't expect that revenue to repeat this year. Uniform Direct Sale organic revenue growth rates have been very strong year-to-date, however we expect these rates to be pressured in the second half of the fiscal year as the business faces increasingly challenging comparisons. Payroll taxes reset in our fiscal third quarter, increasing our SG&A costs on a sequential basis. Our financial guidance does not include the impact of any future share buybacks and we remain in a dynamic environment that can continue to change. Our guidance contemplates a stable economy and excludes pandemic related setbacks or economic downturns. That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you. You've had really good results. So congratulations on that. I'm curious how would you characterize your outperformance. Has it been more because of new business? Has pricing come in sort of better than you expected? And maybe as part of that, if you could talk about your SAP program, like how much of a benefit do you think that has had over the during the course of this year? Good morning, Faiza. Thank you for your question. Yes, we, our beat on the revenue side are driven significantly by new business, it's continues to be a very attractive for us. But we are selling more items into our customer base. So it's pretty broad. I mentioned in the prepared comments that pricing is above what our historical experience has been. As you can imagine, due to the experience with inflation that we're seeing across our organization. But it is -- but the primary drivers volume growth and we're benefiting from that. We're investing for that and things are -- we like the trend there. As far as on the margin side, we are committed that we are not going to be solely focused on growing margins because of pricing. In fact, we are dedicated to finding efficiencies in our business, some of that is through revenue leverage just general revenue leverage that we get, but we are focused on finding efficiencies and you mentioned SAP certainly that technology is helping us significantly. We've had -- we've talked about our -- the digitization. Our digital transformation of our business that has been very, very important to us and we're seeing benefits whether it's in our routing efficiencies, productivity of our sales partners, be getting better reuse of our products, in-service inventory because of SAP. Those are all benefits that we're seeing and the marketplace is noticing it and it's helping us with a competitive advantage in the marketplace. Great. And then as we look ahead some companies have started talking about, started sounding a little bit more cautious, as you know, a lot of economists are forecasting a potential recession. Talk about how do you, how does, you talked previously about how your business might get impacted, but talk about like what's the sales pitch during a recession. I think that would be helpful for us to hear. Great. First off, we continue to watch our customer base very closely. We're looking at all of our data to see if there's some trends that we might see if customers are consuming less and what have you. So we're watching that. Now as far as in a recession every recession that I've been -- I've experienced while at Cintas over the last 33 years, we've always sold an attractive amount of new business. And the reason being is, we hope businesses and in an environment, that we help them, position them for success as far as, if they're in the business and they have less people, then somebody still has to take care of certain functions. So we're able to sell value there. If they are in an environment where they're looking to save money, there's in many cases we're able to save them money. It's not that they are. We're always asking for increased spend. It's just redirect the spend to us. And in many cases, we're able to help customers with that instead of spending it with some other vendor or with an outsourced item that they bring it to us. And we can bring efficiencies to them. So we fully expect that we -- our new business will be attractive in any type of economic environment. Certainly, we prefer when the economy is growing robustly, but we'll find ways to be successful in whatever the environment. Hi, this is John, filling in for Ashish. Congratulations on the strong results. Maybe just following-up on Faiza's question, could you talk more about kind of retention, as well as just what the current customer conversations are going like today? Thanks. Yes, thank you, John. I'll speak to it if, Mike, if you'd like to contribute on this subject. But, first off, our retention levels are quite attractive. We very much like where they are. We're focused on making sure that our customer is - it's why we wake up in the morning, is to take care of them, and that focus that culture is pervasive and we're making sure that our partners are positioned to be able to make sure they can take care of them and exceed their expectations. So all that is attractive for us and keep in mind we have a really broad customer base. So we serve over million customers that we see on a very consistent basis. Some are doing some are challenged in the current economic environment, whether they struggle to find people or they're struggling with the wage inflation or inflation in general and then we have other customers that are thriving in this type of environment and frankly we have everything in between. And but generally speaking, what we see are, it's still -- we still like what we see with our customer base. And I think that broad customer base is a real benefit for us. That's great color. Thank you. Maybe quickly to follow-up. Could you just talk about capital allocation and if there's any change there, just what you're seeing today in M&A given some of the more challenging headwinds with inflationary pressures? Sure, John. This is Mike and we haven't changed our philosophy in terms of capital allocation. We want to continue to invest in the business. And certainly, as we've seen the accelerated growth over the last three quarters, we are investing in the business, but we love M&A and we continue to have all of the discussions to try to keep that pipeline active, but it always takes to come to a decision and we are working those conversations hard and our expectation is that we will be able to continue in the M&A path, but that's we certainly love that option. And certainly, we -- I misspoke a minute ago on dividends. We paid a dividend in September - on September 15th, we paid another one on December 15th, and we certainly have increased the dividend every year we've gone public. We like that option as well and then the buyback continues to be an opportunistic alternative for us when we have excess cash, so no philosophy changes. We're still working all of those in the same way that we have. You mentioned you're continuing to sell more items to your existing customers. Can you describe how overall customer spending behaviors have evolved with the overall economy and if sales cycles have changed at all? Thank you, George, for the question, and good morning. Again, we have a very broad customer base. And we have a very broad product offering and we're blessed to have both and as a result we're organized in a manner where we're trying to make sure that our customers know everything that we have to offer, they don't always. We've spoken in the past about how going through the pandemic was really, really challenging. One of the positive outputs of that was the fact that our customer base saw the broadness of our offering and in many cases didn't realize we had products and services that we have. So we're focused on that. We're trying to provide more value. When we do that, it is, it helps us because we're -- when we stop our truck and the invoice is larger that's good leverage for us. So we'll provide more value to the customer and we're getting leverage in that manner. So all that's positive. So as far as the sales process being elongated. We're not saying that at this point. And as I mentioned earlier, we are certainly seeing a mix out there. Some customers are struggling and some are doing quite well and everything in-between. But generally speaking the customer base continues to head in a positive manner. Got it. That's helpful. The upside in revenue this quarter was driven I think significantly by new business. Approximately how much of the new business growth in the quarter came from the no programmer market or Uniform Rentals? Yes, good question, George. So no programmers continues to be a really great opportunity for us. The majority of our new accounts that we sell are in the no programmers section. And so we've been focused on that. We train our partners on that. And those that set of prospects sees value in what we provide. And as a result, the TAM is massive and so that's very exciting for us and we see very nice growth opportunities into the future. I guess I wanted to ask on the First Aid segment, Mike. The margins in particular I think really stood out. You made the comment that you're getting some favorable mix shift as the PPE is rolling out. Last quarter's margins were also very good. I think better than most people expected. So it feels like there's something pretty sustainable in the margin rates. Would you agree with that assessment or is there something in there that we should be aware of as we come to 2Q fiscal '24 as a tough comp or something, maybe just some detail as to what's really driving these margins that are really frankly kind of a step function better than what you put up in the past? Yes, Andy, you're right, the margins are better than historical. The mix shift has been great. We have a -- there's a number of areas where we're able to gain leverage. Certainly the new business is a very nice lever for us. The change in -- I'll call it society and the focus on health and wellness is a real tailwind for us. And so as a result of that cabinet revenue growth is very attractive for us that affects the mix, but we are also finding, I mentioned we've got -- we're finding efficiencies in throughout our business. And First Aid is included in that. And so whether it's routing technology. We've been on SAP and First Aid for a little bit longer, but we're finding efficiencies and we have a very strong supply chain that is finding opportunities to source better and improve our overall operating margins. And Mike, anything you'd like to contribute there? The only thing I might add is to specifically, Andy, nothing to call out that there is one-time or short-term in nature. It's just that the business is performing very, very well. Great. I guess kind of similar question, different segments on the Uniform Rental and Facility Services segment. Obviously, you're getting good gross margin leverage, which says a lot about all the things you've already talked about. You mentioned making investments in the business. It appears that the SG&A line and the Uniform Rental segment in particular has been seeing investments there. And I was just wondering maybe you could provide some detail as to what kinds of investments you're making or if it's maybe just still kind of return from COVID and getting some travel and T&E back in there. Maybe just a little detail about SG&A in the rental segment. Yes, Andy, good question. We're excited about the gross margin improvement that we're seeing in that business. Despite a 20 basis points headline that we're that we're up against in energy still. So, you're right, the SG&A is up. It's there is we're making investments in the business and appropriately so. Also some G&A medical costs, workers' comp and what have you are higher this quarter and there's always some puts and takes as it relates to that, but we are guiding towards for the whole year in that business, incrementals in the 20% to 30% range and we are, as I mentioned, that margin expansion is going to come in a number of ways, but revenue growth leverage, productivity, which is a broad word, right. There are so many areas where we get productivity improvements and pricing. But, yes, so we're focused on improving the margins there and we'll manage through the G&A investment, the SG&A investment as we move forward. Two questions. One on labor. We've heard from others -- other industries and companies that labor availability today still remains somewhat a governor growth. I mean has that been the case for you guys? Are you holding back in certain markets due to constraints around qualified labor and just generally how would you characterize the labor availability situation today versus say last quarter? Thanks for the question, Tim, good morning. As far as labor is concerned, the -- I'll call the labor market in totality, easier, but not easy. It is still certainly challenging there. We care passionately about how that looks for our customers and how it impacts our customers. I mentioned some are struggling to staff still and as a result, that affects their business, which impacts us. So but from his standpoint of Cintas and how we're staffed that is not affecting our growth rate, it would be more about how our customers are impacted. I can tell you it wouldn't go well here. If someone said I can't grow as fast as you think I should because I can't staff. We figure that out and we think the environment that we provide for our partners where they have great opportunities and a great wage and benefits and great security and great development is a real advantage for us in the marketplace. So as far as Cintas staffing that is not slowing us up. Certainly, our customers could be impacted by that to some degree. That's good. That's good color, Todd. I mean, it's good to know, I mean there are some companies we've talked to that are literally dialing back on sales and marketing costs just because they can't find a labor to support the growth. So that's good to know you guys aren't in a situation. One more from me on wage rate inflation. I'm curious what that's running at approximately right now for your folks actually out on the routes and how does that compare to your historical averages? Thank you. Yes. Wage rates. I don't have an exact number to give you, but we start with the answer and work backwards. And the answer is, we've got to have great people, we've got to have really well-trained and prepared people who can help us be successful and take care of our customers. So is above historical. Yes, it is above historical but nevertheless we're focused on putting the very, very best team out on the field, so that we can take great care of our customers and prepare us for the future of this organization. Thank you. I guess just to follow-up a little bit. There's a lot of press out there around C-Suite anxiety, right. And I just wanted to know, historically, I guess, how long before that starts flowing all the way down to kind of your direct customers on the street and how quickly can you react because your current guidance obviously is through me. And so things might be fine till then I was just curious if there is a timing element that we should be considering to. Yes, Manav, thanks for the question. Yes, we always have anxiety, right. It's part of making sure you're sharp and but nevertheless it is, we do worry about do our, as an economy, do we talk ourselves into pulling back and is that happen to our customer base and does that happen as a ripple effect and but we're not seeing it. We're again, our customer base. It's so broad. Some are doing great. Some are not. But in general we like the direction of our customer base and we in many ways we hope they don't read the press and they stay focused on taking care of their business and investing for the future. And but we'll see what that holds and how the Fed handles things and how that might impact the general economy. Manav, I might add, you go back 2.5 years to the pandemic to the beginning of the pandemic. I think we show that we can be pretty nimble when it comes to our cost structure and adapting to changes in the environment. Yes, that's fair. And Mike maybe if I could just ask a follow-up just on CapEx and free-cash flow expectations for the year. Any changes or help there? Well, look, we -- what you've seen maybe in the first half of this year is when we grow and we've seen three quarters now straight of double-digit organic growth. So a nice actually four quarters, so a nice acceleration in the performance. And when we grow and the volumes are healthy, we certainly invest in the business and that investment can come through in the way of working capital. And so you see a little bit more working capital usage in our cash flow statement. And that's not necessarily unusual for us when we see an acceleration in the growth rate. But we like our cash flow. It will continue to be strong and this year should not be an exception to that. And that cash flow. I talked a few minutes ago about capital allocation and the cash flow that we've got going on this year will not force us to make choices. We can still do all of the capital allocation that we typically think about. So we like where we are. Hi, Todd, Mike and Paul. I wanted to ask a little bit about merchandise amortization, kind of given the strength of Cintas' new business, which usually has uniforms going into service. You know, how did merchandise amortization affect gross margins? I mean rental gross margins in the second quarter? You know, obviously, I know rental gross margins were up despite any effect of merchandise amortization. And do you expect rental gross margins to be up in the second half of the year, year-over-year? Andrew we -- as it relates to the amortization, certainly you've seen the growth that I've talked about a few times and that translates into more garments and other products being injected into our in-service inventory. And we love that. We love when that happens. And so we're seeing growth in the amortization. But we're able to leverage that pretty nicely so far. And you know our business well. We amortize many of those rental products. And so we have good foresight or visibility into what's coming. And that means we can plan, we can source, we can increase prices when necessary. So the visibility gives us a nice advantage in terms of how we think about other ways of operating the business. And as it relates to the second half of the year, look, we don't typically provide guidance on gross margin specifically. But certainly the guidance that we've provided contemplates improvement in our operating margins in the second half of the year and the growth that we have on the top line and all of the other initiatives and things we've got going on. They are performing well and enabling us to do that, to do that margin improvement even in a difficult period of time. Hi. Thank you for taking my question. So your guidance for the rest of the year, I guess, for the back half implies growth probably on the sales side and the 8% to 9% range, which is moderating from what you did in the first half. I'm curious if you could just walk us through kind of where you're assuming there might be some deceleration. Is that just as you come off lapping the COVID recovery and maybe where there might be opportunity for upside just based on the strength you've seen year-to-date? Heather, thanks for the question. Yes, so a slight, but still very attractive growth. We like where that is. We're preparing for that. And but we are certainly up against some tougher comps in the back half, specifically with First Aid and Uniform Direct sale. So we'll be lapping those and but we like the growth levels and we find them quite attractive. And that's what we are preparing for. Thank you. And do you think, you know, are there areas that you're seeing in your business. You know, you've done well year-to-date. You've raised your guidance sort of I know First Aid and Safety is very strong right now. Other sort of areas in your business, whether it's certain customers like your opportunity in health care or other business lines where you're really seeing outperformance and kind of growth beyond your typical run rate. Yes, good question. So again, our customer base is very broad, but I'll tell you this that our verticals where we're investing are, you know, health care, hospitality, education, government are performing quite well and they're growing at an accretive rate to our growth. And we think we choose them wisely and invested in them appropriately. And that customer base is doing well. Within that customer base, again, you get a mix, but nevertheless in general we like that area and it's growing very attractively for us. Thank you. I mean I know you've talked about the economy a few times. I'm wondering, as you look at some of the benchmarks for your business and maybe your customers businesses. Anything that stands out either that is positive that maybe you were anticipating would decline or anything that's negative that you are anticipating would be the other way. Kartik, it's a good question. I continue to talk about how broad our customer base is. So you name it, we see it. But the scarcity of employee -- of workers is an issue. Unemployment is still at a very, very low level. There's still, I think, 10 million job openings in the U.S. economy. So as a result of that, you know, people are, I think, careful about how they're handling their employees and being judicious about that. And then just last question. Just from an energy standpoint, obviously fuel prices are coming down. It seems as natural gas prices are coming down as well. Is the headwind you're anticipating from energy prices maybe what you anticipated at the beginning of the year when you gave guidance to now? Has that changed at all? Yes. So we still see energy as a headwind. And when you go to the pump right now, it is certainly a little bit lower than it was a quarter ago. But about 40% of our spend on energy is in natural gas for our production facilities and electric. And that is not heading in the right direction. Natural gas prices are up and electric prices are up. And so but certainly the attention more gets to everybody fills up at the pump for the most part, but not as much focus on natural gas or electric. But we're seeing it and it's I'm sure it's affecting households as well. Hi, guys, good morning and happy holidays. I wanted to ask another margin question. Mike or Todd, I mean, the guidance for this year, the back half, it seems like you're the guidance kind of implies a higher than normal incremental margin. And I think, Todd, you mentioned the Uniform business could be 20% to 30% incrementals this year. Is this -- are we moving into a scenario where incrementals could be higher than your normal call it 20% to 25% range and maybe are you more comfortable talking in like a 25% to 30% range for the business going forward. Thanks. Well, we haven't, Seth, we haven't really changed the narrative on that in terms of the 20% to 30%. But you know as -- there are different ebbs and flows within the business. And sometimes there are periods where we are investing maybe a little bit more than in other quarters et cetera. And, you know, Todd's focused on the full year results and the longer term results. And so there can be ups and downs, certainly, based on our guidance, we are contemplating margin improvement in the back half of the year. And I don't know that it's anything that we're ready to say is a new norm. It's just simply we look at the year and say we've got some really good incremental margins in that 20% to 30% range that will cause the full year margins to go up. But I wouldn't look at it as a new normal type of a thing. It's just simply there are ebbs and flows within the business and timing of investments, et cetera. Okay. That's helpful. Thanks. And then just on the Fire business, the organic growth in the Fire business continues to be in this sort of mid to high teens range. Is that a sustainable number or do you feel like for Fire and just sort of maybe any color on really what's driving that unusually strong organic growth. Thanks. Yes, Seth, I'll take that one. We love the Fire business. It's a very attractive business for us, it's the only business we're in where every business legally has to comply with the local laws around it. So the TAM is absolutely massive. And our sales team is doing really well and we're selling into additional customers. We're selling more into our existing customers. We've got a great offering. We really like our position in the marketplace. And the team is doing a heck of a job. So, yes, we would like to continue to grow that business at double-digit rates. Can it achieve the levels that where we are today, that would be outstanding. But certainly double-digits is our focus for that business. Thank you very much. I want to get a little follow-up on some of the questions on client hiring, which obviously could impact Cintas volumes. Do you feel like you really sell at a level in the organization that you get kind of an advance look at the hiring plans? Or is it really kind of you monitor it as it happens? So like in current you need to react because clients will just kind of add or subtract people kind of in the moment, but you don't -- it's not that you're getting a heads up on that. I'm just trying to understand like your view. Obviously, it's a very broad client base, but just in more generalities. And then there have been any changes, you used to talk about kind of an add stops metric. And I'm wondering if there's anything materially different in what that would look like now. Shlomo, great question. It really depends upon -- our view of the what the staffing levels of our customers will be. It really depends upon where our relationship is some they'll share with us. Hey, calendar '23, here's what we're thinking. Others, they don't depending upon our relationship levels or their planning level. And so in that case, it's a little bit more reactive. So, you name it, we have that type of experience where it's very transparent and we have a good. We can see around the corner with our expectations there. And then some are just very reactive and we have to see what's going on with their customers. So but generally speaking with add stops, I would say, we see our experiences continues and the patterns that we have in the past. And I mentioned earlier that, I don't know, certainly Q1 speaking of the economy Q1, Q2 was GDP shrunk. Q3 was slightly positive. We'll see what Q4. holds in store for GDP. It's tough to tell, if we're in a technical recession or if we're not and what calendar '23 holds in store for us. But the employment situation in the U.S. is still tough to get people and as I mentioned there's 10 million job openings. We'll see if that continues to decline. But we're trying to make sure that we're positioned to grow and but as Mike mentioned, if the economy affects our customer base in a very negative manner, we'll be prepared to pivot and manage our cost structure appropriately and we're planning on being successful in whatever the economic environment brings to us. Thank you. Just one follow-up on just on the pricing. Is it kind of normal now for the clients to expect these pricing increases or is it are you getting any material push-back on them as this time is going on? Shlomo, as I mentioned, in our prepared remarks, pricing is -- has always been a component of our growth. Same is the - what we went through with some serious economic turbulence with COVID-19 and what have you. So that being said, we're planning on growing our business most attractively through volume growth and getting leverage there and planning on growing margins via leverage on that revenue growth and finding efficiencies in our business. That being said, it's a very competitive environment. And as we talk to our customers, they certainly challenge us. And they want us to find efficiencies in our business and not just pass along cost to them and that's what we're focused on. Thanks very much. Good morning. Happy Holidays, everyone. First question in Uniform Rental. I'm just curious about the winning business you guys have obviously highlighted penetration of existing customers, strong volume growth, new customers. Could you speak to what is no programmer versus what is competitively won? Is there a lot of that activity right now of competitively won? And then if you could just kind of differentiate what you're seeing with large customers versus may be small and midsize in the context of that question. Thanks. Yes, Scott. I'll start, Mike, if you want to contribute on this subject there. As far as the market, the competitive market. We sell a lot of no programmers. Certainly we do take business from our competitors, but that's, we find that there are so many businesses out there that say, wow, I didn't realize that you would serve a business of my size or I didn't realize you had those types of products and services and they see great value in what we do and so we're very focused on that. As far as the customer base, the larger customers, some of them are struggling, smaller ones are certainly some of them are struggling, but I would say, generally speaking, the smaller ones are probably a little under a little bit more pressure just because it's tough to attract retain staff, pay people and at the levels that you have to be competitive in the marketplace. So that's kind of a generalization that may not be completely fair and I could give you plenty of examples of smaller businesses that are thriving. But that's kind of a generalization I thought I might share with you. Great. Thanks. And then as a follow-up, specifically, Uniform Direct sales, I think it was about 33%, 34% organic growth in the quarter. Very strong. I heard you mentioned on an earlier question that would be a segment facing some tougher comps in the back half of the fiscal year. If you just speak to kind of what the business activity has been there, what's driving the strong growth right now? What type of customers? Has it been particularly lumpy or is it been just a solid, broad based versus maybe just one or two big customer wins? Just a little bit more elaboration on that business line. Thanks. Sure. Good question. Very broad based. It's not one customer or a couple customers. It's very broad based. And when you think about that, that area, certainly hospitality is a big component of it, but there's other customers that are national and scope type customers. But hospitality specifically I'll speak to, yes, they're struggling to staff, but there's a lot of demand out there in the hospitality sector. And as a result they need help. And you know and when you think of that, when they're struggling to staff and they have to provide products and services, we've become a very attractive opportunity for them to sole source and to provide products that they can get quickly and that are very attractive and allow them to provide the proper guest experience that they want to provide for their patrons. Thanks very much. I wanted to ask a follow-up on pricing. I know you've been sort of putting through a higher level of price than normal recently, and now it sounds like, you know, obviously you've mentioned a couple of times that volume is going to be a bigger driver to growth. But I guess my question is pricing going to be more of a normal increase versus prior years or, you know, based on, you know, like the challenging macro, although you said you're not seeing it yet, like is it going to be lower than normal or roughly around sort of a normal year for pricing in calendar '23? Yes, Toni, good question. As we think about pricing in the future, it certainly is above historical today. It's tough to predict what inflation holds in the future. But presuming that comes down, I'd say you'd see us closer to historical from a price adjustments. But it really depends upon what happens with the Fed, what happens with the economy, what happens with wage pressures are so many inputs. And that one's tough to predict. So but we're watching it very closely. Great. And then when you think about the margin expansion implied and you mentioned sort of higher margin expansion in the back half of the year, is that like I guess how much of it is a result of like energy costs coming down from prior levels or maybe inflation having reached its peak and coming down like I guess how much of it is that versus scale or initiatives, if you could give any sort of breakdown or examples of where the margin expansion will come from? Thanks. Toni, I would say, it comes from a lot of different places and it's hard to put a number on any particular one of them. But, you know, a couple examples. Energy, we've kind of looked at that, as Todd mentioned earlier, still is a little bit of a headwind going forward. So we're not necessarily expecting we'll get a bunch of energy benefit in the second half of the year, but our revenue growth has been really strong and the performance the momentum has been good and that certainly will continue to help in the second half of the year when we grow at real nice levels like we've guided towards and like we've had in the first half of the year, that always helps our ability to drive better margins. But we've talked over the last year or so about important initiatives that we have. Those remain and continue to do well and those are things like our routing improvements through our smart truck initiative. And we have more of those, whether it is sourcing initiatives that Todd touched on in First Aid or others. But those initiatives become very important to us, too. And then there are just some timing of things, maybe some investment in the first half of the year that was really helping propel our growth and continue our momentum. That may not be at the same type of level in the second half of the year. So it's a lot of those different pieces that kind of fall together. And it's, you know, it's hard to put numbers on every single one of those. And at this time there are no further questions. I would like to turn the call back to Paul for closing remarks. All right. Well thank you for joining us this morning. We will issue our third quarter of fiscal '23 financial results in late March and we look forward to speaking with you again at that time. Take care.
EarningCall_1329	Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. And the lines will be open for your questions following the presentation. Please note that this call is being recorded. On the call today, we have Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, Senior Vice President, Investor Relations and Business Development. Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal first quarter 2023 earnings release. It can be found at www.kurasushi.com in the Investor Relations section. A copy of the earnings release has also been included in the 8-K we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Also during todayâs call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP. And the reconciliations to comparable GAAP measures are available in our earnings release. Thank you, Ben. And thank you everyone for joining us today. I'm excited to report another strong quarter where we outperformed industry averages with regards to traffic growth, saw two strong restaurant openings, and delivered restaurant-level operating profit margin that exceeded the same period prior to the pandemic. Our performance has been driven by the steadfast support from our loyal guests and warm receptions by new fans alike. In an environment where consumers are forced to be more careful with their discretionary spending, weâre delighted to see that when our guests go out to eat, they choose to dine with us. Our three goals for this year are to continue our rapid unit expansion, grow into our G&A, and to maintain the operational excellence and incredible values that have made us our guestâs top choice for dining out. Our first quarter sales were $39.3 million represent revenue growth of over 30% over the previous year's first quarter revenue. We saw comparable sales growth of 6.9%, while facing headwinds created by adopting of 8% of pricing at the beginning of September. This 6.9% comp figure breaks down to 4% from traffic and 2.9% from price and mix. We are especially pleased by our traffic growth, which outpaced the casual dining segment by a monthly average of more than 700 basis points and which we believe is an indication of our concept resilience in a potential economic downturn. As mentioned in our previous earnings call, we believe that there is significant opportunity in capturing new guests as they trade down from local sushi restaurants will have taken price much aggressively than we have. On traffic growth during the period in casual dining as a whole is suffering from declining traffic only underscores opportunity created by our unparalleled value progression. Looking at our operating results. We are pleased to note that our labor costs as a percentage of sales are 60 basis points below the prior year, confirming the expectation that a 50 basis point labor improvement in the prior quarter, driven by the implementation of our three technology initiatives was not just a onetime benefit, but potentially a long term tailwind for our operational efficiencies. Due to ongoing inflation, our cost of goods sold as a percentage of sales was 160 basis points higher compared against the previous year. And it's largely responsible for the year over year decline in restaurant-level. But it is difficult to predict when we can expect a moderation in commodity cost. We do not expect this inflation to be permanent and remain optimistic that we can achieve the margin price we saw in the previous fiscal year as we enter a more normalized environment. As Jeff mentioned in the last earnings call, key area of focus as our new CFO was to manage G&A expense. For a growing company, there are certain investments in people and infrastructure that are necessary to support the growth and we will not compromise that. However, this does not mean that there are not opportunities for savings and pursuing these savings is a top priority. Since the IPO, we have said that the best possible profitability for us is it to leverage our G&A cost against an increasing larger store base. While this leveraging will be a multi-year process, we are proud to announce that we are making substantial progress throughout this call as demonstrated by the improvement in G&A expense as a percentage of sales of over 100 basis points as compared to the prior year. I'm particularly impressed by the teams efforts to control cost and for us to have achieved the leverage during the period when we are continuing to see inflation in the underlying items. Our G&A strategy is to renegotiate existing contracts and to [indiscernible] efficiencies, which will allow us to minimize new hires. Our support center employees have listened to the occasion and I'm proud of the company wide cooperation that had made this possible. Turning to development. We opened two new locations in the first quarter, one in the Mall of America in Bloomington, Minnesota and one in Jersey City, New Jersey. Subsequent to the end of the quarter, we opened our Philadelphia location in late December. As I'm sure you heard on our previous earnings call, construction and permitting delays have been a headache for the rest of the industry. And two of these units similarly suffered from unusually long opening delays. That being said, we believe that the worst is behind us as the remainder of our fiscal â23 pipeline is really survival, which typically make for further experiences. Additionally, we are very pleased by the early performance of these three units. It's great to see our restaurant drive in the Mall of America, further indicating cross national portability and across demographics and Jersey City [indiscernible] continue to show the east coast market tremendous potential. We currently have four units under active construction is still more breaking ground later this month. With still more restaurant openings expected in Q2, we are on track to achieve the annual guidance -- growth guidance we provided in the last earnings call. Lastly, I'm very excited to announce that we have made significant progress in the implementation of our new Waitlist app and reward program platform and expect the testing to begin during this quarter. The Waitlist app we will have an immediate positive impact on customer satisfaction by improving waiting time accuracy, which we hope will translate into improved attrition rate for guest waiting time. With the new reward program platform, not only will we have greater flexibility in the way that we can reward our guests, but we will be able to begin leveraging environmental data for targeted marketing for the faster time. Our levered program has been hugely effective in driving frequency and average check growth, but still mid of program based in the power of data and the utilization of this data represents a new chapter in our marketing efforts. On that note, we began our targeted marketing efforts specifically geared towards first time guests in December. But it's too early for us to discuss the impact yet, we believe that the opportunity in capturing new guests who have been discouraged by the aggressive price taking we have seen among local fish competitors. It's truly significant that capturing these guests remains a key pillar of our marketing strategy for the fiscal year. Before I hand things over to Jeff, I would like to note that we took pricing of approximately 7% in the first week of December. Finally, I would like to thank all of our team members, both at our restaurant and the support center for the great work they do every day to create the magic that is a great experience. Thank you, Jimmy. For the first quarter, total sales were $39.3 million as compared to $29.8 million in the prior year period. Comparable sales growth as compared to the prior-year period was 6.9% with regional comps of 10.3% in California, and 2.1% in Texas. Turning to cost, food and beverage costs as a percentage of sales were 31.6% as compared to 30% in the prior year quarter due to food cost inflation, partially offset by pricing taken over the course of fiscal 2022. Labor and related costs as a percentage of sales decreased to 31.9% from 32.5% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives, as well as sales leveraging from pricing taken over the course of fiscal 2022. This leveraging was partially offset by wage increases and incremental pre-opening labor. Occupancy and related expenses as a percentage of sales were 7.3% and were largely flat year-over-year compared to the prior year quarter 7.4%. Other costs as a percentage of sales increased to 13.5% compared to 12.1% in the prior year quarter due to increases in pre-opening costs, advertising and promotional costs and repair and maintenance costs. General and administrative expenses as a percentage of sales decreased to 16.9% as compared to 18% in the prior year quarter. On a dollar basis, general and administrative expenses were $6.6 million as compared to $5.4 million in the prior year quarter. With the increase, largely driven by compensation and partially offset by reductions in professional fees and insurance costs. Operating loss was $2.2 million as compared to an operating loss of $1.3 million in the prior year quarter. As a percentage of sales, operating loss was 5.5% as compared to a loss of 4.2% in the prior year quarter. Income tax expense was $10,000 compared to $12,000 in the prior year quarter. Net loss was $2.1 million or $0.21 diluted share compared to a net loss of $1.3 million or $0.13 per diluted share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 18.2% compared to 19.5% in the prior year quarter. Adjusted EBITDA was $0.6 million compared to $0.8 million in the prior year quarter. Turning to cash and liquidity. At the end of the fiscal first quarter, we had $26.9 million in cash and cash equivalent and no debt. Lastly, I would like to reaffirm the following guidance for fiscal year 2023, we expect our total sales to be between $183 million and $188 million, we expect general and administrative expenses as a percentage of sales to be approximately 16% and we expect to open between nine and 11 new units with average net capital expenditures per unit of approximately $2.5 million. Thanks, Jeff. This concludes our prepared remarks. We are now happy to answer any questions you have. Operator, please open the line for questions. As a reminder, during the Q&A session, I may answer in Japanese before my response is translated into English. Please bear with us. 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 Andrew Strelzik with BMO Capital Markets. Please proceed with your question. Hi, this is Daniel Gold on for Andrew. Thanks for taking the question. When we think about the results in the quarter, our math suggests your comp slowed throughout the quarter to 2.5% in November. What do you attribute that to? And what are you tracking quarter to date or in December? Thank you Daniel for your question. Please allow me to answer your question in Japanese and Ben is going to translate it. [Foreign Language] [interrupted] In terms of our comps, we were exceptionally pleased to see that in this environment we were able to achieve comps of 6.9%, particularly because our traffic was up 4% over the course of the quarter, which, as everybody knows in this environment is pretty rare. So looking at industry averages, like those provided by NATRAX over the period that was our Q1. It's pretty clear that our peers in the casual dining space are down in traffic. And so, again, the fact that traffic is up for us is a great sign for concept, it's a great sign for the strength of the consumer. But that being said, as Jimmy mentioned in the prepared remarks, our focus for fiscal '23 is going to be in terms of capturing first-time guests in this sort of environment, it's only natural that people are going to reduce the frequency of their out-of-home dining occasions, and we've been able to remain one of them for -- remain a dining occasion for our guests. But for us to maintain the traffic growth that we've seen in the last quarter, we think it's imperative for us to capture first-time guests. Jeff, is there anything you wanted to add? No, I think the traffic that we were able to get is something we're very happy with. Getting people in the door is the first step, and we've been able to do that. We've been able to increase the number of people coming in by 4% over last year in a very, very tough environment. So we're not really going to give monthly comps, and I know we did give September and October on the last call, so you can obviously do math yourself. But we're very, very happy with where the comp came out for the first quarter of our fiscal year, especially compared to our peers. People are still coming in. And as Ben said, if people were going out 3 times, now they're only going out 2 times. It appears based on the numbers that we've been lucky enough to remain one of those two dining occasions that people do choose to eat away from home. Got it. That's really helpful. Thank you. And one other question for me. One of the stated goals for the year is G&A. I'm curious on what your plans are on a multiyear basis. You've guided to 16% sales -- G&A as a percent of sales for the year. What do you think is a reasonable place to get to longer term? Are you expecting linear progression down or plans for G&A investment? I'm expecting near progression down. We're not going to give any guidance past this current fiscal year. We are a growth company. I do think that our G&A is elevated. And as we've said many times on these calls and then in meetings with investors and conferences and whatnot that we -- one of my goals -- my top goal is to get it down. We did see a little bit of leverage when you compare the first quarter of this year to the first quarter last year, which we're very pleased with. But it's not a trend yet, and we're going to continue to guide towards the 16%. The number came in where we expected it to for Q1, so there were no surprises, but stick with the 16% for now. I do expect that to get better in future years, but I'm just not able to quantify that at this time. But Jimmy also said in the prepared remarks that we're also not going to compromise investments that we need to invest in our company for future growth, but there is room for improvement. And that's a promise that we have made to everybody, and that's a promise we're going to keep. I just can't quantify for future years right out past fiscal '23. Thanks. I wanted to just come back to the traffic versus menu pricing versus mix portion of the commentary for the November quarter. In terms of -- I think that I calculate close to 8% menu pricing that you would have been carrying throughout the quarter before you took this December price increase. And if traffic was up of 4%, does that imply that you had a fairly significant mix shift during the quarter? [Foreign Language] [interrupted] So in terms of Q1, we did see a little bit less of flow-through from pricing than we had in past quarters. That being said, we did see average check growth on a quarterly sequential basis from Q4 to Q1, and so, it's not like there's aggressive check management, checks are still growing. And the purpose and plate consumption over the same period was flat as well. Certainly, it's a point of focus for us. But given that this is just result from one quarter, we don't think this is necessarily indicative of a trend yet. Okay. Got you. And you're not providing any color on kind of quarter-to-date trends, whether or not because I did want to ask you a 7% price increase that you took in December, whether or not that's having any impact on traffic trends? And then the second part that's kind of tied into that is, you did see a pretty healthy jump now the last two quarters in food and beverage costs. We know that there's inflation out there, certainly on commodities. But I wanted to get a sense for, are we getting close to where you feel like that peak in food cost inflation has happened? And with that incremental 7% that you took in December, is that hopefully going to balance out kind of your COGS as a percent of sales? So in terms of -- let's take the first part of your question, which is about December and the price increase, and early indications that we've seen is that, the response by guests has been just fine. Previous price increases that we've taken, we're seeing pretty much the same pattern, which is little to no negative response to the pricing increase. We're very lucky where our pricing is compared to our competitors. We do have headroom to take price, and we did take that price to 7% at the beginning of December. So we're happy with what we've seen so far in terms of no negative response to that. But we're not going to give any other more color. December is only closed five days ago, so we're not able to really give any more color as it relates to the beginning of the second quarter. As far as your question on COGS. I am optimistic that we're reaching a peak, but I'm not banking on that. We do see some things continue to go up when we have seen sequential month-to-month inflation since the beginning of the year and even as we go back into Q4 of last year. And I'm planning for that to continue to go up, which is why we took the price. The price does not fully offset the impact of what we're seeing with inflation, and we don't expect it to, but it is helping. And one thing that really encourages us is because of that traffic of 4% during the quarter. Is that -- guests are reacting pretty favorably to the pricing. That really isn't impacting whether or not they want to come visit us. But I'm optimistic, but I'm not optimistic enough to tell you that I believe that we've reached the peak. There are some positive signs out there. But again, same thing we see on the last couple of questions, that's not a trend yet. Just to add on that note about commodity inflation. As we mentioned earlier, what are the few concepts that are posting positive traffic in the casual guiding sector? And I think, really a big part of this is due to our exceptional value proposition, and that includes a lot of guests that are trading down from more expensive sushi restaurants. And so this -- we sort of see this as a long-term investment in terms of growing our overall restaurant base, which is an opportunity that I just don't think other people are seeing here. And so, while there may be short-term commodity pressures, this -- in the end, having this excellent value, I think is going to position us for that much more success once we see a normalization in inflation. Got it. And then just wanted to clarify another comment from the script, which was on the unit openings and kind of the cadence that you're expecting. So I think what you said was that you had four units actively under construction and then a couple that -- additional that you are going to expecting to break ground by the end of the month. In terms of completing those, getting them open, because I know, as you noted, that they've -- they're a little bit behind schedule for a variety of reasons, construction permitting delays, HVAC systems, whatnot, but can you give a sense for your expectations around how many -- you've opened one quarter-to-date thus far? Are you thinking you're going to get two more open this quarter? And then just in terms of even for the back half of the year, is that going to be even split? Is it going to be back half-weighted? Any color you could provide would be super helpful. [Foreign Language] [interrupted] In terms of -- I mean, we're sort of going to repeat what you just mentioned, and we're going to be repeating ourselves from the prepared remarks. But what we can say is that, we've got four units under construction. We've got two that are just about to break ground. So we've already opened one to date in Q2, we expect a couple more in Q2 one or two, and the remainder will be in the back half. One thing to keep in mind is that, the actual construction times haven't really gotten longer. The delays in openings that we're seeing are largely due to inspections and permitting where, for example, before, if you had an inspection, you could get a follow-up inspection the next day. Now this is like a two week wait. And that's a lot more typical in urban markets versus several rural markets, which is why we have a lot of optimism for the back half in terms of not seeing the sort of hiccups that we saw with, say, Philadelphia. And then the other thing that gives us a lot of comfort is that the remainder of our pipeline are largely in new build-outs, and so that just generally makes for a much smoother process. There's very rarely issues with gas lines or having to get the floor level or anything like that, and so that's another tailwind that we have for the remainder of the pipeline. Hi, good afternoon. I guess circling back on inflation, Jeff, could you quantify the commodity and labor inflation you saw in the quarter and what you're expecting for the year? We haven't quantified it. I mean you can see the math quarter-over-quarter, what we've seen. We were very fortunate this year on the wage inflation or in this quarter as we also said in the prepared remarks, I think with the price increases as well as the three initiatives, the technological initiatives that we implemented, which we've mentioned, give us about 50 basis points to 60 basis points of labor leverage. But along with the pricing, we were able to come out with a better quarter this year from a labor perspective. So I have -- and on the food, I already mentioned kind of what's going on with inflation. I'm sorry that I can't quantify what I've seen. But as I mentioned, I'm optimistic, fingers crossed, but not promising that we'll see an improvement or at least a leveling out of food cost. And just to follow up on that. I think you said the 7% wasn't -- it wasn't enough to cover all of the inflation you're seeing. So should we kind of read into that to anticipate restaurant-level margins kind of being under some pressure all year? Or I know there are other initiatives that you guys have and that you've been working on and abilities to kind of pivot that could help bolster margin. But I'm just kind of looking for some clarity and maybe on what the messaging is that you're trying to get across there. The first thing to remember is that, our Q1 is our -- seasonality-wise is our lowest performing quarter from a margin perspective. So as we go throughout the year, we do expect margins to improve. I do not see much more downward pressure on margins. I really don't. I feel like we've reached the peak or getting -- nearing the peak, both in terms of wage and cost of goods sold. I mean if you really look at the numbers, it was really all COGS this quarter, really that impacted our bottom line and our margins. So if we can get or what control we have, and I think we have some control, but a lot of it's out of our control of the macro environment. Once inflation comes down or inflation eases, I really think that our margins are going to see some improvement. And when that's going to happen, I can't say, but I really feel like maybe the worst is behind us as it relates to that. Okay. And then I'm sorry if I missed this, but I don't think I heard any update on loyalty and the membership trends there. And I'm just curious, as you're continuing to generate the positive traffic, are you having continued success converting folks to loyalty? And is there any update on frequency of loyalty versus non-loyalty? Yes. So the number -- the loyalty -- the rewards membership growth rate has pretty much been in line with the exceptional rate that we've been seeing over the last year or two. We're really pleased with that. In terms of the rewards program, the bigger news is really the fact that we're able to begin testing with Punch in this quarter. Up until now, we've used an in-house platform, and it's been very useful in terms of driving frequency and increased check spend. But in terms of data leveraging or targeted marketing, we haven't been able to use it. And so being able to switch to that, it's really kind of a paradigm shift in our rewards program and our marketing strategy. And so that's something that we're -- that's going to be the big news for rewards this year. Hi. Thank you for taking the question. I was hoping we could dig into some of the either initiative platforms, tools and just your overall approach in terms of going after that first-time guest and getting them into the funnel. It seems like that's a big opportunity. You talked about it a couple of times. I imagine that there is either some tools, marketing or some sort of approach that you're bringing. And without giving it away too much, I'm just curious if you could talk about it high level and how you're thinking about that unfolding as we go forward. [Foreign Language] [interrupted] In terms of our targeted marketing, just at a very high level, it's going to be heavily focused on search engine optimization. So whether it's Google or Yelp, we'll be able to drive that many more guests who are interested in Japanese or sushi. We'll be top of mind because we'll be at the top of the list, and so that's something that we're excited for. The incremental spend that we spend on targeted marketing is not going to really result in a change in the overall marketing budget. It's going to be more -- we're optimizing -- we're always optimizing our marketing efforts, and we'll be able to reallocate some of those savings towards that targeted marketing, which goes very far in terms of the effectiveness on a dollar basis, and so that would be a high level. And then with the rewards program platform, Punch, we're really going to be able to slice and dice our consumers in a way that we just have never been able to do that before. So for instance, if there are guests that are -- we know that they eat noodles every time, then we can send them a noodle coupon for half off at, say, 4 p.m., which is historically a shoulder period for us. People ask us, "You've got incredible wait times. How are you going to be able to drive comps in these tremendous over performing stores?" And this is one of those opportunities. It's going to be harder to get somebody get additional parties in the door during 8:00, but that's certainly not the case in 4:00. And so that's one of the other big things that we're excited about. Very helpful. Thank you for that. Maybe coming back to the inflation topic from a slightly different angle. I kind of appreciate the current environment, and I know that we've -- you've got an entire team. And just relatively new to the role here, but one of the things we had talked about was just maybe some supply chain optimization or just opportunities there. And I was curious if you could, again, high level, talk about any sort of initiatives you're working on there, leveraging the core brand strength and the broad basket you have. But also maybe any sort of near-term wins or opportunities around where there's room to optimize or maybe drive some efficiency over time as you just get things in line to help scale the brand? One of the things that I really want to look at is getting more of our basket into a broad liner. I think that, that will really help us. I think there's some opportunity there. One of the things that we've had trouble with over the last year was having to buy some of our fish that we buy from suppliers that were not our regular suppliers. And because during the pandemic, some of our regular suppliers had to throw out a lot, and they weren't able to fulfill some of the orders that we needed. So we had to go to these smaller houses and didn't get us greater prices. So I'm hoping that, that starts to come back. And it has actually in fiscal 2023, has started to come back in our favor. But between that and shifting to broad liner and really just looking at all of our contracts, and this is something that I'm doing with G&A, but also I'm asking the purchasing department to do it for our food purchases as well, and I think that there's opportunities to go back to our suppliers and leverage the growth that we're going to be seeing over the next few years. And if we can maybe get into some a little bit longer contracts with some people, where we promise them the growth -- same sort of growth that we're promising out to the street right now, and they can see that there's an opportunity for them to make a lot of money in the future, I think we can leverage some better pricing. And don't know how well we've done that in the past because I am still relatively new, but I really want to push those types of initiatives to see if we can reduce those costs and get our COGS down somewhat. Even in an inflationary environment, I think that's possible. Just to add on that. We do have a number of things that we're looking forward to in the back half of the year, such as improved supply lines for select items, which means that there's no compromising in quality, but we'll see a certain amount of savings. And those are savings here and there, they're not going to be enough to really move the needle. What's tricky about our basket is that, we've got over 100 inputs, and it's one of the reasons we were so resilient. In the past year in terms of our COGS, we had our all-time best. But it also makes it trickier to -- there's never just one big thing that you can address. And so like Jeff mentioned, being able to move to a broad liner is going to be a tremendous opportunity for us. That's very helpful. I appreciate that. And one more kind of housekeeping item for me. In terms of just we think about the price that you're running now, you mentioned taking an incremental pricing window here in December. Can you provide us when and how and at what pace you would think about more pricing in the future or just kind of what the philosophy of the approach is there? And yes. Thank you. Given that we just took price in December, I think it's a little bit early to discuss future pricing decisions, but I think the philosophy is going to remain largely the same. Historically, we've taken price about twice a year, typically to offset minimum wage increases, which we've already done, and then we'll adjust based off of inflation. But given that it's impossible to predict when inflation is going to end or what degree it's going to look like, it's hard for us to give any numbers at this point. But that being said, it's really clear that the traffic here is being driven by the value proposition, and so that's certainly something that we don't want to compromise. Hi everybody. Thanks for taking my question. So just a couple, most of my questions have been asked and answered, but a couple for you. The first one, you mentioned on last quarter's conference call about potentially sourcing from Japan. So I was wondering if that's something you're still contemplating. And how meaningful could that be to your gross margin? Yes, that's something that we're still looking forward to. We're in the process of exhausting the inventory we have with our existing vendors and the agreements that we have in place. But that's something that we continue to look forward to. I think even in the last call, you mentioned that we don't expect to benefit from that until the back half of the year. And the benefit is going to be dependent on ForEx. But right now, I mean the American dollars is so strong that the benefit seems meaningful. And some of that challenge, too, will be making sure that if we do find a supplier that we're happy with in Japan that we can get with -- I'd really like to get that into the broad line distribution once we get that a little bit more streamlined, too, and that will really help as well. But a lot of the suppliers in Japan, from my understanding, won't be able to distribute through a broad liner. So we may have some challenges there, but that's something that the team is really working through now to figure out the best path to take. Okay, okay. And then second question for me is on just your staffing levels right now. Curious if you're seeing much change if it's becoming easier to find people, what kind of wage pressure there is, et cetera. Just if you could expand on any of those. Thank you. [Foreign Language] [interrupted] In the past earnings call, we mentioned that our hourly -- for our hourly positions, we are about 95% filled. I'd say that today, we're at 95% to 100% at all of our restaurants. We're in an extremely good position. We're not seeing any quarantining. Not net -- no quarantining that's impacting operations. Last year during the time, we had seating limits or shortened hours. It's certainly not the case now. We're exceptionally happy with the staffing situation. And we're very proud of the work that's being done by our recruiting team, our ops team training, HR. And just on that note about staffing, I know that there's -- the FAST Act is probably top of mind for a lot of people on this call, especially because we have -- California is our largest market. I just want to reassure everybody that's listening that as the legislation is written, it does not impact us. We're -- it simply does not apply to us. I've heard some people say that look, if everybody's wages are going up, then your wages are going to go up, too, whether or not your impact -- whether or not you're legally falling under that category. And to that, I'd say, if that were the case, then you wouldn't have any people working in, say, Texas or New Jersey for $2.13 as a server because they can get a guaranteed $8 elsewhere, people clearly go for the server positions because they're very lucrative with tips. And with our tips, we're one of the best paying employers in the sector. And so the FAST Act for us it's not a concern, I think it makes us more competitive, if anything. And then in past calls, we've mentioned how the management pipeline is one of our key considerations in terms of our unit growth rate. We're happy to say that the management pipeline is exceptionally strong. The opening delays that we've seen to date are because of permitting issues or inspections. They're certainly not because we don't have management. And in fact, those delays have allowed our management trainees to get that much more training, and so we have a very strong class for this year and next. We're -- it's not a concern for us, and so that's certainly not a gating factor for continued aggressive growth. There are no further questions in our queue. 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_1330	At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President of Investor Relations. Please go ahead, sir. Good morning, everyone. Iâm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation Fourth Quarter 2022 Earnings Release Conference Call hosted by Steve Bandrowczak, Chief Executive Officer. He is joined by Xavier Heiss, Executive Vice President and Chief Financial Officer. At the request of Xerox Holdings Corporation, todayâs conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the express permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor, and will make comments that contain forward-looking statements, which, by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, Iâd like to turn the meeting over to Mr. Bandrowczak. Good morning and thank you for joining our Q4 2022 earnings call. One year ago, it would have been difficult to predict the number and severity of obstacles we and many other companies would face in 2022. Supply chain conditions were challenged entering this year. In February, Russia invaded Ukraine and the humanitarian tragedy that disrupted supply chains further and led to the effective shutdown of our operations in those markets. These and the aftereffects of the pandemic fueled an unprecedented level of inflation and currency dislocation. And Central Bank efforts to control inflation drove historic increases in interest rates. Finally, for Xerox, last year, we unexpectedly lost our dear friend and leader, John Visentin. I am proud to report that we managed through these challenges taking significant corrective actions to match supply with demand and lower cost to offset inflationary headwinds. For the year, revenue of $7.1 billion increased 1% in actual currency and 4.8% in constant currency. Our first year of constant currency revenue growth since our separation from Conduent. However, growth in revenues and cost savings were more than offset by broad-based inflationary pressure, resulting in a decline in operating profits and free cash flow. Still we delivered revenue and free cash flow above the revised guidance levels given last quarter. Throughout the year, our company and our people remained resilient and never lost focus on what is most important, providing value to our clients. I couldnât be more proud of the effort our team expended in the fourth quarter to deliver the highest level of quarterly equipment revenue since 2019, an accomplishment that was instrumental in driving full year revenue and free cash flow above our revised guidance. We ended the year with momentum in our values and business performance. Sustainability has long been a top priority for Xerox, and our sustainability efforts are being recognized in the marketplace. Xerox was recently named one of the Global 100 most sustainable corporations in the world by Corporate Knights and received an A rating from the Climate Disclosure Project for climate transparencies, one of the leading evaluators of corporate environmental reporting efforts. Importantly, the progress we have made to improve the sustainability of our offerings is driving improvement at our clientsâ own sustainability goals. And our ability to help clients manage their sustainability goals is increasingly a competitive differentiator in the marketplace. Turning to our performance. In Print and Managed Print Services, equipment revenue grew at the highest rate since before the pandemic due to improved product supply. Consumables such as supplies and paper, grew again this quarter and contractual print services, our largest, most stable source of revenue, grew low single digits in constant currency, including contributions from recently acquired Go Inspire. In Q1, we plan to launch a series of customer experience applications to improve the setup, security and productivity of equipment geared towards small and home office users. Included in these plans is the launch of CareAR Instruct, which provides augmented reality support for our A4 devices using digital twin technology. IT Services grew revenue double digits for the quarter and the year, including contributions from Powerland in Canada. Enabling that growth is the breadth of enterprise-class services we bring to mid-market clients. Xerox Automation, our robotics process automation solutions, once again grew signings meaningfully on a quarter-over-quarter basis. The automation group wins business by understanding at a deep level our clientsâ business, industry and needs and then use that knowledge to drive customer success through customized solutions. Increasingly, our team is integrating automation with other leading technologies such as object content recognition and machine learning to drive productivity enhancements. As an example, this quarter, our automation group won new business from an existing U.K. client by developing an end-to-end document workflow solutions that combines multiple advanced technologies to extract, classify and process digitized information from scanned documents, saving the client significant time and money. Digital Services signings also grew double digits in the quarter and for the full year, and our offerings are resonating in the marketplace. In December, Xerox was named a Top Accounts Payable Solution Provider by CFO Tech Outlook in recognition of our ability to assist clients with digital transformation of their payables process. Our AP workflow optimization solution delivers a reduction in processing costs and improvement in working capital for our clients and is just one of many digital services we offer. In 2023, we will begin offering our suite of digital services to the mid-market, further augmenting the types of enterprise-class services and solution sets we can bring to mid-market clients. FITTLE grew originations this quarter more than 40% for both captive and noncaptive leases, capping off a year where total originations grew high single digits, including double-digit growth in noncaptive leases. We recently announced an innovative funding solution for FITTLE, enabling a strategic shift in its business model to focus on being an asset-light best-in-class provider of leasing services and solutions. This funding agreement also allows for growth in FITTLEâs portfolio without the use of Xerox balance sheet. Xavier will explain this funding solution in more detail. I will now touch on our priorities for 2023. Amid all the volatility and uncertainty in the marketplace, we, at Xerox, are focused on what we can control to drive growth in profits and shareholder value. Our 3 main priorities this year are customer success, profitability and shareholder returns. Starting with customer success, we can deliver more value to our clients by making it easier to do business with Xerox. I have spent a lot of time since becoming Xerox CEO meeting with our clients and partners to discuss the ways we can extend our relationships through additional value-added digital services. And all too often I have heard, I didnât know Xerox could do that. To leverage this opportunity and drive revenue growth, we are taking a more holistic client-centric approach to improving customer outcomes by delivering essential products and services that are closely aligned with our clientsâ needs. The current macro backdrop plays to our advantage in this regard as our IT and digital services are designed to increase productivity by reducing the cost and complexity associated with clientsâ technology and document workflows. Further, it is apparent from our market research that Xerox has a clear path to win more business within the IT and Digital Service markets because of the trust we have built over time, providing value to our clients. We are confident our brand and client relationships can be leveraged to expand our penetration of wallet share, and we are confident in our ability to expand client TAM over time as we invest in and develop new types of digital services for a hybrid workplace and distributed workforce. An example of our ability to increase wallet share is the recent renewal and addition of services at a large telecom operator in Canada. This client, like many, is adapting to the complexities associated with a hybrid workplace. Leveraging our deep relationships across the company, we took a holistic approach to tailoring a set of print and digital services that will help them in the hybrid transition and improve overall productivity. We also included advanced analytics for print management, digital mail, to bring speed, security and cost savings to their mail and carrier operations and advanced software solutions to streamline and enhance their production print operations. By leveraging our relationships and portfolio of offerings, we are able to drive customer success while growing our annual contract value by double-digit rate. Another priority for 2023 is the continued focus on profitability. Since 2018, Project Own It has been a cornerstone of our transformation efforts and a focal point for the optimization of our cost base. We reached our 2022 targeted gross cost savings of $450 million, bringing total savings since 2018 to more than $2 billion. Just as important as these savings, however, is the management operating system, the set of disciplines around measuring and monitoring business processes that was instilled in our organizational culture by Project Own It. We do not plan to provide annual savings targets going forward, but the behaviors engendered by the program will aid in our continuous effort to implement a more flexible cost base and operating model. Just as we will make it easier to do business with Xerox, we will make it easier to do business within Xerox by investing in processes that drive incremental organizational efficiencies and enable the types of collaboration required to offer holistic solutions to our clients. The current macroeconomic environment necessitates a greater focus and scrutiny on the profitability of our offerings and operating units. Accordingly, we have become more disciplined about where and how we do business, placing emphasis on metrics such as return on investment and the generation of profit, not just revenue dollars. This discipline has already been applied to our investments in R&D. In the past few months, we have taken actions to lower and in some cases, redirect investments in R&D towards projects with more certain and near-term returns. We exited our joint venture Eloque and pared growth investments in 3D printing. Novity and Mojave, 2 successful businesses incubated at PARC were spun out, allowing these businesses the freedom and flexibility to attract external growth capital at their own pace. To be clear, investments in innovation remain a priority at Xerox, but will be more focused on projects and partnerships that augment our existing strengths and opportunities within print, IT and digital services. Finally, we will continue to prioritize shareholder returns, a greater focus on customer success and profitability will naturally result in higher profits, but we also remain laser-focused on cash flow generation. Despite a strong finish to the year, free cash flow in 2022 fell below our initial expectations. 2022 was an anomaly, not a trend. Beyond expected improvements in profitability for 2023, we have already taken steps to improve our capacity to generate more free cash flow per profit dollars, such as FITTLEâs receivable funding agreement. We also remain focused on improving working capital and expect improvements in inventory efficiency in 2023 as supply chain conditions normalize. Each of these priorities, customer success, profitability and shareholder returns will remain cornerstones of our long-term strategic plan. And each of these priorities are reflected in our full year guidance, which calls for stable revenues amid a challenging and volatile economic environment and growth in adjusted operating income margin and free cash flow, the details of which Xavier will provide. To recap, â22 was a challenging year, one that tested the resolve of our employees and the strength of our business model. The lessons learned from overcoming these challenges will serve us well as we execute on our strategic priorities for the year. And these priorities will ultimately form the foundation of a long-term plan for delivering sustainable growth in profits. Thank you, Steve, and good morning, everyone. As Steve mentioned, 2022 was a challenging year on a number of fronts. Revenue and profitability were impacted by surging inflation, supply chain challenges, currency disruption, the war in Ukraine, higher interest rate and as a consequence an uncertain and unpredictable macroeconomic environment. Encouragingly, we ended the year stronger with full year revenue exceeding our initial guidance of at least $7.1 billion, despite more than $250 million of currency headwinds and a more than $90 million headwinds from halting sales to Russia. Adjusting operating margin improved sequentially each quarter this year and grew 440 basis points year-over-year in Q4, due in large part to improved product availability. Full year of free cash flow exceeded our revised guidance, and we put in place a funding solution at FITTLE that will improve future free cash flow generation while supporting FITTLEâs growth. Q4 revenue grew in actual and constant currency for the first time since quarter 2 of 2021 due to resilient demand for our product and services and improvements in product supplies and mix. Revenue growth of 9.2% at actual currency was negatively impacted by 470 basis points of currency headwind, notably the euro and British pound. Equipment revenue grew significantly, reaching its highest level since Q4 of 2019 due to an improvement in supply chain conditions. As a result, our backlog, including equipment on IT hardware, declined 43% sequentially to $246 million. Our backlog remains elevated, but itâs healthy. We expect backlog to decline through the first half of the year as supply chain conditions further normalize. Post-sale revenue grew mid-single digit in constant currency for the fourth consecutive quarter. Growth this quarter was driven by IT services, which includes the acquisition of Powerland and consumable. The resiliency of contractual print services revenue was observed again this quarter, aided by recent pricing action and the acquisition of Go Inspire. Turning to profitability. Profits were higher year-over-year, driven mainly by better equipment sales, improved product and geography mix and lower logistics costs, partially offset by higher bad debt expense. We expect profitability to improve further in 2023 as we realize the benefit of price and cost action taken in 2022, further improvement in product availability, lower logistic cost and additional operating efficiency. Gross margin improved 190 basis points over the prior year quarter, mainly driven by a favorable shift in product and geography mix, lower supply chain-related costs and benefit associated with price and cost actions taken throughout the year, partially offset by ongoing product cost increases and the effect of recent acquisitions. OpEx, excluding bad debt expense, was lower year-over-year due to our focus on improved return on R&D investment and Project Own It action. Adjusted operating margin of 9.2% increased 440 basis points year-over-year, driven by 300 basis points of supply chain-related cost improvement, 130 basis points from cost reductions action and 100 basis points from price increase on currency. Partially offsetting this benefit were higher bad debt expense associated with the release of reserve in the prior year. Other expense net were $7 million lower year-over-year due to a $39 million benefit from sales of noncore business assets, partially offset by an increase in nonservice retirement-related costs and higher currency losses due to currency volatility in certain geographies. Fourth quarter adjusted tax rate was 21.8% compared to minus 8.8% last year. The increase was largely due to prior tax benefit for changes in the remeasurement of uncertain tax position. Adjusted EPS of $0.89 in the fourth quarter was $0.55 higher than the prior year, driven by higher adjusted operating income, sales of noncore assets and a lower share count, partially offset by a higher tax rate. GAAP earnings per share of $0.74, was $4.71 higher, mainly due to a noncash goodwill impairment charge of $750 million or $4.38 per share in the prior year. Let me now review revenue, cash flow and profitability in more details. Turning to revenue. Equipment sales of $554 million in Q4, grew 49% year-over-year in constant currency or 44% in actual currency. Growth was driven by better availability of product across all categories and regions, particularly for higher-margin A3 devices in the Americas region. The sequential growth in equipment revenue mirrors the decline in equipment backlog, revealing a resilient order activity amid an uncertain macroeconomic backdrop. We continue to see particular strength in demand for our A3 office machines. Equipment revenue growth outpaced installation this quarter due to favorable product mix and the benefit of recent pricing actions. Installation growth was strongest for higher-margin mid-range product and Color A4 multifunction equipment. Color A4 outperformed Black & White due to a stop in shipment of A4 mono product to Russia and supply shortage. Post-sales growth in constant currency was driven by IT services, including benefit associated with the recent acquisition of Powerland in Canada and growth in consumable. Contractual print services revenue was resilient and grew low single digit year-over-year in constant currency, reflecting benefit of recent pricing action and the acquisition of Go Inspire. Notably, this important component of our annuity revenue grew modestly in 2022, despite a slower-than-expected return of employees to offices and ongoing macroeconomic concern. We believe we have now reached a normalized level for this revenue stream. Growth in post-sales revenue at constant currency was partially offset by lower financing revenue, reflecting a lower FITTLE receivable balance. Geographically, both regions grew in constant currency. The Americas region grew faster than EMEA due mainly to better product availability and mix as well as stronger growth in consumable sales. Letâs now review cash flow. Free cash flow was $168 million in Q4, lower year-over-year by $14 million. Operating cash flow was $186 million in Q4 compared to $198 million in the prior year. Working capital was a source of cash of $73 million this quarter, $120 million lower than the prior year, driven by higher accounts receivable on the use of cash to position inventories ahead of Q1, partially offset by a higher account payable. Additionally, cash used to fund finance receivable and operating lease was $169 million in the quarter compared to a use of cash of $50 million in the prior year, reflecting improved equipment sales activity and FITTLE growth strategy. Positively offsetting this effect were higher operating income in the current quarter and favorable timing of other liability payment. Going forward, we expect FITTLE receivable funding agreement to result in finance receivable being a source of cash as new originations are increasingly funded by third-party financing partner while collection runoff of existing receivables continues. Investing activities were a source of cash of $17 million compared to a use of cash of $31 million in the prior year due in large part to an asset sale in the current quarter, partially offset by slightly higher CapEx, which mainly support our investments in IT infrastructure. Financing activities consumed $67 million of cash this quarter, which is comprised of dividend payment on the early payment of a portion of our 2023 notes, netted by proceeds from finance receivable securitizations. Turning to profitability. Quarter 4 adjusted operating profit margin grew substantially on a sequential year-over-year basis for the reasons previously discussed. Importantly, margin expanded sequentially each quarter this year as we took corrective measure to offset an unprecedented level of inflationary pressure and ongoing supply chain challenges. We successfully implemented price increases across our portfolio of products and services and took action to rein in costs, most notably, across areas of investment where the expected payback period extend across multiple years or was less certain. Many of these actions were reflecting in the achievement of our targeted Project Own It savings of $450 million. As Steve noted, weâll not be providing our targeted savings amount for 2023, but the principle of continuous improvement and operating efficiency instilled by Project Own It will play an important role in driving expected margin improvement in 2023 and beyond. Turning to segment. In Q4, FITTLE finance assets were $3.3 billion, up 7% sequentially in actual currency. FITTLE origination volume grew more than 40% year-over-year. Both noncaptive channel origination, which includes third-party dealers and non-Xerox vendor and captive product origination grew more than 40%, a function of growth in new dealer relationships and third-party equipment origination as well as higher Xerox equipment for lease. FITTLE revenue declined 9.6% in Q4, mainly due to a reduction in operating lease revenue, which reflect lower equipment installed in prior periods. Segment profit was minus $5 million, down $30 million year-over-year due to a reserve release of $12 million in the prior year quarter, lower net financing profit, higher intersegment commission associated with higher Xerox origination, higher bad debt expenses and strategic start-up cost on investment. Segment margin was negative 3.4% compared to positive 15.2% a year ago. Over time, we expect current and future receivable funding solution to result in lower financing revenue and profit for FITTLE, which will be partially offset by growth in fee-based commission and servicing revenue. However, in 2023, we do not expect a material change in FITTLE revenue or profit as lower finance revenue will be offset by higher upfront commission and lower bad debt expense. Print and Other revenue grew 10.2% in Q4. Print and Other segment profit tripled over the prior year quarter, resulting in the 640-basis point expansion in segment profit margin year-over-year, driven by improved product supplies and mix and the benefit of price and cost actions taken throughout the year. Iâd like to spend some time now to discuss how FITTLE recently receivable funding arrangement is expecting to affect free cash flow for the year. The agreement Xerox and FITTLE signed with an affiliate of HPS Investment Partners contemplates sales of FITTLE lease receivable of around $600 million in 2023. This amount will have otherwise been funded by Xerox, so this reduction in our funding obligation will result in a direct benefit to operating cash flow. However, this benefit is expected to be partially offset by growth in our lease receivable portfolio. When considering the year-over-year change in free cash flow, the net receivable funding benefit will be additive to free cash flow. Additional agreement covering U.S. non-direct controlling receivables are not included in guidance but would further increase expected free cash flow for the year. Receivable funding agreements are expected to contribute to free cash flow for multiple years, but at a decreasing level due to the timing of prior lease receivable runoff. Turning to capital structure. We ended Q4 with $1.1 billion of cash, cash equivalents and restricted cash. $2.9 billion of the $3.7 billion of our outstanding debt is allocated to -- onto FITTLE lease portfolio. The remaining debt of around $800 million is attributable to the core business. Debt consists of senior unsecured bond and finance asset securitization. We have a balanced bond maturity ladder over the next few years and expect to repay the remaining $300 million of debt maturing this year in March 2023. Finally, I will address guidance. We expect revenue to be flat to down low single digit in constant currency in 2023. As noted earlier, demand for our portfolio of products and service remain resilient, particularly for our most material and profitable A3 office devices. Contractual print services revenue, our largest contributor to post-sales revenue, is expected to remain steady. While we have not yet experienced a meaningful pullback in demand for our product or services due to macroeconomic pressure, our revenue outlook does account for a potential deterioration in macroeconomic conditions. If economic conditions were to degrade further, we believe the most likely effect will be delays in equipment purchases or service implementations, not cancellation or order reduction and difficulty implementing future price increases. Offsetting these risks are the annuity-like nature of our post-sell business on the countercyclicality of many of our IT and digital services for which demand is expected to increase even if IT budgets are rationalized. This year, we are reinstituting guidance for adjusted operating income margin. For the year, we expect adjusted operating income margin to be at least 4.7%, an 80-basis point increase over 2022 level, driven by recent enacted and expected price and cost action as well as lower logistic costs. We expect to generate at least $500 million of free cash flow, including the benefit of FITTLE receivable funding solution. Excluding the net benefit of the receivable funding solution, we expect free cash flow to be in the range of 90% to 100% of adjusted operating income. Finally, our policy of returning at least 50% of free cash flow to shareholders remain unchanged. While we do not provide quarterly guidance, I want to provide some color on the expected quarterly cadence of our result. First, on revenue, equipment sales growth is expected to be higher in the first half due to easier products-to-price compare. And at this time, we do not expect a significant deviation in the quarterly growth rate of post-sales revenue. For adjusted operating margin, we expect sequential improvement in margin after quarter 1 and year-over-year increase in margin in quarter 1 to quarter 3. The sequential improvement reflects normal seasonality, the clearing of the remaining backlog and the cumulative effect of lower R&D spend, which is expected to benefit margin in the second half relative to the first half. Finally, free cash flow. The cash flow benefit of the receivable funding arrangement are expected to be realized throughout the year at roughly the same cadence as equipment sales revenue. I guess just kick-starting right there, Xavier, with your comments about being kind of risk for the guidance and what youâre seeing from customers. Can you give us any context about sort of what youâre hearing and seeing from enterprise customers, sort of folks have started to see some slowing in enterprise? It doesnât seem like you guys are meaningfully seeing it yet. And so you did -- I think you pointed equipment sales out just now is kind of like the primary risk to the forecast that you see. So just some context there. And then I have a quick follow-up after that. Ananda, Happy New Year to you as well. So yes, so what we are seeing here from a demand point of view, from our customer, enterprise and SMB customer, the demand is still strong. And Q4, as you have noticed, it has been a very good quarter for us. It was driven by the ability to reduce backlog -- equipment backlog, mainly with A3 equipment. But at the same time, the order pattern remains strong. So we still see a demand on our offering, and I should also flag services. So I have commented in the early comment there, we have seen equipment demand being strong. But if you look at the post-sales revenue, post-sales is made of contracted activities. So some of this is print related, some of it is not print related. And when we look at our forecast, we want to be, letâs call that realistic and balanced in the way we approach it. Realistic because the macro environment is an environment which is bringing uncertainty. At the same time, we are confident and balanced when we look at the demand, not only for the equipment side but also for the solution side. Iâm sure, Steve will be able to comment what the offerings are currently driving this demand here. Yes. I am Steve. So one of the things that weâre seeing, if you think about the macro environment with inflation, with the ability to be able to higher cost increases, all of our customers are dealing with those macro trends. And so as we think about customer success and really driving solutions specific to driving productivity for our customers, we think we have a great opportunity to expand inside of the existing customer base that weâre in today. Simple example, if you think about school districts and their challenge with administrators, teachers, having more, doing more with less, how do we drive more productivity in workflow, things like, our equipment can do language translation, our equipment can grade papers, our equipment can do and look at things like plagiarisms on documents. So driving productivity, driving workflow inside of very specific verticals, we can actually help drive and penetrate and help our customers with their macro trends, and we believe weâve got a great opportunity to play certainly in the small and mid-market space. Congrats on the really strong results in the December quarter. Steve, I guess, I wanted to ask you a bigger picture question and that is just, as we enter 2023, it feels like based upon our conversations that most enterprises and small businesses have kind of settled down into their hybrid work set up, whatever that may be. Iâm just curious kind of what youâve learned now as weâve seen kind of hybrid work and work from home normalize, what have you seen in terms of how enterprises and SMBs are consuming Xerox in this new world? Whatâs maybe surprising to you? What maybe is -- came a bit unexpected to you? Would love to just get your feedback on that. And then I have a follow-up. Yes. I think thereâs a couple of things, Erik. First of all, youâre right, companies are getting settled into this new hybrid environment, but itâs driving significant challenges in and around security of documents and data security around how workflows happen in the company, how do you drive productivity. And so what weâre seeing is a great opportunity for a couple of things. One, to actually play in that space, right, we have been incredibly innovative through the years around how we drive workplace productivity. This is just a new area for us in terms of workplaces wherever an individual is. And so we see an opportunity to do a couple of things. One, with our products and solutions, workflow with our cloud solutions, AI solutions, what we think we can do with augmented reality, we can actually help customers drive productivity, but more importantly, drive insights to the data that they have inside of those workflows. So we believe thereâs a great opportunity for us to play in that space and really be the provider of choice to help customers in this new world wherever their employees are and drive productivity and drive insights to data. So thatâs the first thing. Second, as you think about the macro headwinds that customers are facing, as I talked a little bit earlier to Ananda, we have an opportunity to drive some very specific workflow solutions. You heard me talk about what weâre doing in accounts payable. We can do things like drive productivity and help our end customers in their workflow, but very specific around verticals and very specifically around customer success. And so we think we can play in this area, and we have a great opportunity to expand our wallet share inside of customer accounts there. Okay. Super. Thatâs super helpful, Steve. And then, Xavier, maybe a question for you is, really nice to see some margin expansion into 2023. Can you help us -- two-part question, can you help us maybe better understand the trade-off between gross margins and OpEx in 2023, how to think about each of those? And then what would be some of the more influential factors that you would have to see in 2023 to help you maybe get operating margins closer to, for example, 2020 or 2021 levels? Yes. Thanks, Erik. So as you have noticed it on that, we commented it in quarter 3, Q4 was an important quarter for us. And you have noticed that we have been able to drive margin up and Q4 was a strong quarter, driving the overall margin for the company and for the year up there. So the ingredients that make it work and the ingredients that will be required to achieve the plan that we have in quarter -- in 2023 are quite simple. #1 is things that we have already put in place. We have put in place price increase. Price increases in order to phase some of the cost inflation, but also to rebuild the margin here. These price increases have been enacted in 2022, towards the year, and weâll have a flow-through of price increases that will still be valid and be measured during 2023. This price increase, as you know it, are contractual. 2/3 of our revenue is annuity-based, is contractual, which means that when we enact a price increase and it lasts, it lasts for the year and for the year after and the year after. So second point is the improvement on supply chain. You know that 2021 and 2022 have been, I would say, literally crazy from a supply chain point of view. And I say mainly the cost of supply chain and the uncertainty around this year. We are expecting -- and weâre already seeing it, the supply chain condition to normalize. And even if the cost of container is not yet at what it was pre-supply chain crisis or pre-Ukraine and the COVID situation, I mean we have seen great improvement in the cost of container shipment, which will help to improve the gross margin up. Finally, is the way we will invest. And the last point is quite important. We commented in our earnings that we are putting in place a flexible cost base. But in flexible, it just means that we will be very selective in the way we make the investment. And in an uncertain macro environment, our responsibility is to ensure that we prioritize for term high yield return investment versus longer-term investment. So thatâs a key component. Obviously, we will have to offset some of the headwinds that could exist. Technically, you know that we have the benefit of the Fuji Xerox royalty, we still have some inflation costs there. But thatâs the reason why back to the 3 main components that I mentioned to you, price, supply chain and investment. We are confident in our ability in 2023 to expand our operating margin. This is Angela Jin on for Samik Chatterjee. Congrats on a strong quarter. So a question about backlog. So I saw that backlog came down about $183 million quarter-on-quarter, and equipment sales are up $164 million quarter-on-quarter. So can you just walk us through the gap there? Like, is the implication here that youâre seeing an uptick in cancellations or equipment order rates are dropping? And if you continue at this rate, will you reach pre-pandemic levels back within a quarter? So how should we think about sort of the cadence of backlog into the first quarter of 2023. Yes. Angela, so the backlog here, I would say itâs a good story because you know this backlog was building up. We started to see a decrease of the backlog in quarter 3, and we were pleased to be able to get some of these backlogs reducing and to have the 43% decline -- 49% -- just 43%, sorry, of a decline in quarter 4. This is mainly related to the high profit equipment that we have, what we call A3 equipment. And this is related to supply chain conditions improving and also the logistics agility and logistics speeds coming back to a normal level there. So that was a good story. That was a good story because it helped the mix of products that we are selling, bringing it back to, I would say, more normalized mix. Second point, it helped the overall gross margin improvement both on the equipment side, but also some of these products are driving good post-sales revenue and profit here. So thatâs regarding Q4. When we look at the order patterns that we are seeing here, we still see quite a very strong demand still for the same mix of products. So our A3 product, Steve described some of the capability of this product, donât look at them as printer only, they are essential for our customers to drive workflow and productivity that they need in this current hybrid new ways of working here. So when you look at what was the equipment growth versus the decline in backlog, you look at the inventory we have as well on the channels that we measure it, I mean the math works, I mean, we balance it on those growth that we can see on the equipment versus the backlog decline, was in line with what we were expecting and planning for. Looking at next year now, what we are expecting is to flush this backlog during the first half of the year. And to give you a number, the normalized backlog -- if you look at the backlog that we have today versus a normalized backlog, we are currently at 2.5x what is the normal backlog. So weâre expecting this to be cleaned or flushed in quarter 1 with some remaining impact in quarter 2. Assuming supply chain and manufacturing stay good for the rest of the year, you should be in a BAU mode for the second half of the year. Got it. Thatâs really helpful. And then for my follow-up, so just thinking about your free cash flow guide of at least $500 million, can you maybe dig in more into, what portion of that is attributable to your core business versus FITTLE? It seems at some point right now that the core free cash flow is, for in the low 100s range unless thereâs a plan to sort of very meaningfully ramp originations in 2023. Yes. So if I go back to -- letâs start with 2022. In 2022, we said free cash flow is an anomaly. And it is an anomaly for 2 reasons. One anomaly is related specifically to the reduced profitability that we have in 2022. The second point, and I call it, good cholesterol, bad cholesterol. So good cholesterol was that FITTLE is growing. And when FITTLE is going, it means that the FITTLE is using cash and it has an impact on free cash flow. So now if I normalize this, and I project this in 2023, what will be a normal free cash flow? We gave you -- I gave you an indication in my earlier comment there, by saying we expect in 2023 free cash flow without FITTLE movement here, normalized free cash flow to be around 90% to 100% of adjusted operating profit. So thatâs a earlier indication of what it could be. Then on top of that, you will have the benefit of what we call the forward flow agreement. You should look at this agreement as being simply the fact that we managed to get a great agreement with [indiscernible] party who will fund the forward flow. By forward flow, you should look at this by saying this is like the future receivable from FITTLE or future origination of FITTLE, and we wonât have to do that from the Xerox balance sheet. What does that mean? It means that you will have the runoff of the book that was on Xerox balance sheet that will be completely offset by this forward flow agreement here. You have to take into account, 1 of the chart in the deck that explain it as an illustration. You have to take into account that FITTLE is still growing at the same time. So this affects the $600 million waive 1 that we have signed in quarter 4, is offset by the fact that FITTLE is growing. So when you look at our guidance of $500 million, this takes into account this normalized free cash flow without FITTLE, letâs say, between $300 million to $330 million. And then you add on top of that roughly $200 million, and then you have this $500 million guidance that we have provided. All right. And if I could just squeeze in one last quick one. So equipment margins are up to 33%. So it drove a lot of upside in this quarter. It seems like the mix is more favorable than usual with A3 units being shipped and strong U.S. sales. So what is the sustainable level of equipment margins going forward? So equipment margins, when I look at the pattern we have had during the year, Iâm not stopping only to quarter 4, I look at how equipment margin evolved across the year. And youâre right, mix is a key driver. But one of the key driver was, as well our ability to pass price increases to customers. And to keep this important margin for us, I would say, protected or intact in the way we were dealing on pricing with customers. This is what we have done. And we believe that with the prices that we have enacted and the impact it will have in 2023, we will be able to sustain and offset some of the pricing or cost inflation that weâre expecting here. So normalized margin is not far from what you have seen. I wonât say quarter 4 is entirely representative. But we can -- if you want to -- also provide via our IR team, give more guidance around how we look at the margin for the rest of the year. Iâm wondering about just balance sheet cash requirements. As youâre shifting, obviously, your model on the financing side, but also as the business itself changes more to solutions and services, how should we think about what level of inventory over time? Because I would assume this will maybe become a little bit more of an inventory-light model as you move more away from just equipment? And then also just in terms of core cash needed to run the business because Iâm trying to figure out what your excess cash is as you think about where maybe youâre going to be exiting 20 -- I guess, â23, weâre already in â23? Shannon, letâs go back, so I just provided some articulation. So I will maybe repeat or clarify some of the points here. So you have -- you can look at our guidance for free cash flow for next year in 2 ways, I would say, business without FITTLE and the business with FITTLE. So business without FITTLE, as we mentioned it, 2022 was an anomaly in the way free cash flow came, specifically due to the margin pressure and the erosion of margin, specifically during the first half of the year. Now if you look at the normalized on what we have put and guided for normalized free cash flow without FITTLE for next year, you can count on around 90% to 100% of adjusted operating profit. This is a number between $300 million to $330 million. The second part... Xavier, I wasnât asking about cash flow. I was asking about actual cash. So just to be clear, so I understand the cash flow. Iâm just saying what kind of -- what level of cash do you need to run the business? And then just off of your balance sheet because, obviously, you have to pay down some debt right now. But Iâm wondering, like, if I think about your company right now, if you generate the $500 million in free cash flow next year, where do you think you need to be in terms of total cash coming out of the â23? So that will give us an idea of what excess cash you might use to deploy elsewhere. Yes. So we have been -- if your question is related to, Iâd say, to capital allocation and what we do with cash here, so the priority is quite simple, and we did not change it, by the way. 50% of free cash flow is returned to shareholders. The first part will be by a dividend. As you know this, we have maintained our dividend and even during COVID-19 period. So we keep our $1 dividend, and this will be one of the driver on the way to drive the cash -- and to bring the cash back to shareholders. So if you take 50% out of $500 million, you are at $250 million. So dividend is in the range of $140 million, $150 million. The way the cash will come and the free cash flow will come during the year will be related to this funding, and if not with FITTLE, it will be progressing. So we will provide a comment or more information during the next quarter earnings on how we will potentially use and the return of this cash between shareholders and also we will invest for the business and in order to support what Steve just described before, the investment or the strategies that we have on high yield, low -- I would say, low time of return that we will have on a product like digital services, but also all the automation offerings and the workflow automation that we are pushing to customers. Okay. And then I guess my question is basically, as you think about the debt maturities you have coming due and obviously, the near-term one will be paid with cash on hand. Is your idea to delever the balance sheet over time because you are shrinking the FITTLE business? Or do you anticipate utilizing the cash that you generate from FITTLE in other areas and keeping a higher level of leverage on the -- on your balance sheet going forward? So what we plan simply to do is to face our debt obligation. So we have a $300 million debt to pay in March, and we are on line and we plan to pay it based on the cash generated by the business. We are not planning at that time to add like a highly or overall leverage of the balance sheet. And if you look at the debt ladder that we have in 2024, 2025, Iâll say, quite clean. And we think that weâll be able to face this debt obligation. So Iâm not specifically concerned about our ability to phase debt and how debt will take a prevalence versus other type of investments we plan to do. Okay. And then I guess, just my last question is, as you talk to customers and you look at some of these management services contracts that you have out there, what is the discussion in terms of page volumes going forward, size of equipment? Are you seeing -- I think last quarter, you talked about some customers sort of negotiating in lower page volumes, is that continuing? Or as offices open up are things normalizing? Yes. Good question, Shannon. So what we see are currently and we commented, I think we believe we have reached like a normalized position here. We donât see a higher erosion around, I would say, page volume. We see as well on our ability to negotiate contracts with that product minimums. And from a price point as well, we have had some data points showing that the price increase that we are passing to customers are sticking. So the way we look at this lines, what we call contracted print revenue lines there, the way we look at this line from a revenue next year is like a flattish type of line, which is good because this is not like an accelerated decline. So return to office has been, I would say, slow in some places, a little bit higher in certain geographies. But the way we look at it and for the last 3, 4 quarters, this line had been, I would call that like flattish, steady. So thatâs the way we look at it for the next year. In your prepared comments, you mentioned about the Federal Reserve changing of interest rates and all that. And then I have a follow-up. But can you just kind of give us some outlook about what we kind of should be modeling or thinking about for interest expense because now that you have your relationship with FITTLE and things like that, it gets a little more complicated, especially with interest rates swinging a lot? Is the Q4 number like a long-term number that we could use or kind of use the full year number and just divide it by 4? Thereâs just a lot of moving parts in your interest expense item. Jim, so the way to look at the interest rate, and Iâm speaking here about core debt. So this first of all, our core debt is mainly based on a fixed interest rate. So all the rates that we had for our debt maturing is not indexed or directly related to the Fed increase -- rate increase or inflation that we can see on the right there. #2, we are paying down our debt, as you have noticed it. We did it this year. We had a maturity of $1 billion coming in March 2023. We took the opportunity early in March and also in December to already pay down $300 million, around $350 million. We have [3, 2, $350 million], we have $300 million left to do, and we plan to do that there. So no concern on our ability to pay down cash. From an interest point of view, if you take just the interest charge that we have had in quarter 4 and youâre really doing well , that means you will be closing the debt and the FITTLE business is not reported directly in this interest because you have this being reported in interest income on the one side, interest expenses on the other side. So the forward flow agreement will obviously change the way in the future on how the interest for the FITTLE business will be reported. Maybe, give me just the opportunity to reinforce 1 point on FITTLE. With the forward flow agreement that we have signed, the business model of FITTLE is changing. And FITTLE is becoming now an asset line -- asset-light servicing model for lease business, specifically related to that office-related or our industry-related type of equipment, Xerox and non-equipment there. What it does mean? It means that the ability for FITTLE to grow outside of Xerox is now enabled, and it is not done at the detriment of the free cash flow. And potentially, as you highlighted, at the detriment of rate or our ability to leverage or to get the rate that could make FITTLE competitive, we signed and we signed this agreement with a strong partner that has a strong balance sheet that help us to support the growth of this business without having the impact on adjusted cash flow. Okay. And then my quick follow-up. On Page 12 of your earnings presentation, where you talk about the effect on free cash flow of your receivable funding arrangement. I know this year is kind of the inaugural year of this agreement with your financing partners and impacted the net positive, net funding benefit to your 2023 cash flow. Long term, should they kind of equal out, meaning the growth in the receivables, should they kind of equal out? Or should they kind of always be a net funding benefit like weâre seeing in the year 2023? So youâre right, Jim. The way to look at it is over the time and time will be 4 to 5 years, while the runoff of the existing portfolio, which has been funded by, letâs call that the Xerox balance sheet on FITTLE acquisition programs that we have in place. So this one-off will decline over that time, and it will be replaced by this funding agreement. And this funding agreement is done outside of Xerox balance sheet. So this benefit that we see, specifically 2023 and also in 2024, will erode over time. But it will be offset, not from a free cash flow point of view, but in the P&L way of looking at Xerox. It will be offset by the fact that this agreement, as I mentioned, it is a shift in the way FITTLE will work. It will be offset by commission that we are receiving and every time we sell some of this future receivable to our partner. But also, we are still highly, I would say, rewarded by the fact that we will have fees from this business and also some benefit of how we will service and manage this portfolio. So this is a change, this is a shift in the way the FITTLE business is being built. This is for the good, I would say, of Xerox because less use of Xerox balance sheet, while preserving the growth of FITTLE and being able to preserve the revenue on the profit related to this business. This does conclude the question-and-answer session of todayâs program. Iâd like to hand the program back to Steve Bandrowczak for any further remarks. Thank you for listening to our earnings conference call this morning. We have turned the page on 2022. Macroeconomic conditions remain uncertain, but this past year has proven that at Xerox we can react and drive profitable results. I am confident we have the right team and strategy in place to deliver growth and profitability and shareholder returns in 2023 and beyond. Thank you for joining our call and have a great day. Thank you, ladies and gentlemen, for your participation in todayâs conference. This does conclude the program. You may now disconnect. Good day.
EarningCall_1331	Greetings. Welcome to the RF Industries Fourth Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. Thank you, operator. Good afternoon, and welcome to RF Industries' fourth quarter fiscal 2022 financial results conference call. With me on today's call are RF Industries' President and Chief Executive Officer, Rob Dawson; and Senior Vice President and Chief Financial Officer, Peter Yin. Before I turn the call over to Rob and Peter, I'd like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its fourth quarter and fiscal 2022 financial results. That release is available on the company's website at rfindustries.com. This call is also being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on this call today may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When used, the words anticipate, believe, expect, intend, future and other similar expressions identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements. Additionally, throughout this call we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our GAAP and non-GAAP reporting and present the reconciliation between the two for the periods reported in the earnings release. Thanks, Jack. Good afternoon, everyone. Thank you for joining RF Industries fourth quarter and year end fiscal 2022 conference call. I'm pleased to report that we capped the year with annual sales of $85.3 million, the largest year by far in our company's 40 year history. A 48% increase year-over-year and above the high end of our previously stated guidance. We also delivered adjusted EBITDA of $6.6 million for the full year. Importantly, as we expected we saw improvements in gross profit margin throughout the year and in the fourth quarter we reached a high of 31%. We believe this reflects our strategic shift to higher value products and solutions and our focus on managing expenses even in an inflationary environment. This year, we also closed on the acquisition of Microlab, our largest acquisition thus far, and we did it without any dilution to shareholders. Microlab, which is now fully integrated is a very exciting addition to the RFI family. I'll be telling you more about how it expands our opportunity set in a few minutes. On today's call, Peter will cover our financial results in more detail, as well as our guidance for fiscal 2023. For my part, I'd like to take a few minutes to reflect on how far we've come over the past few years and why we have such strong conviction in the future of RF Industries, and our ability to generate sustainable returns for shareholders. 2022 was a challenging but rewarding year for the team. We endured supply chain and transportation headwinds among other macro challenges, yet we still grew sales by nearly 50% with both organic and inorganic increases. Thank you to our amazing team for making this happen. This team has made tremendous progress reinventing a 40 year old company that was maybe a little sleepy and trapped in a commodity driven business. That said, the company was consistently profitable and had a stellar reputation for quality customer service and the best part, great people. Those were the good bones that I saw when I joined the company at the end of 2017. So five years ago, we set our sights on developing the strategic plan that would unlock the value of our foundational strengths. Our strategy was a two pronged approach, keep fueling the cash cow of organic growth and look for hidden gem acquisitions that could deliver a new value proposition into an expanded market opportunity. All while launching an aggressive go to market plan to add key distribution and get to the important end user customers, especially in the wireless industry. While I believe we barely scratched the surface of our potential, we made significant headway in 2022 on the disciplined execution of our plan. Since the plan's inception in late 2017, we've nearly quadrupled in size. We're consistently profitable and we've defined our differentiated value proposition in the market. To transform our company, we focused on several core areas. First was to build out a strong team. We've augmented an already impressive team with an enviable list including skilled executives with strong industry experience, many of whom come from larger competitors. Most of our additions are trusted and proven former colleagues. We also bolstered our corporate governance and strategy with several director changes on our Board of Directors in the past few years. Second thing we focused on is quality. The goal is always to offer quality products that customers need and come back for time and time again. And early on, we discovered we could win on speed by understanding the inventory needs of our clients, we can deliver whatever a customer needs quickly and faster than the competition, through both our production capabilities and our distribution network. With a great team, quality products and a speed advantage, you can accelerate a strong go to market plan. Our go to market strategy has been to influence the key end user customers to include our products and solutions in their bill of material for projects and general business purposes and then make it easy for them to purchase through whatever channel makes the most sense for them. This approach informed our decisions to add distribution and to acquire specific companies and product areas. Next is to become as valuable to our customers as they are to us. With key acquisitions such as Microlab in 2022, and C Enterprises and Schroff Tech before, on top of our custom capabilities and existing business we've broadened and deepened our product offering to better serve our customers and solve greater problems with higher value bigger ticket items. We have additional product announcement in the coming months that we believe will be game changers for us and will be part of the next phase of growth for the company. Then we had to move beyond commoditized products to those with technical advantages or intellectual property advantages. Through product development, like with our OptiFlex hybrid fiber solutions and select acquisitions, we have and will continue to compile a more distinctive proprietary product offering that will help us build a protective moat from competitors around our company. The next key is to look at efficiency. We continue to look for ways to achieve scale, reduce redundancy and improve efficiency and margin. Being good stewards of money, cash flow and redeployment of capital has been another important driver. We've consistently been solid with cash flow, but we've been equally strong in deploying our capital smartly. We've made three acquisitions in 3.5 years, including our company's largest in our history last year with Microlab, using cash and low interest loans for all of those. We haven't caused any dilution for our shareholders. A cornerstone of our business is that we manage our money well. And last but not least, we keep our eyes squarely on growth. We've nearly quadrupled our size in five years, including during a global health pandemic and with other global macro head wins. And with 4G still in deployment and the promise of 5G not yet fully realized, our future for organic growth is bright. With smart acquisition targets, it can be even stronger. And no one here forgets growth comes in many forms. That includes paying attention to our core business which has grown for five straight years. Now I'd like to spend a couple of minutes to reiterate or restate our core value proposition. We focus on our customers' needs with quality, speed and availability and we always have the customer in mind, making us easy to work with. Our growth plan organically and through acquisition is to provide more of the bill of materials of interconnect products for telecom, wireless and industrial customer applications. This expanded offering allows customers to buy more from RF Industries across multiple product categories, which can help them reduce complexity and supply chain costs. Our go to market strategies and business development efforts have generated significant multimillion dollar orders from existing and new customers, which combined with our steady distribution centric core business led to much of our growth and resulted in a continued healthy backlog of $27.8 million as we entered the new fiscal year. Historically, many of the products we sell like coaxial jumpers and fiber optic jumpers are in very fragmented markets, which means, we're up against multibillion dollar global [behemoths] (ph) as well as mom and pops. So how do we compete? Two ways: inventory availability through stocking on-site and with distributors; and through our fast turn production. As an example, if you're doing a wireless installation in downtown Los Angeles, you suddenly realize you need 1,000 coaxial jumpers. You're dead in the water without them and your options are limited. You can go to a large competitor with a small order and might wait two or four weeks or you can come to RF Industries and we'll have it for you in a couple of days or better. That's what we do in a piece of our core business. We are really, really good at inventory availability. We either have it on our shelves or on the shelves of one of our six national distributors or we can make it quickly. And along the way, we strengthen our relationships with our distributors by working together to get stocking positions correct. That's how we create value add in our core distribution business. And that coupled with our custom capabilities is why we do business with all Tier 1 wireless carriers. That's how RF Industries trusted reputation among customers opens the door for more business. And that's why we've continued to add more products in that wireless bill of materials to become more of a one stop shop. Availability, speed and quality continue to be cornerstones of who we are. But that value proposition is evolving and becoming more powerful as we've added higher value and more proprietary products and solutions, both through product development and through acquisition. We've been working hard to elevate our offer to create more of a moat around our business with those higher value proprietary products and solutions that we believe will give us more of a competitive advantage in the market and produce higher profitability in our next phase of growth. So as we turn to fiscal 2023, we're confident in our ability to deliver a solid shareholder return for all the reasons that I've just outlined. Starting this month, we are consolidating our West Coast operations with a new facility coming online in the next 30 days in San Diego. And in our second quarter, we'll be doing some consolidation on the East Coast in New Jersey. This allows us to streamline operations and achieve greater scale. Although this will create a short term expense impact, the long term synergies and cost savings will be measurable. We've reached a size and scale where we can capitalize on opportunities for centralizing functions and realizing cost savings through integrating previous acquisitions and implementing new processes. This year, we will also be introducing a new brand strategy. As we've grown, we've acquired a number of products and brands with different names. Some have greater awareness than others. We've completed research to understand the power of the RF Industries brand, as well as the individual brands and product names. In 2023, we plan to roll out a new brand architecture and strategy that will include our overarching positioning, identity -- the identities of our house of brands and a touch points that connect shareholders and customers to those brands, such as our website and collateral. This is an exciting development in the evolution of our company and we look forward to sharing it with you in the coming months. With a shared vision and strong roadmap, I believe we barely scratched the surface of our potential. Before I close out my remarks, I want to acknowledge and provide my sincere appreciation to our 340 employees. Our continued success and strong standing with our customers is due to their relentless commitment to our company's performance and serving our customers. I'm obviously pleased with the progress that we've made in growing the business over the last five years. But as always, I believe the best is still ahead of us. And with that, I'll now turn the call over to Peter Yin, our CFO to delve into the details of our financials. Peter? Thank you, Rob, and good afternoon, everyone. As Rob mentioned, we are pleased to report record sales and adjusted EBITDA for our fiscal year. Before diving into the details of our fourth quarter and our year end results, I want to note that fourth quarter results represent a more normalized reporting of our financials. However, when comparing the full fiscal year results, there are impacts from the Paycheck Protection Program loan forgiveness and the employee retention tax credit, both the PPP loan forgiveness and the ERC were recognized in the second and third quarter of fiscal 2021. On today's call, I will be excluding the impacts of the PPP loan forgiveness and the ERC when applicable to make the full fiscal year results more comparable. Sales in the fourth quarter were $23 million, a year-over-year increase of $1.9 million or 8.9%. For the full fiscal year, sales increased $27.8 million or 48% to $85.3 million. Microlab product contributed $15 million since the acquisition in March. Organic growth year-over-year accounted for $12.8 million, which represents growth in most of our product areas, but primarily driven by the growth in our OptiFlex product line, which is our hybrid fiber solution that is used to support the build out of wireless power sites. Adjusted EBITDA for the fourth quarter was $1.9 million compared to $1.5 million, a 22% year-over-year increase. Adjusted EBITDA for the full fiscal year was $6.6 million, which is an increase of $3.9 million or 143% year-over-year from $2.7 million. The increase is primarily due to the higher sales along with a more favorable product mix, primarily driven by Microlab products. Fourth quarter gross profit margin increased to 31% from 25.3% in the fourth quarter last year. The 570 basis point increase in our year end margin was driven by favorable product mix. Our sales team continues to work on increasing sales of our higher margin offering and our operations team is working hard to control costs and reduce costs where we are able. We continue to be impacted by the elevated cost of shipping and materials as a result of inflationary pressures, as well as the ongoing wage pressures we have discussed previously. Recently, we have seen pricing for our materials start to stabilize and believe that the supply chain constraints we've been facing while still ongoing are lessening. We believe there is room to further improve our margins as we believe our sales increase will be driven by our higher value products and solutions. Operating income was $715,000 for the fourth quarter and net income of $451,000 or 4% per diluted share. Non GAAP net income was $1.5 million or $0.15 per diluted share. At the end of the fourth quarter, our balance sheet remains strong with cash and cash equivalents of $4.5 million with working capital of $26.7 million and our full $3 million revolver remains available. Our inventory was $21.1 million, up from $11.1 from last year. The increase in inventory is to support the increase in sales and to mitigate against supply chain disruptions. Microlab accounted for $4.9 million of the inventory increase, but it is also important to note that we have also invested to increase the inventory levels of Microlab products, which has increased $1.2 million since the acquisition. We believe our current inventory level supports our strategic business model of inventory availability, which is essential to meet demand as we expect increased CapEx spend related to the continued build out of 4G and 5G wireless networks. While supply chain issues have eased, once we believe that they have resumed to more predictable levels, we will be able to lower our carried inventory, bringing up cash for other investments. Moving on, we continue to see momentum building around new business. Our backlog remains healthy going into fiscal 2023 with $27.8 million on fourth quarter bookings of $20.2 million and as of today, our backlog currently stands at $26 million. Before I discuss our guidance for fiscal 2023, I want to take a moment to expand on something Rob discussed. Our company has been undergoing a thorough reinvention over the course of the last few years. We are all excited about the potential ahead, both from a top line growth rate, as well as the margin improvement we expect to realize. As our sales mix shifts from more traditional products to solutions that are pivotal to continued deployment of 4G and 5G networks, as well as overall infrastructure build outs. We believe we will see increases in our operating income from economies of scale as we continue to grow and from efficiencies and synergies we will realize when we move into two new facilities and consolidating operations in 2023. As for fiscal 2023, we expect the usual seasonal impact that we have experienced in our first fiscal quarter and we anticipate increased sales throughout the year. We expect revenues to be in the range of $90 million to $94 million for fiscal 2023. Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Josh Nichols with B. Riley. Please proceed with your question. Great. Good to see a strong finish to the fiscal fourth quarter heat and guidance outlook for next year as well too. Could you provide a little bit more color. Was there any like one large particular one time orders that may have contributed to the outperformance this quarter or were things pretty well dispersed amongst the different offerings? Yes. Thanks, Josh. So, no, I wouldn't say there was one large order. I mean, we just did still have a pretty meaningful amount of hybrid fiber ship out in the quarter, which was not unexpected and sort of what we shared at the end of last quarter that we thought was going to happen. I think overall, it was a pretty normal quarter for us. So nothing crazy, core business performed, steady growth over the prior year like it generally has. Sales of Microlab products were stable and kind of in the range that we've been expecting them a little better than maybe their historicals. So the only -- the biggest number in there would have been the hybrid fiber, which has been consistent over the last several quarters. So nothing out of the ordinary. Great. And then I know you've talked a lot about not just the top line, but the margin profile, which has consistently increased throughout this year on the gross margin front. And then also some EBITDA margin targets. Is your plan next year, do you think the company is going to be achieving north of 30% gross margin and any targets you could put out there at a high level for EBITDA for the year? Sure. Yes. So we were happy to see, obviously, gross margin go up as fiscal 2022 went on and ending the way you did was great to see. I think that's our expectation going forward. Now in fiscal 2023, we always have kind of a funky first quarter with November, December, January being the three months of our fiscal first quarter. So short of that normal seasonality that we experienced, we expect margins to continue getting better throughout the year. We think our product mix will help drive that. Once we get into the new facilities, as well there's some early in the year expenses to help us get that done that are one time charges. Then we expect our EDITDA margins to get better as well. So we're still aiming to be north of 30% on the gross profit line and to consistently get above 10% on the adjusted EBITDA line. I think as we get through the year, the EBITDA piece is the one that I'm encouraged and excited to see as we start to be able to take some real synergies and savings as we get into the moves. So it will be similar to what we've seen in the last few years where the first quarter is a little lighter than the other three and we have growth from there. And understanding the seasonality of the first quarter and then things tend to pick up from there, but curious what are you seeing in terms of carrier CapEx build outs 4G more specifically 5G, those have been hard to time in terms of the spend. I'm just curious what you're hearing with your conversations with your customers about what the expectations are for calendar 2023? Yes. So I think on both 4G and 5G kind of looking at them together, the CapEx as calendar '22 wound down, this is one of those years where things really slowed down from an expectation of what was going to happen in December in particular. That's normal. This is my fifth iteration of a major build, I think. And so, what we expected most years, I think the thing that we've generally seen is with the overall economic uncertainty carriers are still committed to a meaningful amount of CapEx. I think there was a little bit of holding your breath as the year ended to see, okay, how do we end up and our carrier is going to keep spending like they said. We haven't seen any major pullback on that. There's still a pretty significant amount allocated. I think I won't be surprised if there's sort of delays in acceleration as we get into early and late spring, which is normal build season when it really gets moving. The part of that that I'm most intrigued to see really is on the small cell side. Do we start to see the spend that we've been expecting, sort of the pent up demand spend that's been sitting there, which I think we will. I think this is a year -- 2023 is a year where we need to see some of that. So I guess summary there is, we expect pretty meaningful CapEx, macro sites, small cells and venues as well as we get into better weather and some of those outdoor venues start to be built out. Thanks for clarifying. And then last question for me. Looking at the guidance for next year, I guess, you've historically been able to secure some large orders. And to your point, I think the small cell opportunity is probably like a bit underappreciate. I'm just curious like are you still pursuing some of these large multimillion dollar orders? Is there a good pipeline of those? And as much of that or a big ramp in small cell included all in the guidance that you're giving initially or is that more like an upside scenario case? Yes, I think that a larger small cell spend would be an upside case. We have some of that built into our expectations, it's really hard to predict. So it's one of those things, but putting an exact number on has been difficult to do, especially early in the year. I think as we get through the year, we'll get a clearer sense of what does that build plan look like. But they are absolutely in our expectations, there are some pretty significant wins that need to be in there in multiple product areas. We're still shipping a lot of hybrid fiber, we're hoping for even more of that. As we go on, that's a tough one to predict as well kind of week to week or month to month, but we're hopeful there. And then our other kind of bigger ticket items as we get into small cell and thermal cooling, those are areas that we see large opportunities. And the last thing, as I mentioned a minute ago is, from a venue perspective with the add of Microlab into our offer, when a large venue like a football stadium in particular gets built out and we're specked in there, those are hundreds of thousands of dollars in one PO just for passes. We can now throw in fiber and coaxial jumpers as well and some other items to try to fill out that bill of materials. So I don't want to understate the possibility of those as those start to line up as well as some decent wins. Hi, Rob. Congratulations on a strong EPS for the year. You mentioned some costs around consolidation on the West Coast, East Coast and then savings. Is this consolidation, manufacturing, operations, this is a first question. And then can you sort of quantify the amount of expenses around that? And then the amount of cost savings down the line? Sure. I'll tackle the general concept, the consolidation, I'll let Peter give some sense of the cost and then I'll come back and maybe share what we think that's going to be longer term. So the consolidation is, its operation, its production, its inventory. We're starting with the West Coast, we're combining our legacy RF Industries product line that [indiscernible] offer and the fast turn fiber offer that we acquired from the enterprises a few years ago. So those who are being combined production offices, corporate staff and then our corporate headquarters is moving there as well to one new facility to help us, I think, take advantage of our scale and maybe take some synergies out as well. Hey, Martin. Thanks for the call. So the one-time cost, a big chunk of that is going to be just the moving expenses associated with that. Am I coming through okay here? Okay. I'm getting a lot of feedback on my end. So just moving costs related to that. That's the biggest probably onetime charge we see. And then there's going to be some leasehold improvements that will -- as we're getting into there, having that kind of get a fix from a cost savings perspective, Aaron, I don't think there's much to share quite yet. We look forward to be being able to share that kind of once we get into the building and things iron out a little bit more. So I think those cost savings would be a little bit premature to share here on the call. Yes. The one thing I'll add to that Peter is just I think from a production team perspective and some of the higher level roles, what do we really need when we get two large operations hold into one. We have 130 people, call it, in Southern California, 135, I think our expectation is that we can get better at doing our production in a slightly more lean scenario and handling inventory maybe in a healthier way also. So I think as we get into the first quarter and talk again in March, I think you'll hear more quantification of what those dollars are, but we think they're material to the business as we go on. Yes, I think we're talking about between, call it, $250,000 and $500,000 from a move expense. It could be a little higher than that if -- things don't always go perfectly with the relocation. So it's not a crazy number, but it's not free. So I think we're expecting to spend several hundred thousand dollars to get relocated into these facilities where we can really recognize some savings from that. Looking at your -- well, take the midpoint of your revenue guidance for next year as revenues up 8%, can you talk at all about how pricing is factored into those projections? Yes, good question. Thanks, David. So we've taken a little bit of price increases. Some of that already printed through in results that were shared now depending on the timing under which we took those increases in the prior year. I think there's a little bit of it. I mean, call it, it's certainly not the full 8%, but call it a percentage point or 2% that we would tie to price increases based on product mix. We weren't able to take price increases on everything that we sell. That's what makes it a little harder to predict some of our items just we don't have that kind of pricing power. Others, it's more standard just annual increases that we generally take. So I think we're putting a little bit of weight into the price increase piece on that, but the majority of that growth is just going to be from increased sales in some of the newer product areas. And we may have to offset some slower sales of some of the big project items we've done over the last few years. It's hard to know if all the projects that we're doing, specifically on the hybrid fiber side are going to stay at the exact same level, but our expectation is, those will continue to be robust, maybe not at the same level they were last year and we need some other product areas to increase to offset that to give us the growth. Okay. And then on that line, is it possible to at all characterize have your price increases been able to keep up with your cost increases or are you having to absorb some of those? Yes, good question. I think on the customer side -- sorry, on the cost of goods side, we've generally been able to keep up as the cost of goods have moderated a bit in the last several weeks or a couple of months. The piece of this that's been harder for us to control overall is just wage pressure. We see consistent increases on all of our folks, our production teams, et cetera. So there's room for us to get a little sharper there, I think, to find some additional savings and some opportunities. We do have -- we had initiatives in place for some time to take cost out of the business. We think we're going to be able to offset most, if not all, of the increases that we've experienced from a wage perspective with those initiatives. So we think it's sort of where we're starting with a clean slate and now it's about growing the business and recognizing some of those better margin items to help us print through the better profit. Thank you for taking my question, Rob. I'm wondering about your -- the product launches in this fiscal year, and in particular, I'm wondering about the timing of those launches and whether there have been any legs of revenues with those new products you've got coming in and whether it's a fiscal 2023 revenues or whether it's -- whether it'd be later than that? Yes. Hey, Hal. Thanks for the question. So we have multiple things that we're going to be launching. I think the good news here is, from our last couple of acquisitions we've added some solid engineering talent and some product roadmap capabilities. So we have small cell and thermal cooling offers, we have Microlab products that are on the docket and we've kind of always got new versions of hybrid fiber that are coming out as well. Historically, there's not a lot of product launches from us, because we weren't very product road map centric, we were more looking at market opportunities or responding to customer needs and then coming to market with something. This is a more proactive approach. The majority of the things that we plan to launch and announce already have customer trials, either completed or ongoing and we expect there to be in most cases revenue during fiscal 2023 to coincide with those launches. I'm not much of a send out a press release because we have something that we think is cool kind of guy. I prefer to send out something when we think it's cool, customers think it's cool and we can actually quantify some dollars around it. So you can expect that when we do launch something, our expectation is that there's a revenue stream tied to it that we can also speak about at that time. Okay, great. Thank you. And another -- I think my final question was kind of a broader question, regarding mergers acquisitions. Two part question. One is, your past acquisitions and most recently Microlab, have you completed the sufficient amount of integration that you're now actively looking for new acquisitions. And with respect to potential new acquisitions, the environment has changed a lot over the past year, right, with higher interest rates. There's a potential recession people are talking about, funding availability has changed a bit, I suppose. And there may be greater willingness on the part of potential targets to enter into discussions with you. Can you talk about that? Sure. Yes. So the first piece, so Microlab is, I'll say, generally integrated, if not fully integrated. The only thing remaining there is getting into a new facility for them from where they're located currently. So just moving down the street, but I need a little bit of additional space to do some other things in there. But other than that move, which really didn't have anything to do with the integration of the business, our systems implemented there, our teams have been integrated almost since day one. So we're largely complete on that, which in a normal environment would then free us up to be actively looking at deal flow and acknowledging deals. It's not that we're not doing that, we are looking and the pipeline continues to sort of build and evolve. But we're pretty cautious about doing M&A in an environment like this, making sure that we've got the right acquisition target, the right size and scale. As always, I think as everyone's learned, I care a lot about what price we pay for it and try to be conservative on that and make sure that we're allocating capital wisely. So there's nothing imminent. I'm not rushing into any deals and whether that -- whether that continues to be the case this full year or not, we'll have to wait and see, but I don't think it's a very -- while people are interested in talking about M&A, it's a little bit of a funky environment to be going out to find capital. We've done a great job of using cash and low interest debt in the past. Where our stock sits today, I'm not terribly interested in using that equity as -- using that paper to do an acquisition either. So I think we'll continue looking at deals as something great comes along. We can always get creative and figure it out, but I think at the moment. We've got a lot on our plate with getting integration of these new facilities and starting to print through the savings that we believe will come out of it over the course of time along with the sales initiatives and the big operational initiatives that we've had ongoing for several quarters. So not to say we won't look and continue to look, but we're definitely going to be I think conservative about our approach to M&A at least right now. Hi. It's Orin Hirschman. How are you? Congratulation on the progress. Good. Thanks, guys. So just a few questions. So on [Schroff Tech] (ph), there were some very large trials or decent sized trials going on in the cooling. Did any of those trials mature into sales or they maturing into sales and you have to revamp anything in terms of what the customers wanted? Just give us a quick update on that. Sure. Yes. So trials have all gone well. We expect to see some nice wins this fiscal year from that, both from those trials as well as just kind of the general uptake of our product line. The team -- the engineering team did a great job of, I think, reinventing an existing product line. So I'm not going to say we started from scratch, but we certainly added some enhancements and some key things really right in the middle of COVID over the few years to redevelop a product line that had a little more longevity to it and was more future looking. So those enhancements are definitely helping. And I think the general belief and reaction from customers in the market is they are positive on our solution. And as I said, it's not going to go, I think we expect some meaningful opportunities to come to fruition this fiscal year. Okay. In terms of the small cell strategy, I know it's not -- itâs upside you've mentioned for this coming year, counting on it. Are you still missing any pieces in the puzzle for what you bought for the customer? Yes, it's a good question. So I don't think we are. I think the bill of materials there is generally filled out. The two areas that we don't offer today in that bill of materials that we could or we could review and it's part of both our openly, publicly stated acquisition strategy, as well as organic development is, we don't have antennas from a broad based perspective today and there's a power requirement in small cell applications that could be a nice adder as well. I think finding the right fit there is something we have to be really smart about. And so because of that, we're pretty pleased with the offer we have today. We have no intention of offering the radios. There's obviously a big ticket item inside those boxes that is more than one radio and that's not an area that we intend to go in, but our general belief is, we can design, engineer and build a fully integrated small cell shroud of varying shapes and sizes and types using products of our own and helping integrate those from others. So I don't think there's anything missing from our offer to service what a customer might want. On that note, are you -- let's say, for the antenna, are you buying from outside vendors on the antenna because the customer wants it to come in one finished box? So generally, there's going to be a manufacturer of record on the bill of materials. So someone will be named or someone's will be named as the spec position for antennas. So generally those are things that we're told to use based on the carrier, the location, the region, the type of shroud that's being deployed. So yes, we're either buying them or we're having them supplied to us to help integrate into those cabinets. Okay. And so finally on the gross margin, definitely on a component level things are improving across many, many, many companies that we speak to in the last month or two notably. This company on a gross margin basis even before it took in the higher gross margin Microlab, years ago had been higher in the mid-30s, you mentioned that for various competitive reasons, it may not get back there. But even if the base business gets back to a number with a three in front of it and you have Microlabâs on top of that. It would imply a gross margin we do get back to a more gross margin in the mid-30s. Can you see a path to do that again? Yes, good question. So I think we absolutely see a path to getting to the mid-30s. I think product mix in the short term makes that harder to say specifically when. And I like to be able to give a pretty specific guidance on timing and numbers and quantify it when talking about those results. So we absolutely see it. I think the way you characterize it is correct. If our core business, if we start to see some things normalized there where some of the costs come down a hair, both on cost of goods and cost of labor, we can start to see better gross margins there and then with the new product areas, although that's Microlab or others, if the mix starts to swing heavier in that direction, we absolutely believe there's an opportunity to get those margins up into the mid-30s. So I don't expect it early in the year. I think if that's something that's possible this year, it's going to be late in the year. And it may be something that we don't see that kind of consistently happening till we get into fiscal â24. The only reason I say that is, when you look at our top line numbers, the better our top line does generally the better our gross margins go with it, because we absorb labor and then we start to see a much healthier gross margin as well as kind of every other profitability line. Historically, we've had discussions about how do we get consistently to $15 million a quarter than it was how do we get consistently to $20 million a quarter. We're kind of there. And now it's great. Let's see those numbers -- if we truly were putting up the exact same number every quarter, I'd be able to give a much clearer answer, because the mix moves around and therefore our top line moves around a bit with it. It's harder to say specifically when that is, but I don't think itâs sort of a question in the mid-term to get some margin push back up into the mid-30s. Okay. And last question, some of the new products that you're mentioning, when do we get a peek at those? And when do they expect revenues? Yes. So we expect revenue this year from anything that we're going to launch. I think the soonest that you'll see something probably come out from an official product launch during our fiscal second quarter, again, that starts in February. So February, March, April timeframe. We expect to have some things to share and then subsequent to that, there's a couple of things in the back half of the year that we believe we'll be talking about as well. But as I mentioned in a prior question, I'm not big on announcing something just to announce it unless there's some marketing genius reasons for it or we've already got customer review, customer feedback and customer opportunities that we can relate at the same time. I like to be able to share -- here is something new to talk about. People have already looked at it and we know that it works and we know that people want it. So now here's the revenue that we expect to drive with that. We've generally been able to do that. We had a two field launch last year with a unique kind of shroud. We talked about that and immediately had a series of handful of purchase orders in the hundreds of thousands of dollars to talk about right on the heels of that launch. So expect similar kind of this year, but we should have something to talk more about during our fiscal second quarter. Okay. We have no further questions in queue. I'd like to turn the floor back over to Rob Dawson for any closing remarks. That's great. Thank you, John, and thanks everyone for joining our call today. We appreciate your support of RF Industries. I'd like to thank our team for their hard work in helping us achieve these new levels of performance and our customers for allowing us to partner with them. We're excited about our continued positive momentum as we move into fiscal 2023. Peter and I look forward to reporting our fiscal first quarter results in March. Thank you again and have a great day.
EarningCall_1332	Thank you all for joining. I would like to welcome you all to the First Bank Earnings Conference Call Fourth Quarter 2022. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Thank you, and good morning, everybody. Welcome to our fourth quarter earnings conference call. I'm joined today by Andrew Hibshman, our Chief Financial Officer, and Peter Cahill, our Chief Lending Officer. The following discussion may contain forward-looking statements concerning the financial condition, results of operations, and business of First Bank. We caution that such statements are subject to a number of uncertainties, and actual results could differ materially, and therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described under Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2021 filed with the FDIC. Thank you, Andrew. I'll start with some high level comments on the quarter and the year. I'll turn it over to Andrew to get a little more detail behind the numbers and then he'll turn it to Peter to give a little more background on the lending side. I'd say overall, I think it was a decent finish to a very, very good year. Unfortunately in Q4, the NIM expansion that we achieved in Q3 was eroded and we ended-up back at margin levels more in-line with where we saw things in the second quarter. But despite the margin erosion, we do have overall profitability levels have remained very strong and we achieved tangible book value per share growth of $0.46, which was meaningful book-value growth during the quarter. Our asset quality remained very good. We saw net recoveries during the period and our level of non-performing loans remained very, very low. Our return on average assets was down a little bit from the third quarter, but remained very healthy at 1.35%. We continue to bring in high quality new bankers, several new deposit generators were also brought in on the sales side during the year and we're excited about the prospects for those teams as we move forward. And we think we'll see continuing operating leverage opportunities as we continue to scale our operations and also look to integrate the Malvern merger later in the year. I'd like to highlight strong performance metrics. While they were down from Q3, I think they still show very, very good performance, especially relative to peers. Our return on tangible common equity was 13.5%. Our efficiency ratio was below 50% for an eighth straight quarter. Our pre-provision net revenue return on assets was 1.95% just a little bit below 2%. Our net interest margin has been over 3.5% for the past eight quarters. Our non-performing assets to assets remain very low at 23 basis points. And overall, our allowance covers are non-performing loans by over 4 times. On the lending side, we saw $74 million in loan growth during the quarter with over 70% of that new production coming from C&I. We have very strong asset quality with low delinquency. We're building out our capabilities in small business and asset based lending to continue to move our ratios a little higher on the C&I side further diversifying down a little bit from the investor real estate category. And we've seen gradual evolution of the organization as we've continued to layer in attractive C&I lending niches, really building the franchise out from a traditional real estate focused community bank into more of a middle market commercial bank. On the deposit side, we obviously had some challenges. Overall deposit growth was strong, but we did see a significant increase in our cost and deposits. Some of that was related to the way the timing of events played out during the quarter. As I mentioned, we had significant C&I lending opportunities. We actually had a reduction in payoffs and paydowns that we normally see on the commercial real estate side. Those two things together put a little pressure on funding, which caused us to have to increase the rates on our money market. And the good news is, we were able to bring in over $100 million in deposits and deposit growth during the quarter, but we also saw a lot of excess non-interest bearing balances move out of the non-interest bearing accounts into interest bearing accounts here at the bank, which gave us the liquidity we needed, but obviously had an impact on our cost of funds and on the margin. Now we were expecting some movement out of NIB (ph) although it did happen a little bit quicker than we expected. We think some of that again was a timing issue related to the need to bump up our money market rate in order to make we have the dollars needed to fund the good C&I loan opportunities. But all-in-all, we've made a lot of good moves to make sure that we can continue to drive core deposit growth. We did actually see an increase when you look at just new non-interest bearing accounts opened during the quarter. We actually brought in more in new money and new accounts than we saw money leaving and closed accounts. So again, it was a lot of money moving out of non-interest bearing into interest bearing, which impacts the margin. But in terms of retaining customer relationships, our team did an excellent job. So in summary, despite some headwinds emerging in Q4, we had a very good and profitable year in 2022. We realized top quartile performance across key metrics like return on assets, return on tangible common equity, pre-provision net revenue and tangible book value per share growth. In fact, our tangible book value per share grew 10% during the year despite a lot of challenges on the interest rate side. And we achieved good high quality loan growth and improved asset quality profile. Furthermore, we have reason for optimism as we work our way into 2023. We've been able to attract several key bankers that will help us drive core deposit growth moving forward. We've got some nice new C&I lending niches, which will help drive both portfolio diversification and an improvement in our overall commercial deposit balances, which will put less reliance on higher cost sources of funds. We're doing a nice job enhancing our digital banking capabilities to make sure that we remain competitive in that space. And we're continuing to see fallout and opportunities from M&A within the New Jersey banking market that we think will create great opportunities for both customer acquisition and banker acquisition as we move into 2023. And finally, the exciting opportunity with the Malvern acquisition to integrate that really drives some size and scale and improved profitability within our PA franchise and also drives overall improved scale benefits across the entire franchise. So certainly challenges as we look out to 2023, but also reasons for optimism as we love to continue to build and grow shareholder value here at First Bank. Thanks, Pat. For the three months ended December 31, 2022 we are $9.1 million in net income or $0.46 per diluted share, which translates to a $1.35 return on average assets or $1.40 excluding tax affected merger related expenses. The primary factors contributing to the quarterly results were historically strong, but slightly declining net interest margin, strong credit quality metrics, and effective management of non-interest expenses. Net income declined $1.1 million from the linked third quarter, but was up $1.3 million compared to the fourth quarter of 2021. Strong commercial loan growth continued in the quarter. Loans were up approximately $75 million excluding the small decline in PPP loans, compared to an increase in non-PPP loans of $36 million in Q3, $84 million in Q2 and $65 million in the first quarter of 2022. Total deposits were up $104 million during the fourth quarter of 2022 with interest bearing deposits up $184 million and non-interest bearing deposits down approximately $80 million. We continue to maintain key relationships. However, they have become more rate sensitive resulting in movement of funds. We did a detailed analysis of the decline in non-interest bearing balances during the fourth quarter, a very small percentage of the decline related to accounts that were closed and left the bank, but during the fourth quarter, we did experience several large relationships of maintaining significant non-interest bearing deposits, moved into interest bearing products and we saw some normal end of year fluctuations. The growth in interest bearing balances was due to new money, CD and money market promos, we initiated during the quarter, coupled with the movement of funds I just discussed. Due to the shift in the deposit mix, the repricing of certain existing customer balances and the new money promos during the fourth quarter, our total cost of deposits increased 70 (ph) basis points compared to the linked prior quarter, primarily due to this increase in deposit costs, offset somewhat by the increase in the average rate on loans, our tax equivalent net interest margin decreased to 3.69% for the quarter ended Q4 2022 compared to 3.97% in the previous quarter. The decline in the margin in the fourth quarter was exacerbated by low PPP fee income and prepayment penalty income during the fourth quarter of 2022. Excluding PPP fee income and prepayment penalty income, the margin would have been approximately 3.67% in Q4 versus 3.89% in the third quarter of 2022. Our asset liability management approach continues to be conservative, but we have taken steps in the fourth quarter and plan to continue to shift our balance sheet to a more liability sensitive GAAP position. In the current rate environment, we expect continued pressure on the margin in the short term, but we believe the quarterly decline will not be as severe as the time was in the fourth quarter of 2022. Liquidity levels increased slightly during the fourth quarter due to our deposit gathering initiatives. We were also able to slightly reduce borrowings and broker deposit balances during the fourth quarter. As we have mentioned on previous calls, our strong organic loan growth has lowered our liquidity levels, but has also contributed to our investment portfolio being relatively small when compared to peers. The size and low risk nature of our investment portfolio has limited our unrealized losses compared to some of our peers. During the first three quarters of 2022, unrealized losses increased, but an unrealized losses actually declined slightly during the fourth quarter. Due to our strong net income, we were able to increase our tangible book value per share by $0.46 during the current quarter. Based on net recoveries during the quarter and a strong asset quality profile, we maintained our allowance for loan losses as a percentage of loans to 1.09% at December 31, 2022 compared to the same percentage at the end of September. This was supported by only a very slight increase in non-performing loans compared to the end of the third quarter and we are also currently finalizing our CECL calculation and expect our allowance as a percentage of loans to increase by approximately 5% to 10% upon adoption during the first quarter of 2023. In the fourth quarter of 2023, total non-interest income increased to $1.4 million, from $934,000 in the third quarter of 2022. The increase from the third quarter of 2022 was primarily due to an increased loan fees, which was principally related to a miscellaneous one-time loan fee. Our SBA loan activity and pipelines continue to be strong. However, sale activity has been slower than expected, primarily due to the rising interest rate environment which has reduced the premiums earned on sales. And in most cases, we are attaining the loans on our balance sheet. Loan swap activity also continues to be slow. While non-interest income levels may continue to fluctuate, we do not expect a significant increase in non-interest income over the next several quarters. Annualized Q4 2022 non-interest expenses or 1.84% of average assets or 1.78% excluding merger related expenses compared to a peer average of 2.11%. In total, non-interest expenses were $12.5 million in the fourth quarter of 2022, up $728,000 or 6.2% compared to the third quarter of 2022. The increase was primarily due to merger related expenses associated with the merger agreement we finalized in December and higher salaries and employee benefits. Excluding merger related expenses, non-interest expenses increased only 2.4% compared to the linked third quarter. With the difficult interest rate environment, we continue to be laser focused on expense control, but we do anticipate our quarterly expenses will continue to increase slightly from the core Q4 2022 levels as we continue to add to staff and inflationary pressure continues to affect other expense items. While we believe the current interest rate environment will continue to put pressure on our margin, we are still generating historically high levels of net interest income and operating efficiency results. We believe we can continue to generate core loan and deposit growth and combined with very strong credit quality metrics and effective management of non-interest expenses, we are well-positioned to continue our strong core profitability trends in 2023. Thanks, Andrew. I'll try to provide some additional information not already covered by Pat or Andrew. From a lending perspective, 2022 was pretty clean from the standpoint of noise in the numbers. My comments will focus only on organic results, PPP loans, as Andrew mentioned, are about done with slightly over $3 million or so remaining and their paying is agreed (ph). Regarding the fourth quarter, I think the results were excellent. Approximately 29% of our growth for the year took place in Q4, just slightly behind Q2, our largest quarter, and up nicely from the third quarter, which was the slowest. Total loan growth for the year, again absent PPP, was around $260 million. This exceeded our total loan growth goal of $200 million by 30% and overall kept us in double-digit loan growth for the year. Loan generation continues to be good in all areas of the bank. One thing of interest was that new loans closed and funded during the fourth quarter declined from an average of $126 million in the first three quarters of the year to $83 million in Q4. There are a number of factors that play here. First, we are well ahead of plan throughout the year, which meant we could be a bit more selective. Also through the first six months, loan growth was weighted towards investor real estate loans. So again, we were selective about what we pursued in the second half of the year and then for the fourth quarter. Then with the impact of the economy on interest rates, hoping cool loan growth on the Investor Real Estate side a bit, we experienced a reduction in loan payoffs that I think both Pat and Andrew mentioned during the fourth quarter. All of this resulted in good growth in the C&I side of the portfolio for the quarter, which brings in as you know more floating rate loans as well as relationship deposits. Payoffs in the fourth quarter totaled only $14 million compared to $177 million or a quarterly average of $59 million per quarter during the first three quarters of the year. And the total for the year, C&I and to a much lesser extent, consumer made up 47% of all new loans closed and funded and investor real estate made up the difference. The positive news, we saw moving into the fourth quarter was that the percentage of new loans coming from C&I rose the 70% of total loans closed and funded. Looking at the reason for loan payoffs in Q4, 62% of payoffs were due to the underlying asset being sold and 25% of total payoffs were refinanced by another bank. The entire year, the kind of ârefinanced out number was higher at around 38%. At this point, I'll talk a little bit about our loan pipeline, which continues to look good. The numbers we discussed here are based upon probable funding, which means we project first year usage and multiply that by a probability factor based upon where we are in the approval process. That means, for example, a loan that's already approved and will have a much higher probability of closing, no one that just went into underwriting. At December 31, our loan pipeline stood at $233 million down slightly from 240 at the end of Q3. The total number of individual loans in the pipeline rose, however, from 211 at the end of Q3 to 222 year end. The average pipeline figure for the 12 months is past year was $244 million. So at December, we were around 4.5% off the average for the year. Factors that impact the month, the numbers include the number and size of loans that have already closed and funded and therefore get moved off the pipeline. For example, we closed and funded $45 million in loans in December. This is above the average month and those deals came off the pipeline at 12/31. Overall, I'm satisfied with what we're seeing on the pipeline. Things seem to have slowed a bit, but we're still seeing a lot of activity. Based upon economic uncertainty that we see and face every day, we're taking a cautious approached underwriting new business, especially in investor real estate and construction lending as well as with any new prospective customer coming into the bank. As loans move through the pipeline, they eventually hit our projected loan funding report, which we've talked about here before. This report looks at 60 days and projects funding then prepayments for Andrew's team in finance. Our review of the loan funding report over the next 60 days shows continued good activity right in line with previous quarters. Regarding asset quality, it's not much more to say beyond Andrew's comments and what's in the earnings release, things from my perspective continue to look very good. Credit metrics are solid. Loan delinquencies, which were at record lows at the end of Q3, one even lower at the end of December. That's my recap in the fourth quarter in 2022. We're planning on continued growth and meeting our goals and objectives going into 2023. From the lending side, we have a number of priorities, some of which we've previously announced, but which really haven't had a chance to positively impact performance yet. Obviously, number one on our list is the pending merger with Malvern, that's the top priority, then we discussed that on previous call. We have a new regional office and opening up in Westchester, Pennsylvania, right before the end of the first quarter here. Right now, we're running that market out of a very small space on the third floor of a building downtown. In a few weeks, we're going to have a full service bank branch in Westchester, which will provide room to grow as well as be a better retail location, drive up et cetera. Similarly, in Northern New Jersey, we've located a new Northern Regional office in Essex County. We are tentatively scheduled to have our relationship management team in the new space by the end of the quarter with retail space to follow in Q2. Late last year, we announced our equity fund banking initiative, lending to private equity funds in our market. This team is doing well and has a strong pipeline. Pat and Andrew mentioned SBA lending. I'm satisfied with the results the team had in 2022 despite the impact on sales of the guaranteed portion of seven, eight loans. We expect even better performance this year in SBA and we're looking to add to staff there, if we can find the right people. I'm also happy to report that we recently hired a seasoned banker to build out and develop an asset based lending team. Pat made reference to that in his comments. This person has many years of experience in asset base lending and in our market and we'll add to our product set. We expect the team to be up and running by early second quarter. So we're excited about all these projects, each in its own way will enable us to continue to grow successfully in 2023 and years to come. Thank you, Peter and thank you, Andrew. At this point, I'd like to open it up for the Q&A session for the call. Thank you. [Operator Instructions] The first question we have on the phone line comes from David Bishop of Hovde Group. Your line is now open, David. I think you noted, you exited the year a little bit flush with cash. Was there, and obviously, noted the declined DDA balance. Was there any like more to come of aggressive [indiscernible] maybe prefund some of the loan growth in 2023 and try to get ahead of the market and further rate increases and just be a little bit more aggressive to position yourself from a liquidity perspective ahead of 2023? Yeah. Listen, I think there's always a variety of reasons why certain actions are taken. I mean, the practical reality is, you put a product out there or you tweak a rate and you don't know exactly the extent of the activity it will generate and I think as we were taking a look at our product design and setting our rates and we saw there might be an opportunity if we were going to air on the side of one or the other we wanted to maybe bring in a few more dollars than not enough dollars and that's ultimately how it played out. I think we put out rates that at the time, were decent rates. I think they've subsequently been surpassed by competitors based on subsequent Fed moves, but it did give us an opportunity to retain business that was getting competitively courted, if you will, and then also bringing some additional dollars. And listen to your point, while we love the highest margin possible, you don't want to play games on the liquidity front. You got to make sure you're dealing from a position of strength on the liquidity side. So yeah, that obviously played a role. And I'm just curious, Pat or Andy, when you look at the overall cost of deposits, maybe from a -- I don't know if there's a way to quantify where you see maybe that trending too over the next couple of quarters and what you're seeing in terms of average loan yield production? Yeah. I mean, great question. Obviously, we have visibility into rates that are currently being offered and what's that generating in terms of new business. The piece that's a little hard to forecast is money that's been sit on the sidelines, folks that maybe don't need it in their operating account that, when yields were low, they didn't want to bother making the move over. Now those folks are looking to put some of that money to work either with us at a higher rate or into the market. And I think we saw a fair amount of that happen in Q4. Our hope is a lot of the money that was looking to move, made the move and that what we'll see going forward will be significant reductions in that shift out of NAV into interest bearing and at least so far in January, the non-interest bearing balances are holding up. So a little hard to say with a lot of certainty, but we think every bank will reach a point where depending on their liquidity position, they may need to make a move. And when they make that move on the rate side, it'll cause a short term jolt, but then things will normalize. And I think we believe based on the efforts we're making on the core deposit generation side that Joel came for us in Q4. And that's not to say deposit costs will continue to move higher. But we're optimistic to move higher at a much slower pace. Got it. And then just a final question for me. I'll hop back into the queue. Outlook for loan growth, I'm curious, but your double-digit this year it sounds like a decent pipeline. You think there's enough demand and bankable credits out there to support that or it comes in a little bit from the low-double digit range? Thanks. Yeah, sure, David. I think given some of our new initiatives and given what we're seeing in terms of significant slowdown in terms of prepayments and payoffs. I think hitting our plus or minus $200 million loan growth goal will be manageable, it'll likely be done with less new business, right, maybe not as much churn as in prior years. And certainly, we expect it'll be done a lot more with C&I and floating rate commercial deals and a little less on the commercial real estate side. But I just think because we'll see fewer payoffs and paydowns, achieving a net growth goal of -- in that $200 million range, I suspect will be doable. Yeah. Thank you. Our next question comes from the line of Manuel Navas of D.A. Davidson. Please go ahead, when you're ready. Hey. Good morning. Could you give a little bit more color on kind of the NIM trajectory. And I know you have your deal closing too and just kind of, a little bit less pressure this coming quarter, what kind of thought process after that? Yeah. Great question. I'd love to have better visibility than we do. Obviously, there's a lot of moving pieces right now and it's a little tough to predict. I think we expect there'll probably be some continued pressure on the margin. We're sort of targeting a margin over the next couple of quarters of somewhere in the 350 to 360 range. We're going to work like hell to try to get it up closer to the higher end of that range, but that's sort of the best I could predict at this point. And then when you look out to the back half of the year, largely because of the idiosyncrasies of merger accounting, we'll almost certainly see a sizable margin pickup on the back end because of how you take the upfront marks and you accretive back in the income. I don't know, Andrew, do you have anything you want to add there, but I know based on some preliminary numbers you were showing the margin going up quite a bit on the back half, but more a function of the merger accounting than anything else. Yeah. That's right. I mean, obviously, a lot will depend on the shape of the yield curve and what happens. It seems like the Fed's going to move a little bit more gradually here over the next couple of meetings and we'll see what happens there, but yes, it's going to get a little complicated later in the year with all the purchase accounting, but we'll make sure to do a good job of disclosing the impact of the different purchase accounting things that are flowing through the margin, so you'll see that. But I think Pat's got kind of guidance on the margin coming down slightly again early in the year and then hopefully, we get a little bit of a better yield curve over the back half of the year and hopefully, we can kind of maintain that kind of core margin and then with the Malvern integration you'll see some significant fluctuations because of those interest rate marks that get accretive back into interest income. That's really helpful. You kind of talked a little bit about deposit costs in a big picture, are you targeting a certain beta through the year? And anything that can kind of help with seeing where they're going to go or is it just such a relief target at the current moment? I mean, we obviously have deposit betas built into our budgets and our forecasts. I'd say they were coming in a lot lower than expected as we moved through the year and then I think they jumped up little bit higher than was anticipated towards the back end of the year. So I think the short answer is, yeah, we're looking at those betas, but there is a moving target right now. We're trying to look at the margin overall and what we can do to keep it at. I think if we can keep it in that 350 to 360 range, that's a very healthy level and that's a level of which I think we can generate really strong returns on assets and equity. And we obviously have other levers to pull if the deposit costs move a little higher than we anticipate. We're going to have to get a little leaner on the operating side, but there's always opportunities there, if you look hard enough. So it just becomes a function of, to where you can to maintain those deposit costs while maintaining your liquidity. And if you got to end up pushing them a little higher than you'd like, then you got to find other ways to make sure you can keep your profitability at sustainable levels. That's helpful. And I think I might have missed this in the expense discussion, but is there kind of a core run rate expectation for 2023? No. I think Andrew broke out what we estimated is kind of the core for Q4 ones and then indicated there'd be -- what we think would be modest increases from that core level. So I don't know, Andrew, if there's details, he didn't already provide that, but I thought gave some good guidance in terms of what kind of the core expense base look like. And, in fourth quarter things always move around a little bit as true up accruals and other things. But there certainly is continued pressure on the expense side. I think the good news there is those pressures are subsiding and we're hopeful that what used to be a sort of a 2% to 5% expense growth world that kind of jumped more to 8% to 10%, will come back into that plus or minus 5% range. Yeah. I think that's right, Pat. I mean we have Peter mentioned some we have the new Westchester location, but that's really just a movement of a location. So expenses aren't going up significantly there. We do have the new Fairfield location, which will add to our occupancy expense. But we don't have any other significant initiatives that are going to drive our expenses off significantly early in 2023, but then obviously we have the Malvern deal which will drive up expenses when we close that deal in the middle of the year. Good morning, gentlemen. How are you? Could you talk a little bit about the merger with Malvern and will you close-up any of their branches? And could you talk about the revenue enhancements possibly? Thank you. Sure. Sure. Thanks, Ross. Yeah, I mean, listen, we're obviously looking closely at opportunities. I think there are some things that they had underway that we're going to work with them to continue to finish up on. There are some branches that are near some of our locations, the branch in Florida that is a market we haven't been in, we'll obviously take a look at to see how that's performing. But there's nothing that we've announced to date, but we're certainly going to take a good hard look at that. And the other thing is, there's some spots that we had our eye on from a strategic growth perspective and some of these new locations will -- it'll allow us to hold off on some expenditures that we had planned in those markets. So I think the branch profile something, we always look at. We always looking at our own branch profile, quite honestly, to see if there's opportunities there as well. There is some back office space that we may not need. There's some own buildings that have some open space that could be opportunities for sales or for lease up. So I do think there's opportunities on the expense side. And then, we did a deep dive into sort of the SG&A side of things and we uncovered a number of line items that just quite honestly were a lot higher than we would have expected for bank that size and a lot higher than what we think we'll need on a pro forma basis going forward. So we feel pretty good about our ability to hit on our guidance we provided in terms of the overall cost saves. And then, as you talk about revenue enhancement, certainly they have some things that we don't currently offer on the wealth managed and insurance side. I think it's important to point out, we didn't build in any revenue enhancements into our pro forma earnings model, but certainly we'll take a hard look at what's happening there in terms of those ancillary products and services and what can be done either from a growth or a cross sale perspective. And I also think there's just going to be opportunities as a larger bank to basically make sure we're getting more looks at more deals, which allow us to be a little more selective, a little more disciplined, allow us to get our rate on certain deals that maybe before you had to feel like you had to be a little more competitive to win the business. And so that's an area quite honestly that we've seen in our prior deals that we never model in, but just by virtue of having a little bit of extra pricing discipline, we found we've been able to improve the loan yields of the combined franchise pretty nicely. Okay. And going back to your expense growth. Could you just touch upon again going on a little late? What kind of net expense growth you expect over and above the â22 base, your non-interest expense? Yeah. Andrew, you want to take that? I know you gave a range on a percentage basis above the core, so maybe you can just spell that out here. Yeah. I think we talked about that, I think, 5% to 8% is kind of a reasonable number. Now you got factor in, we're going to have a bunch of merger related type expenses over the next couple of quarters until we get this thing closed. But I think our core rate, we expect to be in around that range because we are seeing some pressure, but we don't have any major cost initiatives here outside of the Malvern acquisition. Okay. And just one final that I just thought about this question as a less thought. Would you consider buying back some shares if your stock continues to say this, what seems to be an unduly low inexpensive level? Yeah. So the short answer is absent any constraints we'd love to be buyers of our stock at these levels. Now there are challenges when you announce a merger and what that means for your 10b5 plans and exactly when you're allowed to be in the market and how much you can buy when you are in the market. So we're not as free to do perhaps as much as we would want on the buyback front right now just given the rules there. But objectively or say differently, on a personal level, I'll be really looking at the opportunities as we get out of blackout here because, listen, we're growing book value. We're earning good money. I'm really excited about the opportunities ahead of us. I'm not pretending that there aren't challenges as well. But I think the way we've shown we can try core earnings and book value growth, I think it's attractive at these levels. Yeah. That's something we're working on and discussing with counsel. There's a few different rules. And obviously, blackouts tie into, not just what's already been disclosed. But if you're in possession of material non-public information, that can create new blackout periods and, what you're allowed to do once the merger's been announced before it has regulatory shareholder approval, those rules are a little different and then you may have one set of approvals and not the other and what does that mean in terms of your ability to get in and out of the market. So It's something we'll be monitoring closely with counsel, but there's no simple answer there. Sorry, yeah, I just to add to that, yeah, it's very nuanced. The rules are very nuanced once you announce an acquisition. So even if you get out of blackout, you're very limited in how much you can do. So itâs going to be difficult for us to get any meaningful shares, but we're going to take a look at this because if we have any opportunity to get shares, as Pat mentioned, I think we'd very interested in buying shares back at this time. Thank you. [Operator Instructions] I can confirm we've had no further questions registered, so I'd like to hand it back to Patrick for any closing remarks. Okay. Thank you very much. Appreciate everybody, who took the time to dial in and listen, appreciate the great questions. And we'll look forward to bring everybody a fresh update as we get through the first quarter and announce our earnings in about 90 days. So thank you everybody. Have a great day.
EarningCall_1333	Greetings and welcome to the Cemtrex Fourth Quarter and Full Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on the forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly released results of any revision to these forward-looking statements in light of new information or future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion on these factors and other risks, particularly under the heading Risk Factors. A press release detailing these results was issued on December 28, and is available in the investor relations section of our company's website centrex.com. Your host today, Saagar Govil, Chief Executive Officer, and Paul Wyckoff, Chief Financial Officer will present results of operations for the fourth quarter and full fiscal year ended September 30, 2022. Great, thank you, operator, and good afternoon, everyone. I'm pleased to welcome you to today's fourth quarter and full fiscal year 2022 financial results conference call. The fourth quarter was highly transformative for Cemtrex, divesting the non-core assets Smartdesk and VR subsidiaries to focus on accelerating our Vicon and AIS brands. We see escalating demand for these businesses and believe this shift in focus to capture significant near term opportunities will help us to reach positive operating income by 2024 and maximize shareholder value over the next several years. This restructuring is expected to result in an operating expense reduction of over $5.2 million per year on a go forward basis. We have also identified another million in corporate overhead from legal, accounting and development expenses that were incurred in fiscal year '22 that will not be incurred in fiscal year '23. This will result in approximately $6.2 million in operating expense reduction to be realized going forward from November 2022. We believe our transformation will deliver a strong balance sheet and access to capital markets to execute our growth strategy. Our focus on Vicon comes at an opportune time as it is rapidly building a dominant security technology brands focus on V-SaaS solutions, leveraging AI and cloud technologies solutions for commercial, industrial and government applications. Vicon is seeing growing demand for its award winning roughneck cameras and Valerus video management software solutions. We believe Vicon can move towards $5 million in $10 million in recurring revenue over the next couple of years as a global leader in advanced security and surveillance technology to safeguard businesses, schools, municipalities, hospitals, and cities across the world. The industry is rapidly shifting to SaaS solutions leveraging AI and cloud technology solutions for today's highly dynamic environment. Allied Market Research is predicting the global V-SaaS and video surveillance market will reach over $83 billion by 2030, with a CAGR of 10.9% between 2021 and 2030. During the quarter, we were delighted to welcome Shane Compton as COO at Vicon Industries. Shane is an accomplished leader in the physical security industry bringing over 20 years of experience as a COO, CTO, and CTO and in the industry leading companies like Costar and Pelco. He's now leading the company's global sales support operations and engineering teams to deliver on operational excellence and deepen Vicon's commitment to world class support and customer experience. Shifting gears on our advanced industrial services business, we are also incredibly optimistic as the company is well positioned to monetize the increase in demand for predictive maintenance services reshoring and manufacturing back to the U.S. and increasing complexity and industrial equipment. With over 35 years in the industry and high repeat business, AIS has a strong reputation as a single source industrial contractor and premier provider of industrial contracting services. AIS is a significant source of cash flow and has a strong balance sheet empowering the ability to offer more comprehensive services due to inventory of equipment. As the industrial and manufacturing economy in the U.S. continues to thrive, we believe AIS has significant potential for expansion, particularly with bolt-on acquisitions. To mark this important transformation, we have also taken the opportunity to launch a next generation Investor Relations website to better reflect our forward thinking approach to the Cemtrex brand and enhance communications with the investment community. We believe there's a compelling investment case to be made to both current and prospective shareholders and the site will serve as an invaluable tool to keep our investors better informed of our progress and strategic vision. This site will be going live over the next few days and we will make an announcement accordingly. Thank you, Sagar. Our revenue for the full year of fiscal year 2022 totaled $50.3 million, compared to revenue of $43.1 million for the full year of 2021, a 17% increase year-over-year. The increase in revenue for the year was due to increased demand for the company's products and services. The Advanced Technology segment revenues for the years ended September 30 2020 and 2021 were $29.1 million and $24.2 million, respectively, an increase of 20%. The Advanced Technology segment increase was due to an increased demand for security technology products under the Vicon brand. Industrial Service segment revenues for the full year 2022 increased by 12% to $21.2 million, primarily due to the increase in demand for their services. Gross profit for the year ended September 30, 2022 was $19.1 million or 38% of revenues as compared to a gross profit of $17 million, or 39% of revenues for the year-ended September 30 2021. The decrease in gross profit as a percentage of revenues for the year-ended September 30, 2022, as compared to the prior year, was due to increased costs or revenues as a result of increased costs for goods and increased transportation costs for those goods. Total operating expenses for 2022 were $35.9 million, compared to $25.7 million with 2021. The increase in total operating expenses was primarily driven by increases in personnel costs, insurance, travel, legal, and research and development costs. Operating activities for continuing operations used $16.1 million for the year ended September 30, 2022, compared to using $10.1 million of cash for the year ended September 30, 2021. Net loss for the full year of 2022 was $13 million, as compared to a net loss of $7.8 million in 2021. Net loss in the fourth quarter of 2022 totaled $3.2 million, compared to a net loss of $9.7 million in the fourth quarter of 2021. Cash and cash equivalents totaled $10.6 million at September 30, 2022 as compared to $11.4 million at June 30, 2022 and $15.4 million at September 30, 2021. Inventories increased by $3.9 million, or 68% to $9.5 million at September 30, 2022 from $5.7 million at September 30, 2021. The increase in inventories attributable to the company's purchase of inventory to the security business of our Advanced Technology segment to maintain sufficient stock on hand for sales to overcome recent supply chain delays and issues. Thank you, Paul. In summary, with our restructuring complete and strong performance for Vicon and AIS, we are well positioned to create long-term value for our shareholders. Looking ahead, we believe revenues for Vicon Industries based on our current demand should increase by approximately 16% to $28 million for fiscal year '23, given the launch of our AI-based analytics solution, more improvements to our core product Valerus, as well as additional sales opportunities. We also believe AIS will continue to expand revenues by approximately 3% to $21.8 million, driven by continued strength in the industrial services market. Additionally, based on steps that company has taken during this fiscal year 2023, gross profit margin percent for Vicon is expected to increase to approximately 48%. Similarly, based on operational improvements made, we believe gross profit margin percent for AIS is expected to improve to approximately 34%, for the fiscal year 2023 for AIS. We have taken steps to reduce expenses at the Cemtrex corporate level as well to drive improvement in our overall operating expenses. With all the combined actions taken, we believe the operating loss over the next four quarters to be under $2.5 million. The effects of these changes will be partially demonstrated in our December quarter performance due to the timing of the restructuring, and we expect our March quarter performance to reflect the improvement more fully. We also believe that we can reduce inventory by more than $1.5 million over the course of fiscal year '23, as we have seen supply chain constraints improve. This will allow us to offset the cash loss from the expected operating loss over the next couple of quarters by the cash obtained from the reduction in inventory, reducing the burden on our overall cash position. With approximately $10 million in cash on hand and a dramatic reduction in expenses, we believe we have sufficient capital in the near term to focus on executing on our roadmap, both financially and operationally without the need for immediate capital. Our expectation is that the company reach a positive operating income in fiscal year 2024. We continue to work to position the company on a path to a sustainable financial model and for long-term growth, which we believe will provide long-term value for our shareholders. I look forward to providing our shareholders with further updates in the near term. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jason Kolbert with Dawson James. Please proceed with your question. Thanks, guys. Thanks for the update and really appreciate some of the comprehensive detail in terms of the numbers. I just like to ask some big picture questions. When we think about Vicon versus AIS, it seems like the tremendous growth opportunity exists for Vicon, and AIS seems a little bit like a means to an end. So I'm just trying to understand how you're looking at the business, how you're looking at capital spending, and where you see the future growth coming from? Yeah, sure. So with respect to organic growth, I think there's no question that Vicon is the more compelling near term opportunity. The demand in the industry is pretty high for the need for physical security. And there's a lot of disruption taking place due to incumbent technology being replaced by next generation technology, which creates an opportunity to take market share. So in a big picture, we see an opportunity to grow there more quickly. And I think in terms of where we'll be focusing our investment that will certainly be driven on that side of the business. I think with respect to AIS, the opportunities will be more driven by acquisitions. I think that with respect to AIS, there's more opportunity to gain scale, through finding good acquisition opportunities. I think for the last couple of years, valuations have been unusually high relative to what we think is fair value for businesses of these types. And we're starting to see valuations come down. So I wouldn't say that we're sort of exclusively thinking about Vicon. I think we're looking at both businesses opportunistically and seeing opportunities to drive growth in both. Okay. That's actually very helpful, because what it's telling me is that you'll be opportunistic on AIS, if you see the opportunity and it can build free cash flow, is that right. Okay. And can you talk a little bit in terms of the Vicon and really some of the camera and intelligence software products, what gives you competitive edge given the fact that you're in such a highly competitive market? I'd like to understand a little bit about, how your installed base is looking at you? And what it's going to take to get kind of some of the new, bigger contracts that are out there? Yeah, absolutely. So Vicon has been in the industry for 55 years. So we have a strong brand. So a lot of customers know us in the industry. And that really helps with our credibility, in terms of when we compete with other folks in the market. So first and foremost, people recognize us. And then secondly, we spend a lot of the last three years investing in our product portfolio quite substantially. So our products, when you compare them against our competitors, they are right there as far as competitive advantage in terms of pricing, in terms of the feature set. And we continue to invest in the product line to ensure that it gets there. We're also rolling out our AI analytics this month. And, that's homegrown analytics that we've built, leveraging the latest AI technology out there. So a lot of it is really just investments we've made starting to pay off and take advantage of the opportunities that are in the market today. So it's a combination of doing that on an ongoing basis. And then we've also made investments in people, right. So over the last 18 months, we've hired a number of really talented individuals from our competitors. We made an announcement, near the end of the summer, where we brought on Hiam. So Haim is, a tremendous product manager has a great product mind, and helps to bring a lot of value from that perspective. And a number of the other folks that we've got, obviously, Shane, just recently joining as well. So all these guys have brought a lot of perspective and a lot of value from many of our competitors in terms of bringing best practices and helping us continue to chart a course that creates our own space in the market and competitive advantages. So that's, again, a lot of that. The other the other thing is that we really just sell end-to-end solution. So many of our competitors, they're generally selling a portion, a portion of the solution. And Vicon is generally going to the market on a complete solution. And a lot of the market, especially in the enterprise world is looking for an end-to-end solution. And that's really how we differentiate ourselves. So it's really a combination of all of these things that is really helping us make be competitive in the market and continue to drive sales growth. Do you know the cost to purchase and develop the assets that were divested and purchased by management led by Mr. Govil? That last was a quote from an article that divulged the divestiture. I don't know that figure off the top of my head, I can get back to you off this call and provide -- The deal was, was publicly disclosed. And it was a combination of cash and investment opportunity within the Smart Desk company and also royalties on their revenues. Well, I mean your first question was how much the cost to develop those companies, not how much the assets were? So, some for $85,000, he got a million dollars worth of assets, and then promises of something that may or may not happen. Yeah, so if I may interject. Richard, so I can think I can sort of generally understand where you're going with it. So I'll say a couple of things. One is when the company explored options before the assets, we looked at a lot of different options. And these were all money losing businesses. And so there were no buyers lining up for these things. So I want to be clear about that, that the opportunity to make swift changes to the company, they're just not -- they were not readily available for the company and meaning that we approached different investment bankers, and we talked to different advisors about the various options. So because these companies were losing a lot of money, there wasn't an opportunity to get a lot of cash for them. So it's not like I'm getting a sweetheart deal here. There's no buyers lining up, right? I mean, that's the reality. Okay. The second thing is, the company's market cap was less than cash. So for a big part of most of 2022. And so, when you think about the collection of seven different brands, under the Cemtrex umbrella that is trading less than cash, the value of these businesses under this umbrella wasn't a -- the market was not recognizing that value. And so the company had to make some strategic decisions and we had to do it quickly. And this was discussed at the board level in terms of we need to make some strategic changes about what we're doing here. And that was discussed at length and the company made an announcement around this in -- I know that the announcement was on 11-22. I don't make myself clear. You had a vote of the board of directors, from which you abstained. Would it not have been better to have shareholders' vote on these asset purchases? And you abstaining from that vote? Yeah. So, good afternoon. So, I have a couple of mundane questions not actually about the operating of the company, but about some of the stock transaction. So hopefully, you can help me. I've been an investor, or I've invested with clients in Vicon since around 2000. So I have many years, working with Vicon and Cemtrex, with the preferred stock. So do you have just a moment to answer a couple of quick questions for me, please? I think those kinds of questions would be best directed offline. I'm not sure that this would be the best form for that. I certainly agree with that. But I've made no less than five attempts to contact your company directly, and through Investor Relations. And I never received a call back. So I thought I just asked these two questions. And then maybe if somebody can get back to me some time, that would be fine. But approximately, what percentage of Vicon do you own? 95% and the 5% of the outstanding shares that are still out there, I guess you'd call them minority very minority holders. What can be done to placate them and make it so you own 100% of Vicon? I think that's a question best to take offline. I'm not sure that that is necessarily in the cards. But, I think it's something we should, if you had further discussion about it would be -- Well because there were some Vicon holders that were asked to participate in the secondary never saw daylight since. Pbviously, I've got some sour grapes here but not going on. I understand. One question, last question is Cemtrex preferred stock in the year 2021, you as a part of a dividend, you settled your dividend obligation in unregistered shares of stock, is there a reason for that? Yeah, it was a little bit of a mixed up that has been sorted out now actually. So if you reach out to Paul after this call we can -- there's an opinion available -- through our transfer agent we can get those shares unrestricted. So that is -- Yes, I appreciate that. That is causing havoc in my account. So at this point, we get charged $50 a year to hold it now. I've done that already. They tell me I need to hire an attorney, get an opinion and pay hundreds and hundreds of dollars to get it done. Yeah. My questions were actually along the lines of the last two investors. But I'm really concerned that as of -- early as of fall of 2021, you're painting a rosy picture for your roadmap for the Smart Desk, and your AR/VR products, namely the StarForce Game. And then I think it was around February, you made another $500,000 investment in Masterpiece Studios, making that a $1 million investment right there. And then as early as May, you announced you're going to divest in all of these business units, and focus on Vicon and AIS. So I'm just a little perplexed, why your lack of foresight, when you're painting a rosy picture in the fall, and then less than six months later, you're going no, that isn't working. We got to, it just seems like a real lack of foresight, or was it the SEC action against you and your father in the company that was temporary in your decision? Or could you could you just expand on your reasoning to divest in those? So there are a couple of reasons for that. I think the primary driver for that was really that -- well, I won't say primary, and I appreciate the question, Steve. So pretty, the company, as an owner of seven brands, doing many different things did not get the value attributed for all of those seven things simultaneously. And I think my impression after speaking with many investors, was that they didn't understand the story. And it was very complicated to an associated value with the business and appreciate everything that we were doing. And as a result, this was reflected in the Cemtrex stock price. And in bringing on a new board, this was discussed in great length at the board that, bringing better focus to what we're doing as an organization would have a direct impact on creating shareholder value. So from 2021 into the end of 2022, the share price was declining substantially despite all of these exciting things that we were doing. So it wasn't sort of my decision alone, unilaterally just changing out a whim here, this was a combination of result of recognizing and seeing what was actually taking place with respect to the overall business, to share price, and so forth. The other thing I just really want to point out is, all of the things that we've liked about Smart Desk and VR, those are long term opportunities, and they will consume a lot of cash. And so if, in order to do them, the company needs to continually be raising capital, which means more dilution. And if the stock price is going down, it just makes that more and more difficult. So, I mean, we viewed where the stock price is, is a referendum from shareholders that, the direction that we're going in is not the right one, right. And we need to get back to focusing on where we can drive cash flow, and where we can drive growth in the nearest amount of time. And that meant focusing on things with the most upside in the nearest amount of time. And that would not result in more and more endless dilution for shareholders. Does that make sense? No, it does, I just want to make sure that this time, I mean, your last stock split in June 2019, it and eight for one, and then you refocus on Smart Desk, and you start calling your flagship product. And you just kept throwing out teasing everybody about some VR game that never happened. And then you got rid of Rob Cemtrex, and then you sold Griffin Filters to your father. And then since then you reported $50 million in losses, you're carrying $20 million in debt. And I'm just want to make sure that you do it right this time, because I meant the best since 2014, we're looking at them at a third reverse split. And can you say what that cost is going to be? How big it's going to be? So my initial investment is pennies on the dollar. So it's basically a tax write off, but I would like to see some accountability for how you've been running this company. I mean, and then now the SEC finally comes up where you cost the company, another $2.2 million. And I mean, is that factor in anywhere? Are you going to repay that or is that just a write-off for the company? I mean, does SEC describes it in their filing as fraudulent conduct? So, I mean, I would like you to comment on that a little bit. Yeah, I can't really comment on the SEC matter. I think everything that we had to say has been already disclosed on that matter. So, there's nothing really more for me to add. It's a situation where anytime you get into a legal battle with the SEC, you have to be mindful of running a legal bill, and all of the implications that that come with that as a distraction to running the core business for a company of our size. So that's really all I'm going to comment on that. But I think that based on the direction we're going right now, we've taken an enormous amount of steps to move this company in the right direction. We have a new board, all the new board members that came to our auditors. We moved and shed all of our money losing operations, we're focused on are two very well established businesses with product market fit that have real opportunity for growth and opportunities in this market. And we're very much focused on driving growth and making improvement in the overall business and helping that translate to create more value for shareholders. And I think everything that we've been doing now over the last 12 to 15 months, I think, has all been under that same guide and direction. And we're going to continue to do that to turn this around. And that's really what we're 100% focused on. There are no further questions at this time. I would like to now turn the call back over to Mr. Govil for his closing remarks. Thank you, operator. I would like to thank each of you for joining our earnings conference call today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please feel free to reach out to our IR firm and regroup we'd be more than happy to assist. Thank you.
EarningCall_1334	Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's Fourth Quarter 2022 Earnings Conference Call. Today's call is being recorded. The management discussion and slide presentation, plus the analyst question-and-answer session are being broadcast live over the Internet. [Operator Instructions]. At this time, for opening remarks and introductions, I'm turning the call over to Mr. Matt Welch, Vice President of Investor Relations for the Boeing Company. Mr. Welch, please go ahead. Thank you, and good morning. Welcome to Boeing's Fourth Quarter 2022 Earnings Call. I am Matt Welch, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer; and Brian West, Boeing's Executive Vice President and Chief Financial Officer. And as a reminder, you can follow today's broadcast and slide presentation at boeing.com. As always, detailed financial information is included in today's press release. Furthermore, projections, estimates and goals included in today's discussion involve risks including those described in our SEC filings and in the forward-looking statement disclaimer at the end of the web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of certain non-GAAP measures. Thanks, Matt. Good morning. Thanks to all of you for joining us this morning. Last time we were together was the 2nd of November, where we had a chance for the first time, at least in my 2-year, 10-years to talk about guidance and expectations for the years ahead. The good news is we had a very solid fourth quarter-over-quarter that, in my view, puts us in good stead to step forward and meet the guidance that we have delivered to all of you. Not only have we taken big steps to reduce the risks that, of course, we've faced over the last three years but importantly, we're well on our way to restoring the operational and financial strength that we got used to prior to our MAX moment. Challenges remain, we have a lot to do, but overall, we're feeling pretty good about the way we closed '22 and we're well positioned for '23 and beyond. Our key metric, as everybody knows, is free cash flow. Importantly, we were able to generate more than $3 billion in free cash flow in the fourth quarter driven by the progress in our performance and importantly, continued strong demand. And this helped us generate positive full year cash flow for the first time since 2018, a very important turnaround metric for us. Several key milestones and events that I'd like to highlight. Let's start with the BCA deliveries, which I know everyone tracks. '22 total was 480 with 69 deliveries in December. Notably, the 737 deliveries, we had 387 and exceeded our target of 375 and it included 31, 787s as we unwound inventory and delivered from the production line following the important return to delivery over the course of the summer. On the order front and on the market side, we continue to see very strong demand across the portfolio. More than 800 net orders on the year, driven by the 737 MAX and the 787, highlighted most recently by the very historic deal with UAL, United Airlines in December. In 2022, we sold 200-plus net wide bodies. That's the most since 2018. More broadly, the 737 MAX team has made tremendous progress. Fleet is performing exceptionally well. Production is stabilizing, demand is strong. We delivered 1,000-plus 737 MAXs in total now. And since our return to service, the fleet has surpassed 3 million flight hours. It's safe and it's the most reliable of the airplane fleets. Production, we've all gone from 0 to 31 a month and we're prioritizing stability, which we have not yet achieved, but we're on a steady course to do so. And orders, more than 1,500 gross orders to date. 737 MAX returning to service in China is another indication of this overall improvement in our business. This month, of course, we all know that that occurred. We have more airplanes on the tarmac in China to bring back into service just as we did here in the U.S. before we began any deliveries of any sort. And I'm not going to guess going forward when deliveries may or may not start, as everyone knows in our guidance, we have derisked for that possibility. 737 MAX 7 and 10, everybody knows, we got our extension approved and attached to legislation at the end of the year. That was a very important moment. I'll remind everyone that, that doesn't mean that these were certified. It simply means that the FAA and Boeing can follow the existing application and do that job and do it the right way. So, we feel very, very good about having derisked that moment as well. I will also want to point out, every argument we made on behalf of that extension related to safety. The premise for our chosen course and the application that we filed with safety first and it will always be safety first. Following defense. Our SLS launch. This was an enormous emotional upper for our company and for our team broadly. The Artemis 1 launch in November, which was powered by the SLS rocket was more than a little inspiring. And I'd like to congratulate the NASA team broadly for the succession of the Starliner mission. It's an incredible success, incredible, and it went beautifully and almost flawlessly every step of the way. So again, a significant accomplishment for space travel in general. But that rocket, again, just shows what Boeing is capable of when we put our minds to it, we follow our disciplines, we stay patient and ultimately prove to the world that there's more to do in space. Following Global Services, another terrific story, it is simply following the recovery of our industry in general and everywhere in the world. So, we had a great quarter pretty much across the board. We continue to grow. We continue to invest so that we are prepared to support our customers as they bring their airlines back to where they were before COVID. So, we'll reaffirm our guidance. And with this progress, which we feel good about both the financial and the operational outlook that we shared with you in November, and that includes the cash flow, the delivery ranges that we set for '23 as well as for the 2025 and 2026 time frame. Our realities are still the same, a difficult, difficult supply chain. And while average deliveries met our objectives, we continue to face a few too many stoppages in our lines simply so that we do not travel work as we run into supply chain shortfalls. So those stoppages, while they are coming down are not where they need to be as we think about stable rates going forward. I will not, in this discussion and or in Q&A, highlight any one supplier within the supply chain. Know that we're working with all of them. There's a significant amount of transparency in those discussions between them, between us and everybody is focused on the rate improvements that we have outlined to all of you. All things considered and reflecting on these last few years, we're feeling pretty good about where we stand heading into this year. Demand, very strong portfolio, very well positioned. We have faced plenty of tests in a number of orders all around the world with some of our toughest customers, and we know this portfolio is well positioned. We have a robust pipeline of development programs, including broadly across our defense business, and we're innovating new capabilities that prepare us for the next generation of products. One of the more significant achievements was recently announced by NASA in their sustainable flight demonstrator contract. This is a set of technologies that's intending to cut fuel emissions by up to 30%. Those are the kind of standards that, in our view, are required to ultimately launch a new commercial airplane wrapped in sustainability. We've de risked major aspects of the business, and our performance is improving. We're embedding lean across our operations to drive productivity ultimately to achieve the kinds of targets that we've set out. We've got work to do, but we're feeling really good about our progress. We're proud of our team, and we're confident in the future. Great. Thanks, Dave, and good morning, everyone. Let's go to the next page and cover the fourth quarter financial results. Revenue in the fourth quarter came in at $20 billion. That's up 35% year-over-year, driven by higher commercial volume. Core operating margin was negative 3.3%, and the core loss per share was $1.75. Both the margin and the loss per share were significantly better than prior year and impacted in the quarter by period expenses and abnormal costs. From a free cash flow perspective, our primary financial metric was positive $3.1 billion for the quarter, up significantly versus the prior year on higher deliveries and strong order activity and up sequentially versus the prior quarter and a bit better than our original estimate. I'll take a minute to go through each of the business units. Moving on to the next page with BCA. BCA revenue in the fourth quarter was $9.2 billion. That's up 94% year-over-year driven by higher 787, 737 deliveries, partially offset by 787 customer considerations. On the operating margins, they were negative 6.8% in the quarter, singly better than a year ago and in the quarter driven by abnormal costs and higher period expenses, including higher R&D spending. I'll take a minute to go through a few highlights of the major programs, starting with the 737. We had 110 deliveries in the fourth quarter and 387 for the full year, slightly ahead of our estimate. We ended the year with 250 MAX airplanes in inventory, 30 of which were -7 and -10 s, and we had 138 for customers in China. We do expect the monthly deliveries from inventory to slow slightly as fewer airplanes will be available, combined with some impact from the -7, -10 builds. We still expect most inventoried airplanes will be delivered by the end of 2024. On the 787, we had 22 deliveries in the fourth quarter and 31% for the full year. We ended the year with 100 airplanes in inventory, most of which will be delivered by the end of 2024. We booked $350 million of abnormal costs in the quarter, taking the total to date to $1.7 billion. We're increasing the abnormal accounting estimate by about $600 million to roughly $2.8 billion in total as we will be under the five per month production rate a bit longer than expected due to a supplier constraint that has temporarily slowed production. We still expect to hit five per month this year. Our total year delivery guidance of 70 to 80 is unchanged, and there is no change to the 2023 cash flows. 77 orders were strong in the quarter, and we've added 100 airplanes to the accounting quantity, which increases our GAAP program margin. On the 777X, the program time line is holding and efforts are ongoing. Abnormal costs were $112 million in the quarter, and there is no change to the $1.5 billion total estimate. On the customer settlement front, we continue to make good progress resolving contractual issues on the three big programs. The 737 MAX is near the finish line with the vast majority of customers settled. Of the original $9.3 billion of the set aside, there's only 3% left. On the 787, a year ago, we included a significant provision in the program, which has been very stable. There are far fewer customers in the MAX, and we've already reached agreement with several, all in line with our estimates. On the 777X, there are even fewer customers and discussions are ongoing. Keep in mind that the revenue and cash impact of these settlements will be over several years and all contemplated in both the near- and long-term financial guidance. Finally, on the orders front for BCA, we booked 376 orders in the quarter and have over 4,500 airplanes in backlog valued at $330 billion. Moving on to the next page, I'll cover BDS. BDS revenues in the fourth quarter were $6.2 billion, up 5% year-over-year. Operating margins were 1.8%. And if you include services, defense margins would be 200 basis points higher to 4%. There are two things impacting BDS margins in the quarter. First, we felt the operational impact of supply chain constraints in labor and stability. Second, we saw adverse timing of certain cost accrual true-ups, including higher pension costs that flow through the P&L in the quarter a big focus for the BDS leadership team to improve execution stability both in the factory and in the supply base. Some additional highlights, as Dave mentioned, we're very proud of Artemis' 1 successful mission to the moon last November, and we delivered 45 aircrafts in the quarter, including the first PA to New Zealand as well as three satellites, including the first 2 O3B M Power units. We received $7 billion in orders during the quarter. including a contract for 2 KC-46A tankers from Japan and an award for 12 Chinook helicopters from the Egyptian Air Force. The BDS backlog is at $54 billion. Moving on to the next page, Global Services. BGS had another strong quarter, primarily driven by our parts and distribution business. BGS revenue was $4.6 billion, up 6% year-over-year and operating margin was 13.9%. Commercial volume was very strong, partially offset by some softness in the government space. We received $5 billion in orders during the quarter, including an F-15 depot support order for the U.S. Air Force, and we opened up the Germany distribution center. The BGS backlog is $19 billion. Moving on to the full year, the next page. Full year financial results, revenue came in at $66.6 billion. That's 5% up year-over-year driven by higher commercial volume, offset by lower defense revenue. Core operating margin was negative 7% and the core loss per share was over $11 both a bit worse reflecting the impact of defense charges taken earlier in the year. And on free cash flow, we generated $2.3 billion positive free cash flow in the year up significantly from the prior year driven by higher deliveries and order activity. Moving on to the next page. I just want to put that $2.3 billion of free cash flow in perspective. As you can see from the chart on the left, we've made a lot of progress over the last three years. 2020 was a usage of $20 billion of cash, 2021 improved but was still a usage of $4 billion of cash, in 2022, $2.3 billion positive. As Dave mentioned, a lot of work that's been done and more work to do. The team is pretty proud to get back to positive territory. It's been the 737 return to service and the deliveries that are ramping. It's been the 787, it's been restarted. It's been the commercial market recovery that's been a benefit along the way with a very strong order book, reflecting our customers' confidence in our product lineup. And of course, our service business has held up incredibly well. It was a good exit to 2022, and we expect momentum to continue for 2023. Moving on to the next page, cash and debt. On the cash and marketable securities front, we ended the year with $17.2 billion, up $3 billion versus the third quarter and we had $12 billion of revolving credit facilities, all of which remain undrawn. On the debt side, we finished the year with $57 billion in debt. And as a reminder, our investment-grade credit rating continues to be a top priority. Our liquidity position is strong, and we're very comfortable satisfying near-term maturities, and the overall plan continues to be deliver airplanes, generate cash, pay down debt. Moving on to the next page, 2023. Our financial outlook for 2023 is unchanged from what we shared in November. Operating cash flow in total will be between $4.5 billion and $6.5 billion. We'll reinvest about $1.5 billion in CapEx for a net free cash flow of $3 billion to $5 billion in 2023. As we start the year, overall demand remains strong. Global pass-through traffic increased almost 70% in 2022, and we're at 75% of pre-pandemic levels globally. If you take out China, that number grows to over 90%. So, demand is pretty robust and reflective of our order book. Our priority continues to be execution stability. And while we still see some disruptions in the factory and the supply chain, we're hard at work with our partners to address these issues and ultimately focused on meeting our customer commitments. On the segment operating cash flow, same numbers as November, BDS, we expect to be a usage of between $0.5 billion and $1 billion of cash. BGS will generate between $2.5 billion and $3 billion, and BCA will generate between $2.5 million and $3.5 billion. On the commercial delivery front, 737 deliveries are unchanged and between 400 and 450 airplanes, 787 deliveries are unchanged between 70 and 80 airplanes, and we've added a couple of items on the expense front. We expect R&D for 2023 to come in at about $3.2 billion versus $2.9 billion in 2022. The vast majority of this increase will be in BCA. We also have unallocated eliminations in other which will be relatively in line with 2022 at $1.6 billion. One important thing to note is on the quarterly phasing, it will look very similar to last year as both deliveries and the financials will improve throughout the course of the year. On the first quarter specifically, EPS will be an improvement over 4Q 2022 but remain in a loss position. And cash will still be a usage in the first quarter, although an improvement from the first quarter of 2022. Overall, we're squarely focused on free cash flow. And it's so far so good as we enter 2023. Moving on to the last page, 2025, 2026 long-term guidance. Same page we showed you in November, $10 billion of free cash flow is still our objective. And it's important to note that margins and EPS are important, but they will be uneven over the next two years. As we unwind the BCA inventory, we put the BCA abnormal costs behind us, and we get the BDS margins back on track to its normal trajectory. We're still confident that this plan is underpinned by things we largely control. One, productivity. Two, the commercial rate ramp. Three, services growth and four, the transition of key defense programs from development to production. Overall, we're as confident today as we're back in November, and we feel good about the way 2023 is starting. Yes. I think, Brian, the numbers speak for themselves. We couldn't be more pleased with the way the year closed with very few surprises. We're heading into the year. We know the supply chain is going to be tough and constrained, but we also believe that we control that environment. It's our job to get ahead of it. So, thank you. We're happy to take some questions. Good morning, Dave and Brian. So congrats on the progress in billings in the fourth quarter and the free cash flow generation, and you reiterated, obviously, the long-term free cash flow target of $10 billion in the decade and the $3 billion to $5 billion in '23. So Brian, I guess, on '23, can you just maybe talk around confidence levels around that expected free cash flow target specifically at BCA and BDS, like kind of what are the key risk to call out, I assume it's supply chain around the guidance ranges? And then just, Dave, unrelated question, but can you comment broadly on the pickup in MAX flights in China as our checks show 220 revenue flights that are scheduled in February, and there's already 60 flights that have occurred this month. So clearly, there's MAX activity that's picking up in China? Thanks. Yes, Peter, why don't I start with China. Your numbers are within the range of my numbers, that is what's going on. I think as everybody knows, the opening up of China is going to be a major event in aviation. And the aviation industry was already stressed in terms of demand broadly in the world. So this is a serious bump for everybody, but most importantly, within China, they need the MAX to fly to satisfy those demands. So we were going to do there what we do here in the U.S. and focus on the airplanes they have on the Tarmac today, which is close to 100 airplanes, the readiness of each and every one of them, and ultimately, they're getting into full revenue service. So for six months, I think that's the course for all of us to stay focused on. And then we're going to take up the question of deliveries. And is there a moment in time where that begins to come back. I don't want to predict that date, Peter, but the odds go up every day. Our MAX gets back into service and the airplanes that we have on our tarmacs, hopefully, we get ready and deliver to our customers. So, I think there's a reason to be optimistic. We will not change guidance and or predict those outcomes until they actually occur. And Peter, on the cash flow, the 3% to 5%, again, we feel very confident with that range. The key underpinnings will be the deliveries that we talked about, the 37 at the low end assumes that we don't get much better through the course of 2023 than we did this past year, which is low 30s for the whole year. At the high end, it actually says we do low 30s first half and then low 40s in second half. So I think that all of that is within the mix. As you recall, we had a big December. One caution is that December was kind of over 50% on the MAXs, but October was not quite that high, and that's an indication that we're still not stable, it's still bumpy, but we still feel good about the overall trajectory in terms of being able to hit the $400 million to $450 million. And on the 87 similarly, I feel good about where we landed and then we were headed to hit the 70% to 80%, which underpins pretty much most of the cash flow for BCA, those two product lines. And then BDS, no change to what we thought things playing out pretty much as we expected. Thank you. Good morning. When you look at the MAX right now, the good news is you don't have a demand problem. And as you guide to 31 a month production in 2023, and our assumption is that if you had engine delivery is higher, you can move up from there, given that you're facilitized and staffed for 38. And if you look out at the 2025 or 2026 timeframe, when you're guiding to 50 a month, you were once at 57 a month. So that would not be new territory. So what I'm trying to get at is when you look at these two years, clearly, there are supplier issues in '23, but is it feasible that you could see that production rate go higher? And if so, what would you want to see? And I look at '23 and '25 differently since '25, I'm assuming we'd be out from under a lot of these supplier issues. Yes, Doug, again, I don't want to conjecture too much, but the two essential things to achieve that kind of objective. Number one, are we facilitized at that kind of rate? And the answer is, as we progress through this year, we'll be yes. Number two, and by far, the more challenging is, are we going to be stable, month-to-month, quarter-to-quarter, predictable where the supply chain and the buffers that we put in place with respect to that supply chain are adequate. That's a harder, tougher put. I think it's going to take us all year to ultimately demonstrate that stability can and will be achieved. And if I get to that, and I hope I do, we do, then I'll take on that conjecture. But I -- for right now, we are just squarely focused on that question of stability. As Brian said, our fourth quarter was good. We finished well. We didn't have a lot of surprises in December. But if you look at the month-to-month in the quarter, you can't be happy with that. I mean just a few too many stoppages along the way. As you know, our philosophy is we're not going to travel anything anymore. We're not going to compound issues that occur. And we're going to maintain that philosophy. So watch the month-to-month, that's going to tell you a lot about our willingness to consider the rates you're talking about. And is that true? And when you look out to the '25, '26 timeframe, obviously, there's a long way to go before we get there. How do you think about just flexibility given there may be a number of scenarios that could come out here in terms of production levels? Well, as I said, will we be facilitized to handle that kind of volume at that stage? Yes, we'll stay well ahead of that. And you'll see things that occur over this year that will demonstrate that. So I'm -- that's the part of it. I'm not so worried about. Again, it's stability questions. And then there will be a factor that we'll have to apply with respect to China. We're going to have to believe we're back and we're back for good. Good morning, everyone. I wanted to ask about supply chain. Can you -- I heard you, Dave, that you're not going to mention any specific supplier and I hear that in respect of that. But if you could provide any more detail on what's happening on the 787? Is there a new quality control escape? Or is it just pure timing delays, visibility into that getting better? Any incremental detail there would be really helpful. And then what's the latest from the engine OEMs? I sounded a little better yesterday, but what are you guys hearing? Let me start with the latter of the engine discussion. Again, what I'm really happy with is the transparency with which we are planning for rates with our engine suppliers and you know who they are and predominantly one. And I'm feeling good about that. And we have plans to do it. I don't think any of us are yet at the high confidence moment on that, but we will. And that progression will occur over the course of the year when we are at high confidence, then we're going to get to the kind of rates that we -- that are built into our guidance. We've got a low end and a higher end and we'll find out where we're going to fit on that depending on it. But the transparency is amazing, no one's out guessing each other. And because this market has been so strong, no one is second guessing the rates. Everybody knows these rates, if we get to them, we'll achieve them and then we can continue to move forward. So there's a lot of good, but until we see it month to month and until we get to that high confidence moment, we're going to hold our production rate steady. And Brian, you're up to date on the 87 discussion. Yes. So on the 87, so the fourth quarter was our first real full quarter in a while of being able to deliver airplanes, both still at a low rate and also from an inventory it feels pretty good. And as we go into 2023, remember, the scope of work is pretty clear what we have to do in terms of reworking the inventoried airplanes. But remember, our suppliers have a part of that responsibility in their scope. So, bringing the suppliers - the big suppliers along to make sure that they are conforming and they've got all the protocols in place to get that done on their end is something that we're working our way through. It's going to take us a little bit longer than originally expected, which is why we are going to shift out, going to five per month a bit later in the year but we still see 70 to 80 in the cards, and so far so good. What you'll likely see is some good liquidation of the inventory as we go through the year and then obviously ramp up the factory as we get deeper into the year. But net-net, the 70 to 80 we still feel good about. Thanks. Good morning. Just wanted to clarify a couple of things. One, Brian, I think you mentioned $600 million higher abnormal cost on the 787. Is that cash? Is that absorbed now in the '23 unchanged free cash flow guidance? And then also for defense, if you can just touch on your margin profitability expectation and rough magnitude for 2023? Thanks. Sure. So, in terms of the first question, the 787 abnormal, there is no cash impact. Part of that is just because part of that is just fixed cost absorption, but there's no change in the cash outlook. It's not significant in that regard. So, we're holding on the defense margins. So, in the quarter, as I mentioned, we had some bump around from the supply chain constraints and some of the labor, not just in the fourth quarter, as well as some of the timing of accruals that I mentioned. As we move our way into 2023, we clearly expect those margins to get better. It's not going to be all the way back to what normal might look like, but it's going to be improved sequentially. And we feel pretty good about the lineup in terms of the product portfolio. And as we remind you is that the products are performing incredibly well with the customers. So, we feel good about the underlying basis. BDS margins will get better, and we're positioned for that as we head into the year. Good morning, everyone. Dave, you mentioned the milestone order from United despite the macroeconomic uncertainty in the near and medium term. So, when you look at COVID-19 now approaching the rearview mirror, China reopening, I mean the demand for air travel has been pretty strong. Can you talk about what your customers are saying about potential new aircraft orders? Should we anticipate more airlines making landmark orders like United? And could we see BCA at a positive book-to-bill for the year? Yes. Again, I always hesitate to forecast specific orders. I will say that we're involved in more big orders now than we've been in a long time. I think last year was a big indicator for folks that big orders are out there. I think the United One is, in fact, indicative. But Delta earlier, there's just -- there are some big interests in aviation, I'd say, the majority now outside the U.S. as opposed to inside the U.S. And we're considering some big -- some really big things. And we're in the midst of all of those. So yes, I have a -- I'm pretty optimistic. I'm not going to forecast numbers because that's never healthy. But I do think over the next couple of quarters, you'll see some big decisions made to both manufacturers, and you'll see some new entrants into the aviation world that aim to make a real difference, and again, largely in the global markets. Thanks, Dave. If I could do a follow-up, with that environment that you described, it sounds pretty robust. Can you describe the pricing environment for these orders and how they compared to pre-COVID levels? Yes. Well, when you're in the midst of any one deal, it feels ruthless. But if you really do balance it out, and I guess I credit both manufacturers, it's been pretty disciplined through this whole COVID moment. And so, you see very few reaches and sort of crazy things that are out of the norm. And now we're in sort of that supply chain constrained world where people simply want to get positions so that they know they have airplanes when the time comes. Recessions don't seem to get in the way because remember, we're competing for deliveries out four and five years from now. So they're not really computing recession into that. So anyway, again, I feel good, and I also -- I'm going to guess that -- because it's always a guess that pricing will stay disciplined. Thanks very much. Good morning. And really, I guess, just a little bit of a quick clarification this morning rather than a question. Just making sure to understand the difference between production and deliveries this year on 737. When you say the high end of the guidance is assuming low 30s and moving to high 40s you're talking deliveries there. And then with regard to production, when you say that you are kind of hoping to get to a place where you see some stability this year, that's with regard to production in the factory. And so that would make it very -- make it seem unlikely that the production rate is going higher than 31% this year. Is that a fair way to think about things regardless of where that delivery shake out? You're right on characterizing the delivery framework. And I would say that as we move through the course of the year and we'll have fewer inventoried airplanes, that will put a little bit more opportunity on units come out of the factory. So production rate at the right moment could get higher. We'll wait and see. We're just going to stick to the range for now. Right, right. And as far as that stability that you're looking for, how much at this point would you say needs to come from improvement in the supply chain versus any improvement that's necessary in the internal productivity? Yes. Look, I don't want to suggest that we don't have our own opportunities internally. We do, mostly driving cycle out and creating buffers in the right positions, et cetera, all things that you would a cash flow company that really practices lean. So we will make improvements there. But the lion's share of the rate discussions is going to be built around the supply chain and the capacity, literally the capacity and capability of that supply chain to meet the new rates. And as I said, very transparent discussions. It's almost entirely built around labor availability, trained labor ability as we move through the course of the year. Hiring is not a constraint anymore. People are able to hire the people they need. It's all about the training and ultimately getting them getting them ready to do the sophisticated work that we demand. Yes. Thank you very much. Could you update us on your efforts to certify the MAX 7 and 10 as well as the 777X? And as part of that, the agreement to allow you to push out the certification date of the 7 and the 10, I think you agreed to backfit some software changes on the existing MAX fleet. Could you tell us how much that's likely to cost? When did you take the accounting impact? Thanks. I'll take the last part of that to get that off the table. The provision to retrofit the fleet was taken in the fourth quarter. That's behind us. It was small. And there's a reason why it's small. But I just -- I hope everybody knows and understands how important it was to get those extensions in place in the legislation. The argument was purely a safety argument. Fortunately, we got a lot of support on both sides of the aisle, and we got it done. So this gives us all the flexibility we need to get these airplanes certified under the existing applications and we feel good about that. We think first flights for the 7 will be this year and probably for the 10 next year. So we like where that stands. Everybody's calm, the FAA, nobody ever put pencils down. So we're just going to progress. And like always, we're not going to tell you exact dates as to when we expect those certifications. So all feels good. And then yes, the legislation that was approved included some improvements that we put into our cockpit on the DASH10 that everybody agrees are useful and helpful to pilots. And those largely software adjustments will be incorporated into the entire MAX fleet over several years. As Brian said, it's not a large number, but we provided for it, and we're confident we can meet those objectives provided the CERT and those improvements are accomplished here in the next year or two. No, I'm sorry. Everything is on course for the 777X. And I think the only issue that has created some concern over the last couple of years has been our agreement with the ASO and some of the design principles that we think we're making terrific progress with ASO. And I think we will have a coordinated regulatory approach to the set, and so we're staying on our targets. Thanks for taking the question. Good morning. Could you touch on the large pickup in 787 deferred the balance in the quarter, what that means going forward for the cash outlook on the 87? And also, Brian, if you could just touch on the big pickup that we saw in the BCA unit loss, is that just related to the higher 787 deliveries in the quarter? Thanks. Yes. On the deferred production balance, that's basically the 787 cost base extension that I mentioned has an impact on program margins, and that's amplified by all the finished goods inventory that's sitting there on the under airplanes. So that's driving the increase. And your last question, basically, it's impacted by customer mix and the impact of customer concessions and considerations. Okay. And a quick follow-up on the -- I think you said 138 China airplanes in inventory. Are you still looking to remarket those? Yes, but only partially. And as of now, when you see the sort of the results of that effort, you can assume that will be on pause with respect to that until we get -- until we understand completely where China wants to go. So the answer is yes, and you'll see progress but you'll also see a pause so that we can discern what China wants to do. And hopefully, that's good news. Good morning, everybody. Brian, just a quick clarification question and then one over on the services business. And a clarification, you mentioned that margins at BDS tick up in '23, but don't get back to the long-term margin rates that you expect are on a normalized basis. Just curious what the milestones are going to be for us to be watching out for on getting back to those normalized rates? And then on the services business. Maybe just a little bit more color on expectations for '23 with regard to your expectations on growth rate and margins? Thanks. Yes, sure. On the BDS. So as you mentioned, long term, high single digits, is what we've talked about. But in the near term, the same kind of supply chain constraints and labor availability that we've talked about in the BCA world, impact the BDS role as well. So when the current environment is less constrained and stabilizes, that will be a benefit. We expect it to happen partly in 2023, but the key thing to watch is just the stability of the supply chain is going to be a big, big deal that we're keeping our eye on. And that's going to be important as margins will tend to accelerate. The time and the pace remains to be seen, but it will get better in 2023. On the services side, so we had a big year for the services business. It's going to have to -- and part of that was based on the commercial recovery, and we enjoyed the benefit of that in 2022. But BGS, in terms of their revenue, they finished the quarter at a pretty good spot pretty clean basis. And if you just kind of think about that as how you would extrapolate into 2023 by quarter gives you a pretty good view of where we see that growth coming for. So it will grow, margin will be just fine right within that mid-teen levels that we've enjoyed. So we feel pretty good about the prospects of the service business, very stable, continue to grow, no surprises. Good morning, everyone. Just circling back on thinking about product development and so on and so forth. Like you mentioned at the Investor Day that Boeing wouldn't be going forward with a middle of the market product probably until sometime in the 2030s. How should we think about that in light of the recent win with NASA on the -- that you trust based -- the trust brace transonic win program and what that means? Could that be some early technology on a new platform? Or what are you looking for to happen in the technology world to feel confident about doing something new? Yes. So Ron, I'm going to highlight three things that I think are going to contribute to a truly differentiated new product. One of them is the trust wing, so I'll refer to that now. As you know, that is technology that's been worked on for the better part of a decade alongside of NASA. And the program that we've embarked on here is how do you commercialize it? How do we put it through the right set of tests, et cetera, so that, in fact, can be incorporated into new airplanes? So there's real intent there to be able to do it. I'm not sure it is going to be as good and/or applicable for middle of the market and/or a wide-body, but it will definitely have a role to play someday in the narrow-body world. So that's number one. Number two, you've heard us talk about the digital thread being able to create the digital model, not just for the airplane, but for the factory and for the servicing. But we are really cutting our teeth on a couple of defense programs that, frankly, we're learning a lot every day, all day, so that whatever we do on that next commercial airplane will incorporate the digital threat. And it will be way more mature than what it's been so far in our discrete defense programs. So anyway, I feel very good about that. And then the last major element has been the one that usually carried the day, but in this case, I think will simply contribute to a better day and that's propulsion technologies, bigger bypass ratios, and you probably know a trusting setup, trusting setup will create that opportunity to a far greater extent than today's wing simply because of the distance from the ground. So there are lots of reasons why I think these technologies can and will be proven and ultimately adapted. And when you're considering a 50-year kind of program for any new airplane, you have to think about this. And in our view, the objective has to be somewhere between 25% and 30% better than it is today. And that's what we're focused on. And I think we have the time to do it and the technologies to play out. Got it. And if I can, just a quick detailed follow-on. What are you thinking about headcount productions as we go -- headcount projections as we go into '23? I mean how has it been in the labor market kind of across the supply chain, which you hear is everybody needs more people. And how has it been for Boeing? And what are you doing to try to cross that bridge? Yes. Ron, I want to be clear. We have had no trouble hiring people, none. We're sort of at or a little above where we were in the days you guys all remember because we've got so many of these rework apparatus going on, and there are a lot of people required to do it. So our job is to actually just take what we have, incorporate all the learning from the folks who are doing the rework that will displace whatever retirements and or demographic issues that we have over the next couple of years. We have a pretty good setup on labor and a pretty good mechanism ironically with these return to service aircraft and the joint verification, a pretty good mechanism to train mechanics, train our people to do the job. And on the engineering front, man, we've had a real good run hiring is over 10,000. Our job is to make sure that we just train them right, get them involved early and get on the life. So we are not facing a big demand. Our supply chain probably still is working the hiring a bit, but it's nowhere near as important as their -- the training of the people that they're bringing in. I've seen this thing really ease up in the last year, like really ease up. Tier 1s, I doubt any of them are really fighting for talent anymore. And underneath that, I think the supply chains are filling out. It's all about now that training and development. Dave, Brian and Matt, good morning. So you're not going to be surprised, I'd like to ask you about defense. I wanted to know, first, could you broadly discuss your defense portfolio, the opportunity set and what we should be focusing on? Just by example, I noticed that AIA you were discussing a C-17 C-130 recap. Second to that, could you also discuss the F-15EX program in terms of expectations for deliveries, production rates? And also if margins on the program might be comparable to what we saw when you were selling older models under FMS? Thanks. Yes. So let me take this one. Let me address it at the portfolio level. In light of the difficulties we've had with the fixed-price development contracts, which I consider more of a contracting exposure as opposed to a portfolio exposure, I feel really good about the portfolio broadly, and there are reasons why I feel that way. We're fully invested, as you know, autonomy. I believe autonomy and teaming are going to be one of the real drivers with respect to airplane development, Air Force, Navy requirements going forward. And we're already invested and we're making real progress with both of those members of the fighting forces. And I'm sure you know the programs that we talk about. And there are others we can't talk about, which we're as excited, if not more excited about. So the long portfolio and the development that we've sustained over all these years, I feel really good about. We have the T7 trainer. It's way more important than just the market for trainers itself. Ultimately, we think it's -- it can be used as a derivative to do other things for the Air Force, and I'm sure you know what that's about. But maybe even more importantly, it's an absolute poster child for our digital thread. And it's teaching our customers how to think about the use of the digital thread, and it's teaching us how to perfect all the production technologies that we need to take full advantage of the digital trend. So if I look at our -- just our sort of our wing fleets, I feel very good about where we are. And as you point out, the F-15 -- the new derivatives boy, they are really important to our customers. We feel great about the future. It feels like a new platform, frankly, from my perspective, I'm not going to hand out the production rates at this stage, but we're feeling pretty good about the international demand as well as our U.S. demand. And you know, in light of the only other choices, this gets, frankly, more valuable over time until the really new classified work ultimately was completed and brought to the market. Anyway, I feel quite good about the portfolio. It's development where we stand in it. And I'm sorry, some of the contracting methods that we used in the early going here, but anyway, we are where we are. And I can't get off the page without talking about the tanker, which we all still believe very, very strongly and, again, difficult contracting moment for us. On the other hand, futility to the Air Force has been fantastic. The Vision system our commitment to it and then technologies beyond that allow for even autonomous refueling. These are things we're fully invested in, and we believe in the growth of the industry and the need with our customer. So anyway, there are other things, and you probably know a lot of that, but there's a reason to feel good, frankly, on the development front with respect to Boeing's defense business. Good morning, guys. And thank you. I know it's been asked a thousand different ways, but I don't know if I know the answer yet. So maybe, Dave, can you give us an idea of how -- where you are on the MAX and 787 from a cash per aircraft perspective? Or how far that is below prior peak? And is there a cadence of that profitability, free cash flow as we think about production rates increasing, supply chain impacts and just pricing as you get aircraft out of inventory. Let me take a shot at the -- I'll talk cash margins, and let's start with the 787. So near term, they're pressured but positive, and we got to work through all the things that we've been describing. In long term, they're going to be higher than they were back in 2018, driven by productivity, pricing in the Dash 10 model. So the 87 feels like it's on the verge of doing some real special stuff over the long term. On the 37, near-term pressure because all the supply chain things we talked about, some customer mix things that we're going to battle through impossibly some impact to remarketing. And then long term, it's going to be more or less in line with what it was before and the benefit being the productivity and the rate ramp. So that's kind of how we think about those two programs over time from a cash perspective. Really -- Sheila, you really have to get through calendar year '24. And then a lot of the cloud, a lot of the things that we've been wrestling with, the things that impact the -- our margins and the lumpiness along the way, that all begins to clear as we get to the tail end of '24. And as we think about '25 and on, I think that clarity will be apparent to everybody.
EarningCall_1335	Good day, and thank you for standing by. Welcome to NVE conference call on third quarter results. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session [Operator Instructions]. Good afternoon, and welcome to our conference call for the quarter ended December 31, 2022. This call is being webcast live and being recorded. A replay will be available through our website, nve.com. I'm joined by our CFO, Joe Schmitz. After my opening comments, Joe will present a financial review then I'll cover marketing, design wins, new products, and then we'll open the call to questions. We issued our press release with quarterly results and filed our quarterly report on Form 10-Q in the past hour, following the close of market. Links to the press release and 10-Q are available through the SEC's website, our website and our Twitter time line. Comments we may make that relate to future plans, events, financial results or performance are forward-looking statements that are subject to certain risks and uncertainties, including, among others, such factors as uncertainties related to the economic environments in the industries we serve. Risks and uncertainties related to future sales and revenue, uncertainties related to future stock repurchases and dividend payments, our dependence on critical suppliers and risks related to supply chain disruptions as well as the factors listed from time to time in our SEC filings, including our annual report on Form 10-K for the fiscal year ended March 31, 2022, as updated in our just-filed quarterly report on Form 10-Q. Actual results could differ materially from the information provided, and we undertake no obligation to update forward-looking statements we may make. We're pleased to report a strong quarter. Net income for the quarter increased 22% to $0.88 per diluted share, driven by a 22% increase in product sales. Thanks, Dan. Third quarter total revenue increased 18% to $7.4 million from $6.29 million for the prior year quarter. This was our second consecutive quarter with large year-over-year revenue increases. The increase was due to a 22% increase in product sales, partially offset by a 46% decrease in our contract R&D revenue. The large increase in product sales was primarily due to increased purchasing by existing customers and new customers. We acquired new customers from traditional semiconductor companies with our superior products and shorter lead times. Sales increased in most of our markets and product lines. Sales were especially strong in industrial markets, which more than offset some weakness in our medical device markets. Improvements in our supply chain allowed increased product shipments, although there continue to be risks related to those shortages. Paradoxically, supply chain disruptions may have favorably affected product sales for the quarter and nine months. Since we believe the disruptions may have been less severe for us than some of our competitors. We may be less susceptible to supply chain disruptions because we have our own wafer fabrication and product test operations. On the other hand, we believe the supply chain disruptions have had an unfavorable impact on our cost of sales. Improvement in the supply chain may have been due to reduced demand in some semiconductor industry sectors such as memories, PC and consumer electronics. Demand for our primary sectors of mixed signal integrated circuits appear to have been less affected by the industry downturn, although there are risks and demand could change. The decrease in contract R&D revenue was due primarily to the timing of completion of certain projects. Gross profit as a percentage of revenue increased to 80% for the third quarter of fiscal 2023 from 78% for the third quarter of fiscal '22, primarily due to increased prices and economies of scale due to increased revenue. Total expenses increased 31% to $1.1 million for the third quarter of fiscal 2023 compared to the quarter -- third quarter of fiscal '22, due to a 17% increase in R&D expense and a 62% increase in SG&A. The increases in expenses were primarily due to increased employee compensation expense and increased staffing. While spending was higher in total dollars as a percentage of sales, spending was only 1% higher versus the prior year quarter. Interest income for the third quarter of fiscal '23 increased 43% due to an increase in our available for sale securities and an increase in the effective interest rate on those investments. Net income for the quarter increased 22% to $4.23 million or $0.88 per diluted share compared to $3.47 million or $0.72 per share for the prior year quarter. The increase was driven by increased revenue and increased interest income, partially offset by increased expenses. Net income increased from 55% to 57% of revenue. For the first nine months of fiscal 2023, total revenue increased 26% to $24.5 million from $20.3 million for the first nine months of the prior year. The increase was due to a 27% increase in product sales, partially offset by a 13% decrease in contract research and development revenue. Net income increased 35% to $14.5 million or $2.99 per diluted share from $10.7 million or $2.21 per share for the first nine months of fiscal 2022. Turning to cash flow. Our strong balance sheet and strong margins allowed us to buy equipment to build the capacity we needed and pay premiums, if necessary, for the raw materials we needed. Cash flow from operations for the first nine months of the year was $14.8 million. During the first nine months of the year, we increased inventories $1.37 million to help mitigate shortages. Despite the inventory increase, our cash flow from operating activities actually improved by $288,000. Purchases of fixed assets were $908,000 in the first nine months of the fiscal year, and all but $24,500 were in the most recent quarter. These were primarily capital expenditures for additional production equipment that we plan to deploy this quarter to increase our capacity. The $14.8 million cash flow from operations more than covered the $14.5 million for the three dividends declared so far this year. We have now paid more than $155 million in dividends since we started paying dividends in 2015. Today, we announced that our Board declared another quarterly dividend of $1 per share payable February 28 to shareholders of record as of January 30. That will bring our total dividends to more than $33 per share since 2015. Thanks, Joe. I'll cover marketing, design wins and product development. The marketing highlight of the past quarter was promoting our products at the electronica trade show in cooperation with our distributors. Electronica is a major industry event and it was live for the first time in four years. Highlighting recent design wins, we're pleased with the interest in products for power conversion and alternative energy. In the past quarter, we got two isolator design wins, a design win in home energy storage for green energy and another design win in electric vehicle charging stations. The expected revenues from both those design wins are modest in the near term, but highlight our value proposition and our prospects for the future. Farther from home, we've mentioned before that we have parts on the Europa Clipper mission to a moon of Jupiter. The launch is targeted for October 2024 and the mission is to investigate whether Europa has conditions suitable for life. Our parts are also being evaluated for the Mars sample return mission, and this month, we completed rigorous testing and shipped a number of parts to NASA. That mission is to return soil samples from Mars. The mission is scheduled to launch in 2028 and return to earth in 2033. These NASA projects are not large revenue, but they will validate the exceptional reliability of our technology. Turning to product development. In the past quarter, we expanded tow product lines, our line of Tunneling Magnetoresistance magnetic sensors and our family of the world's smallest DC-to-DC converters. The new magnetic sensor is an ultra-high sensitivity magnetometer, our most sensitive sensor ever. High sensitivity allows more precise motion, speed and position control in robotics and mechatronics. There are two demonstration videos on our website and YouTube channel. DC-to-DC converters transmit power without a direct electrical connection. Our smallest parts are less than a quarter by 8th of an inch. DC-to-DC converters are critical components in a number of industrial and automotive applications, including interfaces to next-generation power switches such as silicon carbide power transistors. These transistors are an emerging market with the potential to improve the efficiency of power control and energy storage. There is a demonstration showing the simplicity of using our DC-to-DC converters, spintronic couplers and silicon carbide transistors for power control in the video section of our website as well as our social media sites. We're proud to supply products to some of the world's most demanding customers, including Abbott's Pacesetter subsidiary. Abbott is a leading supplier of implantable medical devices. We recently executed an extension to our supplier partnering agreement with Abbott, which Joe negotiated on our behalf. The extension runs through the end of 2023 and includes price increases that will help offset our cost increases. The latest amendment was filed on a current report on Form 8-K/A and incorporated by reference in our just-filed 10-Q. It's also available via our website or the SEC's website. So, a few questions here. Just wanted to ask. So 22% product revenue growth during a semiconductor downturn is a nice number. There was obviously a sequential decline after you had some pull-ins, I think, last quarter in the PUF business. But can you just sort of parse out that growth rate in terms of what you think might have been catch-up on prior deliveries versus kind of purely organic growth? Any color you can give around that and any differentiation between new customer sales and legacy customer sales? Thanks for the question. This is Joe. We typically compare to prior year quarters. That said, there are a couple of things, and you mentioned one of them. Our anti-tamper product sales for the defense sector and isolator sales were exceptionally strong during the September quarter, and they've returned to more normal levels in this quarter, particularly the anti-tamper product. That's a chunky business and tied to the customers' development cycle, so we can't really control that. Medical devices were rather weak in the December quarter. We do expect that, that business will recover in the March quarter, though. Okay, that's great. Thank you. And just curious, so you've been through this period that kind of a once-in-a-lifetime opportunity to get in front of new customers and get some new design wins. What did you guys learn overall about marketing from this experience? This is Dan. So we learned the value of some of the features that we have and in particular, some of our customers like different features, and that will inform our future product development. But we have picked up, as you alluded to, we picked up a number of new customers. Some of them came for the shorter lead times, but we expect them to stay for the product performance and we expect to be an excellent supplier. So, we saw a great opportunity to open some doors that hadn't been opened to us before as a smaller company. So we saw it, as you say, it was a great opportunity, and we're determined to make the most of it. And then are there any kind of key performance indicators on design wins or others that you guys kind of share with the Board to give some future indication of future growth? So, we tend to look at our order flow, and Joe has commented on that. We look at new customers. We look at design wins. I was able to share two of those. So are we getting design wins in the markets that we've targeted, even though they may not represent large near-term revenues, we see them as important indicators for the future. So those are things that we tend to look at internally. We share them in calls like this wherever we can. And then we also look at things like our key strategic customers, and we've commented on Abbott in this call, and we were happy to be able to report a renewal and we expect them to continue as a customer for the foreseeable future. Thanks. And then just on the growth rate, 20% product growth plus in this quarter. Do you think that kind of growth rate is a sustainable number here going forward? Or how should we think about modeling product growth? Our goal is to grow. And so that's what our plans are. We invest in the future. As Joe mentioned, we invested over $900,000 in fixed assets to increase our production for the year. We continue to invest in people, as Joe mentioned in his comments about our expenses, which are investments we see as investments in the future. So, it's hard to predict the growth rate. As you know, we're in an industry that has -- that's cyclical and has its ups and downs. But our goal is -- our goal over the long term is certainly to be a growth company. We believe we have products that are in demand. We have excellent technology. We have great people, and we're picking up some really top-notch customers in key markets that we talked about in the prepared remarks. So that is certainly our goal is to be a growth company. Thank you for that. And then I wanted to just ask about the -- I think you had signaled the investment in test equipment. I believe it was and talked about that being kind of a bottleneck and that packaging supply was another area with some headwinds. Can you just give us an update now? So is that equipment in place? And do you expect that's going to do something significant for the -- your ability to grow now? So, the equipment is physically here, which is why it showed up in the fixed asset expenses and in our cash flow statement. Our team is working on deploying the equipment and it's partially deployed. We still have some work to do, but it's looking very good. Our suppliers and our engineering team have given it a top priority, and they've really done an outstanding job on deploying some very complicated state-of-the-art equipment with artificial intelligence and other features that will help us be more efficient, help our employees be more efficient and continue our trends being a very productive company with high revenue per employee. So I think we said our goal would be to fully deploy that equipment this quarter. That's an aggressive goal. That's the March quarter. But we believe it's achievable, and so that will help our capacity in the relative near term. So as Joe alluded to in some of his remarks, we -- one of our advantages over other semiconductor companies, traditional semiconductor companies is that we have our own front-end and back-end operations. So that equipment that you referred to as the back-end operation or part of packaging and test. So we don't package ourselves, but we do test ourselves. So that gives us a big advantage over other companies, removes that bottleneck. And those investments, this equipment has a long lead time. So these are investments that we made some time ago, committed to them some time ago. So they're just coming to fruition now. So the timing, I think we see as fortuitous. We see ourselves with opportunities to grow and having the capital equipment in place will help enable that growth. And so, Dan, just from a revenue perspective, is that the impact of this test equipment from the fact that you can show potential customers a domestic supply chain capability kind of thing down to testing? Or is it that you actually have product that your backlog on because you had a bottleneck of testing? Or is it both? It's both. I might put a little color on the second point, which is that we quote lead times. So we quote lead times that allow for us to test the parts. So having more equipment allows us to quote shorter lead times. So we think that, that's important to many customers. To your first point, with supply shortages and the supply chain challenges that have been well publicized throughout the semiconductor industry, many companies are looking for domestic suppliers and onshore supply. So there's been a lot written about that. And of course, the priorities that have been set domestically by the CHIPS Act and other actions that encourage domestic supply of semiconductors. So, we're proud to be a part of that. And some of these investments may benefit from those incentives. And we do have customers that ask us about security of supply and being able to tell them that our back-end operations and much of our front-end operations are here in the United States. That is important to some of our customers, and that's a competitive advantage. Great. Thank you for that clarification. And so I'm going to jump off and let somebody ask some questions. So I may come back with some more Hey, Dan, this is [indiscernible]. I'm sitting here with Andrew from Shores Edge. Congratulations on a great quarter, and congratulations on being included in some really important space missions. That sounds very exciting. I had a question about the receivables and the inventory and kind of the dichotomy here. So your receivables are really kind of very much on the low end, and can you provide some color around that, that your sales have been quite high these last two quarters, but the receivables are going down just seems unusual. Have you changed anything as far as customer payment requirements or how you bill and ship or requiring prepayment? Or is there something else going on there? This is Joe Schmitz. I'll address the question, and thank you for noticing that. Our accounting team has taken a lot of pride in that result this performance or this quarter. I would say there's really two pieces to that. Typically -- well, first of all, I should back up. We -- our terms have not changed nor has the mix of customers change to the point where the days sales outstanding would significantly change. What you're seeing there is the result of a lot of good work to diligently pursue accounts that are trending towards past due. And then you'll also -- and then also, this quarter, if you remember -- if you recall from last quarter, where we had a high level of anti-tamper, big project-related sales, I mean, we got collection on a lot of those outstanding receivables this quarter. So that is also a favorable outcome. But I just want to compliment my team on the work that they did to help us keep in front of this. There's just a lot of good work that happened there. In most other applications, I would say I would see inventory as a drain on working capital. In this particular environment, at this particular time, that helps us reduce our backlog, serve our customers faster. And I see that as a healthy thing for our business at this point in time. And I would not say that it's not coincidental that we try to find a way to fund our working capital without having to dip into the bank account, so to speak. So they are related in that context. So as I understand you, the inventory increase is really about making sure you don't get caught with supply chain shortages and getting -- and just having adequate parts on hand to be able to provide quick turnaround time. So maybe part shortages are a big deal, right? So like if you don't have something, you might not be able to get it for some number of months is what I'm thinking about? Yes, yes. We've -- to Dan's point or to what we said earlier, I guess it was my comment, I mean in some cases, we've paid a little bit of a premium to get the inventory on hand so we can meet our customer delivery schedules. We've also taken larger quantities than we would necessarily take because, in some cases, the supply chain has been spotty. So I think at this point, as I said earlier, at this point of time in the company, that increase in inventory is going to help us in the future to deliver to customer schedules. Right, right. That makes sense. Okay. One other question. Can you provide any color on the kind of the order flow within the quarter, would you say it was relatively even? Or did it kind of slow down towards the end of the quarter or been increasing? A lot of the other companies, there's some slowdown happening in certain sectors, so I'm just kind of curious if there's any commentary you can provide on the sort of the trajectory of the order flow in general over the course of the quarter? Yes. I would say we still have good order flow. I think if anything, we are seeing customers, in some cases, reseasonalizing their demand based on their schedule. But in terms of the flow itself, we've not seen a decrease. Okay. Excellent quarter. Congratulations on being able to earned the dividend for the three quarters and hope for to market news for you next quarter. Alright. Obviously, you had nice year-over-year comparisons, and you're doing well, and we appreciate as a shareholder, I appreciate that. But I'd like to focus in on product sales, last quarter, were $10.5 million. This quarter, $7.2 million. That's down over $3 million. And you explained that somewhat of defense -- apparently a big defense order and some other cyclical issues. But that would imply you were not capacity constrained in the third quarter, yet you are adding capacity, which looks good and is promising. Can we expect that the sales will jump up to $10 million again pretty quickly based on these factors? By the way, I'm quoting here, you also said that we have a number of top -- new top-notch customers. So I'm assuming they're part of the reason for the capacity additions. So please explain that a little more, the capacity and the sales that can be expected and when? Well, this is Joe. I'll try and answer some of that -- some of those questions. You were correct that there is a chunkiness in our government-related business that we alluded to in our comments. We're still serving that market. It's just returning to a more of a normal state. So I would say that to jump back up to a $10 million quarter would be not something that we would say that we can readily see in the future, although that's certainly our goal. The capacity discussion is around reducing our backlog, improving our service levels and being positioned to attract new business when those opportunities present themselves. So -- we have -- so in the short term, we will be reducing our product backlog with these new investments, but we're also laying the foundation for, hopefully, good things to come in the future. Well, as I said, our goal is to grow, and that's why we're adding the capacity. And we have several different segments that we serve. So the test capacity is in the business that the industrial and medical business, which is our core business. And then we have the lumpy anti-tamper business that Joe alluded to. So I think the cycles that you're looking at are not indicating a slowdown in business as much as some of the lumpiness that our business has. And we're structured as you probably know, that we're pretty flexible. We have a lot of equipment. We work on making sure that we have adequate capacity across the board so that we can handle increases in business that we avoid bottlenecks and then we invest well in advance of -- to prevent bottlenecks. So that's why we -- the equipment that we have now are investments that we committed to a year ago or more. So we're very optimistic about the future, and we're investing in making sure that we can be a growth company. Okay. Thank you. And then just one other aspect. You renewed the Abbott contract. Is there anything you can tell us -- does that imply that they're just going to continue ordering as they have in the past? Or is there a lot of potential increase in business in that renewal? So yes, we try not to speak for Abbott. But we certainly see that we have a strong benefit proposition in providing parts for their medical devices. And these are medical devices where the long-term trends are favorable, sometimes in the short term, as Joe alluded to, like in the past quarter, revenues were down a bit. But the long-term prospects are very good for those. The demographics are -- we're all getting older. We're going to need pacemakers and other medical devices. The -- we're starting to see a recovery in health care from the slowdown for discretionary health care through the pandemic. So as you probably saw, there was an article in our local paper, the Star Tribune about the increase in health care services that we're seeing here in Minnesota and throughout the country. So we certainly see the trends as very positive, but it's a business that has a fair amount of inventory in the chain, as you would expect, for a life support medical device and it can be somewhat cyclical in the near term and sometimes factors beyond our control impact the business in the near term. So things like new model introductions, competitive introductions, FDA approvals, treatment practice for heart failure and other conditions. But in the long term, we see this as a very good business where we have a strong benefit proposition and where there's good growth potential. So what is public is that they list the subsidiary, it's in the contract. So it's a matter of public record. So the subsidiary that buys these parts of Pacesetter, which is the CRM division, the cardiac rhythm management division of Abbott. So from that one can certainly infer that, that's where these devices are used. But from our standpoint, it's a contract or an agreement to supply a certain type of sensor. And so that's -- and the rest of the specifics we had to redact from the agreement for confidentiality concerns. I wanted to ask about linearity in the quarter. Looking at the DSO and the days inventory, it looks like that -- what was linearity like especially at the end of the quarter? I'm not sure I understand the question. If you're asking, is there a direct correlation to the drop-off in revenue to the reduction in receivables to some sort of a drop off of revenue, I'm not sure you can make that case because a lot of our receivable activity was on, as I mentioned, was on large outstanding project-related work that we're getting collection on. So I would not say that as due to some sort of a decrease in revenue as much as just a lot of good hard work on our end. I don't know if that's answering your question, but I'm trying to interpret your... Well, I don't doubt that there was a lot of hard work on your end, but your DSOs are 25 days. And if your terms are 30 days, then you're less than a cycle if everyone is paid. So it would appear that maybe you didn't have as many sales in the last month of the quarter? Well, I think we had said in our prepared comments, we did have some softness in our medical device sales. Some of that was in December. Not all of our customers are on 30 days. Some of our customers actually have shorter terms. It's a very good number, 25, it's a record as far as I can tell. But inventory days are also a record, excluding the first COVID quarter. And a lot of that is in work in process raw materials, which I view is a good thing. But would you anticipate that the raw materials would start to work its way lower from here? Yes. I mean I think that -- I mean, that's obviously what we intend to do. I think that would be a reasonable assumption. I mean that product is going to be -- that raw material and work in process is going to be used to fill existing orders. So I would also say that you'll see a -- you saw a little bit of an increase in our finished goods inventory as well, and that was a buildup for some of our future demand that we have in the first quarter of this year. So it wasn't all finished raw materials and work in process. No. Well, that's correct. I mean it was all three categories grew, but it does seem like with supply chain constraints using raw materials would come down, the work-in-process increase. I believe one of the gentleman earlier asked about if we could continue to see the 20% growth. But just looking year-over-year, both finished goods and work in process, they're up 20 in -- almost, what, 30% or 40%. So it would seem that your inventory, at least is positioned for the company to continue to grow. Is that correct that's at a pretty rapid rate? We're not going to get into the business of projecting future sales, but that has been one of the things we've talked about on these calls over the past year is having the inventory ready to meet customer demand. So yes, that's our intent. Just a couple of quick follow-ups. So Dan, I think you have said in the past that you guys might actually be the dominant player in sensors used in the new generation of hearing aids. And those OTC hearing aid regulations came out, I guess, in October after a lot of delays, et cetera. I know it's very early in the development of this market. What are your thoughts about what kind of traction you're seeing from customers? Is this a needle-moving event next year or the year after? Or how are you thinking about this at this point? Well, we certainly see it as an excellent opportunity in the long term and the chance to help serve a large underserved market. There are statistics that the FDA has cited that only about 20% of those who could use a hearing aid seek hearing aids, presumably because many are discouraged by the prices and the dispensing inconvenience. We have seen that there are large retailers now offering OTC hearing aids, which on our last call in October, we couldn't quite say that. We are starting to see signs of it. So there have been a number of announcements by brick-and-mortar and online suppliers that they're going to be offering OTC hearing aids. So we do see it as an excellent opportunity to grow a market. And for us, we look at -- we've developed products that are geared for that market. So these products are probably going to be rechargeable or more skewed towards rechargeable as opposed to primary batteries that are -- that tend to dominate the legacy hearing aid business. So our goal is to serve both markets, the OTC hearing aid market, the traditional hearing aid market. And also we see a broader hearables market as more and more companies are developing consumer wearables and hearables. So we've developed rechargeable compatible sensor devices, and those parts have received some very positive feedback in that industry. So we do see that as an excellent market. Great. Thank you. And then just a couple of others. You guys did some development work on a Spin-Torque diode. I think it was like a gigabaud kinds of data rate and with implications that there was government interest, of course, they funded the research, I think, and then potentially some commercial interest at some point. Whatever happened with that? So yes, you've got an excellent memory, Jeff. So those were some devices, some research that we did in 2018, we completed a contract with the Army that successfully demonstrated the feasibility of a Spin-Torque microwave diode spectrograph. So that has military usage and -- but we also invested in the technology because it could increase speed and also plays into the anti-tamper or physical unclonable function market. And I think one of the other areas that, in fact, I think you might have pointed out is that there's some fascinating research going on in probabilistic computers. And we've demonstrated stochastic magnetic tunnel junctions which are similar to the technology that was used that we developed for those Spin-Torque diodes. And that's been proposed for the -- as a component, a key component for probabilistic computers. So it's long term, but we do see that research as having applicability in other areas in addition to the focus at the time, which was five years ago, which was primarily for defense applications. Got you. Okay. That's great. And then just one other. You guys have looked at the analytical equipment market as a potential end market at some points in the past. And I know you were doing something looking at exosome detection. I was just wondering if anything had progressed there. Yes. So we continue to see exosomes as a fascinating area. So exosomes are biological components that can be used to diagnose disease such as cancer and to make less invasive cancer tests. So we do have biosensor technology for higher sensitivity electronic rather than the optical test that can be used to detect exosomes. So we are looking at possible partnerships to use our technology. We don't envision ourselves getting into the medical diagnostic market. We don't have the distribution or the expertise on the equipment side. But we do see the possibility there of providing sensor systems and advanced biosensor systems to support those. So that's an area of long-term research and exploration for us. Hi, Dan, hi, Joe. Excellent quarter. My question was on the emerging hearing aid market, and that has been answered. So I'm okay. Thank you. I'm showing no further questions in the queue. I'd now like to turn the call back over to Dan for closing remarks. Well, thank you for all the questions. We were pleased to report a 22% increases in product sales and earnings for the quarter. We look forward to speaking with you again at our fiscal year-end call tentatively in early May. Thank you again.
EarningCall_1336	Thank you for standing by, and welcome to the Bridgeline Digital, Inc. Fourth Quarter 2022 Earnings 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] As a reminder, today's conference is being recorded. I will now turn the conference to your host, Mr. Tom Windhausen, CFO. Sir, you may begin. Thank you very much. Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, and I am Bridgeline's Chief Financial Officer. I am pleased to welcome you to our fiscal 2022 fourth quarter conference call. On the call this afternoon is Ari Kahn, Bridgeline's President and CEO, who will begin with a discussion of our business highlights. I will then update you on our financial results for the quarter and we'll conclude by taking questions. Before we begin, I'd like to remind listeners that our conference call that during this conference call, comments that we make regarding Bridgeline that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time and we expressly disclaim and assume no obligation to inform you if they do. The results we report today will not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors, such as the impact of public health measures could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by Bridgeline Digital with the Securities and Exchange Commission. Also, please note that on the call this afternoon, we will discuss some non-GAAP financial measures when commenting on the company's financial performance. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release. You can obtain a copy of our earnings release by visiting our website. Thank you, Tom. Good afternoon, everyone. This year, Bridgeline delivered 27% top-line revenue growth, a $3.6 million increase in revenue to end of year with $16.8 million in total revenue. Most of our revenue growth was in subscription and license, which increased by 36% to $3.6 million to $13.6 million. Subscription and license revenue was over 80% of total revenue for the fourth quarter and the year. In the fourth quarter, we booked $1 million in new license ARR from 28 sales with $340,000 in ARR annual recurring revenue. Our cross-sell strategy remains strong and drove 13 license sales to existing customers on top of 15 newly won customers. Existing Bridgeline customers, including HP, 7-Eleven and Sage Publishing expanded their commitment to Bridgeline this quarter with further investments in Bridgeline software and services. We ended fiscal 2022 with over $2 million in net income and $196,000 in adjusted EBITDA, driven primarily by our subscription and license revenue, which comprised over 80% of our total revenue with gross margins of 75%. We ended our fiscal year with $2.9 million in cash that being after a prepayment of $1.7 million in the fourth quarter relating to a negotiated $600,000 discount to the earn-out working capital adjustment on the HawkSearch acquisition in consideration for just a six month early payment. Our cash and projected revenue positions us well to continue our investments in sales and marketing and innovation without additional capital for operations. Our 28 sales in our fourth quarter included a top distributor who committed to more than $0.25 million multi-year license for Bridgeline's TruePresence in HawkSearch products to power their site search and recommendation. HawkSearch's AI site search technology was identified to help grow the distributor's massive online catalog with 700 sites, 5 million products and 15 million monthly queries. A major Asia Pacific retailer with 150 brands and 2,600 locations, selected Bridgeline to power ten of its brands including New Balance, Reebok, Converse, Skechers and Footlocker. A leading plumber supplier has committed to a more than $60,000 license for Bridgeline's HawkSearch to power personalized recommendations and data quality enhancement capabilities. This supplier will use HawkSearch to power site search for their 28 distributor locations, 15 appliance stores and distribution for their catalog of over 200,000 products. A garden and pet supply market leader has committed to a more than $80,000 license for Bridgelineâs HawkSearch to power personalized recommendations and data quality enhancement capabilities. This supplier will use HawkSearch to power search functionality for two leading websites with millions of search inquiries each month. In addition to our new customer wins, we also had outstanding customer subscription renewals with more than 100 renewing customers, including Caterpillar, AstraZeneca, Hammacher Schlemmer and Coca-Cola Euro Pacific Partners. As a percentage of revenue, customer subscription renewals were 94%. Partners are an important part of our growth, especially for driving HawkSearch sales. Bridgeline announced in October a new partnership with Niteco, the world's largest Optimizely agency, which services 500 customers in 30 countries including customers such as Panasonic, Heineken, and Electrolux. This partnership is focused on selling and implementing HawkSearch, which is Optimizelyâs first non-native site search integrated with both their B2B and their B2C platforms. In addition, Bridgeline partnered with Thanx Media, who is a systems integrator that serves Fortune 500 customers such asPayPal, Target, and Ulta Beauty. Thanx Media is certified in both the Optimizely and BigCommerce platforms and it has extensive experience with HawkSearch. This partnership helps Bridgeline sell HawkSearch licenses within the first month after signing. Further, BigCommerce has expanded the availability of Bridgeline's HawkSearch connector to their multi- store front users, including leading brands such as Ted Baker, Bandy Group and Aerofit B2B. This strategy has continually led to a strong growth rate and more online revenue for Bridgeline's customers. In our fourth quarter, we released the rapid UI framework for HawkSearch. This release speeds the time to market for our customers and reduces their total cost of ownership. It also accelerates Bridgeline's sales cycle, which in turn improves our win ratio. This solution is built on a Java scripts framework called Handlebars that embeds an entire search experience directly into the website, including the search park, intelligent auto complete and the full search results page. Sales and demo experiences are improved because our sales team can demo HawkSearch within the prospectsâ website rather than with the generic demosite. We plan to extend the framework to include additional HawkSearch components, such as recommendations and landing pages. Bridgeline expanded its executive team with John Murcott joining the company as EVP of Products and Strategy. Mr. Murcott brings more than 20 years of experience in the marketing technology sector to Bridgeline. He was the founding member of my first MarTech company, FatWire, which he helped build and do an industry leader in content management before it was acquired by Oracle in 2011. All of these coming together leaves us really excited for fiscal 2023. Thanks, Ari. I am excited to share with you this afternoon our positive financial results for the fourth quarter of fiscal 2022, which ended September 30, 2022. Our total revenue for the quarter ended September 30, 2022 was $4.2 million, an increase of 3%, as compared to $4.1 million in the prior year period. Looking at each component of revenue, our subscription and license revenue, which is comprised of SaaS licenses, maintenance hosting revenue and perpetual license revenue increased 3% for the quarter ended September 30, 2022 to $3.4 million. As a percentage of total revenue, our subscription license revenue was 82% of total revenue for the quarter ended September 30, 2022. Our services revenue was $0.8 million for the quarter ended September 30, 2022, up slightly from the $0.8 million in the prior year fourth quarter. As a percent of total revenue, services revenue accounted for 18% of total revenue for the quarter ended September 2022. Our cost of revenue decreased 6% or $0.1 million to $1.2 million for the quarter, compared to $1.3 million in the prior year period. As a result, our gross profit increased 7% or $0.2 million to $3 million for the quarter ended September 30, 2022, as compared to $2.8 million for the prior year period. Overall, our gross margin profit â our gross profit margin increased to 71% for the quarter ended September, compared to 68% in the prior year period. Our subscription license gross margins were 76% for the quarter ended September 2022, as compared to 75% in the prior year period, and our services gross margins were 47% for the quarter ended September 2022, compared to 37% in the same period in 2021. Our operating expenses slightly decreased to $3.4 million for the quarter ended September 2022, from $3.4 million in the prior year period. Within operating expenses we increased our spending in sales and marketing supporting our current and future growth. Our net loss was $0.5 million for the quarter ended September 30, 2022, as compared to a net loss of $1.4 million in the prior year period. Moving to EBITDA, as Ari mentioned, our adjusted EBITDA for the quarter ended September 2022 was $0.1 million, compared to $0.2 million for the prior year period. Moving to our balance sheet, at September 30, we had $2.9 million of cash and $1.2 million of accounts receivable and at September 30, 2022, our total assets were $27.5 million and our total liabilities were $7.2 million. Bridgeline looks forward to continued success in fiscal 2023 and beyond as we continue our focus on revenue growth, product innovation, expanding customer success and delivering shareholder value. Thank you for joining us on the call today and at this time, we'd like to open the call to questions and answers. Moderator? Hi. Great year. Looking forward to the upcoming year. You talked about in, I guess, in your prepared remarks, you mentioned TruePresence. What kind of traction are you seeing from there? And what kind of opportunities do you see over the next couple of years for that product? Well, TruPresence is a â is our brand that focuses specifically on the franchise market. This is a very tight market. We've got great traction in it with customers like UPS, AlphaGraphics, Sport Clips and we are â we've taken every single one of our products and created a TruPresence version of it. So now from a entry point in terms of becoming a TruePresence customer for Bridgeline, we can help you increase your traffic with WooRank. We can increase your conversion with our HawkSearch TruPresence product. We can increase sure average order value with our recommendations product and so forth. So we think this is going to continue to be a big part of our growth and each TruPresence deal, they tend to be significantly larger than other deals and they grow as our customers grow. So for instance, we won an electrical distributor with 700 locations and that's essentially like selling 700 licenses all at once and as that distributor grows and opens new locations, the license fee grows proportionately and we don't have to do any work for that. So it's a very important part of our model. And okay, and in terms of â and you talked a little about this in the press release, but how important is it â your customer base, growing your customer base and then selling back into your customer base more offerings? Right. Well, for SaaS software companies like us, the customersâ acquisition cost is a major impediment to growth. A lot of times for a SaaS company, it can take 15 months just to break even on your customer acquisition cost. However, if you've got multiple products and you can sell a product into an existing customer, those customer acquisition costs are substantially lower. For instance, there is basically no advertisement budget needed to sell to your existing customer base. Your commissions to your existing sales reps can be much lower. You don't need to have high level executive sales reps to sell to an existing customer, because you're not dancing with a new partner, so to speak. It's less sophisticated. So, what our strategy is to grow more quickly on a per sales and marketing dollar basis by - in addition to winning new customers, selling to existing customers and that's where important new products that we're innovating and releasing internally, as well as looking for acquisitions and acquiring new products come into play. And we are going to continue to focus on that throughout 2023, both on the acquisition and the innovation side. HawkSearch was a game changer for Bridgeline in terms of its go-to-market strategy. Before HawkSearch, we really didn't have any partners that were making a significant impact on our growth. Today, thanks to the partners that came with HawkSearch. We have partners attached to more than 80% of our new deals. We classify our partners into two groups. We have what we call ISV partners, Independent Software Vendor partners. These are generally platform companies like Optimizely, BigCommerce, Sitefinity, salesforce.com and we also have a second class of partners which are agencies, Agencies our systems integrators that are implementing MarTech solutions. And our partnerships with the ISVs generally are around making our software out of the box, compatible with each of those ISVs so that their customers can just turn us on with a flip of the switch and that is huge because each of these ISVs have typically thousands of existing customers that once we establish a partnership and are compatible with their software can be sold our software in the same low-cost customer acquisition cost model that we do in terms of selling into our own customers. So you're going to continue to see press releases from Bridgeline about partnerships. You're going to see us at all of our ISV partnersâ conferences that we can attend. And I expect that that 80% ration of new customer wins being attached to a partner we did remain. And just one last one about acquisitions, when you are looking for an acquisition where â is it â are you getting customer feedback on maybe products or offerings that they would like to see Bridgeline has within the portfolio or you are looking for just potential larger customer base that you could sell into? Yes, yes. We've had instances where we've had customers explicitly say, âHey, here is a particular product that we love. We know that you guys are acquisitive, you should consider buying that company. We haven't pulled the trigger on any of those. That's happened, however. We look at both our target acquisition software and its customer base. We want to be able to cross-sell into that customer base that's hugely valuable and of course, the software is important and it's got to be able to sell into our customer base, as well as win new customers. We are different than other companies that you see in the MarTech space that are doing roll-ups of app. Those companies are often purely financially modeled and they are buying an app and they are stripping costs, and that's the end of their strategy. Bridgeline is different because we're buying apps and we're buying customer base. We're putting our dashboard on top of those apps so that the new customer base will immediately be able to see the strength of their website with regard to traffic conversion and average order value and received intelligent recommendations as to the other products that Bridgeline offers that can help them grow their own revenue. So we have a much more strategic growth strategy from an inorganic perspective and not just looking at reducing costs, but instead looking at accelerating growth and we are doing that through our cross-sells with our dashboard and really leveraging that customer base. I do have one more quick one. Sales and marketing expense, about $1.4 million a quarter, you're pretty happy with that level or do you think it might increase just a touch? Well, we're going to increase our sales and marketing spend a little bit next year. $1.4 million is approximately where we're at. We're going to accelerate that. We feel that we have to be careful about our bottom-line in 2023. We think that the â although we've not seen a slowdown in terms of our own sales yet, we're still in, we think, perilous waters from a macroeconomic perspective. But investing in sales and marketing when you've got a product that has all the right features and people are really calling for it, you don't want time to slip by. So we're moving fast on the sales front. Thank you. One moment please. Our next question comes from the line of Leo Carpio of Joseph Gunnar. Your line is open. The first question â hi, the first question is regarding the economy. What's the economy's impact to your business pipeline right now? Is it serving as headwind, tailwind and is it focused on any particular product or industry you're seeing right now? And I'll ask the second question as a follow-up. Okay. Okay, great. The market that we're in is so large relative to us and even in a horrible economy is still growing in the double-digits by any real measurement that we're fortunate that we've not felt any headwinds yet. Things could change and we're cognizant of that and we're careful about it but as it stands right now, we think that the MarTech industry overall is growing. And one thing that we still see is challenges in terms of hiring and we are focused very much on our own R&D teams on making sure that we treat them great and that they have room to innovate because even with these headlines of layoffs at Facebook and so forth, it's a great job market for these guys. And that's a little bit of a challenge for us, but we have a really excellent team and they're coming out with new products left and right and our sales team is winning deals and in fact, the bell rang earlier today. I'm looking forward to our next press release to tell everybody of our latest conquest. Thanks. And then the follow-up question is regarding M&A. You talked about in the past as being you're having your criteria of companies that you want to acquire, but market conditions are they choppy for acquisitions? So just give us like an update in terms of how â what you may be interested in and how it has a related market condition in terms of are you still just weighing the sidelines or more of wait till 2023 more stability? We have â we are still very interested in acquisitions. We think that, that's an important part of fiscal 2023 for us. The private markets held pretty strong relative to the public markets last year in terms of the targets that we spoke to, who started last year looking for as a multiple of revenue, three or four or five times revenue and ended the year still at two or three times revenue and we think that there is opportunity for them to be a little bit cheaper next year. So we're focused on apps that help companies grow revenue that are active in our most critical ISV partners and that means Optimizely, Sitefinity, BigCommerce, Salesforce, CloudCraze. And we are looking for companies that are between $3 million and $6 million in revenue that we can pick up for two times revenue or less with the right payment terms and earn-out, typically an earn-out directly proportional to retained revenue over the first two years and initial payment of 50% with 50% being the earn-out. Those are the terms that we think makes sense. Itâs a little bit of a challenge for us, because our market cap to revenue is not at two times. So we have to really structure the deals right to make sure that itâs accretive which is one of the reasons that weâve not done a deal in the last couple of quarters. But we are still seeing companies come to us every month and I feel like we are going to find the right targets in 2023. Thank you. [Operator Instructions] I am showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks. Great. Well, thank you, everybody, for joining us today. We really appreciate all of the support from you, our shareholders as well as from our customers and our partners. We are excited about our business, the ongoing growth prospects for 2023 and we look forward to speaking to you again on our first quarter of FY '23 conference call in February.
EarningCall_1337	Good morning. Are we good to go? Good morning. My name is Lisa Gill and I'm the healthcare services analyst with JPMorgan. It is with great pleasure this morning that we have with us Teladoc Health. Presenting for Teladoc Health, will be CEO, Jason Gorevic. And then for the Q&A session, CFO, Mala Murthy will join me here at the table. Thanks, Lisa, and thanks, everybody for joining us this morning. It's so nice to be back in sunny San Francisco. Really happy to be back in person after a bit of a hiatus. But as I think about the last three years, an awful lot has changed. When we were here three years ago, we were pre-pandemic. Telehealth was something that some people knew about, people had engaged. But I would say, legitimately, people didn't really appreciate the scope and the scale of what telehealth could do. Virtual care now is expected to deliver on the full scope of consumers' healthcare needs. And at Teladoc Health, our mission is to empower all people everywhere to live their healthiest lives by transforming the healthcare experience. We do that through a comprehensive, broad and deep telehealth platform. Our virtual care platform now serves over 80 million people and that platform enabled over 21 million visits just last year in 2022. Because of the fact that we deliver over a 0.5 billion digital health interactions through 30,000 providers on our platform and deliver unmatched consumer experience with over a 60 Net Promoter Score. Teladoc Health is the number one brand in virtual care. It's not just the number one brand among consumers. It is also among health plans, hospitals and health systems and both domestically and internationally. Through the last three years, a lot has changed. What hasn't changed is the financial strength of Teladoc Health. You may have seen this morning, we issued an 8 K that narrowed our guidance to the high end of our previous range with that narrowed our guidance to the high end of our previous range with quarterly revenue -- new revised guidance, but between $633 million and $640 million. Meaning a full year revenue number of $2.403 billion to $2.41 billion. We also reiterated our previously announced adjusted EBITDA guidance of 88 million to $98 million for the quarter and $240 million to $250 million for the year. That constitutes a 400 basis point improvement in margins over the last three years. So as we've gone through this transformation of what consumers expect and what Teladoc Health delivers, we've expanded our margin, created greater scale and consistently now delivered positive operating cash flows with a strong balance sheet of over $900 million on the balance sheet. This is in stark contrast and I get asked a lot about the competitive landscape. This is in stark contrast to many of the small competitors out there whether they are public or private who lack the scale to be able to take advantage of this financial discipline and deliver strong financial results consistently. When I think about the last selling season, you may have heard me say at the end of the third quarter, that the third quarter was a catch up quarter when we talk about bookings. Bookings in the first half of the year had been slower due to a lot of the macro environmental things that were going on and the fact that more and more we're selling a more complex bundle of services that legitimately elongates the sales cycle. The third quarter was a strong quarter and the fourth quarter came in just about exactly with our -- in line with our expectations. So we closed the year with bookings for the full year '22, very similar to bookings for the full year '21. I want to highlight some of the ways that we grow and do it in the context of some of these new deals that we've put on the books over the course of â22. In some cases like with Centene, we're expanding the populations we serve with new products like our partnership around Primary360 and especially with respect to their exchange based virtual first health plans. So we piloted that program with them in â22 and we've significantly expanded it going into â23. With some clients like some of our Blue Cross Blue Shield partners, we're going in with the entire suite of our chronic care solutions, delivering on the promise of whole person virtual care and doing it in a way that meaningfully moves the needle on the full cardiometabolic suite of services that we offer which delivers better clinical outcomes and lower costs for our partners and for their clients and members. We do that both with health plans as well as with large employers. Southwest has been a client for almost a decade now, and they started with General Medical Services. And today, we've expanded to our entire suite of cardiometabolic chronic care solutions. That's a great example of our land and expand and how we continue to deliver more value for our clients. I'll talk in a little bit about a new product that we're bringing to market for hospitals and health systems. Inpatient connected care, where we light up our hospital room and virtualize it so that a hospital can take better advantage of a scarce professional workforce. Because we all know that the hospitals are under pressure for the availability and the cost of clinical resources. And we're delivering care and technology assets both domestically as well as internationally. And Charite is a good example of that in Germany. When we think about and I hear a lot about whole person care, there are a lot of companies out there talking about whole person care. When we think about whole person care, we really mean that you have to have the entire full credit answer. From a consumer's perspective, you have to have everything from primary care to acute care, everything from chronic condition management to specialty care, and you have to take care of both the mental and physical health of a consumer because they are intricately intertwined. And the green bubbles here represent the capabilities that are necessary to do that at scale. If you can't engage a consumer population, you can't drive meaningful behavior change, and therefore, you can't drive better outcomes. If you don't have an integrated experience, then it's a disjointed set of capabilities and clinical programs, that's not whole person care. And so I can confidently say that we're the only one who has the set of capabilities, the integrated consumer experience and does it at significant scale. And when we look at what are the proof points of that, the proof points are in what are our clients buying from us and what are our consumers using. When I look back at 2017, fewer than 10% of our population had access to more than one of our products. Today, over 50% of the population we serve. Remember, that's 80 million people. Over 50% of them have access to more than one of our products. And when I look at chronic care programs, just in 2019, we're at 3% of people using more than one of our chronic condition management programs. And today, we're at about 28% of people engaging with more than one of our chronic care management programs. In a couple of slides, I'll show you what the impact of that is on clinical outcomes. Now this has been a journey, right? I've been in this role for 13 years. And over the course of that time, our vision hasn't changed. The mission to deliver on whole person care hasn't changed. What has changed is the scope of our offering. And this has been a methodical march to be able to expand the scope of our capabilities, the clinical programs that we deliver, and therefore, the value and impact we have for the clients who buy from us, the partners who work with us and the consumers that we serve. And you can see in '23 and beyond, we're continuing this march to be able to deliver more value and make a bigger impact on health outcomes and on cost of care. We want to partner with health plans and with employers to deliver better care. We also recognize that the health systems can't be ignored in this effort. And so we engage both on the health system and delivery side of the market as well as on the planned sponsor side such that we can bring a fully integrated set of capabilities that works with the entire health care system, not against it. I want to highlight just three of these innovations that we've brought to market over the last -- probably nine months now. First, just last week, we announced the delivery of our unified one app, a single app that gives the consumer access to all of our clinical programs and all of their clinical data in a unified experience under one Teladoc Health brand and that brings together both mental and physical care, both chronic and acute and episodic as well as a longitudinal relationship where one exists with either a specialist for chronic care management or with a primary care physician under our Primary360 program. We've been talking about whole person care for a couple of years now. This is where it all comes to life in a single experience for the consumer. And most importantly, it delivers better clinical outcomes because it's all together in one experience. Last year, we launched Chronic Care Complete. Chronic Care Complete takes the legacy Livongo capabilities, devices, which sit on top of robust data science and deliver digital interactions with the consumer to change behavior and improve clinical outcomes. And we put that together with the Teladoc Health Virtual Care delivered by physicians. And so now when someone has an exacerbation or needs medications titrated, there's a physician there working with all of our digital assets to deliver a better experience, but most importantly, better clinical care that drives better outcomes. And lastly, I mentioned our inpatient connected care. This enables a health system to take their nursing workforce and make them virtually enabled into every bed and every room in a hospital. Where hospitals are under pressure and health systems are under pressure for a more expensive and scarce workforce. This enables them to get better productivity and better leverage that workforce. The investments that we're making, and we've been talking about the fact that over the last couple of years, they've been heavy investment years. But those investments are necessary to be able to deliver whole person care in a comprehensive manner and do it at scale. And so on the bottom, the bottom row here, you see all the capabilities. Technical capabilities, logistical capabilities, quality of care delivery capabilities that enable the delivery of the care at scale in a comprehensive manner. These things may not seem sexy, but they are absolutely required. They are a pre-requisite to be able to deliver whole person virtual care at scale. And so on the top, the top row is what the consumer sees. It's what the consumer experience is. So when we talk about a stepped care model, it's the ability for the consumer to experience digital interactions when that's appropriate and sufficient and interact with a highly trained, highly specialized physician when that's really necessary. It enables us to leverage technology and also human resources to be able to make the biggest impact and deliver the most efficient and most appropriate care to the consumer. Last year, we announced last mile integration, where we now are able to have pharmaceuticals delivered directly to the consumer's home. Of course, if you have a virtual care environment, you don't want to then have to have someone make a trip to the pharmacy, right? So we want to make sure we can deliver that to the home. We also have enabled now in-home lab testing for similar reasons, right? All of this should come to the consumer just like every part of everything else we do in our lives. And this year, we're partnering with health plans to close gaps in care, using data better to be able to close gaps in care. And you'll see some of those results when I talk about our Primary360 and some of the clinical performance around our Primary360 product. And all of this is in service of delivering more value. If the features are only features, but they only really are meaningful if they move the needle on clinical outcomes, cost of care and consumer experience. I mentioned the expansion of our multiproduct sales and our multiproduct utilization. So let's go one level deeper into what that means in terms of clinical outcomes. When someone has more than one and engages with more than one of our chronic condition management programs, they're checking their blood glucose more than twice as much, right? So we know that when we engage someone with multiple programs, they're going to be a more engaged and more active member of changing their behavior. They can only measure that if they're actually checking their devices. And so we know that, that's a mechanism to be able to get people to live healthier lives and take a more active role for themselves. This is in stark contrast to single point solutions that are in the market. Similarly, the more programs someone has access to, the more engaged they are and the more they impact their hemoglobin A1C levels. And you can see how that makes a bigger impact, every additional program that they engage with. And lastly, mental health is a critical component of helping someone manage their chronic conditions. So you can see that they achieved almost a 2% increase in weight loss when they engage with our mental health programs and a significantly larger impact on their A1C levels when they engage with our mental health programs. Delivering great health care isn't just about the physical, it has to incorporate the mental health components of it. And so I said I'd go deeper. When we started talking a little more than a year ago about Primary360, we said it was going to take us a little bit of time and a little bit of experience and some scale to be able to really demonstrate what the results are. So here are some of those results. We're getting greater engagement from those who have been disenfranchised by the health care system. 65% of the people who engage with Primary360 say that they didn't have a primary care physician. Once you engage people, you can then engage with them on better prevention. So 20% of the women who came to us were in need of a pap smear. They were overdue for their preventive screening and we were able to get them in and get that scheduled. And 31% were due for a colonoscopy. And we were able to get that scheduled and get them the preventive care that they need. Preventive care leads to earlier detection. 37% of the people who are being treated for diabetes under our Primary360 product are newly diagnosed diabetics. And 25% of those dealing with hypertension are newly diagnosed by Primary360. These are people who would have gone undetected. Remember, they didn't have a primary care physician and would have led to exacerbations, more cost to the system and worse outcomes. And the clinical impact is significant. 56% of those presenting with high blood pressure have lowered their blood pressure. And more than 50% have used more than one Teladoc Health Service. The benefit of multipronged holistic whole person care is real. And the consumers feel it with over 70 Net Promoter Score from our Primary360 program. Finally, I want to turn to our BetterHelp direct-to-consumer mental health business. There's been a lot of questions and a lot of talk about BetterHelp. And I think it's because it's been so successful, right? We just announced as part of our 8-K this morning that BetterHelp did over $1 billion in revenue in 2022. That's staggering growth. Over 1 million people received therapy over the course of '22 from BetterHelp. With nearly 50 million interactions with therapists and over 25,000 therapists on the platform. This is incredible scale and incredible impact. More than 50% of people in this country who are in need of mental health don't get it. And BetterHelp is a better modality, it's more accessible and it breaks down barriers to getting care that people need. And it's a business that benefits from scale. More data, more innovation leads to better matching between a therapist and a consumer, which we know drives better outcomes and stickier relationships. And better engagement leads to better retention and there's a brand halo to this. BetterHelp is by far the leading consumer mental health brand in virtual therapy. But beyond all of that, it gets to what's really the impact. 88% -- we get all kinds of questions about, well, what's the conversion rate? How good is this? How efficient is this business? 88% of members who have a first therapy session stick with it after that first therapy session. Two-thirds of patients report clinically significant improvement in their anxiety or depression using the GAD-7 or the PHQ-9 as the measure, which are industry standard measurement tools for depression and anxiety, and we deliver a great consumer experience with NPS over 70. These are the hallmarks of a business that has grown, but has also leveraged data and scale and experience and innovation to continue to improve. So as I wrap up, and I think I'm 1.5 minute over time, and we go into Q&A. I guess I just want to reiterate that there are a lot of virtual care companies out there who are narrower, who lack scale, who are nipping at the edges with single point solutions, but there's really only one virtual care leader that's operating at scale and delivering on the promise of whole person virtual care. Thank you for all the comments, Jason. So let's start with, obviously, you talked about where we're going to end 2022 and really shift the focus now to beyond '22. And I know you're not giving guidance for '23 at this point. We do have to wait for the fourth quarter for that. But how do we think about the underlying business and what's really changed post-pandemic? And how do we think about your business model going forward? Yeah. Thanks, Lisa, and thanks again for having us. We really appreciate it. I think the biggest difference post-pandemic is consumer expectations, right? Consumers have gone from thinking about virtual care for limited episodic capabilities to really looking to longitudinal relationships, holistic relationships that are more than virtual urgent care, right, and that take care of them regardless of what they need, but also are integrated with the physical delivery system. And as I look toward '23 and beyond, that's what we're seeing from buyers, right? Buyers -- we go out and do a lot of buyer research, right, among health plans, among large employers. And what we find is, whereas pre-pandemic the majority of buyers were looking for individual point solutions. We're now at the stage where it's 50-50. 50% of buyers say, I'm looking for best of breed individual points, and I'll do the integration of them. And the other 50% are saying, I'm tired of all that, right. I'm sick of doing the integration myself, and I realized that unintegrated point solutions don't deliver on the full capability. And so I think that's why 75% of our sales last year were multiproduct sales. I appreciate the numbers around BetterHelp. And I think for those of you in the room that follow Teladoc, that's been really the pressure point for 2022. As we thought about the fourth quarter and where the numbers have come out, maybe just help people to understand how you're thinking about the BetterHelp business. Does it fit within Teladoc overall and longer term? And then secondly, Mala I heard you talk about the [indiscernible] have more visibility into BetterHelp going forward. So what are some of the metrics that we'll see? Will you see this broken down specifically where we think about sales and margins, et cetera., on a go-forward basis? Yeah. So if I think about the BetterHelp business, certainly, if I think about 4Q, we talked about the 8-K revenue today. We talked about it being about $1 billion in revenue for the full year. Listen, this is a business that has scaled very significantly. What is important as we think about this business also is that it has done so with strong margins. And we've talked as we have gone through the year about the pressures on ad spend, et cetera., in the marketplace. Certainly, there has been an explosion of capital going into overall digital health, but certainly in the metal health space. And several of the companies who have operated in this space certainly have plowed a lot of capital into digital -- into ad spend. And listen, we've also seen some bad actors in the space who have taken advantage of the suspension and regulations to sort of aggressively promote controlled substances. That is not what we do. What we have always said is, the way we approach this business is in a way that we will drive sustainable revenue growth and at attractive margins, and we do so taking advantage of our scale or experience. And importantly, as Jason talked about, our high quality standards. So if I think about this business going forward, certainly, it will -- the right way to think about it is balancing our revenue growth with profitability. And as you said, we will provide more transparency on a quarterly basis as we move forward. We are going to give you more color on the exact metrics that we will disclose when we talk about it in February. And does it make sense, I mean just given the valuations of some of the other companies out there, would there be a value creation opportunity to not have BetterHelp as part of Teladoc or does it make sense for this to still be a component of Teladoc when we think about consumer? Yeah. So we do the analysis all the time in all the parts of our business, right? It's part of being good stewards of capital. We get a lot of benefits from the synergies between the two parts of the business, the direct-to-consumer business and the B2B business. Just some examples. BetterHelp developed a very, very sophisticated matching algorithm for matching a consumer with a therapist. It's based on just years of and reams of data, and we did it using a machine learning algorithm or a set of capabilities to deliver this algorithm. We apply that now against the B2B side of our business to deliver better mental health outcomes because of better matches. Similarly, because BetterHelp is a direct-to-consumer marketing engine in order to attract new clients, we've developed things like media mix optimization algorithms that we also apply against the B2B side of our business to be able to do better consumer engagement. And we've always said that part of our value proposition to B2B buyers is that we get greater engagement than any of our competitors. And so there are significant benefits. Similarly, we have used some of our learnings out of the B2B side where we get more pressure from our health plans and employers to deliver on higher quality standards, and we've applied those against BetterHelp in a direct-to-consumer environment. So it may not be quite as evident but there are significant synergies from the combination of the two. So we've been writing a weekly piece on flu. And I know that years ago, when your company was much smaller, so we made a big difference, right? It could be a big swing factor, it would introduce people to a tele-benefit during that period of time and maybe use it again. My understanding is not as big a deal these days. But was there a benefit in the fourth quarter ran flu? Yeah. So if you think about visit revenue overall for our business, it's about 10% of our overall revenue, and flu is a subset of that. So if you think about the impact of flu on our 4Q, it's approximately $2 million. So again, if you think about it in the scheme of the overall revenue we have, compared to a few years ago, we are so diversified compared to what we were a year ago. So flu is a small portion of visit revenue, which in turn is only about 10% of our overall revenue. Yeah. I think we're past the point of awareness, right? We don't have to build awareness in telehealth anymore. And historically, pre-pandemic, the flu would help to do that. Now it's more about sort of expansion and educating consumers on the full scope of what they can get from virtual care, right? So the full scope of being able to take care of chronic conditions, being able to get longitudinal primary care, being able to get integrated mental health into those programs. So I don't think it really has -- maybe it does a little bit around the edges to engage a consumer. They have a great experience. And so they're willing to come back for more. I do think once we bring more people on to our single unified app, that will expose them to the full breadth of our services. And so more in the top of the funnel, if you will, will have a downstream impact on all of those other services. As we think about '23, it's been interesting, I think, for all of us in the room to watch what's happened with employment trends much stronger than anticipated. But as we think about the macro background and we think about especially a direct-to-consumer product like BetterHelp, how do we think about how that could fare because it wasn't around back in '08, '09. So if we think about the overall macro trends, the first thing I would say is parts of our business were a lot more subscale or not even developed in the '08 cycle, for example. So let's first start with that as a caveat. But if I think about the various dynamics playing out, Lisa, let's start with the BetterHelp part of the business, right? It's interesting. There are a couple of different somewhat opposing dynamics at play. If you think about, say, inflation staying high or macro uncertainty generally impacting consumer sentiment, making them feel more uncertain, that certainly may have an impact on them availing themselves of BetterHelp because as we have talked about, it is an expensive product. It's one of the more expensive products that's not in a box that you can buy online as we say. But opposing that, Jason talked about it in his remarks, if there is a recession and material job loss and people lose their employer sponsored coverage, they can absolutely avail themselves of BetterHelp, which is going to be less expensive than traditional brick-and-mortar. So you have a couple of opposing forces here. Somewhat similarly on the B2B side as well, Lisa, we have talked, as we have gone through this year about the macro uncertainty certainly playing on employers minds, benefits managers being distracted, right? They have a lot to sort through. And therefore, even as we are confident about the value we deliver to them and the ROIs, it may be challenging for them to add on additional programs. That said though, given that their cost inflation and given especially the medical cost inflation that would be a perfect opportunity for us to be able to sell in the value we deliver and how we can help them in terms of cost savings. Jason, you've talked in the past on chronic care. And I've talked about a pilot program that you had with Blue Cross Blue Shield in 2021. Maybe if you can just walk us through kind of where it is today. So many in this room and other places are talking about value-based care and what does value-based care actually really mean when we think about this? And what is the role that Teladoc can play as we think about that future? Yeah. So we're leaning heavily into value-based care. I know it's probably an overused term, you're right. For us, value-based care really means being paid for either the clinical quality and clinical outcomes that we deliver or the cost impact that we have or both, right, sort of full stop. So in this case, this pilot we did with a Blue Cross Blue Shield plan said, here we're going to take a fixed per member per month or per subscriber per month fee for some of our chronic care programs. We want you to measure the cost of those populations that we serve and that we engage with, and we want to share in the savings that we generate. And so the client did their own actuarial team, did the analysis. They measured the impact. We were significantly, significantly less expensive, meaning the -- we drove cost savings relative to the benchmark population that significantly exceeded their expectations. We were able to achieve a share of savings bonus. This was a small pilot, so it wasn't material in our overall financials. But I think the benefit there is that, number one, we were able to get this bonus. But more importantly, the Blue Cross Blue Shield plan accelerated their rollout of these programs because of the impact that we had on this population and the demonstrated value that we were bringing. We see ourselves continuing down that path with multiple payers going forward. We see others who are more focused on clinical outcomes. And so we're willing to put our fees at risk for achieving real outcomes and movement of the needle in terms of someone's A1C or their blood pressure or weight loss. And so we want to be held accountable for delivering real value. And finally, we're in market now with a client where we have a Primary360 population. We get paid a specific per member per month fee and we share in the savings we generate or if there's a cost overage relative to a benchmark population. We share in that as well. We have a ceiling on -- and it's a 50-50 split with us in the plan. So we are mutually motivated to drive better results. We have a cap on what our revenue can be in terms of a bonus. We have a floor in terms of the downside. So we know exactly what our exposure is. But we want to be holding hands with our partners to deliver better care and lower cost and do it in a way where our incentives are aligned. When we think about the biggest opportunities going forward when we think about both value-based care. I think the example you just gave is some level of primary care capitation within Primary360. Is that a bigger opportunity? Is chronic care a bigger opportunity for you longer term? And as I think about the customer you're going to be most focused on in these areas, is this the self-funded employer or is this the managed care plan? I think the answer is yes, right? So when we do, for example, kind of a primary care capitation with an upside, downside risk corridor, we want to bundle in our chronic care management programs because that's how we're going to have the biggest impact on cost and outcomes. So we're bringing all of those together. And I think the true answer is, where we are going to make the biggest impact is where we bring all of those capabilities together for a given population. It's not to say we won't sell chronic care either diabetes as a stand-alone product or a full cardiometabolic suite without primary care and take some level of risk on that. But I think where we're going to have the biggest impact is when we bring all of those capabilities to bear. And we're seeing significant interest both from the plans as well as from large employers. And even in some cases, the large employers who are self-funded, pushing their health plans to do this and make our products and services available through the plan. I think post pandemic, it's been a rough time for Teladoc. And I think that you guys have to stay focused on delivering on the numbers, getting people refocused on the areas, getting more visibility. We're all looking forward to that on BetterHelp. But Jason, we're sitting here together at 9:00 a.m. on Monday. A year from now, what do you hope that investors will better appreciate about Teladoc than they do today? Yeah. I think my hope is maybe three things, they better understand the components of our business and appreciate how each one of those components contributes to the overall performance. Second, they really see us differentiating ourselves in terms of delivering on the promise of whole person care in a way that is broader and at a scale that nobody else really can match. And third is that we get appreciation for the financial performance of the business, which I believe is really differentiated in the sector. Yeah. I don't -- I think sometimes when we talk to investors, they don't realize that you are cash flow positive. Indeed. So if you think about the strength of our balance sheet, the fact that we have $900 million on our balance sheet, the fact that we are operating cash flow positive. And we will continue to make progress on that. These are absolutely -- it allows us to invest in our business. The innovation slide that Jason talked about, that is something that we are building and using the strength of our P&L and the strength of our balance sheet to help drive. So that is absolutely a differentiator for us.
EarningCall_1338	Good afternoon. Iâm Chris Schott at JPMorgan and itâs my pleasure to be wrapping up day 1 of the JPMorgan conference with the presentation from Merck. From the company, we have the companyâs Chairman and I, Rob Davis; as well as Dean Li, who is President of Merck Research Labs. After a very successful 2022 for the company, looking forward to Robâs presentation and comments on â23 and beyond. And then after the presentation, weâll go to some fireside chat Q&A on the stage here. Appreciate it. Thank you. Good afternoon, everybody. Obviously, we will be making forward-looking statements and I'd refer you to our statement here on the screen. If you look at 2022, it was truly an exceptional year for Merck. And I can tell you, I couldn't be more proud of what the team has delivered scientifically, commercially and operationally. As we look at it, our science-led strategy is working. We're focusing on what matters. We're putting the patient at the center. We're acting together as one team and we're doing it with urgency and speed. And I think you're now starting to see those results. And it's reflecting not only in our commercial and financial results but most importantly, it's coming across in what we're seeing and how we're advancing our pipeline. You're going to hear more about that from Dean here in a minute. But I can tell you, I feel very good about where we are, the progress we're making. We're starting to see some important programs mature and really starting to see some real good visibility as we look to growth long term. As we look at what we're doing externally, we're continuing to augment that pipeline through important business development. I'll spend a little bit of time talking to you about that and how we see the progress we're making, really starting to set ourselves up for a pipeline that is positioned to grow as we look well into the next decade. And obviously, beyond the idea of how we can do commercially or scientifically, we always focus on what we do from a sustainability perspective, making sure that we act in a way with objectives tied to sustainability. And I think if you bring it all together, it's why we're so confident in our ability to drive value for the patient and, in turn, for the shareholders. No, go back one slide, if I could. Now if you look at the business from a commercial and operational perspective, we're really delivering across all of our growth pillars. In 2022, we delivered 15% growth if you exclude the impact of LAGEVRIO and we were able to leverage that to important operating margin expansion. The business is performing extremely well. And as we look forward, the underlying growth drivers are there. So as we think about 2023, I can tell you we have confidence that you're going to see the momentum we've had in those underlying growth drivers continue. And part of what gives us that confidence is the track record. If you look across all of the growth drivers, what you see in '22 is a continuation of sustained growth over the last 4 years. And importantly, that growth is in de-risked assets and it's growth that we feel is quite sound, robust and will continue. And so that's why as we look forward, we continue to feel so good about the business. But obviously, while we're very excited about what we've been able to do in the short term, we recognize value creation is about the long term and do you have a sustainable engine. And increasingly, we focus on that. We ask that question, do we have a sustainable engine? And I can tell you today, my confidence, sitting here now, given the progress we made in the last 15 months, couldn't be higher that we are making meaningful progress to have that sustainable engine. And really, we're doing it through 4 levers. We raised these last year to you all and we've made a lot of good progress. It's focusing on our important durable growth drivers in the Animal Health business, in the vaccines business. It's deploying cash flow to business development. It's understanding the position we have in oncology today and leveraging that leadership well into the next decade. And it's not stopping with oncology. It's advancing our broad pipeline, whether it's in cardiometabolic, in vaccines, in neuroscience and in our infectious disease and immunology space. So as we look at it, we're making progress across all 4 and you'll hear me speak a little bit about the first 2. I'm going to ask Dean to talk about the second 2 but the message is the progress is there. We have more to do but the path is in front of us and we are delivering. As you look at the durable growth drivers, what's important as you think about our vaccines business and our Animal Health business, these are very much annuity-like businesses with stable growth. And in both cases, we have a growing pipeline. So as you see, what we showed to be nice and robust growth across both, we expect that to continue into the long term. We've talked about starting with the vaccines business which is really anchored in our product, GARDASIL, that, that product will continue to grow meaningfully. And in fact, we expect it to more than double off of 2021 sales. So that -- if you look forward, what that means is growth in excess of $11 billion by 2030. We're excited about we have -- what we have with our pneumococcal conjugate vaccine suite of products and portfolios. We're going to continue to make advancements there. Our VAXNEUVANCE product is now approved in both adults and peds. And importantly, V116 which is the next-generation adult product we have, will have its Phase III data readout in 2023 and we're very excited about that. And in addition, we have late-stage programs in RSV and recently, we had some important data readouts in progress with dengue which we're very excited about. On the Animal Health business, it's continued growth well above what the animal health business market can do, driven by the companion animal business, by what we have in livestock and importantly, a growing way on what we're doing to invest in technologies. So as we look at this and we think about what the business is doing, it's generating revenue growth, it's generating margin expansion, it's generating strong cash flow and we're going to leverage that cash flow to continue to build the pipeline. That continues to be an important priority. It's about the science, it's about focusing on how can we find the best opportunity where there's an unmet need, a scientific opportunity to address that need that fits strategically with us where we see value. Where science and value align, we will act. But what's also important is that we're not desperate. We're disciplined, we're focused. But I can tell you, we have a lot of confidence given the track record of the BD we've done over the last few years and growing and broadening pipeline that Dean is going to talk to you about. So we're in a position where we can be selective. We can look for the best science. But when we see it, we will move and I'm confident we will do so in a value-creating way. And if you look at 2022, you can see an example of what we've been doing. During this year and a lot of this actually happened and almost all of it in the last half of the year in 2022, we made a lot of important deals. And importantly, it's beyond just looking at acquisitions. It's looking at licensing deals, at collaborations. But whether it's moving forward with next-generation approaches in vaccines, for instance, what we've done with Orna and circular RNA; with our personalized cancer vaccine collaboration with Moderna; programs in oncology in Imago which is in hematology; Kelun with a portfolio of ADC products; and also what we're doing with ORION in prostate cancer. If you look across those top 4 programs alone, Imago, Kelun, Moderna and ORION, those 4 deals will bring assets all starting Phase III studies in 2023. All programs we didn't have 6, 9 months ago. So in just 1 year, we've brought 4 new programs into Phase III. And some of those, for instance, the personalized cancer vaccine, all we think can be very meaningful. So I feel very good about the progress we're making. We're going to continue to focus on this. We've deployed $36.5 billion to business development over the last 5 years. To give you context of that, that's about 90 deals a year. And what we are achieving from that currently is 16 mid- to late-stage active clinical programs, in addition to early- and discovery-stage programs as well coming from those deals. So there's a lot going on and I'm confident that we will continue to drive the same kind of progress as we look forward. And if we can do that, I'm quite confident that as we think about the engine not only through R&D but how we will augment it through business development, building on the commercial execution we've shown we can deliver, we're in very good -- we're in a very good position to continue to drive the business. So with that, I'll turn it over to Dean to give you a little bit more insights into the portfolio of R&D before I come back up and close. Dean? Thank you. Itâs great to be in person here at JPMorgan. We aspire to be the premier research-intensive biopharmaceutical company. And in 2022, weâve made significant advances towards that aspiration. In oncology, we have continuing approvals in KEYTRUDA and in Lynparza that are reshaping how oncology treatment is happening today. We, with our partners, Moderna, announced Phase IIb results of a personalized cancer vaccine that really, I think, is going to be an important area of investment, both for us and for Moderna. In cardiometabolic, we announced the top line data for the Phase III STELLAR trial in PAH. And in vaccines, we are advancing a population-specific strategy: the right vaccine to the right patient at the right time. As Rob also noted, we, with our partners Instituto Butantan, had important data at the end of the year in relationship to dengue. And weâre excited about resuming our islatravir HIV program as well. What do we want to achieve in oncology? We want to achieve the fact that over the last 10 years, we have had the privileged position and the honor to reshape cancer care throughout the world. And what we intend to do for the next 10 years and beyond is to do more of the same. We have KEYTRUDA, Lenvima, Lynparza and WELIREG. They continue to provide important readout that lead to filings that we will be having from now over the next 5 years. Not only that, I think a critical important point is that we are moving from late stage to early stage. The early stage is especially exciting to us because thatâs a place where the tumor burden is much less. And if we can truly affect in early stage, we began to open up the prospect that in some patients, we could actually cure them. What is our strategy? Our strategy is we have built a strong immune-oncology pipeline. We have also built an increasing precision-targeted or molecular-targeted series of assets that ranges from VEGF RTK inhibitors that weâve done with ESI. It deals with the PARP class of inhibitors that we have collaboration with AstraZeneca, includes LSD1 that weâve just done with Imago, RAS, BTK and importantly, WELIREG with HIF-2 alpha. Not only do we have precision-targeted ones but increasingly, weâve revealed what weâve done into the tissue-targeted space. We have had ongoing collaborations with Daiichi Sankyo, Seagen and Gilead. And more recently, weâve announced what our partnership with Kelun has provided us. And over this next year, we will be providing that data of the Phase II readouts that will launch a large series of Phase III studies. The modalities that we go, go from small molecules to antibody drug conjugates to immune engagers to biologics to cell therapy and, more recently, to RNA. The collaboration Moderna leverages their undisputed expertise in mRNA and matches it up with our deep experience in cancer and especially immune-oncology. What are we trying to do? KEYTRUDA reveals the pre-existing immunity to cancer. What weâre hoping to do with the personalized cancer vaccine is to tickle the immune system. And the data that we have received in the positive Phase IIb results have been the results of a 6-year partnership. In that Phase II trial, we show that in adjuvant treatment to patients with Stage III and IV melanoma, following resection, there was a demonstrated statistically significant and clinically meaningful improvement with the vaccine on top of KEYTRUDA. How big of that reduction? Itâs 44%. So the vaccine, on top of KEYTRUDA, was an additional 44%. I need to remind everyone what KEYTRUDA does by itself an adjuvant. So that was a high bar to beat and it was a very clear signal that we had with a positive Phase IIb. We have a lot of work. We have a lot of work ahead of us following this Phase IIb result. We must advance this to Phase III trials in melanoma. We must ask the question of how early can we go, how late can we go. And we must examine not just melanoma but signals that we have looked for in other immune-sensitive cancers such as non-small cell lung cancer and other cancers, especially that have been susceptible to KEYTRUDA. We plan to discuss this Phase II with regulatory authorities and we will be initiating these Phase IIIs this year. We have advanced throughout the therapeutic areas in cardiometabolic. Weâll talk about sotatercept but itâs not just sotatercept. We have other agents in pulmonary arterial hypertension and weâre excited about our MK-0616, our oral PCSK9 inhibitor as well as our Factor XI inhibitor. In the vaccine field, again, itâs this population-specific strategy that weâre advancing with VAXNEUVANCE and with the readouts that Rob talked about in terms of our V116 investigational adult pneumococcal vaccine. We have important readouts in terms of schizophrenia, treatment-resistant depression and Alzheimerâs. And as Iâve spoken before, weâre excited about resuming our HIV programs with islatravir in collaboration with Gilead and also in assets that are wholly owned by Merck. Sotatercept has the potential to transform the treatment of patients with PAH. I have treated patients with PAH. This is a rapidly progressing and fatal disease. The positive results for the Phase III STELLAR trial demonstrated a profound impact in the 6-minute walk distance. Equally important is that it met 8 of the 9 secondary endpoints such as time to clinical worsening. We target filing for this with regulatory agencies in the first quarter of 2023. We will host an event at ACC because we will be presenting the full data of the STELLAR data at ACC, the American College of Cardiology, in March. And at that time, we will also present the PCSK9 Phase II studies as well. We have much to do. We are advancing sotatercept in multiple Phase III trials as we want to really transform the treatment of PAH. Iâve talked about this population-specific approach to pneumococcal disease. Why do we want to do this? Just look at this incidence curve. It is bimodal. You have a pediatric incidence and you have an adult incidence. But itâs not just bimodal in terms of the timing. The serotypes, the combination of serotypes responsible for pediatric pneumococcal disease is different than that from adult. So what are we doing with VAXNEUVANCE? Weâre expanding coverage, while importantly, maintaining production against the historically invasive disease-causing serotypes. Also from this graph, what you will see is how important it is to give protection within the first year of life, where much of the invasive pneumococcal disease occurs. In V116, weâre advancing our Phase III investigational candidate and it specifically targets adult disease. Itâs covering serotypes that account for 85% of all invasive pneumococcal disease. So we are excited at advancing a strategy that is the right vaccine to the right patient population at the right time. We have an extensive discovery efforts. They are throughout all therapeutic areas. We're investing in multiple modalities. We are here because we are looking for partners that we have been successful at working with and we encourage all these partners to come see us because we're open for business and we're interested in advancing our pipeline with you. One of the major advantages that our discovery organization has is that we have an excellent global clinical development organization that knows how to reveal the unambiguous, promotable advantage of the innovative medicines and vaccines that we move forward. Well, hopefully, as you can see, we've made meaningful progress in 2022. And importantly, we have increasing confidence that we do have that sustainable engine to drive this company and to drive growth well into the next decade. And to give you just 2 proof points of this, we've been talking about the cardiometabolic space. We have the potential, as we've talked about over the last year, for 8 approvals coming in the latter part of this decade, that will allow us to have in excess of $10 billion of revenue by mid-2030s. That's important. But equally important is the benefit we're getting from the business development we've been doing in the oncology space. And as we've been talking about, it's about broadening our space and broadening our reach in oncology to take the strength we have in KEYTRUDA to go into new targeted areas, into new therapies into new modalities. And I'm happy to say that as we look at just what we've done in the last couple of years, we see the potential for greater than $10 billion in revenue coming from our suite of ADCs and our suite of small molecules. And it's important to know this excludes all of what we're doing to expand, deepen and extend KEYTRUDA, Lynparza, Lenvima and WELIREG for the benefit of patients into the future. It excludes what we have in our early-stage development. It excludes further business development and it excludes the personalized cancer vaccine we just talked about. So as we sit here today, our ability to drive the type of leadership we want to have in oncology is there. We're confident about it. We're going to continue to do more. I can tell you, I couldn't be more energized by the value we're bringing, by the patients we're helping but we have more to do. The progress is there. The confidence is there. But we're going to stay on task and we're going to deliver. Great. Thanks for those comments, Rob. Maybe just to kick off the Q&A. Right or wrong, I think that Merck narrative has â this KEYTRUDA concentration has kind of dominated the narrative for a few years now. And it feels like weâre maybe finally starting to shift away from that with the pipeline progress that weâve seen. But how are you thinking about the companyâs ability to manage through that LOE? I know youâve talked about some of those pieces in the presentation here but just your confidence today versus letâs say, 16 or 18 months ago when you took the Chief Executive Officer seat? No, as I sit here today, do I think we're done? I don't. I don't want anyone to believe that we're taking our eye off the ball or we're not focused. We are. But as I was saying in the prepared comments, if you look at the progress we've made in 15 months, that's why I wanted to give the proof point around the cardiometabolic space. We weren't talking about cardiometabolic 15 months ago. We weren't talking about the ability to bring this many new targeted therapies outside of KEYTRUDA as well as in ADCs and the small molecules you saw us talk about. Those didn't exist 12, 24 months ago. So we're making progress. So as I sit here today, we continue to aspire to grow through the LOE of KEYTRUDA. We'll see whether we're able to do that. We've got more work to do. At a minimum, I'm quite confident that we are making meaningful progress in both lessening the impact and shortening the time before we will definitely be back to strong growth into the next decade. So that's where our focus is. But as I think about it and what I've been talking with the folks inside of Merck and I've been talking with some folks here today, increasingly, we're starting to talk less about 2028. It's not 2028. We're talking about, do we have a sustainable engine? And if you have a sustainable engine, 2028 will take care of itself. And we are starting to really build that engine. I have a ton of confidence in what Dean and his team are doing, the progress they're making. And so as we sit here today, I'm feeling good, I'm feeling good. Good to hear. Good to hear. Maybe first starting on business development. I know itâs a big topic for the story. Just elaborate a little bit more on your priorities and how youâre thinking about kind of size and stage and whatâs really the sweet spot for Merck at this point as you think about capital deployment [ph]. So as we sit here today and as we just commented a moment ago, it starts with the science. So we always start with, is there a scientific opportunity that we see to an unmet need? And once we see that, we ask how does it inform the portfolio? Does it fit in the portfolio? What's the strategic fit and we can drive value? So as we drive that strategy, I can tell you, we tend to see more of that and our focus is in smaller bolt-on acquisitions. And increasingly, in the more recent time, it's been through collaborations, licenses and partnerships. Thatâs why I wanted to highlight in the prepared remarks because I think people often want to talk about the acquisition. They forget that every one of these collaborations weâre doing, weâre accessing great science and weâre usually doing it through relationships that are 3, 4, 5 years in the making. So we know these assets. We know the people behind them. We have a lot of confidence in them. So that strategy is going to continue, focusing more on that bolt-on. Weâre obviously opportunistic and willing to consider anything that fits that framework but it always starts science. Does it meet value, if it does? And obviously, we want to make sure weâre not disruptive to what we have in-house. So thatâs the way we think about it and youâre going to see us continue to do more as we move forward into 2023 as what weâve been doing in the past. And I can tell you, as we sit here today, we have several opportunities weâre looking at as we speak. So hopefully, weâll have more to bring forward as we move later into the year. So in that context, can I just -- when I think about if the deals are skewing maybe towards smaller acquisitions or collaborations, the company generates a tremendous amount of cash. Balance sheet is healthy. How do you think about whether it's share repo or further interest in the dividend, like how do you think about where that -- the cash flow goes going forward? Yes. Well, the capital allocation strategy we follow, first and foremost, is weâre going to invest in the business. And so weâre going to invest first in R&D. Weâre going to invest in ensuring we have the capacity to drive commercially the products once the demand is there. Weâre committed to the dividend. Weâre going to continue to drive and grow the dividend. Beyond that, as I look at how we think about the remaining free cash flow thatâs there, I think the best path to long-term value creation is about reinvestment back into the business. There is plenty of opportunities and great science for us to invest in. And I think weâre showing that. Weâre demonstrating that. So that is, first and foremost, where we will go. But to your point, weâve been very clear, we will not sit on excess cash if we donât see the opportunity. So, over time, if we donât see that opportunity, we will return it to the shareholders. But right now, based on the portfolio of what we see out there, I want to see those things play themselves out before I give up that dry powder because I think everyone out here wants us to invest for sustainable long-term growth and thatâs what weâre going to do. Yes, absolutely. And maybe just one more question on this. When you think about the landscape for acquisitions, it seems like, on one hand, biotech valuations have been depressed. On the other hand, it seems like if you're going for kind of really well-positioned science, et cetera, those may not be the assets that are seeing the pressures that some others are. How do you think about the landscape right now in terms of accessibility of assets? Yes. And I think you almost hit upon it in your comment which is, to me, it is more of a have and have not. I mean, obviously, we have seen from a macro perspective, biotech valuations have come down. But for those assets, in those companies that are showing promise, they are still able to get capital. And frankly and what weâve seen recently, when people have had positive data readouts, the prices are still rising and performing quite well and the premiums theyâre expecting are still there. So as we see it with the type of assets weâre looking at, I havenât seen a fundamental shift. That being said, I believe either through ability to have asymmetric view of information or the science and/or synergies we bring, we can still find deals that make sense and create value even if you donât see that repricing. Acceleron is the best example of that. Our scientists came forward. They had conviction based on the work we were already doing in the space and said this is real, this is important. You need to move. We met and I put a lot of confidence in the team. We got ahead of the Phase III data and it paid off. So thatâs the way weâre going to continue to pursue that. And I think on the oncology side, youâve seen a lot of opportunities or examples where those synergies we bring through the leverage we now have, people want to work with us. And so those â thatâs whatâs driving our business development. I think that will bring forward progress even if we donât see a valuation change in the marketplace. Great. Great. A question for Dean. As we think about the mRNA personalized cancer vaccine that you're working on with Moderna, can you just help put this program in data into context, both, I guess, in melanoma and kind of directionally where this could go, like seems like you're pretty excited about the data that you're seeing there. So, let me just -- I got asked this at a different form. So I just want to make sure that we emphasize. So when we talk about GARDASIL, we're talking about essentially, a cancer vaccine but it's a preventative cancer vaccine. When we're talking about this personalized cancer vaccine, it's essentially a therapy, right? It's taking a bunch of neoantigens, personalized neoantigen and trying to tickle the immune system. So, I think it's very important that we understand that this is a therapy. In some sense, people talk about immuno-oncology plus immuno-oncology. They talk about the 2 different checkpoint inhibitors. This is a checkpoint inhibitor plus another I-O agent. And when we look at the data, the bar is high for adjuvant melanoma when you have KEYTRUDA. I mean that bar itself, when you saw the approval just for that was high. So, for the ability for a personalized cancer vaccine that's being used as a therapy on top of that, to have a 44% reduction in melanoma, it catches your attention. It feels a little bit like the 2012, 2013 sort of inflection when we were first getting the initial readouts of KEYTRUDA in melanoma in the first place. Now this is Phase II drug data. We have a lot of work to do. But the question that arises is, is this limited to melanoma? Are there other immune-sensitive cancers? And the track record of the immune-sensitive cancers is where KEYTRUDA works. How broad is this among different tumors? And how early and how late can it go? So, we have a lot of work to do but we are excited because this has been a holy grail for the field for 20 years to make a personalized cancer vaccine that can work as a therapy. And we have a hint that it can work and we have a lot of work to do it and we're going to move very fast with Moderna, who we are very lucky to have had a 6-year partnership on this program. So when I look at your I-O/I-O kind of opportunities youâre developing, how would you rank this one versus whether itâs TIGIT or otherâ¦ How do I like -- which kid do I like better, is that right? So they're all different and we'll have to see how they play out. But the personalized cancer vaccine clearly has to be something important when you see a Phase II readout with a 44% improvement over KEYTRUDA that already has what a substantial improvement. In terms of the checkpoint inhibitors, we are very interested in the checkpoint inhibitors. I know people was asking about TIGIT. We have a very good molecule. It's very specific. It's very potent. And we have 8 clinical trials. I think 5 are registrational. I would just tell you that not only are we expanding our partnership with Moderna in terms of personalized cancer vaccine, we listed a fifth registrational trial, KEYVIBE-010, just over December. So I've tried to advance in both of them. Okay. So itâs not an either or necessarily approach. And maybe just last one on as I think about the KEYTRUDA franchise. Just the role of subcu and how we think about the programs you have there and the time lines for those to move forward. Well, let me just sort of reset because there are different context of how people talk about subcu KEYTRUDA. I can tell you how I think about it. I think about it as scientific innovation that drives access to a life-saving medicine. If you have -- especially in the early stage, you have patients, don't want to be tethered. They can't be tethered to an infusion center. If you can remove that for them, you will increase access not just in the cities but in the world, throughout the United States but in other countries. So this is important innovation. So we think that, that's a huge place. When you have KEYTRUDA working with an oral agent and you can remove the infusion center, that's a huge place. I think there's some debate and not everyone agrees with me but I actually worked in a health care system. I believe that even when you have an infusion medicine plus infusion KEYTRUDA, if I change it to subcu, I can really, really limit the time that you spend in an infusion center and also stage it in the quite correct sequence depending on the sequencing of other drugs. So, weâre very excited to move to a different route of administration because we think itâs a way to use scientific innovation to produce access to life-saving medicine. We have a series of programs and relationship with subcu. Some of them are in Phase III. Some of them are moving to Phase III quickly. And theyâre all going to read out before the 2028 sort of LOE and weâre interested in advancing. Some of them will be â23-â24, â24-â25, that would be the timing that weâreâ¦ Well, I can just tell you that, at least for me, the one that I really think is important is the one that allows me to give both Q3 weeks and Q6 weeks is going to be really important. And that one is the pembro with the high [indiscernible]. That gives you the most optionality for patients, for health systems and for that concept that we want which is advancing scientific innovation to make sure that there is access to life-saving medicine. Great. Rob, on GARDASIL, this product clearly has exceeded expectations pretty consistently here. I know you talked about $11 billion-plus in 2030 sales. What do we need to do to bridge from where we are today to get to that peak sales level? And I guess part of my -- the second piece of that would be -- is that peak? Or is that just -- can this actually get even much larger than that given the... Well, if you look at where we are in the journey, obviously, it starts with a growing recognition which I think is now really taking hold that as Dean said, this is a cancer vaccine which is important. So weâre going to continue to drive it. But if you look across the global population, itâs still â thereâs still a huge unmet need and itâs pretty underpenetrated. The focus areas, how can we drive geographically to drive for greater reach, continue to drive for gender neutral. There still is a situation and underappreciation that itâs not only protecting the female, you need to get the male protected because that brings protection for the female. But increasingly, people are recognizing there are a lot of cancers that affect the males as well, head and neck and others, that itâs important that you bring both. So weâre going to continue to drive for gender neutral. And then increasingly, weâre now, as we start to bring online additional capacity, we can start to drive also into the mid-adult population. Weâve obviously been limited to trying to do it more in the pediatric setting because we were limited in what we had. As we go to having an unconstrained situation, weâll be able to go more fully across all of these areas. And if you look at where we are today, actually in 2023, weâre bringing online 2 new bulk facilities. Those will be ramping up between 2023 and 2025. So as we get to â25, we will be unconstrained in our ability to drive global demand. In the meantime, weâve shown we can drive productivity in our existing facilities. Thatâs why weâve been able to drive the growth weâve had. And Iâm confident youâre going to see us grow. Weâre very confident in hitting the $11 billion number. I donât want to get into projections beyond that but letâs just say that the global need is still significant and weâre committed to trying to address it. Great. The one on the vaccine side, the pneumococcal franchise. And this is one that it seems like an area that Merck's pretty excited about. It feels like the Street, I don't say skeptical but I was trying to still get their hands around where the role Merck plays here just given some entrenched competition. So can you just help us in terms of what you think the Street, what we're kind of missing here and giving you such confidence in your role? Yes. Maybe I'll start commercially and then Dean can comment as well. I think, one, there's a misnomer that if I just have more serotypes, it's better, more is better. That is not necessarily true. Because what Dean showed on the slides and what we're really focused on, the serotypes that cause disease in infants is very different than the serotypes that cause disease in adults. And so we really are taking a more of a bespoke approach to this and how we're thinking about it. And what's very important as you think about in the pediatric setting, with VAXNEUVANCE, we show very good protection in the first year. Weâll have to wait and see what the competition does. But importantly, if you canât show protection in the first year where 45% of the pneumococcal disease happens, itâs in the first year. So if you think of your first 18 years of life, itâs actually 45% of all disease is in your first year. So itâs very important that you have coverage that way, not only by the time you get the full booster in the 3 plus 1 but before you get the booster. So weâre going to have to see how that plays itself out. If you look in the adults with V116, as Dean talked about, weâre able to cover 85% of the residual disease in what weâre going to have with V116, 30% more than even what PCV20 would have and with serotypes that are different and driven for the adult disease. So our approach is to make it very bespoke, specific to children, specific to adults. Itâs going to be a commercial battle. I have no doubt. But I will tell you that I have a lot of confidence in our clinical profile. And as we sit here today, this is a market roughly $7 billion in 2020. Itâs probably going to be $13 billion, $14 billion by 2030. So this is a large and growing market. And Iâm quite confident weâre going to have a meaningful portion of it. How much depends on how some of these dynamics in the final clinical profile play themselves out when we see the full suite of data once all the products are in the market. Great. And maybe just in the last minute or so here. I know we're going to put your guidance in a few weeks here. But can you just talk about pushes and pulls for '23 that we should be keeping in mind for the story? Well, as I made the comments, if you think about our underlying growth drivers, you're going to continue to see good growth in our oncology portfolio, in our vaccines portfolio. I would highlight, LAGEVRIO was a very important product for what it did for COVID patients in 2022. Through the third quarter, we have about $4.9 billion in revenue. We're guiding to $5.2 billion to $5.4 billion for the full year of 2022. We're going to see meaningfully less than that as we look at '23, just given what's happening with the pandemic and the fact that there's still a lot of inventory of LAGEVRIO in the marketplace. So that is going to be a headwind. But actually, from a margin perspective, that's a tailwind because it actually -- our margins -- it's a drag on our margin. And so our margins are going to go up as we look at that. Beyond that, the JANUVIA, JANUMET situation, while we feel very good about the fact that we potentially have now proven out we can extend in the United States through 2026, we'll see. We won a court battle that gives us that. It's being appealed. But as of right now, we have protection in the U.S. through 2026. But for the rest of the world, namely in some of the big markets, China and Europe, we've already lost protection. So we will see that LOE hit in '23 versus 2022. And then the other 2 areas, obviously, foreign currency continues to be a headwind. Pricing is a headwind. But with all that said, we are confident you're going to see good growth and you're going to see margin expansion.
EarningCall_1339	All right. Good afternoon, everyone. Welcome to our next company presentation by Illumina. I'm Julia Qin, life science tools and diagnostics analyst at J.P. Morgan. Thanks, Julia, and the J.P. Morgan team for hosting us, and thank all of you for joining us today. I'm Francis deSouza, the CEO of Illumina. As a reminder, our presentation today includes forward-looking statements, non-GAAP measures and reconciliations to GAAP measures. Please refer to our SEC filings for a presentation of risks. Also, please review our statements on the whole separate requirement related to GRAIL. GRAIL must be held and operated separately and independently from Illumina pursuant to the interim measures ordered by the European Commission, which prohibited our acquisition of GRAIL. Today, I'll cover three areas in our presentation. First, a company overview, including preliminary 2022 results and 2023 guidance; second, I'll review our sequencing platforms business and NovaSeq X; and third, I'll cover how we're accelerating clinical genomics, including an update on GRAIL. I'll start with who we are. Our mission at Illumina is to improve human health by unlocking the power of the genome. Illumina sequencers enable researchers and clinicians to accurately read genomes, decode how they translate into health and disease and to leverage those insights in patient care. Our vision is that genomics will transform lifetime health management. Billions of people will have our genomes sequenced many times over our lifetimes to prevent and optimally treat, improving outcomes and lowering costs as we fight disease. Carrier screening and non-invasive prenatal testing will be standard. Newborns will be sequenced as a frontline diagnostic for suspected genetic conditions. Genomic testing will be routine for early detection of diseases, including cancer and neurodegenerative diseases, and therapy effectiveness and recurrence monitoring will be required at every progressive treatment line. Illumina touches every step. To make this vision a reality, we are working to enable more discoveries and to make genomics a standard part of clinical care. By 2027, our addressable market will be $120 billion, a six-fold increase from 2014 as clinical oncology, genetic disease and reproductive health testing expand, and new research modalities like multiomics, single cell and spatial emerge. Our market today is only 7% penetrated, going to 14% by 2027, driven by increased adoption of genomics globally. Illumina is at the center of this rapidly-growing genomics landscape. We have unmatched scale, differentiation and diversification. We serve over 9,500 customers across 155 countries, with an installed base of approximately 23,000 instruments. In 2022, we delivered over $4.5 billion in revenue, with more than 80% of our revenue coming from recurring sources, including consumables and services. We achieve this through our relentless focus on innovation. We have over 8,800 patents worldwide and invested $1 billion in R&D in 2022. This positions us very well to deliver on our long-term targets of mid-teens revenue growth and high-teens operating profit growth. Turning now to our financial results. Illumina delivered consolidated revenue of $1.075 billion for the fourth quarter 2022, with core revenue of $1.058 billion, GRAIL revenue of $23 million and with a record NextSeq shipments. Full year consolidated 2022 revenue was $4.576 billion and consolidated non-GAAP operating margin was 10.4%. Core Illumina revenue was $4.545 billion, non-GAAP gross margin was 69% and non-GAAP operating margin was 23.5%. GRAIL revenue was $55 million for the year. Turning to performance by platform. We placed more than 3,200 instruments in 2022, bringing our install base to approximately 23,000 instruments. We shipped 340 NovaSeq 6000s in 2022 and had $1 million in average pull through per instrument. We had strong placements in the first half of 2022 even after a record 2021. Second half placements were tempered by growing customer excitement for NovaSeq X. We shipped a record 1,210 mid-throughput instruments and saw the fourth consecutive record year for NextSeq shipments. For low-throughput, we saw 1,670 shipments with 500 new customers. And in 2022, we delivered multiple innovations that will lead to the next waves of growth for Illumina and for genomics. Turning now to 2023. We expect '23 revenue growth of 7% to 10% with core Illumina revenue growth of 6% to 9% and GRAIL revenue growing at approximately 80%. This is driven by multiple factors: the NovaSeq X upgrade cycle; momentum in mid-throughput following a record 2022; consumables growth from our expanding install base; demand elasticity; and accelerating adoption of the Galleri test. Non-GAAP operating margin for core Illumina of approximately 22% is consistent with higher instruments shipments in a launch year. Margin improvements beyond 2023 as the NovaSeq X install base comes online and consumables ramp. We expect an operating loss for GRAIL of approximately $670 million, reflecting investments to support an FDA application, NHS trial and expanding the commercial organization. GRAIL is making progress on its path to profitability and will approach breakeven in the next five years. Illumina strategy involves innovating in both, leading the industry in sequencing platforms and accelerating clinical genomics globally. Starting with our leadership in sequencing platforms. High-throughput represents the largest part of our portfolio by revenue. This quarter, we will begin shipping the revolutionary NovaSeq X series, the most powerful, most sustainable and most cost-effective sequencer ever developed. NovaSeq X can sequence 20,000 genomes per year, 2.5x higher throughput and 2x faster than the NovaSeq 6000. This speed enables single day runs with turnaround time under 24 hours. NovaSeq X is also the world's most sustainable high-throughput sequencer. With a 61% reduction in climate change impact, it's the only high-throughput sequencer to eliminate the need for dry ice for shipping, expanding the market and improving efficiency. NovaSeq X is also the most cost effective high-throughput sequencer, delivering the most accurate genome, short and long reads multiomics analysis in a single flow cell on a single run on one instrument. And NovaSeq X is the only high-throughput sequencer with onboard analysis, variant calling and up to 5x lossless data compression. Savings from the built-in DRAGEN analysis onboard over five years can cover the cost of the NovaSeq X. These features collectively provide fast, easy, more complete and fully-analyzed genomes at a cost as low as $200 per genome with analysis. NovaSeq X has over 40 patent applications, took five years and 1,500 scientists, engineers, developers and designers to create. These innovations make high efficiency, high-throughput sequencing accessible at a global scale. Customer response has been fantastic, exceeding our expectations. And we already have over 140 orders for NovaSeq X Plus and an advanced pipeline of more than 200 orders. We plan to ship 40 to 50 instruments in Q1 and over 300 instruments in 2023. The strong global interest with orders from more than 25 countries, 4x more than in the first quarter after the NovaSeq 6000 launch. We're also seeing stronger than expected demand from the clinical customers, with more than 35% of orders coming from the clinical segment who are bringing on higher intensity sequencing applications such as liquid biopsy, MRD and other multiomic tests. And approximately 15% of orders are from new to high-throughput customers, who are bringing sequencing in-house due to NovaSeq X's ease of use and cost benefits. This represents the strongest pre-order book we've seen with any Illumina instrument launch, and this demand will catalyze a multiyear upgrade cycle. Over the next few years, we expect average pull through for NovaSeq X to comfortably exceed NovaSeq 6000s, as NovaSeq X unlocks the market's demand elasticity, enabling more samples, more analysis per sample, and more sequencing intensity per analysis. I'll walk through each. There are three major factors contributing to the growth of samples. First, genomics combined with clinical information can increase drug discovery success by up to 150% and reduce costs by up to 50%. To achieve this, we need more samples over time and from a more diverse population. For example, the All of Us initiative aims to partner with at least 1 million Americans to accelerate medical breakthroughs and 80% of participants represent historically underrepresented communities in medical research. The need for genetic diversity in databases is also driving these larger cohorts. Today, we announced that Amgen and its subsidiary deCODE Genetics will sequence the first 35,000 genomes in our collaboration with Nashville Biosciences, representing the largest set of Black individuals sequenced to date. And the Singapore PRECISE 100,000 genome project is creating the largest and most complete Southeast Asian genomic data set. Second, new areas in oncology include a broader group of patients and more testing per patient. MRD testing is done multiple times for those undergoing cancer treatment and those in remission. In early detection, anyone over the age of 45 with a family history of cancer or other risk factors will be tested regularly throughout their lifetime. Together, these expand the population tested on a repeated basis by 100 times. Third, techniques such as single cell and spatial analysis are creating multiple samples from what used to be a single sample. NGS forms the basis of deeper molecular analyses of these samples. Turning now to the second driver of elasticity. Researchers and clinicians are additionally running additional omics analysis on a single sample for more comprehensive molecular understanding. NGS is enabling these analyses at scale, as it did with DNA, and the cost and workflow of NovaSeq X will accelerate this trend. For instance, researchers are increasingly conducting whole transcriptome analysis at scale to get complete mRNA information in addition to DNA. Also, NGS is for the first time enabling scaled proteomics research with simultaneous analysis of thousands of proteins from hundreds of samples. NovaSeq X reduces the cost and data analysis barrier, and with multiple flow cell lanes provides flexibility to do multiple analyses at the same time on the same run. These capabilities enable new studies to include genomics and proteomics where genomics may have been the only thing considered previously. For example, the UK Biobank recently partnered with Olink for proteomic analysis of 50,000 of their 500,000 Biobank samples. Third, customers are increasing the intensity of sequencing for each analysis looking for more sensitivity, specificity and information from each sample. We're seeing this in cancer testing as customers move from small panels to comprehensive genomic analysis, increasing the output per sample by a factor of five. And the expansion of liquid biopsies due to lack of available tumor tissue, the reduced cost and better patient compliance translates to 12x to 15x more sequencing than solid tumor testing. We're seeing this growth already across customers engaged in liquid biopsy testing. Lastly, as costs for sequencing and bioinformatics analysis decrease and workflows improve, there is a trend towards whole genomes rather than panels, increasing sequencing intensity by 40x. Many customers, including CeGaT in Germany, will use the cost and efficiency benefits of NovaSeq X to accelerate this trend. NovaSeq Xâs higher output per analysis enables customers to rethink analysis for their projects in ways that they weren't even considering before. Multiple customers have said that the NovaSeq X enables them to start with genomes in projects that were previously exome focused. Now turning to mid-throughput. We had a fourth consecutive year of record NextSeq shipments, with NextSeq 1000, 2000 consumable revenue doubling from 2021. We expect further NextSeq 1000, 2000 expansion in 2023 across applications including multiomics, genetic disease research and cancer research. Customers appreciate NextSeqâs 1000, 2000âs unique capabilities as the only mid-throughput sequencer with built-in analysis, and the first mid-throughput instrument to include the 2 by 300 longer read kits. In early 2024, we will make the new XLEAP-SBS chemistry available on existing NextSeq 1000, 2000 instruments. Now to low-throughput. Low throughput is a great way to enter into sequencing and then later enable upgrades to mid and high-throughput sequencers as projects expand. And Illuminaâs low-throughput instruments have been used in over 130,000 publications, more than all other sequencing companies combined. Our low-throughput instruments attract hundreds of new customers each year, opening up new geographies and applications like infectious disease. Iâll now touch on Illumina Complete Long-Reads. Illumina Complete Long-Reads is the only offering that addresses the 5% of hard-to-read genic regions at scale, with high accuracy, all on a single instrument and with 90% less DNA input than other long reads. This year, we will launch two products, a whole genome assay and an enrichment panel, enabling a comprehensive high accuracy, long read view for as little as $600 per genome. Turning now from our products to accelerating clinical genomics. Over the last decade, Illumina has built a clinical infrastructure with deep expertise, scale and reach. Clinical consumable shipments were $1.3 billion in FY 2022 revenue, representing 45% of our total sequencing consumables. We serve more than 5,000 clinical customers with 10 IVD EUA product families and 1,200 product registrations, and regulatory approvals over 62 countries. Our instruments, reagents and software are core components of many of our clinical customers' workflows and processes. Oncology represents a $78 billion market for sequencing. And in the next five years, we expect NGS penetration of this market to grow at a 30% CAGR. Multiple trends are driving this growth. Tumor-naive approaches will be used in pan-cancer targeted therapies requiring deeper sequencing and more liquid biopsy. Pharma drug development will drive dollars towards applications, including vaccines and targeted therapies, and patients will have multiple tests over their lifetimes. We see significant need across the cancer journey starting with early detection. The GRAIL Galleri blood test is the only commercially available multi-cancer early detection test addressing a $44 billion early screening market. Galleri's blood test screens for more than 50 cancer types, 45 of which do not have another recommended screening test. And it's the only test which pinpoints cancer location with 89% signal of origin accuracy. With its breadth and precision, GRAIL is predicted to avert one in three cancer deaths over a five-year timeframe. In addition to Galleri, GRAIL is working on a unique multi-cancer MRD test that doesn't require a tissue biopsy and enables a 2x to 3x reduction in turnaround time relative to customized approaches that require tissue biopsies. Illumina reacquired GRAIL in 2021. And as we work through the regulatory process, we're also exploring strategic options related to the divestiture order from the European Commission expected this quarter. We will keep you updated. GRAIL had a very strong 2022. Consumer demand for the Galleri test has exceeded expectations with physician orders for more than 60,000 tests received to date. Galleri have the fastest first year revenue ramp in cancer screening test history. GRAIL has established over 60 partnerships with leading health systems, self insured employers and other healthcare stakeholders. In 2022, more than 4,500 providers ordered the test. Galleri received FDA Breakthrough Designation, was recognized by Time as one of the best inventions of 2022, The Atlantic as one of the breakthroughs of the year, and Fast Company as one of the world-changing ideas of 2022. Clinical trial data for Galleri is consistent and positive, and real-world evidence of more than 30,000 patients corroborates this data. Provided reported cancers detected with Galleri include: stage one pancreatic, head and neck, endometrial, esophageal, and gastrointestinal stromal tumor cancers; and stage two rectal, liver and head and neck cancers. Galleri has also had a very positive reaction from consumers with a 97.1% satisfaction rate. GRAIL is making progress towards reimbursement with 300,000 participants across multiple studies, and a final FDA submission expected in 2024-2025. GRAILâs NHS trial spans 140,000 participants, with a rollout of up to 1 million people beginning in 2024, if the trial is successful. This exciting momentum translates into an expected GRAIL revenue CAGR of 60% to 90% over the next five years. Turning now to therapy selection. Illumina participates in the $9 billion therapy selection market by providing sequencing systems to more than 1,100 therapy selection test developers who performed approximately 1.75 million tests in 2022 alone. In addition, we provide our leading TruSight Oncology offerings, or TSO 500, to 1,500 oncology testing service providers. In 2022, TSO 500 sample volume grew 60% year-over-year across more than 500 customers, and we expect more than $100 million in 2023 revenue. Also, in 2023, we expect TSOâs IVD registration in Europe and to submit for IVD registration in the U.S. and Japan. Moving to minimal residual disease monitoring or MRD. MRD is a $25 billion market that's only 1% penetrated. Early traction is strong with more than 200,000 tests performed in 2022, up 140% year-over-year. Illumina is well positioned with more than 10 MRD solutions in development on Illumina platforms. And payers are recognizing the therapeutic impact of MRD. In the U.S., four indications are currently covered by Medicare, and two by commercial players, with an additional eight indications expecting coverage by 2025. We look forward to seeing this market and the rest of our clinical applications grow in 2023 and beyond. In closing, Illumina has a best-in-market portfolio, global infrastructure and team serving large, expansive growing markets. In 2023, we're looking for the NovaSeq upgrade cycle -- NovaSeq X upgrade cycle and momentum in mid-throughput following a record 2022. We also expect to see consumables growth from our expanding install base, unlocking of demand elasticity and accelerating adoption of the Galleri test. All of these move us closer to our mission of improving human health by unlocking the power of the genome. We look forward to sharing more with you in the coming months, including on our earnings call on February 7. Thank you. Thank you, Francis, for the great overview. Let's welcome the rest of the management team on stage for Q&A. And as a reminder for the audience, if you have a question, feel free to raise your hand, we'll pass the mic to you. And you can also submit your question through the digital conference book. So, I can get us started, maybe starting with the '23 outlook. Last quarter, you talked about your preliminary review of 10% reported growth. You're guiding to 7% to 10% reported and 6% to 9% core Illumina. So, maybe just talk about what has changed about your view since then? And what are you assuming at the lower and upper end of your guidance? Yes, we're looking for 2023 to be an exciting year for us on a number of perspectives. So, what we said earlier was we expecting revenue growth closer to that 10%. And what's going to drive this year is going to be the few things I talked about. One, obviously, we're entering a big upgrade year, right? And so, we're launching the X in Q1 and we're kicking off with probably one of the biggest upgrade cycles in sequencing, right, as we upgrade our high-throughput customer base. And so, one of the things to watch over the course of the year will be, obviously, how that upgrade cycle is going. We feel really good about the preorders that have come in to date. And with the numbers we have already, we're effectively sold out not just for Q1, but for most of Q2 too. And so, we feel really good about the demand side of it. And, obviously, the work to do now is to scale up manufacturing. We're looking to ship 40 to 50 units in Q1, 300 units over the year. So, one of the things to watch will be that ramp. And I think that represents certainly from a demand side upside potential for us. The other thing we're going to be watching for this year is how the X unlocks some large projects driven by the demand elasticity that X will tap into. And so, while we haven't built that into our guide for the year, we're talking to customers about projects that they would like to kick off. And so, we're going to be watching the timing of those projects and what of those projects come in this year versus in the coming years as we roll out the X. And on the other side of the ledger, we're continuing to monitor the macroeconomic environment; the situation in China, inflation and so on. And so that's sort of the puts and takes as we look at the rest of the year. Got it. So, is it fair to interpret that it's more a prudent approach to your '23 outlook? Obviously, the NovaSeq X order book is really strong and it should support a lot of upside, like you mentioned. Have there been any changes or evolution in any of the near-term headwinds that you previously talked about, like consumable destocking, like customer lab expansion delays and things like that? Yes, I think we are -- as we sort of lap the second quarter of last year, we've first started to see some of the destocking, that's certainly going to be less of a factor into 2023. And then in terms of lab expansions, some of the customers that have delayed it have got those back on track, but from a guide perspective and not really assuming any big lab expansions will play out in 2023. And so, really the story of this year is going to be some of the things I talked about earlier, the upgrade cycle and those much more than some of those other things. Awesome. So, speaking of the NovaSeq order book, 140 orders, very strong number, how does that compare to your internal expectations? And in terms of the customer mix, 35% commercial, is that in line with your expectations? Or how should we think about the continued momentum going forward? Yes. We've been working on this product for five years, right? And so, we had many, many people, and we had incredibly high expectations for its launch, as you can imagine. And NovaSeq X has exceeded all of them, right? We are -- the order book we have right now is exceeded where we expect it to be for this time in the launch. And there have been a number of places where we've been surprised. One is, we're surprised by the clinical interest. What we had modeled coming in is what we saw with the 6000, which is the first set of customers that would deploy the X we expected would be in academic and research environments, and they'd be the first ones that would be replatforming their fleets to take advantage of the benefits of the X. And that's certainly happening. But we've also seen our clinical customers come on board. And we said the 35% of the preorders we've got have come from clinical segments, and we didn't expect it to be as big as it was. And so that's been a nice upside surprise. We've also seen more new to high-throughput customers come into the pre-order book than we expected. This is a -- it's a very powerful machine. We weren't expecting as many people to use this as their entry point into new to high-throughput. But what's played out is that the operational ease of use that we delivered with X has made that power accessible to customers that frankly were a little intimidated to bring sequencing in-house before. And so, it's the economics as well as the streamlined workflows, the operational efficiencies, the built-in analysis, which is a big deal in terms of reducing the bioinformatics hurdle to deploying sequences. And so that surprised us to see 15% of the order base come in from new to high-throughput. We're also surprised by the global demand. We've talked about the fact this is several times more interest in pre-orders from countries around the world than we saw even with the 6000. And part of it is driven by the operational efficiencies and ease of use that are built into the X. But part of it's also driven by the investments we made around eliminating the need for a cold chain and dry ice and shipments. And so, now you have these instruments that are accessible to parts of the world that may have a cold chain but don't have a reliable cold chain. And so, now they feel they can comfortably bring in sequencing in-house rather than sending samples outside the country. And so, we didn't expect again quite the global interests that we've seen. Awesome. In terms of just how to think about the continued momentum of that order trajectory, what do you think is the magnitude of year-end budget flush benefit that you saw in 4Q, and how to think about the order book going from here? Yes, I think there's no question now that demand is going to vastly exceed what we can supply this year. I think we're so far so -- itâs so clear now that this year we're going to be supply limited. The 300, we could comfortably raise that a lot, because the demand is broad. Ultimately, we do believe that not only will you see every customer that's got a NovaSeq 6000 ultimately upgrade to the X, again, it's so far better in terms of performance than anything out there, but we will also see again a significant expansion of the market. The demand elasticity that NovaSeq allows customers to tap into is a very significant factor. It's why -- I'll give you an example. Part of the interest we saw from clinical customers are customers that are doing liquid biopsy applications. And we talked about the fact that liquid biopsy requires a lot more sequencing than if you were using solid tumor tissue, right? And so, those are the kinds of applications that I think the X will dramatically expand. And I talked a little bit about that in my presentation. And so, I think we'll see a multiyear both upgrade cycle as well as new customers coming into the X. You're also kind of seeing that with the increased clinical interest so early, right? That's exactly moving to a higher throughput, more kind of specificity, more sensitivity being required in these assays. So, you're already starting to see that very, very early in the cycle. Right. Obviously, you're working on ramping up your manufacturing capacity to catch up with that strong demand. What's the run rate capacity that you're hoping to reach by year end, 500 systems a year or? Well, I mean, if you sort of run the math, right, in terms of we're going to start with 40 to 50 in Q1, we're going to ship over 300 for the year. So, even the math tells you we're going to be comfortably above even 80 instruments per quarter. And the reality is we have a fantastic operations team that as demand comes in, we can scale that up if we need to. And so, the hard part of the work, and it's all hard part, but it's the scaling up that's happening now to make sure that we've sort of fixed a reproducible manufacturing process, that we've scaled up all the vendors that we need, all the suppliers that we need. And so, a big part of the work is really just this year. And then, once we get to Q4, we feel that it's easier for us to then scale up as demand continues to grow. But we expect this year we're going to exit with being able to make over 80 instruments per quarter, and then building up from there. Got it. And that capacity constraint is only on the instrument side, or is it on the consumable side as well? It's a little bit of -- both of them are going to be new processes, right? So, as I said with the X, we have redesigned that instrument from the ground up; every part of X is new. So, if you look on the consumable side, if you look at the chemistry, the entire chemistry is new. It's new FFNs, it's new reagents, it's new dyes, it's new blockers, it's new everything. What that means is every part of the manufacturing process is new. On the flow cell, we have a new mill process for manufacturing our flow cells, that's new as well. And so, every part of our manufacturing is being scaled up and started being scaled up in the middle of last year, right? And so, we're working through that, and we will scale all of it up over the course of the year. Got you. Now turning to NovaSeq 6000, can you talk about the residual demand you saw in 4Q? And what's your expectation? Did you maybe take a slightly lower as well in your updated '23 outlook? Yes, I think two things are very clear. One, that going forward, the biggest part of both demand and then the shipments will be on the X, right? At some point as we ship the X, that will be the primary instrument that our customers will want and that will be therefore the primary instrument that we will ship and that's what will drive our revenue. Having said that, it's also true that there are customers that are using the 6000 in production at scale. And if you are a research customer that's in the middle of running a large cohort for a project, you're going to continue to do that on the 6000 most likely, and that will continue to drive some demand for the 6000s both on the instrument side as well as the consumable side. Similarly, our large clinical customers have validated workflows that they've built on the 6000. And as those applications continue to scale, they will continue to drive demand for 6000s. Again, both on the instrument side as well as the consumable side. So, you will continue to see us ship 6000s on hardware and consumables going forward. But certainly, the biggest part of the revenue for us going forward in high-throughput is going to be on the X. Got you. Speaking of the competitive landscape in the high-throughput market, BGI is allowed to enter the U.S. market this year. How meaningful a competitive threat do you view them? Or do you think them as a bigger playing OUS markets rather than the U.S. market? We've always had competition, frankly, even when we entered the sequencing market in 2007, the players in the market, and we always take competition seriously. And so, we continue to monitor the market and we want to make sure that from a customer perspective, we're continuing to provide the best value proposition to our customers across the dimensions that they care about. Performance is certainly one, cost effectiveness another, ease of use, the clinical infrastructure that we deliver. And so, we're going to continue to take competition seriously and monitor the market. But our focus will continue to be obsessively focused on our customers and what they want. And fortunately, and Susan Tousi, our Chief Commercial Officer is here in the audience, but fortunately we have a fantastic commercial organization that is very close to our customers. And so, I said, we have over 9,500 customers in 155 countries. And so, we have a sort of front row seat to what our customers, not only want today, but will want in the future. And so that informs our thinking around how we invest for our roadmap. And so frankly, the biggest part of our attention is always going to be on what our customers are thinking about, what they wish they could do in the future, and that's going to drive our innovations. And that's why in a lot of cases, you see us do things that frankly nobody else did, for example, the elimination of need of dry ice, right? We're the only company that made those investments to remove the need for a cold chain in your supply. And that was because our customers told us that that was very onerous for them that unlock -- unpacking the reagents was a big operational disruption. And frankly, they wanted big science to be green science. And so that's what led to our investments in those sustainability features, for example, not because there's anybody else doing it, nobody else is. Got you. Just sticking with the core business for a moment, can you talk about the gross margin and operating margin trends in 4Q? And you're, obviously, assuming some deterioration in '23. So, just help us think through the puts and takes and drivers there. For both. Yes, I think Q4 margins came in close to where we were expected, maybe slightly higher as we continue to drive efficiencies through the process. For 2023, we had said that gross margins would be towards the lower end of the range, high 60%-s to low 70%-s that we have provided. The reason for that is quite simple, right? It's the first year of a major instrument launch. We expect the mix to be skewed more towards instruments and, therefore, lower margins. Now, of course, as we move forward, we do expect that, as Francis had mentioned, right, demand elasticity will pick up, you'll have more of the consumables and we expect to see gross margins improve as we go into 2024 and beyond. We're almost out of time, but I want to squeeze in one more. GRAIL, obviously, we know -- I know you're still waiting for the EC divestiture order, but what's your interpretation of the word that GRAIL should be restored its independence swiftly? Yes. So, the European Commission has emphasized a few things. I think swiftly is one. So, I think -- and where all incentives sort of move as quickly as possible through this process, the European Commission and Illumina both. The other thing they have emphasized is they want to make sure that we're doing the right thing for GRAIL and GRAILâs customer. So, they recognize the lifesaving potential of the GRAIL Galleri blood test. And what they're saying is look, whatever we do has to make sure that we protect GRAILâs ability to be successful in the future and bring the potential lifesaving benefits of that test to customers around the world. So that's another true north if you like, both for the European Commission and for us. And so, they're saying, look, what we're balancing here is we want to move quickly, but we also want to make sure we're doing the right thing to make sure that GRAIL Galleri and its customers are set up for success and able to bring its lifesaving tests to customers around the world in a responsible way. And, obviously, from our perspective too, the other part of the true north is to make sure that we're doing the right thing for Illumina shareholders, right?
EarningCall_1340	At this time, all participants are in a listen-only mode. After the speakersâ presentation, there will be a question and answer session. To ask a question during this session, you will need to press star-one-one on your telephone. Please be advised todayâs conference is being recorded. I would now like to hand the conference over to your host today, Laura Rossi, Head of Investor Relations at Amerant. Please go ahead. Thank you Michelle. Good morning everyone and thank you for joining us to review Amerant Bancorpâs fourth quarter and full year 2022 results. On todayâs call are Jerry Plush, our Chairman and Chief Executive Officer, and Carlos Iafigliola, our Senior Executive Vice President and Chief Financial Officer. As we begin, please note the discussions on todayâs call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, references will also be made to non-GAAP financial measures. Please refer to the companyâs earnings release for a statement regarding forward-looking statements, as well as for information and reconciliation of non-GAAP financial measures to GAAP measures. I am pleased to be here to report on our performance for the quarter and full year, but before we get into that, I would like to first acknowledge and thank all of my colleagues here at Amerant for their dedication and effort again this quarter. We have a great team and weâre excited about the strong additions to the Amerant family this quarter and throughout the year. They will play an essential role in our growth in 2023 and beyond. Moving onto the remarks for the quarter, Iâm pleased to share that on January 18 of 2023, our board of directors approved a dividend of $0.09 per share payable on February 28 of 2023. The ability to pay dividends along with the ability to repurchase stock are essential parts of effective capital management and value creation for our shareholders. More on this in a few minutes. Iâll now provide a brief overview of our performance for the fourth quarter and year, and then Carlos will go over the details. He will then turn it back to me for some observations regarding 2023 as part of my concluding remarks. Letâs turn to Slide 3 for a summary of our fourth quarter highlights. Net income attributable to the company was $18.8 million, down 10.3% quarter-over-quarter driven by the recording of a provision for credit losses of $20.9 million which includes a one-time $11.1 million provision expense in connection with the adoption of CECL, as well as some other items which Carlos will cover in further detail in the coming slides. Please note we will provide disaggregated CECL impacts for each quarter of 2022 in our upcoming 10-K report. Our net interest margin expanded to 3.96%, an increase of 35 basis points quarter-over-quarter. Our balance sheet continued to grow, reaching a record high of $9.1 billion in total assets compared to $8.7 billion as of the close of 3Q22. Total gross loans were $6.9 billion, up $416 million from the $6.5 billion last quarter. Total deposits were $7 billion, up $456 million from the $6.6 billion last quarter. Core deposits also increased by $114 million this quarter compared to 3Q22. The companyâs capital continued to be strong and in excess of minimum regulatory requirements to be considered well capitalized as of December 31, 2022, and during the quarter we paid out the previously announced cash dividend of $0.09 per share on November 30, 2022. Regarding effective capital management, as I referenced earlier, on December 19 we announced that our board authorized a new $25 million share repurchase program which became effective on 1/1/2023, and this will remain active for the calendar year of 2023. At the time of this announcement, we stated we did not intend to use this new authorization before reporting the results today, and we did not use it. We do now intend to be opportunistic throughout the year to utilize this authorization where appropriate. Letâs look at core PPNR on Slide 4. Core PPNR increased to $37.8 million, up 24.8% compared to the $30.3 million reported in the previous quarter. As weâve consistently stated, we believe itâs essential to show that net revenue growth of the company excluding provisions and non-routine items to show Amerantâs core earnings power. Turning now to Slide 5, here is a list of several key actions taken during the fourth quarter. We continue to focus on actions that will drive profitability and improve our efficiency ratio. We also intend to continue investing in future growth, as you will see. We referenced last quarter a commercial property that moved into REO. This was disposed of in October at no additional loss. Regarding an update related to our banking centers, as we previously announced, we did close the Pembroke Pines, Florida location on 10/17/22 and we consolidated the existing customers into our newer Davie branch location. We opened in University Place in Houston at the end of October and closed the South Shepherd banking center. This is a far superior location for us as the Texas Medical Center, Rice University, Rice Village, and the NRG Center complex are all within a one-mile radius. The downtown Miami location is now expected for 3Q23. This will be a flagship location for us in the heart of the city with private banking, wealth management and commercial banking all having business development officers located there. We received OCC approval to open a new full service banking center in Key Biscayne, Florida. Permits are expected sometime this quarter and opening is expected for the second quarter. Weâre excited to be opening there and weâve already attracted a well respected team to drive growth. We also received OCC approval for a new location on Las Olas Boulevard in Fort Lauderdale, Florida. This office is expected to open in 3Q23 and will bolster our consumer bank growth, especially in private banking there. We continue to add key business development personnel in domestic retail, private commercial banking, as well as wealth management. Our board appointed Ms. Erin Dolan Knight as a member of the board of directors effective on December 15 of 2022. Erin is well known and respected here in the Miami marketplace and her knowledge and banking experience make her an excellent addition to our board. As previously referenced, the board authorized a new share repurchase program for up to $25 million of Amerant shares of Class A common stock. On the partnership front, we announced an expanded multi-year partnership with the Florida Panthers, making Amerant the official bank of the Florida Panthers and FLA Live Arena. Weâre excited to not only be able to say weâre the official bank of the Panthers but to also have them as one of our newest customers, and the same goes for our partnership with the Miami Heat. Banking with us is an essential part of these partnerships. Weâll talk more about this in our concluding remarks. Then finishing up this slide, we became a large accelerated filer and adopted the current expected credit loss accounting standard, which Carlos will go into detail shortly. Now weâll turn to Slide 6. Here are select key performance metrics and their change compared to last quarter. Our net interest margin improved to 3.96% compared to the 3.61% in the previous quarter, and our efficiency ratio improved to 58.4% compared to 65.4% last quarter. Please note that the core efficiency ratio for 4/2/22 was 61.3%, so for consistency and transparency, we included the three core metrics of ROA, ROE and efficiency excluding any one-time or non-routine items in the footnotes in the slide so you can easily see the underlying performance for the quarter. Weâll turn now to Slide 7, which focuses on Amerant Mortgage. On a standalone basis, Amerant Mortgage had net income of $0.9 million, an increase of $100,000 or 13.9% compared to Q3, primarily the result of mortgage banking income from transactions with the bank. On a consolidated basis, we recorded a net loss of $1.5 million for the fourth quarter in connection with the operations of Amerant Mortgage. Year to date 2022, the company has purchased approximately $413 million in loans through Amerant Mortgage, which includes loans originated and purchased from different channels. The current pipeline shows $64 million in process or 88 applications as of January 12, 2023. With that said, Iâll now turn things over to Carlos, who will walk through our results for the quarter in more detail. Turning to Slide 8, Iâll begin the discussion with our investment portfolio. Our fourth quarter investment securities closed at $1.3 billion. We also had a strong cash position of $290 million for the end of the quarter. When compared to the prior year, the duration of the investment portfolio extended to 4.9 years due to higher market rates and lower pre-payment speeds recorded in our mortgage-backed securities. As I shared last quarter, our investment strategy has focused on achieving the right balance between yield and duration while maintaining high credit quality in the portfolio. The floating portion of our investment portfolio increased to 13% compared to 11% in the previous year. As I have done in the previous quarters, I would like to reference the impact of the interest rate increases on the valuation of the debt securities available for sale. As of the end of the fourth quarter, the market value of this portfolio had increased by $3.9 million after tax compared to a decrease of $35 million in the third quarter. The quarter-over-quarter increase was driven by mortgage bond spreads contracting during the performance of the quarter. We had an after-tax decrease of $97.2 million in the valuation of our AFS portfolio during 2022 which was a direct result of increases in interest rates and is consistent with our interest rate sensitivity analysis for a 300 basis point shock. Note that 73% of our AFS portfolio is guaranteed by the government while the remaining portion is investment grade. It is also important to comment that our tangible common equity ratio ended at 7.5% after considering the impact of changes in valuation of our AFS portfolio. Continuing to Slide No. 9, letâs talk about the loan portfolio. At the end of the fourth quarter, total gross loans were $6.9 billion, up 6.4% compared to the end of the last quarter. The increase in total loans was primarily driven by higher C&I loan balances and residential loan purchases during the quarter, despite having received approximately $163 million in prepayments from both CRE and C&I portfolios. Consumer loans as of the end of the fourth quarter were $605 million, an increase of $28 million or 4.8% quarter-over-quarter. This includes $433 million of higher yielding indirect consumer loans compared to $487 million in the previous quarter. Loans held for sale totaled approximately $62 million as of the end of December, all in connection with the activities of Amerant Mortgage. Turning to Slide No. 10, letâs take a closer look at credit quality. Overall credit quality remains sound and reserve coverage improved over the quarter despite charge-offs recorded during the same period. The allowance for credit losses at the end of the fourth quarter was $83.5 million compared to $53.7 million at the close of the previous quarter. The change was primarily due to CECL. We elected not to apply the three-year transition provision to our capital calculations. In the fourth quarter, we recorded a one-time day one $18.7 million adjustment to retained earnings with a corresponding after-tax cumulative effect of $13.9 million to account for the CECL impact as of January 1, 2022, and a day two $11.1 million adjustment to provisions to account for the CECL impact for the year ended December 31, 2022, including loan growth and changes in macroeconomic conditions during the year. The provision for credit losses in the fourth quarter under CECL excluding the retroactive effect corresponding to the first, second and third quarters of 2022 is approximately $7 million. The provision also included $9.8 million in additional reserve requirements for charge-offs. The total provision recorded for the quarter was $20.9 million compared to a $3 million provision in the previous quarter. Net charge-offs of $9.8 million in the fourth quarter compared to $0.7 million in the third quarter. Charge-offs during the period were primarily due to $5.5 million related to consumer loans, of which $3.4 million resulted from a change in the consumer credit charge-off policy from 120 days to 90 days past due, $3.9 million in connection with a New York-based CRE retail loan, and $1.1 million in business loans. This was offset by $0.6 million in recoveries. The CRE retail loan is expected to transition into REO during the first quarter of 2023 with no additional changes in valuation once we finalize updating ownership. Non-performing assets totaled $37.6 million at the end of the fourth quarter of 2022, an increase of $12.5 million compared to the third quarter and a decrease of $22 million compared to the fourth quarter of 2021. The increase this quarter was primarily due to the New York property I previously mentioned and primarily offset by the disposition of a $6.3 million OREO the previous quarter. The ratio of non-performing assets to total assets was 41 basis points, up 12 basis points from the third quarter of 2022 and down 37 basis points from the fourth quarter of 2021. In the fourth quarter of 2022, the coverage ratio of loan loss reserve to non-performing loans decreased to 2.2 times from 2.9 times in the third quarter, an increase from 1.4 times at the close of the fourth quarter of 2021. Continuing to Slide 11, total deposits at the end of the fourth quarter were $7 billion, up $456 million from the end of the third quarter. This growth was driven by time deposits which totaled $1.7 billion, up $342 million compared to the previous quarter. Note that domestic deposits account for 66% of our total deposits, totaling $4.6 billion as of the end of the third quarter, up $455 million or 11% compared to the previous quarter. Foreign deposits, which account for 34% of total deposits, totaled $2.4 billion, slightly up by $1.5 million compared to the previous quarter. Our core deposits, which consist of total deposits excluding all time deposits were $5.3 billion as of the end of the fourth quarter, an increase of $114 million or 2.2% compared to previous quarter. The increase in core deposits was primarily driven by commercial deposits inclusive of new funds from our sports partnerships and additional funds from municipalities. The $5.3 billion in core deposits includes $2.3 billion in interest-bearing deposits, which increased $154 million versus the previous quarter, $1.6 billion in savings and money market deposits, which decreased $88 million versus previous quarter as opportunity cost of customers increases with interest rates, and $1.4 billion in non-interest bearing demand deposits, up $49 million versus previous quarter. Next I will discuss the net interest income and net interest margin on Slide 12. Fourth quarter 2022 net interest income was $82.3 million, up 18% quarter-over-quarter and up 47% year-over-year. The quarter-over-quarter increase was primarily attributed to higher rates in total interest-earning assets, primarily loans, driven by the combined effect of a 125 basis point increase in the Federal Reserve benchmark during the fourth quarter and a 75 basis point increase at the end of the third quarter. We observed a beta of approximately 55 basis points in our loan portfolio during the third quarter and a beta of 41 basis points for the full year, which helped to drive our margin. Also contributing to the increase in the net interest income was higher average balances in loans. The increase in net interest income was partially offset by higher rates in interest-bearing deposits, broker fees, and FHLB advances. As we mentioned in the past quarter, we continue to be very disciplined managing an increase in our product rates during this interest rate cycle. We adjusted certain interest rate-sensitive products and relationships to partially reflect the increases in the market rate. As a result, we observed a beta of interest-bearing accounts of approximately 49 basis points during the third quarter and 28 basis points for the full year. Moving to the net interest margin, as Jerry mentioned, NIM was 3.96%, up 35 basis points quarter-over-quarter. The change in the net interest income on the net interest margin was primarily driven by the increase in the yield of our loan portfolio, which is now at 5.85%, an increase of 79 basis points compared to the previous quarter. As I said in the last quarters, the improvement in the NIM is a reflection of our asset-sensitive position. Moving to Slide 13, weâll show the interest rate sensitivity analysis. As you can see, our balance sheet continues to be asset-sensitive with about half of our loans having floating rate structures and 59% re-pricing within a year. Our NIM sensitivity profile to interest rate up scenarios has decreased compared to the last quarter due to increased amount in time deposits. These changes are consistent with a more competitive environment for deposit gathering. This quarter, we are showing a potential increase of approximately 5% in net interest income under an up 100 day scenario and 8% for an up to 100 day scenario. We will continue to actively manage our balance sheet to best position our bank for expected remaining increases in interest rates as the Federal Reserve continues its efforts to dampen inflation in 2023. Continuing to Slide 14, non-interest income in the fourth quarter was $24.4 million, an increase of $8.4 million from the third quarter. This was primarily due to a recorded net gain of $11.4 million on prepayment of approximately $175 million of FHLB advances as we took advantage of what we consider was their peak evaluation; second, an increase of $0.6 million in fee income from client derivatives; and third, higher market valuations under [indiscernible] instruments. Offsetting this increase in non-interest income was higher losses due to the sale of an investment that was downgraded below investment grade. We consider $9.1 million of our non-interest income as a non-recurring item, an increase compared to the $1.4 million in third quarter 2022. This was primarily driven by the net gain in prepayment of advances that was previously discussed. Core non-interest income was $15.3 million in the fourth quarter compared to $14.5 million in the previous one. Amerant assets under management and custody totaled $2 billion as of the end of the quarter, up $184 million or 10% from the end of the third quarter, primarily driven by an increase of $127 million in net new assets as we continue to execute on our relationship-focused strategy, as well as $67 million from an increased market valuation. Turning to Slide 15, fourth quarter non-interest expenses were $62.2 million, up $6.1 million or 11% from the third quarter and up $7.2 million year-over-year. The quarter-over-quarter increase was primarily due to the following: accrued for severance expenses as well as higher bonus variable compensation in connection with recent performance, higher loan level derivative expenses related to the client derivative transactions, higher expenses in connection with our brand positioning efforts such as out-of-home billboards and sports partnerships, higher professional and other services fees in connection with the adoption of CECL, as well as consulting and legal fees and additional projects, and additional depreciation expenses in connection with the closing of a banking center. These increases were partially offset by lower technology expenses, as well as the absence of an OREO valuation that we had during the previous quarter. We consider $2.4 million of our non-interest expenses as a non-recurring item, an increase compared to the $2 million in the third quarter of 2022 primarily driven by severance-related expenses, as I mentioned before, and also due to conversion expenses. Core non-interest expenses were $59.8 million for the fourth quarter compared to $54.2 million in the third quarter. The efficiency ratio closed at 58.4% in the fourth quarter compared to 65.4% in the previous one and 41.4% in the fourth quarter of last year. The quarter-over-quarter decrease was driven by higher net interest income while the year-over-year increase was primarily due to the absence of the gain on the sale of the companyâs headquarter building that was recorded in the last quarter of 2021. Core efficiency ratio, which adjusts for non-recurring items, was 61.3% in the fourth quarter of 2022 compared to 64.1% in the third quarter of 2022 and 75% in the fourth quarter of 2021. Thank you Carlos. As I referenced earlier, Iâd like to make a few comments on initiatives we have underway. I thought this would be helpful to provide. For most of 2022 and now for the first four and a half months of 2023, our team has been and will continue to work diligently behind the scenes preparing for the conversion of our core systems. Slated to take place on May 8, we believe this will be a significant step forward for us to be able to provide more up-to-date, highly integrated technology which post-conversion will result in making banking with us easier for our customers, as well as our team members. Regarding our digital transformation efforts, another team led by our Chief Digital Office is working in parallel during this conversion timeline to be ready to greatly enhance our information and data evaluation capabilities. Called Harmony, it reflects our goal of having far more information readily available when interacting with our customers and potential clients, as well as for management purposes. Iâd like to comment next on expansion. We have filed an application with the OCC to open a single location in Tampa to support our growing business opportunities there. We intend to only have one branch there on the first floor of our new regional office location, which we will be announcing soon. This single branch is ideally situated, like the others I referenced earlier in my remarks and the key action slide, to support deposit market share growth aligned with our goal of continued expansion in private banking and commercial banking. In conclusion, the benefits from the decisions we made throughout 2022 and from the efforts of our team members are clear, as evidenced by a higher core PPNR, significant net interest margin expansion, another quarter of solid loan and deposit growth, and strong capital ratios. As we enter 2023, please know that we, like others, absolutely recognize the challenges that we will all face given uncertain economic conditions. We like the markets we are in and believe they are showing more resilience than other areas of the country, which is a key differentiator for us, but obviously we recognize that even the best markets will likely experience some impacts. We intend, though, to continue to remain focused on executing on our strategic initiatives, as we have in past quarters, as our commitment to be the bank of choice in the markets we serve is unwavering. Start with the loan growth - impressive results in the fourth quarter. Iâd be curious about the moving parts of loan growth in fourth quarter within each category, and then, I guess, the outlook for the growth in â23, and in particular curious about the appetite to add additional mortgage loans from here and also some additional consumer loans. Okay, thank you for the question. The changes in the loan portfolio primarily came from the commercial side. CRE was not the biggest component of the growth this time around, it was probably about $40 million. C&I on the opposite side came with about 120, and specialty finance also came with about 70, so they were probably the biggest drivers this quarter. Then consumer came with about $100 million coming primarily from the different sources that we have. Those were the primary drivers for the quarter, Matt. And then the expectations for â23 within some of those categories you mentioned, Carlos, Iâd be curious what your thoughts are there. Yes, hey Matt, itâs Jerry. I think itâs probably safe to say, if you think about our expectations for the year, we still think with the strong pipelines we have, and I think itâs safe to say that youâll continue to see a fairly similar distribution. Obviously it was a lower quarter, as Carlos mentioned, in CRE, but I do think youâll see us look to have a pretty balanced distribution product-wise. Weâve hired folks in all of these categories and retained the team that we had in CRE, that weâve had throughout 2022. We do expect to continue to look for C&I bankers, particularly as we continue to expand here in South Florida and also in Tampa and in Houston, so. I do think over time, youâll continue--youâll see us beginning to build more and more C&I business-related--it will start to become a greater proportion of the growth. Okay, well, and I guess Iâm trying to drill down and appreciate lots of these loan categories were ramping in â22 for various drivers, various reasons. Iâm trying to appreciate if we should expect a similar level of ramp in â23, or if it would slow down given some of the economic uncertainties. Yes, look - I think weâre going to--obviously this is all dependent on market conditions, but our view is weâve added a lot of quality people and you would say that every addition adds incremental volume to the organization, right, and so from the perspective of weâre going to continue to be prudent in our credit decision-making. I will tell you that weâre being very diligent about looking for full relationships with anyone who wants to borrow money from us. Weâre looking for the full banking relationship with each and every one of them, but I do think itâs fair to say that we had an outsized growth for 2022 and I think thatâs why we gave you guidance that the number would probably look a little bit more like the 10%, maybe 12% range, tops, compared to where we are. Then I guess moving over to the expense outlook, I think you had several adjustments on the expenses to non-recurring items. I think core expense is still a little bit elevated near that $60 million level in the fourth quarter. I know youâve got lots of projects that youâre working on for â23, so might be hard to nail down specifics, but just would appreciate any kind of thoughts on expectations for operating expenses in â23. Yes, so definitely we had certain items that surged during the last quarter of the year, and I guess one of the items was the accrual for the variable comp. That was definitely one of them, plus severance, but those were extraordinary items. For the core expenses, we still expect the $58 million to $59 million. Remember that inflation is already being factored in, in the cost of the personnel expenses, and thatâs been pretty much--there were several adjustments performed during 2022 that will take full effect in 2023. Thatâs part of the change. Additional to this, we also have the expenses of the projects that you mentioned, that those will be recorded as one-time as we go through the conversion process, so we expect roughly between $58 million to $59 million in core expenses. Including extraordinary it will be probably closer to the $61 million, approximately, with the conversion services. Yes, you know Matt, I just would add to that, that one of the things, there clearly will be some--a little bit of volatility, but itâs good volatility when you start to look at it from the standpoint of the--you know, if itâs around accruing for driving deposits and loans, thatâs a good thing at the end of the day, and so the guidance Carlos just gave you is inclusive of what we expect, but obviously if we have outperformance in a given quarter, like we just did this quarter, we had a higher number to true up what we need to accrue for payouts. Thereâs now less than a billion in assets to go until you hit the $10 billion threshold, and with 10% to 12% growth, it feels like youâll kind of be flirting with that $10 billion maybe by the end of this year. Do you think that you cross $10 billion this year, and can you remind us of any of the expense impacts or Durbin impacts that we need to think about over $10 billion? Yes, look - I think we gave--obviously we said around 10% or so. Youâre right - weâll be right there. I think weâre going to be very conscious of crossing through that. I will tell you weâve been spending a lot of time doing the necessary preparation, and weâll do that throughout 2022. I think Carlos can comment on any kind of Durbin implications, but to be candid, my expectation is if there are, thatâs closer to a 2024 item. Yes, there is--we have been doing analysis, Brady, and honestly the gap of what we need in terms of risk management, integrated audit, and bull risk and all that regulatory framework, crossing the $10 billion is-- weâre probably already are completed on that end. We did every possible sensitivity analysis - risk, shocks, etc., so those are already covered. I believe that one of the items that you mentioned, Jerry, the Durbin amendment wouldnât have a significant impact for us. We started estimating and itâs probably in the $500,000 to $1 million a year - thatâs preliminary expectations what we have, but again you have to have a four quarter average going north of the $10 billion in order for all these changes to kick in, so weâll definitely keep an eye and as we get closer, weâre definitely going to do any type of GAAP analysis to understand. But based on our preliminary assessments, we are in very good shape to be closer to $10 billion. Okay. Then just bigger picture on performance metrics, as I look at 2022, you guys basically hit--there was a lot of noise in the year, but you basically on a core basis hit a 1 ROA. How are you thinking about profitability looking forward? Do you think the 1 ROA is kind of stable from here? Is there room for additional profitability improvement or pushing the efficiency ratio down further? No, I believe the 1 is sustainable. We have been doing a lot of changes in terms of our cost structure and in terms of other income. I believe one of the key drivers is the financial margin, that we believe is very strong, and as you saw captured in almost--you know, people refer to 125 basis points over the quarter, but in reality we had the last change of the Federal Reserve on September 21, so in reality it feels like 200 basis points. We believe that we should be stable at around 4% financial margin that will give us the core earnings to keep closer to the 1%, so we feel strong on that too. Okay, and then finally for me, just this core system conversion in May, outside of any sort of one-time expenses, will there be any changes in the expense base? Will the expense base go higher with this new system, or does it allow you to potentially become more efficient so expenses could go down? Any impact from that conversion? Yes, we will provide more guidance on the decrease on the second semester, probably when we get closer to conversion because there will be several applications. If you recall, in the Q1 and Q2, we recorded provisions for contract termination for two of our largest technology providers, so as soon as we go into conversion, the second semester of 2023 shouldnât have the regular expenses related to this previous technology provider. More to come on that, but weâll fit you up with more information on those decommission as we get closer to conversion. Got it. Actually, one more - so the expense outlook for $58 million to $59 million, is that just for the first quarter of 2023 or do you think that thatâs the 2023 quarterly run rate for the full year? Thatâs reflective of what we believe it will be the first quarter. Again as Jerry mentioned, as we continue to build up business teams and as we continue to--for instance, the last quarter of 2022 was a great example, there was a surge in production so therefore there was an increase needed in the accrual for variable comp, so as we move and as we create more businesses, that should be subject to change. But this guidance is for the Q1. Just wanted to start on the deposit side and just get an update on--and sorry if I missed this, I hopped on a little bit late, but just any sort of expectations for betas. On the one hand, you guys are pretty rate sensitive and are benefiting from the Fedâs actions, but there are some out there, especially some of the larger banks that are now calling for a pivot by the end of the year, so just wanted to see from a flow perspective, beta perspective what you guys would expect. The loan to deposit ratio is obviously kind of elevated, you still have some attrition of the foreign deposits, although they were up this quarter. I know those are very low betas, so just kind of holistically how should we be thinking about betas and flows, both in the higher-for-longer camp and then what actions you would potentially take to limit downside if the Fed does pivot. Thanks. Yes, good question. In terms of beta, Michael, during the quarter we recorded 0.50 more or less on the deposit side. Something that really helped this quarter was the stability and the cost of international deposits - they barely moved. We went from probably 0.11 to 0.16, the cost, so it continues to be very cheap and very low sensitivity, so that helped us a lot with the blended beta for deposits. The 0.50 was definitely a sensitive number given the changes that we saw in the market. We expect to be closer to the--between 40 and 50 for the first quarter. Remember that liquidity in the financial system is shrinking and the competition for deposits is high right now, and there are certain accounts that you definitely need to move and be proactive in adjusting rates. Even thought you do it certain product types, you also have to be very cognizant that there will be changes in other accounts, so we expect that 0.40 to 0.50 in terms of cost--beta reaction to the cost of funds. Important is the behavior of the financial margin. We believe that the level of acceleration that we had in the last quarter of the year wouldnât repeat itself. I believe it was significant. We started to feel like the financial margin will grow but more decrementally, I would say, so thinking about 4% financial margin would be kind of the level that we feel that should be steady throughout the year. Yes, hey Michael, I think itâs important to note a couple things. Weâre going to continue to evolve how we incent our personnel, again as I made a comment earlier about weâre looking for full banking relationships, and with any existing and with new customers, and weâre putting on a very strong incentive program to really drive deposit growth first and foremost. If you recall, weâve talked frequently about being a deposits-first bank is one of the most important things. We are laser focused on maintaining that loan-to-deposit ratio and not allowing it to get up above 100%, and I think that weâve demonstrated that. Itâs something weâve focused on all throughout 2022. Weâre going to continue to do that in â23, and my comment would be that between all of the business development people weâve added, youâre going to see incremental volumes come from a combination of more people, more focus, and these new systems are going to enable it to be a lot easier, particularly as we acquire more and more commercial customers, and also on the municipal side as well. We think thereâs a combination of things that will enable us to continue to grow on that side of the balance sheet. Jerry, thatâs a great point, and just to kind of follow up on that, do you feel like you have the products in place that your competitors have to be competitive, or is that still a work in progress as you roll off the core systems integration and maybe some other products and services? But do you feel like you are where you need to be, or do you feel like thereâs still more work to be done to compete more effectively, because I think everybody has changed their deposit incentives, right, so I mean, do you have the products and capability to be successful in your strategy? Thanks. Yes, I definitely think so, and I think theyâre going to be further enhanced post this conversion in May. I think that at the end of the day, a lot of the deposit gathering we do, weâre a people business, right - itâs personal, itâs relationships. All the expansion weâve done in private banking, weâll continue to do. These new offices, I mean, they are in very deposit-rich markets and this is very targeted by us to be able to basically have some physical presence, certainly not the big size branches of the past but certainly smaller and just very well located in the right spots. I think itâs a combination of all these things that are going to get there, but again directly to your question, I think itâs a question for me of saying, hey, weâre okay today and weâll get better as we go forward on the product and service side. Perfect, and then maybe just one final one for me, just on credit. Obviously CECL implementation, but ex-that, you did build the reserve, which I think is prudent. I appreciate all the detail in the back of the deck on commercial real estate - thatâs certainly a lot of focus. Can you help us get comfortable with credit and kind of where you are from a reserve perspective? Youâve had some chunkier loans come through over the past couple years. Just trying to size the bucket of potential credits that you could be working through over the next couple quarters and if we should expect the reserve to continue to grow from here. Thanks. Yes, well, I think you know that under CECL, you will see higher provisioning just as a result because youâre doing lifetime expected, right, and so as we grow, youâll see more provision expense than you would have historically seen, and thatâs really what the purpose of this change was all about from an accounting standpoint. I think the question on the quarter, and there was definitely a little bit of noise vis-Ã -vis we changed the policy on the consumer side, where we were going to 120 days to charge-off. We backed that to 90 days, so somebody goes three cycles, itâs done, itâs charged off and then itâs in full recovery mode, so you had a catch-up adjustment that also flowed through. Regarding the one specific credit that Carlos referenced on the call a couple of times related to New York, obviously itâs a CRE relationship, it is something we put a lot of time and energy in understanding, and we decided that it was the prudent thing to do on that particular credit to take that formally in--well, itâs basically a $2.5 million incremental adjustment on that credit in particular. Look, we book good-size relationships, right, and to your question about chunky, we do think that itâs really important to recognize that that was--and this kind of goes back to one of the earlier questions, why weâre doing so much diversification in terms of the type of loans weâre booking going forward, and thereâs more emphasis on the private banking side, weâve ramped our emphasis up on business banking, weâre ramping our emphasis up in diversification in C&I, particularly the addition of equipment finance and doing more middle markets. The question, weâre evolving the portfolio, the composition of the portfolio. The emphasis, I guess in the past, and you know this, that was a $740 million portfolio two years ago when we made the decision to stop, and itâs a commercial real estate portfolio, so if there is some chunkiness that does happen, it was just basically a result of these past two credits that have happened and flow through the P&L over the course of â22. There really has been a significant reduction in commercial real estate retail, I can tell you that, as it relates to in the portfolio, and certainly itâs very selective if we would have done anything like that production-wise. I guess the other comment is consumer, and as Jerry referenced, we changed the policy; but still, the behavior of that portfolio, its losses are below our expectations. Itâs probably in the 1.5% to 2% losses, and pretty much we run models that take that to 3.5% or 4%, so still the behavior is below those parameters, so performing well compared to that, even though we changed the policy and you see additional charges this quarter in that concept. Just sticking with credit for a second, it looks like overall criticized balances were down, which is a positive, but it looks like there was some migration from special mention to substandard, potentially. Could you walk us through a little bit more of what youâre seeing in that criticized balances? Yes, that was specifically the loan that we mentioned that was downgraded from--so special mention to substandard, and that is the source of the additional reserves that we took this quarter. That loan was dropped from $24 million to $20 million based on a specific reserve, and then it will transition into OREO this quarter, so. We made that comment on the call that that will go into OREO with no additional changes in valuation. That was the biggest item. Then curious where do you see the most opportunity on the non-interest income side, and just wonder what should we expect there as we go through the year? I know itâs obviously a challenging environment for mortgage still, but it seems like wealth management accounting has been a bright spot for you guys in the past. Just if you could walk through a little bit more of what youâre seeing there. Yes, look - I think with the emphasis weâre placing on private banking, there is a natural evolution as these customers come on to also be able to cross-sell on the wealth side, so I think thatâs one driver. I think the other is weâve added some key personnel, very experienced people to help develop--using the capabilities that weâve already got in-house to really develop more on the domestic side. Historically, weâve had a fair bit, virtually all of it being connected with the international side, and we think thereâs just huge upside for us, so in terms of expectations, I think itâs really a volume play for us to continue to be a slow, steady build. But itâs a very, very important part of our plans, is to really drive incremental AUM into the organization. Yes, I believe the last quarter was a good example - $127 million of increases in net new assets. We really want to keep up with that behavior of keep growing, and of course the interest rate cycle is not helping that much the mortgage company but we still--you know, weâre having production and we expect to keep going up with the mortgages and selling to the secondary market. Just one last one from me, you guys said that it sounds like the balance between the different loan categories growing throughout the year should be kind of similar to what we had this past quarter, so should we expect consumer stays around 8%-ish of loans over time? Is that the number youâre comfortable with? No, I think youâll see that diminish because weâve done the transition into a white label solution and that weâll have direct influence over, so in terms of if you think about us historically--you know, Carlos can comment, but we had a pretty steady appetite of the indirect from the relationships we had, and I think we clearly should see some trail-off from that as the other begins to ramp up. Yes, I guess the best way to describe it is that the indirect purchases were done in bulk and would probably be bigger in amount every month. We just stopped buying from the indirect sources and now weâre coming in, as Jerry mentioned, on the white label, but the white label are focused on footprints where we operate, so you have just Houston and Florida, so the growth would be slower than the payments coming out from the indirect purchases, so it will be a net decrease, so to say. But the composition-- Hey, good morning everyone. Maybe first, just following up on that SOFI conversation, those loans, it looks like were down $63 million. How much of that, if any, update on the net charge-offs was related to those loans versus your core self-originating consumer? There was about $3 million coming from that indirect purchases, and then we had another surge due to the change in policy, but related to the performance was about $3 million. Okay, thatâs helpful. Then if you can give me an idea of what you guys are booking new CDs at and domestic deposits - it looks like thatâs probably going to be the biggest driver of deposit growth from here, at least in the near term, so what are you having to pay to get that new CD growth? Yes, I think market rates have run around 4%, and thatâs where we are. Customers seem to prefer the, call it sort of the nine to 12-month bucket, and thatâs where weâre pricing our 12-month product right now. Yes, we had to manage via promotion as opposed of change in the rate, so we--you know, we keep it up on the branches and on the website as a promotional rate that we can discontinue whenever, but itâs not affecting our typical re-pricing of CDs on an ongoing basis. Okay, thatâs great, and then have you been able to hold spreads, I guess? I mean, obviously the international deposits help a lot in terms of your overall average cost, but have you been able to hold spreads in terms of new production versus what youâre having to pay for new funding? Maybe give a feel for where those new loan yields are coming on at. Yes, new loan yield, so definitely the changes in SOFR and LIBOR have helped a lot increasing the base rate. We havenât forget even in this interest rate cycle to keep being very disciplined with adding floors to lending structures-- I guess maybe just thinking about that holistically as we look at â23 for NII trends through the year, I know Carlos, you said you feel like you can hold the NIM flat through the year. I would think, just given how asset sensitive you are, if we do actually get what the forward curve is projecting, it would be really hard to keep the NIM flat in the back half of the year, especially if you can continue to grow and have to pay for CDs at a near-market rate. How do you sustain that NIM throughout the year, and how do you think about the ability to grow NII, maybe particularly in the back half of the year if rates get pressured back lower? Well, the question, I guess, comes out of Jerryâs comment on increasing DDAs and non-interest bearing accounts. Thatâs one of the items that weâll be working the most. As you noticed, the commercial side was one of the key drivers on the last quarter, and we expect that to continue, and on-boarding full relationships with DDA should help us with the DDA side and blending up the cost of funds. That should be one of the offsetting factors of incremental CDs or additional--or costly money markets. Yes. I think too, Stephen, itâs the incentive plan for our bus-dev officers. Thereâs a combination here, right - there are more bus-dev officers, thereâs a much greater focus, we are focused on full relationships. Itâs a combination of things, to Carlosâ point, that will help drive and keep us growing on the non-interest bearing side, because itâs critically important that weâre considered having those kind of core relationships with customers. I think our folks would attest that--and weâre also looking to sell the totality of the bank. We add a C&I customer, weâre looking to do banking work, weâre looking to do private banking. There is all sorts of things that we are emphasizing that historically have not been the priority, and I think that youâll see this is a big, big change for us. I think thatâs going to be very helpful. Look, I think youâre spot on - thereâs going to be pressure towards the back end of the year, but I think from a--thereâs a difference between us thinking about the NIM versus the NII, and I just wanted to make sure we were all aligned on this. Obviously greater outstandings is going to drive incremental NII every quarter for us, so my sense is youâre going to see NII growth continue in the organization as we just--as we naturally are growing our loans and deposits. But thereâs no question that market conditions are going to really have an impact on--you know, you have competitors that are going to pay up depending on how theyâre going to be in liquidity stress, and weâre going to have to selectively react to those type of things, so. Then just last question from me, when you guys think about capital, whatâs kind of your constraining ratio as you think about that? I mean, the $25 million buyback, where the stock is today, the stock is a lot lower than when you were extremely active in the buyback in late â21 and â22, so it kind of feels like youâre not getting paid for the improvements in the bank, frankly, with the way the stock is, so how aggressive might you be with that buyback at these levels? Look, I think what we said was we will be opportunistic to exercise that, but I also think itâs important to say youâve got to be balanced, right? I mean, weâre in a nice place where weâre trying to make sure we have sort of all the tools in the toolkit, right, so now we have a buyback in place, we continue to pay the dividend, but weâre also growing the company, so weâre using capital. I know that we need to be good stewards of capital - I mean, itâs probably first and foremost. I think one of the really strong points about us that I think people should take a lot of comfort in, is that 7.5% ratio is an excellent ratio in this day and age, and thatâs obviously inclusive of the marks, and so I think weâre in a good place. I just think itâs also a function of making sure weâre managing all of our liquidity sources as well, right, so capital is--I mean, cash is precious right now because weâve got good demand that weâve got to deploy it into, so weâll be making lots of trade-off decisions as to which oneâs going to provide the best return in the capital. And is that--is that 7.5% TCE, is that kind of the constraining ratio you look to, or is there another ratio you focus on more intently there? Weâre looking--typically for capital planning purposes, we like to look into the Tier 1, which provides a more holistic approach to the position of the company. But yes, as Jerry mentioned, we like to look at the 7.5 as well because that includes the change in valuation, as I mentioned, during the year that changed as well, so. But itâs a balancing act right now between the growth that you want to have and the opportunity that the stock in the market presents. Great. Thanks for all the color, guys. I thought it was a really impressive quarter, whether or not the market agrees. Congrats. Thank you, and Iâm showing no further questions at this time. I would like to hand the conference back over to Chairman and CEO, Mr. Jerry Plush for any further remarks.
EarningCall_1341	Great. Good morning, everyone. Welcome. I'm Jessica Fye. I'm a Large Cap Biotechnology Analyst at J.P. Morgan, and we're delighted to be continuing the conference this morning with Vertex. There's going to be a Q&A session right in this room after the company's presentation, so no need to switch rooms. There's going to be mic runners. So, if you have a question, you want to raise your hand, you can do that. Alternatively, you can use the portal to fire me questions to an iPad up here, and I can ask them for you, or you can just listen to my questions. Well, good morning, everybody. Just thank you so much and thank you to J.P. Morgan for hosting this. It is nice to be back in San Francisco, in-person, and to do this live. Some housekeeping notes to start with. This slide has our Safe Harbor statement listed. In brief, let me remind you that the forward-looking statements made during this presentation are subject to risks and uncertainties that are discussed in our SEC filings, and I encourage you to read the filings, actual events, and outcomes may differ materially. With that, let's get on with it. At its core, Vertex's strategy is to invest in scientific innovation in order to create transformative medicines for people with serious diseases, with a focus on specialty markets. Underlying this corporate strategy is an R&D approach, which is designed to yield disproportionate success. This approach has fueled our achievements in CF, generated a broad, advanced, and diverse portfolio, delivered multiple programs with near-term launch potential, and built a company with a strong financial profile, talent base, and culture that is going to drive long-term success. The results of this approach are depicted to the right of the slide. We have successfully launched four medicines in cystic fibrosis and our [2022] [ph] guidance is between $8.8 billion and $8.9 billion. We have near-term commercial opportunities in four disease areas: Exa-cel, previously known as CTX001 in sickle cell disease and beta thalassemia, VX-548 in acute pain, and the vanzacaftor triple combination in cystic fibrosis. And as a marker for R&D productivity of the six disease areas outside of CF, in which we entered Phase 2 development in the recent past 5 of the 6 programs have yielded positive proof of concept results. This includes sickle cell disease and beta thalassemia, as well as acute pain that I've already spoken about, but it also includes APOL1-mediated kidney disease or AMKD, as well as type 1 diabetes with our cell-based program. We also have a Phase 2 study underway with VX-548 in neuropathic pain and another Phase 2 study with longer duration of treatment with VX-864 in alpha-1 antitrypsin deficiency. In total, this makes 8 programs in mid and late stage development all of which I believe have a high likelihood of success. This slide lists the 8 programs that are in mid and late stage development. Each asset presents an opportunity for a transformative medicine and each opportunity represents a multibillion dollar market. This vision, this broad potential of our clinical stage pipeline is not a distant vision. This is right in front of us. We have the opportunity to bring new products to 5 disease areas in the next 5 years, our 5 and 5 goal. Let me start with CF, and let me start with the numbers. We are updating the epidemiology in CF, in the U.S., Europe, Australia, and Canada to 88,000 patients, up from 83,000 patients in 2021. The growth in this population comes really from three places. First, there are additional patients coming forward to receive treatment given the overall improvement in CF care. Second, registries are capturing data better around the globe. And third, and maybe most importantly, CF patients are living longer. Our medicines are delivering meaningful long-term benefit. For example, we recently showed that there is a 70% plus improvement in lung transplantation and mortality with people who are taking CFTR modulators. Notably, what this means is for a baby born in 2021. The mean predicted survival for this child is 65 years of age. Just a few decades ago, that number was in the mid-30s. Our goal, to be clear, is to have all patients who could benefit from CFTR modulators on our therapy. And we see continued significant growth in CF as there are more than 20,000 patients who are eligible for CFTR modulators or could benefit, but are not currently on therapy. These patients largely fall into two categories. First, where we have recently secured reimbursement and we are early in the launch curve; and second, younger age groups. For these younger age group patients, we continue to study our medicines in younger and younger patients. I'm pleased to let you know that our TRIKAFTA, 2 to 5 year old submission, has been accepted for priority review in the U.S. with the PDUFA date of April 28. Our next-in-class, vanzacaftor triple has completed its 52-week, I should say, has completed its enrollment, and the 52-week dosing period continues. We now project that this study, the vanzacaftor triple combination Phase 3 studies will complete by the end of this year. We have high expectations for this program and we look forward to the data readout, but we're not done. We have already identified additional potentiators and correctors in the lab, and we are already advancing them into the clinic. Lastly, there are about 5,000 CF patients who cannot benefit from CFTR modulators because they simply don't make sufficient protein. For these patients, our mRNA approach or VX-522 may be appropriate. This molecule VX-522 is a result of our partnership with Moderna and it has been cleared to enter the clinic. It was also recently granted Fast Track designation by the FDA. The initiation of this trial, which has already occurred is an enormous milestone. It is our first mRNA therapy to enter clinical trials and brings hope to the remaining CF patients who are waiting for a drug to treat the underlying cause of their disease. Let me move from CF to the pipeline and let me start with Exa-cel for sickle cell disease and beta thalassemia. This is our next near-term commercial opportunity. Exa-cel holds transformative potential for patients and is poised to become the first approved gene editing therapy for any disease. Sickle cell disease and beta thalassemia are a significant burden to patients, to families, and to the healthcare system. In the U.S., economic analyses have predicted and modeled that the lifetime costs of sickle cell disease â severe sickle cell disease is between $4 million and $6 million over a lifetime. Exa-cel is a one-time autologous ex-vivo gene editing investigational therapy in which a patient's own cells are collected. Using CRISPR/Cas9, these cells are precisely and durably edited at the BCL11A locus. And then these edited cells are transfused back into the patient. The clinical benefits, they are evident from the data that we've shown to date. And we're excited to bring this therapy that holds the potential for a one-time functional cure to patients who have been historically underserved. I'm going to move on to our commercial preparedness, but I do want to give you an important update on our regulatory status with Exa-cel. I'm pleased to let you know that Exa-cel has been filed in the EU and the UK for both sickle cell disease and beta thalassemia as of last December. You know that we've initiated the rolling submission in the U.S. and we remain on-track to complete that submission later this quarter. We are making strong progress in our commercial readiness to launch Exa-cel. Our commercial and medical affairs teams are hired and trained and we have established the infrastructure to support physicians and patients through the treatment journey. Our initial launch of Exa-cel is going to focus on the 32,000 most severe sickle cell patients and beta thalassemia patients out of the universe of approximately 150,000 sickle cell and beta thal patients in the U.S. and EU. We believe these 32,000 patients can be efficiently served with about 50 authorized treatment centers in the U.S. and about 25 authorized treatment centers in the EU because the geography of these patients both in the U.S. and outside the U.S. are concentrated into specific geographies. In parallel engaging with the treatment centers, we've also been working with payers, as well as policymakers to ensure that these stakeholders understand the significant burden of this disease and to ensure patients have access and reimbursement to this therapy if and when Exa-cel is approved. Let me move on now from Exa-cel to the pain program and I'll focus my comments on acute pain with VX-548. There is a staggering unmet need in acute pain. The toolkit for the management of acute pain has remained largely unchanged for decades. VX-548 is a NAV 1.8 inhibitor, and if approved would represent the first new class of medicines with the potential to treat this high unmet need. It's important to know VX-548 acts on the peripheral nerves. It blocks the pain signal there. And thus, it may be able to provide effective pain relief without abuse potential. Abuse potential is a central nervous system phenomenon. The NAV 1.8 target is both genetically validated and pharmacologically validated. We ourselves have completed successfully 5 Phase 2 proof of concept studies with VX-150, the predecessor molecule to 548 and with VX-548 itself. The pivotal development for 548 in acute pain initiated last year. We're currently enrolling two randomized controlled trials and one single arm study. With a goal of seeking a broad moderate to severe acute pain label. I'm pleased to share that we now anticipate that the VX-548 pivotal development will complete towards the tail end of this year or the beginning of next. And with that, we see the opportunity for a potentially near-term and significant potential to support patients and launch yet another molecule. Let me talk a little bit more about the treatment gap that exists. The current standard of care for acute pain has NSAIDs and acetaminophen on the one end of the treatment landscape and opioids on the other. While NSAIDs and acetaminophen have pain relief, the relief level is limited, and there are concerns with GI and liver toxicity. Opioids on the other hand are effective pain medicines, but they have important side effects, including somnolence, dizziness, nausea, and most importantly, abuse potential. This leaves a gap in the treatment landscape for medicines that can be used for effective pain relief with a desirable benefit risk profile without abuse potential. VX-548 showed strong efficacy in the Phase 2 program, an attractive benefit risk profile, and by way of its mechanism of action, that's to say peripherally acting, lacks abuse potential. VX-548 has been granted both fast track and breakthrough therapy designation indicative of FDA's recognition of the high unmet need and the compelling clinical profile to date. Let me put some numbers around this opportunity. Today in the U.S. alone, there are approximately 1.5 billion treatment days of an acute pain medicine prescribed annually. Even though 90% of these prescriptions are generic, currently, this is a $4 billion market. With respect to the settings of care and where these prescriptions are written, approximately two-thirds or 1 billion of these prescriptions are driven by hospital or institutional prescribing. These are concentrated in about 1,700 hospitals and about 200 IDNs or integrated delivery networks. In other words, it's concentrated, and we believe we can approach this opportunity with a specialty sales force. In addition, we see both high demand and a clear path to access and reimbursement. Let me give you some examples for why I say that. Almost all institutions and all 50 states have some guidelines in place regard to opioid prescriptions. Most recently, the NOPAIN Act signed into law on December 29 of last year, directs CMS to make a separate add-on payment to hospital outpatient settings and to ambulatory surgical care settings for non-opioid medicines. This new law is an example of the growing movement to empower hospitals, patients, providers, to utilize non-opioid treatments. And we are excited for VX-548 to be a potentially near-term effective non-opioid treatment for patients who are waiting. Let me move from pain to Inaxaplin or VX-147. VX-147 has the potential to treat the underlying cause of APOL1-mediated kidney disease. This genetic disease was just recently defined in 2010. This is a disease that relentlessly and rapidly progresses to dialysis, transplantation, or death, and there are no approved treatments for this disease. We've already shared that in our 13-week Phase 2 study, we demonstrated a 47.6% reduction in proteinuria. That is an unprecedented result in FSGS, let alone in APOL1-mediated kidney disease. We are now in a Phase 2/3 pivotal trial with Inaxaplin with a pathway established for accelerated approval if the data are supportive. Given that AMKD has only recently been defined, and it is a relatively asymptomatic disease until late in its course, diagnosis rates are low. We are addressing that with multiple initiatives, including one with Alonzo Mourning, the basketball Hall-of-Famer, who himself suffered from AMKD until his transplantation. And our goal here is to improve awareness, diagnosis, as well as screening. In short, AMKD affects about a 100,000 people in the U.S. and EU. With Inaxaplin, we see the potential of bringing a first-in-class treatment that could transform the underlying cause of this disease. And thereby unlocking a big market opportunity. Let me move from Inaxaplin to Type 1 diabetes. This slide shows you a trio of our programs that are all grounded in the VX-880 cells. These are the naked cells. This VX-880 program has already demonstrated proof of concept with the first two patients dosed at half the target dose. What I mean by that is, we've demonstrated that patients have improvements in hemoglobin A1C, elevations in C-peptide, and decreases in exogenous insulin need. In fact, for patient number 1 treated at half the targeted dose, there was a complete elimination of exogenous insulin. As I mentioned, all three of our programs in this disease area rely on the foundational VX-880 cells. The VX-880 program itself is now in Part B. That's where we dose with the full targeted dose. This part of the study is now fully enrolled. And we expect to be able to share more data and longer-term data from these patients this year at upcoming medical congresses. I should note that the next portion of the study Part C, is the part of the study where we are able to dose at full targeted dose without a stagger. Part B has a dosing stagger between each patient. Moving to the middle panel, the VX-264 program. The VX-264 program is the cells, the same VX-880 cells, this time cloaked in a device so as to evade the immune system. Whereas VX-880 uses standard immunosuppressives, this program does not have a need for immunosuppressants. Last year, we simultaneously filed a CTA in Canada, as well as the IND in the U.S. I'm very pleased to share that the CTA has cleared and we look forward to initiating the enrollment and dosing of the VX-264 trial in Canada in the coming months. In the U.S., the IND has not cleared and the program is therefore on-hold until we receive the FDA's questions and satisfactorily address them. On the last panel is our hypoimmune cells. In this program, we're editing the VX-880 cells, and that will cloak the cells from the immune system. That's our second approach, the device being the first, to potentially eliminate the need for immunosuppressants. This program continues to make nice progress through preclinical development. This is a top line view of our pipeline with select preclinical assets, as well as our clinical stage program. I'll make three points on the clinical stage program. It's broad, diverse, and advanced. It reflects four modalities in play: MRNA, cell therapy, gene editing, and small molecules. And it also reflects a nice balance between internal and external innovation with 40% of the pipeline coming from BD activities. A couple of comments on the select preclinical assets on this slide. The next wave of innovation is right around the corner. And I'll call out the DMD program here, which would be our first in vivo gene editing program for which we expect to file the IND later this year. The improved conditioning program, which would vastly expand the number of patients eligible for Exa-cel and the NaV1.7 program, another pain program that alone or in combination with VX-548 would expand our leadership position there. A moment on our financial profile as I've already told you, we guided for 2022 8.8 billion to 8.9 billion in revenue, and we'll be giving you actuals on February 7 along with 2023 guidance on our earnings call. In the middle panel, you see a select few of our external innovation investments that have led to this pipeline that I showed you on the previous page. And with our business model, with the lean SG&A spend, large treatment effects, you see that we continue to provide excellent operating margins at the top end of our peer group. I'm going to leave the slide for you to review, but in essence, 2022, we had a very good year across the board that sets ourselves up for a very important 2023 with multiple catalysts. And I will end with this slide. You could use this as a marker, a report card, for our advancement and progress in the CF business and through the pipeline for 2023 and beyond. We seek to continue our journey in CF, prepare for near-term commercial launches, drive and accelerate our pipeline forward, including our goal of five launches in the next five years and continue to deliver financial performance. Great. I think some of the other members of the management team are going to come up for Q&A as well. And again, if you have a question, you can raise your hand, otherwise, you can submit it electronically as well, but I'll start. Let me just cut right to the chase here. So, your company is generating plenty of cash. You've got a nice cash balance. How much of a priority is returning cash at this juncture versus reinvesting in the business or anything else? Yeah, sure. Listen, we know that the greatest way for us to create value is to develop transformative medicines serious diseases. And therefore, innovation continues to be our top priority. For capital allocation, we've been active investing both internally and externally over the last several years. And I think we've shown that those investments have been wise, you see the advancement in the pipeline, you see the level of success that we've had. And importantly on the BD side, a number of the programs 40% have benefited from BD that we've done in recent years. So, looking ahead, investment in innovation both internally and externally will continue to be the priority. We have also maintained a share buyback program over recent years. We've purchased about $1.5 billion of shares in the last two years and you can back that we'll continue to have a repurchase program going forward. Great. There's one that came in on the portal so far. So, have you begun price negotiations with payers in Europe for Exa-cel or when can that happen? And it's sort of alluding to bluebird's negotiations in Germany, I think, how do you expect it to go for Exa-cel? Sure. So, I'm going to ask Stuart to address that. Obviously, we're at the stage now where we've completed the filings for sickle and beta thal in the EU and UK. And Stuart can tell you a little bit about where we are in the international region and in the U.S. Yes, in both regions, we have both our commercial and medical affairs teams up and running and they're already engaging with payers, policymakers, and indeed potential authorized treatment centers. We haven't started talking about specific pricing negotiations. It's much too early to do that, but we have been talking with payers and policymakers about the unmet need, which I have to tell you is well understood in Europe, the unmet need for new products in this particular area. We've also been talking with them about the potential mechanisms and payment models because pricing is one thing, payment model is another thing for these one-time functional [cures] [ph] as this is a â obviously a relatively new development across the industry. What I will tell you about that is, based on our work in CF and our initial discussions with payers there, I think it's very clear that from a payment model point of view, one size is not going to fit all. And that is a big part of the discussions that we're having, what is the needs of the individual countries and therefore, what is the right payment model for them. And I think our experience in CF is going to stand us in good stead there. We've been very creative, very flexible in working with countries and that's led to our success in negotiating many, many reimbursement agreements for CF. And I think that's a capability that we're going to be able to utilize to help us be successful in â with Exa-cel as well. Hi. I was just curious about the stem cell therapy in diabetes, and what that might cost individual patients? If it's cost prohibitive, if you could provide any color on that? Thank you. Yes. I'll ask Stuart to tackle that. I'll start by sharing that there are islet cell transplants available, cadaveric islet cell transplants, and whole pancreas transplants, and that can give you a sense for [a way to] [ph] start. Stuart? Yes, again, I mean, it's obviously much too early to be talking about specific pricing ranges. Weâre absolutely thrilled with the progress of the program to be able to declare proof of concept for the VX-880 program, the naked cells, just based on two patients is truly amazing. As Reshma said, what we're looking to do here is develop a one-time functional cure and a one-time functional cure over time that we can cloak from the immune system so that we don't need immunosuppression as well. So that is the promise of what we're doing here. Clearly, the cost of type 1 diabetes is very, very high. These patients are very intensively managed. The cost of cell therapies, as Reshma said, the cost for cadaveric cell transplants are well-known. The issue with those is really not price prohibitive, it really is quantity and quality of cells prohibitive. And that's what we are seeking to fix by developing fully mature, fully differentiated, fully functioning, glucose sensing, [insulating, secreting] [ph], islet cells, but being able to do that in industrial quantities at very, very high quality. So, cost prohibition is [not what hold back] [ph] cadaveric islet cell transplant, it's really quality and quantity of cells and that's what we're seeking to fix. On the pivotal program in pain, you talked about that completing as soon as the end of this year potentially. Should we expect to start hearing data by the end of this year? Is that on the table or is that, sort of when the trial completes and then we would hear something maybe in 2024? And then second, there's multiple trials here, should we expect this to come as sort of one update or could they come sort of in sequence? Yes. So just to ground everyone, the pivotal program for VX-548 in acute pain is comprised of three studies. There's one RCT, randomized clinical trial in bunionectomy, one in abdominoplasty as a model for soft tissue and a model for hard tissue pain, and then a single-arm study with pain of any variety. So, that's what comprises the Phase 3 program. The two RCTs are very, very similar to the RCTs we've already completed in Phase II. They're really the same models. They're the same endpoints, and it's the same duration of therapy, 48 hours. We are sharing that we expect the completion of the trial late this year or early next. After that, it takes a little bit of time to bring in the data to analyze it and to share it, but we move pretty fast. And I do expect that the update will be a singular update for the entire program. You also talked in the presentation about some updated [epi data] [ph], can you walk-through, kind of the reasons why you're able to update it and why you see more patients? Yes. So, the way we collect the epi is largely working with countries around the world that have very well-established registries. And what we've seen over the last few years is increasing numbers of patients reported in those registries and still active and alive in those registries. And really what's driving that increase is a couple of things. The first one is, more patients coming forward to be looked at in registries, and we believe that is largely as a result of more patients, kind of returning to be treated as a result of highly effective therapies. In addition to that, the registries have continued to develop and expand and so there's better data capture in those registries. And thirdly, and perhaps most importantly is the increase in survival that Reshma mentioned that we've seen, which has been going on for a number of years now. That increase in survival is something that we expect to continue as more and more people are treated with CFTR modulators over time. And so, we see this being a trend which is going to continue. And just to dimensionalize it, back in 2021 at J.P. Morgan, we updated our epidemiology from 75,000 patients in North America, Europe, and Australia to 83,000. This year, we're updating that for those same geographies to 88,000 patients who are living with CF today. For your Phase 2/3 study in kidney disease, can you talk about how enrollments going there? What progress you're making on sort of identifying the patients to, kind of put into that study? Yeah, this study in comparison to something like the VX-548 acute pain study, we always knew would have a different enrollment trajectory, and it would take a little bit of time because this disease itself was just defined in 2010. There is not widespread screening or diagnosis. And the disease itself is actually rather asymptomatic until the late stages, so you don't even know you have it. We are working to ensure that enrollment is efficient by having a concurrently run genotyping study. And if you genotype in, you can then enroll in the randomized clinical trial We're opening many, many sites, so there are sites close to where our patients are. And we're embarking on campaigns like the one with Alonzo Mourning to ensure that patients know to look for this disease asked for testing and such. Where we are today is that we are expecting the Phase 2 portion of the Phase 2/3 pivotal trial to complete this year. So, we're also expecting pivotal data for the new triple coming up. Can you talk about you know, what you want to see from that, you know, it seems like TRIKAFTA sets a pretty high bar here, so maybe also talk about what your level of confidence in and being able to â isn't being able to beat TRIKAFTA? Yeah. I'll ask David to take that one. Our confidence in the vanzacaftor triple is very high, and David can speak to why we feel that way. David? Yes. No, it's true that TRIKAFTA has a remarkable profile, and so it is very difficult to do better, but if there's any medicine we think can do better, it's the vanzacaftor triple therapy. And the reasons for that are two-fold. One, we have evidence from our HPE assay, human bronchial epithelial assay, running our labs in San Diego. That assay as we run it has proven quantitatively to translate from the lab two levels of CFTR function in patients repeatedly for all four medicines in multiple others in clinical trials. And the vanzacaftor triple at clinical exposures is better in the HPE assay, drives higher levels of chloride transport, then does TRIKAFTA. That's one laboratory data. The second is, Phase 2 data. We did a Phase 2 trial of the vanzacaftor triple, and we focus here on sweat chloride because sweat chloride is a direct measure of CFTR function, but also it's more tightly measured in a small study as you get a more accurate measure in the small Phase 2 study than you can of FEV1, which is a more variable measure. In that Phase 2 data, the sweat chloride we have obtained when compared through PKPD modeling cross-study comparison to previous studies with TRIKAFTA clearly shows higher levels of CFTR function. So, the combination of laboratory data and our Phase 2 data tells us that the vanzacaftor triple has a high likelihood in Phase 3 of [driving] [ph] higher levels of CFTR function, and we know from natural history and our own clinical trials, it's higher levels of CFTR function that leads ultimately to patient benefit. Is there anything you can say about how long the IP for the vanzacaftor triple might extend beyond the TRIKAFTA IP? We haven't shared the IP protection for vanza, but what I will tell you is that the TRIKAFTA protection runs all the way out to 2037, so you could expect it to be longer than that. And I know we're talking about how hard it is to beat TRIKAFTA, but sometimes we get questions about other products and development for CF. So, can you talk a little bit about what you're watching for competitively in the CF landscape and the extent to which you think your franchise is defensible? Yes. We look at everything in CF as you would imagine. And as I think about the competitive landscape, the nearest term and most substantial competitor to TRIKAFTA is vanzacaftor and that triple combination, and that study will end by the end of this year. Just a follow-up on the 880 program, you said that you're looking for a cure, so what is the bar for the data for that to be the modality that you move forward as opposed to the other two? Yeah. The three programs are both related to each other. And we have somewhat different goals for them. So, if you [wonder about] [ph] why do you have three programs? The most important thing to understand is that the foundation for each of these programs is the VX880 cells. There are two things you're trying to do when you're working with cell therapy for type 1 diabetes. One, have cells that are fully differentiated, insulin producing, self-regulated. You need that. And the second thing you need, and it's in this order. The second thing you need is to cloak those cells from the immune system. So, the big breakthrough here is that we already know that our VX880 cells work because at half the dose we were able to show proof of concept. That program will use standard immunosuppressives, and what we're doing with the device program and the gene editing program is two alternative ways to cloak those cells so that you don't have to use immunosuppression. But as I think about it, that's the secondary issue. The primary issue in the big breakthrough is having cells that are fully differentiated, insulin producing, and can regulate glucose. The data that we've already shared and you could look through, it goes through C-peptide and hemoglobin A1C and in exogenous insulin, etcetera, gives you that confidence in those cells.
EarningCall_1342	Greetings and welcome to ServisFirst Bancshares Fourth Quarter 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] As a As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Mange, Director of Investor Relations. Thank you, David. You may begin. Good afternoon, and welcome to our fourth quarter earnings call. We will have Tom Broughton, our CEO; Bud Foshee, our CFO; and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we'll take your questions. I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update them. Thank you, David. Good afternoon, and welcome to our fourth quarter conference call. I do want to make a few comments on the year, I think, in order before we move on to the 2023 outlook. We certainly are pleased with the results of the year. It's a second straight year that our earnings per share growth exceeded 20%. Also, our return on equity exceeded 21% and our efficiency ratio was 29%. And I must say this trifecta of 20s was due to the hard work of the best bankers in the industry. They actually do a pretty good job of making an average bank CEO look better than average, so I appreciate what they do to make us successful and thank them for everything they've done for our company and for our shareholders. However though, there is little time to celebrate success as our shareholders do want to know what we plan to do in 2023, so we'll move on and talking about -- little bit about the year and going forward. And talking about liquidity, our bankers have focused on building deposits since the middle of 2022. We have seen a steady increase in the deposit pipeline over the last four months. We're certainly pleased with the process and we're consistently seeing the deposit pipeline at 150% of the loan pipeline, this Bud will cover, we did grow liquidity in the fourth quarter and we're very pleased with our progress there. Fortunately, we've built our bank with core deposits, which are primarily commercial, not any brokered CDs and Federal Home Loan Bank Advances, our clean balance sheet is a tremendous asset in the current environment. On the loan side, we did see good loan growth in the fourth quarter, we always see robust loan demand in the fourth quarter, there are some year-end draws for company balance sheet purposes that we see, so that's always strong. We did see some slowdown in our loan pipeline, itâs mostly due to our being more selective on rate terms and structure and focusing on our core customers. Banks are in a much better position than many years on the loan front. We are certainly in stronger position, it will take time to see the improvement in loan yields, but it will come in the next couple of years. From a team standpoint, we brought in outstanding new bikers in the fourth quarter and we now have 154 producers. While we are focused on cost containment in 2023, the door is always open for outstanding bankers. Thanks, Tom. Good afternoon. Liquidity, our liquid assets increased by $470 million from September 30 to December 31. We expect this positive trend to continue in 2023, as we anticipate low double-digit deposit growth versus high single-digit loan growth. Our net interest margin PPP fees and interest income were $103,000 in the fourth quarter of 2022, compared to $5.1 million in the fourth quarter of â21. Year-to-date PPP fees and interest income were $7.7 million in 2022. Alright, no PPP fee income is anticipated for 2023. Deposits increased by $500 million in the fourth quarter. Our net interest margin by quarter, starting with the fourth quarter of â21, it was 2.71%, first quarter of â22 of 2.89%, the second quarter 3.26%, third quarter 3.64%, and then the fourth quarter of â22 it was 3.52%. Our loan loss provision, our allowance for credit losses to total loans was 1.25% at December 31, â22 and that is unchanged from September 30 of 2022. Our net charge offs average loans were 0.06% for the fourth quarter of 2022. Non-interest income, credit card income was $2.3 million in the fourth quarter, versus $2.2 million in the fourth quarter of 2021. Our net interest cap income was $162,000 for the fourth quarter and $7 million year-to-date. We anticipate the net income to be zero in 2023 as the cap matures in May of 2023. Our non-interest expenses, salaries and benefits as a result of our market expansions, total salaries increased by $572,000 in the fourth quarter and by $6 million year-over-year. Fourth quarter 2022 extended expense was $3.2 million versus $4.3 million for the third quarter of 2022. We had net new ads to staff of 13 employees during the fourth quarter and 71 for 2022 year-to-date. Capital, the Bankâs Tier 1 capital leverage ratio has improved by 192 basis points, since December 31, 2021. The ratio was 7.79% at 12/31/21, and improved to 9.71% to 12/31/22. Tax credits, we have taken steps to extend the benefit period of some of our proprietary tax credits. Thank you, Bud. I'm pleased with the Bank's performance in 2022 and more specifically in the fourth quarter. During the past year, our borrowers had to stand on their own in this post COVID environment without major government stimulus that had occurred in the prior years and our customers have responded well even in the face of rising inflation. Bank's balance sheet is well positioned for any uncertainty in 2023 and beyond with a record low amount of OREO with less than $250,000 and NPAs total assets of roughly 12 basis points. Grew loans and we continue to be selective with new clients and we want to grow our bank with clients, who can fund both the asset size and liability type of our balance sheet. I'm pleased to say the majority of our credit metrics were in line with the prior quarter and that is near historical lows, so we won't go into a ton of detail, but I'll be happy to cover specifics in the Q&A section of the call. As of loan growth, the Bank increased our loan loss reserve for the quarter by $5.3 million, which amounts to an ALLL to total loans of $1.25 million. The past due loans at year-end were $110 million on loan portfolio of roughly $11.7 billion, so we've not started to see weakening in the portfolio. Past dues were roughly $1 million less than they were in the third quarter. The OREO portfolio decreased $5 million over the quarter, so it's now only $248,000. Charge-offs for the quarter were 6 basis points, when annualized net decrease from 11 basis points for the prior quarter. We are proactive as possible on handling problem loans, so we don't carry a known issue into the following year. Our overall credit metrics continue to be outstanding and continue to improve for the quarter. 2022 was a strong year for our Bank and we head into 2023 well positioned to maintain our status as one of the top performing banks in the country. Thank you, Henry. One point I want to make is when we talk about the discussion on higher interest rates, and deposit betas and margin compression is that while we may have some quarter-to-quarter issues. However, higher interest rates help not hurt banks and it seems like today banks are more attractive as an investment alternative than they have been in a decade. It's certainly interesting to me that some investors they were selling bank stocks when rates were low. And now they're selling bank stocks when rates are high. So it was kind of hard to make some of them happy, it seems. My first partner in the banking business years ago after several years in business, he observed that we always do better when we need deposits. And we do, we do better when we need deposits. It is certainly you have more discipline on the loan side, you can be more selective and also it helps you focus on what you need to do. So certainly, needing deposits is a good thing, higher rates is a good thing for banks. We're working on our 2023 budgets and finalizing those in the next couple of weeks as we plan the year, but we have certainly made significant investments in new bankers in 2022 that we think will see the benefit of this year. As you could see, we've had a last couple of years certainly been robust from a hiring standpoint. So we are very optimistic about the outlook for our footprint and particularly what our bank we think can produce as we go forward and we can continue to see robust economic activity in the Southeast. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Brad Milsaps with Piper Sandler. Please proceed with your question. Tom or Bud, I was curious, you know, you did grow deposits by about $0.5 billion as you mentioned. I'm just curious what type of cost didn't those deposits have on average as you brought in, you know, I was looking at some of the supplemental data and noticed the spot rate on interest bearing deposits much higher than, kind of, where you were on average for the quarter? So just kind of wanted to get a sense of, kind of, the pricing on some of that deposit pipeline that you guys talked about? Yes. So, at quarter end, the cost -- of our total deposits was 1.66%. Cost of interest bearing DDAs was 2.39% and total cost of interest-bearing deposits was 2.32%. Yes. You know, Brad, it's just -- theirs is not a -- thereâs probably not a lot of uniformity there. That's not -- we're not in the buy and deposits business and we're in the business of development and relationships with customers. And most of the time when we go on a call, most of the time I'd say that the price and deposits never comes up, that's not the sort of business we're in. We're not the buy and money standpoint business. So it's kind of hard to give you a good answer, Brad, any better than that. Got it. Got it. Maybe ask differently, Bud in the past you've been kind enough to give us sort of the most recent month net interest margin, I might be curious if you do want to provide, sort of, most recent months net interest income. It would just seem that you've got quite a bit of a headwind as we kind of enter the first quarter given not only day count, but kind of where some of those deposit spot rates are? Just, kind of, want to get a sense of, kind of, your momentum as you enter the first quarter as it relates to NII? Yes. But I donât -- in front of me, I don't have just the month of December, I think you really looked at what we've got a quarterly analysis of our margin right? Like we were at 3.52% and margin for the quarter, I think 3.50% 3.60% is a good gauge for that. What is that, I mean, you know, the -- thereâs like how much the Fed is slowing down, it's the right increases. I mean, itâs still a guessing game as to where we're going to be from a deposit cost standpoint. Like Tom said, I mean, that's not the major thing we do when we count deposits, or we don't manage the margin [indiscernible] we continue to grow the bottom line and don't really look at just the margin this quarter. Okay. And then maybe just final question for me, I guess in total your expenses were up high teens in 2022? I know there's a lot of incentive comp in there for the year that you had? Can you talk a little bit about, kind of, where you would like to see that number maybe managed to in 2023, kind of maybe some different puts and takes you might have maybe given the more challenging net interest income line? We don't anticipate that much really from a net staff additions in 2023, so that salary increases should be in the 3% to 4% range as if you guys come up. We do anticipate with the conversion that will save money from an IT standpoint, but I don't think anything else. We had some unusual. We had like in the third quarter, we had our lawsuits so much or some other expenses like that, that will reoccur in 2023. So alright, Henry? But it also looks like this quarter you might have benefited from a -- or no, maybe that's year-over-year -- no, kind of a reversal of the provision for unfunded commitments. Was that -- am I reading that correctly? We did. Yes, that one, you just -- you never really know what that number is going each quarter. We did have a reversal in the fourth quarter. Hey, Bud, I think you said in the pre-envelope, I'm not sure I heard you right, but it felt pretty good about just maybe the outlook for at least the direction of loan yields over the next year or so? Did I hear you right? It looks like the loan rate was 5.41% at the end of the quarter, but just curious maybe as you look out in the quarter or two and assuming the Fed stops maybe in this quarter or next? I'm just curious what's the impact on loan yields in terms of the lagging catch up in terms of what you're booking right now at market? Yes. Well, our new loan should go on at least at prime at 7.5% from that standpoint. And when Fed raises rates over one month period, we have about $4.2 billion that reprices -- that we were repricing. You take -- you have about $2.1 million of either reprices and take $1 billion that reprices during the next 30-day period. Got it. And then just curious, and I think I heard you right, you're expecting maybe low double-digit deposit growth. As part of that maybe just drilling down this quarter, what were some of the trends in the correspondent banking division of those balances and maybe a number of new relationships you're able to add this quarter? Yes. This is Rodney Rushing. We grew the corresponding relationships throughout the year in the fourth quarter. I think our total number of new banks we added was seven for the quarter. Our total number of existing correspondent relationships is right at 340 probably all one or two that close. And for the fourth quarter total fundings for correspondent grew by, I think, $140 million for the quarter. And for the year, correspondent balances were down mostly in the DDA balances, because banks didn't have to keep near as much in their analysis account. Rates going up as fast as they did in â22. We moved some of that into Fed funds and then some moved out. And as my correspondent banks their liquidity has been put to work and has declined just like I was getting 22%. The corresponding business continues to grow our relationships and we're looking at a couple of new markets in 2023 that we haven't finalized, which one we're going to go to yet. But still growing it and we anticipate it continuing to grow. Got it. And then on the credit front, just curious within the outlook for high single-digit loan growth. Any areas where you're being more conservative, more cautious pulling the reins back from an underwriting and credit perspective? I think kind of across the board and more specifically in commercial real estate sticking with core customers, who can have deposits and have loans with us and seeing our businesses where we're focused this year. Yes. Dave, this is Tom. Just to jump in is -- we can be more selective today than ever. So it's really an outstanding time. I mean, that's why my old partner said things are better when we need deposits, because you make better decisions and we certainly can be very selective on the loan side and we can be much more proactive in pricing, rate structure today than we try not to ever give own structure, but we could certainly be more proactive than we've ever been in a long time. How about that? There are no further questions at this time. I'd just like to turn the floor to Tom Broughton for any closing comments. Thank you, [indiscernible], sorry for interrupting. Brad on earlier, we're working on 2023 budgets and we give you a little bit better idea on expense management after we finish them. But we just started -- we got our first run about 30 a week ago. So that's the first time we saw anything to our beginning point and we're not even close to the finish line yet. So we are much -- very proactive in expense management for the year as we go forward. So that's certainly something we're going to work on. And I think we always say we're disciplined growth company that sets high standards for performance and this is a great year for us to outperform the industry. And show that we are what we say we are. And I think probably a lot of banks are going probably set very low goals based on what I see you analysts throwing out there. So it is a great year to do it, and we appreciate everybody joining us on the call. Hope everybody has a good evening. Thank you.
EarningCall_1343	Ladies and gentlemen, thank you for standing by. And welcome to the SLB Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, ND Maduemezia. Please go ahead. Thank you, Leah. Good morning. And welcome to the SLB fourth quarter and full year 2022 earnings conference call. Todayâs call is being hosted from Houston, following our Board meeting held earlier this week. Joining us on the call are Olivier Le Peuch, Chief Executive Officer; and Stephane Biguet, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and our other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our fourth quarter press release, which is on our website. Thank you, ND. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover our fourth quarter results and follow this with a quick review of our full year 2022 achievements. Then I will share some thoughts on the outlook for the full year. Stephane will then provide more detail on our financial results and we will open for your questions. To begin, we sustained growth momentum through the fourth quarter, delivering strong revenue growth and further margin expansion, both sequentially and year-over-year. The quarter was characterized by very strong activity growth in the Middle East and offshore and was augmented by robust year-end sales in Digital. Growth was once again broad-based and our operational, commercial and earnings performance was outstanding. We ended the fourth quarter with sequential revenue growth and margin expansion in North America and in all international areas. In the international markets, quarterly revenue topped $6 million for the first time in more than four years. Additionally, our international revenue growth rate has visibly outpaced the international rig count growth since the cycle trough in 2020. Service pricing, new technology and digital adoption all continued to trend positively. Looking broadly over the second half of the year, the pace of growth in North America significantly moderated. At the same time, international accelerated, growing in excess of 20% compared to the first half of the year, almost twice the growth rate of North America. We are clearly witnessing the start of a new phase of -- in the growth cycle, which will increasingly be driven by resilient international growth. This market dynamic led to a lower-than-usual cash flow performance at year-end. However, we further reduced net debt during the quarter and closed the year below our leverage target. Overall, these fourth quarter results helped us surpass our revised full year revenue guidance and we closed with EPS, pre-tax segment operating income and margins all at the highest levels in seven years. Switching to the full year, 2022 was pivotal for our industry and for SLB. It marked the second consecutive year of outperformance for the energy sector, providing further evidence of the multiyear upcycle and investment momentum that is underway. I would like to take a few minutes to reflect on what we achieved. We announced our new brand identity, with sustainability embedded in everything we do and opened a new chapter for the company. This firmly positions SLB to benefit from the underlying macro trends that will shape the future of the energy, Oil & Gas Technology Innovation, Industrial Decarbonization, Digital Transformation and New Energy Systems. We executed consistently for our customers, achieving our best safety and operational integrated performance on record. We advanced our technology leadership and service quality differentiation, leading to more contract awards, higher technology adoption and increased pricing premiums. In our Core Divisions, we expanded pre-tax operating margins by more than 300 basis points. This was led by well construction, which expanded margins by more than 550 basis points. We also launched new products, services and solutions that increase efficiency and lower operational emissions. You have seen many examples of these in todayâs press release. Our Fit-for-Basin, Technology Access and Transition Technologies Portfolio have fueled growth and margin expansion in every division and every geographic area throughout the year. And we continue to strengthen our Core portfolio for growth and position for future resilience and returns with the acquisition of Gyrodata and the announced joint venture with Aker Solutions for subsea. In Digital, we had strong growth in Exploration Data, INNOVATION Factori and AI solution sales, and the adoption of our new tech digital platform is accelerating. We ended the year with more than 270 DELFI customers, more than 70% growth in DELFI users and our SaaS revenue more than doubled. These positive undercurrents combined with higher APS revenue, contributed to the Digital & Integration Divisions, expanding pre-tax operating margins by more than 170 basis points. We continue to build adjacent expansion opportunities for our Digital business, both in operations data space and beyond oil and gas, such as carbon management. And in New Energy, we progressed technology development milestones, established new partnerships, particularly in CCS, and made new investments that have created a focused, yet comprehensive portfolio that offers promising growth opportunities for the future. Today, this portfolio comprises five business areas, Carbon Solutions, Hydrogen, Geothermal and Geoenergy, Critical Minerals and Stationary Energy Storage, and we are accelerating our R&D efforts to develop technology solutions that address hard to abate industrial and power generation emissions. As you see, our three engines of growth are on solid footing and are positioned for market success. In sustainability, we reduced our own carbon emissions intensity in Scopes 1 and 2, and we continue to be one of the highest ranked companies in our industry across the four rating agencies. We also made significant advances launching SLB End-to-End Emission Solution or SEES, an industry first to help our oil and gas customers address methane and other greenhouse gas emissions. Finally, for our shareholders, we demonstrated our commitment to superior returns. We increased our dividend by 40% in April 2022, followed by a further 43% increase announced today and resumed our share buyback program this month. These achievements highlight a remarkable year for SLB and speak to how we have successfully leveraged the breadth of our portfolio and our competitive strengths to deliver peer-leading outcomes for our customers and shareholders. We are primed for significant success and look forward to carrying momentum into the year ahead. I would like to extend my thanks to the entire SLB team for delivering an outstanding year. Moving to the macro, we enter 2023 against the backdrop of market fundamentals that remain compelling for both oil and gas and low carbon energy resource. First, despite concerns for potential economic slowdown in certain regions, oil and gas demand growth remains resilient. The IEA forecasts that oil and gas demand will grow by 1.9 million barrels to reach approximately 102 million barrels per day. In parallel, markets will remain tightly supplied with modest production increases offset by the end of SPR release and well productivity declines in certain regions, most notably in North America. Second, there is a greater sense of urgency around energy security. This is resulting in new investment in capacity expansion and diversity of supply. You will see this reflected in the number of new projects sanctioned, gas supply agreements signed and the return of offshore exploration, all at a pace unforeseen just 18 months ago. And third, the secular trends of digital and decarbonization are set to accelerate, driven by significant digital technology advancement in cloud and AI, favorable government policy support in New Energy investments and increased spending on low carbon initiatives by operator globally. Underpinning everything, commodity price remained at supportive levels for durable investment. In North America, spending growth is expected to be more restrained after an exceptionally strong year in 2022. Capital spending growth is expected to increase in the high teens as rig counts potentially approach a plateau. Public companies, particularly the majors, are expected to increase short-cycle spending in key U.S. land basins and drilling activity remain strong to build up well inventory and support target production increase. In the U.S. Gulf of Mexico, where we have a significant presence, we expect the strong spending uplift to continue. Turning to international, markets are poised for strong growth in the Middle East and Latin America geographically, and more broadly, in offshore and in gas. In the Middle East, we expect record levels of upstream investments, with a ramp-up in various capacity expansion projects designed to deliver more gas production and a combined oil increment of 4 million barrels per day through 2030. Offshore activity will continue to strengthen as tiebacks and new development projects mobilize and new FIDâs are sanctioned, while Russian activity is expected to contract. Excluding Russia, customersâ capital spending internationally is expected to increase in the mid-teens. The combination of long-cycle oil capacity expansion projects, offshore deepwater resurgence and strong gas development activity will be a key driver for the multiyear duration of this cycle. This outlook is very favorable for SLB with multiple paths of resilient growth in Core, Digital and New Energy. On a full year basis, our ambition is to grow revenue in excess of 15% compared to 2022, supported by the step-up in international and offshore momentum, which will augment growth established in North America. As a result, year-on-year adjusted EBITDA growth will be in the mid-20s driven by further margin expansion. More specifically, in the international markets, we foresee growth in the high-teens, excluding Russia, which is set to decline this year. We expect the highest growth rates to be realized in the Middle East and in offshore markets, particularly in Latin America and in Africa. In North America, we anticipate about 20% growth supported by offshore strength, land drilling activity and higher pricing. Full year margin expansion will be driven by further positive pricing dynamics, increased technology adoption and improvements from our enhanced operating leverage, mainly internationally. Let me share with you how we see this year unfolding. Directionally, during the first quarter, we anticipate a typical pattern of activity begin -- beginning with the combined effect of seasonality and the absence of year-end product and digital sales. Additionally, the first quarter will reflect some impact of year-on-year Russia activity decline. This will be followed by a rebound in the second quarter and further acceleration of growth trajectory in the second half of the year, particularly in the international markets. This typical pattern of activity and the favorable dynamics I described earlier combine to support the ambition we have set for full year growth and margin expansion. In addition, the beneficial impacts of an earlier than expected reopening in China, the easing of inflationary trends and any further restriction on Russian exports could lead to an acceleration of short-cycle activity globally and fast-tracking of FIDs internationally. This could present further upside over the second half of the year. Thank you, Olivier, and good morning, ladies and gentlemen. Fourth quarter earnings per share, excluding charges and credits was $0.71. This represents an increase of $0.08 compared to the third quarter and an increase of $0.30 or 73% when compared to the same period of last year. In addition, we recorded a net credit of $0.03, which brought our GAAP EPS to $0.74. You can find details of the components of this net credit in the FAQs at the end of our earnings press release. Overall, our fourth quarter revenue of $7.9 billion increased 5% sequentially and 27% year-on-year. All divisions posted sequential revenue growth led by Digital & Integration and Reservoir Performance. From a geographical perspective, North America revenue grew 6% sequentially, while international revenue grew 5%, led by the Middle East. Fourth quarter pre-tax operating margins of 19.8% improved 104 basis points sequentially and 393 basis points year-on-year. Notably, over 70% of our GeoUnits posted their best margins since 2016. Adjusted EBITDA margin for the quarter of 24.4% was 219 basis points higher than the same quarter of last year, exceeding the guidance we provided at the beginning of the year. Let me now go through the fourth quarter results for each division. Fourth quarter Digital & Integration revenue of $1 billion increased 12% sequentially, with pre-tax operating margins expanding 386 basis points to 37.7%. This growth was driven by year-end exploration data licensing sales in the Gulf of Mexico and Africa. Increased APS project activity in Ecuador and higher digital sales internationally. Reservoir Performance revenue increased 7% sequentially, while margins expanded 146 basis points, primarily due to new projects and activity gains internationally, led by the Middle East and the offshore basins. Well Construction revenue of $3.2 billion, increased 5% sequentially, due to strong activity from new projects and solid pricing improvements internationally, particularly in the Middle East and in Latin America. Margins of 21% declined 50 basis points, as improved profitability from the higher activity in the Middle East and Latin America was more than offset by the onset of seasonal effects in the Northern Hemisphere. Finally, Production Systems revenue of $2.2 billion was up 3% sequentially on higher international sales of artificial lift, completions and midstream production systems, partially offset by reduced sales of valves and subsea production systems. Margins improved 32 basis points due to favorable technology and project mix. Now turning to our liquidity. Cash flow from operations during the quarter was $1.6 billion and free cash flow was $855 million. This performance did not reflect the increase we typically experience in the last quarter of the year as free cash flow was $200 million lower than in the previous quarter. This was due to a combination of the following four factors. Second, our inventory balance increased 22% year-on-year to support our increasing product backlog driven by the sizable share of tender awards we have secured going into 2023. Third, we pulled forward certain investments in CapEx in order to fully seize the continued revenue growth expected in 2023, particularly in our Well Construction and Reservoir Performance divisions. As a result, our capital investments increased $255 million sequentially. Our full year 2022 capital investments were therefore $2.3 billion, as compared to our initial guidance at the beginning of the year of $1.9 billion to $2 billion. Despite this increase, the CapEx portion of our capital investments was still at the midpoint of our 5% to 7% of revenue target. Lastly, lower-than-expected year-end accounts receivable collections contributed to reduced free cash flow. As you may recall, we had exceptional cash collections in the fourth quarter of 2021. We did not achieve the same level of year-end collections as last year, and as a result, our DSO in Q4 2022 was approximately five days higher than at the same time last year. However, it is worth noting that our 2022 year-end DSO was the second best we have achieved going back at least two decades. Therefore, this is just a timing issue. Beyond free cash flow, our overall cash position was enhanced by the partial monetization of our investment in the Arabian Drilling Company, an onshore and offshore drilling rig company in Saudi Arabia. ADC completed an initial public offering during the fourth quarter and in connection with this IPO, we sold a portion of our interest in the secondary offering that resulted in us receiving net proceeds of $223 million. We currently have a 34% interest in ADC. We also sold an additional portion of our shares in Liberty, which generated $218 million of net proceeds during the quarter. We currently have a 5% interest in Liberty. As a result of all of this, we ended the year with net debt of $9.3 billion. This represents an improvement of approximately $400 million sequentially and $1.7 billion compared to the end of 2021. This also represents our lowest net debt level since the first quarter of 2016. Consequently, our net debt-to-EBITDA leverage is now down to 1.4. In addition, our gross debt reduced by almost $2 billion during the year. We repaid in the fourth quarter $900 million of debt that matured and repurchased $800 million of notes that were going to come due in 2024 and 2025. As a result of our strong operating results and the net debt reduction, our return on capital employed for 2022 was 13%, representing its highest level since 2014. Now looking ahead to 2023. We expect total capital investments consisting of CapEx and investments in APS and exploration data to be approximately $2.5 billion to $2.6 billion, as compared to $2.3 billion in 2022. Based on this, our capital investments will grow at a slower pace than our expected revenue growth in 2023. As a result and when taking into account our 2023 guidance for EBITDA to increase in the mid-20s when compared to 2022, we are confident that our free cash flow will increase significantly in 2023. Accordingly, we reaffirm our ambition to deliver a minimum average of 10% free cash flow margin through the 2021 to 2025 period. This will allow us to continue increasing returns to shareholders as we leverage both the length and strength of the current growth cycle. Specifically, for 2023, we expect to distribute visibly more than 50% of our free cash flow to our shareholders between dividends and stock buybacks. Today, we declared the 44 -- the 43% increase in our quarterly cash dividend to $0.25 per share, in line with our announcement at our recent Investor Day event. In addition, we have resumed our share repurchase program this month and are targeting a minimum amount of $200 million for the quarter. For 2023, we are targeting to return a total of $2 billion to our shareholders in the form of dividends and buybacks. Thank you. [Operator Instructions] And our first question comes from the line of James West with Evercore ISI. Please go ahead. Hey. Good morning, Olivier. Good morning, Stephane. So I guess the first thing I wanted to touch on, Olivier, is the international business had a really strong second half, particularly strong fourth quarter. But from everything I understand and see in the market is, we are really just getting started with ramping activity, particularly in the Middle East, particularly in some of the offshore markets, but we are in the early stages of that and so there should be a further acceleration in international activity. I know you gave some guidance for 2023 in terms of what you are anticipating in terms of revenue and EBITDA. But how would you characterize the next several quarters we will see, of course, the normal seasonality in 1Q, but as we get into kind of 2Q, 3Q of next year, we should see kind of big volume increases, and then of course, price increases on top of that? As we see today, the combination of offshore Middle East and broad gas investments internationally will continue to support a very solid growth internationally. We are seeing -- as we have seen in the fourth quarter an uptick into the rate of growth for Middle East and thatâs driven by a commitment to oil capacity increase and further gas development. And this, as I commented briefly in my prepared remarks will lead Middle East investment to be on record ever as we anticipated in this year or next year. And as a result, will generate significant pull for our revenue going forward. But I think what I will say is that, what is characterizing international as we see it, is that it has a lot of resilience, because itâs multi-pronged. It moves multiple engines, short and long, oil and gas, offshore and onshore. And I believe that the -- with our commitment for capacity expansion and gas development in Middle East is combining with offshore long-cycle, a return of deepwater, which is the operating environment that will see the most activity increase this year and also the return or the acceleration of exploration and appraisal offshore, which would be one of the defining characteristics of the quarters to come. So when you combine all of this, you are getting a very resilient multi-pronged and multiyear sustained growth pattern for the international market. And I think thatâs what we see and it will indeed support not only growth this year, but it will support year growth next year and the years to come and it will be multi-pronged and fairly broad and with multiple geographic impact. Right. Thatâs exactly what we are seeing. So excellent there. And then maybe if I could hone in just as a follow-up on the offshore markets, because thatâs an area where Schlumberger has or sorry, SLB has an increased market share, itâs also a high technology area of the business. Could you maybe talk through some of the things that are happening in offshore, shallow water plus really the deepwater area and especially what you are seeing in exploration and appraisal, because thatâs, as you said, the defining characteristic here and we havenât seen exploration in, well, a long time, so Iâd love to get your thoughts there? Yeah. Yeah. Absolutely. First, I think, to define, offshore has been, I think, seeing an uptick that started about 18 months ago. We donât see it abating and we see it continue to steadily grow. I think what is changing this year is that, the shallow water environment was leading the growth to a large extent in the early part of this offshore cycle expansion. We are seeing the deepwater to catch up and including indeed exploration and appraisal activity that is set to visibly outpace international offshore activity actually. So deepwater will be the highest operating environment activity growth in 2023, and as part of it, exploration appraisal will be also outpacing and slowly rebounding. So itâs visible in multiple regions and I think you have seen East Mediterranean with a couple of announcements by two or three major announcements of gas discoveries that are set to be appraised further and then for future development. You have seen some last year announcement in the South Africa and Namibia Basin that also get additional appraisal and future development. And you have seen that the East Atlantic margin and/or Suriname and Guyana remain very hot. And finally, East Asia is also seeing some deepwater gas exploration at the same time. So you have this four or five offshore mostly deepwater areas that are seeing exploration appraisal results of gas and oil, energy -- gas and energy security and oil - pursuit of oil reserve replacements by major and by national -- large national company. So I think this is happening. And this builds on top of the very high shallow water activity that has already rebounded and is set to further accelerate in the Middle East, where be it in Saudi and UAE or in Qatar, we have a combination of oil and gas offshore development plans that are in place. So offshore outlook is strong and is here to stay for years to come. Hey. Good morning. So two things really stood out to me today, I guess, the first was you calling this a distinctive new phase of the cycle, but also really kind of what it means for the duration of the cycle, what Iâd like to ask you about. So first, on the Middle East, itâs clearly now taken standard stage. You have talked about a record level of upshoot in spending in the next few years. In a lot of ways, itâs feeling like 2005 again. But I was wondering if you could talk about how this cycle could be different for SLB in this region for the perspective of the types of work you are performing, how are the contracts being tendered differently and really what that means for the pricing opportunity both within discrete services and integrated contracts? No. Thank you, Dave. Let me comment first on your remark on durability. I really believe that the cycle that we have entered internationally, that is characterized now by the Middle East joining the growth engine if you like is set to be very durable. I think and the driver of that, as I said, is a combination of four or five countries having committed capacity expansion for oil production for the future and that are much in need as we can see that the tight supply is here to stay and to stretch the market and also for regional gas development and this is happening simultaneously in multiple countries. So this is set to happen and will not last one year. These are long-cycle offshore, onshore, gas, and some of it unconventional, and oil development. So this is first durability is here to stay and we are talking about years. And I think the targets are expanding anywhere from to 2027 to 2030, depending on the country, depending on the ambition they have on sustained production. So second is that what is quite unique and this is a combination of offshore, onshore, oil, gas, conventional and unconventional. I think you have the Qatar conventional gas development. It is only set to further increase. You have the unconventional development in Saudi and in UAE, you have the other gas development in the region, including the East Med that has a fundamental potential of East Med gas development. And then you have the mix of offshore, onshore that I think is quite unique, particularly on the rebound on the shallow water increase of activity you have seen. So that is unique and that gives us a unique opportunity to outperform and to use Fit-for-Basin to use our local content, use our customer centricity, and engagement that we have in the region, and to build on those market positions to really benefit and we are poised to certainly have record revenue in Middle East in -- during this cycle and eclipse previous 2014 peak by margin. And how are the contracts different, before -- last cycle I donât think we really talked about integrated drilling contracts or kind of LSTK contracts. I think it was mostly discrete services. So is that different today and how does that change sort of your business, I think, is there more opportunityâ¦ I think that what would characterize this cycle is performance. Itâs all about performance. And I think our ability to perform in this integrated contract, and as you have seen, what we have shared during this press release on the Jafurah contract and been able to up our performance to peer some of the North America performance and performance will dictate market allocation -- market share allocation and will dictate technology adoption. So our ability to Fit-for-Basin, our technology like we did in Qatar and other regions and local content like we are doing Saudi and other regions, I think, is giving us opportunity to earn this contract and to use a pricing premium for this technology adoption to deploy Digital and you have seen the announcement we made a few months back with -- in the sustainability platform with Saudi Aramco and more announcements will come. So we are building our future in Middle East in engines, and we are building on the performance in execution. Technology adoption and differentiation and LSTK, while being a part of the landscape of the way we operate is not the largest piece of our business in the Middle East. Thank you. And just a secondary question -- second question just a follow-up on what James was asking about on the offshore side. Obviously, you feel confident in the duration, we are seeing this kind of shallow water business, which you didnât really have in the Middle East before. But thinking about the deepwater side, we are seeing rig contracting picking up materially. Petrobras, it seems to be cornering the market on deepwater rigs. So I guess my question is sort of similar to my other question, how is this different this time. Is the customer base changing much from what you see, is it going to be the same big players that we saw the last time and so is that changing much? And I am just sort of thinking that should we be expecting to see a bit more of a pronounced inflection in the second half of the year as deepwater comes on? Yeah. I think thatâs what we are predicting as well. I think, as I have indicated, the deepwater, we see the highest activity uptick compared to shallow and land, because land is being impacted by the activity compression and decline in Russia internationally and hence this is what we anticipate as well and we donât expect this to stop at the end of the quarter or next year. So this trend is set to continue indeed. Good morning. Obviously, you covered a lot of ground on kind of international, the outlook, the multiyear outlook, pricing momentum is starting to build and we touched a little bit on Daveâs question here on offshore. So I kind of want to dig on -- dig into that a little bit more and talk specifically on subsea. We keep hearing a lot of anecdotes out there, some really strong margins that are starting to get booked in backlog. So could you speak to the subsea market, what kind of fundamentals you are seeing out there and I donât know if you are willing to kind of talk to -- if you think the industry, not necessarily Schlumberger, but if the industry can kind of get back to prior cycle peak margins on the subsea side? I cannot comment on that industry. I think I can comment on what I see as activity outlook and what we see in our backlog and type of activity for subsea. So the undercurrent, if I was to use that terminology for subsea are very strong, because on the outlook, the mid- and long-term outlook, because of this deepwater activity that includes exploration appraisal and future development. FID -- offshore FID for 2023 is set to be the high since 2012, 2013, indicating that there is a pipeline of subsea activity in the horizon and we have seen some of it materializing in our work this year. We are seeing also some infill drilling, tieback activity, which benefited us in recent quarters and we are very reassured that the market is inflecting for further growth. And indeed, the conditions are set for price to be accretive into the margin, into the backlog going forward to build up and to resume some extent previous subsea margin. But I cannot comment on the industry at large, but I believe this is an industry that is very critical to the success of offshore development and where we see a lot of collaboration, engagement, technology development and critical technologies like subsea processing, boosting and trends are positive as we see it. And we are -- as you know, we made a strategic decision to align with -- to form a JV with Aker Solutions and Subsea 7 to address that market opportunity, and that this announcement reflects our view on the market. Yeah. Absolutely. All right. And just one follow-up unrelated, if we kind of look at 1Q and just kind of think about the moving pieces, you walked through some of this with international seasonality. I didnât hear anything kind of explicitly on North America, but I donât know if you can kind of just step us through 1Q moving pieces between North America and international and maybe some color around margins? Yeah. First, because you pick on it, I think, Iâd like to first reflect on North America. North America has been a fantastic success in the last 18 months, 24 months. I think the rate of growth that the team has achieved both in offshore and land market has outpaced the re-growth visibly, the success in our technology offering and fit and tech access model that has been very successful there. I think as we expanded margin, as you have seen, our margin are the very, I would say, different, if not very accretive level today in North America. So this is a very good base to be on. And as the market 2023 unfolds, first there is a little bit of a shift to drilling to rebuild the DUC inventory that will favor us in a month and a couple of quarters to come before the usual plateauing or a moderation of growth in the second half. But we see an increased level of rig activity in North America, and clearly, on the momentum of -- and itâs typically it happens in the early part of the year before it plateaus in the second half and thatâs nothing new. Thatâs a pattern that we expect and will have an impact on the first quarter. And then we see a continuation of the offshore strength and in -- be it in Gulf of Mexico, in east Canada or further North in Alaska and this activity set to continue to grow in 2023. So NAM will be indeed an engine that will support growth in the first half. And by contrast, as I said, the usual pattern of seasonality internationally in the Northern Hemisphere will be offsetting this and we will also this year have the effect of the Russia year-on-year decline that we expect to impact negatively. So you have a mix there that I think we have described and but NAM will be an engine of growth in the second -- the first half. I wanted to get your thoughts, Olivier, on the level of service intensity that you are seeing, particularly in the Middle East, perhaps, relative to the 2009, 2014 cycle, as well as thoughts on the spare capacity -- OFS capacity in markets like the Middle East and offshore? Yeah. I think let me reflect first on the indeed, the service intensity. I think the -- again, as I said, I think, there is a significant expansion happening at the same time concurrently and there is a significant focus on performance. So this has led to an increase of service intensity in the contracts where we operate. We are fully passing to this and we are leading on many of them based on our performance. But at the same time, we have much increased and much improved asset efficiency, and hence, we are able to deliver that service intensity, that performance focused delivery to our customer without increasing our CapEx intensity and we remain with our target of 5% to 7% total CapEx, as you have seen in our guidance today. So thatâs -- I think thatâs one aspect that I think is critical and we use that discipline in our CapEx, that capital to actually to indeed use this to help us extract and guide further up the pricing in the market. So the pricing is driven by, first and foremost, performance. As we see it, our performance gives us a premium, technology, a unique technology that either impacting performance or impacting decarbonization as transition technology or that is fit for the basin. And then, obviously, the stretch in the capacity market that is now being obvious and is being tested in the Middle East and in offshore is driving another undercurrent of pricing positive trends. Great. And just -- I want to follow up on this -- on performance. How -- Olivier, how are your key, call it, NOC partners differentiated in between performance, and call it, the lowest cost bid in terms of tender awards? Are you seeing more direct awards, but how is this -- how are the tendering process being impacted by this focus on performance? I think it has been a significant impact. I think if you look at the Kimberlite survey that has been just published. I think we remained the best performance supplier as indicated by the total survey based on technology, based on the delivery, service quality and operational efficiency that we deliver. I think this is recognized. This is leading to either of two things, I would say, direct awards or -- and ability to negotiate premium on our service pricing or technology pricing to reflect our differentiation performance. So the industry is measured by performance and we believe that we have set the benchmark and we continue to pursue collectively in our organization through technology, through a process in operational efficiency, through digital operation, so that we can extract this performance and offer it to the customer and they recognize it and give you the premium. Yes. Good morning. You guys posted some pretty impressive margins in North America last year. Do you think most of the margin benefit overall and the share gain benefit within drilling services from your new strategy has now been captured, does there the market is going to stagnate here onshore for a period. I am just curious about your ability to potentially still deliver exit-to-exit growth onshore in North America or whether the benefits from a share perspective and from a margin perspective that had largely been captured? No. I believe that the market has still room to grow. I believe first from the activity, as I described, albeit I think, itâs very well known that the limited access to the Tier 1 inventory and acreage and the stretch on capacity in the market has created a negative inflection onto the well productivity. But we expect the major, the public to this extent and much less the private to drive the growth this year. In this market, we are well positioned, because we have a technology access model and Fit-for-Basin technology that has in drilling onshore made a performance impact and has been recognized hence has earned a premium. We have a production portfolio -- production system portfolio that is set also through our ESP or frac trees to succeed. So we see further runway both in growth and in margin expansion as the market is still stretched and similar to international market, the market recognizes the opportunity to differentiate to performance, particularly the public company. So our view is that in the North America both land and offshore. There is not only activity-based growth coming this year not to the same magnitude in land market like last year and still support also pricing, considering the stretch and considering the recognized premium on Fit technology and on performance and part and this is true both on land and on offshore environment. Great. No. I appreciate all that color. And then just turning to Russia, you mentioned that Russian activity will be trending lower in 2023. Is that a market comment or does that apply to your activity in the country as well? No. Thatâs -- I think thatâs a market comment directionally and in line with some independent market analysts view. This is five to or single-digit to teens digit decline and we align with this view and I think our market activity will decline accordingly. Iâd just like -- Iâd like to come back to your positive commentary on the increase in the offshore and particularly deepwater. I was just curious to the extent you can share it with us kind of the way to think about the impact on Schlumberger, excuse me, SLB, as we go from kind of a conventional land rig, an international land rig, shallow water and the deepwater, right, like so whatâs the sort of multiple of revenues, potential margin expansion as you go across those? Yeah. I think we have commented this before and we have commented that offshore is an intensity of 5 times revenue intensity per rig and we maintain that view, whether this can expand depending on the intensity, depending on the market mix, depending on the pricing, I think is, I would say, a floor to some extent. But, yes, we see the deepwater accelerating and I think itâs something that is not only in one region, but I think itâs pretty broad. As I commented, itâs Latin America, itâs Africa, itâs East Med and is to some extent also East Asia. Hence, this addition, I mean, we are not talking about necessarily 50 rigs, but one and twos and threes rigs in those regions. And the fact that they are relating to also a content of exploration and appraisal is creating a mix that is favorable in the quarters to come, I would say. Okay. And then my unrelated follow-up is to come back on the CapEx. Understand 2022 running a little hot and the growth rate a little slower in 2023 based on that accelerated CapEx. But whatâs the right way for us to think about CapEx as a percent of revenue, because for a bit, it seemed like kind of 5% to 6% running a little above that in 2022 and by my own calculations maybe still running above that in 2023. So I just wondered if thereâs been a change in how you are thinking about it or it just reflects market conditions as we look into 2023 in the middle of the decade? So, I think, you clearly have to distinguish the CapEx portion, which is directly correlated to the level of activity and the APS investments. So together as we guided, this is a total envelope for 2023 of $2.5 billion to $2.6 billion. Within this, the CapEx portion, as we said, we will continue to target a range of 5% to 7% of revenue. So it allows us to flex it based on activity, but we will not go above this and it will be probably pretty similar to the percentage we saw in 2022. Okay. Great. So no change in how you are thinking about the investments and how that affects return on capital employed and everything going forward? Good morning. You have outlined 2023 international growth and at your investor event kind of give us some parameters around 2025, but then your comments today about international growth could keep going through 2027 and possibly to 2030. I think we are all pretty familiar with Middle East, strong growth offshore as well, growing substantially, but what do you see as some kind of the later cycle growers or is this cycle mainly Middle East and offshore? Yeah. I think, again, to make sure we are clear on the commentary we have shared. I think I was specific about the later part of the year, the â27 to 2030 oil capacity and gas development commitments in the Middle East, okay? Offshore, similarly, I think, itâs a typical development and FID that are being blessed and sanctioned this year and years to come, have three years to five years horizon. So combining the, what is expected to be the FID and dollar value in offshore environment in 2023 in the last 10 years with a pipeline is still strong going forward, we indeed expect three years to five years follow through on offshore from today and combining with Middle East, the rest, I think, is more related to short-cycle and itâs difficult to combine. But I think these two major growth engines internationally, I think, have the potential to sustain a very resilient growth of international environment for years to come. Indeed, thatâs correct and thatâs hypothesis at this point. So, Olivier, I wanted to kind of follow up as you kind of laid out your financial targets back from your Analyst Day in November and it looks like you are very much on track to kind of meeting those targets. And I just want to get a sense now as we are kind of entering into 2023, you got -- are you getting a feeling that the market momentum in both international and offshore is even better than you thought it was when you laid out your plans for the Analyst Day in November? No. I think, generally speaking, I think, directionally, I think, the market assumption we took, the macro backdrop we anticipated are roughly the same. I think I will only put two comments. I think first is that the dynamic of this year has, as I commented in my remarks, a little bit of an upside depending on the China economic rebound and opening and that could lead later in the year to upcycle and FID acceleration and that will have an uptick on the year outlook. And secondly, I think, the -- and I think building on the recent visit I had in the Middle East and the engagement I had with a lot of customers there. I think the strength of the -- and commitment to this capacity expansion and to this gas development program, I think, is here to stay and will be resilient to market condition, I would say. So I believe that the duration of the cycle, I think, we limited our guidance to 2025, but itâs obvious -- becoming obvious -- increasing obvious that this cycle will expand and we will have the strength to expand growth beyond â25 both on offshore and Middle East growth engine that will materialize. Okay. Thatâs great color. And then a lot of great information around your core businesses, just kind of curious now what -- if you could give us a brief outlook on whatâs happening on the New Energy side? No. I think, New Energy, I am very pleased with the progress. I think we crystallized our strategy very much in the last six months. I think we have been commenting on it extensively during the Capital Market Day to outline the five selected domains in which we are investing in technology. We are investing in partnership, we are investing into equity and critical partners to accelerate our go-to-market, to accelerate our success. So continue to make progress on each of these five domains and we have seen some announcements relating to CCS, which I believe has a lot of momentum and we are involved into dozens of projects this year and we have crystallized and materialized some partnerships, including the partnership with Linde for blue ammonia, blue hydrogen and gas processing and we have been investing in RTI as well for carbon capture. And we continue to make progress and you have seen some announcement on Geoenergy with Celsius, which is a very critical technology that is being assessed and being recognized in Europe as something that could really have an impact as a new technology, as a new domain that could transform a little bit the way the heating and cooling of buildings and cities are done. So we have a great long-term outlook on this and more will come on this. But in general, we are making progress on each of these domains, be it in pilots, be it in early commercial contracts, be it in technology milestones. We will continue to inform you on these milestones so that you can judge the progress and continue to assess the potential and then keep us -- we will keep you informed on our journey towards 2030 and the mission we have to the next decade. So I am still positive and encouraged -- continue be encouraged with what the feedback we are getting for our partners and from our customers. So ladies and gentlemen, as we conclude todayâs call, I would like to leave you with four key takeaways. First, our 2022 results represent another positive step in our financial and operational performance journey. Financially, we realized broad revenue growth and margin expansion, closed the fourth quarter with year-on-year EBITDA margin expansion ahead of our initial guidance and further reduced net debt. Operationally, the year was transformative, as we executed our strategy across our 3 engines of growth and communicated our new brand purpose and identity. This firmly positions SLB to be the leader in the energy sector across multiple opportunities and time horizons. Second, the macroeconomic environment remains highly supportive of a resilient upcycle in both oil and gas and low carbon energy solutions. This is fundamentally driven by demand growth amidst very tight supply and further boosted by the prioritization of energy security and decarbonization. These market conditions will continue to support steady global oil and gas upstream investment for years to come and will prompt additional investments in low carbon energy solutions for a balanced planet. Third, the oil and gas industry is entering a new phase in the upcycle marked by the inflection in the Middle East and the strengthening of offshore activity. Taken together, this signals the onset of a new growth pattern internationally. These dynamics are closely aligned with our strengths and will enable us to benefit from a favorable pricing environment and further technology adoption. Additionally, we believe that the secular trends in Digital Transformation and decarbonization will only accelerate all markets, presenting an advantaged position for SLB. Finally, based on our confidence in the strength of the upcycle, our favorable market exposure and strong financial results, we reaffirm our ambition to significantly expand shareholderâs returns in 2023, commitment to more than double the returns when compared to 2022 through a combination of increased dividends and share buybacks. I could not be more satisfied with SLBs position at the onset of 2023 and have full confidence in our teamâs ability to fully seize the new phase of this upcycle and accelerate our investment for the future. We look forward to once again exceeding your expectations throughout this year. Thank you very much for your time.
EarningCall_1344	Good morning, ladies and gentlemen. Welcome to JPMorgan Chaseâs Fourth Quarter 2022 Earnings Call. This call is being recorded. [Operator Instructions] We will now go live to the presentation. Please standby. At this time, I would like to turn the call over to JPMorgan Chaseâs Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Jeremy Barnum. Mr. Barnum, please go ahead. Thank you very much. Good morning, everyone. The presentation is available on our website and please refer to the disclaimer on the back. Starting on Page 1, the firm reported net income of $11 billion, EPS of $3.57, on revenue of $35.6 billion and delivered an ROTCE of 20%. This quarter, we had two significant items in corporate, a $914 million gain on the sale of Visa B shares, offset by $874 million of net investment securities loss. Touching on a few highlights. Combined credit and debit spend is up 9% year-on-year, with growth in both discretionary and non-discretionary spending. We ended the year ranked at #1 for global IB fees with a wallet share of 8% and credit continues to normalize, but actual performance remains strong across the company. On Page 2, we have more on our fourth quarter results. Revenue of $35.6 billion was up $5.2 billion or 17% year-on-year. NII ex Markets was up $8.4 billion or 72% driven by higher rates. NIR ex Markets was down $3.5 billion or 26%, predominantly driven by lower IB fees as well as management and performance fees in AWM, lower auto lease income and Home Lending production revenue. And Markets revenue was up $382 million or 7% year-on-year. Expenses of $19 billion were up $1.1 billion or 6% year-on-year, primarily driven by higher structural expense and investments. And credit costs of $2.3 billion included net charge-offs of $887 million. The net reserve build of $1.4 billion was driven by updates to the firmâs macroeconomic outlook, which now reflects a mild recession in the central case as well as loan growth in card services, partially offset by a reduction in pandemic-related uncertainty. Looking at the full year results on Page 3, the firm reported net income of $37.7 billion, EPS of $12.09 and record revenue of $132.3 billion and we delivered an ROTCE of 18%. On the balance sheet and capital on Page 4, we ended the quarter with a CET1 ratio of 13.2%, up 70 basis points, primarily driven by the benefit of net income, including the sale of Visa B shares less distributions, AOCI gains and lower RWA. RWA declined approximately $20 billion quarter-on-quarter, reflecting lower RWA in the Markets business, which was partially offset by an increase in lending, primarily in card services. Recall that we had a 13% CET1 target for the first quarter of 2023, which we have now reached one quarter early. So given that, we expect to resume share repurchases this quarter. Now, letâs go to our businesses, starting on Page 5. Starting with a quick update on the health of U.S. consumers and small businesses based on our data. They are generally on solid footing, although sentiment for both reflects recessionary concerns not yet fully reflected in our data. Combined debit and credit spend is up 9% year-on-year. Both discretionary and non-discretionary spend are up year-on-year, the strongest growth in discretionary being travel. Retail spend is up 4% on the back of a particularly strong fourth quarter last year. E-commerce spend was up 7%, while in-person spend was roughly flat. Cash buffers for both consumers and small businesses continue to slowly normalize, with lower income segments and smaller businesses normalizing faster. Consumer cash buffers for the lower income segments are expected to be back to pre-pandemic levels by the third quarter of this year. Now moving to financial results. This quarter, CCB reported net income of $4.5 billion on revenue of $15.8 billion, which was up 29% year-on-year. You will notice in our presentation that we renamed Consumer & Business Banking to Banking & Wealth Management. Starting there, revenue was up 56% year-on-year, driven by higher NII on higher rates. Deposits were down 3% quarter-on-quarter as spend remains strong and the rate cycle plays out, with outflows being partially offset by new relationships. Client investment assets were down 10% year-on-year, driven by market performance, partially offset by net inflows where we are seeing good momentum, including from our deposit customers. Home Lending revenue was down 46% year-on-year, largely driven by lower production revenue. Moving to Card Services & Auto, revenue was up 12% year-on-year, predominantly driven by higher card services NII on higher revolving balances, partially offset by lower Auto lease income. Card outstandings were up 19%. Total revolving balances were up 20% and we are now back to pre-pandemic levels. However, revolving balances per account are still below pre-pandemic levels, which should be a tailwind in 2023. And then auto originations were $7.5 billion, down 12%. Expenses of $8 billion were up 3% year-on-year, primarily driven by investments as well as higher compensation, largely offset by auto lease depreciation from lower volumes. In terms of credit performance this quarter, credit costs were $1.8 billion, reflecting reserve builds of $800 million in Card and $200 million in Home Lending and net charge-offs of $845 million, up $330 million year-on-year. Next, the CIB on Page 6. CIB reported net income of $3.3 billion on revenue of $10.5 billion for the fourth quarter. Investment Banking revenue of $1.4 billion was down 57% year-on-year. IB fees were down 58%, in line with the market. In Advisory, fees were down 53%, reflecting lower announced activity earlier in the year. Our underwriting businesses were affected by market conditions, resulting in fees down 58% for debt and down 69% for equity. In terms of the outlook, the dynamics remain the same. Pipeline is relatively robust, but conversion is very sensitive to market conditions and sentiment about the economic outlook. Also note that it will be a difficult compare against last yearâs first quarter. Moving to Markets, revenue was $5.7 billion, up 7% year-on-year, driven by the strength in our macro franchise. Fixed Income was up 12% as elevated volatility drove strong client activity, particularly in rates and currencies in emerging markets, while securitized products continue to be challenged by the market environment. Equity markets was relatively flat against a strong fourth quarter last year. Payments revenue was $2.1 billion, up 15% year-on-year. Excluding the net impact of equity investments, it was up 56% and the year-on-year growth was driven by higher rates. Security Services revenue of $1.2 billion was up 9% year-on-year, predominantly driven by higher rates, largely offset by lower deposits and market levels. Expenses of $6.4 billion were up 10% year-on-year, predominantly driven by the timing of revenue-related compensation. On a full year basis, expenses of $27.1 billion were up 7% year-on-year, primarily driven by higher structural expense and investments, partially offset by lower revenue-related compensation. Moving to the Commercial Bank on Page 7. Commercial Banking reported net income of $1.4 billion. Record revenue of $3.4 billion was up 30% year-on-year, driven by higher deposit margins, partially offset by lower investment banking revenue and deposit-related fees. Gross Investment Banking revenue of $700 million was down 52% year-on-year, driven by reduced capital markets activity. Expenses of $1.3 billion were up 18% year-on-year. Deposits were down 14% year-on-year and 1% quarter-on-quarter, primarily reflecting attrition of non-operating deposits. Loans were up 14% year-on-year and 3% [ph] sequentially. C&I loans were up 4% quarter-on-quarter, reflecting continued strength in originations and revolver utilization. CRE loans were up 2% quarter-on-quarter, reflecting a slower pace of growth from earlier in the year due to higher rates, which impacts both originations and prepayment activity. Then to complete our lines of business, AWM on Page 8. Asset & Wealth Management reported net income of $1.1 billion with pre-tax margin of 33%. Revenue of $4.6 billion was up 3% year-on-year driven by higher deposit margins on lower balances, predominantly offset by reductions in management and performance and placement fees linked to this yearâs market declines. Expenses of $3 billion were up 1% year-on-year, predominantly driven by growth in our Private Banking Advisory teams, largely offset by lower performance-related compensation. For the quarter, net long-term inflows were $10 billion, positive across equities and fixed income and $47 billion for the full year. And in liquidity, we saw net inflows of $33 billion for the quarter and net outflows of $55 billion for the full year. AUM of $2.8 trillion and overall client assets of $4 trillion were down 11% and 6% year-on-year respectively driven by lower market levels. Finally, loans were down 1% quarter-on-quarter, driven by lower securities-based lending, while deposits were down 6% sequentially driven by the rising rate environment, resulting in migration to investments and other cash alternatives. Turning to Corporate on Page 9. Corporate reported a net gain of $581 million. Revenue of $1.2 billion was up $1.7 billion year-on-year. NII was $1.3 billion, up $2 billion year-on-year due to the impact of higher rates. NIR was a loss of $115 million and reflects the two significant items I mentioned earlier. And expenses of $339 million were up $88 million year-on-year. With that, letâs pivot to the outlook for 2023, which I will cover over the next few pages, starting with NII on Page 10. I will take a sip of water. Okay. We expect total NII to be approximately $73 billion and NII ex Markets to be approximately $74 billion. On the page, we show how the significant increases in quarterly NII throughout 2022 culminated in the $81 billion run-rate for the fourth quarter and how we expect that to evolve for 2023. Going through the drivers. The outlook assumes that rates follow the forward curve. The combination of the annualization of the hike in late December, the hikes expected early in the year and the cuts expected later in the year should be a nice tailwind. Offsetting that tailwind is the impact of deposit repricing, which includes our best guess of rate paid in both wholesale and consumers. In addition, looking at balance sheet growth and mix, we expect solid overall card spend growth as well as further normalization of revolving balances per account and modest loan growth across the rest of the company. We expect that this tailwind will be offset by lower deposit balances given modest attrition in both consumer and wholesale. But itâs very important to note that this NII outlook is particularly uncertain. Specifically, Fed funds could deviate from forwards, balance attrition and migration assumptions could be meaningfully different and deposit product and pricing decisions will be determined by customer behavior and competitive dynamics as we focus on maintaining and growing primary bank relationships and maybe quite different from what this outlook assumes. And further, the timing of all these factors could significantly affect the sequential trajectory of NII throughout the year. That said, as we continue executing our strategy of investing to acquire new customers as well as deepen relationships with existing ones and as we see the impact of loan growth, we would expect sequential NII growth to return, all else being equal. And just to finish up on NII. As the guidance indicates, we expect Markets NII for the year to be slightly negative as a result of higher rates, but remember, this is offset in Markets NIR. Now turning to expenses on Page 11, we expect 2023 adjusted expense to be about $81 billion, which includes approximately $500 million from the higher FDIC assessment. Going through some of the other drivers, we expect increases from labor inflation, which, while it seems to be abating on a forward-looking basis, is effectively in the run-rate for 2023. An additional labor-related driver is the annualization of 2022 headcount growth as well as our plans from a modest headcount increase in the year, all of which are primarily in connection with executing our investments. And on investments, while we are continuing to invest consistent with what we told you at Investor Day, itâs a more modest increase than last year. The themes remain consistent and we will continue to give you more detail throughout the year, including at Investor Day in May. Of course, as is always true, this outlook includes continuing to generate efficiencies across the company. And finally, while volume and revenue-related expense was ultimately a tailwind for 2022, we are expecting it to be close to flat in 2023, which will be completely market dependent as always. Moving to credit on Page 12, on the page, you can see how exceptionally benign the credit environment was in 2022 for the company across wholesale, card and the rest of consumer. Turning to the 2023 outlook, for card net charge-off rates specifically, Marianne gave quite a bit of detail about this at our recent conference and our outlook hasnât really changed. So to recap that story, the entry to delinquency rate is the leading indicator of future charge-offs. And it is currently around 80% of pre-pandemic levels. We expect that to normalize around the middle of the year, with the associated charge-offs following about 6 months later. As a result, loss rates in 2023 will still be normalizing. So while we anticipate exiting the year around normalized levels, we expect the 2023 card net charge-off rate to be approximately 2.6%, up from the historically low rate of 147 basis points in 2022, but still well below fully normalized levels. So letâs turn to Page 13 for a brief wrap up before going to Q&A. We are very proud of the 2022 results, producing an 18% ROTCE and record revenue in what was a quite dynamic environment. Throughout my discussion of the outlook, I have emphasized the uncertainty in many of the key drivers of 2023 results. And while we are ready for a range of scenarios, our expectation is for another strong performance. So as we look forward, we expect to continue to produce strong returns in the near-term and we remain confident in our ability to deliver on our through-the-cycle target of 17% ROTCE. Hi. Good morning, Jeremy. I wanted to ask about the NII outlook, Slide 10. The range of outcomes on deposit costs is quite wide. As you mentioned, it looks like 1.5% to 2% demonstrated there. Does the $74 billion NII line up with kind of the midpoint of that? Maybe you could give some color about kind of the drivers of the $74 billion and where that lines up on this range of deposit cost outcomes? Sure, John. I mean I wouldnât take the chart on the bottom left too literally. Thatâs just supposed to give a stylized indication of the fact that relatively small changes in deposit rate paid for the company on average, as we all know, can produce quite significant impacts on the NII and also that there is â as we have already talked about, a meaningful [Technical Difficulty]. The outlook is our best guess, as Jamie says. And the drivers within that are the usual drivers in wholesale. We would expect to see a little bit of continued attrition, especially of the non-operating type balances. And you are going to see some internal migration there out of non-interest-bearing into interest-bearing over time. In consumer, CDs are flowing right now and we are seeing good new CD production. We have got a 4% CD in the market as of this morning. And so continued CD production and internal migration there will be a driver. And the rest of it is â well, of course, as I said in the prepared remarks, we do expect across the company modest deposit attrition as we look forward as a function of QT in the rate cycle and so on. So we have got the best guesses for all of those in the outlook. And of course, the actual outcome will be different in one way or another and we will just run the business this year. Okay. Thanks. And on buybacks, how will you think about approaching buybacks and putting it in that mix of capital decisions that you have and any thoughts on kind of the size or quantifying the potential buybacks? Yes, sure. So sort of in the mode of like helping you guys out to put a number in the model. If you sort of look at the way we are seeing things, obviously, we have got another GSIB stuff coming next year. So say, 13.5% target and the sort of using your estimates, organic capital generation, minus dividends, etcetera and all of the elements of uncertainty there, I think a good number to use is something like $12 billion of buybacks for this year for 2023. But you know, of course, that buybacks are always at the end of our capital hierarchy. So if we have better uses for the money, those will come first and the timing and the conditions of how much we do when is entirely at our discretion and also noting that we are potentially going to see a Basel III NPR sometime in the first quarter or maybe the second quarter. And while that will be an NPR and it will only cover part of the surface area and it wonât be final, so itâs unlikely that it meaningfully shapes short-term decision-making. There will be some information content of that release that could shape our decisions as well. Hi, good morning. Jeremy, my first question is just, as you can imagine, following up on the NII line of questioning, I appreciate that there is a significant amount of uncertainty in this yearâs NII forecast in particular. But to follow-up with Johnâs question, Iâm wondering if you could give a sort of more specific guardrails with regards to what youâre expecting for deposit attrition and deposit beta in terms of the terminal deposit beta. I think the feedback Iâm getting very early from investors is that they appreciate the headwinds thatâs occurring for NII this year. At the same time, you have been consistently beating what seems like conservative NII expectations for 2022, including printing a giant $20.3 billion number in the fourth quarter. So thatâs why I think the more specific guardrails could be very helpful as investors try to figure out what their own expectations are versus that? Thanks, Erika. So look, I totally appreciate the desire for more specific guardrails. I would want that too, if I were you. I do think that weâre trying to be quite helpful by giving you a full year number which, if weâre honest, involves a lot of guessing about how things will evolve throughout the year. I think once you start giving guardrails, you implicitly assume that outcomes outside of the guardrails are very unlikely. And thatâs just a level of precision that weâre just not prepared to get into, especially because in the end, as I said, a lot of the repricing decisions that we will be faced with as a company or respond to data in the moment at a granular level in connection with the strategy, which is about growing and maintaining primary bank relationships rather than chasing every dollar of balances at any cost. So in that context, we do expect modest balance attrition across the company for deposits, as I said. Jamie, on [indiscernible] Erika, thank you. I do want to give a big picture about why and I do not consider 74 conservative. So the Federal Reserve reduced its balance sheet by $400 billion. $1.5 trillion came out of bank deposits. And so investors can invest in fee bills, money market funds. And of course, banks are competing for the cap of money now, and banks are all in different places. And some banks are started competing heavily. Some have a lot of excess cash and maybe compete less. But if you look at prior â and forget what happened in 2016. I think people make a huge mistake looking at that. Weâve never had this queued this zero rates. Weâve never had rates go up this fast. So I expect there will be more migration to CD, more migration to money market funds. A lot of people are competing for it, and weâre going to have to change saving rates. Now we can do it at our own pace and look at what other people are doing. We donât know the timing, but it will happen. And I just also want to point out that even at 74, weâre earning quite good returns. And thatâs not â and weâve always pointed out to you that sometimes weâre over earning and sometimes are under earning. But I would say, okay, this time weâre over earning on NII this quarter. Weâre maybe over earning on credit. We maybe underearning something else. So these are still very good numbers, and weâre going to wait and see and we will report to you, but I donât want to give you false notions how secure it is. And my follow-up is exactly in that line of questioning. Letâs zoom out for a second here. To your point, Jamie, the returns are still good. You mentioned that your outlook already captures a mild recession. And Iâm going to reask the question I asked in the third quarter. As you think about 2023, do you think JPMorgan can hit that 17% ROTCE that you laid out in Investor Day, even with the headwind in NII and the headwind on the provision? Yes, we can. But a lot of factors could turn that. But yes, we can. I think when we do Investor Day in May, we may give you a more interesting number, which is what do we think our ROTC will be if we have a real recession, which I think even in a real recession, it would probably equal the average industrial company, which is good. So weâre going to give you some detail around that, and those are still good returns, and we can still grow. And 17% is â remember 17% is very good if you compound. Some growth is 17%. Those are extraordinary numbers. And I also want to point, we donât know exactly what capital needs to be at this point, and we have to modify that at one point. And Erika, let me just add a very minor clarifying point as I want to be crystal clear about this. So as you know and as we discussed a lot, like through the pandemic in terms of the way we construct and build the allowance, while itâs anchored around our economist central case forecast, which is correctly, say, is a mild recession, through the way we weight the different scenarios and a range of other factors, the de facto scenario thatâs embedded in the forecast is actually more conservative than that from an [allowance] (ph) perspective. So we just want to be clear about. Good morning. I guess maybe, Jeremy, just following up on the credit assumptions underlying. If you could give us a sense of whatâs assumed in that reserve ratio at the end of the year, be it in terms of the unemployment rate and your outlook around, just a lot of chatter around commercial real estate, the struggles to reprice in the current rate backdrop? Are you concerned about that? Are you seeing pain points in CRE customers given whatâs happening with cap rates and then just the overall backdrop today? Sure. Let me just do CRE quickly, Ebrahim. As you know, our sort of multifamily commercial term lending business is really quite different from the classic office type business. Our office portfolio is very small Class A best developers, best locations. So the vast majority of the loan balances in commercial real estate are that sort of affordable multifamily housing, commercial term lending stuff, which is really quite secure from a credit perspective for a variety of reasons. So we feel quite comfortable with the loss profile of that business. And so yes, so then you were asking about the assumptions in credit overall. So yes, as I said, like the central case economic forecast has a mild recession and if I remember correctly, unemployment peaking at something like 4.9%. The adjustments that we make to the scenarios to reflect a slightly more conservative outlook have us imply a peak unemployment thatâs notably higher than that. So I think we have appropriately conservative assumptions about the outlook embedded in our current balances. And the trajectory that weâve talked about in the presentation, they are definitely â can capture something more than a very mild soft lending. But of course, it wouldnât be appropriate to reflect a full-blown hard landing in our current numbers since the probability of that is clearly well below 100%. Noted. And I guess just as a follow-up on youâve managed RWA growth pretty well when you look at like loan growth year-over-year versus RWA, stayed relatively flat. As we think about just managing capital, how should we think about the evolution of RWA? Are there still opportunities to optimize that going into whatever the Fed comes out with on Basel? Thank you. Yes. So there are definitely still opportunities to optimize. Weâre continuing to work very hard, and itâs a big area of focus. Some of that is reflected in this quarterâs numbers, but some of the other drivers of this quarter are what you might call more passive items, particularly in market with RWA. And yes, but we should be clear that although weâve said that the effects of capital optimization are not a material economic headwind for the company, they are also not zero. There are real consequences due to the choices that weâre making as a result of this capital environment. And in a Basel III outcome, that is unreasonably punitive from a capital perspective. There will be additional consequences to that. We obviously are hoping thatâs not the case and believe that itâs not appropriate, but we will see what happens. Hi, thank you. Iâm curious, I want to talk levered loans for a second. Youâve done a good job avoiding some of these â put on these loans for the like the better half of the last half year. So good call on your part. Things have gotten a lot cheaper. However, bank balance sheets, not yours, are still kind of mucked up with a lot of the back book. Iâm curious to see if things have gotten cheap enough. Do you consider yourself back in? And how important is this in general for activity levels to pick back up to have available funding from the big banks? Yes. A couple of things there, Glenn. So short answer is weâre absolutely open for business there. Terms are better, pricing is better. We have the resources needed. Weâre fully there. No overhang and no issue. Also, I think there is a bit of a narrative that like activity in the market needs to overcome overhang, weâre not convinced that, thatâs true. We think that the overhang is in the numbers and people need to look forward and the system has the capacity to handle the risks. So I recognize your point. I think itâs an interesting point, but we are wide open for business and not particularly concerned about the overhang from the perspective of bankâs ability to finance activity. Interesting. So maybe a bit asking, more so. Okay. Maybe, Jamie, while we have you. In the last annual letter, you talked about low competitive moats and intense competition from all angles, not just fin-tech. And I was just trying to think out loud. Is that better or worse, that competitive landscape in a much higher rate backdrop? Maybe Iâll just leave it at that for you to see where you go with it. I think itâs the same. You have the Apples, who are basically doing a lot of banking services and Walmart starting theirs. And obviously, higher rates will hurt some of the folks in the fin-tech world and maybe even help some folks. So we expect tough competition going forward. Jeremy, you mentioned in your payments business that if you took out the equity investment write-downs, the growth was over 50%. Can you share with us on the equity write-downs, obviously, private equity is going through some challenging times. And Iâm assuming that... Very good. Thank you, Jamie. Can you â sticking just with private equity for a moment. Can you share with us where the risks are in the private equity markets to JPMorgan? Is there â when you think about it from your loan book? Or is it really just an equity investments? And maybe expand upon that. Sorry, do you want me to take that? Yes, this is a couple of things. So Jamie is right. The headwind year-on-year is primarily a function of the fact that this is an investment that just because of the management alternative accounting standard we were forced to mark up previously. This is an investment that we got payment in kind as part of the sale of some of our internally developed initiatives. So anyway, itâs fine. The point is there is a small write-down this quarter. And the important point there is that the core business performing exceptionally well, both because of higher rates, but also because of the strategy that talked a lot at Investor Day paying off across fees and value-added services and so on and so forth. And I guess throughout your question is like private equity in general and how are we feeling about that space? Did I hear that correctly? Thatâs correct, Jeremy. And just in terms of any lending, obviously, so many of these companies have seen their valuations come down considerably. Is there any elevated risk lending to some of these companies considering the struggles they are having? Yes. I mean I think thatâs a risk that we manage quite tightly as a company. Our exposure to the sort of non-bank financial sector are probably defined. And of course, as we thought a little bit about what normalized wholesale charge-offs could look like through the cycle. they are obviously higher than effectively zero, which is what we have now. But we feel confident with our credit discipline and what we have on the books. Great. And then as a follow-up question, you guys did a good job building up that loan loss reserve this quarter. Two questions to that. First, the Shared National Credit exam results are always released in February. Does the reserve buildup takes some of that into account? And second, how much of the reserve build was more of a management overlay versus your base case, the quantitative part of the decision-making for building up the reserve. Yes, yes, I know. I got it. The sort of conservatism of the management overlay did not change for all intents and purposes quarter-on-quarter. I think thatâs the best way to think about that, Gerard. Hi, thanks. Good morning. Iâm just wondering if you can help us understand the ongoing efforts on your mitigation for the RWAs in advance of all the points weâve made already about the pending capital regime. How do we â can you help us understand what type of effects that has, if any, on parts of the income statement, whether itâs NII or the trading business? Yes. So if I just take that one. Just assume weâre going to have modest growth in RWA. And in every single businesses, mortgages, loans, derivatives, how we hedge CVA and stuff like that, we take access to manage RWA. Do not â it does not really affect the business that much. It might 1 day, but it doesnât affect it today. And so we donât build in somehow we lose a little bit of this, a little bit of that. And there â and the biggest opportunity down the road will be a reopening in the securitization markets. and they are still very tight. And I think 1 day, they will reopen. Okay. And then on the â one follow-up, just coming back to the reserving process. Can you just help us understand relative to the 5% peak in 3Q that you gave for your unemployment rate quarterly average in the 3.9 average baseline? Just where does this fourth quarter reserve get you to? And does that rule of thumb that you kind of gave us last quarter still stand in terms of scenario analysis on potential builds ahead of this mild recession? Can I just make it real simple? The base case, okay, is where it hits almost that 5% unemployment. Then you probability weight other scenarios. Thatâs why Jeremy is saying the reserve is higher than the base case. We didnât change the probabilities in our weighting. But of course, it got worse and the base case got worse. Thatâs all it is, which still is a good benchmark, youâll keep in mind, is if we got to a relative adverse case, all that a 6% unemployment, we â and then once you get there, you assume the average weighting, you have wins. It could get better or it could get worse. At that case, we would need about $6 billion more. When the base case itself deteriorates, weâre moving closer to relative adverse, thatâs all it is. These are all probabilities and possibilities and hypothetical numbers. And if I review, like just look at charge-offs like actual results. And so â and we break this out, but itâs hard to describe, and every bank does it slightly differently, and every bank has a slightly different base case and slightly different weighting of adverse cases, etcetera. And so weâre just trying to make it as simple as possible. Yes, I hear you. The challenge at this time is that weâre going to have the income statement effect way ahead of that charge-off. So weâre all trying to just fit for that. But I appreciate that. Thanks, Jamie. And once the any base case gets to where you expect relative adverse, youâd be adding to $6 billion of reserves before you have charge-offs. Hey, Ken, maybe just out of interest. Implied to your question might be a little bit, to what extent does this quarterâs build sort of is a down payment on the $6 billion? And the answer to that question is much less than all of it because a lot of it was driven by loan growth, but in some of it, as Jamie says, is driven by the flow-through of the downward provision in the central case. You could say, subject to the caveat that this is a little bit or not science, that there is some down payment on that $6 billion. I wanted to understand a little bit about how you are thinking about managing the expense line as you go through this year. I know we talked already about how itâs hard to predict NII. Obviously, markets has pushes and pulls. Can you help us understand how you are thinking about delivering operating leverage? Where the elements of the expense base are needing to be invested and so you really canât touch? And where there are opportunities to potentially peel back such that if you get a weaker rev line, you can still deliver positive operating leverage? Sure. So, I mean as we have â as you know, obviously, we tend to break down our expenses across our three categories. And in some sense, the category that you are addressing is the volume and revenue-related expense, which we highlight because it should pre-symmetrically respond to a better or worse environment and thereby contribute to operating leverage. So, for example, in this yearâs ultimate outcome, and the number that we want on printing on Page 22, the year-on-year change in volume and revenue-related expense, still we are finding the numbers, we will probably show you more at the Investor Day, but itâs probably close to $1 billion. In other words, year-on-year decline, whereas next year, we are assuming something more like flat. So, while the sort of year-on-year dollar change in the outlook sort of â21 to â22, â22 to â23 is comparable, the mix is quite different actually. And so for example, if we wound up being long about the type of environment that we are budgeting for, you would expect a significant drop in the volume and revenue-related expense number thatâs in the current outlook, and that would contribute to operating leverage. For the rest of it, we are always generating efficiency. And we have worked just as hard at that, whether the revenue environment is good or bad. And as you know, we invest through the cycle. And so broadly, our investment plans really should be that sensitive to short-term changes in the environment. Of course, certain types of things like marketing investments in the card business, in particular, the math of what we expect the NPV of those things to be the cycle may change in a downturn. And that could produce lower investment, all else equal. But the core strategic investments that we are making to secure the future of the company are not going to get modified because of the ups and downs of both the environment and... Okay. And part of the reason for asking is one of the debate points on JPMorgan stock has been around the capital charges, the capital march. And will capital be a bigger burden for you to bear as we go through the next couple of years? As you deliver on the positive operating leverage side, it gives you room to absorb some more capital obviously and still hit those IRR and ROTCE target on incremental investments. Maybe you could help us understand what level of capital increase you could absorb given the operating leverage you are expecting to generate? And maybe thatâs an unfair question today, and itâs a better question for Investor Day, but thatâs kind of the debate thatâs out there on the stock. Got it. I mean itâs a fair question. Itâs a good question. I am not going to answer it super specifically. And Jamie may have some views there too. But let me just quickly say, we have kind of said that we feel quite confident about this companyâs ability to generate 17% in the cycle. And thatâs incorporating our sense of the current environment, the operating leverage that you talked about and the expectation of higher capital requirements with the 13.5% target in the first quarter of â24. The question of whether Basel III end game and other factors increase that number and how much of that we can absorb and still produce those returns is of course, impossible to answer right now. But I would remind you that itâs not just denominator of our expansion, unreasonable capital outcomes will increase costs into the real economy, which goes into the numerator too. Itâs not what we want, but that is the possible outcome. Hi. I recognize you are evolving your business model and you are spending money to make more money and that your track record last decade was strong there. But as it relates to Frank acquisition thatâs been in the news, I am just wondering what that says about the financial discipline for the 15 deals that you pursued, the $7 billion of investing each year and the one-fifth increase in expenses over 3 years to your guide of $81 billion in 2023. So, itâs really a question about financial discipline. And I know you canât go in details on the Frank deal. And look, you earn the purchase price in two days, okay? So, I get that. And if there is fraud, there is only â you canât do anything about fraud, but still itâs diverse management resources and attention. So, maybe just in the specifics as it relates to the acquisition strategy, like who sources them? Who negotiates them? Who does the due diligence? Who runs it? And ultimately, who is accountable for all these 15 different deals? And when you have investments going across business lines, which is a strength of you guys, but who is ultimately accountable when these investments donât go the way you want to? And Jamie, you recognized, a couple of years ago at Investor Day, you said, âLook, sometimes you are going to waste money as you are innovating and you are growing.â But ultimately, who is accountable when investment doesnât go right, like the Frank deal or another deal or some of the other $81 billion that you expect to spend this year? Obviously, Mike, letâs say, a very good question, which we always concerned at. We have always talked about complacency and all things like that. So obviously, when you are getting up to bat 300 times a year, you are going to make â have errors. And we donât want our company to be terrified errors that we donât do anything. And the complacency is then burdened by bureaucracy, which is stasis and depth. So, you have to be very careful when you make an error like you cripple the firm. We are very disciplined and you see that in a lot of different ways. You see in our leverage lending book. You see the success of our investments. You see it in the quality of our products and services. You see it in our â in all these things. And itâs no different for an acquisition. There are â so the acquisitions are done by the businesses, but itâs also a centralized team that does extensive due diligence. So, the business does it. The centralized team does it. We have been doing it for 20 years, like we just started doing something like that. And obviously, there are always lessons learned. And at one point, we will tell you the lesson we learned here when this thing is out of litigation. But we are quite comfortable. And the people who are responsible are the people in the business. So, they â that business did the acquisition, they are responsible, they report back. And we expect people, when they talk to all of us is the goods, the bad, the ugly. We are never looking for how great everything was. And obviously, this thing in one way or another, it was a huge mistake. Let me follow-up on that. So, that relates to the inorganic growth. As it relates to the organic growth, such as in the payments business, which I know is a focus that cuts across a lot of different business lines. So, as you invest more in payments, which is â can be a 20 or 30 PE business, which could be great if you got there, who is responsible for that sort of organic investment that cuts across? Sometimes the way you aggregate the data, itâs consumer, itâs the investment bank, it could be asset management, it could be commercial, it can be everything in payments. Who is responsible for those? So, just to be clarified. So, I would say that Marianne and Jen, when it comes to credit, debit, checks and all the consumer-related stuff and Takis, which I think you saw in the presentation about payments at Investor Day reporting to Daniel, and that is on the wholesale payments, merchant processing, a whole bunch of stuff and those are direct responsibilities, itâs quite clear this is an area that counts across the company. So, itâs a payments working group that just spends time on that. That working group has not done an acquisition, okay. And if they make â if they want to invest â which there are cases, by the way, which you â and you will see more this year, we decided jointly and all the way up to Daniel and me. And then last follow-up to my first start, the general comment. I mean this is the third year in a row of about $5 billion of expense growth, and you have Slide 11 there. But I mean thatâs a lot of certain front-loaded expenses for less certain back-ended benefits. How is your comfort level that you are going to see those back-ended benefits relative to the past? Totally and we try to show you guys at Investor Day, every branch we open, for every bank that we hire, for every tech thing we do, we are pretty comfortable. There are certain things thatâs more like infrastructure, like getting to the cloud, and stuff like that, which you canât identify all of that. But we are pretty comfortable that we â if they werenât working, we changed them. So, we ask ourselves that question every day with any wealth managers or branches or certain things, so â and marketing is half of that, not quite half, but half that number. Thatâs a very specific â for the most part, very specific dollar in, how many dollars out. Itâs not a guess, and we are pretty accurate at that kind of stuff. And again, if we â if there is $1 billion that we were spending that didnât give us the return, we cut the $1 billion. Hi, good morning. So, I wanted to start off with a question on the outlook for trading in the investment banking businesses. Just Jeremy, given the strong pipelines you cited, I was hoping you can provide some additional color just in terms of what you are hearing from corporate clients, especially in the context of the mild recession scenario you outlined, when you would expect to see some inflection in investment banking activity. And similar question on the trading side, you are facing difficult comps in the coming year. We still have QT, rate volatility proxy still elevated. Do you anticipate a significant moderation in trading activity or not? Sure. Thanks Steve. So, letâs do banking first. So, I think the thing thatâs interesting about banking right now is that the declines have been so significant, obviously, from very elevated levels. But even relative to just 2019, 2022, was a relatively weak year. And as we look into 2023, itâs possible that the actual economic environment will be worse than it was in 2022. That could conceivably make you pessimistic about the investment banking wallet outlook. And to be sure, itâs not as if we are super optimistic. But itâs important to note that part of the issue here is how quickly things change in 2022, specifically with respect to rates as that affects the debt business and valuations as it affects M&A and DCM as well. And one of the sort of necessary conditions for people to do deals or decide to raise capital is just getting comfortable with valuations in the all of open market. So, I think there is a chance that, that actually winds up helping in 2023 in the investment banking world. Of course, we donât know. But those are some of the things that we are thinking about. Similarly, on the markets side, obviously, markets had another very strong year, better than we had expected since the numbers were so strong. Coming out of the pandemic, we were expecting more normalization than what we actually saw. And 2022 had a lot of themes. I think the active management community did well. That always helps us a little bit. And we had volatility with relatively orderly and continuing markets. As we look towards 2023, maybe some of those themes will be a little bit less obvious, and that could be a little bit of a headwind. But on the other hand, itâs not like the volatility is going away. And markets seem to continue to be quite orderly. And 4.5%, 5% rate environment is probably one where there is more trading opportunities than the zero percent rate environment. So, of course, we donât know. We will see. I think you would have to probably expect some normalization there. Itâs â the numbers are really very strong in markets, but we will see and we will see what happens. Thatâs really helpful color. And just for my follow-up on finalization of Basel III. Sorry, Jeremy, I couldnât help myself here. But in December speech, you strongly hinted at capital requirements moving higher for you and peers. You also alluded in your comments or in response to one of the questions that the finalization of Basel III can potentially be very punitive. Given the absence of the proposal, I was really just hoping you could speak to how your scenario planning for the eventual finalization and any additional detail you can offer on the areas of mitigation. I think the one issue or area of confusion is that one of the biggest sources of RWA inflation is op risk, which canât really be mitigated. What are the actions that you can take to really offset some of those potential headwinds? Yes. So, Steve, I would love to get into more detail here, but I just think that the question of how to mitigate is really hard to discuss in a lot of detail until we see an actual proposal. And the reason that we talk about potentially punitive increases, I mean you studied this issue closely. Itâs just to point out that under the version of the world where you get the worst outcome in all of the different moving parts of this thing, itâs a very significant increase to the capital requirements of the system as a whole. And given how strong the system is today, that just like doesnât make sense to us. So, we just want to say that. But yes, Jamie, please. I mean just, look, you guys know that the operatorsâ capital, the trading book, the CCAR, G-SIFI, all those moving parts, letâs just see what they are. We will deal with them when we get there. And then we will figure out what we have to modify our business and stuff like that. We donât think itâs necessary to increase capital ratio. We are quite clear on that. One of the new numbers we put on the top of the press release was our total loss-absorbing capacity. So, we have now almost $500 billion. I mean really, like at one point, when is $500 billion of that, $1 trillion liquidity, all those thing is enough. And so â but letâs just see what it is. They are going to work it through their international laws, their international requirements. We are hoping that America is the same as international. That would be nice. G-SIFI is supposed to be corrected. We will see if that happens. So, letâs just see. We donât have to guess. And if the number is too high, we are going to tell you what we are going to do about it. Just a minor expansion to that, just to expand a bit on Jamieâs point that itâs important to be clear, there will be time to adjust, like there is a long road from the NPR to â so to sort of supports Jamieâs point, letâs see what it is and then we willâ¦ Good morning. How do you guys think of the managing the securities book, given the outlook of lower deposits? Obviously, the yield curve is quite inverted depending on what part you are looking at or most parts, frankly. And at the same time, the securities book is cash flowing a lot less than it was a couple of years ago just given the rate environment. Yes. So, remember, the securities book is an outcome of investing, but basically excess deposits. And you have like $2.4 trillion deposits and $1 trillion of loans and things like that. So â and we manage it to manage interest rate exposure, all these various things. And so â and then when you say the size of it, we forecast, which I am not going to give you the numbers, we forecast every quarter what we are going to buy, what we are going to sell, how much is coming in, how much we need for liquidity, and we adjust it all the time based upon deposits coming down and loans and stuff like that. Obviously, what you get to invest in is at much higher rates today. And you see JPMorganâs lost an ACM loan book as the percentage is much lower than most other people. We are kind of conservative there too. I guess a bigger picture question. We have seen such a drop in really 5-year to 10-year part of the curve and even further out. And banks arenât really buying, as said, you are selling. And I guess I was wondering if you had thoughts on who is buying and whatâs driving the rates so much lower than most people thought they should be at? Yes, we do. But we should get the answer, of course, to get that. We look at it, what everybody is doing, pension plans, governments. We look at every part of the curve. We look at what other banks are doing. I think I have mentioned earlier in this call, banks are in different positions. Some may have to sell securities to finance their loan books. We obviously donât. So, people are in a different position. And as Jeremy pointed out, itâs very important. That yield curve will not be the same six months from now that is today. While we use that to kind of look forward, itâs not actually our forecast. We know it will be wrong. And with the investment portfolio, we would be invested when there are opportunities. We bought a lot of Ginnie Maes when there is a 60 OAS spread. We have sold â one of the reasons we take securities losses, because that gives you $10-plus billion you can reinvest it when you think of more attractive securities. Hi, good morning. Thanks for taking my questions. So, the first one on credit quality. Thanks for giving us a commentary on the shape of NCOs, I guess, specifically for credit cards topping out at the end of this year. Could you give us a bit more color on how reserve builds should shape out this year, I guess with respect to CECL? I am guessing that it should top out quite soon. Thatâs my first question. Just assuming all your macro assumptions are unchanged and all the assumptions are unchanged in the property are unchanged and so forth. Yes. Andrew, well, I think we have talked about CECL like quite a bit, and I think there is some decent color there in terms of Jamieâs $6 billion over a few quarters in a world where the economic outlook is worse than it is today. We are definitely not going to get into the business of giving you an outlook for sequential evolution of the loan loss allowance. But itâs appropriate today and it will evolve as a function of the environment. Sure. Okay. Letâs drill down into NII then. I just want to square a few comments you made there, Jeremy. So, if I heard you correctly, I think you are still talking about sequential increases in NII. So, I guess looking towards like $20 billion plus for 1Q, maybe even 2Q. So, I guess we are hitting about $40 billion for 1H and then a sharp drop off as, say, deposit costs increase and maybe we get a few Fed fund rate cuts as well. Is that the way we should be thinking about it? Yes. No. So, let me un-controversially say no there, Andrew, just really wouldnât doubt. So, my comments about sequential increases were to address the sort of obvious conclusion, which we are somewhat correctly drawing from the slide, which is that in a world where we are exiting the fourth quarter run rate at 81, and we are telling our ADX markets or whatever. And we are telling you 74 for the full year, there are obviously some sequential declines in there somewhere as a function of what plays out. We are simply saying donât project those into the future in perpetuity. Once things adjust, we will return to normal sequential growth. Does that make sense?
EarningCall_1345	Thank you for standing by, and welcome to Duck Creek Technologiesâ First Quarter Fiscal Year 2023 Earnings 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] Good afternoon, and welcome to Duck Creekâs earnings conference call for the first quarter of fiscal year 2023, which ended on November 30th. On the call with me today is Mike Jackowski, Duck Creekâs Chief Executive Officer; and Kevin Rhodes, Duck Creekâs Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website. Todayâs call is being recorded and a replay will be available following the conclusion of the call. Statements made on this call may include forward-looking statements regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business and other matters. These statements are subject to risks, uncertainties and assumptions that are based on managementâs current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. You should not rely on forward-looking statements as predictions of future events as actual results and events may differ from any forward-looking statements that management may make today. Additional information regarding the risks, uncertainties and other factors that could cause such differences appear in our press release and Duck Creekâs latest Form 10-K and other subsequent reports filed by Duck Creek with the Securities and Exchange Commission. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release, with the primary differences being stock-based compensation expenses, amortization of intangibles, the change in fair value of contingent earn-out liability and the related tax effects of these adjustments. Thank you, Brian, and good afternoon, everyone. Let me first start by wishing all of you and your families a very happy new year. Iâm pleased to report that Duck Creek is off to a strong start in fiscal year 2023 as we exceeded all of our key operating metrics in the first quarter. We continued our business momentum from the fourth quarter and signed a number of transactions with new and existing customers for Duck Creekâs OnDemand core products, as well as our expanded portfolio of strategic insurance solutions, like distribution management and reinsurance management. As expected, P&C insurers are successfully adapting to the changing macro environment, and we believe that insurance continues to be one of the better positioned industries in uncertain times. This, together with strong execution and focus from the Duck Creek team helped drive the quarterâs positive results. Overall, we are encouraged with our recent performance and the opportunity ahead of us for the remainder of fiscal 2023. We are certainly mindful of how fluid and uncertain the macro environment is, but we are confident in Duck Creekâs ability to drive continued profitable growth with our products that are critical for the insurance industry as they migrate away from legacy applications and adopt modern cloud solutions. On todayâs call, Iâll provide some color on what weâre seeing in the market, highlight some key wins in the quarter, update you on progress towards some of our key priorities this year and highlight an important and strategic acquisition that we signed this week. Let me start with a quick overview of our financial results for the first quarter, which exceeded our guidance on both the top and bottom line. For the quarter, we reported total revenue of $80.6 million, up 10% year-over-year. And this was underpinned by subscription revenue, which is our revenue derived from SaaS of $43.8 million, up 23% year-over-year. Our annual recurring revenue or ARR was $180.6 million, which resulted in 24% growth over the prior year. And we are also profitable in the quarter with adjusted EBITDA of $3.2 million, our 16th consecutive quarter of profitability. We believe our best-in-class SaaS platform continues to address many of the most pressing business challenges facing P&C insurers. Modernizing their core systems enables insurers to respond to market changes with innovative new solutions more quickly and provide a better customer experience more efficiently and cost effectively than legacy solutions can. Duck Creek OnDemandâs ability to positively impact a carrierâs top and bottom line ensures that we remain a strategic investment priority even in challenging economic conditions. As we discussed on recent earnings calls, we have been confident that the various headwinds facing the economy, including inflation, geopolitical uncertainty and supply chain delays would largely be transitory issues for the P&C industry. Our confidence was driven in large part because the mandatory nature of insurance in many facets of life. In most cases, insurance is a requirement to operate a business, own a car or carry a mortgage, making it a nondiscretionary expense for most businesses and households. When you combine this with the ability of carriers to take rate increases to offset cost pressures in their business, we believe their willingness to invest in new technology solutions would improve. So, while the economy remains uncertain and new spending continues to receive additional scrutiny, we believe our improved performance over the past two quarters has proven our thesis to be correct. In the first quarter, we signed nine SaaS deals for a variety of our core and strategic insurance solutions with new and existing customers of all sizes. This includes a strong start, closing reinsurance management deals following the acquisition of Ephesoft. We are pleased with the pace and the mix of business in the quarter, which was an important demonstration of the success of our land-and-expand go-to-market model. Here are some highlights which reflect the breadth of our success. We made important progress on our objective to migrate on-prem customers to the cloud, signing HUB International, a global top five insurance brokerage, to migrate policy, billing and insights to Duck Creek OnDemand. A customer since 2011, HUB chose to move to the cloud to further optimize customer service and maximize operational efficiencies, while removing administrative overhead by automating workflows on the Duck Creek platform. This is a great example of the types of migrations we can look to. It highlights the growing interest among on-premise customers in deploying cloud solutions. We are pleased with the progress we have made with migrations and expect this to be an important growth driver for Duck Creek in the coming years. We had an another exciting win with a prominent Tier 1 insurer who selected Duck Creek Policy, Billing and Insights to modernize one of their strategic commercial line portfolios. Our ability to move with speed and agility, along with our demonstrable depth in their use cases made Duck Creek a standout technology provider. This Tier 1 insurer was impressed with our software, service and hands-on support, and they chose Duck Creek because of our specialization in the commercial and specialty segments. We had a particularly strong quarter with our Distribution Management and Reinsurance Management solutions. We signed 3 new Distribution Management, or DM deals, in Q1 and including a significant DM agreement with one of the worldâs largest Tier 1 P&C insurance companies. This global carrier has one of the largest networks of producer relationships in the industry and will leverage Duck Creekâs Distribution Management solution to bring even greater value to their channel partnerships. The ability to more effectively manage and communicate with agents has become increasingly important to many carriers, given the pace of change in the industry. Duck Creek is leading this category as our largest competitors and many other P&C insurtechs do not have an offering in this space. As I mentioned earlier, we had a great quarter in Reinsurance Management, or RM, as well. We signed 2 Reinsurance Management deals in the quarter. Our first deal was a cross-sell win with Core Specialty Insurance, an existing full-suite Duck Creek OnDemand customer. We also had an RM deal that added a significant Tier 1 P&C U.S. insurer as a new Duck Creek SaaS customer. This is a great example of how Reinsurance Management can provide a new entry point into a new customer and provide us an opportunity to expand our relationship in the future. Both of these reinsurance wins are notable for the speed of which we signed them as they were originated and completed in less than 6 months following the closing of the Ephesoft acquisition. We remain very excited about the opportunity in reinsurance, and we continue to receive strong customer feedback on the breadth and depth of our solution in the market. These Distribution Management and Reinsurance Management wins with existing customers are also a great example of the sizable cross-sell and upsell opportunity we have with our more than 100 existing SaaS customers. Another great example where Duck Creek is adding value to our existing customers is with Hollard Insurance, a leading international insurer who expanded their Duck Creek OnDemand deployment in Australia to include our global policyholder solution. Our policyholder solution will enable Hollard to improve real-time service to their premium paying customers through a modern digital channel. We also continue to enable customer success by quickly bringing customers live on the Duck Creek OnDemand platform with 8 new implementations going live in Q1. Two notable go-lives in the quarter were: Novo, an exciting new innovative insurtech auto insurer who went live with Policy, Billing and Insights as part of their launch. Novo has a mission to redefine, reimagine and reinvent the insurance industry by shifting the power dynamic back to the consumer. A key part of their decision to deploy Duck Creek is our reusable and scalable deployment framework and architecture, which will enable them to deliver on their multistate rollout plans as quickly as possible. FCCI, a leading commercial and casualty insurer, went live with our Distribution Management solution, which when fully implemented, will make it dramatically faster and easier to onboard and manage the agent appointment process. We now have nearly 75 customers live on one of Duck Creekâs core or strategic insurance SaaS solutions, which is roughly 75% of our Duck Creek OnDemand customer base. Our ability to get customers into production quickly often in only a few months is a key competitive differentiator and a significant value driver for insurers. On the product front, we continue to deliver leading insurance capabilities to our customers as part of executing on our road map. Our teams also remain focused on delivering core technology enhancements that will better enable and smooth the on-prem to on-demand transition. Automation is a key focus across our platform, and our product and engineering teams continue to improve end-to-end suite-wide connections to bring operational ease and efficiency to Duck Creek OnDemand customers. In addition, we released several product enhancements in the quarter. The following three will help further our goal of expanding our strategic insurance solutions and expand internationally. We extended our leading Reinsurance Management solution to provide more functionality for international insurers, including the improved management of claims incurred but not reported, or IBNR; enhancements to our inuring update calculations and supporting international rate accommodations. We also launched a new line of business offering that will help insurers capture market share of the fast-growing pet insurance opportunity in the UK, which is expected to exceed Â£1.5 billion of gross written premium by 2025. The pet insurance market is still in its early stages of customer awareness, so we have developed an easy-to-use solution that combines relevant content, including 4 standard pet insurance plans, prebuilt partner integrations to enrich pet-related data and out-of-the-box mobile-first digital journeys for sales, service and claims. We also launched our Policyholder OnDemand product internationally. As mentioned earlier, Policyholder will be deployed at Hollard Insurance as a charter customer in Australia. Iâm very excited to announce that we further expanded our product footprint with the acquisition of Swiss-based Imburse, an exciting technology start-up who is connecting insurance to the global payments ecosystem with a modern digital payment gateway platform. Through this acquisition, Duck Creek will simplify the payment process for insurers by providing technology that easily integrates into multiple PSPs and digital payment options, providing greater choice and flexibility to customers. Imburseâs out-of-the-box offering allows insurers to go to market faster at lower cost with a broad range of payment provider choices. This is a natural extension of our product vision to create solutions that solve critical business challenges facing insurers and their policyholders. Imburse offers a cloud-native platform that is purpose-built for the insurance industry, and we are confident that it will fit seamlessly into our land-and-expand go-to-market strategy. Our plan is to integrate the Imburse SaaS payment gateway platform into our Duck Creek OnDemand offerings and fully enable the use cases for premium payments, claim payments, agent and broker commissions, reinsurance fees and insured policyholder payments. This will unlock substantial value to our customers, and itâs also a fantastic growth opportunity for Duck Creek. Overall, it was a terrific first quarter, and weâve gotten off to a strong start in fiscal 2023. While we remain mindful of the macro environment and recognize that market conditions continue to create cautious buying behavior, we are executing well, and we believe that we are well positioned to deliver on our key financial and operational objectives for the year. We are encouraged by the continued growth of our pipeline and customer interest in core systems modernization. We remain confident that this will continue to be a top investment priority in the P&C industry for many years to come and will support strong, durable and profitable growth for Duck Creek. We are excited about the opportunity in front of us and are focused on delivering significant value for our customers and shareholders. Iâd like to finish by thanking all of our employees, partners and customers for everything they do to make Duck Creek successful. Thanks, Mike. Today, I will review our first quarter fiscal 2023 results in detail and provide guidance for the second quarter and full year of fiscal 2023. First, Iâll briefly comment on the pending acquisition of Imburse. We are really excited to have the Imburse team join Duck Creek. This is another strategic acquisition that we believe will position us well for the future as we integrate this technology with our core offerings. Now, letâs cover Duck Creekâs strong first quarter results. SaaS annual recurring revenue, or SaaS ARR, at the end of the first quarter was $180.6 million, up 24% year-over-year and up $11.3 million or 7% sequentially. The strong performance in SaaS ARR primarily reflects a strong start to the year for our business as well as approximately $1.8 million from contracts that were signed in the last two weeks of the first quarter that would not have been normally reflected in SaaS ARR under our prior calculation. As a reminder, starting this quarter, we have updated the calculation for SaaS ARR to be the annual value of all active contracts in force at the end of the quarter, and the calculation is not dependent upon a full month of revenue recognition in the quarter. We believe this better represents our future expected revenue and will eliminate the timing impact of deals that are signed at quarter-end. We also think this is a more transparent metric. Total revenue in the first quarter was $80.6 million, up 10% from the prior year period. Within total revenue, subscription revenue, which is comprised fully of our subscriptions to our SaaS products, was $43.8 million, up 23% year-over-year. In the first quarter, subscriptions represented 83% of our software revenue. Revenues from on-premise software licenses was $1.8 million and maintenance was $7.2 million. This represented 11% of total revenue and was in line with our expectations. We expect these line items to continue to decrease as a percentage of revenue, given the strong growth in our subscription revenue and the growing interest in our cloud migrations among existing on-premise customers. Services revenue was $27.9 million, down 6% year-over-year. The year-over-year revenue reduction reflects our ongoing efforts to have our systems integration partners manage an increasing portion of our implementations, while we focus our services teams on delivery assurance and the higher value-added components of a project. Weâve undertaken a conscious effort to make this a reality. SaaS net dollar retention in the quarter was 107% and in line with our expectations. SaaS net dollar retention is likely to continue to be below some of the historic levels that we have seen, in large part due to the fact that on-premise migrations are not typically captured in our retention calculation. That has historically been a small part of our overall bookings but is expected to increase going forward as it did in Q1. Now, letâs review the income statement in more detail. These metrics are on a non-GAAP basis, unless otherwise noted. And we provided a reconciliation of GAAP to non-GAAP financials in our press release. First, on a GAAP basis, our gross profit for the quarter was $43.4 million and we had a loss from operations of $6.6 million. We had a net loss in the quarter of $5.2 million or $0.04 per share based on a weighted average basic shares outstanding of 132.7 million. In our financial tables, you will notice a $645,000 expense related to severance. This was related to a modest workforce reduction we undertook at the end of November. We expect annualized cost savings from this action to be several million dollars. Turning to our non-GAAP results. Gross profit in the quarter was $46.5 million or a gross margin of 57.7% compared to 60.1% in the first quarter of fiscal 2022. Subscription margin in the quarter was 65.3% compared to 63.3% in the first quarter of fiscal 2022. As a reminder, there can be quarterly variations due to the timing of when revenue recognition begins for certain contracts and the timing of expenses at the early stage of new deployments. We believe our subscription margins are an important demonstration of the scalability, ease of use and performance of our SaaS platform. Professional services margins were 35.8% in the quarter, in line with our expectations and our long-term target of the mid- to high 30% range. We continue to balance sustainable utilization rates and our ongoing efforts to increasingly leverage our systems implementation partners. Turning to profitability. Adjusted EBITDA in the first quarter was $3.2 million, which was ahead of our guidance, primarily due to better-than-expected timing of revenue in the quarter and our ongoing discipline around expense management. This represents our 16th quarter of adjusted EBITDA profitability, an important indication of our ability to profitably generate high levels of subscription revenue growth. Non-GAAP net income per share for the quarter was $2.6 million or $0.02 per share based on approximately 137.4 million fully diluted weighted average shares outstanding. Turning to our balance sheet and cash flow. We ended the quarter with $264 million in cash, cash equivalents and short-term investments, and we remain debt free. Free cash flow in the first quarter was negative $7.4 million, which was a meaningful improvement from negative $25.5 million in the first quarter of fiscal 2022 due to improved cash collections and overall working capital benefits. I would now like to finish with guidance, but first, let me add some color on the acquisition of Imburse. In terms of timing, we anticipate closing the transaction within the next 30 days. We are excited about this acquisition from a product and technology perspective as it will add to our lineup of modular strategic products that are integrated with our core platform. From a contribution perspective, Imburse has been operating as a startup. We anticipate it will contribute several hundred thousand dollars of subscription revenue and will negatively impact EBITDA by approximately $3 million, which is being included in our guidance today. We do expect Imburse to be EBITDA positive in fiscal 2024 as we launch it as a stand-alone product to the U.S. and have it integrated into our core suite. Inclusive of Imburse, we expect our second quarter results to be as follows: total revenue of $79.5 million to $81.5 million; subscription revenue of $43.5 million to $44.5 million. This equates to about 16% to 18% subscription revenue growth after taking into consideration approximately $2 million of onetime subscription revenue in the second quarter of fiscal 2022 related to a contract buyout. We expect adjusted EBITDA of $4 million to $5 million as we had some expenses defer from the first quarter and into the second quarter, and we will pick up some of the incremental expenses from the Imburse acquisition. That said, we are looking to -- for acceleration of EBITDA in the second half of the year. And lastly, our non-GAAP net income is expected to be in a range of $3 million to $4 million or $0.02 to $0.03 per fully diluted share. For the full year of fiscal 2023, we are raising our guidance as follows: total revenue of $331 million to $338 million; subscription revenue of $177 million to $181 million; adjusted gross margins are projected to be at 60%; we expect adjusted EBITDA of $26 million to $28 million, an increase from our previous guidance; and lastly, our non-GAAP net income is expected to be in a range of $17 million to $19 million or $0.13 to $0.14 per fully diluted share. We continue to take a prudent approach to forecasting deal close rates. While our go-to-market team did a great job in the fourth quarter and now again in the first quarter, we are continuing to adapt to the increasing scrutiny on all transactions. And while we are encouraged by our performance, the macro environment remains fluid, and we believe itâs too early to assume further improvements. To wrap up, we are pleased with how we performed in the first quarter and our position heading into the remainder of the year. Weâre at the early stages of a global growth opportunity and believe that we are well positioned to build upon our results in fiscal 2023 and beyond. Hey, guys. Thanks for taking the questions here. Maybe on the macro, starting off, Mike. Maybe some of the puts and takes you guys are seeing in hearing from customers. Youâre starting to maybe see rates go up for the first time. You may be seeing some of that inflationary pressure ease slightly relative to used autos and some others. Weâre clearly not out of the woods yet. But how should we think about that landscape evolving over the next, I donât know, what, 6, 12 months and unlocking some of that willingness for modernization? Maybe that has been somewhat of a gating factor that led to some of the elongations we saw in the last couple of quarters. Yes. Thanks for the question, Dylan. Yes, we -- as weâve communicated all along, weâve seen -- weâve continued to see a strong demand in the environment and interest from insurers to invest in their technology. But we are seeing, as you indicated, that they are adapting to changes in the market conditions. And really, this comes down to their ability to recapture their loss cost pressure by taking more rates in the industry. Now, we are seeing the carriers on the commercial side of the business are getting some rate more quickly. We saw the earlier half of the year, carriers were able to get more rates in. On the personal lines or consumer lines, it takes a little bit longer just because of the regulatory environment. Thereâs a little bit -- thereâs more challenges getting rates through there. But overall, what I would say is insurance companies typically have just a long-term horizon and they look at investing over the long term. And I think they are getting more comfortable. But with that, theyâre keeping top of mind transformations, cloud deals. We think that the environment has improved a bit from a year ago, but we also recognize itâs still a challenging environment and deal cycles do remain elongated today. But we do feel better about it, and we feel like weâre operating very well under the current conditions right now. Got it. Yes. I think thatâs evident in the results but itâs good to hear as well. Maybe switching over to the Imburse acquisition, too. Could you dig into, again, obviously, insurance is a complex landscape, but the complexity of payments in this ecosystem relative to maybe other verticals and how it can unlock? I think there was a lot of information on their website around things like parametric insurance, things that can be unlocked with kind of some of that real-time payment capability. Could we dig into that a little bit? Thanks. You bet. And when insurers really look at how they have to work with payments technology, thereâs a couple of things that theyâre really looking at. Theyâre looking at, first, how do they plug into various PSPs or payment service providers and what are the best ways to connect? The second thing they look at is the overall workflows on behalf of the premium paying customer, whether theyâre paying their premium or receiving a claim payment or with their distribution channel. And then finally, what they look at also is overall reporting and balancing and reconciliation of those payments. And so Imburse, what they do is give us a nice way to plug into those PSPs, manage that overall insurance processes and those workflows as well as all the reconciliation and reporting. And this is certainly an issue that carriers are always dealing with. And having these capabilities preplumbed into our backplane, where in our SaaS solutions, we can manage the processes of policyholder payments and claim payments and even managing commission payments back to the agent, we think this is a real strong opportunity for Duck Creek. Mike, maybe just to start with you. That was like some good traction with those strategic products that you mentioned, Distribution Management and Reinsurance Management. I was wondering if you could just dig into those products a little bit for us. Remind us how those products are priced, maybe a little bit about the competitive landscape. And also, if tactically those tools can also work with your competitor core solutions. A lot there. Does that make sense? It does, Saket, and Iâll be thrilled to talk about it. Iâve always talked about our strategy is a land-and-expand strategy. And beyond just the core solutions, we have been looking for opportunities to expand in strategic solutions for carriers where they have a complex business problem to solve. And itâs still a very sticky asset. It can run standalone but it also works by being highly integrated to the core so that we can have a strong attach rate. And in the case of Distribution Management, what this does is help insurers manage their overall distribution channel how to market to and identify new agents and brokers, how to appoint them and onboard them, how to do the contracting with them. And then once you get them onboarded -- and doing the contracting with them, thereâs also an appointment process through the regulatory bodies that weâll go manage as well. But once that theyâre contracted, we also have to manage your commission payments. And then also, you have to have this ongoing management and looking at their performance and data behind how your channel is performing. So, itâs really an asset that helps carriers really take one of their most strategic assets in the channel partners and manage it effectively. And then on the reinsurance side, this is an asset that we sought out because we know that reinsurance, just given the fact that insurers are trying to manage risk more effectively, trying to manage capital more effectively, so weâre seeing a growing need of more complex reinsurance contracts as theyâre trying to manage their risks. And as somebody in the industry once told me, insurance runs on reinsurance. So, we sought the asset out over from Ephesoft, and it was a great acquisition for us, and we can see the momentum already because insurers have a lot of manual processes in managing their reinsurance. And weâre seeing some really nice take-up, and Iâm thrilled with the wins that we had in the quarter. Hey Saket, then the final question on integrating with our competitors. Thatâs what we love is these assets, they stand alone and theyâre engineered to stand alone. Now, weâre integrating them tightly with Duck Creek, but weâre also finding because many of our competitors donât have these assets, itâs a great way for us to land in there, build a relationship. Now, weâre a part of the carrierâs fabric, weâre in the halls and then we have a better opportunity to expand other assets as well. So, we think itâs a nice way to penetrate into the accounts where some of our competitors already exist. Got it. That makes a lot of sense. Kevin, maybe for my follow-up for you. I was wondering if you could just talk about how much maintenance to SaaS conversions contributed this quarter to net new ARR. And either qualitatively or quantitatively, maybe how you think about the pipeline of that -- of those conversion opportunities through this year. Yes, Saket, happy to. Let me cover the pipeline first and then Iâll go back to the quarter. First, weâre seeing tremendous energy and interest from our on-prem customers. As we talk to them about our road maps, as we talk about the opportunity to go into the cloud, thereâs a lot of excitement about that. So, thatâs good. In the quarter, we had what I call a couple of meaningful ones, one that we didnât talk about, one that we did talk about. I donât want to break down exactly the amount, but I would just say that they were meaningful in the quarter. And you can see that a little bit within net dollar retention. Well, Iâll just remind everybody that migrations typically are not net dollar retention but they are in ARR. And so, when we look at ARR, that obviously includes everything, all deals done and that was an exciting part of our quarter and ARR is getting a couple of these migrations in. So weâre continuing to see strong interest there, and weâre tracking with our expectations. Got it. And Kevin, Iâm so sorry, if I could just slip in one just based on that comment just on not being included in the NDR. Generally speaking, not just for the quarter but generally speaking, whatâs sort of the multiplier, right, on a SaaS contract versus maintenance that maybe youâve seen historically? Sure, Saket. I mean, it depends on each customer. And remember, there are some of these customers that are on term-based licenses. Some are paying for the original license and some are on maintenance contracts where they paid for a perpetual license historically. But let me just state, on average across the board, roughly about 2.5 to 3 times is what weâre seeing a customer uptick, if you will, on a gross basis, meaning how much we have already a maintenance would say, itâs $1 million would be 2.5 to 3 times that on the new deal. Yes. Hi guys. Thanks for taking the question, and congrats on the quarter. Mike, I noticed that the Insights product was part of your prepared remarks around two new deals and one of the go-lives during the quarter. Can you just talk a little bit about why that product in particular is resonating right now? And then more broadly, if you look at the base, what do the attach rates look like on that today? Is that something that you feel pretty optimistic about going into 2023 here that you can permeate more within that existing customer base? Thanks. Yes. Parker, Insights is a very important product for us and for our customers. What Insights really is you think about an enterprise-wide data warehouse for an insurance carrier where they can see all of the data, how theyâre performing, the amounts of products that theyâre selling, their loss ratios, even distribution and how their agency channel is performing. And so anytime a carrier buys a core system from us, Policy, Billing or Claims, typically, theyâre also asking the questions of how can they have better views of their data and how can they look at that data more holistically across the organization. So, Insights doesnât just source the data from Duck Creek. Carriers quite often land data from other systems, even legacy systems into our Insights platform and it really just gives them more of a 360 view from a data perspective of their overall business. And then quite often, it serves as a conduit the way carriers will integrate with downstream systems. And thereâs a lot of complexity in how they have to do it in terms of sending the financials down to their back office systems and general ledger and those types of things, and it serves as a conduit for that as well. And thatâs why the attach rate of it is quite high. I donât have the specific number in front of me, but I would suspect itâs over 70% of our core solutions that bring Insights along in terms of the demand that weâre seeing out there when we sell a new deal. Got it. Understood. And then, Kevin, quickly, at the end of your prepared remarks, I believe you referenced a modest workforce reduction done at the end of November. Can you maybe talk about what sort of roles were eliminated there? Who was most affected within the organization and if any of that was on the go-to-market front? Thanks. Yes, sure. So no, it was not on the go-to-market front, I would say. As we think about our business and we think about as we look across the organization and make sure that we are -- making sure that weâve got the right investments in the right places and we have the right prioritization across the board, we were realizing that we had some misalignment across the board in certain areas. Some of it was related to COGS, so we had a little bit of a benefit in the staff ops side. And then the rest of it was non-go-to-market. I want to be very clear, even really non-innovation non-go-to-market. And so -- but it was very small. I would say it was relatively small but will give us some growth in the back half of the year. And I would note that some of our benefit that we get with EBITDA, right, so weâve got Imburse kind of taking $3 million out of EBITDA this year, but yet we raised by $1 million, and so weâve got a $4 million improvement in EBITDA this year. And thatâs a clear indication that weâre taking that reduction in force to the bottom line throughout the year, which I think is the right thing for us to do in this environment. Hey. This is Strecker on for Alex. Thank you for taking our question. Can you break down how much of your ARR base is core versus noncore as well as the net new ARR this quarter? And then, can you also help us parse out how much came from Ephesoft this quarter? Thank you. Yes. So, a little bit of granularity youâre asking for there between the core and the non-core. We actually donât break down our ARR that way. And the reason why Iâll say is that oftentimes we bundle our products together, so itâd be one price to the customer for a number of different bundled packages together. So, it would be very hard to unbundle that and come up with a separate standalone price for each one of those. So for that reason, but I would say, broadly speaking, the large majority of our ARR would be just based on the pricing and how large the products would be, would be hundreds of our ARR would come from core products. And in terms of Ephesoft, we had a small contribution as expected in the quarter. But I guess like we said last quarter, itâs a smaller company. And we -- I think they had $5 million of ARR contribute last quarter, and it will continue to be a good solid steady improver of our ARR, but itâs one of many different products that we have. But weâre not breaking that out going forward. Okay. Thank you. And then just one quick follow-up. With the new ARR calculation, should we expect any different seasonality throughout the rest of three quarters of the year compared to what weâve seen in the past? Thank you. Sure. No, I do not think so. I mean, just to be clear, what we are doing here is, in the past, we used to -- basically the second half of the final month of any given quarter, we found that those particular deals that we had in the second half, because we had kind of a half month convention of how we were thinking about ARR coming in, that we would not be recognizing revenue on that -- on those deals that came into the second half. Some of itâs provisioning, et cetera. And so, at the end of the day, what we are doing now with changing our ARR definition is any active contracts that we have signed by the end of the quarter will enable us to actually take ARR credit. So, itâs more transparent to you in terms of the deals that we will have in a particular quarter. And we feel like itâs a better meaningful representation of what our future revenue will be. Just to clarify, Kevin, on Imburse. You said several hundred thousand dollars in revenue, and the time period youâre speaking about was the remainder of this year? Correct, Peter. Thatâs right. Itâs small and itâs just getting started, and they, quite frankly, had built out all the technology, but not built out all the go-to-market. But we love the technology and we think itâs going to snap in really well to the company and snap into all of our core products. And then we can really use our go-to-market engine to drive this company in the future. And weâre just super excited. Weâre really, really happy with the technology purchase there. So Peter, just to be clear, itâs Mike, the revenue contribution and the EBITDA impact for the fiscal year is the time that we noted. Got it. Okay. Thatâs helpful. And then just how are you thinking about free cash flow for the year versus your annual EBITDA guidance? Can you talk a little bit about how youâre thinking about that? Well, I mean, we had a better quarter in Q1 versus the prior year. I think $7 million this quarter and $25 million negative cash flow quarter. And if you look at the last two quarters prior to that, we were generating somewhere around $15-or-so million each quarter. So, weâre not going to guide. We canât guide and weâre not guiding on free cash flow going to the year because you never know what changes in working capital will cause that change. But Iâm pretty pleased what happened in Q1, and I feel like we will be positive for the year, certainly from a free cash flow perspective for the full year. I can probably give you that. Wonderful. Thanks so much for taking my questions. First, I want to drill a little bit on migrations. It sounds like youâre getting some solid momentum there. To what extent is that a function of you as a company focusing more on it versus maybe providing additional incentives versus just the market and customers being more ready for that? And then, Iâve got a follow-up. Rishi, I would say itâs all of the above. But there is no question that it was a really big event when we had our formation event last year and we went through our overall plans, our road maps, where weâre investing in our products. And I think our customers now really understand that all of the innovation that weâre really driving is in our cloud product today. And weâre being a lot more transparent on our road maps, and weâre walking through in terms of all of our plans in terms of the investments that we are making in the product. So, thatâs creating some energy. At the same time, I think most insurers know that they have to have -- CIOs of insurers know they have to have a cloud strategy of some sort. Data centers are starting to age. Servers are starting to age out and need to be replaced, and I think thatâs causing more interest as well. And then finally, when I just go look at the backdrop of our customer base and us talking with them and focusing in on some sales motions, where weâre having road map sessions with them and actively selling to them and then talking about the merits of making the upgrade go away and not spending all your resources on upgrading, I think thatâs triggering more interest as we have the sales motion. And then time to time, weâll work with customers and make some investment in the account, if thereâs some technical data or some inhibitor for them to do a contract. But anything that we can do to kind of move a deal along and have a win-win for both of us is what weâre focused on. Got it. Thanks. Thatâs helpful. And then when I just think about some of the momentum that youâre seeing in Distribution Management, Reinsurance Management, at least preliminarily, what does that uplift for a deal look like? In other words, if you had a customer that was maybe $5 million in SaaS ARR and then you were able to cross-sell DM and RM to them, what would that uplift look like? Thanks. Yes. When we look at those assets for a like-for-like carrier, obviously, anytime we do a core deal, weâre typically talking about low-single-digit millions of ARR contribution, sometimes mid-single-digits in a single transaction, somewhere in that neighborhood. When weâre selling RM or DM, itâs typically in the hundreds of thousands, sometimes in the mid- to high hundreds of thousands. And weâre getting some deals that are encroaching upon a 6-figure deal. So, it depends on the size of the carrier, the global scope of what theyâre looking at, sometimes weâll transact our way up to those amounts. But we are seeing some very meaningful size deals that are out there. But broadly, think of our core transactions of being millions of dollars of ARR contributors, RM and DM independently, high hundreds of thousands of dollars or mid-hundreds of thousands of dollars contributors. Thanks. Mike, I kind of want to go back to your macro commentary tonight, especially kind of related to how it was last quarter. It sounds like youâre still baking some caution to the outlook. But given Q1 is not really a seasonally big quarter, what do you think changed intra-quarter that drove the higher ARR results? And was there any pull-forward of pipeline that you thought was going to close in the second quarter? Yes. Alex, we were pleased with our bookings and what we got done in Q4 and what we got done in Q1, right? So I wonât say that, that ARR, I mean, we anticipated that we would do pretty well so thatâs not a surprise and weâre pleased by it. Iâm not going to suggest that the environment has changed tremendously from last quarter. I think weâve adapted to the environment quite well. And then, we also have been working on some deals that are coming through the pipeline that we see and gives us confidence for the remainder of the year. But I also think, as we set out for even the full year with our overall plan, we adjusted for the current market conditions. I think itâs unfolding as we expected. We are seeing carriers again take rates. And they are doing deals. Now, on the Tier 1 side, we have seen the deal size, the initial deal size come down a little bit from what we historically saw, call, 24 months ago. But I think -- so we could still see that the buying behaviors are a little bit different and thereâs a little bit of delay in the time frame. So I think, again, weâve adjusted to it. So, we havenât seen it deteriorate more at all and we think itâs improved moderately. So again, weâre still a bit cautious and weâre watching it closely. But, it feels better today than it did 12 months ago, thatâs for sure. Okay, great color. And Kevin, on the subscription growth guidance for second quarter, I know thereâs less days in the quarter. I think we usually see a bit more of a step-up versus Q1. Is there anything onetime that was in the Q1 subscription number or that might be reversing, or any known churn or kind of renegotiations in the second quarter to be aware of? No, I canât call out anything that I would say is different or seasonally changing from the first quarter into the second quarter. The only thing I would say is the comparable from last year, and I put this in my commentary. So I want to make sure you got it. Last year, the year-ago quarter, we had that $2 million kind of onetime contract buyout. So, the comparable year-over-year is going to be slightly more difficult in the second quarter of this year. But other than that, thinking back a year ago, thatâs it. I think one thing I would even -- I would also like to note is we did get some deals earlier in Q1 than we anticipated that contributed to Q1 revenue. We knew that they were going to close but they came in earlier. So, we kind of exited -- had an exit rate that was a little stronger, and thatâs why we beat our Q1 guide. Thank you. At this time, Iâd like to turn the call back over to CEO, Mike Jackowski, for closing remarks. Sir? Okay. Thank you, everyone, for participating in our Q1 fiscal year â23 earnings call. As I said, weâre off to a great start to the year, exceeding all of our key operating metrics. And I feel weâre well positioned to achieve our key financial and operating metrics for the year. Weâre also thrilled to announce the acquisition of Imburse, which positions Duck Creek to take advantage of the billions of dollars of premium payments, claim payments and agency commissions that we manage every year. And Imburse will also help assist in our ambition to continue to expand globally. Weâre positioned for the rest of the year with terrific momentum as we finished Q1 with a SaaS ARR of $180.6 million, which is up 24% year-over-year. So, let me just wrap up and again by emphasizing that we have an enormous opportunity in front of us as the industry continues to transition solutions to the cloud. So thank you, and have a good evening.
EarningCall_1346	Good morning. My name is Emma. I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakerâs remarks, there will be a question-and-answer session. [Operator Instructions] Before beginning, let me cover the formalities. I want to remind everyone about the Safe Harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the companyâs SEC filings and last nightâs news release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without express permission. Your participation on this call constitutes your consent to that request. With me today are Nick Stanage, our Chairman, CEO and President; and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our fourth quarter 2022 results detailed in our news release issued yesterday. Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share both fourth quarter and full year 2022 results. Many of our key markets have seen a robust return to growth in 2022, especially in Commercial Aerospace, where air travel has experienced a strong and much welcomed rebound. Our Space and Defense markets have remained strong and have grown nicely over 2021. Thereâs also been a year of supply chain challenges, inflationary pressures and a tight labor market. Hexcel has remained focused on meeting our customerâs needs and overcoming the headwinds faced. We achieved a roughly 20% step up in annual revenues and delivered double-digit operating margins, a 500 basis point improvement over 2021. The strong recovery and return both to domestic and international travel are appealing to see airports that now are crowded with travelers and high load factors for airlines globally, and we see it as airlines are reportedly returning into service, older aircraft that are not fuel efficient, simply because they cannot get new planes fast enough to meet passenger demand. The opportunities for growth are tremendous and I continue to believe that no company is better positioned than Hexcel to benefit from the strong pull for newer composite intensive, lightweight aircraft that are more fuel efficient. Hexcel advanced materials are enabling enhance sustainability and will continue to do so for decades to come. In 2022, we celebrated numerous times with supplier recognitions from customers, including Airbus, Boeing, Lockheed Martin, CTRM Aero Composites, Sunseeker and the list goes on. Our customer intimacy throughout these challenging times has never been better. So many times over the past several months customers have asked, how are you doing it, how does Hexcel just keep delivering when others are struggling? I give credit to our one Hexcel team. They have done a phenomenal job. They go above and beyond, not only to ensure that we succeed, but to further position us for an incredible future. I could not be prouder of the team as they stay the course, remain focused and never wavered in their commitment to our customers. Now letâs turn to some specifics reported in our earnings release last night. First, I will cover the fourth quarter results and then full year 2022. Fourth quarter sales of $429 million are 19% higher than Q4 2021. Adjusted diluted EPS in the fourth quarter was $0.40, compared to $0.16 last year. Turning to our three markets in Commercial Aerospace, fourth quarter sales of more than $256 million represented an increase of almost 29% in constant currency when compared to Q4 2021 and up 23% sequentially over the past quarter. We have now realized six consecutive quarters of double-digit sales growth in this market. Other Commercial Aerospace increased almost 45% in the fourth quarter compared to Q4 2021. Business jets and regional jets, both grew strongly year-over-year. Virtually every platform from narrow-body to wide-body to business jets is growing and the customers continue to ramp as fast as the supply chain allows. As the market recovers, Hexcel benefits from the continued penetration of lightweight composite materials, as well as our relentless commitment to innovate with our customers on new materials and processes for next-generation programs. The same is true in Space and Defense, fourth quarter sales of $126 million represented a 22% increase year-over-year in constant currency. This was broad-based growth across the submarkets we serve and also geographically with growth in programs in the U.S., Europe and Asia. We were pleased last quarter to see the U.S. Navy confirm all production for the composite rich CH-53K heavy lift helicopter. This will become a top defense platform for us in next few years as production ramps. Industrial sales of $47 million were down 7% year-over-year in constant currency. Given the economic pressures, the wind energy industry has changed structurally and opportunities for our legacy glass prepreg products have limited. However, we have seen stability in our wind business in the second half of 2022 focused on our European market. Our Industrial business is pivoting away from wind energy to other markets, including automotive, consumer electronics, marine and recreation. I mentioned earlier that some of our customers have recognized us this year and I wanted to specifically mention the sustainability award we received in November from Airbus Defence and Space. The award granted to Hexcel recognizes a partnership we announced in 2021 with Fairmat to recycle carbon fiber prepreg composite offcuts from Hexcelâs European operations and our customers. The offcuts are reused in manufacturing composite panels sold in the industrial markets. Itâs an award that recognizes a key collaboration, an important milestone in our relentless pursuit of innovations that in partnership with our customers will lead to a more sustainable future for us all. Now letâs turn to our full year 2022 results. Sales were $1.58 billion, up almost 22% year-over-year in constant currency. Adjusted diluted EPS for the year was $1.28, compared to $0.27 in 2021. Adjusted operating income as a percentage of sales was 10.4%, which is almost doubled our 2021 results. In our markets, Commercial Aerospace sales were led by the Airbus A320neo and A350 programs combined with strong growth of about 63% year-over-year for other Commercial Aerospace driven by business jets. We are encouraged as we begin 2023 by strong order activity for both narrow-bodies and wide-bodies. Our two largest Commercial Aerospace customers, Airbus and Boeing, delivered 1,141 commercial aircraft in 2022 combined, up 20% over 2021. Backlogs are growing with more than 12,600 aircraft in total for Airbus and Boeing. Airlines are ordering again as they refresh and increase their fleets to meet increased growth in passenger demand and as we strive toward meeting their sustainability goals for emission reductions to greater fuel efficiency, which is achieved in great part by replacing heavy metal components with lightweight composite materials. The recent order from United Airlines for 100 Boeing 777s and 100 737 MAX jets reflects the largest order for years for wide-bodies as demand increases, especially for international travel. With the Chinese Government recently lifting its strict COVID entry requirements, air travel within China and cross-border is expected to expand rapidly, another positive factor for new commercial aircraft demand. Now turning to Space and Defense. The invasion of Ukraine, tightening global concerns for the need to strengthen national defense, and as a result, we see governments around the world committing to increase defense spending and that leads to increased opportunities for us over time. Hexcel composites are the benchmark in this market and our products are on over 100 programs, which provides us with a diversified foundation for a strong future. Finally, Industrial sales were negatively impacted by the decline in wind energy business, which was mostly offset by growth in a variety of Other Industrial markets. At the end of 2022, we closed our industrial wind energy plant in Tianjin, China due to a decline in wind energy orders that led to a stop in prepreg production earlier in the year. Our Industrial business suits over 30 different markets from a manufacturing site in Austria, including legacy wind business. This legacy European wind blade business is forecasted to remain stable for a period of time, supported by existing contracts. While we no longer have manufacturing operations in China, we will continue to maintain a sales office in Shanghai to serve our customers in the region including COMAC. Our focus is set firmly on a solid growth trajectory in 2023. With the increased demand we forecast across the business in the coming years, we have reinitiated construction on a carbon fiber line in Decatur, Alabama. This new line should be operational and qualified in 2025 for aerospace-grade carbon fiber production. When the line is completed, the Decatur plant will be home to our first combined fan and carbon fiber production facility in the U.S. Reflecting confidence in our return to growth and our capacity to generate cash in the coming years, the Hexcel Board announced yesterday an increase in our quarterly dividend from $0.10 to $12.5 per share. As the revenue news release last night, we are issuing 2023 financial guidance with double-digit growth in both sales and EPS. We are guiding to $1.725 billion to $1.825 billion in sales for 2023 with adjusted diluted earnings per share of $1.70 to $1.90. Our guidance on free cash flow is to generate more than $140 million, while continuing to tightly manage accrued capital expenditures we spend approximately $90 million. Thank you, Nick. As a reminder, the majority of our sales is denominated in dollars. However, our cost base is a mix of dollars, euros and British pounds as we have a significant manufacturing presence in Europe. As a result, when the dollar strengthens against the euro and the pound are translate -- our sales translate lower, while our costs also translate lower leading to a net benefit to our margins. Conversely, a weak dollar is a headwind for our financial results. We hedge this currency exposure over a 10-quarter horizon to protect our operating income. As a result, currency changes are laid into financial results over time. As a reminder, the year-over-year sales comparisons and I will provide are in constant currency, which thereby removes the foreign exchange impact to sales. Turning to our three markets, Commercial Aerospace represented approximately 58% of total fourth quarter 2022 sales. Fourth quarter Commercial Aerospace sales of $256.2 million increased 28.9% compared to the fourth quarter of 2021. The Airbus A320neo and A350 grew the strongest followed by encouraging growth from both the Boeing 787 and 737 MAX. Business and regional jets grew strongly year-over-year. Space and Defense represented 29% of the fourth quarter sales and totaled $126.5 million, increasing 22% from the same period in 2021. Strength was broad based globally with growth in all of our various sub-sectors including fixed-wing rotorcraft and space. Industrial comprised 13% of fourth quarter 2022 sales. Industrial sales totaled $46.7 million decreasing 7% compared to the fourth quarter of 2021 on lower wind energy sales. For wind energy, the year-over-year fourth quarter comparison was somewhat challenging, as they were still wind energy sales in Asia for the prior year period, but no sales in the fourth quarter of 2022. Wind energy sales stabilized in the second half of 2022 with sales virtually unchanged sequentially from the third quarter to the fourth quarter of 2022. Recreation and Other Industrial sales grew year-over-year whereas automotive was unchanged. On a consolidated basis, gross margin for the fourth quarter was 23.1%, compared to 19.2% in the fourth quarter of 2021. Higher sales volume is driving favorable operating leverage, although inflationary cost pressures and the productivity challenges related to a less experienced workforce remain headwinds. Additionally, energy costs continue to pressure margins and we are working to minimize near-term volatility. We do this by locking in forward contracts typically for 12 months and these assumptions are built into our guidance for 2023. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 12.3% in the current quarter, compared to 12.2% in the fourth quarter of 2021. The fourth quarter saw a rebalancing of an unusually low third quarter SG&A expense. For the year SG&A and R&D expenses were 12.3% of sales, compared to 13.6% of sales in 2021. Adjusted operating income in the fourth quarter was $46.3 million or 10.8% of sales. The year-over-year impact of exchange rates in the fourth quarter to adjusted operating income was favorable by approximately 40 basis points. The financial impact of closing the Tianjin, China wind energy plant was not material. The plant size is just under 90,000 square feet. So relatively small for Hexcel. Most of the assets were fully depreciated and the charges incurred were primarily severance related. Now turning to our two segments. The Composite Materials segment represented 83% of total sales and generated a 12.7% operating margin strengthening year-over-year on higher sales to support increased capacity utilization. The operating margin in the comparable prior year period was 8.7%. The Engineered Products segment, which is comprised of our structures and engineered core businesses represented 17% of total sales and generated a 14.4% operating margin, driven by favorable sales mix. The operating margin in the comparable prior year period was 4.2%. The effective tax rate for the fourth quarter of 2022 was 17.7%. For full year 2022 the effective tax rate was 21.1%. Changes in the geographic mix of profitability, as well as changes in valuation allowances impacted the effective tax rate in 2022. Net cash generated by operating activities for 2022 was $173.1 million, compared to a $151.7 million in 2021. Working capital was a use of cash of $72.7 million in 2022 increasing to support higher sales. Capital expenditures on an accrual basis was $69.8 million for fiscal year 2022, compared to $41.4 million for fiscal year 2021, with the growth largely reflecting the construction of the new R&D innovation center at our Salt Lake City, Utah facility and the expansion of our engineered core facility at Casablanca Morocco. Free cash flow was $98.7 million for the fourth quarter of 2022 and was $96.8 million for the fiscal year 2022. Rising profitability was favorable to cash generation, partially offset by higher working capital that is supporting our sales growth along with higher capital expenditure in 2022. In 2021, free cash flow generation was $123.8 million. The Board of Directors declared a $12.5 quarterly dividend yesterday payable to stockholders of record as of February 10th with a payment date of February 17th. We did not repurchase any common stock during the fourth quarter of 2022. The remaining authorization under the share purchase reprogram on December 31, 2022, was $217 million. Finally. I would like to share additional details regarding our 2023 guidance. As Nick stated, we are forecasting sales in the range of $1.725 billion to $1.825 billion, adjusted diluted EPS in the range of $1.70 to $1.90 and free cash flow of greater than $140 million. Accrued capital expenditures are forecast in the range of $90 million. This forecast includes ongoing maintenance capital expenditures, as well as the spend related to the reinitiated fiber line construction, the completion of the work on our R&D center in Salt Lake City and the expansion of our facility in Morocco. We expect full year 2023 Commercial Aerospace sales to compromise approximately 58% of total sales. Our sales forecast are based on publicly stated OEM aircraft build rates and expectations. We expect Space and Defense to comprise approximately 29% of total sales and we expect Industrial to comprise approximately 13% of total sales. Additionally, we expect depreciation to remain similar to 2022 levels. We have locked in much of our forecast energy and intended [inaudible] trial needs for 2023 to minimize the impact on our margins of any price volatility experienced in those markets. Consistent with prior yearâs selling, general and administrative expenses are forecast to be higher in the first quarter of 2023 compared to the following quarters, reflecting the timing of recording stock-based compensation expense. Continuing on this seasonality, we expect free cash flow to be stronger in the second half of the year. Our 2023 forecast foreign exchange exposure is more than 80% hedged today. Based on our existing hedges, foreign exchange is forecasted to be a tailwind in 2023 and is incorporated into our guidance. We estimate that a 5% movement in relevant exchange rates would have approximately $2.5 million impact on earnings net of our hedges. We expect the effective tax rate in 2023 to be approximately 23%. Thanks, Patrick. Before I turn it over to questions, I wanted to share with you that earlier this month I had the pleasure of welcoming the Hexcel team to our 75th anniversary and to set the stage for a year-long celebration of the pivotal moments and people in our past that have propelled us to this significant moment in our history. This anniversary provides us with a rare opportunity not only to look back at our shared legacy as a company but also to look ahead to all that Hexcel can and will become in the next five years, 10 years or 25 years from now when we celebrate our 100th anniversary. Our history at Hexcel is rich and diverse. It was in 1948 that two 20-something-year-old mechanical engineers who had recently graduated from the University of California, Berkeley and completed service in the US Navy took $500 moved into a basement workshop and changed the aerospace industry forever with some fiberglass, honeycomb-dipped in resin. And although much has changed in the world and with Hexcel, since the time of our founding, one thing has never changed and thatâs lightweight. It was our first innovation and for 75 years, we have continued building a strong, broad portfolio of lightweight materials for our customers. We have changed the world for the better. Over its 75-year history, Hexcel has completed more than 20 mergers and acquisitions. All that we are today reflects all that we have been in the past and challenges us to continue building a strong foundation for the future. Hexcel has been a composite leader for 75 years and will continue to lead our industry for at least 75 more. Lightweight composites are the future of sustainability. Hexcel has the products, the knowledge, and most importantly, the people to deliver that sustainable and profitable future. Thank you. [Operator Instructions] Your first question comes from the line of David Strauss with Barclays. Your line is now open. Could you touch on the margin outlook implied in the guidance for 2023, it looks like you are implying somewhere in the mid-30% incremental margin range, if thatâs correct? And you have previously talked about getting back to the mid-teens margins when you get back to $1.8 billion to $1.9 billion on revenue, is that still how you are thinking about progression from here? Yeah. Hi, David. So, I mean, firstly, yes, you are in the ballpark that is kind of the leverage shape that we are seeing. You can do the math thatâs built into our guidance. So I would agree with that. And then, I mean the caveat there, I mean, we will drive it as strong as we can as we always do with incremental volumes and margins we are going to continue to push. So we will do that as much as we can. And I guess in relation to that, I mean, we called it out, I mean, I mentioned it in the analysis we do have some headwinds around the edges of our cost range. We do a very good job on sort of long-term contracts for our resins and major fibers and hedging FX and hedging acrylonitrile, but we do have inflationary exposures around minor raw materials, freight, packaging, energy, expect the energy in Europe. And so those mid-teens margins 14% to 16% range are more challenged right now, but we are not giving up on those targets and we are going to push as hard as we can, especially as the revenue continues to grow in the next sort of a couple of years up towards that, yeah, $1.8 billion, $1.9 billion and plus range. So we will keep driving, but there are headwinds today that makes it a bit tougher. Okay. And in terms of capital deployment from here, you obviously announced the dividend increase, you have been paying down a bit of debt, obviously, you still have authorization on the share repo program. How should we think about what you might do with the cash that you are going to generate next year, would you see yourself getting back to buying back stock? Thanks. Yeah. I mean, our priorities remain the same. We are always going to look after our organic growth, but we are doing that comfortably now. We should be under that 100 level of CapEx as we called out for a few years now. M&A is definitely on our agenda. We are staying focused and disciplined for opportunities. We see that as part of our growth. But in the meantime, we announced what we believe is a very positive dividend increase, the 25% from $10 to $12.5. And yes, so stock repurchases will come onto our agenda if the cash starts to come in. This year, next year, the next two or three years we are going to generate a lot of cash, itâs going to start to flow. And undoubtedly, I would expect stock repurchases to emerge at some point, but M&A we are staying disciplined increase in dividends and then balance that with some stock repurchases is how I would look at it. Maybe you could -- can you speak to sort of raw material and labor inflation and your ability to kind of pass that through to customers kind of understanding you have hedging? And then also part two of that is, on all the new hires that you have made, how long do you expect it to take to get the new hires up the learning curve? Thanks. So in terms of - I mean, we have talked about the raw material inflations and even just to David, as I was saying, we do a good job for some of our key raw materials to mitigate the impact, but we are not immune to inflationary pressures and so we have seen them. I think we probably 2022 saw bigger inflationary pressures and hopefully, we are going to see in 2023, we are starting to see it dissipate. Energy costs, however, in Europe are high. Where we can part pricing through or sort of increase pricing to sort of cover those cost increases we do, we have a lot of long-term contracts, some of which have formulas that led us to pass it through and we obviously take advantage of that wherever we can and work with our customers to manage pricing. Industrial, we have more flexibility that tends to just flow straight through formulas. So we do have some price increase flow-through, but a lot of the time we are taking efficiency and productivity to manage and overcome the inflationary pressures. In terms of labor, you canât give someone five-years, three years of experience in six months or nine months, but we are working as hard and as focus as we can on training and accelerating it. And we were very encouraged by the output, and the production we saw in Q4, which really underpinned our ability to get out of a high level of sales. By the end of Q3, we called out the strong demand and we certainly saw that in the fourth quarter. So we are still working on training, itâs not a short-term fix and working on pushing it through 2023. Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open. Pardon me, so next question, oh, my apologies. Sorry, this is Ellen [ph] on for Sheila. Just on the organic sales growth of low-teens in 2023, how are you thinking about the contribution from narrow-bodies versus wide-body ramp given disruptions to the MAX and 787? Sheila, if you look, obviously, we have more content on wide-bodies and what we are seeing with respect to the A350, the Airbus A330 and the 787 coming back that provides a nice boost to 2023. Similarly, with Boeing rebounding and stabilizing their supply chain, MAX is expected to grow and the 320 is just limited by the supply chain. So we are not going to give you the percentages per se narrow-body versus wide-body, but we are seeing pretty strong growth in both of those platforms. Hey. Good morning, guys. Maybe just a quick one on technology. When you think about looking out over the next couple of years or maybe even towards the end of the decade, with Boeing really not pursuing a new airplane for a while other than what they have got going on at the moment. How are you thinking about investments in technology and where do you think you need to spend maybe some incremental internal funded money on what and just curious on how you are thinking about that? Yeah. Ron, so remember the development cycle for commercial aircraft is quite long seven years, eight years. So material development obviously takes place well in advance. So I donât know that we are spending incremental. We are spending the appropriate level for what we see as opportunities for next-generation materials, both from a mechanical standpoint, as well as processing capability and the ability to lay the materials down and form the parts faster. So again, and is that unique, solely to a potential new Boeing aircraft or new a Airbus aircraft, the penetration we are seeing in business jets, penetration and opportunities we are seeing in Space and Defense all require next-generation materials. And again, we are pretty much agnostic. Our assets run all of our products, our development on our fiber is applicable across all of our markets, so a continued focus on R&D and investment, getting our center done in Salt Lake City and getting it staffed appropriately is certainly front and center and a key driver for our future. Patrick, I think you gave end market composition for 2023, which you can back into growth rates. And so correct me if I got them wrong, but it did look like the Commercial end markets are growing about 13 and Defense up about 11, are those right, and I guess, Commercial seems a little bit lower and Defense alone, it seems with a stronger than they were otherwise expect anything to call out there? Yeah. No. Your math is pretty good. I mean Commercial Aero, perhaps, the run rate is slowing a little bit certainly Airbus from what we saw in 2022, but itâs still good solid growth and itâs the majority of the growth, is still the largest portion again. Space and Defense, we are just seeing a lot of general strength very broadly CH-53K, F-35 is still continuing to creep up. We have got some European military spend going up and then we are across such a broad base and given the military budgets, thereâs just a lot of pull at the moment. I guess I should also mention business jets and Commercial Aero remains robust, but again, what you probably expect a lower growth rate. Okay. And maybe one on the CapEx side and starting this year is that primarily for growth beyond 2025 versus what you -- when you started the program obviously, the A350 was at 10 and you were thinking about beyond 10, 777 was at 52 gone 57 you think about beyond that. Is the focus of the Decatur expansion eyes on those kind of rates or is it more of an efficiency formula that you donât need those kind of growth beyond yourâ¦ Itâs a combination, Myles. So we obviously see the wide-bodies continuing to creep up, but the military as we have just talked about is going to put increasing demand for our products to the business jets, something like the Dassault Bolton 10x with a composite wing, thatâs pulling. So it really is sort of we see some growth in the wide-bodies, plus some new programs and extra pull come 2025, 2026 in general program growth. Nick, I want to follow-on with what you ended your monologue with a little bit and touch maybe on what Rob was talking about, just because this is such a secular story and I wanted to ask you about your opportunity on narrow bodies specifically. And why -- what are the technical hurdles and can you get to narrow-body at some point, like you are on wide-body and while I know there is no new aircraft on the near-term horizon, I am thinking of things like A320neo, rewing 220-500 and then I will throw in the GE or the CFM RISE program as well? Yeah. Thanks, Robert. Well, there is no reason whatsoever that narrow-bodies canât approach a similar penetration or entitlement as wide-bodies. Remember the latest airplanes develop happened to be the wide-bodies, the 787 and A350, and they are the aircraft that are 50% composite in total weight. If you look at the next new narrow-body and the entitlement, our technology and the market technology has just enabled that to perhaps grow even bigger. And you can see signs of that. Look at what Dassault is doing with Falcon 10x. Thatâs a composite wing. So we are seeing more and more pull for composites. We are seeing the development that we are doing not only on the mechanical performance of our composite fiber products, but the way it is processed, the way our customers are able to make parts, lay it down and tape or fiber placement, the way they are able to cure it, whether itâs in our autoclave or autopilot, and whether itâs a combination of thermoplastics or thermosets. So we have that total array, that total sweep of products to enable our customers to optimize the next new aircraft. So, as a follow-on to that, is there any way for us to think about the relative differences in your product offering than your closest peers? Well, I -- the first thing Iâd say is, we are the largest in the aerospace industry. I would say, we are amongst vertically integrated and diversified. If you look at our portfolio of pan and fibers, woven products, unidirectional and woven prepregs, honeycomb core, engineered core, all the way to structures. If you look at our peers and what they have to offer is a much narrower band. Now, I am sure they are working similar technologies to improve mechanical performance, to improve processing and lay down, but I like where we are. I like the direction we are moving and at the pace we are moving, and I think our customers are going to appreciate and recognize the value proposition we provide them for the long-term. Maybe a follow-up on wide-body demand. When you look at Boeingâs production rate plans, working with 787 go from 1.5 to 2.5 per month today and they are kind of going to that 10 per month by 2025, 2026 and thatâs a 400% to 500% increase. You guys already have the CapEx in place since you were meeting the rate higher from that pre-COVID, so it would seem like a step up in volume should be relatively easy for you. So just want to understand, are there any hurdles that we want to keep in mind, as we see the ramp up or should this be easy-peasy considering how the CapEx is in place already? Well, I am not sure Iâd characterize it as that easy, growing and ramping up and driving efficiency and productivity is always challenging, and we always challenge our team to go above and beyond and not do it the way we had in the past decade, but define new ways, new opportunities to make us even more productive going forward. To your point, expanding and growing. Knowing how to put the assets in the ground thatâs fairly straightforward. We have replicated our assets numerous times in various countries and we know how to do that well. We have got great processes and teams to make sure we manage and deliver and execute based on our commitments. Iâd say and Patrick touched on it, the training curves. We have a significant number of our team that are fairly new in terms of their knowledge with the product, processing and efficiencies. And although we are running and we are ramping up, and we are seeing more efficiencies climb rapidly. That is the challenge that we really focus on and really work on going forward. So we know how to do it, to your point, we have done it before, itâs nothing special, itâs just a matter of executing. And I think we have a pretty good track record on delivering on our commitments and executing to plan. Thanks, Nick. Thatâs really helpful. And following on some of the earlier questions on long-term growth. I mean, you have addressed your market share success in carbon fiber and you have benefited from the high barrier to entry, intermediate modulus carbon fiber. Thatâs been very clear in your operating history. But when you look at that next-generation wide, sorry, next-generation narrow-body when we get to that 2030 timeframe, if thermoplastic you indeed takes more of a share versus your traditional metal products like how do you think about that evolution. Would you have the same benefit in terms of your technology? Is that a substitution also for carbon fiber? How do you think about the evolution of thermoplastics and carbon fiber in that sense in your competitive advantage? Yeah. Well thermoplastics clearly are not as mature as thermoset technology and it has a ways to go. What we are promising is we have that technology. We are working on that technology. We are demonstrating that technology with our customers. And I donât believe thereâs going to be a mass transfer of products moving from thermoset to thermoplastic overnight. I think there will be applications that are better suited for thermoplastic, that are better suited for thermoset, and again, why I love our position is that we offer both, we can help our customers identify the optimum solution based on the application they have. So, again, I think, itâs going to be a function of when that new aircraft is launched, how far down the road, because all technology whether itâs thermoset, thermoplastic or honeycomb core and noise suppression or thermal management those technologies just continue to advance every day and will be even more ready down the road. I wanted to just ask you M&A pipeline anything evolving there, anything of interest and -- but, yeah, if you could just comment on that? Well, we never slowed down, Gautam. We have got an active business development function. We look at technologies that will enhance our portfolio, would allow us to serve our customers better provide more value. So we have an active pipeline. Bolt-on type acquisitions, bolt-on type technology targets are high on our priority list. Obviously, I canât get into details on any of those names, but you can imagine some of them may be actionable, may not be actionable and that changes over time. So itâs clearly one of the priorities we constantly look at and we balance our capital deployment against what internal developments we have versus what M&A opportunities we see not only near-term but potentially mid-term or long-term. I was just curious with a while back there was the Woodward pursuit or whatever you want to call it, the -- any desire to move into the aftermarket? Well, again, the Woodward merger of equals that we worked in 2019 and announced early in 2020, which we then had to abandon because of the pandemic. That was very unique, a game changer really for both companies and to the advantage of our customers in offering more efficient and optimized solutions. Aftermarket is certainly a nice piece of business that helps diversify away from all we and can stabilize markets during different type of macro events. It certainly is attractive, but itâs not what drives our strategy, our strategy is driven around lightweight, innovative solutions to help our customers meet their efficiency and sustainable requirements going forward. And if there happens to be some aftermarket tied to that. Thatâs great. But we donât target or make that a priority. Hey, guys. Nice end of the year. Just curious sort of an interesting time most pundits are looking for a downturn in the U.S. to battle inflation. How do you think that affects the industry this time around, if there is a meaningful slowdown in the U.S. and are the indicators still seeing pretty pause for us bit, but just your thoughts there? Yeah. Mike, it has a certain Space and Defense. We have seen that that market segment is fairly resilient to short-term recessions or economic impacts and we see the same. Commercial Aerospace if you look at where we are coming out of the pandemic, if you look at the strong demand and if you look at the supply chain challenges, perhaps, a little slowdown in other areas may actually be an enhancement to help with the supply chain catch-up and just a new aircraft in customers hands that are looking for them. So we see minimal to no short-term impact in our Commercial markets. Even in our Industrial segments. If you look at our strategy and the way we differentiate it tends to focus on the high end, whether you are talking automotive or marine or recreation and sports, those are high performing applications that really are pretty resilient to recessions. Electronics and Consumer Goods certainly there could be an impact there. But right now, we do not see the impact of significance based on what we are looking at today. Hey. Good morning, guys. Thanks for taking the question and nice results. If I can just to go back to the guidance and I guess the implied midpoint of the growth rate for Aero, you had a really strong sequential uptick in this current quarter. Hadnât really been much change in rates? And I guess, it seems like that revenue run rate is just going to be flattish through 2023 to get to the midpoint. I mean is that the right way to look at it? I mean, it sounds like the 87 ramp will be a bit later, but anything from a cadence perspective, we should be thinking about? I think we will see some steady growth sort of going into the first half of 2023. I think the seasonality that we always historically saw and we saw what we did state in 2022 with Q3 being a bit softer reflecting the European sort of holidays in that region is likely to happen again and now sort of going forward in future years. I think we will see that seasonality. And we will see how the year finishes, which is really going to depend on where the OEMs are with that build rates. But I think Q4 over Q3 2022 was clearly aligned step out that you have got that kind of seasonality effect. We talked about the strong underlying demand and our ability to get product out of the door. And yes, so we are going to see another step up again into the first half of 2023 and our Q3 we will back of a little bit to seasonal lines, and then hopefully, finish the year strong again. But a fairly solid stable robust growth year. But double-digit in all our markets, which is what you will see, Commercial Aerospace, Space and Defense and Industrial. Got it. And just on the market, I mean, you are basically they are back at the $1.8 billion. It sounds like you are definitely grappling with some of those inflationary cost headwinds. But so just to be clear that, I guess, the confidence level in the mid-teens. Just maybe kind of battling that a bit. Should we just calibrate expectations to deal with some of these higher costs around that target you guys had out there? Well, I think, you are all doing, I mean, you are backing into our guidance EPS. I think that obviously reflects a little bit of the headwinds. I think notably the European entity, which should be, I donât want to be compliant and I donât want to be overly optimistic, but hopefully in time will dissipate and then as we come out of 2023 and 2024 that should give us a bump on margins and return to something more normal. But as Nick talked about and as I talked about, we are going to drive efficiency and productivity to overcome this. What are really inflationary pressures as much as we can and drive the incremental margins. But in the short-term, there are some headwinds to that initial mid-teens guidance, but we are working hard to continue to aim for that. Nick, Patrick and Kurt, good morning. Two fairly quick questions for you here, one on EPS, one on free cash flow. You had some really good outperformance all through 2021 business jets, looks like it starts to be a difficult comp this year. I just wanted to know if you could discuss your outlook for business jets and if you think the current level -- if the current level sales is sustainable? Yeah. Hi, Rich. So, I mean, we saw fantastic growth 2022 over 2021 in business jets and regional jets were good too, but I guess, business jets especially so. We see continued strength, I mean, the rate of growth. I donât expect to see the step up 2023 over 2022 the same in past 2022 over 2021. But we do see the elevated sales, the continued strength. Gulfstream, Dassault, Bombardier continue to build that bring out new models, they are all more composite Rich than the older business jets. So it has become a really good space for us and we see continued strength. So we are positive Rich. Okay. Thanks. And just quick follow-up on your cash flow guide for this year, I am kind of curious as to what leverage you have and what your working capital assumptions are? For example, is there any buffer or safety stock embedded in your guide and things start to improve as the year goes on, might that be upside to your guide. I am just trying to get that generally here whatâs the profitability of being coming at 2023 above your free cash flow guide? Well, that always be our objective. Nick and I are going to push cash as hard as we can. I mean I think when your topline is growing, you have always got a bit of upward pressure, a bit of growth around working capital. We took some of the pain and we pulled it out on our inventory growth in 2022. We kind of got ahead of ourselves a little bit very deliberately to support our customers and get the sales out of the door. So obviously the inventory growth will be less than it might normally otherwise be, but as sales go up receivables go up, we will manage payables. So, hopefully, only modest but with topline growth, working capital will grow modestly and we will keep driving cash. So can we outperform, thatâs definitely our target, Rich. Thanks for sneaking me in that will happen with the technical side that. But anyway, Iâd like to follow up on Mylesâ question from earlier. On Defense, because what you saw in Q4 and what you are projecting for 2023 on revenue growth is clearly different from what other defense companies the same particularly in Aeronautics, with Lockheed, look at Northrop, look at A400M, whatever it might be. So, I wonder if you could give us a little more clarity on what you have seen and what gives you confidence this growth rate is sustainable? Well, I mean, we are seeing whatâs in front of us Rob and we are seeing continue with strong growth on the CH-53K. I mean I know we keep talking about it, but it truly is really good growth that continues to grow very strongly. The last year, this year and probably going into 2024. The F-35, itâs not going to grow a lot more, but itâs going to step-up a little bit more in 2023 understanding Lockheed delivery issues, but they continue to produce and we are supporting the production. And then you have got, as I say, just broad spend across the world. In Europe, you have got the Rafale, which is going well, you have got stability even in the Eurofighter, which is a little bit stronger than if you would have asked me what 2023 was going to be two years or three years ago. I would have said, the European was going to be down, and say, itâs actually probably going to go up. And then just general broad strength across many, many platforms as we talk about civil helicopters stepped-up, itâs a small part of what we do, but itâs stepped-up nicely, especially in Europe in 2022. Thatâs going to continue for a while and Space itself is more robust with the Commercial Space applications, but itâs very broad based Rob is the answer. It is. It is and I think we have said. I donât -- at some point is going to be up there with the F-35 and those two will comfortably be our two largest programs again.
EarningCall_1347	Hey, good afternoon, everyone. My name is Jess Fye. I'm the large-cap biotech analyst at J.P. Morgan, and we're delighted to be continuing the conference today with Moderna. Good news this year. We don't want to switch rooms for Q&A. So Stephane is going to give the presentation and then we're going to go straight into Q&A after that. A couple of ways you can ask a question. There's mic runners in the room, so if you want to raise your hand, we'll try to get a mic to you or alternatively you can submit a question electronically and I'll read it off the iPad out here. Thank you, Jess. Good afternoon, everybody, and thank you so much for joining us today. It's quite an impressive room for this presentation. Before I start, let me remind you that we'll be making forward-looking statements that investing in Moderna entail some risk that you can find on the SEC's website or on our website. So as you all know by now mRNA is like software. As you know, computers use a binary system to code any piece of software where live across species on the planet uses a quaternary system to code for any protein, that makes mRNA an information molecule. And this beliefs and this understanding that led us 10 years ago to build this company. We believe that the key main advantages of mRNA versus small or large molecule are very profound in what they can mean for patients and for creating value. The first thing that's very exciting to us is a very large product opportunity ahead of us, not only this year or next year, but in the next 10, 20 years, a very large white canvas to paint on. Of course, we can do secreted protein like the biotech industry, but what excites us the most is who can do transmembrane protein those proteins on the membrane of a cell, who can do intracellular protein, including protein inside compartment of cells, like one of our rare disease program is inside the mitochondria that were getting the protein in. So a very large product opportunity. We can make very complex protein. In the transmembrane, you will see one of that is actually made of five protein, for which we make five mRNA that is actually in Phase 3 right now. So this is not science fiction. That's something we know how to do and we can combine the mRNA. We are programmed when we have two, three, four, five, six mRNAs in pre-clinical and up to 15 mRNAs in one dose. So the flexibility we have to do the right biology to get the drug to work is very profound and very different from small or large molecules. The other piece that has excited us since the beginning, and I mean a lot having been in large pharma before is the belief that this technology will lead to higher probability of technical success of drugs getting to the clinic and drugs getting to market. Why is that? It's because we always use the same chemistry. What we inject in the human body is the same for every product. So we believe this is going to drive a massive impact in change of probability of technical success versus the industry average that a lot of people are using to assess asset's chance to get to market. The first piece that we believe that I think we have demonstrated a couple of times is the ability to go a very different speed in term of cycle time of development versus small or large molecule. And why is that? It's because we always make the same product using the same processes. Well, in large pharmaceuticals, you have to invent how to make the product every time, the team in the labs have a cool new molecules. Well, in our case, when the teams in the lab have a molecule they wonât take to the clinic, it's the same manufacturing process than the overall molecule, allowing us to go really quickly sometime in 40, 60 days from a candidate to starting a clinical trial and filing an IND. And last but not least, because we use the same manufacturing process for everything, we use the same factory with the same people in the same room using the same CapEx. Literally one week we can make a COVID-19 vaccine and the week after in the same room with the same machine, with same people, we can make a flu vaccine or rare disease drug or cardiology drug. So the flexibility that gives us the efficiency of capital is really profound. So based on those beliefs that we had ten years ago, we set up a very different vision and strategy for how to build this mRNA company. We kind of threw the biotech playbook by the window because it was a different science. So we believe it was not the right way to build an mRNA company than it was done for the technologies. And so the way we thought about it is that if we invest in technology mRNA technology, delivery technology and for an application that we call modality, we can make the first drug work safely in human. Then the next drugs and the next, next drug in that same application is a copy and paste. Use the same chemistry for the mRNA, use the same lipid, the same administration, the same manufacturing process. You just change the order of a sequence. And here you go again. And you could do that across many applications. And that's how we set up to build Moderna. What is interesting is, inventing a new application, a new modality is difficult. It's time consuming and is expensive. Why? Because you have to figure out how to deliver the mRNA into the new cell type that you want to have a biological effect. That's hard. And then you need to deal with immunity. How do you make sure that the immune system doesn't react in the way that you don't want about your product. And then, of course, all the translation. But what is quite interesting in the last 10 years, but even more interesting now that we have $18 billion of cash and 4,000 people in the company is I believe that Moderna is uniquely positioned to continue to lead in the space of mRNA. First, it's all we do. Two, is what critical mass in science. We have digitalized the company to allow speed and we have the capital that can invest in science. So what we have done over the last 10 years and as you can imagine, we've been a bit distracted with the pandemic. We have developed seven modalities, seven application that you see on this slide that all have drugs in humans. We have many more applications or modalities that our teams are working on in the lab that we hope to be able to introduce if the science is positive. I won't have time today to walk you through all of our programs, there's 48 of those through all the modalities, so I want to pick a few, and those I'm not going to cover are in the appendix of this deck that you can find on our website. So let me start by the first modality infectious disease vaccine. We think there's an incredible opportunity to have a massive impact on human health through mRNA technology for vaccines. There are more than 200 viruses documented by scientists that hurts human. 200. And there vaccine against around 20 of those. That's a lot of whitespace, so I won't have time to cover everything. But let me start by the big vaccines that we have a very active pipeline on. First, respiratory viruses. You are aware, of course, of SARS-CoV-2, of influenza, now RSV is becoming more popular because it's doing a lot of damage. You can see on this slide some of the leading respiratory viruses that circulate in the US, in Europe, around the world every year. And you can see with the red, those viruses that do not have a vaccine approved on the market. And the vision for respiratory viruses is quite simple. We want to develop a vaccine against all of those viruses. We want to combine them so we don't need three or four shots every fall and want to adapt them to the variant circulating in the country where you live. Not a single variant for the entire planet, which we believe some years doesn't make scientific sense. So that's a bit the opportunity we're trying to address. Let me say a couple of words on COVID. So we reported this morning $18.4 billion of sales for the year. Those are, of course, at this stage unaudited. We confirm that we have at least $5 billion of contract already signed or deferrals from '22 into '23 that we qualify kind of as a [indiscernible] in term of sales for the year. In this $5 billion number, you have some countries like Canada, UK and so on. But this number assumes no sales in the US. And of course we are working actively with channels in the US to provide the updated 2023 booster into US pharmacy hospitals and doctors. No new contract in Europe is assuming the $5 billion. No new contract in Japan, Middle East and many other parts of the world. RSV, we are very excited about RSV because how much damage it does to the community area. We've announced that our Phase 3 study 36,000 participants is fully enrolled. This is a Phase 3 study that is a registration study looking at safety and vaccine efficacy. We announced this morning that we crossed the number of cases, itâs a case driven study, 64 confirmed cases. The requirement was 42 for the first interim analysis. So we should expect very soon and I'm talking weeks, not months, the vaccine efficacy coming out of this. On flu, we are running two Phase 3 studies in the southern hemisphere fully enrolled, looking at immunogenicity because some countries told us that we use that for an approval. And in Northern Hemisphere efficacy study, 22,000 participants that could come as early as this winter given the number of cases that has been happening across the world in the fall and this winter. Let me now pivot to another family of viruses, latent viruses. Those are viruses that once in our body never leave our bodies. And so they create short term health care damage. But some of them creates very important long term damage. I won't go through the list. I don't have time, but something on the right side, you can see all the vaccine -- all the viruses for which there is no vaccine on the market. And so CMV is currently in Phase 3. CMV Cytomegalovirus is the number one cause of birth defects in this country and around the world. One in 200 kids in the US is born every year with CMV disease. The Phase 3 is 40% enrolled and we are now seeing that, we are now also enrolling in Japan. We believe the CMV opportunity is $2 billion to $5 billion annual sales for this product, given there is nothing on the market. And as you can see, we believe that we can build a very important portfolio for patients and on the way to create value for investors across the different vaccines we have in the pipeline. CMV, EBV, Herpes, VGV and also HIV. So that's a quick run by vaccine. I wish I could spend more time on the vaccine. You guys can join us on the vaccine day in April to learn more. So now, modality number two, cancer vaccines. As many of you know, in December we're very excited to share some positive data in our combination with KEYTRUDA with a personalized cancer vaccine. This study was powered. The control arm was KEYTRUDA monotherapy. The other arm was Moderna personalized cancer vaccine plus KEYTRUDA. We are very delighted to show a hazard ratio of 0.56, meaning a 44% reduction in risk of recurrence or death versus getting KEYTRUDA monotherapy. You can see the P value. It's the first time with mRNA that any company has shown in a randomized clinical study positive outcome. And as you know, cancer vaccines have been for the last couple of decades a graveyard of candidates. And so we're very excited about what this could mean for patients. Because the mechanism is teaching T-cell. How to recognize the epitopes from the cancer of every individualized patients. We think it's applicable to a lot of other tumor types. So with our colleagues at Merck, we're actively preparing a Phase 3 study that could start as early as this year. And also planning several additional Phase 3s in indications where KEYTRUDA monotherapy works with the same belief that we could improve the response versus KEYTRUDA alone, combining KEYTRUDA and Moderna drugs and we're going to be expanding and testing that technology in many, many tumor types and potentially also going much earlier in disease progression. So kind of watch this space, we're going to be investing aggressively in that space. I'm skipping a couple of modality for lack of time. Modality number five, we're very happy to announce this morning a very exciting program in cardiology for chronic heart failure. As you know, it's a massive medical program around the world. Just in US, 1 million hospitalizations every year. The molecule vaccine is really interesting because it's a naturally occurring hormone in humans. It's used actually by pregnant women during pregnancy. And we believe that we can code that molecule to help people with heart failure. We've announced this morning that we've initiated a Phase 1 study in patients and will share with you data as we learn more about this program. That could move pretty quickly if a Phase 1 was positive. Another important modality. Modality number six is rare genetic disease in the liver. There are a couple of dozen rare genetic diseases in the liver that cannot be drug using small molecule or using recombinant. Why? Because the kids are missing a protein inside the hepatocyte of their liver. So we developed technology, IV injection, going into the liver, delivering it to what we believe is the hepatocyte, the mRNA molecule. We now have six patients years of experience on drugs. Some kids have been more than a year with dosage every two weeks. It's generally well tolerated to date, and we're already seeing at low dose a reduction in number of metabolic decomposition event, which the regulators have deemed is the endpoint for the pivotal study for this program. So we are monitoring this, we will update data as we have more. But we are very excited because if this works, it will unleash the entire modality, because as we all know, in rare genetic disease, the biology risk is very, very low. The other one that we are very excited about, which took a few years to make work in the labs is the ability to deliver inhaled mRNA to patients. So we partnered with our colleagues in Boston, Vertex to work on developing CFTR mRNA program, coding for the entire CFTR GENE to help those kids that don't respond to the standard treatment where Vertex has a massive impact on so many lives. But there are still several thousand kids that don't respond to treatment. So what we believe is that, if we were able to give them a full length CFTR protein in their lungs, we could basically restore their lung function. And so we develop that technology. We are very excited that the R&D was opened by the FDA, that this got the Fast Track designation. And this morning our colleagues at Vertex announced that we've already started dosing in human in patients, of course. So this should be able to go very quickly because those kids have no hope. They have no option. And if you think about it, if it works in this application, then we can open a brand new space, a new modality in lung disease. Think about all the lung disease that we could go after inhaled mRNA. That is extremely exciting for us. So this is a typical slide we use to just give you a quick summary of where we are as of January 2023. I want to read everything just to tell you, we have now 48 programs in development. 48. The company is close to 4,000 people and our budget calls for adding 2,000 employees this year, because we are scaling research, we are scaling development, we are scaling manufacturing and, of course, we are scaling commercial. As of the end of the year, we had around $18 billion of cash. So how do we intend to deploy that capital? Our number one priority, and we have been saying that for a couple years, is to invest in the company. We spent 10 years to develop a platform that could scale. One of the biggest challenge for pharmaceutical companies is what is next in your pipeline? We have an information based molecule and we build the platform around it. And so we've the management team and the board of directors, we understand our science. We believe our ability to scale. And so what we announce this morning is the board approved budget for 2023 is actually $4.4 billion of R&D investments. Many Phase 3s. As I said in cancer vaccine, with our colleagues at Merck, which is a 50-50 cost share and profit share. We're going to be very aggressive. We've also announced we bought a priority review voucher, which now make -- we have two of them and we have two Phase 3 that should read out flu and RSV this quarter. So those two can be handy to be able to move very quickly towards approval if the results are positive. In terms of partnership, we do not believe we are on everything being able to the best science in the world. We believe there is amazing science happening outside our walls of our labs. And so we want to tap that technology. And so what we have done last year, you can see the top line metagenomic charisma and already this year, actually last week announcing two new partnership, an acquisition in Japan and also a licensing agreement. What are we trying to do with those partnerships? We're trying to expand the size of our mRNA operating system. We want to provide our therapeutic area with more and more technologies to be able to do more and more drugs using mRNA. We believe there are so many things that we are still learning and exploring to keep expanding and expanding and expanding the mRNA operating system. OriCiro is a good example. Small private company in Japan with amazing new technology. They figure out how to make plasmid, which is the raw material to all the mRNA we make without using E. coli, synthetic cell free enzymatic reaction. Huge impact in terms of speed, scalability and purity of products. That will help us across the company. Using that technology, we can go faster to the clinic for personalized cancer vaccine, which could have an impact on efficacy and more people responding because they are dying of a cancer. It can help us in the labs to go faster from ID to data to just expand the amount of operating system faster to get into the clinic faster. Think about when there's a new variant, the FDA told us on June 28th they wanted a BA.5 Omicron variant. It was in pharmacy on September 2nd. But we spent all of July waiting for the plasmids, GFP plasmids. This technology will allow us to shut that time by maybe half. So that's going to mean a lot of impact for patients. And then the excess cash we will return to shareholder. So we already announced two share buybacks in 2022. We bought for $3.3 billion of stock at an average price of $1.43. There's still $2.8 billion of remaining capacity in the current plan, and the board will continue to review, as appropriate, the use of cash between investing in the company, which is our number one priority, to win partnership, to expand the US and the excess to return to our shareholders. What is exciting for me is other company is accelerating, because the biopharmaceutical world is an analog world where companies have drugs that are all different. But in our case, we have a platform. And so if you look at some of the historical data, at the end of 2018, no commercial product, of course, 21 product in development, mostly early stage, the end of 2020 commercial product, 25 product moving to later stage. 2022, because in 2020 we are kind of pretty busy with the pandemic. 2022, 48 program in development, four programming in Phase 3, nine program in Phase 2. So you can see how the pipeline is expanding into new modalities and is accelerating because we have a capital to do so. So if we invest $4.5 billion in R&D this year, what do you think itâs going to look like in two, three, four years from now? I want to be quick on my slide, our R&D budget in 2019 was less than $500 million. So if you think about it, this picture was generated with much lower R&D budget than where we are now. $4.5 billion is around 10 times. The R&D investments we're going to do in '23. This is what we did in 2019. So this is going to drive a lot of change in our pipeline. And I think a big impact on patient. Because of where the company is and the growth of a company is. We spent quite some time in the last few months to think about where are we heading? What you see on this slide is our original mission, the one we set up when we started the company. Our goal 10 years ago was to figure out how to make mRNA work. Because we are convinced that if we could make one drug work, because [indiscernible] information, we could do a lot of drugs. And what we could do for society and patients over the next five, 10, 20, 30 years could be transformational. Potentially as big, if not, larger than what recombinant as an industry has done over the last 40 years. But where we are today? We know mRNA works. So we thought about what's our next 10 years journey? What's our mission? What should drive us in the morning? And what you see here is what we think is really important to who we are and what we want to become, which is as a team, we want to deliver the greatest possible impact to people for mRNA medicine. What we optimizing for is the maximum impact we can have in the next five, 10, 20 years on the world, thanks to this amazing science. I hope you will join us for some of the key event this year. And I would like to thank you for your attention. I'll be happy just to take any question. Thank you. Great. Thanks for that presentation. It's really starting out with a bigger picture question. Can you talk about how you think about the future as we move toward treating COVID as an endemic disease and as the US shifts towards a commercial model? Sure. So like everybody, I've never managed to transition from pandemic to endemic. So we are learning as we go, but we're trying to use over viruses, over disease to kind of help us think about it at least directionally. We think that flu is a pretty good model for where we think things will end up. The need to update the product regularly based on the biology, potentially different booster in different geographies, which we can do. And we're trying to really help us by even building plants around the world. I don't have to talk about it in this presentation, but we're building a plant in Canada, we're building a plant in Melbourne, we're building a plant in the UK where we've had 10 years agreement with those governments, 10 year supply agreement that have been signed to basically procure from Moderna respiratory vaccine that we can adapt with local authorities to what they want for their people. And so I think for the 50 and -- 50 years old and above people that have immunocompromised, seriously sick, the need for an annual booster is going to be important. But I don't think that's the only population of -- the example I use is, I've done flu shots over the last 20 years. We provided the flu shots at Moderna since last 10 years. Every year has a benefit, like many companies do. Have I taken a flu shot and I'm 50 now. So since I was 30 because I thought I was going to be hospitalized or dying. No, because I want to be sick. They want to give it to somebody else. And I think a lot of people are going to do that as well. Do I believe everybody's going to do it? No. But I think if you look at the 50 plus and people at high risk and people who would just want to be protected, I think it's going to be an interesting market in terms of size. And then I think as we get more and more combinations, we're trying to work on the COVID plus flu, COVID plus flu, plus RSV, because nobody really likes needles too much. When we talk to payers, we are very worried as we get into a COVID plus flu and sooner flu plus RSV is how we will ensure compliance. Because what they want is, if those vaccine exists, they want people to use them, especially people at high risk that might end up in hospitals. And so, through the discussions we're having with payers, both private payers, but also health ministers and so on we believe that there is a very, very important demand out there for combinatory vaccines. And that's exactly where, as you know, we're going in term of pipeline and strategy. So I think combinations and I think the customization of products by geography is going to be driving a big competitive advantage. Okay. So you touched on this a little bit, but you've got some other viral vaccines in development where there is a bunch of competition and some other ones where there isn't a bunch of competition. So how do you decide where to go? Like, what's your kind of overarching infectious kind of vaccine strategy? So let me start by the easy ones. If there is a good vaccine out there we most probably are not going to do anything. So a good example is hepatitis, there is good vaccine for Hep A and Hep B. We have never even talked about should we do Hep A or B vaccine because we don't see the medical need and how much value it could bring. And given other things we could do, we rather do something else with our talent and our capital. Respiratory is different because first we believe we can get a much higher efficacy on flu. We don't think we'll get that done on the 10, 10, the first flu program because it was not designed for that. It was designed to be non-inferior to commercial flu products to go to the market quickly, because we believe that COVID plus flu -- COVID with Moderna's product has shown the best protection against hospitalization. And if we have a noninferor flu vaccine, we think that will provide a lot of value to our health care system. And so, that's what we want to do first. But if you think about flu, there's a lot of things that can be done with flu with mRNA to increase the efficacy, because as we all know, the current vaccines don't have great efficacy. We can do HA antigen and NA antigens to actually improve, we believe, the efficacy of a vaccine. H3 strain is the most important one. Why? It drives 90% of hospitalization. So why only pick one H3 strain? Which other technology are constrained to do because they cannot do more. What about doing two or three H3 strain in the single dose? So you look at the different strains circulating around the world, because it's really hard to guess where the virus is going to be in a few months when you have a vaccine in pharmacies. And so we think we can use the technology in quite an interesting way to develop different products. I even been talking to a country that, I won't mention, because it's a discussion with Sovereign, who's public health expert and health minister say, hey, should we put pandemic strain of flu in the flu product for our country. Think about like an H5 and then the year after H7, H10 because you could create some herd immunity so that if there is a new pandemic with flu, this time not the coronaviruses, you could have a bit of herd immunity and you could rotate that every year. So there's a lot of ideas that you could have using mRNA if you design the product a bit like it's done in the tech world, which is stalled by the problem you're trying to solve and design the product back world. In biopharma, people have one molecule and they're trying to do the best they can with that molecule to find where it could be used. But the way we design drugs is very different. We start with a medical problem, the science, and we move backward to say, what do we need to do in terms of components so that the product has a high chance of working like CMV. Most pharma companies doing vaccine have tried the CMV vaccine because it has been the number one priority of the National Academy of Science for 20 years. And some vaccines went into Phase 2, but they failed because efficacy was too low. Why? They only coded for the GB antigen. But it is well known by scientists that the virus can also get into human cells if you have a pentamer. So it was believed in the industry that if you don't have a pentamer you have no chance, but a lot of pharma company because they only could do the GB because the pentamer, as the name says, it's five proteins that have to come together. So good luck. We were competent to do that, but they still went into the clinic. This is the type of things we will not do because we have so many other things we can do where we think the science makes sense to increase the chance of a drug to get to market. And we have a couple of questions from the audience here. Can you talk about how Moderna thinks about original antigenic sin or immune priming with respect to COVID? Okay, so I think the question is really around the different populations, because what I think is quite unique about this virus versus over virus that we are dealing with in the respiratory space is most of us and I think I can say all of us in this room have never seen the virus as young people, which is why I think people who think that the need for boosting in the elderly won't be there. I just don't understand the science. We believe that because we have not seen, again the older ones in the room. We have not seen this virus in our early years of life, especially teenage years, with a very strong immune system and memory that the need for boosting the subjects are going to be very important. Okay. The next one here is, it has got a statement and a question. Moderna's technologies can change how we do gene editing. You established a great collaboration with Metagenomi. Can you tell us more about how that's going and what your plans are to go to tissues beyond the liver with LNPs or other delivery systems? Sure. So I think there's two questions in there. First is about increasing the application of mRNA. So as you say, over seven modalities use different lipid or different RAT administration like the lung, liver and so on. So we're investing large amounts of money to invent new modalities to go to new cell types. And we can do that for either using mRNA to code for protein as a therapeutics or going to the -- part of the question around gene editing. We can use the mRNA to code for an enzyme that's going to do gene editing. While we have all been excited about CRISPR-Cas9 system, because I'm not aware of any technology that human has touched where the first version of a technology is the best one. We think that it's just the beginning of a very exciting time for science and biology to find different gene editing systems. And that's where kind of metagenomi comes into play, where we want to figure out for different cell types, but actually for different jobs to be done by the enzyme where you might want to use different enzymes. We believe that one thing to do -- one tool to do everything might not how you build a house. And so we are very long in genomics. We have a group that soon is going to be up to 200 people. They are leveraging the entire Moderna infrastructure. So they design mRNA for new gene editing enzymes. And it goes through the same robots that makes everything else that we use for the portfolio and we can move things to the clinics very quickly because the idea here is the same he's using the same delivery system, using the same mRNA just to do gene editing versus just making the human protein. So we think that if you look at the level of investments we are making in gene editing and the infrastructure, we have a Moderna in research, development and GMP manufacturing that potentially in a couple of years from now, we're going to be actually a very large player in gene editing. Maybe switching to PCV. I see we got the encouraging top line results. Can you talk a little bit about where you see this product going, whether it's what tumor types or what other settings? Sure. So given the data and how we think it's a very profound impact. And as you know, the study was powered and randomized and kind of where the P value and the hazard ratios are and so on. We and our colleagues at Merck are really excited about the technology. We've shown and presented ASCO in 2019, I think, â18, â19, I think, the fact that we were able to get T-cells that did not recognize epitopes coding in our products by taking the blood of cancer patients before dosing our product and taking their blood after several injection and showing that then the T cell recognize the epitope we know we coded in our products. So we think that were mechanism of action. Now we have clinical outcome and so we believe this should be applicable to a lot of tumor types across the board. We're going to, of course, start where KEYTRUDA works, but we've had discussions with our colleagues at Merck to say what type of tumors will actually KEYTRUDA did not work, but it might make sense to go back because maybe by combining personalized cancer vaccine to KEYTRUDA, you might get the immune system to the right place where you can have a clinical impact that is beneficial to patients. And then we want to also go earlier in disease. When we want to go later in disease, could you think I'm kind of brainstorming for a minute. It's not forward-looking statements. Could you, for example, with the improvements in liquid biopsy, could you see a world where you try this combining with product like Grail and others, where you basically through blood work figure out some mutation that you got in the vaccine that you basically give very early on. Because we really believe, given what is known about immunology that getting younger patient and much earlier in disease should lead to better outcome because of what happens to the immune system through the disease progression. And so we're going to be creative, we're going to be bold in terms of how many things we do. The great thing with Merck, as have shown the world with Cathedra, they were not shy to try a lot of different studies at the same time. I think that experience and also what's happening with the product patent expiry that they have on their hand and our belief in the science of M&A and the balance sheet that we have. I think you have two companies, and I spoke to Rob Davis, the CEO of Merck, several times in the last few months. We are both very eager to be really bold about what we think this can do for patients and as a consequence, creating value for shareholders. Sure. So if we don't hit on the first interim, then we keep going. The study is not going anywhere and will be for quite a while to monitor people for much more than the 12 months required for filing. Because how the statistics works, it's not because we missed the first interim that necessarily we have a bad efficacy. And if we hit it and we have vaccine efficacy, I think the thing we're going to be looking at is, first, what's their efficacy against disease because the vaccine that have published data so far I think have a very good 80-ish percent protection against hospitalization. But I think -- I hope one could do better on the efficacy against disease because anybody who gets a vaccine will, of course, not to get hospitalized, but so we hope not to get sick. So I think a prevention of disease is going to be important. And then there is a tolerability profile. One of the vaccine that has already got data out there is using a pretty strong adjuvant. And so those are the three things I think we are going to be looking at, VE against severe disease, VE against mild disease and tolerability. That should come very soon. And they're not going to say days or weeks, not months. I mean the team is analyzing over data and so on. So when everything is good at QC, we will release it. Okay. You've also got a number of efforts ongoing in rare diseases in addition to vaccines, in addition to oncology. Where do rare diseases fit in kind of Moderna's strategy? I think it goes back to the same theme, which is, we want to use this technology to help patients. And if you think about those rare genetic disease in the liver, those kids and those parents have no hope. They have an enzyme that you and I have that they're missing. And every time they just get running nose, they get a viral infection or something. The parents rush to the hospital, the kids in near ICU and they might lose their children. That's the [indiscernible]. They try through diet and other things to minimize the risk, but every decomposition event could lead to there for those children. And because of some of those disease leads very high level of acid, you have a lot of brain damage every time you have an incident. And so the way it fits the strategy is we can help patients because the biology risk on rare disease is very low. If you think about cancer or HIV through the roof, but rare genetic disease that have single mutation are pretty low biology risk. And if we can do it once to get mRNA into the hepatocyte of a liver, then the next time we just change the sequence and we go again. So could you get a couple of dozen drugs? Some might be in $1 billion, so maybe $500 million, maybe $200 million or $400 million because of the size of the market. But if you don't need to build any plant for it, if the drugs are going to be developed very quickly, if once year on the market, it's going to be very hard for anybody to come behind us in terms of doing a study because it will be unethical to take kids out of a drug working. And until genomics really works really well, you might have those kids forever and the new born kids with those disease. And as we work on genomics, we might be able to go back to offer parents and doctors and the patients have repeat dosing like every two weeks like enzyme replacement therapy using mRNA to call the protein like what we did today, and or propose a gene editing solution because we know how to get into the same cell type. So that's a bit how we see the strategy. But like you see Vertex, we talked about it, going back with an mRNA solution to treat the patients that they could not treat using the current products. We're trying to really obsess both patients and the families and say, how do we help them and how to create the right product or the right products for each disease? And then we think we'll create value on our way because, again, small clinical trials that are pretty quick, no plans to build. So if you think about just the economics of rare disease for Moderna, it's actually extremely attractive.
EarningCall_1348	Good morning, everybody. I am Chris Schott at JPMorgan and it's my pleasure to be hosting a fireside chat with Joaquin Duato, Chairman and CEO of JNJ today. So, Joaquin, Happy New Year and... Thanks for -- thanks for joining us. I thought I might just kick-off the conversation, you're about a year into the CEO role and let's just hear somewhat your top priorities for the Company as we think about 2023 and beyond. And kind of what you're most focused on in the role right now. Thank you, Chris, and thank you for inviting us, Johnson & Johnson to participate once again in the conference. So, the overarching goal for Johnson & Johnson, it's to be able to deliver sustained growth for patients and shareholders and that's something that we do while being squarely focused on the patient in everything we do, and also working with the values of our credo as we have done during a long period of time. So, when I think about that and I think about Johnson & Johnson being one year in the role of CEO, I always wonder how can we sustain the success and the reputation of Johnson & Johnson during that long period of time, not only in 2022 or 2023, but in this decade and beyond. And I always think Johnson & Johnson has to evolve. So, when you think about our decision to separate our consumer business and create two new companies, the new Consumer Health company and the new Johnson & Johnson around pharmaceuticals and medical technology, you have to think about that in the context of the evolution of Johnson & Johnson to be able to deliver more value and to be more competitive. So that's what we are trying to do. Deliver more value and be more competitive. So my two priorities that I stated back in '22 were, how are we going to the drive more competitiveness in the new Johnson & Johnson, in MedTech and Pharmaceuticals? How we are going to be progressing towards the separation, the successful separation of our Consumer Health business. And I believe as I'm going to describe that, we are well on our way for both. When it comes to the new Johnson & Johnson and our intent to be market leaders and to deliver above market growth, we are doing it both from a commercial perspective and also from an innovation perspective. When I look at MedTech, year-to-date September, our MedTech business is growing about 6% that is above its competitive composite. And I think it's particularly remarkable for a franchise the size of our MedTech business with $27 billion most of the companies that are growing in that ZIP code of 6% they are half or a third of the size of Johnson & Johnson. So I think it's remarkable the evolution of our MedTech business and the type of our market growth that our MedTech business is delivering. When it comes to pharmaceuticals, the year-to-date growth in September was 8%. Clearly, our market growth is the 11 consecutive year that our pharmaceutical group is delivering our market growth and it's a remarkable performance that has driven consistency around time. So from that perspective competitively, we are doing it in 2022. So if I move to how we are executing in our pipeline to continue to sustain this growth into the future, two comments there. One, we have had some interesting approvals lately in Pharmaceuticals with TECVAYLI, our BCMA CD3 bispecific, which is already approved. And also the filing of Talquetamab which is our GPR C5D CD3 bispecific also in relapsed refractory multiple myeloma, which is going to create, which I believe is the best multiple myeloma portfolio that we - I'm sure we'll have an opportunity to discuss later. So we are executing well in our pipeline in Pharmaceuticals in 2022. And then when I go to MedTech, we've been able to continue to advance our pipeline. As a matter of fact, it's not only the number of new product launches in MedTech that we have, but also how we have increased our pipeline value in MedTech. When it comes to the number of projects in our pipeline that have more than $100 million of net present value, we have more than double during this period. And obviously in 2022, we also completed the acquisition of Abiomed, which is going to create a new leg of growth for Johnson & Johnson, a new platform. So we are proud of what we accomplished or we are accomplishing in 2022 both competitively and in our pipeline. So being true to the priorities that I stated. And the second priority, which is the separation of our Consumer Health company, which we have announced that we're going to call Kenvue, by the way. We've made a lot of progress in 2022. We have appointed CEO and CFO, Designate, Chairman for the company, Larry Merlo, that used to be the CEO and Chairman of CVS, And since January, we're starting to operate our consumer business as a company within our company at Johnson & Johnson. And also we have filed with the SEC our S-1 Form in which we indicate that our preferred form of separation is an IPO. So we've made a lot of progress. There's not much I can talk about the consumer separation as you know because of the moment we are but we remain on track for completing the separation and a public market exit in 2023 and we have really meet all the milestones that we told the Street that we were going to accomplish in 2022. Great, great. One question I get with J&J creating a more focused portfolio with the spin. Does that help or can we expect an acceleration in some of your strategic priorities as I think about either pharma or the MedTech business? Thank you. That's a great question. And I normally say that the biggest opportunity for Johnson & Johnson is taking advantage of creating a more focused company around MedTech and Pharmaceuticals. Moving from a three sector company to a two sector company has advantages. It makes Johnson & Johnson a simpler company. It helps us simplifying the company. And when you simplify the company, you make it nimbler, you make it faster, you make it more competitive. And for us, it's only an acceleration of the strategic priorities that we have in Pharmaceuticals and in MedTech that we have outlined. In Pharmaceuticals, we have clearly outlined our goal to be able to continue to grow our market and we have stated that we plan to grow every single year from until 2025 with positive growth even in the phase of the loss of exclusivity of STELARA and that we plan to land $60 billion by 2025 in Pharmaceuticals. This is going to be accomplished mainly through the strength of our existing portfolio, and I'm sure we'll have opportunities to discuss about that later. But also through the new product launches that I described like SPRAVATO, CARVYKTI, TECVAYLI, and then the pipeline that we announced that we have five products that will be launched in this period which all of them have a big year sales potential of more than $5 billion. And to enumerate those products, CARVYKTI, our BCMA CAR-T is one of them. Followed by the combination of Rybrevant, Lazertinib in EGFR mutant non-small cell lung cancer. Rybrevant is a bispecific EGFR c-MET antibody and lazertinib is an oral EGFR inhibitor. Then the next product is our Factor XI milvexian that I will have the opportunity to talk to about that later. Then nipocalimab, our FcRn antagonist in autoantibody mediated diseases. And finally, our bladder cancer platform TARIS. TARIS is a drug eluting device, which is implanted in the bladder by cystoscopy that we believe it's going to be able to create a new option for treatment in bladder cancer, which is a very frequent cancer more than half a million people has bladder cancer. Unfortunately, and it's one that is clearly an underserved area. So those are areas of excitement for us in our portfolio in Pharmaceuticals. When it comes to MedTech, we'll continue with our stated goal of being able to go into higher-growth segments, and that applies to higher-growth segments within our existing markets of surgery, orthopedics, vision and cardiology, and also higher adjacencies as we have done with Abiomed entering the high recovery area. Our focus now in R&D organically is in those areas. We are trying to identify those areas within our existing markets that are faster growing. For example, we are talking about orthopedics, we are going into [indiscernible] knees, into extremities, into robotics, into areas of the orthopedics market that are faster growing. We are talking about vision, we're going to presbyopia. We have a new line of techniques intraocular lenses for cataract that provide better quality of vision. When we are talking about cardiac ablation, we are launching new treatment and diagnostic catheters. And when we are talking about our surgery portfolio, we're trying to digitally enable our stapling and our energy group. So that is the type of focus that we are putting in our MedTech business. And as I said, I'm very pleased of the cadence of innovation that we have in our MedTech business and also on how much we have increased the value of our pipeline in our MedTech business. It's really changing the profile of our MedTech business. We continue to have our strength in surgery and in orthopedics and our global leadership position there, but we are moving into faster growth areas in cardiology and [ambition] too. Absolutely. Maybe digging into the pharmaceutical business first. I guess, a little over a year ago, you put out the $60 billion target by 2025. Can you maybe just sitting here today, how confident are you in J&J's ability to kind of hit that target as you think about what's been derisked so think about what the commercial profile programs have been doing. Thank you. And thank you for the question because it's one that I get frequently asked. We continue to drive towards our $60 billion goal in pharmaceuticals by 2025. And we are confident that we're going to be able to exceed current strict expectations when it comes to our 2025 sales. I mean we'll have an opportunity now if you want to talk about the disconnect. But let me start with the excitement of the growth areas that I see, right? Let me start with the positives first. So, I mean, where is that growth going to come from? I have said many times that the growth is going to come from mainly through our existing portfolio, through the one that is already derisked. As you mentioned, and that's the key area of growth for us. So our existing portfolio, what products are we talking about? We're talking about DARZALEX continue to grow in first-line multiple myeloma. We are talking about TREMFYA, which continued to grow share in psoriatic arthritis and in psoriasis, and we are well in our way in our clinical development of TREMFYA in Crohn's disease and in ulcerative colitis with completion dates of our studies in 2023 and '24, respectively. We are talking about our pulmonary arterial tension portfolio with Uptravi and Opsumit that have been affected by the pandemic, but they are going to continue to come back. And we are talking about ERLEADA, which is our androgen receptor antagonist for prostate cancer. So those products are going to be carrying the bulk of our growth into 2025, mainly through indication expansions that we can discuss later and also through continued to gain share. We're also talking about our new product launches, SPRAVATO, our medicine, our NMDA agonists for treatment of depression, CARVYKTI, our BCMA CAR-T and also TECVAYLI, which it's been already approved, our BCMA CD3 bispecific and most likely the addition of Talquetamab, our other BCMA bispecific. And then more in the later part of this period, we'll have the launches of our -- some of our 5 million portfolio products like nipocalimab, the combination of Lazertinib, amivantamab and the TARIS platform. So those are the reasons to believe on the fact that we will be able to get into this stated goal of $60 billion. Now if you want -- I can go more in detail into the -- into every areas. I just really one -- quick one to follow up on that. When I think about the disconnect you see versus '25, it sounds like from the comments, it's maybe more about the expansion of indications for already approved drugs as compared to the pipeline seems like it's maybe beyond '25 is where that becomes I mean that's the story. Let me start with the growth areas. I mean, the biggest area of growth clearly is our multiple myeloma portfolio. I think we have a best-in-class multiple myeloma portfolio. What we're trying to do with our multiple myeloma portfolio is to change the paradigm from treating to progression to treating to cure. And that is going to encompass being able to create combinations and treatment sequences that are going to drive into cure. That's exactly what we are doing now with CARVYKTI, with our CAR-T 2 studies. And one of the studies, CAR-T 4, which is treating patients with one to three prior lines of therapy, it's going to read soon. So that's going to give you an idea of how a medicine like CARVYKTI could move into elements of therapy and could become a main stay of treatment of multiple myeloma. So that's a clear area of growth that I think -- the Street needs to think about how our entire portfolio in multiple myeloma or DARZALEX in first line, CARVYKTI, TECVAYLI and Talquetamab cannot be something that is cannibalizing each other, but creating the treatment paradigms, which are different by combining and sequencing different medicines there. So that's a growth factor that we have to take into consideration. If I continue on the growth side that I think is exciting for me, RYBREVANT plus Lazertinib, that's an exciting area for us. It's a large area, a first-line EGFR mutant non-small cell lung cancer. We have a Phase 3 study, which is called MARIPOSA, which is comparing Lazertinib plus RYBREVANT versus Tagrisso in first-line EGFR mutant non-small cell lung cancer patients. The study will read in 2024. We -- as it's an event in study, there's a potential for an interim analysis in 2023. And that is a very large market, as you can imagine, and we believe that could be a very significant opportunity for us from a growth perspective. If I continue with nipocalimab, our FcRn antagonist in autoantibody-mediated diseases, again a large area of opportunity. There's more than 200 million people globally affected by autoantibody-mediated diseases. We are now in Phase 3 in warm autoimmune hemolytic anemia. It may lead in 2023 too. We may see results of our rheumatoid arthritis study Phase 2 in 2023 too, and we'll see results of our myasthenia gravis study of Phase 3 in 2024. So that's another area of excitement that I believe it's going to be important for us. If I continue in this area, TARIS, the TARIS platform, that's an area that the Street doesn't even have in consideration, right? Bladder cancer is a big problem, more than 0.5 million people with bladder cancer. We are already in Phase 3 with TARIS with gemcitabine. And also, we have a study that will read in 2023, Phase 2/1 in patients that are undergoing radical cystectomy. So, you're going to see more about TARIS, and that's going to help you profile our TARIS platform in bladder cancer, which is a clear area of underserved patients. And then finally milvexian. We believe that milvexian is going to be a big opportunity. We are developing milvexian in partnership with BMS. We are going to be moving into Phase 3 in three indications, atrial fibrillation, acute coronary syndrome and at the same time, stroke. And look, coronary disease is one of the major causes of death and hospitalization. I do not need to explain to you what the potential of an oral anticoagulant is. And we see there in milvexian in our Factor XI, the potential of how our medicine that is going to have same or better efficacy that Factor Xa's with a better bleeding profile, which will enable us to expand into multiple indications. So clearly, a very important product for us, milvexian. So those are exciting areas for growth. that I think we need to consider. Now let me tell you what I think the Street is missing to because some of these things were known. So what do I think the Street is missing? Number one, it's missing the potential of our multiple myeloma portfolio. And I think it's because the Street is thinking cannibalization, and we are seeing treating to cure and combinations of different products there. And that's the type of clinical data you're going to see. You were at ASH this year. You showed the type of clinical studies we have with CARVYKTI, with TECVAYLI, with Talquetamab, they are creating new lines of therapy in this area, and I think that will be recognized as time goes by. What is the Street missing too? The Street is missing the potential of ERLEADA, our androgen receptor antagonist. ERLEADA is approved in metastatic castrate-sensitive prostate cancer and in nonmetastatic castrate resistant prostate cancer. But the next level of growth of ERLEADA it's going to be in high-risk, localized or locally advanced prostate cancer. And we have two Phase 3 studies there. One of them is going to be ready in 2023. The next one in 2024 in patients that are undergoing radiation or prostatectomy, and this is going to create a new leg of growth for ERLEADA that is not yet recognized by the Street. The Street is also missing SPRAVATO. SPRAVATO is the -- one of the only medication approved for treatment-resistant depression. It has shown significant efficacy very quickly in the first 24 hours and long term. So far, we have not disclosed the sales of SPRAVATO, and you could expect us disclosing sales of SPRAVATO this year, which is going to increase the confidence on SPRAVATO. So SPRAVATO is another product that the Street is missing. I think the Street is missing the strength of our Pulmonary Arterial Hypertension portfolio, specifically both Uptravi and Opsumit, they were clearly affected by the pandemic because there were less new patients because pulmonology's were occupied diagnosing and treating COVID, but now you're going to see that changing, and you're going to see a new leg of growth in our Pulmonary Arterial Hypertension portfolio. And then finally, there's another disconnect, an easy one, which is with SPRAVATO, our Factor Xa. I mean the Street is modeling a loss exclusivity in the short term, and we see the loss of exclusivity of SPRAVATO, more like second half of the decade event. So, there's a number of things that the Street is missing that we hope we'll see more in 2023 as we will start to disclose sales of SPRAVATO, most likely sales of CARVYKTI that are going to increase the conviction of the Street on the potential opportunities that we have to be able to drive towards these $60 billion stated goal in 2025. It seems like a lot of healthy drivers to offset â[indiscernible] exposure. Just a couple more in pharma before going to MedTech. I guess one of the questions I have is on business development priorities. It seems like J&J has had a tremendous amount of success, I think, kind of identifying either partnerships or acquisitions of kind of like right after proof-of-concept and really developing them. Is that still the focus of the organization? Or I guess as we get closer to STELARA, is there maybe more of a focus on looking at things that are closer to market or even in-market assets to acquire? External innovation and business development, it's been always a key source of growth for Johnson & Johnson of strength for the company. About 50% of our growth comes from external innovation, and we see that continuing into the future, just to be clear. We are well equipped in order to be able to identify onboard and develop external innovation opportunities. We have a tremendous infrastructure in order to be able to do that. On one hand, we have our innovation centers that are scouting scientific opportunities in the key hubs in the world in San Francisco, in Boston, in Oxford Cambridge, in Shanghai. On the other hand, we have our incubator network that we call JLABS. We have more than 500 companies and residents. It's really another source of insights for us. I mean when I was driving yesterday, I saw many companies that started in our JLABS incubator network. Then we have our development corporation, which is one of the oldest and most successful development corporations. And then our business development group. So when it comes to be able to have the capabilities to identify and onboard opportunities, we are well equipped. And all these teams work in close collaboration with our therapeutic area, R&D leaders and also with our global commercial strategy lead. So we are well prepared in order to be able to do that. As you mentioned, our success -- and we have many examples of this success has been in opportunities that we identified earlier on. Immediately post proof-of-concept or before proof-of-concept. And that we've been able to drive significant growth, thanks to that. Now does it mean that we are adverse to other types of M&A opportunities? No, we are not. And we did it in the past with Actelion, and we are open to consider this other type of M&A opportunities. Now we have a disciplined capital allocation strategy and discipline metrics in order to evaluate those opportunities. And normally, these companies that you are referring are already well run -- do have a fair valuation from the Street, and it's more challenging and they require higher -- but we are open for all different kinds of opportunities. While we recognize that we have been most successful when we have been able to identify opportunities that were earlier on that were in a space of high unmet medical need that were clearly differentiated in which we have internal capabilities and expertise for evaluating and developing these medicines. And that they were in the spaces that were not overly crowded. So that's our sweet spot, and that's where we will continue to look for opportunities, not adverse to larger ones. Now I want to make a comment on that because it was reported in the press -- in a press release that Johnson & Johnson was one of the companies that was in preliminary discussions for the acquisition of Horizon Therapeutics, right? And I wanted to comment on that this disclosure was due to the rules of the [indiscernible] take over Board that requires those disclosures. And due to these rules, we were in the press release. Now after attending the market presentation, we subsequently decided that this acquisition didn't meet our strategic criteria. And as a consequence, we never entered into diligence, never put a bid for Horizon Therapeutic. So I think it's important for investors to understand that. Horizon Therapeutics was not a company that was in the sweetest spot of our strategic criteria. Okay. Okay. Appreciate that. Switching over to the MedTech business. I know your background is more on the pharma side. But I think from the time you became CEO, you highlighted this is kind of one of your focus areas. So I guess, share your broader thoughts on the franchise today? And do you feel like a business that's positioned to kind of hit that kind of above-market growth that you've been targeting at this point? Yes. So first, I want to eventually be considered also a MedTech person too. And I have stated that a very important part of my tenure would be to make sure that our MedTech business is a best-in-class franchise. Now the thing is, when I say that, I tell you, they are already doing that. And I think that's important. I mean, when you look at our growth year-to-date in September, MedTech is growing more than 6%, which, as I said, it's more than the competitive composite. And I think that they have had a tremendous evolution from being -- growing low single digits five years ago to be now in a ZIP code that only smaller companies are able to achieve. This has been a combination of things that I'm proud that I see in MedTech. On one hand, they have been able to do very well commercially executing. I mean, when I look at the 12 platforms -- now we have 12. Before we had 11 now with Abiomed, we have 12 platforms of more than $1 billion. And the majority of them we're holding or gaining share. When I look at our share evolution and the latest data I have is still 2021, we have our best share evolution in the last five years. So they are commercially executing really well. And I think that has to be appreciated. That's why they are growing more than the competitive composite. But I also -- I think that we are executing very well in the -- in our pipeline and how we are moving our business from markets that are, let's say, more stable to markets that are faster growing. As I said before, look, I mean we're moving our orthopedic business into faster-growth areas. And we are continuing to move our surgery business into robotics and to digitally enable surge and staples. We are continuing to move our vision business into areas like presbyopia, which is faster growing. And we are moving into other markets like with Abiomed that are faster growing. So the profile of our MedTech business is also changing, moving into faster growth markets. And we plan to continue to enhance that, right? So I'm proud of the evolution of our MedTech market -- both our MedTech business, how we have been able to improve our commercial execution and how we have been able to improve our cadence of innovation and the new products that we have introduced. And I'm confident that moving into 2023, our MedTech business will continue to deliver competitive growth rates. And as that topic of competitive growth rates. It seems like it's been a few years since we've had a normalized year for MedTech. What do you consider kind of a market growth rate as we think about the kind of overall industry going forward? So that's a good question. And when we think about the evolution of the MedTech market. The normalized growth rates would be somewhere between 4% to 6% that I would consider the normalized growth rates. The headline for me on the MedTech market, I'm very optimistic about the MedTech market. I believe that MedTech is a very healthy area of growth for the market and for Johnson & Johnson. Now in the short term, you also have to accept some variability due to the COVID situation. And when people ask me to predict that, it's very difficult to predict as you know, right? So I mean, I think we have to be able to leave with the variability that we'll have in the short term due to COVID, which is having a lingering impact, not only because of the number of cases and the hospitalization that COVID drives but also because of the impact in hospital capacity that it creates. So we'll have to live with that variability that COVID introduces. And that variability is going to vary geographically depending on the moment. But overall, the headline for me is that the MedTech market has significant potential and the MedTech market will continue to grow into the future, and it's a great area for Johnson & Johnson to continue to invest. Great. Talking about the Abiomed acquisition, I guess when you were looking at the range of potential companies, the company could add to the portfolio. I guess what brought you to that asset? And I guess, how does that fit in with your broader priorities within the MedTech business? Thank you. So, I mean Abiomed was a perfect feed into our strategic desire of entering into adjacencies with higher growth and at the same time with platforms that have A) playing a significant unmet medical need like heart failure, which is one of the major causes of death and hospitalization; B) has significant durability. Abiomed has a number of pipeline opportunities both in terms of new devices and new indications that are going to create significant durability. I would tell you, decades long durability. And at the same time, it's an area where Abiomed enjoys a significant competitive advantage. So it's years ahead of potential competition. So when we think about something to move for the long term, not only to deliver growth today but also to create a new leg of growth for Johnson & Johnson into the future, Abiomed really squarely fit that bill. So clearly, when we were thinking about what was going to be able to be significant in adding to our portfolio in MedTech, that it was going to be a high-quality company with a high-quality team that was going to create a new leg of growth for Johnson & Johnson. We didn't have any questions that Abiomed was the right choice. And I'm very optimistic about the future of Abiomed within Johnson & Johnson. We just closed the transaction. We have welcomed the Abiomed team into Johnson & Johnson. It's a team that has very similar cultural values to the Johnson & Johnson ones, I think it's going to be a great cultural feed and a very synergistic acquisition for Johnson & Johnson, in which we are going to be able to put all our global footprint in order to expand the therapy, but also all our clinical development engine that we have in Johnson & Johnson to support the development of new indications. In this case, there are PMAs with significant clinical development plans that Abiomed has. So for us, it's been a reason for optimist to be able to complete a transaction like Abiomed. And I think I tried to telegraph during this year that, that was the type of acquisition we were driving through, and this clearly fits squarely what we wanted. And then in terms of, I guess, what's the next on business development within MedTech, I mean, can we think of another larger transaction like Abiomed? Or is it more likely we're going to see Johnson & Johnson do smaller, more tuck-in type of transactions? Thank you. So stay in Abiomed, look Abiomed, now we are starting with the integration. It's going to be accretive to our growth in MedTech year one, and at the same time, will be accretive from an earnings perspective to Johnson & Johnson in 2024. So that's the picture for Abiomed moving forward. When it comes to MedTech and M&A or external innovation, I mean, we -- as I commented in pharmaceuticals, our sweet spot it's always going to be in identifying companies that we can create value. Many of them would be tuck-ins. Like, for example, we have done in extremities with crossroad extremities, and we will continue to look for opportunities in that area that would complement our current portfolio. But we're also going to be looking for other opportunities that are going to be close to the areas of focus that we have today. We have always believed that being close to our areas of expertise is a success factor because we are able to identify better what value this company has and also we are able to add value to expand those therapies. So what are our areas of focus? i-Health remains an important area for us. We have a terrific position in contact lenses. We are the number one. We are also now in surgical vision. So i-Health is an area of interest for Johnson & Johnson overall. Orthopedics remains an area of focus for us, identifying higher growth segments within orthopedics. Surgery, specifically robotics is an important area for us, and we are trying to digitally enable all our portfolio in our surgery space. And then finally, cardiovascular, as we have stated, atrial fibrillation is a growth engine for us and now with the addition of heart failure, but we are continuing to look into the cardiovascular space. So those are the areas of focus for us and we'll continue to be disciplined in looking for opportunities in which we can create value, that serve a significant unmet medical need, like heart failure and for investors in which we have a disciplined financial approach, consistent with our capital allocation strategy, and that's what we'll continue to apply. You can expect from us that we will continue to look for opportunities, but we are always going to maintain a disciplined capital allocation and financial discipline when we look at these opportunities. Great. Maybe turning to the P&L. It seems like we're heading into a year with a lot of moving pieces. I think about the spin, we got the Abiomed acquisition. We've got potential biosimilar STELARA. You've talked a lot about the growth drivers. So I guess, how should investors be just thinking about the pushes and pulls in J&J's business as we go into this? Thank you. Thank you. That's a great question. And as you know, we are now working in completing our Q4 results, and also in generating what will be our 2023 guidance. And we'll have our earnings call -- Q4 earnings call in January 24, I believe, and we'll be able to provide more details about that, right? So when I think about 2023, when I see -- when I look at the context that we are in, macroeconomically that I read in the press every day and that the audience, I'm sure reads in the press every day with the different pulls and pushes that we have there, inflation, higher cost, then more specifically as you were discussing the situation with COVID-19 that we're seeing the situation in China. But broadly, we see also both in MedTech and pharmaceutical presses in price, BVP in China, austerity measures in Europe, changes in the channel mix in the U.S. When I put all that into consideration, I see uncertainty moving into 2023. So while I remain very confident of the strength of Johnson & Johnson to address these challenging macroeconomic conditions, I have to look realistically at 2023, and I have to be cautious about 2023. So that's the first thing I will tell you. I have to be cautious about that. Grounded on confidence that Johnson & Johnson normally it's able to do better in situations where you have macroeconomic challenges, but I have to be prudent about 2023. What do I believe? Look, I think that -- you are going to see the MedTech market continue to recover, as we discussed before, especially as the year progresses, fueled by new procedures. So I'm optimistic about that. And when it comes to pharmaceutical, what I believe pharmaceuticals will have a healthy growth, it may be a softer growth from a market perspective than the past years. So that's the macro picture that I see for the MedTech markets and the pharmaceutical market. In that context, why do I see for Johnson & Johnson? I see our pharmaceutical business and our MedTech business continue to be able to deliver competitive growth. That will be true for MedTech, as I described before, we will continue to deliver competitive growth into 2023. And that will be true also for pharmaceuticals, where we believe we will be able to drive in 2023 above market growth once again, even in the face of the STELARA loss of exclusivity. So that's the picture that I see, and that's how I see the situation. Now when I think about 2023 and specifically in pharmaceuticals, I get many questions about how to model 2023, given all the push and pulls, right? So let me give you some ideas there. Look, on the STELARA loss of exclusivity, look it's difficult for me to give you a view there. I think there's uncertainty. There's different models that you can use. You're going to see HUMIRA model, you have the REMICADE model, so it was something in between there. And the timing is also uncertain because we don't have any biosimilar data approval. So that would be more for you guys to guess -- range it comes there. I mean I see some areas of disconnect. For example, I think that you guys need to take a look at the REMICADE erosion curve, which is accelerating globally. I think that the Street has to take into consideration the loss of exclusivity in Europe of ZYTIGA and our injectable antipsychotics there. That has to be taken into consideration. And at the same time, I see overstated COVID-19 vaccine sales into 2023. We don't see nominal sales or material sales of our vaccine in 2023. So that's -- those are some considerations for modeling that I think -- the Street should look at. Overall, I am -- as I said 2023, but confident that we'll be able to deliver competitive growth. And if I go to my other stated priority, confident that we will be able to complete the separation and the public market exit of our consumer health company. Johnson & Johnson, as I said, it's been always able to do better in terms of macroeconomic uncertainty. I think it was clear in 2022 that we were able to do that. When it comes to capital allocation, which is another question that we get very frequently in 2022, we hit in all our priorities. We invested in our business. We were able to increase our dividend for the 60th consecutive year, and we plan to continue to increase our dividend for investors to know in the new Johnson & Johnson. We also invested in M&A with the acquisition of Abiomed, and we did a share repurchase. So very few companies have the strength of the balance sheet and the word of health to be able to hit on all these priorities in a single year with the macroeconomic uncertainty that we see. So we did in 2022, and I'm confident that we'll be able to do it in 2023 and beyond.
EarningCall_1349	Good afternoon everybody and welcome to the Danske Bank Q4 2022 Pre-Close Call. My name is Claus Ingar Jensen, and I'm Head of Investor Relations. With me, I have Olav JÃ¸rgensen, Katrine StrÃ¸bech, and Nicolai TvernÃ¸ from our IR team. And please note that this call is being recorded for compliance reasons. And the script used for this call will be published on the Investor Relations website after the call. [Operator Instructions] In today's call, I would like to highlight relevant public data and macroeconomic trends in our markets, as well as one-offs that you should be aware of before the start of the signing period on the 12th of January, ahead of the publication of our annual report on February 2. I will go through the P&L statement line-by-line and remark on capital at the end, afterwards, we will open up for Q&A session. But before we start and for the sake of good order, I would like to highlight the following. I will only answer questions related to already disclosed information and one-offs, as well as publicly available data as of the 31st of December, unless otherwise noted. In this connection, I wish to stress the developments in specific indices may not always have the same effect on our performance. I would like to start by commenting on the current macroeconomic outlook before we go through the line items. The environment overall continues to be characterized by uncertainty. Central Bank remains committed to bringing down the rapid rise in inflation, highlighted by the recent ECB rate hike of 50 basis points on the 15th of December with the Danish Central Bank following suit. Our most recent economic outlook indicates some additional uplift in Central Bank rates and although unemployment is expected to rise, we still see it being at a relatively low level. While the housing market has slowed down and property prices are down from the peak earlier in 2022, economic activity has remained good and household finances remain healthy, a good starting point for entering an uncertain year. That's it. Let's have a look on NII. As always, please note that the impact of currency fluctuations in the regions in which we operate and further note that Q4 has the same number of interest days as Q3. Regarding volume developments, we refer to publicly available sector statistics as the only externally available source of insight. We do note that the housing market has slowed down further, while up until the end of November, we saw more resilient business lending. For large corporates, we would expect the lending volume should normalize following the demand for liquidity facilities related to the energy price volatility that we saw in the third quarter. As we have seen throughout the year, please be mindful of the potential fair value effects on the reported lending volume at Realkredit Danmark when rates move up. For Q4, we have seen a slight reversal. As for example, the rate on 30-year fixed the mortgage bonds in Denmark has moved down during the quarter. Since the third quarter, 3-month STIBOR, NIBOR, and CIBOR have increased around 83, 91, and 129 basis points respectively, all on the basis of quarterly averages. Please be aware that such increases in STIBOR and NIBOR in particular will lead to higher funding costs, all else being equal. We have seen several Central Bank hikes during the second half of 2022 across the markets in which we operate. Please note that the two rate hikes in July and September of 50 basis points and 75 basis points respectively from the ECB and the Danish Central Bank will have full effect in Q4. We confirm current NII sensitivity of DKK 800 million to DKK 900 million per 25 basis points uplift across all currencies on average over the next 100 basis points. Further to the increases in policy rates, we have adjusted our deposit and lending rates for certain customers. However, as always, these adjustments will be implemented with a slight delay due to notice periods for certain products. For the vast majority of retail deposits, namely transaction accounts, the rate given to customers is currently at 0%. Turning to wholesale funding, we remain comfortable with our overall funding position and market access, which was underpinned by the strong demand for the euro and dollar benchmark issuance we have executed this week. In Q4, and due to the Estonia matter, we have refrained from issuing any senior preferred and non-preferred senior, as well as capital instruments. The only benchmark issuance in Q4 was the NOK6 billion covered bonds we issued at the 23rd of November priced at NIBOR + 58 basis points. In respect of our fee income in the fourth quarter, we have noted that activity has started to slow towards the end of the quarter. Our recent spending monitor highlighted that based on card data for Denmark, spending was down another 0.6% in November from the same period last year after falling 3.4% in October year-over-year. Additionally, we reiterate that the development in interest rates in Denmark has enabled some of our customers to benefit from re-mortgaging although this is leveling off relative to the activity we witnessed earlier in the year of 2022, and for Q4, it will likely be countered by a general slowdown on the housing market. Finally, in respect of activity-driven fees, business activity generally remained at a good level as indicated by public volume statistics. Activity remained subdued in the capital markets during Q4 with low issuance activity in primary ECM markets in particular. The development in investment fees will as always be subject to asset under management in particular. An important part of fee income in Q4 is typically performance used in asset management where a primary source of income is generated by fixed income products and this have been challenged throughout the year. We refer to Danske Invest website regarding benchmark performance for further details. Looking at trading income, please be mindful that Q4 is normally a quarter with low activity and also subject to fair value adjustments of specific portfolios, including Treasury and Northern Ireland. Spread un-callable, as well as non-callable bonds have reversed in Q4 from the levels we saw in the previous quarter and we have seen the same directional development for the yield spread between Danish and German government bonds. Regarding our insurance activities, please note that we have seen slightly better performing financial markets. And please note that when comparing income from insurance to the level in the preceding quarter, we took a one-off product-related cost of approximately DKK 150 million in Danica in the third quarter. Finally, regarding the merger of MobilePay, which affects other income, the transaction was approved by the relevant authorities as announced on the 21st of October in a company announcement number 14. The tax exempted one-off gain on the transaction is expected to be approximately DKK 400 million, which will be booked in Q4 and on the basis of the merger and the distribution of shares in the new parent company, Danske Bank will have an ownership share of 27.8%. And that concludes our comments on the income lines. If we look at the cost line, we would like to reiterate our guidance for elevated remediation costs for the full-year. And in Q4, we started to see additional inflationary pressure, particularly in the region of our main operational hub, as well as for utility and energy-related costs for data centers, for example. Other than that, we do not have any specific comments regarding our cost development, and we have no changes to our underlying cost guidance for the full-year when you disregard the impact of the Estonia settlement, the Danica goodwill write-down and the solution for our legacy debt collection case in the third quarter. If you should note, the slightly lower settlement amount then the 15.5 billion provision we had made in total by the end of the third quarter, which led to a small adjustment of the net profit outlook for the full-year. Specifically for impairments, we are mindful of the impact of the deteriorating macroeconomic environment and how that affects our macro model charges, as well as post model adjustments in Q4. Please note that our economists published their updated Nordic Outlook yesterday with lower growth forecast and a further revision of house prices and spending. In general, we remain comfortable with the quality of our lending book. We therefore do not have any immediate concerns with regards to the credit quality in Q4. Finally, please note that the Q3 number was affected by 650 million one-off impairment charge we took in relation to the accelerated solution for our debt collection legacy case. We have no comments on non-core. And then as announced on December 13, we reached the final resolution of the Estonia matter with the U.S. and Danish authorities with the financial impact in-line with provisions previously made. As part of the announcement, we adjusted the net profit outlook for 2022 to a net loss better than minus DKK 5.3 billion. And this concludes our comments on the P&L. Finally, our capital position will in Q4 be impacted by the entire net profit as a result of the Board's proposal not to pay out any dividends for 2022. We do not have any specific comments on the risk exposure amount besides noting that market risks remains subject to volatility in the market. And this concludes our initial comments in this pre-close call. Before we move to the Q&A session, I would like to highlight that we enter our silent period on the 12 of January. Shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on Friday the 13 of January end of day. Please note that we will publish our annual report on the second of February at 7.30 a.m. CET and that the conference call for investors and analysts will take place at 8.3 a.m. We are now ready for the Q&A session. If you want to ask a question, please use the ratio hand function. Thank you, Claus. Just two questions, please. On your comment about your macroeconomists have lowered growth outlook and house price assumptions, how should we see this in â I mean, how do you expect the 6 billion PMAs to be used? I mean, can you keep building buffers and buffers or is that sort of a requirement from the FSA that you keep building or should you actually start utilizing some of those buffers? Well, I think first of all, this is a comment meant for, you know due to the fact that we adjust our models according to, of course the outlook for future macroeconomic indicators and that's a normal part of the practice. And if we adjust our outlook downwards, that would mean that the â that will be model adjustments impacting the impairment line. On top of that, management have this question to add to post model adjustments if they, from a prudency point of view, believe that certain risks are not fully covered. But regarding the PMAs, so those were primarily booked due to COVID two years ago, now we know that wasn't used, and they were I guess, re-booked as recession provisions. So, if your lower GDP forecast leads to higher provisions, couldn't you say you're double counting or is there something else that you've become more worried about? I guess you said you didn't or you hadnât? No, I would say that we are not guiding specifically on any of the items, but when we change our assumptions in the model, we have to â eventually to adjust our impairments accordingly. And that is what we have done over the last couple of quarters. And that can, of course, go both ways. That depends, of course, of the direction. And as I said, if there is a need for the management to address some risk that hasn't been covered, they can do post-model adjustments. I think that's how it works. And as I said, we have adjusted our outlook for 2023 when it comes to house prices, but also suspending. And that could of course be reflected in the impairment number for Q4. Okay. Thank you. And then the first thing you said about normalized lending related to energy collaterals. I'm not quite sure I got the whole thing. Could you repeat that, please? Yes. What I said specifically is that we would expect the lending volume should normalize following the demand for liquidity facilities related to the energy price volatility that we saw in Q3. And I think when we discussed the development on corporate lending in the third quarter, we pointed to a number of factors. One of them were that we saw also an impact or increased lending due to the situation around a number of utilities, companies, and liquidity situation, margin calls, et cetera in the third quarter. And that is what we expect would be more of â we don't expect to see the same effect here, i.e. that lending volume should be more normalized. So, when you say that, do you mean that you actually have negative growth that these loans are running off or are you just saying that the growth rates will be more normal? Yes. The growth rates will be more normal. So that element that was a part of the explanation for the third quarter, will not impact the numbers in Q4. That is essentially what we are saying. But whether it's going to be a positive or a negative number, I can't say Jacob. Because there were also other elements in the third quarter explanation. Yes. Thank you. Jan Erik from ABG. Two questions on the NII. The first one on the transaction accounts. Have you said how much transaction account you have in the different kinds of contracts since you said itâs still zero rate on most of them? And have you seen any more competition during Q4 or probably to that on the transaction accounts levels? I think what we said at Q3 were that the migration between from transaction accounts into saving accounts were at a relatively low level at that time. And I think that was echoed by a number of other Danish banks. I would expect that we have seen some more migration into saving accounts over Q4. And we will, in the full-year report, publish the distribution between time deposits and transaction accounts. That's something we do once a year. Yeah. But we will not do that on a country basis, I have to say. Okay. When it comes to your equity and what way you have, sort of invested that, should we assume that you have most in the Danish kroner part or should it be allocated due to the different kind of areas that you already hold your bank accounts or bank lending? Yes. I think due to a change we made recently, it's more reflecting our exposure in the counties where we are operating in. Okay. Then finally on the cost side, just to understand the related cost levels. You talked about the inflation pressure on utilities, et cetera. Is that on top of the sort of the 25.5 billion underlying guidance before the [indiscernible] or is it included in that elevated levels, so to speak? I think we said that we stick to the underlying cost guidance for the full-year, but it's â the development is definitely notable. And of course, also a kind of indication that inflation is starting to have an impact on our cost, but we stick to the underlying cost guidance that we have provided at the third quarter. Yes. You certainly do just a â actually, two questions. The first one is on your guidance for next year and I saw that the Danish FSA was out specifying that as soon as you know your guidance for the coming year, you should release it to the market. So, my question is, are we going to see â will you guys come out sometime during January with your 2023 guidance release or can you keep it to the 2ndf February? How do you interpret these new rules? Well, the way we see it is that just before Christmas and in connection with the settlement announcement, we adjusted our return on equity target for 2023 from to the upper end of the range in 8.5 to 9. So, we see that as our guidance for 2023 so far. And of course, we can always detail that and that is what we expect to do on the second of February, but we do have a guidance for 2023. I think that's the key message from my side. Okay. Very clear. Thank you for that. And then second question, when I talk to your peers, they say that you are out offering positive deposit rates to on-demand deposit â on-demand corporate deposits, can you â what's the â first of all, of course, what's the number we should look at? And then also how many deposits are covered by these supposedly positive rates? Very difficult to comment on corporate deposits because they are by far, I would say, most of them are negotiated on an individual basis. So, it's always from a relationship perspective when we do re-pricing of significant corporate deposits. Smaller deposits from, what you can say, from SMEs, they are there, we haven't seen â there, we haven't seen any changes. But the other deposits, as well as rates for credit facilities and so on are always set on an individual basis. Okay. So, there's no way just sort of in ballpark terms, so we can get a little bit closer to the magnitude of it. No. And I think that's as it has been for a very long time that we are not able to put more color on the pricing on our corporate deposits and loans. Okay. Thank you so much for your questions and thank you for listening in. It looks like there is no more further questions So, I would just thank you for being here and wish you a pleasant weekend. Goodbye.
EarningCall_1350	Good morning, and welcome to the UnitedHealth Group Fourth Quarter and Full Year 2022 Earnings Conference Call. A question-and-answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. Federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the Financial & Earnings Reports section of the company's Investor Relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated January 13, 2023, which may be accessed from the Investor Relations page of the company's website. Thank you. Good morning, and thank you all for joining us today. Over the course of the past year, the extraordinary and dedicated people of Optum and UnitedHealthcare delivered strong, well-balanced growth, progress in developing our consumer-orientated capabilities and strengthened the many ways in which we deliver value-based care in multiple settings. Each of the five growth pillars we discussed with you at our November investor conference are powerful sources of opportunities on their own within large and expanding addressable markets. Yet what really unlocks the potential value we can provide to those we serve is the connectivity of capabilities across our enterprise. For example, this year, we expect 4 million people will participate in fully accountable value-based care provided by Optum Health, almost 1.8 million more than we served as we entered 2022. We're achieving this by connecting benefits, care and other services to support our patients. Many of these patients will have a Medicare Advantage plan offered by UnitedHealthcare, or one of the many other payers who are accessing Optum's expertise and capabilities in delivering this kind of comprehensive care. We will serve these patients in clinic settings, in their homes, integrating behavioral care, supported by our data-driven clinical incidents and next best actions, and all coordinated to provide the right care when and where they need it. Pharmacy is another area in which we are more deeply connecting consumers with our services. We engage 1 million people every day, finding the lowest cost options, managing their specialty drugs, offering vital in-person clinical advice at our community pharmacies, providing complex medication treatments right in their homes, or simplifying access through digital solutions in order to make the process uneventful for them. We believe this connectivity is a path to better outcomes for people and lower costs. It's also driving growth. By the end of 2023, we expect to have more than 750 community pharmacies, nearly 200 more than we had at the beginning of 2020. We continue to see the impact these services have at a very local and personal level, helping providers deliver more complete care and better outcomes, including medication adherence rates, which are about 90% compared to the 50% U.S. average. Our pharmacists are able to take the time to get to know their patients' treatment plans and support their medication management, collaborating with other care providers. We're guided in pharmacy by the principle of getting to the lowest cost for patients and clients. A good example, as more biosimilars come to market, we're positioned to offer patients their care providers and payers significantly more choices in how to secure the best prices for the therapies they need. In addition to biosimilars, we're driving affordability and prescription benefits by combining formulary and cash market pricing to ensure consumers will always get the best economics. Our life-saving drugs program has made very significant progress since our announcements last year. This program offers zero dollar out-of-pocket cost to consumers for drugs such as insulin and epinephrine. Our goal has been to make this available throughout the U.S. And as of today, we've been approved in 48 states for our fully insured business. Moreover, 1/4 of our self-funded employers have now chosen to add this offering for their employees, and we expect that number to rise. Getting to this point in such a short period of time was only possible through the work not just of our teams, but of state officials and others in the broader healthcare community and we're grateful for their support. Looking to the year ahead, let me focus you on a couple of themes you can expect to hear from us. One is continued scaling of our commitment to American consumers. You should and will have -- who should and will have an increasing influence over their care experience. Through our core innovations, product design, enhanced digital offerings and partnerships such as RVO Health and Walmart, you will see us driving this more broadly across the enterprise, becoming closer to the consumer, helping simplify their experiences and empowering their decision-making with greater transparency, speed, convenience and support. You will also hear how we are amplifying our technology capabilities. 2023 will see the emergence of an enhanced OptumInsight, bringing to life the opportunities that the legacy organizations from Optum and change creates, an acceleration of how technology can be used to healthcare providers and ultimately patients within the overall health system. We start this year well prepared to deliver upon the objectives we shared with you in late November, and with a deep sense of responsibility to do so on behalf of the people we are privileged to serve. Thank you, Andrew. While the calendar shows we are two weeks into the New Year, our team's 2023 started many months ago; and in some cases, years ago. We have been laying the groundwork necessary to execute on our growth strategy and sustain our momentum heading into this year and beyond. To give you a sense of how this develops, I'll step through some of the work that has been longue durÃ©e to ready our organization to serve even more patients and customers in this new year and provide greater value for consumers across a broad range of initiatives. Take the many new patients we will serve under value-based care arrangements in 2023, deepening our presence in existing areas and adding new regions. Our team's preparations are extensive. That's because the transition to fully accountable care is not simply a matter of downloading a new app. The preparations include significant investments in clinical training, technology, network coordination and other activities to make certain we are ready to serve. These critical investments help us support both our current year needs and establish foundations for the growth into 2024 and beyond. Our ability to serve people effectively has expanded beyond the four-walls of the clinic with the rapid development of our in-home clinical capabilities. These services complement our clinic-based and digital offerings and bring high-quality care access to some of the most challenged and often underserved patients in this country. For instance, for value-based patients, our in-home services have reduced hospital visits by 15% versus fee-for-service, delivering comparable health outcomes and achieving an NPS of approximately 80. Within health benefits, you've heard us discuss how our innovation in commercial products is adding new growth opportunities. One of those is Surest, a unique solution to employers and employees who are looking for first dollar coverage and high transparency into quality and cost. The momentum behind Surest is strong and building. Just two years ago, one in 25 national accounts offered Surest as an option to more traditional plans. Thus far in 2023, it is one in nine, and we expect it will continue to rise. Our offerings for seniors are another area in which we plan, invest and build capabilities to provide new and valuable offerings for an extended period. For example, we continue to expand the range of clinical services we provide via our HouseCalls initiative. In 2023, we will increase the types of vaccinations offered, expand testing services and deploy even more real-time resources to address social determinants of health. Seniors place high value on being able to get care in their home. It comes with an NPS of 75 and is helping to drive improving retention levels as we head into 2023. In addition, our advocacy service solutions help members achieve better health. Our solutions led to a 42% increase in closing gaps in care, up to 15% lower ER visits and an over 10% increase in clinical program enrollment compared to customers who utilize standard offerings. Turning to health technology, let me offer a few early observations on our progress and long-term growth opportunities we see in this area. With the completed change healthcare combination, we are accelerating our investments to bring this vision of a more intelligent and simpler health system to market as rapidly as possible. We will continue to innovate in and deliver the software, data analytics, technology-enabled services, revenue cycle management and advisory services our customers expect. And we are executing on the synergies of this combination with most of the financial benefit coming from complementary growth. OptumInsight is uniquely positioned to offer integrated, end-to-end technology analytics and services across the entire healthcare value chain. Along these lines, we recently reached two new comprehensive health system partnerships, with Northern Light Health in Maine and with Owensboro Health in Kentucky. The services we provide typically feature a full breadth of our advanced solutions, including information technology, revenue cycle management, analytics and supply chain tools. The key here is that our comprehensive technology solutions are resonating in the market, and we expect to see increasing momentum across all of OptumInsight as we invest in and finalize our integration activities. Thank you, Dirk. The investments and innovations Andrew and Dirk described and that we shared with you in November, speak to a company that has tremendous growth potential as we head into '23 and well beyond. The opportunities to serve people more deeply are tangible and accelerating, building upon a foundation of strong growth in recent years, including our 2022 performance. Revenue in '22 of $324 billion grew by more than $36 billion or 13% over the prior year, with well-balanced double-digit growth at both Optum and UnitedHealthcare. Fourth quarter adjusted earnings per share of $5.34 grew 19% and brought full year adjusted earnings per share to $22.19, growth of 17%. Our capital capacities remain strong. Cash flow from operations in '22 was $26.2 billion or 1.3x net income. We returned $13 billion to shareholders through share repurchase and dividends, and deployed over $20 billion in growth capital to expand our capabilities for years to come. Turning to the performance of our businesses. OptumHealth's revenues grew by 32% in '22 to $71 billion as we expanded the number of patients served under value-based care arrangements by about 1 million. Revenue per consumer grew by 29%, driven by the increase in value-based care patients and in the levels of care we are able to offer. Consistent with our comments in November, OptumHealth is off to a strong start in '23 and will organically grow to serve an additional 750,000 value-based patients this year. OptumInsights revenues grew 20% to $14.6 billion in '22. We concluded the year with a revenue backlog of $30 billion, an increase of $7.6 billion over last year. As Dirk noted, we are advancing our investments to more rapidly unlock the positive impact OptumInsight can have for care providers and patients. We expect to make a significant portion of these important investments in the first half of the year. Optum Rx revenues grew 9%, approaching $100 billion for the year, driven by continued strong sales and the expansion of our pharmacy services businesses. Both customer retention and new customer wins were among the highest Optum Rx has ever delivered, laying a strong foundation for continued market-leading growth. At UnitedHealthcare, full year revenues of nearly $250 billion grew 12%. Our strong 2023 Medicare Advantage member outlook is consistent with the objectives we shared with you in November. We expect to serve up to 900,000 more people in '23 across our individual, group and dual special needs offerings, our 8th consecutive year of above-market growth. This consistent performance underscores the product innovation, benefit stability and high-value seniors have come to rely on from us. Our Medicaid growth outlook for '23 incorporates an expectation that states will resume eligibility redeterminations early in the second quarter. Our objective is to ensure that people will have continuous access to benefits. And when all redetermination activities are eventually completed, we expect to serve even more people than we do today across our state-based commercial and exchange-based offerings. Within our commercial offerings, we expect to serve about 1 million additional people in 2023. Our new and innovative products continue to gain momentum with employers and their employees, which will lead to increasing growth in this market over the next several years. In sum, while this year is just getting started, the early performance we are seeing across our businesses further validates our confidence in the 2023 growth and performance objectives we shared with you just six weeks ago. Thanks, John. As we head into 2023, we're determined to build upon the momentum we've just described this morning, further advancing our mission and delivering sustainable earnings growth of 13% to 16% over the long term. The company seems to be taking a lot of momentum across the board into '23. I wonder when you step back and look at the swing factors that say would push the company towards the higher end of the range that you've offered in EPS or towards the lower end, what are some of the biggest swing factors in your mind, potential positives or challenges? A.J., thanks so much, and Happy New Year to you as well. I appreciate the question. Yes. So first off, we do feel that we're bringing a ton of momentum into 2023. We feel across the board last year, very strong performances. Most of our businesses closed out the year actually a little ahead of where we were anticipating even when we were at the investor conference. So strong from that perspective. As we look into this year, I think real standout for me maybe call out just two or three points. One is just the membership roles and just the scale of growth in our membership. If you look at UHC performance during '22, you heard us talk about that just now, we're anticipating, frankly, another 1 million plus. I wouldn't be at all surprised if we didn't exceed '22 numbers by the time we get to the end of '23. That is a huge plus and signals a tremendous amount of engagement from the marketplace in our product set across all lines of business, whether that's in the government books of business in the MA platform, our determination to make sure that we look after folks in Medicaid as they go through redetermination cycles and, of course, in our commercial books where you've seen tremendously strong growth. So that's really an area which I think is building for us a lot of confidence as we go forward. And then you go across to Optum, and let me just call out record selling seasons coming through from our Optum Rx platform. That's building a tremendous amount of pipeline growth for us within our business over the next several years. OptumHealth, of course, really rapid growth of value-based fully capitated lives. You'll see by the end of '23, we'll be looking after -- well, more than double the number of folks we were looking after at the end of '21. That's an extraordinary expansion, and we expect that to continue to grow hard. OptumInsight, this year will be an emergence of a new OptumInsight. That's a business where we know we can do better. We've known that for a long time. We've been itching to get going on the integration of change and OptumInsight, which we've now been able to do. We really leaned into that in the fourth quarter. You'll see that flow through very rapidly in the first couple of quarters of this year. That's going to give us a whole new cycle of product innovation. We expect that to be a big source of lift as we go forward, backed up by an increasing momentum of being able to sign up these very large health system partnerships. You've seen us do two since the investor conference in November in addition to the ones we already have. I remind you, these are very large scale, very sticky, multiyear relationships, really substantial sources of energy for the organization. So that really drives all of our momentum. I think where we land in the ranges we've given you is all about our ability to execute and making sure that our organization is focused on every single day, making sure we get every transaction right. We look after every patient in the right way. We make sure that we're looking after every consumer approach that we received in the right way. And so execution is going to be what determines where we come out. The raw material in terms of the momentum for the company is just extraordinary as we look into 2023. Great. I was wondering if maybe you could just comment on the RADV expectations for February 1. We just had our conference this week, and there was a lot of talk about this and just what managed care is generally expecting out of that ruling? Lisa, thanks very much for the question. Yes. I mean, we're not going to get into a ton of speculation because obviously, it's very, very potentially imminent. And so not sure there's tons of value there. But I would like to ask Tim Noel looks after our M&R business to maybe share some of his perspective on that. Tim? Great. Thanks for the question, Lisa. We talked about this a bit at the investor conference and don't have a lot of new information to share this morning, but let me revisit a couple of the key elements that we discussed a couple of weeks ago. So first, risk adjustment is really critical to providing broad and equitable access inside the Medicare Advantage program. Also a really important part of ensuring there's no disincentives for caring for the most vulnerable. We also continue to remain very supportive of additional transparency. And here, that takes the form of more timely and consistent reviews. And a few of the key elements that we're thinking about with respect to these audits is it's very important for CMS to include a fee-for-service adjuster to make sure that we're comparing original Medicare and Medicare Advantage on the same basis. And also, very important that we don't conduct these audits decades in arrears. That comes with some challenges, of course. That said, without the final rule set, as Andrew alluded to, hard to get really narrow and specific, but we feel really good about how our results validated. Some of our sample sets were above, some of our sample sets were below. But likely more specifics to discuss at next quarter's call. Thanks, Lisa. Tim, thanks so much. And Lisa, thanks for the question. I mean I think as you just, again, just maybe step up a little bit in the broader position, obviously the whole MA program is unbelievably successful and popular program for seniors across the U.S. And of course, the biggest proof of that is the number of folks who every single year volunteer to sign up to be part of this program. And we're seeing another record year of enrollment coming through as we speak. It's super important that any changes, whether it's in this particular circumstance or any other circumstance, it's super important that folks are thoughtful about collateral consequences, making sure that what is really impressive program in terms of quality of care, reassurance provided to seniors, ability to deliver good value for the senior, good value for society, making sure that any changes are made thoughtfully and holistically is what we would be hoping to see. And obviously, we look forward to working with the administration when and if any further updates come forth. I was wondering if you could speak to the progression of earnings when you add physicians or large physician groups in OptumCare and how that changes over time. I'm specifically looking for sort of margin ranges as you first get started in the first year. When you break even, how long that takes? And then how long it takes to get to the ultimate margins? And I'm curious if the scale that you've got now, half of this book is new in the last three years, does scale accelerate some of that opportunity? Josh, listen, thanks so much for the question. It's a really -- that's a big question. Let me just give a few thoughts toward that. So one of the key capabilities you need to be in value-based care at scale is patients. Patients because it takes three or five years of getting to know medical practices before they become part of our network and as we go through our expansion. Patient then in terms of how you go through the process of building the capabilities and skills within the clinical practices to move from fee-for-service to value-based care. And of course, that patient size is reflected in how long it takes to go through this from an economic and financial perspective. And that's why as we see this rapid development now, it's kind of -- OptumCare, value-based care is kind of an overnight success that took 15 years to build. And that's -- it's really a truth. And we're seeing that scale now come to life and all credit to the teams who are doing that. In terms of what helps here, I think it's really building a muscle within your organization to continuously test, learn, correct, test, learn, correct in terms of how we work. This is a very -- so very -- it's a somewhat delicate system because what you're dealing with, obviously, highly professional clinical decision makers on the front line who are absolutely, ultimately responsible for every decision they make in front of every patient. But you're also trying to make sure they have the right information to be able to learn from the whole system, the information we know about those folks and what's likely to happen, what could happen, what might be the best practice. And how can we get the whole of the system to operate at a higher level. Those sorts of pieces of progress, those areas where we relentlessly invested, give us opportunities to improve the clinical care. If we can improve the clinical care, the economics follow. So within this whole model, getting the clinical care right, getting people in the right facilities, making sure people don't spend too long in care facilities when it's unnecessary, making sure that illness is delayed, deferred because they're treated well that prevention is the priority, that's what drives all of the economics. What we're seeing, Josh, is that over the last three or four years, we are indeed being able to bring our more recent cohorts to a better economic position more quickly. That's allowing us then to continue to invest more aggressively in bringing new patients into the system. And that -- it's really that mechanism, which you're seeing come to life at the moment. Hopefully, that helps a little bit. And next question please. Wanted to touch on cost trend. MLR was in line with your expectations for the quarter. But wanted to hear -- there's been questions about the impact of respiratory in the quarter. There's even been some discussion around a pickup in just overall utilization in December. So would love some comments on those to it, maybe just a little on how trend looked between the different businesses, commercial, Medicare and Medicaid? Yes. Thanks, Justin, for that question. Throughout the pandemic, we've been making these references to baselines, et cetera. I think, now being three years into this pandemic, I'd like to just ground an anchor more to our expectations as COVID has waned. And what I'm most encouraged by is that the fourth quarter played out as we had expected. And what we had set out inside our pricing trends are lining up really nicely as we look forward to 2023. To your comments around the flu, as I had suggested at our investor conference, we certainly saw that spike. We have now seen that start to wane for, I think, five consecutive weeks here as we're moving forward. So to put it out like we had expected, really not a meaningful impact as I'm looking forward versus what we've planned for. So what I'm most encouraged by is we're sort of out of that zone of the unknowns around comparing to baselines, et cetera, and really managing a book of business with greater predictability back to sort of the expectations that we had well pre-pandemic and encouraged about how all of those elements, including flu, are lining up as we look forward. Thanks, Justin. Yes. Could you talk a little bit about the employer segment? And what I'm interested in is what was pricing like in 2023? If you think of the 6% commercial trend that used to be your pre-pandemic sort of levels, what was that like? And for those employer customers, how are they kind of waiting the need to get employees in the war for talent versus focus on maybe higher premium costs and how they're trying to control that? Yes. Maybe I'll start, and then I'll hand it off to Dan Kueter. I'll start with the conversation around trend. As you well know, we used to share trend information back in the day, and stopped doing so simply because it became less instructive as we were pacing through this COVID environment. What I can share, and I think once we get to this zone of consistency, we'll return to those metrics, we're certainly encouraged by what we're seeing on the utilization front. I think we are seeing some durable shifts. We've seen it with respect to ER moving into urgent and in-patient to outpatient. But on the flip side, as we all know, in these labor markets, we're seeing stronger unit costs. And as we all know, unit costs still comprise the majority of the overall trend. And as I had suggested earlier in the year, we did have a higher trend planning for 2023 than 2022. But in reality, that was really a function of the first half of 2022. And again, I want to give that thought and belief that we are largely back to normal levels. And I think once we pace through 2023, we'll get to that zone where we can share those pricing trends. So with that, maybe a little bit more on the competitive dynamic, Dan. Yes. Thanks, Brian, and thanks for the question, Lance. The competitive dynamics in the commercial market remain the same as they've been, always competitive. We continue to price to our forward trend, and we have continued to do that. As Brian indicated, there has been some modifications to that, but all within the range of what we've expected and all within the range of how we've priced. So we don't see any material deviations at all from what we've expected in our plan, so. In OptumHealth as you have added or about to add behavioral and home, more substantial home care opportunities and have talked about those in the context of value-based care. I'm wondering what influence those have on the trajectory of revenue per member served? That's already rising at a pretty rapid clip due to the full cap that you're transitioning lives into. So the home and behavioral adds to that. Yes. So I'm going to ask Dr. Wyatt Decker to make a couple of comments in a second on that. But maybe just before he does, and I think we don't particularly break out what's driving the elements of that kind of consumer served number. But you can imagine that the move to value-based care is a big driver of that. Now one of the pieces within the home platform, just to pick out one of the two areas you called out, David, is, of course, within there, you have a substantial amount of D-SNP population, right? So that particular part of the business helps us do a much better job of looking -- giving a much better end-to-end wraparound care for complex folks often found in the D-SNP population. And of course, they represent a different type of revenue profile compared to more of a community patient. So I just make that point. So within the home piece, it kind of a derivative phenomenon that home creates a capability, which allows us to serve D-SNP folks better. That, of course, is going to be an accelerator to the metric you were focused on. And maybe ask Wyatt to go a little deeper though, around how you're bringing behavioral along as well as home please? Yes. Well, thank you, David, for the question. And it's very timely. We view home health as one of the new frontiers of providing value-based healthcare because of the convenience it provides and the ability to access people, like dual special needs patients that often have very difficulty leaving their home to get care. So you will see us both developing if you will, the platform of home care increasingly in a comprehensive fashion, as well as integrating home care with our clinic-based care model. So it really creates two growth vehicles for us, if that makes sense. And similarly, with behavioral, as we've seen during the pandemic, the need for behavioral care is immense in the U.S. market. And our ability to embed behavioral healthcare services within our primary care and value-based care offerings has been differentiated and will continue to grow, as well as our utilization of virtual behavioral care solutions in both the home and clinic environments. And so we're pretty excited about how this is coming together, and we're creating a differentiated offering that helps accelerate value-based care growth and provide that comprehensive care that people made. Just looking for a couple of numbers. One, just going back to respiratory. Our recollection was maybe 4Q for you guys was about 30 basis points of MLR from respiratory. I know Brian said not meaningfully higher. So I'm assuming that means there is another 15 bps or 20 bps or something from respiratory this quarter. And then just secondly, on the investment gain, about $400 million above The Street, about a couple of hundred million above the '23 guidance run rate. So just wondering, was there a realized gain in that quarter that's kind of above recurring or how we should think about that number? Gary, good morning. I will go back in order here. So just in terms of -- itâd be very similar with Brian Thompson's commentary in terms of what we were seeing in the quarter and I think forward. So those -- that incidence was modestly elevated in the 4Q, but I'd call it modestly elevated, but very much in line with what we would have expected -- and when we were in front of you back at the end of November in terms of flu and respiratory. Let's put those two together in terms of just combining that whole view. So elevated, when you take it into materiality in terms of the $50 billion of medical costs in the quarter, I wouldn't call it immensely material, though, in that element, but very consistent. In terms of investment income, probably wouldn't be very similar to what we reported 4Q a year ago in terms of the absolute level of investment income in there. I wouldn't -- just kind of like last year, probably wouldn't use that as my run rate stepping out into next year though. So we're still comfortable with how we established and guided for 2023 from that perspective also. So very consistent with that 4Q of last year, too. Just interested if you could summarize your key M&A priorities for 2023, and whether there's any sort of shift at all in sort of the key trends that we've seen over the last few years, which have been a big focus on adding the clinical capabilities and the scale at both OptumHealth and OptumInsight. Should we think about that continuing to be the core area of focus or any other additional elements that are worth considering? Thanks so much, Scott. Before I ask John Rex to make a couple of comments on this, I'll maybe just make a few introductory notions. I wouldn't go into a ton of detail about where we're looking, but I would continue to say we fully anticipate continuing to deploy our capital effectively into the marketplace. You know that a hallmark of this company has been its ability to effectively and efficiently utilizes capital to supplement its organic growth, and that's been a big part of the success of the organization. We'll continue to do that. We have a substantial number of transactions in process as we speak. As you well know, we're obviously in the process now of bringing to life the Change OptumInsight integration, which is super important for us. As we look forward, it's a very interesting marketplace. I mean I would say that John will probably confirm this, I think what we see the pipeline of opportunities we see is probably bigger, deeper, more diverse than we've ever seen. That's been a trend that kind of picked up probably early last year, certainly continued. We'd expect to see this year to be a pretty interesting year for us. And it's -- you know our five growth pillars. You wouldn't be at all surprised to expect us to obviously align our M&A capital investment around our growth pillars. Beyond that, I'm not sure it would be necessarily wise for us to go too much more detail. But certainly, John, I'd love you to give a bit more perspective on how you're seeing the landscape and the environment. Absolutely. Scott, yes, so I'd start with just echoing what Andrew mentioned there, the way we approach this very much aligned with our five growth pillars and how we evaluate, how we look for opportunities, I should say, and where we think we should be pursuing investments and relationships. I'd point out that these are certainly very long-lived in terms of the investments that we make, in terms of relational investments we make, in terms of understanding markets, particularly as we've heard us talk about before within the care delivery businesses and such as value-based care that these are. Most of the markets that we want to address are aren't established the way that we would like them to be established, so it's very greenfield in terms of our approach to M&A as we look at marketplaces and bringing together the capabilities that we would pursue. The environment itself that echo what Andrew previewed there, certainly a strong environment in terms of opportunity sets that we are seeing in the broad marketplace, in terms of the types of capabilities that are there, how they might fit within this enterprise and the potential. I think you would expect us to see like where we've been focused. Certainly, over the last number of years, you've seen us do a lot of development as it relates to components of value-based care. And you know we define that very broadly now in terms of how we think about capabilities within value-based care to bring in new capabilities also and across all the other elements. But Iâd overall characterize the environment as strong and the opportunities as among some of the most interesting, I think, that we have seen as a company. Yes. I'd agree with that completely, John. And I certainly, over the next several years, see this part of the agenda being a key part of our continued support of our long-term growth goals, and you should expect to see us be -- continue to be active in the space. I wanted to follow up on the home component of the value-based care opportunity. Wondering if you'd say potentially you're further along in the penetration with the home model inside the UHC book than other payers? Any color there would be great. And then, any sense of how the 4 million fully accountable lives break out by clinic versus home model with the primary care setting, or also how the 750,000 member growth breaks out for 2023 would be great? Stephen, thanks so much for the question. So first off, let me just reiterate how important we see the development of the home model, the home care platform, and we've seen that grow very substantially over the last couple of years in particular. Super important though, to recognize that it kind of -- so of course, sometimes folks can be essentially managed within just the home environment or the home care platform, and that certainly happens sometimes. But of course, what always happens, what very often happens is the clinic environment, the home environment are connected together, which is really what we're building here. So it's not super instructive, I think, to think about folks who are just kind of clinic nominated or home nominated. That can happen. But not really, I think, necessarily the right way to look at it. I wouldn't look at it that way. I'd see -- I really think about it the way we've built the home capabilities as a substantial extension of what we're able to do in the clinical space. And it speaks to the reality of care. People -- a lot -- not everything happens in the 20 minutes you're in the clinic, right? A ton of things happen when you're at home, and making sure that we've got care capabilities there, especially for folks who find it difficult to get out of the home or for whatever reason, find it difficult to engage with the system. That's a super important part of the environment. What I'd say is that, that is resonating super strongly, not just with UnitedHealthcare, but with other payers as well. And there's no doubt that this side of the agenda has caught the imagination of other payers, and we're delighted to see the continued extension of the multi-payer dynamic of OptumHealth and Optum more generally. And this is one of the drivers of that. In fact, during Q4, our external growth rate -- revenue growth rate was analogous to our internal growth, or i.e. Optum was growing just as quickly with non-UHC payers as it was with UHC. And that's a super important signal for the strength of the company. So important area, you'll continue to hear more about home as we go forward. But I would look at it more as a strengthening as a whole rather than a kind of separate stream in which we would be thinking about it that way. The advance rate notice for '24 will be out in the coming weeks. It's clearly been well noted that the past few years have kind of been above the historical trend, and know that at some point we could see some moderation. I'd just be curious what your expectations are around that and how you view its relative importance in the context of your overall outlook for the MA market? Nathan, thanks so much. Yes, as you rightly say, obviously, we're getting close to when we would likely hear the rate notification. And obviously, we don't know what that's going to be. I think where we would sit is -- we think MA is an incredibly important program for seniors. I think it's been demonstrated now repeatedly the value that delivers to the individuals, the value it delivers to society. And of course, the way in which seniors are essentially voting to become part of this program just signals how effective it is. We believe that one of the key elements of that effectiveness that we certainly focused on is our ability to deliver stable benefits year in, year out. So I mean bottom line for us is we hope year in, year out, that the rate notice essentially facilitates that and it allows us to continue to deliver that stability. And we look forward to seeing what that will be, and we'll work with that once it's communicated to us. Not much more we can say on that, to be honest, until we obviously get the right notice. So thanks for the question. On Optum Rx, your near-term Optum Rx targets do imply passing on the savings from biosimilars, but can you detail some of the other levers you have here to drive the strength you're anticipating? How should we rank those drivers across pharmacy services, versus biosimilar benefits over the next, let's say, 12 to 18 months? Great question, Erin. Before I ask Heather to give you a few more details, I think we're super pleased with the progress we've made, particularly on the biosimilar innovation that's coming this year in the next few weeks. And the work that's been done within Optum Rx to deliver a contracting strategy, which ensures that everybody who wants to use a HUMIRA molecule, whether that's the brand or whether it's a biosimilar, gets access to lower cost right out of the gate has been a super important innovation in terms of our contracting strategy. So without folks having to be shifted from drugs or dislocated in the marketplace, we found a way to bring lower cost to everybody in that environment. And I really want to give credit to Heather and her team for the work that she's done to lead on all of that. As you rightly say, we're passing those benefits directly back to the payers and the folks themselves. Sure. So first, let me give you just another sense of maybe next phase when you think biosimilar and then let's hit the strength of the earnings for us in '23. So as Andrew said, we intended to set up the biosimilar strategy to allow the most value to pull through in year one that we can to clients, and we're proud of that. But this is a multiyear strategy, and the markets dynamic will continue to watch it. What's important here is creating a marketplace for competition of the originator with a biosimilar in the specific unique environment with HUMIRA and so many manufacturers coming to market. But over a period of maybe, say, the next 18 months with different attributes, our strategy allows them to compete based on their clinical criteria and product attributes, how the manufacturer support the product and then, obviously, the economics and the pricing. So that's the goal. We'll see that play out over the years. And the goal was to provide choice, not a lot of disruption and be able to extract value without restriction or exclusion. So we'll watch that play out. But when I think about the earnings and the strength of the position we're in or what we hoped to be by the end of '23, think of it as some of the stories you've heard us building and what we've been talking about for the last couple of years, and that's strengthen our pharmacy services. I'll give you an example. Yes, the community pharmacies are growing. They're expanding quickly. But our specialty pharmacies, our Frontier Therapies where we serve some of the more rare disease and orphan drugs are growing as quickly. And in many of those are getting scale. So for instance, the community pharmacies are scaling to the point where we're allowed -- we have central fill supporting because we have the volume of scripts going to those community pharmacies. And we're getting better with negotiations, we're able to negotiate harder on some of our procurement in those businesses. But also look at the PBM. You heard strong selling season again. We hope to have another strong selling season. The pricing is dynamic. We moved quickly with our pricing, with our product attributes. Our product adoption is up 40% year-over-year in our PBM products. And then we've got some return on some of the investments we made in the last year or two, Optum Frontier Therapies, our partnership with RVO. So that, I think, is when you look towards the next year, focus on those areas and look for us to drive earnings growth in those particular areas. Heather, well said. And again, you've seen a real transformation of the Optum Rx platform. If you look at five years ago, about 1/3 of the revenues in that business came from non-PBM pharmacy services. Now it's at half. As a tremendous shift on the business' scale, really is significant. And I'd say one of the key themes, which is driving a lot of that is a relentless shift was the consumer in the way in which that business is orientated and building its product. Real focus on delivering the best possible deal for consumers, making sure they get the lowest net cost. And then you'll see through, as Heather just mentioned, partnerships like RVO Health, you'll see us to continue to innovate the way in which we engage with consumers to make that much more modern, much more as U.S. consumers should get and should expect. so regarding the acuity level of the elevated flu and respiratory costs in the fourth quarter, is there any sense for just how much of the elevated cost for, hate to call it, tripledemic, let's just call it that, I guess, for the quarter, how much of that was related to the hospital inpatient setting in particular? And then from your data, was there any sense that there may have been any slightly lower elective procedures or traditional non-COVID and non-flu-related care in the fourth quarter in light of the elevated flu and respiratory cost and utilization? Stephen, thanks so much for asking that. Listen, I think -- listen, of course, it was Q4. There was a bit more flu and respiratory. But really, I'd say immaterial in the scheme -- in the grand -- in the way I'd say in the grand scheme of the healthcare costs of the U.S., almost not noticeable. I mean, almost nothing to see. And I think I wouldn't -- much as I think there was a lot of anticipation around what could be coming in this notion of different viruses all come, somehow creating this, I think you said triple pandemic, really not there. And the little elevation we saw was somewhat within the ranges of what you typically would expect in a normal Q4 early flu season, which, as Brian mentioned earlier, looks like it's -- we've seen the last five weeks coming down. That's pretty much it, yes. So I really wouldn't guide you to characterize this as a big deal within the overall mix of the total healthcare costs that we're dealing with. It really isn't. Just wondering if you could talk a little bit about your expectations for redeterminations that you talked a bit about how you see that as a membership opportunity, but some more focus on the MLR implications. I guess, if you think about the potentially significant change in the membership of the Medicaid program and the implications for the risk pool there, how are you thinking about potential margin compression and how quickly rates might be able to reflect that, if it does play out? Kevin, thanks so much. I'm going to ask Tim Spilker, who looks after our Medicaid business to talk to that. And maybe Tim, as you do that, you could also maybe just allude a little bit on the degree of visibility you have for your book of business as you roll into 2023. That might also be helpful. Yes, absolutely. Thanks, Kevin, for the question. So certainly, a number of factors in play as we look ahead, certainly, the change in membership that we'll see as redeterminations resume. And then also acuity utilization, all of the factors really as things return to normal. So at this point, from where we look, we've got visibility at around 75% of our revenue for the year. And states, as they set that revenue, have taken all of those factors into account when setting their rates, and that revenue is in line with our expectations and consistent with the outlook that we shared in November. So we're appreciative of the balanced rational view that our states have taken as they've looked ahead, knowing that we've got many factors coming forward. Maybe one last thing, just as we look ahead, the redetermination process will be extended. We know it will take 10 to 12 months depending on the state. And that will give us opportunities to provide data, feedback and insights to our customers, work with them to adjust as things develop. So really no changes from what we communicated in November and with a little bit more certainty now in terms of our revenue. Right. Thank you, Tim. I appreciate that, Kevin. Thanks for the question. Operator, we just have time for one last question, if we could go ahead, please? I wanted to come back to the specialty drug and pharmacy initiatives. And I guess, can you talk about what percent of these drugs are going through the mail channel versus the retail channel now? Kind of how do you expect the share to shift away from retail to mail? And then I'd tack on kind of how should we think about what the earnings power of the shifts can look like as you capture more of the specialty drugs in owned channels versus third-party channels? Sure, great question. As we continue to see the pipeline in specialty drugs, I hope you can feel the urgency around us driving. And you can see it in our growth, but also in our patient care and our clinical program. So our Optum Frontier Therapy, I think, is actually a good model. I know it serves only sort of rare disease and orphan drug, but we talked about the investor conference. It's got a comprehensive clinical model wrapping around it that supports not just the patients, the caregivers, the prescriber, the family, but also helps pharma to deliver the best service in those drugs. That is the model we're using to inform how we serve clients and how we serve patients in our specialty business as well. So think about that holistic support, patient advocacy, patient support, caregiver support, prescriber support, all while investing in automation. So even in our pharmacy -- in our specialty pharmacy today, our automation is up. We're actually seeing over 30% higher self-service in the specialty pharmacy. That's not just mail and maintenance, that's specialty. So we're investing in the automation. For those that have simple transactions and want to interact with us with these, but those that need more comprehensive care with complex conditions that need the value of our 24/7 pharmacist support, our team is there to help them. So we will always continue to work with our retail partners. We are -- we've got a very strong network of that. But we want to be able to serve our consumers and our clients with best-in-class specialty service. Thanks, Heather. And George, thank you for the question. Listen, we come to the end of the call, I hope very much you leave the call with a sense of our optimism and focus on continued growth for the year ahead. We remain intent on expanding our ability to help improve healthcare at the system and individual levels and executing with excellence for all those we serve. We look forward to sharing our progress on this journey with you again in April. And in the meantime, thank you so much for your attention this morning. We appreciate it.
EarningCall_1351	Good afternoon. Thank you for attending today's LendingClub Fourth Quarter 2022 Earnings Conference Call. My name is Megan and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. Thank you, and good afternoon. Welcome to LendingClub's fourth quarter and full year 2022 earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO; and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. 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, platform volume, future products and services and future business loan 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 most recent Forms 10-K and 10-Q is filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-K. 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. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provision net revenue. We believe these non-GAAP measures provide useful supplemental information. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in the presentation accompanying our earnings release. All right. Thanks, Sameer. Welcome everyone. We closed out 2022 with solid results. Both revenue and earnings were near the high end of our guidance range, and importantly, we took action to position the company well to navigate current headwinds. The power of our evolving model is evident in our numbers. Our growing stream of net interest income offset the anticipated decline in marketplace revenue and enabled us to deliver total revenue in line with fourth quarter of 2021 despite a decline in loan originations. For the full year, we generated 45% revenue growth and a record $290 million in net income, or $146 million after you exclude tax benefits from the release of our valuation allowance. We invested our strong marketplace earnings back into our balance sheet, doubling the size of our held for investment loan portfolio, which allowed us to more than double our net interest income. These results begin to provide a sense of the power of this business over the long-term. Our goal, when the environment stabilizes, is to continue to grow the bank balance sheet and the corresponding interest income revenue stream with marketplace revenue acting as a capital-light earnings complement, as well as a compelling membership growth driver. To reach this destination, we first need to navigate through the current environment, and we have plans to do just that. While it's unclear where exactly the Fed and the U.S. economy would land, we remain focused on what we can control and are positioning ourselves to best manage through the uncertainty. Our focus is on three key areas. One, continuing to prudently manage credit quality through the cycle; two, preserving profitability and maintaining a strong balance sheet; and three, being practical and focused in our product and technology investments. So starting with credit, where we will remain laser focused on managing credit risk for both our marketplace investors and ourselves. I'd note the loans we hold on our balance sheet representing prime and high prime customers are continuing to perform well as you'll see on Pages 16 and 17 in our presentation. For loans sold through the marketplace, we are pursuing quality over quantity. As we have spoken about for several quarters, the rate environment is putting pressure on marketplace volumes as the relative value we can provide is compressed until we can reprice our loans to reflect the dramatic increase in cost of funds for especially our non-bank investors. In this higher rate lower volume environment, we have both the responsibility and the opportunity to be selective on credit. Our delinquencies have outperformed industry averages, but we need to remain vigilant and proactive. We anticipated and have seen pressure on our members, most notably in near prime and especially among those consumers with lower incomes. We are also seeing a dynamic pace of change in areas like savings rates and prepayment speeds. A core strength for LendingClub is our ability to use our data advantage and our technology infrastructure to quickly adapt to emerging signals. Accordingly, we were proactive to begin tightening early in 2022 and have continued to tighten our underwriting throughout the year. For reference, our fourth quarter near-prime volumes are down more than 50% from their peak. Longer term, the opportunity to grow personal loans remains significant. With credit card balances building at an over 20% average APR, even more consumers will benefit by refinancing their high-cost credit card debt into a fixed-rate installment loan. And as interest rates stabilize and the U.S. economy regains its footing, we expect our marketplace volumes to rebound. Our second key objective is to maintain profitability and a strong balance sheet. We recently announced the difficult decision to streamline our operations to better align our expense base to our outlook. We also bolstered our net interest income by acquiring a large portfolio of seasoned, high-quality loans from one of our marketplace investors. In the near term, we expect marketplace revenue to be under pressure until the Fed slows or ideally stops with rate hikes. At the same time, we plan to maintain a stable interest income revenue stream by keeping the balance sheet at roughly its current size. Our final area of focus is to continue to prudently invest in the core product and technology capabilities that will create more value for our 4.5 million members. While we remain committed to our long-term vision, we are slowing down the pace of our investments. And our intent in 2023 is to put the building blocks in place that will support future growth opportunities as we come out of the current environment. Certainly, we will remain mindful of the macro economy and we'll continue to adjust the pace of our investment as needed. So I'm going to turn it over to Drew now to walk you through the detailed financial results and our outlook. Thanks, Scott. And hello everyone. Let me take you through our financials in greater detail, starting with the originations and our balance sheet. Originations for the quarter were $2.5 billion, compared to $3.1 billion in the prior year and $3.5 billion in the third quarter of 2022. As Scott discussed earlier, originations were impacted by a combination of higher interest rates curtailing investor demand for loan purchases and our continued discipline in underwriting to maintain strong credit quality. As we deploy capital to retain more of our highly profitable personal loans, we showed significant growth in the balance sheet compared to the previous quarter and over the course of 2022. Total assets increased 63% year-over-year to $8 billion in Q4, with our held-for-investment loan portfolio up 104% over the same period, primarily due to growth in personal loans. We also grew deposits 104% year-over-year now that we have scaled the online banking platform that we acquired. Since the closing of the Radius acquisition in the first quarter of 2021, we have grown the bank from $2.7 billion in assets to $7.6 billion in assets, which is a compounded annual growth rate of over 70% and firmly highlights the benefits of bringing LendingClub's strength of loan originations together with the digital banking model. Earlier, Scott mentioned the portfolio we acquired in December. We are accounting for the portfolio under the fair value option as the short remaining duration in high credit quality limit volatility around its expected performance. We expect this portfolio to generate very attractive returns and have broken it out separately in the net interest margin table in our earnings materials. Now on to revenue. Total revenue was essentially flat year-over-year as net interest income growth of 63% was offset by a 29% decline in non-interest income. Revenue decreased sequentially by $42 million, reflecting lower originations sold through the marketplace and the price on those sales. Our decision to increase loan retention in 2022 has enhanced the resiliency of our franchise during a more difficult environment for the marketplace. Net interest margin increased to 7.8% from 7.6% in the prior year period due to an increase in the proportion of higher yielding consumer loans on the balance sheet. As expected, we saw a sequential drop from 8.3% in the third quarter of 2022, primarily due to the current lag between our ability to pass along higher interest rates on new personal loans relative to the repricing of online deposits. We expect the net interest margin to decline again in the first quarter of 2023 as these trends continue and for the pressure to abate should the Fed's slow rate increases or stop them all together. Total net interest expense for the quarter improved $8 million compared to the same quarter in 2021 and was a reduction of $6 million from the previous quarter. Compensation and benefits expense included $4.4 million in severance charges from the previously announced expense reduction plan. Marketing efficiency was better than expected given the use of more efficient channels and lower competitive pressure. Marketing expenses improved by $11 million compared to the third quarter, primarily reflecting lower origination volumes. Our consolidated efficiency ratio moved to 68.5% from 61% in the third quarter as revenues decreased sequentially. As Scott discussed, the reduction in staff was a difficult decision, but necessary given the more challenging near-term outlook. The reductions will generate $25 million to $30 million of annual run rate savings and compensation and benefits. These savings came primarily from an improved efficiency in our management structure, the slowdown in some strategic initiatives and ceasing originations in two commercial businesses, commercial real estate and equipment finance that we acquired from Radius. We will take the remaining severance charge of $1.3 million in the first quarter. Slide 15 shows the pre-provision net revenue, or PPNR, and the net income for the quarter along with other metrics. In 2023, we will move to PPNR as the key metric, which provides a better gauge on income statement performance. PPNR is a useful measure for evaluating the underlying performance of our company without the quarterly volatility caused by credit loss provisioning. For the fourth quarter, we had PPNR of $82.7 million which increased 12% compared to the same quarter in 2021. We remain pleased with the performance of credit in our portfolio. Our provision for credit losses was $62 million, $21 million lower than the previous quarter, primarily due to a decrease in the dollar amount of loan originations held on balance sheet. Our allowance coverage ratio, excluding PPP loans, increased to 6.6% from 6.4% in the previous quarter due to the effect of ongoing recognition of provision expense for discounted lifetime losses at origination. In the fourth quarter, our tax rate again benefited from a reversal of our remaining valuation allowance as well as R&D tax credits. For the quarter, we had a tax benefit of $2.4 million. As we enter 2023, we expect less volatility in taxes, and the tax rate is expected to be approximately 28%, but other factors such as share price movement will continue to impact our reported tax rate going forward on a quarter-to-quarter basis. Tangible book value per common share grew 35% year-over-year to $10.06 per share at the end of the fourth quarter. We have maintained strong capital ratios on top of a significant allowance for credit losses. This positions us to better navigate through the current environment and provide the ability to strategically deploy capital as opportunities arise. Now please turn to Page 16, where we have provided you with an update to the 30-plus day delinquencies of our prime personal loan servicing portfolio as well as our held-for-investment personal loan portfolio. You will see that credit quality in the prime servicing portfolio continues to normalize as the portfolio seasons and new origination growth slows in the marketplace. The same effect is also true of our own HFI portfolio. We expect this trend will continue given the lower level of originations in the near-term. Given that changing growth trends and seasoning are creating comparability issues with historical data, we are not planning to provide this slide in the future. On the next page, we have provided more detailed disclosure on our loss expectations, which we believe provides a cleaner view of performance. So on Slide 17, you can see credit performance of personal loans on our balance sheet by vintage. We expect the lifetime loss of the 2021 and 2022 vintages to be up to 8% and 8.7% respectively. The estimate for both vintages includes qualitative provisions for the uncertain economic environment. The 2021 vintage delivered very strong credit performance given the effect of government stimulus during the pandemic. The 2022 vintage reflects a move to a higher quality mix of credit but also a normalization of credit trends. We expect annualized net credit losses to be approximately 5% over the life of the 2022 vintage, but that could vary if economic conditions deteriorate significantly. For each vintage, we are providing the breakout of how much in charge-offs have been realized as of the end of 2022, how much of future losses have already been reserved for in our allowance for credit losses, and how much remaining provision we estimate we will take through the income statement, which mainly represents the Day 1 CECL discounting coming through the provision expense over time. If we look at the net interest margin factor in variable expenses and annualized credit losses, we expect post-tax levered returns in the low to mid-30% range. These returns are the reason we plan to invest our available earnings and growing the balance sheet. Now letâs move to guidance and how weâre thinking about 2023. Given the broader macroeconomic uncertainty, we are moving to quarterly guidance. For the first quarter, our origination outlook is $1.9 billion to $2.2 billion, reflecting prudent underwriting and the rate-driven pressure on marketplace demand. We plan to maintain the size of our HFI balance sheet. Therefore, we expect to retain 30% to 40% of our loan originations for the quarter. For marketplace originations we sell, we expect unit economics in line with the fourth quarter. We plan to maintain positive net income levels and invest in-period earnings into loan retention to support future earnings. As we reinvest our capital, we will maintain a disciplined approach to underwriting, drive credit performance and required returns. In 2023, we want to maintain flexibility to grow the balance sheet when we generate excess earnings available for investment. The impact of the Day 1 CECL charge on loan retention can have a significant impact on earnings. With this in mind, we have evolved our focus to pre-provision net revenue, which is a more relevant guidance metric for financial services companies using CECL accounting. Our outlook using PPNR is $55 million to $70 million for the first quarter. Thank you, Drew. Clearly, the multiple economic variables that are at play here have affected our near-term outlook, but I do believe weâve positioned the company well and that we have strategic and structural advantages that will help us outperform over time. As we finish off the year, I just wanted to take a step back to recap the progress weâve made since we acquired the bank. In two years, we have completely transformed the financial profile of the business. Weâve more than doubled the balance sheet, cut tens of millions in issuance costs, added a new recurring revenue stream that represents almost half of our quarterly revenue, and weâve significantly grown our equity. These strong fundamentals will help us manage through what will ultimately be temporary headwinds. As interest rates stabilize and credit card balances and APRs remain at or near-record highs, we believe that our core business of credit card refinancing will be well-positioned to quickly resume growth and drive marketplace revenue. With that, I wanted to say a sincere thanks to all of my fellow LendingClubbers, both those who are with us today and those who we recently had to say goodbye to, for their contributions to our company and to our customers. Thank you. [Operator Instructions] Our first question comes from the line of Bill Ryan with Seaport Research. Your line is now open. Thanks for taking my question. Starting with kind of the guidance, I was looking at it, you have PPNR of $55 million to $70 million, and you look at it with your originations of $1.9 billion to $2.2 billion. You take a midpoint. Your reserve on the consumer portfolio was, I believe, a provision was 8.8% of retained originations. So assuming that math, it looks like you might be breakeven, plus or minus in Q1. So is the 8.8% correct? Is that kind of a good number to use? Or was there something incremental in the provision? And kind of tying with that, the expenses, the charge that you took to reduce the fixed cost and then youâve got a 50% variable cost structure. How long before the cost reduction start to kick in? Is there any of it really in the Q1 guidance? Or does that kind of roll â spill over more into Q2? Yes. Great. Thanks Bill for the question. So let me start with the provision question first. So youâre correct on that ratio. Keep in mind that the components that go into the provision are the day one CECL. The accretion of the discount we have on day one and then other qualitative factors as well. And so one thing about that accretion of the discount is, it really hits more heavily in the first and second quarter after origination. So if you look back at our origination trends, this quarter had a higher amount of that back book accretion coming in. As we look forward to Q1, I donât want to talk about the ratio as much, but if you think about it in terms of dollar amounts, weâre remixing to higher quality credit. We should probably have less accretion just because of the recent trends in originations. And so right now, we would expect that provision to actually come down quarter-over-quarter. But obviously as I just said, itâs a very volatile measure. So there are a lot of different outcomes that are possible on the provision line in any given quarter. Second on expenses, so on the 50% variable cost marketâ¦ Sorry, just one other thing to add, Bill, is the other important part of the message we want to make sure you hear is, our intention is to maintain the balance sheet given the details weâve shared on the attractiveness of the loans weâre plan to continue to add. To the extent that weâve got available earnings, we would put those into the balance sheet. Thatâs one of the other reasons why weâre not guiding to that. Thereâs both the volatility of the provision and also just the intent to be able to continue to grow the balance sheet should the earnings permit it. Yes. And in Q1, we â I should have added just back on the provision as well. In Q1, as weâre going to higher quality loans, we expect that sort of the upfront charge will be lower on the higher quality loans that weâre putting on the balance sheet, which also benefits the provision. On expenses, the vast majority of the savings that â annualized savings that we reported are fixed cost, there is some portion less than 10%, which is variable cost of that reduction. But then the biggest reduction youâll see in our variable cost base as originations comes down is marketing. And youâve obviously already seen that come down each quarter as originations have also declined, Yes. The â sorry, so the savings that weâre getting from the reduction in force, those will come through in Q1. So we will get almost the full impact of those except for the remaining severance charge that I mentioned. And then thereâs a little bit of variable cost that may still come down over time thatâs a little more lagged in reductions in â from the reductions in originations, but I wouldnât call that meaningful compared to the $25 million to $30 million that weâre citing in the overall reductions. Hi, thanks for taking the questions. I wanted to follow-up on that question about the provision. I would imagine that with the loan portfolio essentially being flat that the provision going forward would basically be the loss content of the loans with minimal reserve building, since you wouldnât â since the loan portfolio isnât growing, you donât have to necessarily set aside additional reserves that have already been taken, so to speak. So I would think it would â essentially the provision would match the net charge offs in the quarter. Is that the right way to think of it that you basically donât have to reserve much with a flat loan portfolio? No, thatâs not quite correct, because in order to keep a flat loan portfolio, we need to keep originating loans to offset the runoff. And those new loans we originate are going to have a day one CECL charge that we need to take as well. And then you will still have accretion that occurs on the back book. But as I said, thatâs more loaded to the first couple â thatâs more front loaded to the first couple quarters after origination, but thereâs still a tail on that as well. I see. Okay. And then shifting over to, you mentioned about kind of reinvesting capital to grow the balance sheet is, so is the right way to think of your kind of comfort level on capital ratios is where they ended in the fourth quarter. Is there any other kind of constraint on growing the balance sheet? Because when I look at your deposit growth over the past several quarters, youâve had significant success in garnering deposits. So could you talk about whatâs constraining your balance sheet growth? Sure, yes. So if we think about the ingredients that go into growing the balance sheet I would say capital liquidity and earnings, right? And the third oneâs maybe debatable, but not really for us with our â with the guidance weâre giving. So we still have capital to grow. Our Tier 1 leverage was 12.5% and weâre generating capital each quarter. We had â sorry, that was at the bank level, 12.5%. And liquidity, we have ample liquidity and the online deposit space has been large enough to continue to fund our growth for the foreseeable future. No concerns there. But that up â when we want to grow the balance sheet and originate more loans for the balance sheet, that means more CECL charge that we take, which goes against profitability. So as much as we have the goal of remaining profitable on a net income basis every quarter, we do still need the balance against that. We just havenât used that as the guidance weâre giving you any longer. So that gives us some more flexibility. Got it. And then the last one for me, on Slide 17, you mentioned about your net credit loss rate of approximately 5%. Can you talk about how this 5%, how that compares to what your kind of long-term expectation was for these vintages and on a go forward basis? Yes. So if you look at that page, you can see 2021 and 2022, 2021 given that you still had some of the stimulus benefit from the pandemic was better, marginally better than our expectation. 2022 was marginally below, you put the two together and weâre pretty much on expectation across those two vintages as a total, which is roughly in line with what our expectation is for the year end. Yes. And I would just add. The 2022 vintage maybe marginally less than we expected, but still highly accretive in terms of value created for shareholders by putting it on the balance sheet at least as itâs performing thus far. Thank you for taking my questions. Starting off, one thing Iâd be curious about is thinking about how pricing is evolving and kind of thinking about the marketplace. Because you seem to have talked about in previous quarters is that thereâs kind of a couple month lag on pricing and now that weâre kind of getting closer to kind of at least a slowdown in the Fedâs trajectory and hopefully very soon an end to the hike cycle. Is that really what you think will drive a return to volume as pricing catches up once that happens on the marketplace and just in general for the platform as a whole. And then when I think about the pricing that youâre getting, it looks like pricing was still a little bit lower in 4Q versus 3Q. As we go forward, as pricing moved up, kind of going back to the commentary last quarter where you were saying that youâve been pricing higher on different loan categories during the quarter. Iâm curious if we think about the yield starting to increase on new originations versus the current HFI book on a go forward basis. Iâll start, Giuliano. Iâll see if I can remember all the questions that were in there. So if I missed one let me know. So, the step back, the rate driven pressure is the biggest driver of the volume reduction for especially the non-bank investors whoâve seen their cost of capital really, significantly increase. Thatâs where youâre seeing the pressure, and those buyers are primarily the non â buyers of the non-prime and the lower prime. And so we are both curtailing volume there due to that rate driven pressure and having to until we can get the price up share some economics in that same space. Weâre now the last quarter, including us, the percentage of loans sold the banks is, weâre â we got to be in the seventies [ph] of percent. So itâs really shifted to the bank buyers right now. We have continued to move prices up. We mentioned â weâve testing at all times, price points across all of our risk cells and we think itâs important in an environment that is in and of itself is stable, making sure we maintain, take rates and understand the profile of the borrowers coming through. We are being deliberate about that. So, weâve moved prices up another; I want to say roughly 40 basis points or so over the quarter. And weâre going to continue to push on that. So, we would expect, as the Fed slows down, again, ideally stops thereâs a lag as you â as we mentioned before, Fed, the Fed moves, then credit cards move, then the market moves, and we move, and that, and so we would expect as that pressure abates thereâs the opportunity for the marketplace to begin to reignite. And as weâve shown, as recently as last year, the marketplace can rebound pretty quickly. That all assumes that the credit environment, the unemployment environment is solid. And so obviously that is a factor that Iâm sure is, certainly on our minds and itâs on the minds of our investors. Thatâs one of the reasons why weâre continuing our focus on being proactive and prudent on credit. And Iâll jump in. Juliana, just on the HFI portfolio, if you look at the NIM table unsecured consumer loans went from 13.52% in Q3, 13.6% in Q4, the vast majority of that decline was actually the deferred â the deferred items, fees and expense coming â the yield coming down from that because prepayments have slowed as expected. So, I think in terms of the actual coupon pricing coming into the book, the back book has mostly run its course now, and that pressure is abating. That makes a lot of sense. Then going from there, but when I look at that table that kind of build up to kind of the 30% to 36% marginal ROE on 2023 originations, youâre looking at any kind of implied NIM of 10.1% and youâre â and the footnote says youâre using brokered and CDs as the benchmark test â across capital looks like thatâs currently in the 4% zip code at the moment, and youâre even your high yields are even 4% at the moment. So, does that kind of imply that you think youâre going to be getting on the incremental loans, somewhere in the 14% or low â 14% or higher yield on the loan portfolio, and is that kind of thinking more about 1Q or is that something that you think itâll blend for the full year? Yes, I think, yes, the map mostly right, itâs actually a little better because the proxy, the broker proxy weâre using is closer to 5% than 4%. So, weâre not using our actual high yield savings. Weâre saying if we go out match, use a match duration brokered CD; weâre applying that rate right now. So, weâre taking sort of the interest rate risk component out of the equation here. Sounds good. One thing I wanted to wrap was just, maybe just as kind of a clarifying question was that you guys were talking about keeping the balance sheet relatively flat and then maybe potentially growing a little bit somewhere earnings and capital shake out. Iâm assuming that you mean that inclusive of the acquired portfolio that doesnât have CECL reserves. So youâre still mixing into more of a portfolio with CECL reserves as you kind of replaced the runoff in that portfolio this year. Is that a good way of thinking of it? Yes. Yes. Thatâs correct. We donât â weâve had great balance sheet growth. Weâre clearly going to be slowing down in the near term. But we donât want to lose ground that includes replacing the runoff of that portfolio. But itâs good that you called that out because that portfolio, given that itâs already, fairly seasoned, is going to run off pretty quickly. And so the big addition that will pay down more quickly than our newer generations. Good afternoon. Just I want to make sure I understood your answer to the prior question correct. The flat loan portfolio that includes the acquired portfolio as well, or that, on an average basis, would earning assets in the 1Q look higher than the fourth quarter, obviously, given the timing of the deal? Yes. On loans, it should because we only had one month of as Iâm sure youâre picking up, we only had one month of average balances for that quarter. So we will get the full quarters worth in Q1. Now the portfolio does run off quick, so it wonât be about the 900 million we ended the year at. So it will come down from there over the course of Q1. Okay. And then just you mentioned obviously bank demand in the marketplace and Iâm just â Iâm wondering if, obviously, when U.S. bank acquired, made the acquisition and then turned around and sold the portfolio. I mean, was the predecessor that bought those from the marketplace, were they a big component of your bank demand? Iâm just curious if that change indicates that thereâll be any difference in, or were they a big client, does that make a material impact in bank demand going forward, assuming theyâre not in the market anymore? So that was $1 billion portfolio. It represents a large client. So they were a long â very long-term significant partner of ours. But when the acquisition was announced â where the intended acquisition was announced, we did work with them to begin reducing their overall participation in the mix and anticipation that the new owner may not continue the relationship. So I wonât say that there was no impact, but their purchases drew down. We worked to draw them down materially, like in between when the deal was announced and when it was approved. Hey, good afternoon, guys. Thanks for taking my questions. I wanted to ask on the OpEx side maybe a question for you Drew. So if we look at the fourth quarter, you were about 180 million, I think that included about 4 million of the restructuring charges. So maybe call it $176 million. I mean is it â because there's kind of two components, right? So if you annualize that and then you take out the 25 to 30, but you guys still some with your investing. So I'm assuming there's going to be some growth on that. Just the question is how much? I was wondering if you can give maybe some thoughts around that. I'm assuming it's going to be a lot less than what we saw last year, but not nothing and just was hoping for some more context there? Yes. So marketing, I think you probably understand the trend on marketing. It's just going to tie largely to volume with some rate differences, right? The reason we specifically talked about comp and debt, I gave, I think, a pretty precise number â somewhat precise ranges so that you could â you could, you and all the investors could do the math on it. But you should take that $88 million; you should subtract out the one-time charge, and then apply the run rate savings that we're going to get. Just don't forget we have a little more severance to take in Q1. All the other line items, I mean, there's some puts and takes there, but we're not expecting dramatic changes. We are going to be working â we'll be working to be efficient in spend where we need to and make some investments, but there's a little bit of drag we'll get, for example, on depreciation and amortization because new projects will come into production, but nothing that should, I think, majorly alter your modeling from where we're at today. Yes. No, it is. Thanks for that. And then just, I guess, kind of a big picture question, Scott. I mean, obviously it's a tough environment just to make kind of definitive statements. But I guess one element that's kind of coming to my mind here as I think of other banks in my coverage universe now, like diversity can often help. And obviously, you guys are pretty heavily tied to the personal lending asset class, which is obviously what you do so well. But just curious what your kind of high-level thoughts around that are, I mean, does it make sense longer term to diversify the business more? I mean just kind of more of a philosophical question. I'm just curious how you think about it? Yes. I mean we are certainly thinking about this in a couple of phases that we'll be pursuing in parallel, but some will reach fruition more quickly. One is transitioning the model, as we've talked about, from 100% marketplace revenue to where we are now, call it, 50-50 interest income to marketplace to more on balance, more of the revenue coming off the balance sheet because it is a more resilient income stream than the marketplace revenue is. The marketplace has real value. It's a capital-light way to grow. We can serve customers. We wouldn't serve with the bank balance sheet. But as we're seeing, it is less resilient in the face of market shocks like we have today. So that's one part of the transition that we are eager to continue. And I think last year shows you that the power of when that is working together, and you can think for yourself as the balance sheet gets bigger and you maintain the marketplace, we think that will be pretty powerful as an earnings generator. And then yes, the second piece which we are committed to but are slowing down this year is really finding other ways we can help our consumers. And we know it's a very valuable consumer. They are strong credit, high income, and they like us. And so we are eager to do more for them and that is our plan. It's just that, I think this year, getting new credit products off the ground and services off the ground is, that takes a bit of time, and it requires investments. So we'll be, we are slowing it down, but we are not stopping it. Yes. Okay. And then just one, last one for me, I want to make sure I heard this correctly. Did you guys say that the commercial lending team from the stay over from the Radius Banc was kind of no longer with you guys? And so therefore, if so, would we be safe to assume that the commercial balances will kind of run down to nothing from this point forward? Or did I misinterpret that? So there are three pieces to commercial. Thereâs the GGL, the SBA lending, commercial real estate and equipment finance. So the GGL business, which is closer and what we do in terms of, those small â those are smaller businesses that are closer to the consumer. Itâs also a variable rate product that has similar dynamics where thereâs a robust market should you choose to sell it, but you can also hold it. So, Iâd say that we are the set that piece, that Government Guaranteed Lending piece, we are continuing to grow. But commercial real estate and equipment finance, in this environment just not as attractive returns for the bank or for shareholders. So, we arenât originating new loans there. So yes, over time you could expect those balances to go down. Now they paid down more slowly thanâ¦ Yes, that was going to be my follow-up. Maybe for Drew, just whatâs the amortization there, because itâs correct to assume that those will be replaced with more profitable personal loans if you are keeping the balance sheet flat correct? And I think we will grow the SBA Government Guaranteed Lending business faster. That is part of our intention as well. They should run off slower than PL to grow [ph] so less predictable, right. It just, we may have customers who decide to refinance or diversify their banking relationships, but weâre expecting it to be slower over the course of 2023. Thanks, Megan. So, we do have a question from one of our retail investors. And the question is, with credit card rates and balances at all-time highs, how do you see this affecting your business? Yes, I mean we tried to touch on that in the, the prepared remarks. I think, we believe there is a very, very material opportunity for us on the other side which is these, the balances are massive and these things that are acting as headwinds for us now should turn into tailwinds, which is investor cost of capital will come down based on forward expectations. Credit card, the Fed will not have moved yet, credit cards will not have moved yet. And we will be able to offer real value to our loan buyers and weâll be able to offer even more compelling value to our borrowers. And, it is our intention to be in a position to take advantage of that opportunity and use the earnings that generates to really continue our â the evolution we talked about earlier, which is growing the bank balance sheet and diversifying our overall set of products and services we offer to borrowers. Great. Well thank you all for joining us for the earnings call and if you have any follow-up questions, please contact investor release. Thank you.
EarningCall_1352	Welcome to NextGen Healthcare Fiscal 2023 Third Quarter Results Conference Call. Hosting the call today from NextGen are David Sides, President and Chief Executive Officer; and Jamie Arnold, Chief Financial Officer. Todayâs call is being recorded. All lines have been placed on listen-only mode. [Operator Instructions] At this time, I would like to turn the call over to James Hammerschmidt, Senior Vice President of Finance and Investor Relations of NextGen. James, you may begin. Thank you, operator. Before we start, please note that we will be making forward-looking statements during the presentation and the Q&A part of the call. These statements are based on managementâs current expectations and assumptions and are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings release and SEC filings. This call will also reference certain non-GAAP financial measures. Information about non-GAAP financial measures, including reconciliation to U.S. GAAP can be found in our earnings release, which is available on our Investor Relations website. Thank you, James. In May of last year, we described our multiyear journey to deliver double-digit revenue growth, operating leverage, and disciplined capital management. And I'm pleased to report strong execution and solid results across all three fronts in the quarter. But before I go into my prepared remarks, I'd like to address an important topic. On January 6, we became aware of unauthorized access to a limited part of the NextGen network. Upon investigation, we learned the company was the target of a sophisticated cyber-attack. We immediately executed our internal response procedures and contained the threat, secured our network, and have returned to normal operations. Our forensic review is ongoing and to date we have not uncovered any evidence of access to or ex-filtration of client or patient data. Based on our investigation to date, this incident impacted select administrative non-client files within our network. In total, this affected less than 1% of the devices used by our employees. Out of an abundance of caution as soon as we noticed the threat, we severed connectivity to some systems and notified clients who were impacted in a timely manner. The vast majority of clients continue to operate as usual without any disruption. Those systems have all been securely restored and operations have returned to normal. While unfortunate, we're happy to note that previous investments in cybersecurity paid off. We will continue to invest in keeping our systems safe and secure for our employees, clients, and the patients they serve. Now, back to our progress in the quarter, I'd like to start with growth. Our integrated solution creates a foundation to deliver insights at the point of care, which allows for us to partner with clients to improve outcomes. This differentiation is resonating in the market, especially among leading integrated care organizations looking for a holistic platform to deliver medical, behavioral, and dental care. Our bookings in the quarter reflect this differentiation where despite the macroeconomic environment, we continue to see success in gaining new logos and cross-selling our surround solutions. There were six deals over $1 million spanning both inside and outside the base. Bookings from net new clients represented approximately 30% of sales in the quarter bringing our full-year average back above 25%. We continue to see opportunity to help our clients, address the problems they face in today's environment. Such as staffing shortages, wage increases, and higher patient volumes. These challenges demand for our managed cloud services, revenue cycle, and patient engagement solutions as our clients look to gain practice efficiencies and improve financial outcomes, while continuing to deliver quality care. These factors in addition to strong client retention have resulted in continued growth acceleration across our diverse revenue streams. This is especially clear in our recurring revenues, which has been building momentum and exceeded 10% growth in the quarter. While our commercial efforts are focused on delivering growth in fiscal year 2023, our solutions and development organization are innovating to build new offerings that drive growth in fiscal year 2024 and beyond. We believe there is tremendous opportunity to expand our platform, especially when we look at the patient intake process and other front-end offerings that are currently in early testing with clients. We see strong proof points that our solutions are delivering value and a clear return on investment. I look forward to updating you all on the progress the team is making when we approach the start of our new fiscal year. Moving on to our operations and investments we're making to scale. Our ability to deliver operating leverage starts with the foundation of our employees and our culture. We just recently conducted our annual vote survey that is voice of the employee, which measures employee engagement across 14 dimensions. I'm pleased to say employment engagement has increased for the sixth year in a row and is well above the benchmark, the strong improvement in culture, working environment, and client focus. We've been thoughtful in managing our headcount throughout the year from the expansion of our sales development rep program, creating the upgrade center of excellence, and moving to a remote first work from anywhere organization, which allows us to access talent pools on a global scale, while minimizing our facility footprint. The company is focused on making investments and taking the actions required to show operating leverage. We will continue to optimize our resource mix, rationalized vendor spend, and [re-think] [ph] processes and technologies to improve our productivity as we closed out the final quarter of fiscal year 2023. Now turning to our capital allocation effort. We believe total shareholder return is enhanced by taking a disciplined and deliberate approach to capital acquisition and deployment. Our strategy is focused on investing in innovation, [accelerating] [ph] growth through M&A, and returning capital to shareholders through opportunistic buybacks. Following our last earnings call, we raised $275 million in convertible debt and concurrently purchased approximately 2.1 million shares for $40 million as part of the offering. These proceeds in addition to our cash generation and credit facility provides ample capital to execute on our inorganic growth agenda. We also announced the acquisition of TSI Healthcare, a long standing partner in the first acquisition the company has done in almost three years. TSI expands the addressable market served by our enterprise demand, unlocking new attractive specialties such as cardiology, rheumatology, and pulmonology. The company provides purpose built clinical content and a differentiated service offering, which when paired with our strong commercial channel will drive long-term sustainable top line and bottom line growth. Given the similarities in culture and in the line strategy, I'm pleased to say the integration effort is going well as we start making foundational investments back into the business. Looking forward, we maintain an active M&A pipeline and will continue to assess future acquisitions, especially as it relates to capabilities that accelerate our effort behind NextGen insights. We believe data, analytics, and value-based care enablement will continue to be an attractive opportunity for the company to pursue. Lastly, I'd like to acknowledge the passing of NextGen Healthcare's Founder, Sheldon Razin. [Sheldon] [ph] was an intensely passionate and entrepreneurial innovator. By digitizing health records and automating workflows, decades before the HITECH Act mandating the use of EHRs. [Shelly] [ph] has improved the lives of thousands of clients, tens of thousands of providers, and millions of patients. He will be missed. In building upon his legacy, the company is more focused than ever to innovate and deliver better healthcare outcomes for all. Thank you, David. Now turning to the third quarter fiscal year 2023 financial results. Total bookings came in at 44.8 million. This represents a [19%] increase from the third quarter of last year and a 20% increase from last quarter bringing year-to-date bookings growth to 9%. Software license bookings were below recent trends, which has an outsized impact on both quarterly revenue and earnings. Total revenue for the quarter was 161.9 million, an 8% increase year-over-year. Recurring revenue accounted for 148.7 million or 92% of total revenue. This equates to 11% year-over-year growth. Excluding the impact of the TSI acquisition, our organic growth from recurring revenue was 8%, primarily due to the strong performance in transactional and data services and managed services. Most of the contribution from the TSI acquisition is reflected in the subscription revenue line. Non-recurring revenue for the quarter was 13.2 million and represents a 14% decrease, compared to the same quarter last year and a 17% decrease from last quarter. While we expect Q4 software bookings will return to the prior six quarter trend, we are closely watching for changes in client purchasing preference that could be affected by the macroeconomic environment. Gross margin of 47.3% was down approximately 310 basis points, compared to the same quarter last year and down 94 basis points, compared to the prior quarter. As noted in the discussion about non-recurring revenue, software revenues are off recent trends, which had a significant impact on gross margin decline. Additionally, as discussed on last quarter's call, we have made significant investment in our upgrade center of excellence and professional services, as well as a shift in product mix. Margin improvement will continue to be a focus and spend related to upgrade should start to rate in the back half of fiscal year 2024. Turning to operating expenses, SG&A of 46.2 million decreased by 2%, compared to the same quarter last year, due to lower variable compensation, as well as cost reduction actions we have been executing such as reducing facilities footprint. Net R&D expense was 19.6 million for the quarter and represents 12% of total revenue. This is a 1% increase, compared to the same quarter last year. We had a GAAP tax provision of $1 million this quarter with a GAAP effective tax rate of 11.5%. Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q3 fully diluted net income per share was $0.12, compared to net income of $0.08 per share in the fiscal third quarter of 2022. On a non-GAAP basis, fully diluted earnings per share for the fiscal third quarter of 2023 was $0.26, compared to $0.24 in the year ago quarter. Turning to the balance sheet. We ended the fiscal third quarter with 241.6 million in cash and equivalents and no balance outstanding on our line of credit. Free cash flow for the quarter was a negative 6.9 million. As David noted, in November, we issued $275 million convertible senior notes with net proceeds to the company of [266.5 million] [ph] after debt issuance cost. Key terms include a 3.75% coupon rate, five-year maturity period, and a conversion price of $25.68. We can call them on or after November 20, 2025. For more detail, please refer to the debt footnote in our financial statements. Concurrent with the convertible debt offering, we purchased 2.1 million shares for $40 million at an average cost of [$19.02] [ph] per share. Since the authorization of our share repurchase program in Q3 of fiscal 2022, we have purchased a total of 4.8 million shares for 85.8 million at an average cost of $17, and $0.68 per share. As of December 20, 2022, we still have $74 million remaining in the share repurchase authorization. On November 30, we acquired TSI Healthcare. The acquisition provided minimal impact to our Q3 financial performance since it represents only one month of actuals. We expect the acquisition to contribute between $10 million and $12 million of revenue for fiscal year 2023 and will be accretive to earnings within a year. As mentioned earlier in the call, the impact to revenue will be mainly in the subscription revenue line. Turning to our fiscal 2023 financial guidance. As noted in the press release, we are updating our prior guidance to account for the acquisition of TSI and the convertible debt offering. We now expect fiscal 2023 total revenue to be in the range of $642 million to $650 million, which represents a year-over-year growth of 8.3% at the midpoint. Moving to adjusted EBITDA, we are maintaining our prior guidance range of $110 million to $115 million, and our prior fiscal non-GAAP EPS range of $0.93 to $0.99. In closing, I believe the company is well positioned to meet our long-term objectives based on our strong bookings performance in Q3, operational execution, and disciplined deployment of capital for smart acquisitions like TSI. Thank you, Jamie. NextGen continues to execute with a focus on driving growth for both us and our clients and we're making the investments required to deliver long-term profitability and scale. Our overall positive outlook reflects the tailwinds we created by solely focusing on ambulatory care, our resilient business model, and our focus on driving shareholder value. In summary, I am pleased with this quarter's results. And it sets us up for sustainable double-digit revenue growth in fiscal year 2024, which starts for us in April. This is one-year earlier than we said at our Investor Day in May, which targeted double-digit growth in fiscal year 2025. We will provide fiscal year 2024 guidance in May after we announce our fiscal year 2023 year-end results. And I am incredibly proud of the commitment and care shown by the NextGen family both to each other and to our clients. Hey, guys. Thanks for taking my question. Just a quick one from me when I think about what takes up most of your guys' time. I think about the progress of NextGen as first, your [indiscernible] that he had to focus really on turning around user experience. It felt like your first priority was getting to that double-digit growth target. Now that you're there, is it just pure execution or is there anything else in mind as your next to goal? I think it's pure execution from here. So, some of the new organic products that we're coming out within the insight domain, we're seeing good early client interest. And so, we'll talk about those more, but some of the things we talked are like, behavioral health. Last quarter, we had a really good sales quarter for behavioral health, which is a new organic area for us. So, those were part of the contribution to having a record sales quarter. So, I think from here, it's just execution, getting those new products out driving the margin expansion that we know is there now that we have the revenue growth and then continuing to be smart on how we deploy capital that we've raised and make really smart acquisitions. It's just doing that from here should get us where we want to go. Not a bad place to be. And just a quick follow-up then when I think about the quarterly cadence of margins for the year. Is the uptick in 4Q, should I just assume thatâs license sales shifting from 3Q to 4Q and helping the margins? Yes. I mean that's basically it. And then I think next year too, we think over time as we've, you know weâve talked about this before. We sell more subscription. We're going to temper our expectations for recognizable in our next year plan and account for that by taking out some cost to allow for that reduction in, kind of higher octane revenue. So, we can see the growth that we're looking for from that next year, but yes, it's mainly â you'll see a rebound next year as Jaime said in his comments â or next quarter, I mean, in the recognizable license revenue, and we'll be, as we talked about on the full-year number as we projected in the guidance. Hey, thanks for taking the questions. Just a quick question on the hacking incident. Has that had any impact both your current and potential clients? And I got a couple of follow-ups. No, not so far. Unfortunately, it's more common than you would think nowadays. We were glad to contain it to no client systems affected at all. No client data, no patient data, no provider data. None of those systems were compromised at all. So, we had a few less than 1% of devices that were compromised. We quickly shut that down within a day of realizing that. So, we contained it and then restored everything, communicated with any clients who might have had a process disruption because we didn't answer a support call or other, kind of ancillary things, but overall, all the practice that we've done and all of our policies and procedures served us well during this. As you can imagine, we're speeding up some of our investments in cyber that we had planned. We implemented a number of those even in the last couple of weeks. And overall, we're fortunate it's not material, it doesn't affect our results financially. We've had good conversations with our clients. They appreciate the honesty and transparency. And from here, we'll adopt a really strong culture and we've learned from it. It's one thing to do, the tabletop exercise. It's another to do it in practice. I think we're well practiced now. Got it. That's helpful. And then in the last quarter, you talked about the application becoming QHIN and just you're wondering about the timeline for that to go operational? And then as a follow-up to that, the other participants or the other applicants? Are you encouraged by the level of industry interest? And then as everyone goes live, can you just talk a little bit about how that can impact the business going forward? Thanks. So, we're encouraged by the ability of our software to, kind of scale to QHIN level. We have a number of opportunities there talking with clients about our [indiscernible] [Cloud-Connect] [ph]. So, it's the offering that helps clients connect to any, kind of any source at scale. And the application process hasn't come out for QHIN yet, but we feel like we're there from a technology perspective. We need to work through, kind of the commercial terms and we'll see what those guidelines are. But when we talk with clients about it, I'm encouraged because the idea of doing an interface one time for all clients. So, for example, if you're in Phoenix, you connect to a hospital and then all of our clinics in Phoenix can be connected at hospital through us without having to do that work. It's just so much more efficient that it's got to, kind of both speed interoperability and lower the price of healthcare because we did it one time. So, from an effort perspective, it's just substantially better. So, we're encouraged with our other people in the industry thinking about this the same way. It could be really straightforward to then just connect QHINâs, you know a NextGen QHIN to another supplier's QHIN and all of a sudden all of that is interoperable from one connection between us both. We're already connected to all of our clients. So, if another supplier was connected to all their clients, that one connection could bring enormous advantages and de-fragmentation to the healthcare marketplace and medical records, as well as improve things like how you do care management across domains and across venues. So, in summary, right, we're really encouraged. I think we're in the right place, we have the right technology, and as the application process becomes clear, we'll work through the rest of it, but I think it's a good â it's turning out to be a good move for us. And with, let's say, all the plumbing getting set up on the other end of this, you suspect that this will eliminate some of the bad acting of the info blocking in the industry or does the information highway, the presence of that, not necessarily guarantee a free flow of information from a decision-making standpoint? Yes. Jack, sorry, I misspoke on the Q1 application. It has come out and we're going through it. But I agree with your premise that this will make data much more liquid than it was before. I think some of our other suppliers set-up QHINs too, it should slow down any information blocking from any of those other suppliers or whether it's some aggregators like commonwealth or others. So, those are all I think good. We can â every one of the suppliers can, kind of handle the volume of this and is built to already. And like I said, we're already connected to all of our clients. So, for us to take the next step is really, okay, how do we do this at national scale, how do we think through, how do we run the system, and get value from it. So, I think it's all good for the American healthcare system that these, kind of regulations are coming into effect and we intend to capitalize on them. Thank you and thanks for taking my questions. I just want to better understand the top line growth and margin profile for TSI Healthcare longer-term. It seems the deal is not adding any EBITDA in fiscal 2023, which I understand 24 months, but you talked about the deal becoming accretive to EBITDA in next year, in a year or so. Maybe talk about like what will drive that? Is it just the cost management, cost synergies? Like what are the key drivers, which is that improving margins at TSI? Just maybe flush out a little bit some details there? It's a good question. So, we're still making investments in our own internal technology this year. When we went to Investor Day we talked about, we'll get operating leverage from some of the ways that we're automating ourselves, meaning automating NextGen. So, we've deployed systems to better automate how we handle our support process. We've deployed things like AI that when one of our support staff talking with a client that suggests here might be the possible answer. So, as we're hiring and scaling as we grow, we can bring people online to do their job more effectively and more productively quickly. We're also making a large investment in all the upgrades of Spring 2021, which we've talked about and obviously that will have an end date sometime this year, but that's been a big investment to set up that center of excellence. It's kind of one-time to get through this Cures Act process and then that will fade away or we'll turn that into another revenue generating capability with those employees. So, there's some things that we're doing now to try to set ourselves up to scale for the growth. And that's why we said this year, we're going to have our EPS be similar to last year as we take some of that margin and invest in our own business. And then that sets us up for operating leverage next year and the following years because we're planning on this being a multi-year journey. And I'll hand it to Jamie for other comments. I think David, we've laid out a multi-year plan and we would expect, I think a bit more is our progress on the Rule of 40 scores, so we will show some operating leverage. But as David indicated in his prepared remarks, we will also accelerate revenue growth next year. And on the EPS, EBITDA side too, we can land that exactly with spend. So, I feel like that's the easier part of the equation to work on. We've, I think, worked on and are achieving the harder part, which is double-digit revenue growth or certainly achieve that in fiscal year 2024. And then just the 92% recurring nature of our revenue, a record Q3, we can see fiscal year 2024 very clearly now from a revenue perspective. We'll give guidance in our call in May, but we're spending money this year to still hit our EPS guidance range, but we're using that money to improve our cyber profile to improve our productivity to do more robotic process automation and some of these things that will have a good NPV for us and present value for years to take care of these things one-time. I'm assuming all those initiatives, kind of apply to your TSI Healthcare [transaction] [ph], that's what I was actually referring to, right? Right. So, taking TSI, which we've worked with for many years really like the company, love the people, taking them from a privately owned organization up to a SOX-compliant, public company standard takes investment. And so, we're working through those investments while it's on the IT side, the finance side, how we run, but we'll get through those. And then as we said it, weâll be accretive in the first year. Okay. And then I know we have talked about this in the previous call and you guys made some comments on this call too about the impact of macro environment, but I don't know if maybe it's just me. I mean, it looks like you're a little bit more cautious this time, like you're watching the trends and macro impact. Have you seen any early indications in the impact of sales cycle in decision process among your clients or even indications to put any spending on hold, clearly, your bookings don't reflect there, but just curious like why is there any change in tone or still you think that there is no impact as such? Well, I mean, it does impact our clients from their ability to recruit staff, their bottom lines, right. But to the point of record bookings, right, we're doing well from a sales perspective. So, we're not seeing an impact there. We feel good about the current quarter of Q4 that we're in to end the year. So, it's not affecting us from that perspective. Obviously, like anyone, we have our own cost internally where it affects us. We've seen that, but we're mitigating that and feeling good about that. But the main piece is, I'll hand it to Jamie. Yeah, David. Jailendra, it was more about â when we talked about it today, it was more in context of the software revenue and the software bookings in this quarter. Last quarter, we were, kind of [non-cost] [ph] about the bookings level. And we said, it was kind of a timing. We clearly made it up and through the first three quarters this year, our bookings were up 9% in total. What we did see this quarter that makes â that's sort of â that we called out was the lower software level. And so, we're monitoring the macro trends, all this discussion about potentially a recession this year and other conditions that affect our clients. We are seeing â as we see the pipeline develop there seems to be more of a preference for the SaaS product than the license product and that's what we were commenting on. Thanks. Good afternoon. Maybe just jumping off Jamie on your last point there. So, David, your previous point around license sales was, you had, sounds like some conferences are going to pick back up in Q4. I guess there's a little bit of softness there in Q3. Was that then from deals that simply slipped from Q3 to Q4, I guess have you actually seen a pickup in this already in Q4? Are those in the pipeline or are you off to a quicker start with those this quarter than you have historically? Yes, Sean, it's a little bit of a slip. And so, we have high confidence because some of those may have even closed by now. So, it gives you confidence that this quarter looks good, but I do think like I said in an earlier answer, I think next year we're going to move the license revenue down from our own budgetary expectations because of the lumpiness. And we're seeing that trend because we're selling everything as subscription. So, that's kind of expected. It's been coming down as we've said before for multiple years. It used to be [60 million] [ph] five years ago and now it's around 30 million. It won't go to zero, but it'll keep getting a little bit smaller as all of our new offerings and surround offerings are all subscription. So, that's where we're seeing a lot of growth in the business. No, I was just going to say, it is â if you look at the longer-term trend, [overall] [ph] as Dave said 5 or 6 years, you see a very clear trend line. It did change as we started to come out of COVID. We're just being â we're calling it out, but we have an adequate working set for this quarter. So, we just wanted to highlight it. We try to be transparent. Okay. And then with cross-selling continuing to be an important part. David, you mentioned the strong solutions that being an important part of the growth algorithm going forward. What's the backdrop like there now? And what I'm trying to get is just the motivation for clients to swap out and consolidate ancillary systems on NextGen, is that â it's kind of the main factor there just your ability to integrate all of these solutions and more seamlessly and present them with kind of one offering? Or is there some element when you bundle all these together, can you just price all of these in a way that's a little bit more competitive than standalone point solutions could? Yes. So, we think integration wins. So, integration is an easier way to manage the system. So, you have less interfaces between us and maybe point solutions, it's easier to host, right? So, we can host everything for a client in our in AWS and have an integrated cloud-offering and it's less from a cyber perspective to protect, as well as less to manage. So, if you're a [physician office] [ph], you're under pressure from a revenue perspective, you're thinking, okay, I'm going to have less systems. We think the same thing when we're looking at our own cost internally. We want to simplify the number of suppliers that we work with. And we'll pick integrated suppliers to do more with fewer people. And as you do more, you expect to see a return there. Nothing else from your own staff because there's less systems that they have to know how to work. So, I think that trend is playing out. I think it's favorable for us from an integrated provider perspective. And it should continue. We see people still wanting to buy these solutions. It's easier to add one on than it is to go contracts with somebody new and go through that process. Hi. Thanks for taking the questions. I just wanted to follow-up a little bit on the TSI margin questions, can you maybe talk about the gross margin profile? And then the EBITDA margin profile of that business, maybe near-term and then also steady state just because I think there are a couple of different specialty EMRs that you guys will be maintaining as you scale that business? Thanks. Well, it's not multiple EMR. So, they use our EMR. They have content that's specific to three specialties, the pulmonology, rheumatology, and cardiology. That's really attractive to us because we haven't gone after those specialties, but we use our EMR. So, over time that the EBITDA profile looks really good. It'll look like our own EBITDA profile. And in some ways, they do better in some places than we might do. So, long-term, I think the EBITDA profile will approach ours. And Jamie, I don't know if you want to add any color on the gross margin? Yeah, David. I'm going to go back to why we acquired TSI is more so than talking about â the margins are going to look pretty similar to ours, but the reason we acquired TSI is their specialty content. And their high level of service that they provide to their customers, which â so the content is in rheumatology, cardiology, and pulmonology. These are specialty areas that they had built content and we didn't have it. So, we think it opens up new areas for us and can help accelerate our growth for the NextGen enterprise domain. And the other thing is, some of the things they provide services to their customers. They have some offerings that their customers value and we will bring those to our NextGen clients also. So, it's more about the opportunity it creates on the top line is how I think about it. Got it. And then I think just as you were discussing the TSI revenue acceleration potential, you might have mentioned that the sales force was, kind of limited at the time of the acquisition. I'm wondering were the costs associated with ramping the sales force for that business fully reflected in the fiscal 3Q? And then if not, just when might those investments begin to appear? Thanks. Well, we didn't own the asset that long in 3Q. So, you'll see it ongoing, but it should offset with the growth we think we'll see from that business too. So, it'll be going forward, but it's in all of our guidance. Yes. Good evening, guys, and thanks for taking the question. David and Jamie, kind of a macro question as cost cutting and HR levels and staffing levels seem to be a trend across the industry. I know this is always a sensitive topic, but I know it was hard to hire employees during the upswing. We're seeing a lot of layoffs across a lot of macro tech sectors during this downswing. I guess, I'd ask you how you feel that cost structure and staffing? And does the company see this more as an opportunity to opportunistically hire people and bring on talent or as you look at the demand environment, is this something where you're kind of trying to match staffing levels to end market? And the questions, kind of spun from the SG&A spend in the quarter was, kind of flattish to down slightly year-over-year and below what we had expected. So, just kind of a headline cost and headcount question please. Yes, thanks for your question George. I think we see it as an opportunity to acquire talent. So, when we see Salesforce, Twitter, those kinds of organizations laying off in large numbers, we think, wow, there's probably a great architect in there who could be building software with us in a more resilient industry of healthcare. So, we're thinking about it as this is good. A good time to be us to start growing and thinking about how can we acquire really great talent. We always look at our cost basis and we talked a little bit earlier about how we're thinking about getting efficiency and making investments in systems to automate our own staff and the productivity of our own teams. That'll continue. I think we'll be through most of that in this fiscal year. And then that's why we'll see, kind of earnings growth. Next year, it's one of the leverage points for us, but we're pleased to be hiring in this environment. David, what I would say is, we worked really hard over the last few years to build a scalable infrastructure. We will continue to invest in technology that increases our efficiency. And we managed our headcount very tightly over â even during the growth periods of the last year and a half. And we will continue David's point about bringing on the opportunity for some of these layoffs, it's for us to get certain skill sets that have been hard to find. So, we will be selective in it and that's all part of our plan to demonstrate operating leverage over the coming years. So, you have to be very disciplined to make that a reality. Well, there's no other questions. Thanks for joining. It was good quarter, great quarter as far as our bookings perspective. Still being able to sell in this market. Very excited about the prospects going forward, double-digit growth coming up here very shortly as we start fiscal year 2024 in April 1. Thanks for your continued interest in NextGen Healthcare.
EarningCall_1353	Good morning. My name is Michelle, and I'll be your conference operator. At this time, I would like to welcome everyone to ADP's Second Quarter Fiscal 2023 Earnings Call. I would like to inform you that this conference is being recorded. [Operator Instructions]. I would now like to turn the call over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead. Thank you, Michelle, and welcome everyone to ADP's Second Quarter Fiscal 2023 Earnings Call. Participating today are Maria Black, our President and CEO; and Don McGuire, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC's website and our Investor Relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. A description of these items, along with the reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. Thank you, Danny, and thank you, everyone, for joining us. ADP delivered strong Q2 results headlined by 10% organic constant currency revenue growth; 120 basis points of adjusted EBIT margin expansion; and 19% adjusted EPS growth. We continue to deliver exceptional value in the HCM market as we invest in ourselves and innovate to continuously meet and exceed the changing needs of our more than 1 million diverse, local clients. I'll start with some highlights from the quarter. In Q2, we drove very strong ES new business bookings growth, which included an incredible finish in December. We have continued to see robust demand across our downmarket portfolio and our ES HRO offerings and our international sales performance, especially our GlobalView platform was much stronger in Q2 after a softer Q1. Overall, we are pleased with our sales results for the first half of the year, and although clients are still dealing with a number of uncertainties, our pipelines are healthy, and we feel well staffed, and well positioned to deliver solid bookings growth for the remainder of the year. Our ES retention was once again a source of outperformance with modest year-on-year improvement in Q2 overall despite continued normalization in down market out of business rates. This strong result was just shy of the record retention set during the pandemic and was led by our mid-market, our upmarket, and international businesses. And we're pleased to be taking our full year guidance up slightly. Our pays per control metric was 5% for the quarter, decelerating slightly from Q1 as we had anticipated. Job growth in the U.S. labor market has been slowing, but clearly remains solid, which you see reflected in our client base. Despite recent headlines noting job cuts by number of companies, we have yet to see broad-based softening in the labor market. Last, on our PEO, our growth in average worksite employees was solid at 8%. While we have been expecting growth to decelerate over the course of this year, the pace was a bit faster than we previously assumed and we're adjusting our outlook accordingly. With that said, demand for the PEO solution remains healthy. The secular growth opportunity is unchanged, and we are well positioned to reaccelerate our worksite employee growth. Stepping back from the quarter, I want to provide a quick update on our broader strategy. Over the last several years, you've heard us talk a lot about the modernization of our products. Our simpler user experience enhances ease of use for our key platforms like RUN and Workforce Now, and enables a more seamless integration to complementary solutions like insurance, retirement and payments. Our Next Gen Payroll engine is a prime example of how we're modernizing the back-end of our solutions, and we continue to offer it to a broader set of new mid-market clients. In brand new solutions like Roll in our Next Gen HCM platform position us to address certain HCM opportunities more fully than before. These product enhancements are designed to drive win rates and retention even higher, and we have tremendous opportunity in front of us. But our strategy has always been about much more than just offering HCM software. ADP clients want us to help them find, hire, pay, engage, and provide for the retirement of their workers in a thoughtful and compliant way. To truly solve for these needs, we are modernizing all aspects of the client relationship. That starts with product, but also extends to our go-to-market approach, how we onboard our clients, and even how we advise and support them on critical issues. We refer to this collective effort as our Modernization Journey. And as with our product journey, the opportunities here are incredible. We are removing friction and enhancing the client experience in many ways. In our U.S. down market, we continue to digitally onboard tens of thousands of clients every year, making onboarding easier for our clients and accelerating time to start. We have seen this success in the U.S., and we're beginning to scale the same capability in Canada. Our Intelligent Self-Service capability launched only last quarter is already helping a portion of our client base answer millions of questions from client employees through a completely automated process. And now in our international portfolio, we're implementing chatbots to reduce work for those clients as well. We continue to invest in our robust partner ecosystem, cultivating deep relationships and integrations with financial advisers, CPAs and benefits brokers to provide a seamless experience for our mutual clients. And we're using the power of our extensive data to deliver insights to bring greater value to clients from better aligning pays to market trends, to reducing the frequency and severity of workers compensation claims, to identifying tax credits and other legislative incentives. To bring this large-scale Modernization Journey to life, I'll speak to one of our fastest-growing businesses: ADP retirement services, which helps employers establish and administer retirement plans. Businesses today face a complex environment with significant legislative change and our clients look to us to help them navigate these changes, stay compliant and address talent challenges. For example, in the retirement space specifically, the recently passed SECURE Act 2.0 alone has over 90 provisions for businesses and employees to consider. And what we've designed makes life easy for our clients and partners, improves the financial wellness of their employees, and sets us apart in the market. Our robust 401(k) solution with thousands of different investment options is not only clean and intuitive, thanks to our new UX framework, but is also deeply integrated with RUN and Workforce Now. Our highly tenured, licensed, retirement services sales force understands our clients and understands which solutions to make a meaningful difference in a client's unique talent strategy. To expand on our partnerships with financial advisers, we recently developed a platform called Advisor Access, much like the Accountant Connect platform we developed for the CPA community years ago. This positions us better to serve our mutual clients and their employees. And our tax credit team, full of experts in their field, is there to help our clients or their CPAs apply for, and obtain the appropriate legislative incentives. Our goal in our Modernization Journey is to consistently improve the full end-to-end experience for our clients and their employees, which will in turn contribute to our long-term sustainable growth and profitability. Thank you, Maria, and good morning, everyone. I'll provide some more color on our results for the quarter and update you on our fiscal '23 outlook. Overall, we had a strong Q2 on both revenue and margins. If I can summarize, we had generally positive developments in our ES segment despite some incremental headwinds. Meanwhile, trends were a little softer than expected in our PEO. Let me focus on ES first, and I'll cover our results and outlook all at once. ES segment revenue increased 8% on a reported basis and 10% on an organic constant currency basis which was a good outcome for the quarter. Maria mentioned the strong new business bookings performance in Q2. Given the continued macroeconomic uncertainty, we think it's prudent to maintain our current guidance range for now, although, we feel well positioned for the back half. We also had near-record ES retention in Q2, with first half ES retention results up year-on-year, we're now revising our outlook and we expect retention to be down only 20 to 30 basis points for the full year. This continues to assume normalization in out-of-business losses in our downmarket. Pays per control were in line with our expectation in Q2, but with better line of sight on Q3, we are now assuming less of a deceleration in pays per control over the back half than we did previously and are raising our outlook to now assumed 3% to 4% pays per control growth for the year. And on FX, we had about 2 percentage points of revenue headwind in Q2, but the outlook for the rest of the year is slightly improved, and we now expect full year headwind somewhere between 1% and 2%. Those are the bigger positive developments in ES revenue. There were few developments in the other direction as well. Client funds interest revenue was up nicely in Q2, but was actually a bit lighter than we had planned. This is primarily because yields pulled back slightly from where they were 3 months ago when we provided our prior outlook. We're also tweaking down our balance growth assumption now to 4% to 5% growth for the year due primarily to assumptions around average wage related to worker mix, tax rates as well as the impact of the lapping of the payroll tax deferral. Together, we are lowering the full year by $5 million at the midpoint for revenue and $15 million at the midpoint for net impact to our earnings. We also saw underperformance in some of our volume-based businesses like our recruitment outsourcing business and our employment verification business. Overall, though, we're feeling good about our ES revenue growth trajectory and are taking up our guidance by 1% to now expecting growth of 8% to 9% for the year. Our ES margin was up 170 basis points in Q2, which was in line with our expectations and there was no change for our full year outlook. As a reminder, we've invested in headcount in sales, product and other areas throughout the organization over the last several quarters as we see continued opportunity to win new clients and further increase satisfaction with existing clients. And although we may scale back as appropriate, at a high level, we feel comfortable with our staffing levels against the secular growth opportunity in front of us. Moving on to the PEO. We delivered 11% PEO revenue growth in Q2 with 8% growth in average worksite employees. As Maria shared, the PEO results came in a bit softer than expected. The PEO business continues to benefit from long-term tailwinds, but there was a lingering effect from the pandemic, which is still adding variability to our PEO results and outlook. We are, for example, lapping very strong results on retention, bookings and same-store pays. And while the overall trends are playing out consistent with our expectations, we continue to refine our assumptions about pays and magnitude. With that said, we still see a continued solid demand environment in the PEO and the team remains focused on reaccelerating worksite employee growth. For this fiscal year, we are lowering our PEO revenue outlook to 8% to 9%, driven by growth in average worksite employees of about 6% to 7%. PEO margin in Q2 was up 130 basis points about in line with our expectations, and we continue to expect PEO margin to be flat to up 25 basis points for fiscal 2023. Adding it all up, the favorable revision to our ES revenue outlook is largely offset by our lighter PEO revenue growth forecast. And so we continue to expect consolidated revenue growth of 8% to 9% in fiscal '23. We also maintain our outlook for adjusted EBIT margin expansion of 125 to 150 basis points. We still expect our fiscal 2023 effective tax rate to be about 23%. And we continue to expect adjusted EPS growth of 15% to 17%, supported by our steady share repurchases. I'll just make one quick comment on cadence. We expect consolidated revenue growth to be relatively steady in Q3 from where we were in Q2. We expect margin expansion to be a bit more modest compared to what we experienced in Q2, closer to 50 to 75 basis points of expansion. There were a few reasons, including the lapping of a onetime item last year, comparisons from a headcount perspective, and certain investments in sales and marketing that we're assuming for Q3. Again, there's no major change contemplated for the full year, but hopefully, this helps you think about Q3. On PEO, you mentioned the lingering effects from the pandemic is having an impact. But I was just curious, is the macro environment and I guess, labor market trends impacting PEO differently than ES? Is there more -- is it a question of sensitivity to small versus large market clients? Is it vertical exposure? Or is this really something you see is as quite transient? Thank you, Ramsey. I appreciate the question. So I'll try to cover all the ground on the PEO that you asked about. So specifically, what we saw with respect to the first half, we did see, as mentioned in the prepared remarks, we did see that booking did come in softer. We saw that retention came in a bit softer as well than our expectations. In terms of the lingering effect that we cited, all of our businesses had an impact from the pandemic. I would say the PEO is probably the one that had the most impact. If you think about all the drivers that constitute the PEO, it's everything from average wages to worker mix to paid unemployment to certainly the lines of insurance, workers' compensation and health benefits. So I would say it's the business that had the most impact as the pandemic came into the business. And as the pandemic gets flushing out, it is having a lingering effect on the business. I think you touched on what we're seeing with respect to pays per control in the PEO in the context of ES. But I would say is, pays per control is -- the growth rate is decelerating in the PEO. That was expected. If it contributes to the slighter softer performance in the first half and is contributing to the second half. But the two main drivers really behind the performance in the first half as well as the outlook for the second half are bookings and retention. One thing I would say, though, because I want to go back to the strength of that business. We have incredible faith in that business as it relates to the growth from a long-term outlook perspective. The demand is still there. In absolute form from a bookings perspective, the PEO did have growth year-on-year, albeit it was softer than ES and softer than our expectations. Got it. That was super helpful. And just a quick follow-up for me. Tech layoffs have been -- tech sector layoffs have been in the headline recently. I know you guys have a very diversified business, but I thought I'd ask anyway. How exposed are you to that particular vertical? Are you feeling any kind of acute impact from all those headlines kind of layoffs in the technology sector? Yes, Ramsey, it's a good question. I think it's hard to avoid all the headlines that we're seeing day in, day out. And it's fair to say that there's been a number of large names that have announced major layoffs, I'd also with the -- tough to say that some of those clients are -- or some of those people making those layoffs are our clients. But those layoffs are happening around the world in some cases, they're not necessarily our clients in all of our markets. So I think it's fair to say that we have yet to see any significant impact from all those announcements. And I guess I'll just round it out by saying, we're still seeing stronger or strong demand. We've taken up our pays per control assumption for the back half. And we're doing that not just on our own internal perspective, but we're also looking at the BLS reports, the JOLTS reports. Everywhere you look continues to suggest that there's still strong demand for employment. Unemployment continues to be very low. Unemployment applications are still in record lows. They're not increasing. So the macro environment continues to be very, very favorable for us, irrespective of some of those headlines that we're seeing. I wanted to ask about ES bookings. So it sounds like a positive commentary, strong performance there. I think you called out international as coming back strong versus last quarter and also downmarket. Can you talk a little bit about the mid-market? How are the trends there? And yes, I think the key question in everybody's mind is, are you seeing any signs of macro pressure on bookings as companies potentially pulling back their tech spending? We were very pleased with our overall new business bookings for the second quarter. Definitely saw an acceleration in pipelines. I'll get the pipelines in a minute. I did cite the downmarket, the strength that we're seeing in the downmarket, that's really our entire downmarket portfolio. So thinking about our -- obviously, our Run offering, but all the things that tether off of the Run offer, which is the retirement services that I spoke to at length during the prepared remarks, Insurance Services. We did see strength in Employer Services HRO. And then last but not least, one of the other things that I was most pleased to see was the bounce back in international in the second quarter, both in pipelines as well as results. And that was, as mentioned really in our GlobalView space. So very happy with the results, very happy with the strengthening of pipelines. That's what gives us confidence, stepping into the back half as we think about heading toward our guidance of 6% to 9%. In terms of -- I think you also wanted to know about the mid-market because I didn't cite that specifically. We had very solid yes, very solid mid-market sales, and we continue to see the demand there as a byproduct that is certainly not getting easier for anyone to be an employer, both from a legislative perspective as well as a talent perspective. We have incredible strength in that business as it relates to the product investments we've made. So think about user experience to what we're attaching with the Next Generation Payroll engine. So we made good product enhancements. We had strong NPS. We have incredible retention results. So the mid-market in general had also a solid sales performance. What I would say is, as you contemplate the mid-market, don't forget that Employer Services HRO, the offer that we call Comprehensive Services fits squarely in that market, and that's an area that experienced tremendous growth during the pandemic, and that growth has sustained and is exceeding the overall Employer Services growth. So altogether, the net results for the mid-market are very, very solid for us. Got it. Got it. Very helpful. And then a quick follow-up for me on pays per control. Your number was very strong this quarter we thought, out from your expectations. But also keeps outperforming by 1 point or 2, kind of the broad measures of labor market growth in the U.S. like nonfarm payrolls. Remind us what's the driver of that? And how sustainable is that as the overall labor market slows down? Can you maintain that 1 to 2-point premium? Yes, it's a good question. But just to remind everyone that, that number is really a mid-market number. So we focus on the mid-market when we provide that pays per control number. And it has been strong. As I mentioned in the earlier answer with respect to the macro environment, the labor market continues to be strong. We're continuing to see our existing clients add employees. As Maria said, bookings are strong. And I think it's the kind of the $64,000 question about how long the labor market can continue to grow. Unemployment can stay so low as we look at some of the headlines and will those things start to converge at some point in the future. But for now, I think we're comfortable with what we've done in terms of taking up the pays per control growth for the back half. And Eugene, just to your point about that spread, having existed in the past, I think typically, we would have expected 2% to 3% pays per control growth in normal economic environment, and that compares to maybe 1% to 2% total employment growth. And that's a function of our clients in general being perhaps a bit healthier than the overall economy, but also the fact that total labor includes things like bankruptcies and new business formation. So it's a slightly different take on employment. I wanted to quickly just revisit a little bit, I think you touched on it. But retention and it's an area where we had at least been expecting to see some normalization but -- especially from a company perspective, but it seems to continue to improve or tighten. Obviously, you made technology advancements, et cetera, but what are some other areas, if any, that you'd point to -- that are helping drive that retention performance. Sure. Thanks, James. With respect to retention, we are very, very pleased by the strength that we've seen year-to-date. We cited, at the end of the first quarter, we had record retention. The second quarter was near record. If you look at the first half, it was a record. So we're very proud of the -- not to be a broken record, but the record retention and the strength that we saw -- and we believe that, it is a byproduct of the investments. I alluded to the investments we've made into the mid-market, as an example of the user experience. That's broad-based now across the RUN platform, our mobile app, our international offer, where we're also in international seeing record retention. So we believe a lot of these things are anchored in just really driving a better user experience, driving the product into a better place. I think the other is NPS. We have strong service results that's broad-based across the portfolio. I think we generated a tremendous amount of goodwill and value during the pandemic and how we chose to service our clients. And I think that value is -- has continued, and we see that in the results on the NPS side. So I think that's another place. You did touch on normalization. I think it's an important point to make. We do believe at this point, specifically in the down market, I think we even touched on it during the prepared remarks. We do believe that retention has normalized. When we normalize for average or adjust for average size client, we are back to the downmarket really having out of business and bankruptcies back to fiscal '18, fiscal '19 levels. So we do believe that the downmarket has normalized. So again, back to kind of the broader retention picture, it is a very strong one for us because we believe at this point, that is broad-based. And it's really a result of the investments and the service levels that we offer. So Maria, that's an interesting point that you're already kind of at least what you think were -- where we should be from a attrition perspective, et cetera, at least compared to where we were pre-COVID. What are you seeing now from the competitive environment, especially, as we see companies expressing more concern. Are you seeing flight to quality versus some of the regional players or newer entrants? Is that helping you? Just love an update of how the competitive environment factors into what you're seeing overall? The competitive environment is certainly -- on one hand, I could say it continues to evolve. On the other hand, I would tell you, if there's nothing really new to report. I think what we're seeing and we look very closely at our balance of trade, we look very closely at our win rate. We're measuring all these investments that we make and whether or not they're impacting things such as our balance of trade and such as our win rate. And what I would offer is that, there is a direct correlation between the places we're investing, whether that's the downmarket and our go-to-market brands, headcounts or in the mid-market into the product and the next-generation suite and the win rates that we have. And so we do believe that we're getting stronger in terms of our offer. And I think the record retention is a direct correlation to that. Maria, you mentioned there was a modernization initiative. I'm wondering if you can expand a little bit on that, just in terms of what we should expect over the next 6 to 18 months in terms of new offerings or increased offerings. And how would that end up impacting both from a revenue as well as from expense perspective? How should we think about that? Sure. I love speaking about the investments we're making into the Modernization Journey. And so perhaps, I can offer the story around the next generation and how we're thinking about the impact of that over the next 16, 18 months from a revenue perspective. And maybe, Don, if you want to cover the margin side. So Mark, as it relates to our overall modernization initiatives, there is all the things that I talked about in the prepared remarks, which is around tools, technology, removing friction, taking work out. Last quarter alone, we talked about Intelligent Self-Service, Voice of the Employee. So these are bespoke features, functionality that were layering into our offers, and into our platforms to make them more competitive and bring more value to the market. With respect to the next generation platforms, I touched briefly on Next Generation HCM. We've given updates of that over time. And I think we continue to see us implement our backlog, continue to build scale, build implementation. Our goal would be -- to use your time horizon over the next 16 to 18 months that we would open the aperture to have that suite specifically sold across a broader set of the upmarket clients. In terms of the Next Generation Payroll, which is what we are offering attached to Workforce Now in the mid-market. We continue to make progress on Next Generation Payroll, pretty excited about that progress from a quarter perspective. Every quarter, there's an increase of the number of clients that we are attaching the Next Gen Payroll towards Workforce Now. So I think from Q4 to Q1, we had more. From Q1 to Q2 -- or Q2 to Q1, we had more. As continue again to attach more and more, we're running about 30% to 40% attached. So again, using your time frames over the next 16 -- 6 to 18 months, our goal would be to continue to more broadly offer and scale that offering across specifically, our mid-market. We're seeing, again, great signs on win rates, things like that. I think the other initiative I would speak to is Roll. Very excited about our project that we -- or it's not project, our product that we call Roll, which is really the downmarket product that we're offering to an incremental buyer that digital native. And so again, it's exceeding all of its project milestones. We're learning. We're continuing to understand how a digital buyer wants to consume payroll end-to-end in a digital capacity. And we believe over the next 6 to 18 months that we will learn more and as such, we will scale it across. In terms of the impacts to revenue, I would tell you, revenue over the next 6 to 18 months, I'm not sure that any of those projects will make a meaningful impact to the revenue. They certainly will make any meaningful impact to bookings. And as we onboard those clients, that will generate new revenue lines for us, whether that's an upmarket, our Next Gen HCM, it's a broader piece to the mid-market, our Next Gen Payroll. And then in the downmarket in the micro market that Roll addresses, it take a lot of units for it to make a meaningful revenue impact to the broader ADP. But that's the -- the excitement is really in the offers, and offers being able to drive win rates and retention and changing the competitive narrative. So with that, I'll kind of stop and I'll let Don speak to any margin impact. Yes, Mark, I'll just follow up on Maria's comments. I think the adoption of these products is exciting and doing well. And as we have the adoption increase quarter to quarter, we expect to see improvements in revenue from these new offers. But I think at the same time, the penetration rate within our 1 million existing clients is going to take some time to achieve. So the margin impacts from those new sales and those clients is going to take some time to make its way through to the bottom line, so to speak. But I would say that we -- you've heard us often speak about transformation of these calls over the last few years. And I would say that internally, I think our biggest transformation exercise, our biggest transformation opportunity is coming from these new products themselves. So we are excited about these new offers, and we do think they're going to -- they're going to help us out in the future. That's terrific. And then obviously, in the headlines, everybody is concerned about what could potentially occur from a macro perspective in terms of, if we go into a recession, ADP has obviously got a stellar long-term track record of navigating successfully through recessions. But I'm wondering, what's your philosophy going to be Maria, if we go into a recession in terms of thinking about expenses, margins, et cetera. Would you just focus on the long term? Or would you do things in a short-term manner to adjust expenses? We do have a recession playbook, if you will. I think the first thing that happens is, we adjust things such as our go-to-market. When you think about how we address talent needs on the way up in an economy, it's kind of the converse on the way down. So that's not to suggest that the business wouldn't be impacted. The things that would be impacted are things like bookings. And the reason I bring that up is, it is somewhat self-adjusting, right, as it relates to the action. So in the absence of bookings, there is also the absence of expense. So some of that self-adjust, thinking selling commissions, overall incentive comp. We could also, as a byproduct of that, if there's lower volume on the sales side coming in, we would have lower volume on the implementation side and potentially lower volume on the service side. And so there will be, maybe a pullback in hiring things of that nature. And these are all playbooks that we've run before, a few times in my lifetime. We may add that juncture, choose to prioritize key investments differently, depending on what's happening. But we're going and we're very committed to continuing the work we've been doing on Modernization and on transformation. And I think one of the big lessons for us whether it was this most recent pandemic downturn, if you will, an event or it was the last -- the financial crisis or even the -- I've been here long enough to be a part of the 2000, call it, dot-com, et cetera, bust. And what I would say is, our investments in growth will be maintained. I think that's the key is ensuring that we make smart decisions during a downturn so that when we come out of the downturn, we're positioned to execute quickly. I think we made some very wise decisions, specifically, on the go-to-market, on the seller side during the pandemic that allowed us -- we were lucky because it was short and steep and fast. And as everything opened back up, we were well positioned to take advantage of that market because of the investments that we continue to make. So to answer your question, I think most of the changes that we would make are somewhat self-adjusting in their nature, if bookings were impacted. First one I had is on pricing. So just any change in view around ES pricing, any change in claim acceptance to the higher levels that I think you were contemplating when you entered the fiscal year, just given the macro? Yes, Bryan, thanks for the question. I think it's a relatively short answer. The fact is our prices are holding well. As a matter of fact, I would say that we are kind of at the high end of the guidance we gave previously, and we're comfortable with that. I think if we look at our retention, we look at our NPS scores, it appears that those price increases have been understood and accepted as well, as could be expected. Okay. Good to hear. And then on the international front. So can you just talk about what you saw in Europe here that drove the better performance in the quarter. And you cited U.S. pays per control here in the earnings material, what does that imply in the Europe base? So I'm curious not just on the employment level but also the demand, whether there's really any particular solutions that drove that better performance or different underlying behavior in that base versus U.S? We were very pleased by the improvement that we saw in international bookings. It was driven mainly by our GlobalView offer and a bit of our in-country business. So very excited about what we saw specifically, as it relates to performance in the second quarter. But also about pipelines, right? So a quarter ago, I was on this call citing that we believe that there was some pipeline depletion that happened specifically in international. So pipelines that were pulled into last fiscal year. International was one of the businesses that had an incredibly strong fourth quarter finish. And so we did see a need during the first quarter to rebuild pipelines. The great news is those pipelines were rebuilt and we saw that execution in the second quarter. It's also what gives us optimism as we head into the back half. So very excited about international. And as optimistic as I am, it is an area that we're still continuing to watch for all the obvious things, I said. Last quarter, which is, there's still the crisis in the Ukraine. There's still the energy crisis. It is also an area that we see a tiny bit of pipeline aging. And so international remains a watch item for us, albeit, very excited about the pipeline build and the results in the second quarter. And I think you asked about pays per control in international? Yes. Bryan, pays per control for our international pays tends to be more subdued than what we have in the U.S. in both directions. And so early pandemic, it didn't fall very much at all. And in the recovery, subsequent, we had less growth there. So that's continued. . Yes. So just maybe -- so the government programs that are in place and the kind of the social aspect, if you will, of European employment means that things don't go down very quickly. And as a result, they don't recover very quickly as well because they don't have much to recover from. So that's a good for consistency, if you will, continuity of earnings. So that's -- that works in our favor in these -- when times are trying. Hope you can hear me. Maria, I think I heard you say you were looking to reposition PEO growth. If that's the case, can you elaborate on that? I'm just trying to think if the implied second half growth in WSE volume within PEO, that's a good number to start from. As we look to next year, could growth get better or worse from there? Or how quickly can the repositioning, benefit of the volume outlook? The comment that I made was really about bookings. And so we are looking to reaccelerate bookings in the back half. For PEO, as mentioned, it was a bit softer in the first half. In terms of the question of when we anticipate the reacceleration, the well-positioned reacceleration and worksite employee growth, we don't anticipate that it will be in the next couple of quarters. So not a position to necessarily give guidance for next year. But we are lapping -- as mentioned in the remarks, we are lapping record retention, record bookings. And as some of that lapping happens, we believe we're well positioned to reaccelerate works on employee growth into next year. Got it. Perfect. And then just on Retirement Services, since you mentioned it, in your prepared remarks. Any update on penetration there across the major lines? And if there's any change in the outlook or the model there. Sure. So it's safe to say that business is outperforming its targets. It has great growth. We do have -- and last week, we talked about it, we do have 125,000 plans across that business. It's primarily an SMB space, a little bit into the mid-market and even upmarket. But nonetheless, if you just think of it in the SMB context and with the new SECURE Act and -- which is the 2.0 version of the 1.0 and all the state mandates. At this juncture, we have 125,000 of 800,000-ish Run clients that take advantage of the offer. So you can kind of think about the opportunity in that way. That's not to suggest that every single one of those Run clients could be a retirement plan, but even if we were to capture a bit of that. We do believe, and it's part of the reason I'm so excited about it is because it does continue to outperform its growth targets. And we believe there's tremendous runway for growth in Retirement Services over the coming years. I just wanted to ask one on the volume-based parts of the businesses that you mentioned, particularly on the employment verification. I was just wondering if you could help us understand how much did that contribute? And what are the assumptions going forward? Are you assuming that there will just be less activity around employment verification? Or do you think it was just seasonally lower? Just how should we think about that since you called it out this quarter. Okay. So let me talk about the 2 volume businesses that we referenced in the prepared remarks. The first one would be the RPO business, the recruitment outsourcing. That business was down and that business is not a very big business for us. And most of it is focused in the upmarket. Most of the clients we have there are in the enterprise space. And I think that is an area, of course, where we are seeing something internally that correlates more with some of the headlines that we're seeing in the press. But it's not a very big business for us, and it did come down. On the employment verification business, of course, mostly and significantly related to the mortgage market. We don't share the number that EV business is part of our broader $1 billion comprehensive services business. It's meaningful for us. From a revenue perspective, it's more meaningful for us, if you will, from a margin perspective because it's above-average margin business. Hence, we called it out. But our expectations as we look forward is, we do expect there to be softness in the mortgage market in the back half of the year. And we've reflected those expectations and those forecasts into the numbers that we're sharing with you today. Great. And then maybe just a housekeeping question on the rate side. So just so we understand it. When the company gives the forward outlook for the float revenue guidance. Are you assuming -- I'm assuming the tenure that's come in at the short end of the curve has actually gone up. So is it -- should we assume that the tenure at current levels is what you're now forecasting going forward? I'm just trying to -- we're just trying to make sure that we get it correct, the inter-quarter moves and how we should think about that on the guidance of that. . Yes. So since we presented -- since we gave guidance last quarter, rates have come down, particularly on the mid and the long rates. And even though short-term rates have increased, some of our short-term borrowing costs in our commercial paper program. So the rates that we're giving and the reason we take in our client fund interest forecast down a little bit at the midpoint, is to reflect those increased borrowing rates and the softening, if you will, of interest rates in the mid and the longer term. Yes. Samad, thanks for asking that question because I know we take a slightly different approach than some of our peers. But even when you think about the short end of the yield curve, what is currently baked into market expectations is also what baked into our outlook for the year. So even if the Fed raises rates, that does not necessarily suggest upside to what we had previously guided. And to Don's point, at the longer -- the mid and longer end of the yield curve, you actually saw a decline. And so we share in our earnings release the incremental yield on new purchases and that declined from, I think, 4.3% last quarter to 4.1% this quarter. So in other words, we're getting less in the mid and long end of the yield curve, and we're getting more or less what we expected in the short. I wanted to come back on PEO for a second and maybe piggybacking on Tien-Tsin's question. Just as we think about the second half of the fiscal year. It looks like the revenue growth is going to come in 5%, 6%. And then you talked about getting to some easier comps and some reacceleration. But are you thinking any differently about the medium-term guide for PEO? I think that was 10% to 12% when you provided that at the Analyst Day. So the medium-term guide, all of the medium-term guides were somewhat aspirational in their nature, and we're not sitting here today making changes to any of our medium-term guide. I think, again, when I think about the PEO outlook, just a reminder, because I said it earlier on the call, but I think it is an important point. The demand has been incredibly strong still for the PEO. It is still growing nicely through the second quarter. Technically was year-on-year growth. It just wasn't what we had expected, and it decelerated a bit earlier than we thought. And so when we think about kind of the back half of the PEO, we do expect bookings to reaccelerate. As mentioned, we expect works on employees to not accelerate in the coming quarters, but we're well positioned to do so as we lap the compares into next year. But I think the big piece -- by the way, even retention was healthy. Retention is right in line with really where it's been in the last decade. I spent a lot of years in that business. And I've seen this as nothing abnormal, if you will. It's really just the byproduct of some lingering effects from the pandemic, which is not that different than some of the strangeness that we experienced during ACA in that business. And so what I would say is, demand is healthy, bookings is healthy, just not as high as we wanted it to be on tough compares. Retention is healthy, just not as high as we wanted it to be, again, on tough compares. And we feel well positioned in that business to accelerate and very excited about its long-term growth opportunity for us. Yes. Sorry. And at the same time, remember, at Investor Day, we said that we were expecting high single-digit growth in average worksite employees. So I think we're still very much on that track and pretty much committed to that. . Okay. Appreciate that. Just wanted to follow up on -- so on the pays per control side, obviously, you upticked the guide there. But we have seen in the temp labor market, there's been some material declines in recent months. I'm just wondering how you guys think about the temp labor market relative to broader labor market conditions. And your business with some kind of potential lag? Just any views there would be helpful. Sorry, I will -- let me start. Maybe Danny can add some color. I think some of the leading indicators we look at -- so look at the JOLTS report, we look at the job postings, et cetera, those still seem to be healthy. It is -- I mean, the open positions, the until positions are certainly declining, but they still remain at healthy levels compared to pre-pandemic levels. So I think that would be an indicator we look at. And I think there's still some room there before they get back to what we saw pre-pandemic. So I guess we'll continue to pay attention to it. We're focused on it. But at this point in time, things still feel to be pretty healthy. Yes. Jason, exactly to that point. It's one of many leading indicators that we look at. And for sure, things are slowing, given where we are with employment and 3.5% unemployment rate. So it's not a question of whether we expect the monthly jobs growth to slow over the next several months, I think that's more or less assumed. But the question is, at these employment levels to get that type of growth is still a very healthy outcome. And so I think that's how we would characterize the overall environment today. Maybe Maria or Don, as you look at the PEO business and is -- are you seeing any more competition in the business? Could that be a part of maybe you're seeing? Or is this just that you need to reposition the business a little bit and the business was so strong that the comparisons are difficult. I think the business was so strong. I think the compares were difficult. We plan for deceleration. It happened faster. We do not see a competitive change or landscape that exists. Again, in terms of where that business gets its business from, that 50-50 split between kind of new clients coming in as well as upgrades as well as where we actually return clients that leave. Certainly, there is PEO to PEO switching, but it's a very small piece to the overall results on the booking side or the impact on retention. And we're not seeing -- again, we look at balance of trade, we look at win rates and we do not see a meaningful change in the competitive landscape. . And then maybe Don and Danny, I know you're talking about leading indicators and Don, you talked about the JOLTS report, and I assume we have lots of other statistics. But I'm wondering, are you able to look at the customers you have and the demand they see for employees? And if you kind of compare that to what you saw 3, 6 months ago. Are you able to do that? And if so, maybe what you might see in that type of -- those type of statistics? Yes. I mean, I think the way we look at that, Kartik, is through the pays per control growth. And so as we went from 7% growth in Q1 down to 5% and we were looking to be a bit flatter in the back half, although we've become a little bit more optimistic on that as time has gone on. So I think that would be the key area where we kind of take a look and see what the demand is with our installed client base. Yes. Beyond that, Kartik, we do have some recruitment solutions beyond the recruitment outsourcing one that Don spoke about earlier. And so we have, for example, data on the total number of job postings that our clients have. And if you were to look back, that would typically track JOLTS, the trends would be very similar. Now that said, clearly, you could be in an environment where people have job postings and then they decide to pull them. So how accurate that is, how great of a leading indicator that is, it's hard to say. But at the same time, we have live data on pays per control as Don points out. So we know with precision how many people are being added week-to-week. That's healthy. The job postings are healthy. Granted there are some signs of deceleration, layoffs and temp, but the bigger picture is still healthy. This concludes our question-and-answer portion for today. I am pleased to hand the program over to Maria Black for closing remarks. Thank you, Michelle, and thank you to all of you on the phone today for your thoughtful questions. As you heard from our tone today, very pleased with the first half, excited about how we're positioned for the second half against our updated guidance. Again, everything that we do every day is all about solving for clients in the world of work. And with that, I think it'd be appropriate for me to thank the 60,000-plus associates that are out there every day doing that work for our clients, for their workers and bringing meaningful value into the world of work and into the world of HCM. So thank you to all the associates. Thanks to all the analysts and the investors for your support and your continued support. We certainly appreciate it and we look forward to keeping you updated and speaking with you again soon. Thanks so much.
EarningCall_1354	Good day, everyone, and welcome to todayâs Bank of America Earnings Announcement. At this time, all participants are in a listen-only mode. Please note, this call will be recorded, and I am standing by if you should need any assistance. Thank you. Good morning. Welcome. Thank you for joining the call to review the fourth quarter results. I know itâs a busy day with lots of banks reporting, and we appreciate your interest. I trust everybody has had a chance to review our earnings release documents. Theyâre available, including the earnings presentation that weâll be referring to during the call, on the Investor Relations section of the bankofamerica.com website. Iâm going to first turn the call over to our CEO, Brian Moynihan, for some opening comments, and then ask Alastair Borthwick, our CFO, to cover some other elements of the quarter. Before I turn the call over to Brian, let me remind you that we may make forward-looking statements, and refer to non-GAAP financial measures during the call. Forward-looking statements are based on managementâs current expectations and assumptions that are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings materials and SEC filings available on our website. Information about our non-GAAP financial measures, including reconciliations to U.S. GAAP can also be found in our earnings materials that are available on the website. Thank you, Lee. And thank all of you for joining us this morning. I am starting on slide 2 of the earnings presentation. During the fourth quarter of 2022, our team once again delivered responsible growth for our shareholders. We reported $7.1 billion in net income after tax or $0.85 per diluted share. We grew revenue 11% year-over-year and delivered our sixth straight quarter of operating leverage. And again, we delivered a strong 16% return on tangible common equity. If you move to slide 3, we list the highlights of the quarter, which have been pretty consistent throughout the year. We drove good organic customer activity and saw significant increases in net interest income, which all helped drive operating leverage. Revenue increased year-over-year 11%. It was led by a 29% improvement in net interest income, coupled with a strong 27% growth in sales and trading results by Jimmy DeMare and the team. This growth will exceed the impacts of lower investment banking fees and the impact of bond and equity market valuations on asset management fees in our wealth management business. The positive contributions of NII and sales and trading were also enough to overcome a decline in service charges driven by the fully implemented changes in NSF and overdraft fees in our consumer business. Importantly, we improved our common equity Tier 1 ratio by 25 basis in quarter four to 11.2%, and we achieved that without changing our business strategies. Weâre well above our both -- our current 10.4% minimum CET1 requirement and above the requirement that weâll have beginning next year in January of 10.9%. We added to our buffer while both growing loans and reducing outstanding shares in the quarter. On a year-over-year comparative basis, both net income and EPS are up modestly with strong operating leverage more than offsetting higher provision expense. The higher provision expense is driven primarily by reserve builds this quarter, a result of loan growth in our portfolios and also our conservative weighting in our reserve setting methodology, which Iâll touch on later. Last year, we had large reserve releases. Net charge-offs increased this quarter, but asset quality remains strong. Charge-offs are well below both the beginning of the pandemic as well as longer-term historical levels. And again, Iâll touch on this in a few pages. All that being said, the simple way to think about it is pretax pre-provision income, which neutralize these reserve actions grew 23% year-over-year. Letâs turn to slide 4. Slide 4 shows the year-over-year annualized results. And quarter four results were a nice finish to a successful year in which we produced $27.5 billion in net income on 7% revenue growth and a 4% operating leverage. While the year was strong, full year earnings declined as a result of loan loss reserve actions. For the full year of 2022, again, we built about $370 million reserves. And by contrast, last year, in â21, we released $6.8 billion of reserves. Isolating those changes, again, youâll see that PPNR grew a strong 14% over 2021. As I said earlier, the themes were characterized by good organic customer activity, strong NII and always helped by years of responsible growth. Slide 5 highlights some of the attributes of organic growth for the quarter and the year. This plus the slides that we include each earnings materials in our appendix, which show digital trends and organic growth highlights across all the businesses. Our investments over the past several years in our people, tools and resources for our customers and our teammates as well as renovating our facilities have allowed us to continue to enhance the customer experience to record high levels and fuel organic growth. In the fourth quarter of 2022, we added 195,000 net new checking accounts, bringing the total for the year to more than 1 million. This is twice the rate of addition that we had in 2019 in periods before the pandemic. This net growth has led to 10% increase in our customer checking accounts since the pandemic, while keeping that 92% of our accounts are primary checking accounts of the household and the average opening balance, not the average balance, but the average opening balance of these new accounts is over $5,000. We also produced more than 1 million new credit cards, the sixth consecutive quarter of doing that, bringing us back to levels that we generated pre-pandemic. Credit quality you can see on Appendix slides 28 for consumer remains very high in new originations. Verified digital users grew to $56 million with 73% of our consumer households fully digitally active. We have more than 1 billion logins to our digital platforms each month, and thatâs been going on for some time now. Digital sales are also growing, and they now represent half of our sales in the consumer business. Erica, our virtual digital assistant is now handling 145 million interactions this past quarter and has passed 1 billion interactions since its introduction just a few years ago. This saves a lot of work for our team. When you move to the GWIM business, the wealth management business, our advisers grew by 800 in the second half of the year. Our team added 28,000 net new households across Merrill and the Private Bank in 2022. We experienced solid net flows despite the turbulence of markets. By the way, during 2022, our average Merrill household opened with the balances of $1.6 million, we get very high-quality account openings. On flows, when combined across all our investment platforms in our consumer wealth management business, we saw $125 billion of net client flows this year. Additionally, we continue to see increased activity around both investments and our GWIM business and our banking products. Diversified bank element is a strong differentiator for us as a company. It also supports the healthy pretax margin. This helped the GWIM business deliver strong operating leverage for the year, and they grew revenue and net income to records. In our Global Banking business, we saw solid loan production and growing use of our digital platforms throughout the year and added new clients to our portfolio. As you well know, the overall investment banking fee pool was down. However, we continue to deepen and expand client relationships with our build-out of commercial bankers. Our global treasury services business also grew revenue 38% year-over-year as a result of both rates as well as fees for service on cash management. In global markets, we had our highest fourth quarter sales and trading performance on record, growing 27% from last year ex-DVA. This was led by a strong performance in our macro FICC businesses, where we made continuous investments over the past 18 months. Equities had a record quarter four performance as well. Letâs move to slide 6 and talk about operating leverage. As Iâve said to you for many years, one of the primary goals of this company which is an important part of our shareholder return model, has been to drive operating leverage. Those efforts, including investments made for the future, coupled with revenue growth produced 18 straight quarters of operating leverage, as you can see, leading up to the pandemic. Beginning last year, in the third quarter of â21 -- 2021, I told you that we now started achieving operating leverage and got back on streak, 6 -- and weâre 6 quarters of operating leverage despite all the things that are going on out there, and the team continues to drive towards that for 2023. So, I thought Iâd spend a few minutes on a discussion of topics thatâs been important as weâve talked about investors over the last couple of months, deposits and credit. So letâs go to slide 7. First, on deposits. There are several factors impacting deposits as our industry works through and the economy works through an impressive period, a surge in deposits from the pandemic-related stimulus, the impact of monetary -- unprecedented monetary easing, impact of high inflation and then the reversal of that with unprecedented pace and size of rate hikes and monetary tightening. But on a year-on-year basis, average deposits of $1.93 trillion are down 5%. This reflects the market trends and in fact, it reflects high tax payments to the governments in quarter -- 2022. In addition, as we move forward through 2022, customers with excess cash, investment-oriented cash saw yield as rates increase for money market funds, direct treasuries and other products. Itâs probably more relevant to discuss the more near-term trends comparing third quarter of â22 to fourth quarter of â22, average deposits were down 1.9%. Noninterest-bearing deposits are down 8%, low interest-bearing deposits are up 2%. The mix shift is especially pronounced in treasury services in the global banking business. Corporate treasurers manage $500 billion of deposits they have with us. The impact of their activities has a change in the mix. On the personal side, you can see the checking account balances floating down a little bit from core expenses and spending while more affluent customers put money into higher-yielding deposits in the market. We do manage all these products differentially. And the discussion of these deposits by business segment you can see on slide 8, and weâll talk through that. So this breaks down our deposits in a more near-term trend. In the upper left, you can see the full year across -- for the whole company going across the page and upper to the left-hand chart. We also put in the rate hikes that you can see. On the chart, you can see the heavy tax payment outflows in the second quarter. Then we saw the acceleration of rate hikes and deposits to move to products seeking yield in certain customer segments. But in large part, what youâve seen over the course of the quarter four has been stabilization and more normal client activity. Simply put, we ended quarter four of â22 with $1.93 trillion in deposits, roughly the overall level as we added in quarter three ending deposit balances. So, letâs look at those differentiated by business. In consumer, looking at the upper right chart, we show the difference between the movement through the quarter between the balance of low to no interest checking accounts to somewhat higher yielding non-checking accounts, money market and saving accounts and a limited portion of CDs. Across the quarter, we saw a $24 billion decline in total, down 2%. We have seen small declines in customers continued higher levels of spending, pay down debt and also move money to the brokerage accounts even in this business. Higher wages have offset this. We saw a decline in quarter four deposits in consumer. Correspondingly, we also saw brokerage levels of consumer investments increased $11 billion, capturing a good portion of those deposits. In general, think of these consumer deposits are being very sticky of $1 trillion. That stickiness, along with net checking account growth reflect the recognition in the value proposition of a relationship transactional account with our company. It also has -- it reflects industry-leading digital capabilities we offer, and the convenience of a nationwide franchise. It also reflects that the customers in our mass market segments have fewer excess cash investment style cash balances. 56% of the $1 trillion in consumer deposits remain in low and no interest checking accounts. And because of all that, overall rate paid in this segment remains low at 6 basis points. In wealth management, which you can see at the bottom left of the chart, more than $300 billion of deposits became more stable across the fourth quarter. They also -- here, you also witness a shift to higher-yielding preferred deposits, as you can see on the label from lower-yielding transaction deposits as these customers have more excess cash and move them to seek higher yields. Early in the quarter, we saw modest declines in balances, but Novemberâs rate hikes began to slow and the probability of future rate hikes became less. People had moved their money, and we saw an uptick in balances as we move through the quarter. This reflects the seasonal inflows that happened in the fourth quarter for wealth management clients. At the bottom right chart, you can see the most dynamic part of this equation. Our global banking deposit movement -- moves across $500 billion in customer deposits. The shift here is what drives the mix total for the company. Itâs pretty typical with the exception that it happened very quickly in quarter four, driven by the pace of rate hikes. In a rising rate environment, where a companyâs operational funds are more expensive, we anticipate these changes, particularly in the high liquidity environments as clients use both cash inventory yield, pay down debt or manage their cash for investment yield. We have seen the mix of global banking interest-bearing deposits move from 35% last quarter to 45% in quarter four. And obviously, weâre paying higher rates on those deposits to retain them. Customer pricing here is -- on a customer to customer basis based on the depth of relationship, the product usage and many other factors. So, overall deposit rates paid as a percent of Fed funds increases are still very favorable to last cycle, even as rates are rising much faster than last cycle. I would note, about to the last cycle that the Fed increases have been rapid and weâd expect to pay higher rates as we continue to move through the end of the interest rate cycle. So just remember, while weâre paying more for deposits, we also get that on our asset side. That is simply why the NII is -- net interest income is up 29% from quarter four 2022 versus quarter four 2021. Now letâs move to the second topic I want to touch on specifically, which is credit. And this begins on slide 9. First, it is an intellectible truth that our asset quality of our customers remains very healthy. On the other hand, itâs impossible to gainsay that the net charge-offs are moving to pre-pandemic levels. So, in the fourth quarter, we saw net charge-offs of $689 million, increased $169 million from quarter three. The increase was driven by both higher commercial and credit card losses. As these charts show, theyâre still very low in the overall context. In commercial, we had a few of older company-specific loans, but not related, not predictive of any broader trends in the portfolio. These were already reserved for in prior periods and based on our methodologies, went through charge-off in quarter four. Credit card charge-offs increased in quarter four as a result of the flow-through of modest increase in last quarterâs late-stage delinquencies. This should continue as we transition off the historic lows and delinquencies to still very low pre-pandemic levels. Provision expense was $1.1 billion in quarter four. In addition to our charge-off provision included roughly $400 million reserve build. This was higher than quarter three, reflecting good credit card and other loan growth combined with the reserve setting scenario. So, letâs just stop on the reserve setting scenario. Our scenario -- our baseline scenario contemplates a mild recession. Thatâs the base case of the economic assumptions in the blue chip and other methods we use. But we also add to that a downside scenario. And what this results in is 95% of our reserve methodologies weighted towards a recessionary environment in 2023. That includes higher expectations of inflation leading to depressed GDP and higher unemployment expectations. This scenario is more conservative than last quarter scenario. Now to be clear, just to give you a sense of how that scenario plays out, it contemplates a rapid rise in unemployment to peak at 5.5% early this year in 2023 and remain at 5% or above all the way through the end of â24, obviously, much more conservative than the economic estimates that are out there. We included again the updated slides in the appendix, pages 36 and 37 to highlight differences in our credit portfolios between pre-financial pre-pandemic and current status. We also, again, gave you the new origination statistics for consumer credit on page 28. The work the team has done on responsible growth continues to show strong results. From an outsiderâs view, you donât have to look any further in the Fed stress test results. Weâve had the lowest net charge-offs for peer banks in 10 of the last 11 stress tests. On slides 10 to 12, we included some longer-term perspective. We showed long-term trends for commercial net charge-offs, total consumer charge-off rates and more specifically, credit card charge-off rates. This compares those ratios to pre-financial crisis, during the recovery after the financial crisis, pre-pandemic and then through the pandemic. So that gives you a long-term perspective, which I think keeps in context the idea that weâre moving off the bottom in credit cost towards a level which is normalizing to pre-pandemic, but that level was very low in the grand context of banking. So before I move it to Alastair, I want to just update a few comments on our consumer behavior. Consumer deposit balances continue to show strong liquidity with the lower cohorts of our consumers continue to hold several multiples of balance that they have as a pandemic began. These balances are drifting down, but they still have plenty of cushion left. And while their spending remains healthy, we continue to see the pace of that year-over-year growth slow. In the aggregate, in 2022, our consumer spent $4.2 trillion, which outpaced 2021 by 10%. You can see that on slide 35. Two things to note on that consumer spending pace. There continues to be a slowdown. Year-over-year growth percentage earlier this -- earlier in 2022 were 14% year-over-year. Theyâve now moved to 5% year-over-year in the fourth quarter. So, what does this mean, with that level of growth in year-over-year spending is consistent with the low inflation, 2% growth economy we saw pre-pandemic. Theyâre also moving from services from goods to service and experience and spend more money on travel vacations and eating out and things like that. That is a good for unemployment, but continues to maintain service side inflation pressure. During the quarter, our balance sheet declined $23 billion to $3.05 trillion, driven by modestly lower global markets balances. Our average liquidity portfolio declined in the quarter, reflecting the decrease in deposits and securities levels. And that $868 billion, it still remains $300 billion above our pre-pandemic levels. Shareholdersâ equity increased $3.7 billion from the third quarter as earnings were only partially offset by capital we distributed to shareholders and roughly $700 million in redemption of some preferred securities. We paid out $1.8 billion in common dividends. And we bought back $1 billion of shares, which was $600 million above those issued for employees in the quarter. AOCI was little changed in the quarter as a small benefit from lower mortgage rates was more than offset by a change in our annual pension revaluation. With regard to regulatory capital, our supplementary leverage ratio increased to 5.9% versus our minimum requirement of 5%. And that obviously leaves capacity for balance sheet growth and our TLAC ratio remains comfortably above our requirements. Okay. Letâs turn to slide 14 and talk about CET1, where, as you can see, our capital remains strong as our CET1 level improved to $180 billion and our CET1 ratio improved 25 basis points to 11.2%. That means in the past two quarters, weâve improved our CET1 ratio by 74 basis points as weâve added to our management buffer on top of both our current and 2024 requirements. So, we can walk through the drivers of the CET1 ratio this quarter, and you can see earnings net of preferred dividends generated 43 basis points, common dividends used 11 basis points, and gross share repurchases usage 6 basis points. And while the balance sheet was down, loan growth drove a modest increase in RWA using 3 basis points of CET1. So, we were able to support our loan growth and return capital and add to our capital buffer in the same quarter. Letâs spend a minute on the loan growth by focusing on average loans on slide 15. And here, you can see average loans grew 10% year-over-year, driven by credit card and commercial loan improvement. On a more near-term linked-quarter basis, loans grew at a slower 2% annualized pace just driven by credit card. The credit card growth reflects increased marketing, enhanced offers and reopening of our financial centers, delivering higher levels of account openings. Mortgage balances were up modestly year-over-year, and linked quarter were driven by slower prepayments. Commercial growth reflects a good balance of global markets lending as well as commercial real estate and to a lesser degree, custom lending in our private bank and Merrill businesses. Turning to slide 16 and net interest income. On a GAAP non-FTE basis, NII in Q4 was $14.7 billion, and the FTE NII number was $14.8 billion. Focusing on FTE, net interest income increased $3.3 billion from Q4 of â21 or 29%, driven by a few notable components. First, nearly $3.6 billion of the year-over-year improvement in NII was driven by interest rates. Year-over-year, the average Fed funds rates has increased 359 basis points, driving up the interest earned on our variable rate assets. Relative to that Fed funds move, the rate paid on our total deposits increased 59 basis points to 62. And focusing just on interest-bearing deposit rates paid, the increase is 91. So, even while Fed funds rates have increased 140 basis points more than the last cycle, at this point, our cumulative pass-through percentage rates still remain lower in this cycle. That includes an increase in the pass-through rates in the past 90 days due to the unprecedented period of rate hikes. Included in the rate benefit was $1 billion improvement in the quarterly securities premium amortization. Long-term interest rates on mortgages have increased 345 basis points from the fourth quarter of â21, which has driven down refinancing of mortgage assets and therefore, slowed the recognition of pre-amortization expense recognized in our securities portfolio. The second contributor is loan growth. Net of securities paydowns, and thatâs added nearly $400 million to the year-over-year improvement. And lastly, partially offsetting the banking book NII growth just described was higher funding costs for our global markets inventory. Now, that is passed on to clients through our noninterest market-making line, so itâs revenue neutral to both sales and trading and to total revenue. And as you can see in our material, Global Markets NII is down $660 million year-over-year. Okay. Turning to a linked quarter discussion. NII is up $933 million from the third quarter, driven largely by interest rates. That $933 million increase included a $372 million decline in our global markets NII. The net interest yield was 2.2%, and that improved 55 basis points from the fourth quarter of â21. Nearly 30% of that improvement occurred in the most recent quarter with the primary driver being the benefit from higher interest rates, which includes a 13 basis-point benefit from lower premium amortization. As you will note, excluding global markets, our net interest yield was up 89 basis points to 2.81%. Looking forward, I would make a couple of comments. As I do every quarter, let me provide the important caveats regarding our NII guidance. Our caveats include assumptions that interest rates in the forward curve materialize, and we anticipate card loans will decline seasonally from holiday spend paydowns, and otherwise, we expect modest loan growth. We expect a seasonal decline in global banking deposits and that the other deposit mix shifts experienced in Q4 may continue into the first quarter in the face of more rate hikes. We also expect the funding cost for global markets to continue to increase based on higher rates. And as noted, the impact of that is recognized and offset in noninterest income, so itâs revenue neutral. So, starting with the fourth quarter NII of $14.8 billion, and assuming a decline of roughly $300 million of global markets NII in Q1, which would be similar to the fourth quarter decline. That would get us to a Q1 number around $14.5 billion. In addition, we have to factor in two less days of interest, which is about $250 million. So, that would lower our starting point to $14.25 billion. We believe the core banking book will continue to show the benefit of rates and other elements and can offset most of the day count. So, weâre expecting Q1 NII to be somewhere around $14.4 billion. Beyond Q1, with increases in rates slowing and if balances continue their recent stabilization trends expect less variability in NII for the balance of 2023. Okay. Letâs turn to expense, and weâll use slide 17 for the discussion. Q4 expenses were $15.5 billion, and they were up $240 million from Q3, driven by an increase in our people and technology costs. In addition, we also saw higher costs from our continued return to work and travel and cost of client engagement. Weâve seen pent-up demand for our teams gathering back together in person to drive collaboration and to spend more time with our clients. Inflationary pressures continued but our operational excellence improvements as well as the benefits of a more digitized customer base helped offset those pressures. Our headcount this quarter increased by 3,600 from Q3. And as we faced increased attrition in 2022, our teams were quite successful in their hiring efforts to continue to support customers. As the attrition slowed in the fall, our accelerated pace of hiring outpaced attrition, leaving us with growth in our headcount. As we look forward to next quarter, I would just remind everyone that Q1 typically includes $400 million to $500 million in seasonally elevated payroll taxes. And Q1 will also be the first quarter to include the costs of the late October announcement by regulators of higher FDIC insurance costs. And as a result of holding the leadership share in U.S. retail deposits, that will add $125 million to each of our quarterly costs or total of $500 million for the year. We expect these things will put expenses around $16 billion in the first quarter before expectations that they should trend back down again over the course of 2023. On asset quality, we highlight credit quality metrics on slide 18 for both our consumer and commercial portfolios. And since Brian already covered much of the topics on asset quality, Iâm going to move to a discussion of our line of business results, starting with consumer on slide 19. Brian noted the earlier organic growth across checking accounts, card accounts and investments were strong again this quarter, and thatâs as a result of many years of retooling and continuous investments in the business. So, let me offer some highlights. At this point, we have the leading retail deposit market share. We have leadership positions among the most important products for consumers, and weâre the leading digital bank with convenient capabilities for consumer and small business clients. We also have a leading online consumer investment platform and a great small business platform offering for our clients. And importantly, when you combine all these capabilities with improved service, at this point, customer satisfaction is now at all-time highs. And we produced another strong quarter of results in consumer banking that resulted in $12.5 billion in net income in 2022. For the quarter, consumer banking earned $3.6 billion on good organic growth and delivered its seventh consecutive quarter of operating leverage, while we continue to invest for the future. Note that our top line grew 21%, while expense grew 8%. The earnings impact of 21% year-over-year revenue growth was partially offset by an increase in provision expense, and that provision increase reflects reserve builds this period compared to a reserve release in the fourth quarter of 2021. Net charge-offs increased as a result of the card charge-offs that Brian noted earlier. While this quarterâs reported earnings were up 15% year-over-year, pretax pre-provision income grew an even stronger 36% year-over-year. So that highlights the earnings improvement without the impact of the reserve actions. Revenue improvement reflects the fuller value of our deposit base as well as deepening with our deposit relationships. Iâd note the growth also includes a decline in service charges of $335 million year-over-year as our insufficient funds and overdraft policy changes were in full effect by the end of Q2 of this year. And as a result of those policy changes, we continue to benefit from the better overall customer satisfaction and the corresponding lower attrition and the lower costs associated with fewer customer complaint calls, obviously, as a result of fewer fees. The 8% increase in expenses reflects business investments for growth, including people and technology, along with costs related to reopening the business to fuller capacity. And remember, much of the Companyâs minimum wage hikes and quarter two increased salary and wage moves impacts consumer banking the most of our lines of business and therefore, impacts most the year-over-year comparisons. We also continued our investment in financial centers. For the year, we opened 58 and we renovated 784 more. And against all of that, both digital banking and operational excellence helped us to pay for investments and that allowed us to improve the efficiency ratio to 47%, an impressive 600 basis-point improvement over the year-ago period. Before moving away from consumer banking, I want to note some differences to highlight just how much more effectively and efficiently this business is running since even just before the pandemic. Itâs easy to lose sight of how well this business is operating from an already strong position in 2019. And you can see some of the stats on slide 17 in the appendix. We can best summarize by noting weâve got $318 billion more in deposits, 10% more checking customers, 92% of whom are primary, 28% more investment accounts. And absent the card divestitures, weâve increased the amount of new card accounts by 4%, and our payment volumes are 36% higher. Weâre servicing those customers with 387 fewer financial centers because of our digital capabilities, and itâs allowed us to need 10% fewer people to run the business. Our combined credit and debit spend was up 35%. Digital sales increased 77%, and we sent and received 3 times the number of Zelle transactions. All of this allowed us to run the business with fewer employees and lower our cost of deposits ratio below 120 basis points. Moving to slide 20. Wealth management produced strong results, earning $1.2 billion on good revenue and 29% profit margin. This led to full year records for both revenue and net income of $21.7 billion and $4.7 billion, respectively. This was an especially good result given the nearly unprecedented negative returns of both, the equity and the bond markets at the same time this year. The volatility and generally lower market levels put pressure on certain revenues in this business again in Q4, but what helps differentiate Merrill and the private bank is a strong banking business at scale with $324 billion of deposits and $224 billion of loans. So, despite a 14% decline in asset under management and brokerage fees year-over-year, we saw revenues hold flat with the fourth quarter of â21. Our talented group of wealth advisers, coupled with powerful digital capabilities, generated 8,500 net new households in Merrill in the fourth quarter, while the private bank gained an impressive 550 net new high net worth relationships in the quarter, both were up nicely from net household generation in 2021. We added $20 billion of loans in this business since Q4 of â21, growing 10% and marking the 51st consecutive quarter of average loan growth in the business despite securities-based lending reductions related to the current market environment. Thatâs consistent and sustained performance by the teams. Our expenses declined 1%, driven by lower revenue-related incentives, partially offset by investments in our business. Moving to global banking on slide 21. And you can see the business earned $2.5 billion in the fourth quarter on record revenues of $6.4 billion, pretty remarkable given the decline in investment banking fees during this year. Lower investment banking fees, higher credit costs and a modest increase in expenses were mostly offset by stronger NII and other fees. So overall, revenue grew 9%, reflecting the value of our global transaction service business to our clients and our associated revenue growth, while investment banking fees declined a little more than 50%. The companyâs overall investment banking fees were $1.1 billion in Q4, declining $1.3 billion year-over-year in a continued tough market. Still, we increased our ranking in overall fees for the full year 2022 to number three as weâve continued to invest in the business. The $612 million increase in provision expense reflected a modest reserve build of $37 million in the fourth quarter compared to a $435 million release in the year ago period and pretax pre-provision income grew 13% year-over-year. Expense increased 4% year-over-year, and that was driven by strategic investments in the business, including hiring and technology. Switching to global markets on slide 22. And as we usually do, Iâll talk about the segment results, excluding DVA. You can see our fourth quarter record results were a very strong finish to a good year. The continued themes of inflation, geopolitical tensions and central banks changing monetary policies around the globe continue to drive volatility in both bond and equity markets and repositioning from our clients. And as a result, it was another quarter that favored macro trading, while our credit trading businesses improved also spreads fared better than the prior year. Our fourth quarter net income of $650 million reflects a good quarter of sales and trading revenue, partially offset by lower shares of investment banking revenue. And itâs worth noting that this net income excludes $193 million of DVA losses this quarter as a result of our own credit spread movements. Reported net income was $504 million. Focusing on year-over-year, sales and trading contributed $3.7 billion to revenue, and that improved 27%. Thatâs a new fourth quarter record for this business, vesting the previous one by 21%. And at $16.5 billion in sales and trading for the year, it marked the best in more than a decade. FICC improved 49%, while equities was up 1% compared to the quarter a year ago. And the FICC improvement was primarily driven by growth in our macro products, while credit products also improved from a weaker Q4 â21 environment. Weâve been investing continuously over the past year in our macro businesses. Weâve identified those as opportunities for us. And again, weâve been rewarded for that this quarter. Year-over-year expense increased about 10%, primarily driven by investments in the business. Finally, on slide 23, we show all other, which reported a loss of $689 million, and that was consistent with the year ago period. For the quarter, the effective tax rate was approximately 10%, benefiting from ESG investment tax credits and certain discrete tax benefits. Excluding those discrete items, our tax rate would have been 12.5%. And further adjusting for the tax credits, it would have been 25%. Our full year GAAP tax rate was 11%, and we would not expect 2023 to be a lot different. Hi. Thanks very much. Need a little more help, you gave a lot, but I need a little more help on NII for 2023. You walked us to the $14.4 billion on starting point on the quarter and your words were less variability in NII for the rest of â23. So, I guess, my question is, you got a lot of loan growth, you have a few more rate hikes hopefully coming through, and I understand the opposite. The flip side of that is deposit migration, some outflows and betas. But could you fill in those blanks? Because I think -- I wonât speak for everybody. I know I am -- weâre still expecting some growth in NII for the calendar year. So, maybe you could talk through some of those pieces and maybe the outflow in global banking, noninterest-bearing is a big piece of it. So, thank you. Glenn, Iâll start with just -- just by way of context, obviously. Weâre coming off a period with historic inflows for pandemic deposits. And now in Q4, weâre beginning to see the impact of quantitative tightening and a number of sharp rate rises. So, that obviously creates some uncertainty. We donât necessarily have a playbook for that. We just got to see how actual balances perform, and weâve got to see how the rotation and the rate paid develop. So, itâs dynamic. Itâs evolving, and we manage and we forecast that weekly. So, when we lay out for you the actuals on page 7 and 8 of the earnings presentation, weâre trying to show you what weâre seeing in real time around balances and mix. So, what weâve said with respect to this quarter coming up is we got to adjust for the day count as we would every year. Thatâs timing, and weâll get that back, obviously, in Q2 and Q3. And then we highlighted the global markets NII impact. Itâs always been there. The last couple of quarters, itâs been around $300 million. It is revenue neutral to shareholders as we point, because we pass that along to clients and we capture elsewhere in sales and trading, but it does obviously impact the NII. Thatâs why weâre highlighting it. But as it relates to the forecast, look, we feel like the modest balance declines are kind of in there that may continue. And this continued rotation from some of the noninterest-bearing to interest-bearing. We got some pricing and rate pressure. So, thatâs in the back of our mind, too. And the only final thing Iâll just say is, weâre reluctant to go a whole lot further out. Last year, we declined to give a full year guide. This year, we feel that way in particular because itâs just a much more sensitive environment when weâre modeling when interest rates are at 5% than when they were at 50 basis points. So, for all those reasons. Now, I will say this, thatâs the final point. We just got -- I think we got to stay patient because we got to see how rates and balances and rotation shake out. And as rates return to more normal and as customer behavior and you can sort of see it, itâs behaving and maybe a little more normally than we should be able to resume our upward path over time. But weâve got to see how this shakes out, and thatâs why we donât want to go out beyond Q1 at this stage. Fair enough. I feel bad for all of us. Maybe a quick one on credit. Good to see charge-offs down given everything thatâs going on in the world. But can you talk through the big -- the $1.6 billion sequential pickup in criticized book from last quarter? Whatâs driving that and how you feel about reserves against that? Thanks. Yes. So, youâre aware, the main driver there is commercial real estate. And itâs specifically around about $1 billion of it is office. Obviously, thereâs a significant amount of change going on in office. And what weâve chosen to do is as rates are rising here, weâre pushing that through the models. And just with the debt service coverage it comes down, we pushed through the downgrade. So, weâve chosen to do that. The performance is still okay. So, weâre not concerned with the performance, but weâre just making sure weâre being tight on the modeling there. It is obviously a portfolio where I think you know this, weâre pretty focused on making originations into office buildings that are leased up, generally at 55% LTV at origination and 75% of that book is Class A office building. So, weâre not alarmed there. Weâre just following our own process with respect to making sure weâre current on the debt service coverage. Just remember that weâre talking about office with very high-quality underwriting characteristics, all A Class, et cetera. And so we just have a conservative rating process, frankly. And itâs well viewed out there and well looked at by many people. But remember, office is $14 billion to $15 billion of the total portfolio. So, we feel very comfortable where we are. And then, obviously, we built reserves against the portfolios across the board that are strong and reflect, as I said earlier, basically a mild recession in the base case and the worst recession in the adverse case that we wait 40%. Thank you. Alastair, on the loan loss reserving and Brian just talked about the adverse case being about 40%. Can you guys share with us how much of the reserve building is what may be referred to as management overlay relative to what the models are specifically dictating on reserve building? Donât disclose that. You might assume that thereâs a fair amount. There are three components to this. One is what the model say, two is basically uncertain in precision and other things we overlay and then a judgmental, and you might think that thereâs a fair amount of that right now with the uncertainty. But -- so the model piece, that would be a portion of it. Very good, Brian. And then when you look at your deposit behavior of the consumer, the past cycles, is there any material differences in the way theyâre moving money around or not moving money around from their checking accounts or low-yielding savings accounts? I think -- when you look at that higher-end consumer, not really, they move to when the rate in the market yields money market funds, we move them to it, and itâs part of what we do. And that sort of investment cash, Gerard, as we call it, moves, the checking accounts donât move. The difference, frankly, is that there was a lot of stimulus that was in addition to the earnings power of consumers. So, weâve never had that in history, but -- and so that amount of stimulus. The question is, will they spend it down or will they keep storing it up? And theyâve been spending it down very modestly across sort of medium income households or so and the general consumer business. Give you an example, the cohort that was $2,000 to $5,000 in average balances pre-pandemic at $3,400, theyâre still sitting at $12,800, but they peaked early in â22 at $13,400. So, theyâre drifting down, but itâs still multiples. The big question was, will they end up spending that down? If theyâre employed, probably not. But if theyâre -- if unemployment rate changes -- and our models assume the unemployment rate changes. So I think weâre at 6 basis points now in total consumer rate paid. The rate structure is very high. And we are 11 basis points, it was -- where we got to, we have very low CD volumes and things that have a fair amount of money markets, but most of itâs checking. Thatâs why we showed you the differential in checking. So, is it different? Yes, probably in the mass consumer business just because they are sitting on more cash and may use that cash, in certain scenarios, but the rest of the behavior is largely the same, including in the corporate business where people can have less balances and the effective credit rate generates a bigger number to cover their fees, so they tend to pull the balances out. Just quickly, Brian, just when you look at the high net worth and corporate, did that move from 0% to 3% Fed funds, for example, versus 3% to where we got today at 4.5%? Is most of that completed where the people that were going to move the money have already moved it in those two categories? Well, I mean, I canât say definitively, but youâve seen -- thatâs what we showed you on those pages where we show the stable -- the account balances are relatively stable in wealth management in the fourth quarter, $300-odd billion -- $300-odd billion. Basically, theyâre flat, if you look across the last several weeks. So, thereâs always a little bit of migration to the preferred deposit, which is a market for higher-yielding sort of money market account. But, the big shift in that was, frankly, in the second quarter of â22 when I think we had $50 billion-odd numbers of tax payments, which was lot higher than in past years due to -- if you think about the â21 dynamic and capital gains and other things that went through. So, what weâre seeing is the last 4 or 5 weeks, weâre seeing relatively stable in deposit balances. Quarter end three, quarter and four basically flat, a little bit of movement among the categories. But in that business, frankly, a fairly sort of stable place right now. And so I think this long answer, realize a sort of answer if they move the money, they kind of already moved it. I guess, Alastair, I guess, no good deed goes unpunished. I mean, NII did grow 21% for the year 2022. It did grow 7% linked quarter and the fourth quarter up $900 million. But six weeks after you gave guidance last quarter, you lowered that guidance by $300 million. And it just raised some questions about the quality of your modeling or if you had your arms completely around the asset liability management. So, what happened to cause you to change that guidance, albeit in the context of still some of the best NII growth you guys have seen in many years? Yes. So Mike, if I go back to six months ago, quarter two earnings, what we said at the time was we thought over the course of the next six months, NII might go up by $1.8 billion, $1.85 billion. In actual fact, itâs gone up $2.25 billion. So, thatâs the actuals. Remember, weâre forecasting as best we can at any given time, up $2.25 billion. Q3 was more favorable than I think we had thought and Q4 was less favorable. And the Q4 was less favorable in large part because the balances behaved just a little bit differently, and the rate paid behaved just a little bit differently. And the mix or rotation, if you like, that behaved a little differently. It kind of makes sense because Q4 is where QT kind of kicked in. So look, we donât have a great deal of precedent. Itâs obviously a historic period. Itâs difficult to forecast quarter-to-quarter, and itâs -- our models are just a lot more sensitive right now. So, I think weâre going to try and share with you what we know when we know it, but itâs just a more difficult environment at this point to predict looking forward. Itâs like the first half of your round of golf, you played well, you should have just stopped after then, I guess. But, I guess, as we look -- so in other words, that $400 million extra that you got, youâre kind of giving back here from the fourth to the first quarter. So, $14.4 billion NII guide, if you annualize that that would be still 9% NII growth in 2023. Is that a fair starting point? Can you give us not big confidence, but a little confidence given that deposits have stabilized, the day count, cards are seasonally lower. So again, you analyze that thatâs 9% NII growth. And then, Brian, still on expenses, any change there? Are you going to keep it to just like 1.5% growth? On the first thing, Mike, you -- it was something I was going to pick up on earlier to the first question. You picked up it going to the point -- we will have growth in NII year-over-year in the range you talked about, if you take the $14.4 billion, as Alistair said, we expect it to sort of be less variability and annualize that, compare that to â22 of 9% as you said. So, youâre exactly right. So thatâs good growth. And I think youâll see as you move through the year â23, leave aside the economic scenario playing out. But youâll see -- youâll move from where we are today, which is uncertainty about where the balances will finally settle in and the plateauing of those balances to where you get back to normalized growth and normalized loan growth, et cetera. So, youâve got it right. Thereâll be nice NII growth year-over-year. On expenses, if you look at your guysâ estimates for us, 62.5%, which is what we sort of said earlier this -- in the fourth quarter, weâre comfortable with that. Thatâs what the average of the Street analysts are. And that takes a lot of good management to get there, and weâll continue to work on it, letting the headcount drift back down and continuing to invest in things that provide efficiencies. So, youâve got it. And key to that is the six quarters of operating leverage and the idea of continuing that going. And then, the last part of the income statement -- or the EPS is simply your excess capital, which you highlighted, it seems like youâre well above your CET1 ratio. So, what does that mean for the pace of buybacks and your desire to buy back stock at this price? Weâve always said that the first desire is always to support business growth, and thatâs what weâve been doing. We then -- weâre well above our minimums. Weâre on a path to close out the requirement for next year. And so, we bought back a chunk of shares this quarter, you expect that to start to increase neutralizing employee issuances and then going above that each quarter now because we -- 11.2% something, we were close to 11.4% targets. So, weâre back in the game. Alastair, I know weâre asking you to predict a lot of things here. Just thinking about the credit and the pace of normalization, do you have any sense of where charge-offs kind of might start out there and what kind of pace of normalization if we look at the charge-off ratio that moved up a little bit this quarter, what might that look like for 2023? Yes. So, weâre not going to look too far into the future, John. But if you look at our 90 days past due in the credit card data that we show you every quarter, that tends to give you a pretty good leading indicator of whatâs coming down next quarter. So, you can see the 90 days past due have picked up just a little bit, 30 days past due have picked up just a little bit. Weâre still well below where we were pre-pandemic, but that would tell you on the consumer side, it looks like itâs drifting just a little higher. So, thatâs number one. Number two, with respect to commercial, this quarter was a little unusual. We had three deals that we ended up having to charge off. Not correlated in any way. Theyâre in totally different businesses, and theyâve been hanging around for a while. But it was -- two of them are fully reserved. So, they didnât come as a surprise. But, I think because the commercial stuff was so close to zero, it immediately looks like a pop in any given number. Thatâs part of the reason why we showed those graphs of what charge-offs have looked like over time in the earnings materials. But, the commercial portfolio continues to look very strong. Okay. And you touched on this a little bit on Brianâs comments, but just on loan growth, what are you guys thinking about for this year? And whatâs the perspective of where you closed the spigots a little bit in the third quarter as you managed RWA. You kind of said those were opening up in the fourth, but we didnât really see it translate to robust loan growth. Just kind of that dynamic between what youâre looking to do and what youâre seeing on demand for loan growth outlook. Thank you. Yes. So, we said weâre quite open for business in the fourth quarter, and that remains the case. Brian covered the capital point. We had to do what we had to do in the third quarter. We did it. Weâve added 75 basis points of capital in the last two quarters, puts us in a great place. So mainly what youâre seeing in Q4 is just it was a slower environment for loan growth. A year ago, we were talking about the fact we anticipated that loan growth might be high single digits, and we grew 10. This year, we feel like itâs going to be mid-single digits, itâs going to be slower. And itâs going to be led by commercial, it will be led by card, but things like securities-based lending, thatâs just quieter. Weâve got balances being paid down there. Mortgage is quiet through this year. And then, in our base case, you look at the economic blue-chip consensus, you can see forecast is for recession. So, it will be a quieter our loan growth year this year, I suspect, but weâre open for business to support our clients. I just had one compound clarifying question. The first is, Brian, did you, in response to Mikeâs question on NII, bless $57.6 billion in NII for â23, right? He was saying $14.4 billion times 4 or 9% NII growth. You seem to be going with it. I just wanted to confirm that. I think thereâs a bit of confusion given that you guys were saying you donât want to go beyond the first quarter? And the second question is also for you, Brian. I think that youâve done an unbelievable job at transforming the company. And I think the one thing that remains is that the investor base still thinks you as mostly a bank to invest in when rates are going up, right? And clearly, thereâs a lot of uncertainty over the NII outlook. But, could you sort of give us what we should be potentially excited about that you can control with regards to the revenue trajectory from here? And also you spent so much time on deposits. Iâm just kind of confused on the message in terms of deposit declines from here because you laid out this case that you have this very resilient deposit base, and it seems like a lot of attrition has already happened. So, that -- sorry, that was actually three questions in one. I apologize, but thatâs it. I think, Iâll put all those questions together in one answer. If you go the page thatâs in the report where we sort of say, look at the difference between the consumer business in â19 and now. And itâs something to be excited about because we have -- during a period of time where we were completely shut down in branches like 2,000, open back up. We actually went down from 4,300 branches to 3,900 branches. We built out in a lot of new cities. We still have work. We have 10% more checking accounts. The customer favorability is an all-time high. Our small business part of that business is the biggest in the country and growing. And you look at that, and that provides a great anchor, which provides that great stable deposit base, we show you on the slide where we show that base. It also provides a lot of very low-cost deposits. And as rates rise and materialize that. And then if you think what happened last cycle, for a year when rates did not move up, we continue to grow deposits in the consumer business in the mid-single-digits, which just is infinite leverage. And so, thatâs something to be excited about from not only a customer side, where weâre digitized and Zelle usage is going up. Erica usage is going up -- Erica, meaning our Erica, not you, Erika. But the -- and the balance of the consumer investments open up 7% more accounts in a year where investment world was choppy. And then you pair that into the wealth management business, same thing, one of the biggest deposit franchise in the country, biggest -- 3-point-something trillion high, $3 trillion of assets, growing net households at the fastest rate itâs grown in a long, long time, maybe history, growing advisers. Those are things to get excited. Thatâs the organic growth engine in the company. You got to put that against the backdrop of a plateauing of NII, which is basically what Alastair said sort of think about less variability around the $14.4 billion starting number, which might be annualized and did math. And so, did the math and made it out, but that provides us a good base of which to drive forward. And so, you really got to get through the economic uncertainty and then all those things will start to bear. Meanwhile, the trading business, which we invested in a couple of years ago now at its best fourth quarter ever and Jimmy and the team are doing a good shape. And so, I -- we just feel good about the overall franchise, more customers, more of each customer, and then that provides a big stable base, which is rate increases slow down, the marginal impact of it will slow down until we see the good core loan and deposit growth, which you saw after rate -- the last rate rising increase stopped and produced the 20 quarters of operating leverage or -- and things like that. So, thatâs pretty good to be excited about. Because bank growing its franchise and they are -- growing solid economy in the world at a faster rate than anybody else is pretty interesting. Just to clarify, Brian, you mentioned the plateauing of NII and then, hopefully, all the investments in the business will drive growth from there. Is that still possible if we have a continued rate cuts through 2024? The scenario of rate cuts and rate rises, we basically use blue chips. So, Iâm not sure. It depends on whatâs causing that. So if itâs a normalization of the rate curve back to say, 3% at front end, 4.5% at the back end or something like that. Thatâs different than what you saw when they had to cut rates for the pandemic or after the financial crisis and left in there for years to get the engine of the United States economy restarted. Whatâs different this time, frankly, and thatâs what weâre talking about the consumer data is even with a strong rise in interest rates, a less tight labor market, and inflation and what people are being told to worry about, youâre actually seeing consumer spending consistent with a good 2% growth environment, a low inflation environment, which is good because the consumer is being appropriately conservative right now. Erika, the other thing Iâd just say is you think about why weâve got a slowdown in some of our fee-based businesses right now, itâs because rates have risen so quickly and thatâs created a lot of volatility and itâs created -- the asset management business thatâs had a big sell off in bonds and stocks. So, weâre poised now in a lower base where we can grow from here. Same thing, if you look at our net income, weâve really outrun pretty historic decline in investment banking fees. So, we got a diversified set of businesses where as some normalcy returns, we can see some pickup in those fee lines as well. I wanted to follow up, Alastair. You had about $800 million of incremental interest income from the securities book. And Iâm just wondering if you can help us understand how much of that was attributed to the continued benefit from the swap portfolio? And also then how would you expect that to impact your outlook for the 14.4% in the first quarter guide? Thank you. Yes. So most of the increase in securities portfolio, weâre not really reinvesting in there at this point as the securities portfolio started declining. Weâre using the money thatâs throwing off to put it into loans. Thatâs always our first preferred place. So, youâre picking up on the right thing. Itâs mainly the treasuries that are in there, theyâre swapped to floating. That way, we donât have any capital impact from rising rates. And so, youâre going to see the securities yield just continue to pick up. Number one, based off of the treasuries swap to floating as floating rates go higher. And number two, as the securities come due, thereâll be fewer and fewer of them at lower rates. And so, youâre going to see the pickup over time. And just as a follow-up, whatâs our best benchmark rate to kind of watch that trajectory for how we can understand that helper from that swap portfolio? Okay, great. Second quick one just on capital. You had 20 basis points increase in your CET1. You did $1 billion or so of the buyback. Just wondering how youâre thinking about capital return with the bar package of rules still ahead of us going forward. Thanks. Well, I think Brian said the right things. The strategy hasnât changed. Weâve got to, number one, support our clients. Weâre going to number two, invest in our growth. Then we plan to just sustain and grow our dividend and over time, weâll balance building capital and buying back shares. I think, the difficult part with Basel III endgame right now is we donât have the rules. So, we got to wait, I think, until we see those. Theyâll go through a comment period. At that point, weâll offer much more perspective. But Iâll say the obvious, banks have got plenty of capital. We were asked to take 90 basis points more in June. Thereâs a lot of procyclicality already in things like the stress test and stress capital buffer and in CECL. And I think, look, weâve shown our ability to perform and build capital, in this case, 75 basis points in two quarters. So, weâll deal with whatever the ultimate rules come out with. Good morning. Have you kind of thought about how to better insulate yourself against potentially lower rates and not just kind of a little bit of a decline, but if we get something unusual and rates drop a lot. I know itâs easier for some of the smaller banks to do it, but we have seen some regional banks essentially trying to lock in a corridor of the NIM, so that kind of medium term itâs more about growing the balance sheet versus the rate moves up and down. And clearly, with your deposit rates low, if we do get Fed cuts, thereâs just not as much leverage to bring down those rates. Yes. So, I donât know that weâve thought about it in terms of like a corridor of NIM, but we definitely think about balancing earnings and capital and liquidity through the cycle. So, I donât see us making significant changes to our core. Weâre trying to make sure that we operate and deliver in all rate environments that can be high or two years ago can be zero rate environment. So the changes -- you can start to see our changes at the margin. You can see weâre taking securities out and replacing them with loans, and you can see everything restriking higher. So, weâve got a smaller, more efficient balance sheet. We, at the margin may consider fixing some rates here depending on how things develop over the quarter. But itâs -- weâve had a pretty, Iâd say, good strategy thatâs allowed us to drive net interest yields. You can see those on page 16. Theyâre up 46% over the course of the past year and drive the NII. Thatâs up $3.3 billion year-over-year. So, we feel like we struck that balance. Thatâs what responsible growth means to us. And at the margin, weâll probably still maintain a little bit of asset sensitivity. Two questions. One, just a little more color on the loan growth outlook. I heard you on expecting that loan growth will be slowing as you go through the year. And I just wanted to get an understanding of -- is that more just demand slowing base effects or is there also anything in there from you on proactive credit decisioning as normalization comes through the rest of the year? Thatâs a couple of things. If you look in the fourth quarter, you can see the cards come up, which is seasonal, and thatâs going to come down, and thatâs one of the things that people tend to pay those down. The usage of those cards frankly, are still at low levels, the pay rate, the way to think about that still in the 30s. So, thatâs sort of one thing thatâs been kind of consistent through the pandemic. The customers are paying down the card balances. And you expect at some point, those will get back to more normalized paydown rate in the mid-20s. The second is line usage, frankly, has also come back down. Itâs not gotten ever back to where it was pre-pandemic, and it moved up and it dropped by 100 or so basis points, which across a lot of lines is a fair amount of loan. So, that you saw. And so, how corporates manage their borrowing and cash and demand cycle seems to be flattening out a little bit. Then obviously, acquisitions and things are way slowed down, so there wasnât much activity there. So, I think you put it together, then you have in the securities-based business, customers took down leverage, paid off a fair amount of loans in the wealth management business, even though theyâve grown, I think, for 50 some quarters in a row now or something like that in loan balances, it happens, mortgages, obviously, are low. So -- but what we think is as the rate environment settles in, youâll see that normalize and that weâll get -- weâll be back on the mid-single digits. We just wonât have the 10% loan growth year-over-year because that is faster in economy and faster we do. We have not changed credit underwriting standards. And you can see that in the consistency of the origination standards back in pages of the appendix where we show sort of our cars and home equity and things like that. Itâs just the demand side is a little soft because people are reading the same headlines weâre all reading about recessions coming and what should -- they should be careful. Okay. Got it. And then, on the expense side, I know we talked a lot about the NII and the puts and takes as you go through the year that youâre looking for. What about stability on the expense line to manage through any worse than expected outcomes on the NII? What kind of levers do you think you have to pull there, Brian? Well, we always have the variable compensation stuff will drop because assuming that the reason why rates are going -- being cut is because economic activities were some people thought. And then you have the general just efficiency movements in the house that weâve been pretty good at. And then, you have to remember, we try to get people to go off of nominal expense to operating leverage. And so, we have six quarters of operating leverage. As the NII growth slows down, we have to manage a company to produce operating leverage. And so, weâd expect that fees might stabilize and absorb the $1 billion downdraft in quarterly investment banking fees and start to work up from there and other types of things. So, I think we feel very good about the ability to find ways to manage expenses, always have. We slowed down hiring as we came into the fourth quarter, not because, frankly, we were hired -- weâve gotten our hiring to match the great resignation earlier in the year, and it was sort of overachieving. So, we slowed that down, and that will allow us to get back in the line and start to bring the headcount back down to where we want it to be. But those are, frankly, positions that are relatively -- have a relatively high movement rate and only because of the nature of the job. So we feel good about between very rate compensation, between continue to reduce headcount for efficiency and frankly, just activity levels, in a down scenario weâll be able to pull the expenses down. But yes, meanwhile, we weâre going to invest $3.7 billion in technology development in â23 versus $3.4 billion in â22. We continue to add bankers. We had 800 wealth management advisers in the second half of last year, where our training program for those across wealth manage -- all of our wealth management businesses and other trading programs. We continue to hire young talented people. So weâre trying to maintain that balance of continuing to invest in the growth opening in new cities. Weâre averaging -- these branches weâre opening are extremely successful when you look at the size of them relative to anybody elseâs opening practice. And so, why would you stop that. And yet the total number of branches comes down because weâre managing the expense side. So, weâre paying for this stuff as we go. But -- and so you could slow some of that down and get leverage out of it. But the question would be, as weâre in that scenario, is that the right decision for long-term value creation. Thank you. A couple of clarifications on the same NII question. I just want to understand, in your assumption about staying at $14.4 billion through the year on a quarterly basis, are you assuming deposits to continue growing or shrinking? Number one, are you expecting further rotation out of noninterest-bearing to interest-bearing? And do you expect the $14.4 billion number even if there are rate cuts towards the end of the year? Is that number doable even with -- what is it that youâre assuming? Is it even with rate cuts? So, Vivek, we just said less -- thereâd be less variability around that number due to the fact the market stuff has gone to zero. That has no impact on it that you saw over the last few quarters have impact. So, less variability. All the things you cited are the reasons why we tend to say you have to be careful about saying whatâs going to happen in the fourth quarter â23 with great clarity. What we did say is if at this level with less variability, youâll have nice growth over this year to next year. But I think everything you point out, whether itâs whether itâs rates going up faster than people think because inflation doesnât going to roll or come down because people think that theyâve done a good job and they want to get behind the economy. We base our modeling on the blue chip economic assumptions out there and then looking at our balances and stuff. And so, I think thatâs a reluctance. So all your points are great points, and theyâre all why we are reluctant to say. I can tell you to the 3 decimal places where itâs going to be three quarters out because it can move around on you. And to Mikeâs earlier point, we grew $1.2 billion and $900 million in linked quarter and somehow people thought that wasnât good enough because thereâs math that could have would have gotten you difference. So, stay tuned and weâll tell you what we know when we know it. And -- but itâs good again at customer growth. 1 million net new checking accounts, starting at $5,000 balances, growth in wealth management and loans and deposits. These are things that stick with you and be good no matter what the scenario. Another -- a different question slightly. You gave the $2,000 to $5,000 deposit cohort, Brian, in terms of where they are in the deposit balances. In the past, youâve also given a cohort below that, like $1,000 type cohort. Where does -- how is that doing? Can you give any numbers on that? Itâs similar. Itâs -- theyâre all moving down very slightly, that average balance for that same group of customers taken out. Iâd say -- so itâs in the same sort of -- different sizing, but itâs the same thing. I donât have it right in front of me, but -- Iâll have Lee get it to you. But I donât -- but itâs moving down slightly. The interesting part of that, Vivek, obviously, is in the highest average balances. You actually have seen them down from pre-pandemic, which means you saw them reposition that in the market. So going to the early question, we may have seen a lot of that already take place. But I think of it as being down slightly quarter-over-quarter in that cohort. We have no further questions in queue at this time. Iâd like to turn the program back over to Brian Moynihan for any additional or closing remarks. Thank all of you. Good quarter to finish 2022, and thank you to our teammates for producing it. We continue to grow earnings year-over-year. We have good organic growth and operating leverage for the sixth straight quarter. Those will continue in 2023. The asset quality in the company continues to remain at historic lows relative to any normalized time period in the companyâs history, including the strong credit performance we had just leading into the pandemic. So, our job is now to drive what we can control, which is the organic growth of the franchise, the investments that we make are bearing fruit and also to keep the expenses in good control, and we plan to do that in 2023.
EarningCall_1355	Good morning, and welcome to Peoples Bancorp Inc. Conference Call. My name is Betsy, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly and fiscal year ended December 31, 2022. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakersâ remarks there will be a question and answer period. [Operator Instructions] This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical facts, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings. Management believes, the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples' fourth quarter 2022 earnings release was issued this morning and is available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-Generally Accepted Accounting Principles, or GAAP, financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about 20 to 25 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for one year. Participants in today's call will be Chuck Sulerzyski, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Thank you, Betsy. Good morning, and we appreciate you joining our call today. We are pleased to report that our net income totaled $26.8 million for the fourth quarter or $0.95 in diluted earnings per share. For the full year, our net income more than doubled compared to 2021 to $101.3 million or $3.60 in diluted EPS. This is record annual net income for our company. Our fourth quarter results included several highlights. We had record quarterly total revenue compared to prior periods of over $90 million, which was nearly $3 million higher than the linked quarter. We were able to expand our fourth quarter net interest margin by 27 basis points compared to the linked quarter as we closely managed our deposit costs while our yields improved. We had annualized loan growth of 8% compared to the linked quarter. We lowered our reported efficiency ratio to 56.7% compared to 57.2% for the linked quarter. We generated positive operating leverage compared to the linked quarter. For the full year of 2022, we grew our total revenues by 37%, while growing our expenses by 13% compared to 2021, resulting in positive operating leverage. We had record pretax pre-provision net revenue as a percent of total average assets, which was 2.06% for the fourth quarter and 1.77% for the full year of 2022. Our return on average stockholder equity grew to 13.9% compared to 12.9% for the linked quarter and was 12.7% for the full year of 2022 compared to 7.2% for 2021. Our fourth quarter return on average assets improved six basis points from the linked quarter to 1.51% and we maintained our fourth quarter total noninterest expense, excluding acquisition-related expenses within the range we previously had guided. Our allowance for credit losses was relatively flat compared to the linked quarter and was down 17% from the period year-end â from the prior year-end. Provision for credit losses was $2.3 million for the fourth quarter, which negatively impacted diluted EPS by $0.06. For the full year, we had a release of provision totaling $3.5 million, which added $0.10 to diluted EPS. Our allowance for credit losses has grown in recent quarters due to the deterioration in macroeconomic conditions within the underlying forecast coupled with loan growth. We have also experienced improvements in our reserves for individually annualized loans, which have partially offset the increases. Our allowance for credit losses stood at 1.1% of total loans at quarter end, slightly lower than the linked quarter end and a decrease from 1.4% at prior year-end. Moving on to our loan portfolio, for the fourth quarter, we grew balances by $96 million or 8% annualized compared to the linked quarter end. Our largest contributor to the growth was our consumer indirect loans, which increased $37 million or 25% annualized. We had significant growth in our leasing balances which were up $32 million or 41% annualized. Our construction loans increased $31 million or 58% annualized while commercial and industrial loans were up $15 million or 7% annualized. Compared to year-end 2021, we had organic loan growth of 5%. We doubled our organic lease balances, which were up $133 million compared to year-end 2021. Consumer Indirect loans increased 19% compared to December 31, 2021, while construction and premium finance loans each had 17% growth. The 5% annual organic growth is on the low end of our 5% to 11% historic annual growth rate since 2013. We continue to have high production levels, which exceeded our 2021 production. We had some headwinds during the year with payoffs. Some of these payoffs were desired to improve our concentrations in overall credit quality. During the fourth quarter, we were able to return to our historic growth levels. From a credit quality perspective, we had stable metrics compared to the linked quarter end. Non-performing assets as a percent of total assets improved to 63 basis points, which is one basis point lower than the linked quarter end and five basis points lower than the prior year end. Our non-performing loans were relatively flat compared to the linked quarter end as declines in loans 90-plus days past due and accruing were offset by higher non-accruals. The portion of our loan portfolio considered current stood at 98.6%, which was a slight decline from 98.9% for the linked quarter. Our quarterly annualized net charge-off rate was 18 basis points for the fourth quarter and totaled 16 basis points for 2022. We had some growth in our net charge-offs compared to the linked quarter and experienced most of the increase in leases and consumer indirect loans. Classified loans declined compared to the linked quarter end and were driven by $7 million in upgrades and $3 million in payoffs. Our criticized loans grew compared to the linked quarter end and were primarily driven by the downgrade of three commercial and industrial relationships. We believe all three relationships will have positive resolution in future months that we expect the downgrades will be temporary. The increase in criticized loans from these downgrades was partially offset by paydowns of %7 million and upgrades of $8 million compared to the linked quarter end. We continue to closely monitor our credit quality and take actions to reduce exposure and risks where we can. We are confident in the credit quality of our new originations as we focus on maintaining high credit standards. As it relates to our announced merger, we have made a lot of progress, thanks to the alignment and cooperation from the Limestone team. We continue to be impressed with the organization and prospects and looking forward to closing. We have submitted our proposed applications and documents to our regulators and are in the process of obtaining shareholder approval. At the same time, we have sent teams Limestone locations to ensure a smooth transition and a positive outlook for all associates. Our extensive experience with merger and acquisitions allows us to complete an array of processes quickly, accurately and efficiently. At this point, we are impressed with the Limestone team and the quality of their talent. We are on track to meet our internal and external deadlines associated with the merger, which we expect to close during the second quarter of 2023 and we are looking forward to putting our teams together to move our combined institution forward. Thank you, Chuck. Our net interest income continued to grow and was up 5% compared to the linked quarter and our net interest margin expanded 27 basis points to 4.44%. Our loan and investment yields increased compared to the linked quarter and continued to be positively impacted by the higher market interest rate environment. Accretion income, net of amortization expense from acquisitions was $2.2 million, adding 14 basis points to margins, compared to $2.8 million and 16 basis points respectively for the linked quarter. Our funding costs were up 12 basis points and were driven by higher borrowing costs and increased borrowing balances, while we raised our deposit rates marginally. Our control deposit costs, which were 19 basis points for the fourth quarter, compared to 16 basis points for the linked quarter has continued to help our margin expand at a high rate in recent quarters. Compared to the prior year quarter, net interest income grew 29% and net interest margin expanded 107 basis points. We continue to see improvement from our core growth and the increases in market interest rates. Quarterly loan yields improved by 116 basis points, while our investment security field was 70 basis points higher than the prior year quarter. For the full year, our net interest income grew 47%, while our net interest margin expanded 56 basis points compared to 2021. The majority of the increase was driven by the Premier merger and Vantage acquisition coupled with organic growth and higher market interest rates during 2022. We are currently in an asset-sensitive position as it relates to our balance sheet and we expect a slight reduction in asset sensitivity once we complete the Limestone merger. As it relates to our efficiency ratio, we are pleased that our efforts for reduction have paid off. Our efficiency ratio is 56.7% on a reported basis for the fourth quarter compared to 57.2% for the linked quarter and 62.7% for the prior year quarter. When adjusted for non-core expenses, our efficiency ratio was 55.9%, a decline compared to 56.6% for the linked quarter and 61.5% for the prior year quarter. On a year-to-date basis, we improved our reported efficiency ratio to 59.6% from 73.6% for 2021. The adjusted efficiency ratio was 58.6%, compared to 63.5% for 2021. We had positive operating leverage compared to the linked quarter, prior year quarter and full year of 2021. The value we find in this measure is identifying if we are growing our revenues and we did both on a reported basis and when adjusted for non-core expenses compared to the prior period. Compared to the linked quarter, our fee-based income declined 4% while interest income grew, the overall decrease was driven by lower commercial loan swap fee income, which is included in our other non-interest income, along with lower lease and electronic banking income. Compared to the prior year quarter, our fee-based income was down 1%. Lease income grew considerably totaling $1.3 million compared to $600,000 for the prior year quarter. Our insurance income grew 12% compared to the fourth quarter of 2021 and was positively impacted by our insurance acquisition earlier this year. We also experienced growth in bank-owned life insurance income as we purchased additional policies during 2022 and we had higher deposit account service charges. Our increases were more than offset by declines in mortgage banking and commercial loan swap fee income, which were a result of the high interest rate environment reducing customer demand. For the full year, fee- based income was up 14% compared to the prior year. Our biggest area of growth was deposit account service charges, which was driven by the additional customers from the Premier merger. Lease income grew $3 million compared to 2021, driven by the lease acquisitions. Our electronic banking income increased largely due to higher customer activity and additional accounts from the Premier merger in late 2021. Insurance income increased during 2022 compared to 2021 and mortgage banking income declined due to fewer refinancing and home purchases made by customers related to higher market interest rates in recent periods. Bank-owned life insurance income increased because of the policies purchased during 2022. Moving on to expenses, compared to the linked quarter, total non-interest expense increased 2%. This was driven by higher data processing and software expense, while other noninterest expense and professional fees grew due to recent acquisition-related expenses recorded, which totaled over $700,000 for the quarter. At the same time, we had higher other loan expenses. We were able to offset some of these increases with declines in our electronic banking, franchise tax and marketing expenses. Compared to the prior year quarter, our total non-interest expense grew 11%. The largest growth was in salaries and employee benefit costs, which was driven by the increases in pay-per-associate related to merit increases during 2022, coupled with the recent salary increase we completed at the beginning of October for associates making $60,000 or less a year. We had increased expenses due to the addition of associates from the Vantage and Elite acquisitions completed this year. Also contributing to the increase was higher sales and incentive compensation tied to improved performance and production along with higher medical insurance costs. We recorded higher data processing and software expenses, as well as increased amortization of intangible assets associated with our recent acquisitions. We had additional operating expenses from the Vantage acquisition, which was completed in early 2022. The growth in these expenses was partially offset by lower electronic banking and franchise tax expense. For the full year of 2022 compared to 2021, our total non-interest expense grew 13%. We have been acquisitive in recent periods, which has led to a growth in costs associated with our larger size and footprint over the last year. This has resulted in higher costs reflected through most categories, excluding acquisition-related expenses. Moving on to the balance sheet. We grew our held-to-maturity investment portfolio by over $150 million from the linked quarter end. We have been purchasing bonds that are high yielding with relatively low credit risk as they are issued by government-sponsored enterprises. The additional investment in held-to-maturity investment securities has allowed us to reduce some of our exposure to the swings in accumulated other comprehensive losses that we have been experiencing in our available-for-sale investment securities. At year end, our investment securities comprised 24.1% of our total assets, compared to 23.1% for the linked quarter end and 23.8% for the prior year end. We anticipate that our investment securities as a percent of total assets could decline in future periods as we continue to manage our liquidity position. As Chuck mentioned earlier, we had loan growth of over $996 million or 8% annualized since September 30, 2022. Compared to the linked quarter end, our total deposits declined 3%. This was driven by outflows of governmental deposits, which have a seasonal decrease during the fourth quarter of each year. We also had some shrinkage in our non-interest-bearing and retail CDs. However, our demand deposits as a percent of total deposits were still at 48% at year end consistent with the linked-quarter end and prior year end. We had some growth in our broker CD balances which was a function of our funding process as these were lower price in certain FHLB advances. At year end, the reduction in our deposits put us in an overnight borrowed position. From a capital perspective, we grew our regulatory capital ratios compared to the linked-quarter end. At year end, our common equity Tier-1 capital ratio was 12%. Total risk-based capital ratio was 13.2% and the Tier-1 leverage ratio was 8.9%. Each ratio improved by 22 to 28 basis points, compared to September 30, 2022. We have substantially recovered from the decreases in our capital ratios caused by the Vantage acquisition earlier in 2022. Our tangible equity to tangible asset ratio improved to 6.7% from 6.5% at the linked quarter end as earnings net of dividends increased per capital coupled with a slight recovery in our accumulated other comprehensive loss. We grew our book value and tangible book value per share by 13% and 25%, respectively, on an annualized basis, compared to the linked quarter. Thank you, Katie. We have improved our performance considerably during 2022, along with reaping the benefits of the market interest rate increases and prior acquisitions. We were recognized by Newsweek as the 2023 Best Small Bank in the State of Ohio. We were also recognized by American Banker as The Best Bank To Work For in 2022. This is the second year in a row we have received this honor, and we are one of only 90 banks to receive the award in 2022. We have positioned ourselves to continue to provide a profitable return for shareholders during 2023, while also expanding our business into larger markets in Kentucky and the pending â with the pending Limestone merger. We have been able to capitalize on our recent mergers and acquisitions, substantially reducing our efficiency ratio, building on our positive operating leverage by growing revenues, while offering state-of-the-art technology to our new clients. As we look to our future, we are refreshing our guidance for 2023, which includes the impact of the pending Limestone merger, but excludes the acquisition-related expenses. During 2023, we expect our net interest income to continue to grow to the Limestone merger, as well as full year benefits of higher market interest rate as our loans repriced to the newest rate. We expect net interest margin expansion to slow as we will need to increase our funding costs in future periods. With that being said, we believe net interest margin for 2023 will be between 4.5% and 4.65%, which assumes relatively flat rate for 2023, as compared to year-end 2022. We anticipate loan growth of between 25% and 30%, including the new Limestone balances, while we believe our annual organic growth without the acquired loans will be between 5% and 7%. We expect fee-based income percentage growth to be in low double-digits compared to 2022, which includes the impact of the pending Limestone merger. We anticipate a 20% increase in our total non-interest expense for 2023, excluding acquisition-related expenses, compared to the full year of 2022. We expect our efficiency ratio to be between 55% and 57% for the full year including Limestone. We believe we will have â we believe we will see an increase of about five basis points in our net charge-off rate during 2023, compared to 2022. We continue to believe we will meaningfully exceed all current analyst EPS estimates for 2023, especially considering our refreshed guidance and the anticipated benefits of the Limestone merger. I will note, for all four quarters of 2022, we have well exceeded analyst consensus quarterly EPS estimates. As we move into the new year, I wanted to note, as we customarily do that our first quarter expenses are generally higher due to a few expenses that we typically expect to recognize during the first quarter, which include employer contributions to help savings account, stock-based compensation expense for certain employees, higher payroll taxes and annual merit increases. We intend to keep our momentum moving into 2023 with a focus on strategically growing our core business while also working to seamlessly integrate the Limestone merger. We are making positive progress toward our goals and will keep those in the forefront of everything we do in 2023. This concludes our commentary and we will open the call for questions. Once again, this is Chuck Sulerzyski and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. Maybe just to start off on the margin, obviously, fantastic performance this year at composite cost that Bailey budged. I was hoping for the outlook for next year. You can kind of walk through the quarterly progression that gets you into that 450 to 465 for the year. I would imagine that some funding costs have had to accelerate more meaningfully just to reflect where rates are today. Just kind of curious how that moves throughout the year. Let me just say a couple different things, and then I'll let Katie give some thoughts on it. First off, the value of this franchise is the deposit book and the low rate environment over the last decade really hasn't given an opportunity for that to shine. Rates have gone up 4% and our deposit costs have gone up five basis points. Yes, you tell me how much more rates are going to go up. My guess would be another half of a point to 25 basis points increases and our deposit cost may go up 10 to 20 basis points more during the course of 2023, but not a whole lot more. Yes, the other things I would note are, as it relates to the year-over-year benefit just from the rates as they rose throughout 2022, we'll get the annual benefit of that and quarterly see that come through in 2023. Also, the asset mix changes with our leasing portfolio, which you're well aware has a meaningfully higher yield than other core bank portfolio. So, as we continue to see strong growth in those specialty businesses, we'll see some benefit through margin, as well. Got it. Okay and then one more for me. I appreciate the guide on expenses, including Limestone. Maybe for those to those plus you are not getting modeling the deal. Could you offer kind of standalone PEBO cost guide? I think last quarter you said $56 million to $58 million per quarter for 2023? Yes, I think thatâs still of a core PEBO expectation for 2023 on a quarterly basis, close to $56 million to $58 million. Hey guys. I just had one quick question. I wanted to follow up on that margin. You said 4.5 to 4.65. But Chuck, you also included some things that were inclusive of Limestone. Was that margin inclusive of Limestone or not? And then, I appreciate you kind of going through the color of Fed plus 25 and then assuming another plus 25. I am just kind of thinking that the 15 basis point spread is pretty big. The deposit cost, the biggest, I don't know, variable, I guess, you could say, between the high end and the low end? Or is it more of a mix on the asset side? And then what we're paying for alternative funding too comes into the equation. I'd tell you, I'd lean towards the high side of the range, but Katie will kick me. Yeah, I mean I think it's â as you pointed out, it's largely contingent about where we see the loan growth and also to on the deposit costs, what kind of moves we have to do there as rates rise, as well as alternative funding. I had a couple. I wanted to start â Katie kind of mentioned, depends on the loan growth. So just on the loan growth side here, I mean what are some of maybe the areas that can put you at the higher or lower end of the 5% to 7% range? And then maybe as a follow-up, Chuck, just on the leasing and some of the premium finance, some of the stuff you guys are doing there. I mean how, if at all -- and maybe the answer is, it hasn't, but how, if at all, has kind of some of the uncertainty of 2023 and the funding changing environment and everything impacted your kind of near-term outlook for those businesses? Just curious if there has been any kind of change relative to the last time we spoke. No. I think the specialty finance business is all optimistic on 2023. I would say that some of those leasing businesses will do better. They are almost anti cyclical in harder times as people leave things as opposed to purchase. We have been â as the script indicated, since 2013, we've grown organically 5% to 11% every year. Last year was tough for us with only 5%. We have, in the guidance, the organic pieces being 5% to 7%. I think some of the things that will determine whether it's at high end or higher have to do with what happens in the real estate markets with the higher rates. Do people take things to the permanent market a little bit faster, I think that could impact us some, but our pipelines are robust. We had a great year of originations in 2022. If we can do as well with originations in 2023, we'll have simply more growth because we are going to see some of the moves we made to improve the portfolio by encouraging some credits to go elsewhere. Helpful. And then, just kind of big picture, we are hearing on other calls that bank M&A has slowed. Obviously, you guys had a bit of activity recently. Just can you maybe give us an update near term on kind of the capital priorities for the bank in 2023? And is there a period here where there is some digestion, some growth that platforms acquired that you guys would like to see occur? Or is there still enough dislocation where there are opportunities that externally that would be enticing for you guys to consider? Well, certainly, we have been active with M&A and we see M&A as an important part of the business. We do not have plans to do a deal in 2023. But having said that, we talk to banks all the time, and it's analogous to a portfolio manager running a portfolio they always have to make your contacts. In terms of capital priorities, we have that really robust dividend and weâll retain that. We have blocked out some share buybacks because of the acquisition. Although certainly at this price, we think the stocks are still and we just would like to continue to build our capital levels. Great. And then just lastly for me, I know you guys gave kind of the broader â the guidance and outlook for 2023, but you guys have quite a few contributors in that pot and I'm curious, Chuck, if I had to put you on the spot, I mean any particular area where you think maybe there could be some upside or some optimism about dislocation or growth opportunities for next year on the non-interest income businesses? Well, obviously, the stock market has put a dent in our investment businesses last year. We were pretty much neutral from a revenue standpoint. If the market turns around, those earnings will increase. Last year was one of the few years over my career where you had a double whammy of stocks being down and bonds being off. That's pretty unusual. I don't expect that to happen again this year and I think our investment business has potential upside. Maybe the first question, have you scheduled a conversion date for Limestone? And what I am getting at is trying to understand kind of the cost savings and what you foresee happening in 2023 and if there is any kind of follow-through into 2024? Yes. We have a date in August. I think it's August 5 for â scheduled for conversion. I will tell you that we will get the vast majority of the expense saves in 2023. We'll get some year-over-year benefit in 2024, but it's been our history to get the expense saves pretty quickly. And then as a follow-up, in the press release I think it was favorable funding source was the brokered CDs and youâve done a really good job holding kind of the non-interest bearing deposits relative to what I have seen across the industry. Whatâs your thoughts on kind of the mix shift of deposits and we continue to rely on brokered CDs in your view in 2023? It's part of the mix. It's not a dependency by any stretch of the imagination. I'll just reiterate some of the points that were made. A lot of the deposit activity, the decrease was seasonality. We are going to get a great deal of those deposits back in the first quarter. We have a phenomenal deposit book. It's the advantage of being in the communities that we serve that frankly most of the â many of the competitors have vacated. So it's not by accident. And I would just say, we evaluate broker in conjunction with our FHLB opportunity for funding and whoever price is best gets our business. Okay. Understood. And then, maybe one last question. Can you remind me, have you made any changes to your overdraft fees or consumer fees? And if not, are you contemplating anything there? We have made a few changes of â a few adjustments over the last few years, nothing substantial. I think we have a change going in that's going to â that we've budgeted that's going to hurt us about $400,000. We continue to examine it, but I don't see anything radical at this point in time. Where should we think the kind of loan-to-deposit ratio creeps up to and where kind of you thinking you're going to target it over time? Well, thatâs an interesting question. I think it will continue to go up a couple percents a quarter. Keep in mind that we have the Limestone acquisition coming in. I donât think we will hit the â I donât think we will hit the 90s this year. I think that, I would like the loan-to-deposit ratio generally to be in the low to mid-90s. But again, I think it will improve, but I don't think we'll hit 90. Okay. The lease book has phenomenal yields. It's about 10% this quarter. That should continue to kind of creep up, right? Is that the right way to think about it? Yes, it will go up from there in future quarters. Again, what you've seen over time is some reductions in what we were booking. The North Star acquisition that we did in 2021 had higher yields. That's micro-ticket book. Then the deal we did in 2022 has, which is more of a small mid-ticket book and so you've seen some reduction based on that shifts or the combination of those two portfolios together, but I think the opportunity for 2023 is the expansion in that yield. Thanks. One more follow-up for me on the margin. Could you maybe offer some color on how much NPAs are underneath that 4.50 to 4.65 margin for 2023? And then how much of those total PAAs are coming from Limestone? Yes. So we expect that to continue to be in the range of 10 to 15 basis points as we move into 2023 on a quarterly basis. Okay. I was kind of thinking with Limestone, just given the marks from the rate environment, there would be a bigger pickup there. Is that not the case given the pullback in rates? How should I think about that? Well, I think you have some runoff of the portfolios that we've already â or the acquisitions we've already done. So you'll see some reduction for the kind of seasoned acquisitions and then you'll see an offsetting increase for the Limestone acquisition. But by nature it's going to diminish over time and so it stays relatively steady. Yes, I want to thank everyone for joining our call this morning. Please remember that our earnings release and a webcast of this call will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time and have a great day.
EarningCall_1356	Hello and welcome to today's J.B. Hunt Fourth Quarter 2022 Earnings Conference Call. My name is Elliot, and Iâll be your coordinating you call today. [Operator Instructions] I would now like to hand over to Brad Delco, Senior Vice President of Finance. The floor is yours. Please go ahead. Good morning. Before I introduce the speakers, I would like to take some time to provide some disclosures regarding forward-looking statements. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on J.B. Hunt's current plans and expectations and involve risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission. Now, Iâd like to introduce the speakers on today's call. This morning I'm joined by our CEO, John Roberts; our President, Shelley Simpson; our CFO, John Kuhlow; Nick Hobbs, COO and President of Contract Services; Darren Field, President of Intermodal; and Brad Hicks, Executive Vice President of People and President of Highway Services. Thank you, Brad, and good morning. My comments will be brief today as we have members of our leadership team here to cover specific areas of our business with more detail. As we reflect on the fourth quarter and the full-year of 2022, we have seen and experienced a cyclical shift in market dynamics that will present both challenges and opportunities as we navigate through the upcoming year. That said, we remain encouraged by trends from our real providers that present opportunities for faster transit times and in-turn greater service quality and value for our customers. We also see some loosening in the labor market and some modest improvements in equipment availability. Conversely, demand for transportation service in the fourth quarter was seasonally weak as customers manage through levels of elevated inventories. As we've discussed in the past, we have confidence in the collective and complementary nature of our distinct businesses that are built to be resilient and durable through market cycles. I have a tremendous amount of confidence in our people led by the 14 officers of our company that have a combined 340 years of experience here at J.B. Hunt. In closing, our team will remain disciplined and focused on charting our course to compound returns on the capital we've deployed to support our long-term growth for the benefit of our stakeholders. Thank you, John, and good morning. My comments today will mirror many of the things I shared last quarter and will focus on our priorities for 2023 and beyond. If you recall, we discussed three priorities as an organization. First, to remain committed to disciplined long-term investments in our people, technology, and capacity; second, to deliver exceptional value to our customers across our entire organization; and third, to deliver long-term compounding returns for our shareholders. As we have discussed, the last two quarters and as John mentioned, we've seen a shift in our market dynamics, but our focus as an organization has not changed. We continue to manage our business to put us in the best position for long-term growth. We believe first and foremost, that it starts with our people who are responsible for delivering exceptional value and service to our customers, who in-turn trust us to meet their growing transportation needs. We believe our suite of services across the J.B. Hunt scroll provides customers exceptional value from a company they have learned to trust over the many years and cycles. Our challenge for 2023 is to deliver exceptional value for and on behalf of customers in this market. In the past, we talked about what customers value from their trusted transportation providers, which is cost, service, and capacity. During the pandemic, customers value capacity most with less weight on cost and service. We see the shift occurring now where customers are putting more value on cost or how to save the money and on service quality as capacity is less difficult to source. We believe our suite of services can and will present our customers opportunities to save money with our industry leading intermodal franchise, highly engineered dedicated capacity, a scaled asset light highway services offering, and one of the largest Final Mile Services in North America. In closing, I want to say that we're approaching 2023 with some caution around recent demand trends, but remain highly confident in our ability to thrive in any environment. We will focus on controlling what we can control, managing our business with a focus on long-term growth while remaining nimble. We will compete in the market to earn, reinforce, and gain our customers' trust, and their freight. We are excited about the many ways and opportunities we have to deliver value to our customers, which we believe will reveal itself over the course of 2023 and well into our future. Thank you, Shelley, and good morning, everyone. My comments today will cover our recent performance in the quarter and for the fiscal year 2022. I will also provide you a preliminary view on our capital plan for 2023. Overall, results for the quarter were mixed. As freight volumes were pressured by unseasonably soft demand as compared to prior quarters of the year. That said, operating results were fairly resilient in spite of an unusual item that I'll touch on later. On a consolidated basis, revenue for the quarter grew 4% year-over-year, but operating income declined 13% and GAAP earnings per share declined 16%. We incurred a rather large income statement item in the quarter for approximately $64 million or $0.46 per diluted share for an incremental pretax increase in casualty claims expense. This charge is similar to a charge we incurred in the second quarter of this year as certain claims from prior year incidents continue to settle at much larger amounts than what we have historically experienced. For the full fiscal year 2022 on a consolidated GAAP basis, revenue grew 22%, operating income grew 27%, and earnings per share grew 29% versus 2021. Based on the solid performance for the year, we voluntarily paid out an 8.8 million appreciation bonus in the fourth quarter to our frontline employees in recognition of their contribution to a fantastic and record year for our company. Of note, we paid a similar appreciation bonus a year ago, so the year-over-year impact was not significant, but worth calling out when looking at sequential performance. We continue to focus on and maintain a strong balance sheet providing us with ample liquidity to deploy capital to drive long-term value for our shareholders. Our capital plan for 2023 contemplates between 1.5 billion and 2 billion of capital for business needs. This includes elevated levels of replacement demand as a result of equipment challenges experienced over the last two years; growth CapEx to support investments, primarily in JBI and DCS; and investments in real estate. Importantly to note, a large portion of our growth CapEx is success-driven based on our ability to secure long-term dedicated contracts. This growth component and the timing uncertainty is the reason for this range. Our capital allocation plan for 2023 also contemplates supporting our dividend consistent with our long-term practice, as well as taking advantage of opportunities in the market to repurchase shares. We will continue to monitor and manage our leverage target to around 1x EBITDA, but are comfortable going above this level if investment opportunities present themselves. Thank you, John, and good morning. I'll review the performance of our Dedicated and Final Mile segments and update you on other areas of focus across our operations. I'll start with Dedicated. Demand for our professional outsourced private fleet solutions remain strong as we sold approximately 330 trucks in the fourth quarter, which was greater than the trucks sold in the third quarter. This brought our full-year truck sales number to just over 2,000 trucks, which compares to our stated target range of 1,000 to 1,200 per year. Our backlog also remains strong with more opportunities in the pipeline today versus the same time a year ago, but we have seen some moderation in the breadth of the backlog. Our net truck adds in the quarter declined 187 units as compared to the third quarter, largely as a result of us making progress on our equipment trades as new equipment availability improved, but also because some of our downsizing of fleets to match our customers' business levels. As we've discussed before through our CVD process or Customer Value Delivery, we optimize and re optimize our fleets to present value savings opportunities for our customers. This ultimately supports our 98% retention rate of our customers, as well as supports future growth opportunities with these same customers. Going forward, we will remain confident in our ability to demonstrate the strength and resiliency of this business as we deliver superior value for our customers with our highly engineered outsourced solution. Shifting to Final Mile. We remain focused on improving profitability in this business by working through contracts and making sure we are fairly compensated for the value we deliver, achieving the appropriate level of profitability will support further investment needed to meet the growing needs of our customers and the [actually growing] [ph] segment of the market. We will continue to be disciplined on our commitments and remain willing to put business at risk to achieve the appropriate levels of profitability, which could ultimately influence our top line performance in the segment. Demand for big and bulky products, including appliances, furniture and exercise equipment has moderated some as the headlines might suggest, but we have seen strength in our fulfillment business with off price retailers seeing lots of opportunities with discounted inventory in the channel. Closing with some general comments on operations. Similar to my update last quarter, we continue to see improvements in areas around professional driver recruitment and retention, but at elevated cost. We are a touch more optimistic about equipment availability in 2023, largely as a result of bringing in a third OEM into our mix, but maintenance cost remains elevated across the company. We remain focused on our safety performance, but are doubling down on strategic initiatives across the company to improve performance in this area given the elevated cost the industry is experiencing. Thank you, Nick, and hello to everyone on the call. I'll review the performance of our Intermodal business in the quarter and talk about our opportunity to deliver exceptional value and capacity to our customers in 2023 and beyond. I'll start by reviewing the performance in the quarter. Demand for Intermodal capacity was seasonally weaker than normal as PCs and activity leading up to the holidays was absent this year. Volumes for the quarter declined 1% year-over-year and by month were up 4% in October, down 3% in November and down 5% in December. We experienced improvements in rail velocity in the quarter and also saw some modest improvements in customer detention of equipment on a sequential basis. That said, we still believe we can see further progress on both fronts, which will further improve velocity and decrease transit times in our system. We believe that current trends around velocity present opportunities for us to sell a higher valued and reliable service product in the market. As we think about 2023, we see a lot of opportunities to deliver value to our customers with our industry leading Intermodal service product. As Shelley discussed, customers have shifted their focus more on costs and service versus capacity. We believe our intermodal service product presents our customers with opportunities to save money by converting highway freight back to intermodal, which reduces their costs and is further supported by fuel cost and carbon emissions savings, while [import volumes] [ph] have been weak, we still see opportunities to gain customers wallet share by converting highway freight and transloading more international freight into our domestic containers. Additionally, we are in the best position to commit more intermodal capacity to our customers as we progress through the current bid season based on solid improvement in rail service levels and our investment to expand our capacity. Finally, because I anticipate this being a question, I thought I'd address it here. As you are aware, we have more capacity and better alignment with our Western Rail provider, BNSF, and we have both committed to the long-term growth of our collective intermodal service offering. We will compete in the market on the basis of cost capacity and service and we feel confident in our ability to earn our customers' business and grow our wallet share. We are not approaching 2023 with a volume versus price mentality, but how do we set-up our business to drive the greatest shareholder value over the long-term. This was my eloquent way of saying, we historically have not given any guidance on price, volume or margins and we will continue that streak, but also the streak of managing our business to compounding our growth and returns over the long-term. Thank you, Darren, and good morning, everyone. I'll review the performance of our Integrated Capacity Solutions and Truckload segments, what we collectively call Highway Services. I'll also provide an update on J.B. Hunt 360 and how we continue to see the platform bringing together our scroll, but specifically Highway Solutions to drive value for and on-behalf of our customers, whether with or without a drop trailer solution. I'll start off with ICS. ICS top line revenue was down 33% comprised of a 27% decline in volume and a 9% decline in revenue per load. Our truckload volume in the quarter was down 21%. Transactional or spot truckload volume was down year-over-year, but contractual volume was up slightly year-over-year. We experienced additional pressure on our transactional and contractual business in the fourth quarter as demand and volume were unusually soft during what is normally considered peak season. Maybe said differently, there was no peak and demand was actually weaker in the fourth quarter versus the third quarter, which is atypical. As we've discussed in the past, our goal remains to leverage our platform and make investments that will allow us to scale our business by outpacing the market. Despite the poor performance on our top line, which did influence our profitability, we do remain in our people and our platform J.B. Hunt 360 to deliver exceptional value for our customers and our shareholders over the long-term. Shifting to truckload, while the freight environment was challenging in the quarter, we continue see evidence of demand for drop trailing capacity holding up better relative to the overall market, which we believe was demonstrated in the quarter. Volume in JBT increased 6% versus the prior year quarter. We believe customers continue to see value in the blending of their live and drop trailer capacity needs that we can provide by leveraging our platform powered by J.B. Hunt 360. As we move into 2023, we will remain focused on leveraging our investments and our people, technology, and capacity to further scale the business. We see a long runway of opportunity for future growth in 360box supported by disciplined investments, solid execution, and earning appropriate return on our capital. Wrapping up on J.B. Hunt 360, I wanted to take the last minute here to make sure the investment community understands that our digital freight marketplace is a tool that drives value across our entire enterprise. For example, it allows us to source third party intermodal dray capacity. It provides us backhaul freight opportunities in DCS, and allows us to prop-up a startup fleet as we hire drivers or source equipment. I believe more obvious, you see the results in ICS and JBT as we are able to run non-asset or an asset-light business leveraging our data and systems to provide almost unlimited capacity for and on-behalf of our customers. ICS and JBT collectively is our highway solution for our customers, representing the largest segment of the North American transportation market. Whether the customer needs drop trailers that historically could only be provided by large asset truckload carriers or a [spot load] [ph] and a live load, live unload network, we are one solution on one system backed by the J.B. Hunt brand. That concludes my comments. Thanks Brad. And operator, in the interest of the number of people we have in queue. Can we do just one question per caller? Thanks, Elliot. Hey, thanks. Good morning, guys. Maybe a question for you, Darren. I know you don't want to talk a lot about sort of the pricing volume outlook for intermodal, but maybe I could ask the question this way as you, [sitting here] [ph] in the beginning of the year and as you noted, you have a different setup with your major rail partner in the West, wanted to get a sense of sort of what customer receptivity has been to that increased capacity and the opportunity to potentially convert loads back onto the intermodal network? I guess maybe the, sort of finer point on that as you think about, sort of the historical relationship with intermodal versus, sort of say macro or truckload, do you think that 2023 can be a year of relative outperformance for intermodal just given some of the macro stuff that we're seeing right now? Sure, Chris. Appreciate the question. I think universally our customers are positive towards re-converting highway business that should be intermodal. I think they are appropriately cautious in saying, hey, J.B. Hunt and BNSF, I need you to prove it to me that you're going to get your service and velocity quality back. And I think we're aligned like we continue to say every quarter more than ever with BNSF on that mission. I have talked to my team at length four months now about rebuilding confidence in our customers. Our customers are looking for ways to save money, and intermodal is a way for them to save money. And as velocity improves, it even helps in inventory carrying costs. And so, there's a lot of opportunities for us to continue to talk about growing intermodal and certainly, I don't know of a customer telling us, I'm not interested in converting business to intermodal. I think across the board, our customer base is very receptive, but I do want to at least acknowledge there's a bit of a lag in that process and I think we are busy proving to the customers that the service quality of velocity has improved and will continue to improve as the year goes on. And just one point of clarification, just the BNSF for rail service where it needs to be to make that value proposition to the customer? Yeah, I would say, it's early, but so far in January, our rail service is the best it's been since the first quarter of 2020. And so, that's a really positive sign. We're not quite to where we want to be fully, but there is massive improvement in the rail service today. Thank you. Good morning. Darren, sticking with you, obviously, you're investing on your own in your own capacity, but there's no, kind of commentary on box turns. How you get into what you just said about service being the best since 1Q 2020, can you give us an update on where box turn stand today? Where do you think itâll be in the next kind of 3 to 6 months? And probably more importantly, outside of your own investments, just when the box turns the velocity, the productivity, the fluidity is alone, how much capacity you think that adds to your network over the next 12 months? Yes. So, it's a topic for us daily. Our box turns in the fourth quarter were 1.44, nowhere near where we expect them to be. The realities are, we're in a bit of transition period when velocity, customer unloading, a host of challenges, created weakness in our turn ratio. As we come out of that scenario and get back into a more normalized velocity process, gain productivity with our dray fleet, look for productivity in the container fleet, we have lots and lots of capacity to grow into. That's an opportunity for us. I mean in the fourth quarter, in the second half of the year, we're extremely confident in our ability to serve our customers' needs as there will be a return to a peak season shipping. I don't have a number to give you in terms of how many containers come out of the improvement in velocity. What I would say is, we're probably on a long march and I'm not sure we can accomplish it in 2023, but we anticipate getting back to a turn ratio in the [175 to 180] [ph] in the future. And that will be very direct effort on our part and we'll be cautious with our container purchases, but we have to keep that supply chain open and moving and we need to be onboarding equipment at least some, but we'll be looking to grow our volumes as fast as we can for sure. Hey, thanks. Good morning. So, stick with intermodal. So, you guys have more containers parked in 4Q than I think we've ever seen in a Q4 and it sounds like you're expecting box turns to improve. So, I guess why aren't you dialing back on some of the container adds for this year? And then Darren, I know you don't want to give specific guidance, but maybe just directionally, do you think you're going to grow intermodal volume this year? And how do you think about overall revenue segment earnings? Do you think positive negative just directionally any thoughts? Thank you. Well, I appreciate your attempts, Scott, to get me to give guidance. We're not going to be able to do that. Certainly, I do expect intermodal to grow this year on all fronts, on revenue, on earnings, certainly on volume. I think that as we come out of the first quarter, there is a lag. You can see it in the import economy. I mean, there is a significant lag in demand at the moment. Most of our customers, if not all, are optimistic about summer and the rest of the year. There's an inventory correction going on. We have real opportunities to grow our intermodal business and we're working on that every day. Certainly, we're not going to ignore the fact that right now the market is soft in Q1 and inventory is trying to correct. As far as boxes, we really haven't made any announcement about how much equipment we're onboarding this year. What I would say is, it's more than zero, but certainly we're going to meter back a little bit over where we have been as velocity has really, really brought a lot of capacity to our market. Good morning. I'll shift to a question on dedicated. So, Nick, maybe you could talk about how much of a headwind you saw in the fourth quarter from fleets reducing the size of their fleets? And then looking into 2023, we've got some moving pieces with new business you've won, but also cyclical pressure, how are you thinking about a reasonable target for both gross fleet additions and net fleet additions this year? Yes. So, as we look back at Q4, we felt some pressure, I would say, modest, not a lot, but there were some accounts that were given early signals of reduction and we did reduce just a handful of fleets at this point. The primary thing I would say that we addressed was really we've been carrying a lot of older trucks and so we're starting to pick up a few more new trucks and making some headway in reducing that. So, that was the primary, but there was some fleet reduction. Then we're going to stick with our guidance on what we've said on sales in the 800 to 1,000 range. Our pipeline is still full. We feel good. We are experiencing what I would call just some hesitation from deals that are in there that the customers trying to figure out what's going to happen in the first part of the year, but we are still signing deals. So, we, yes, 1,000 to 1,200 correction, not 800 to 1,000, so 1,000 to 1,200 that we would sell. Also, we have 500 trucks already sold that we will be adding as we get the equipment available. So, we have some momentum on that side. Thanks, operator. Hi, everyone. Darren, I just wanted to ask about how do you think cost can trend in the intermodal business as yield continue to moderate? I'm just trying to understand if you think there's enough cost and efficiency opportunity to offset more pressure on the revenue side from yield? And then John Kuhlow, I just wanted to ask about 8.8 million bonus payment. That's great to see for the whole team. Just wondering if you can talk about, is it pro-rata across segments or is there one segment that's taking the lion's share of that? Thanks. So, I'll start Amit. Appreciate the question. I think that we have long said that there's real cost to exit our system in the form of velocity and improvements in driver productivity. Box turns gets most of the focus because it's an easy metric to see and calculate. Our driver productivity is a significant element inside our cost that can also improve as we grow our volumes and get more normalized into our system. Our customers are beginning to unload our equipment faster. The railroads are operating faster, all of which creates some cost takeout. So, as we grow our business, we really feel strongly that we can overcome any, kind of pricing pressure. We're not looking for any, kind of change to our long-term margin guidance and feel confident that we can deliver in that area in 2023 for sure. We said, we expected to grow volume, expect to grow revenue and expect to grow earnings in 2023. Kuhlow? Hey, Amit. It feels like a second question, but it's a good topic, so we'll grant it to you. On the appreciation bonus, that was for all frontline employees. That's predominantly drivers, but also includes technicians and then some of our office. So, it's primarily in the JBI and the dedicated segments. That's where we have most of our drivers. I'll give you of the [8.8, 3 million] [ph] was in Intermodal and Dedicated was another 5 million and the rest is spread throughout the other segments. Thank you. Good morning, everyone. Maybe an ICS question. I think you guys were very clear in the 3Q to 4Q walk not playing out as expected because of the lack of peak season. How do we think about that going to 2023? What's the [4Q to 1Q] [ph] walk looking like? Is that demand weakness continuing or do you not see as much of a step down sequentially into 1Q? Yes. Good morning and thank you for the question. I started to talk about that pivot at the end of Q3 and we certainly saw that play out. And in my prepared comments, I used the word atypical. We certainly saw that throughout the fourth quarter, a continued weakening from October into December. As we sit here right now just through 15, 16 days in January. I would say, we're consistent with what we saw end of December. However, as Darren mentioned, we do expect sometime maybe second quarter going into third quarter with inventory resets. We would fully expect to see the freight market rebound, but I do feel like this is the area of our company that will most feel the volatility we've long discussed and documented what happened in the spot market and that still sits about where it was. And so, until we see some of that freight demand rebound imports start flowing, I think we'll be in a comparable environment to what we saw in the fourth quarter in brokerage. Hey, good morning. Thanks for taking the question. So, Shelley, maybe you can elaborate a little bit more on some of the caution you're seeing on the demand side and we've touched on it a little bit, but it seems like the general view is that you expect a tough first quarter and then some improvements, sort of towards the middle part of the year. So, Darren, does that give you enough confidence from the demand side and also from the service side, both from the West and the East to really lean in and commit that capacity that you think your customers are going to be there and waiting for? Because it does seem like the timing of the recovery on the service side and demand is going to be a key factor here. So, curious on your thoughts there. Thank you. Good morning, Brian. We did use the theme word and we have through the whole pandemic and that was being fluid, with our customers and just helping them understand where they're at and where we're at from a transportation perspective. We also talked a lot about being cautious in the last discussion. And I think those were some of the demand trends we were starting to see. If you look in the fourth quarter, you saw port activity continue to decline all the way into December. And certainly, we're feeling the impact from that. As we have talked to customers, they have shared with us that there is an inventory correction happening that you've heard both Brad and Darren talk about. And that's really we expect to continue to occur all through the first quarter. We have had good signals from our customers about Q2 starting up back to a more normalized or having a more normal environment. We're not sure at what point that is in Q2, but we do feel like the back half of the year, we have confidence from what our customers are giving us and the data points that they have, what they're going to be doing from an ordering perspective. The freight recession that we see right now is largely inventory driven. We don't see anything else from our customers in total. And then last thing I would say, Brian, if you think about bid season for our company in the one-way part of the business, so this should be all of intermodal and all of highway services. Those really occur in the back half of the year fully loaded. So, if you think about a July 1, if you will, that's really when bid season is complete and we know the results of what's happening in bid season. And that's what really drives what we're going to do from a capital planning. So, you heard Darren say, we're going to be fluid in that part of the process. We have flexibility so that we know how much equipment we can onboard, but I would say, we feel confident in our bid season strategy, our ability to win highway share converted to intermodal and then continuing to grow inside our highway services. And you heard Nick talk about our confidence around dedicated and what our customers are saying there. And I would add, I feel confident about what's happening in the Final Mile space as well. I just want to jump in, Brian. You asked a little bit of â you hinted at Eastern rail providers, and in both Eastern railroads, Norfolk Southern and CSX are also performing better than they have in 2022 and we're confident in their plans and continue to see really significant opportunities in that part of our network to grow highway share conversion back to intermodal as this year goes on. Yes. I wanted to ask you a bit about just beyond supply chain, if you think that there's going to be improvement in fluidity, I mean, it sounds like you're seeing that. Do you think that that happens fairly quickly? And how does that impact the storage revenues? Is that something we should see storage revenues go down a lot in 2023 or do you think it's more, kind of a gradual thing that there's a bit of stickiness in what happens with storage revenues? And I'm thinking in particular storage, container storage revenues in intermodal? Thank you. Sure. I'll take that. I mean, do I think that fluidity in the supply chain will get better with weaker demand and allow the system to kind of reset itself? Absolutely. We're experiencing that today. Our customers are better set up for their supply chains and the port infrastructure is accommodating imports today. And so system is moving more fluidly. As that relates to storage revenues, the only way to answer that is it depends. As long as our customers are unloading faster, then there will be a decline in those revenue streams, but that frees up capacity to operate more shipments on that container every month and that's our focus today. That's why you'll continue to hear us talk about real cost can come out of our system that can translate into savings for our customers, which just allows us to provide value faster and grow our intermodal business. Yes. Hi, morning. I was wondering if you could give us some little more color on this casualty claim expense, sort of the nature of it. I mean, is this like a one-time cleanup through the various business segments or is this â how do we think about, sort of a run rate on an ongoing basis? Thanks. Yeah, Jordan, this is John Kuhlow. I'll address that. We've seen similar to others in the industry over the last 12 months to 18 months a dramatic change in our settlement experience on our claims. All of our claims, but most importantly, our more severe claims are settling at much higher levels than our historical experience. Sometimes to 5x to 10x what they were five years ago. And so, our insurance coverage consists of layers and there are certain layers in there that have caps. And when we exceed those caps, the claims expense reverts to us. And the 30 million that we recorded in the second quarter and the 64 million that recorded in the fourth quarter for a total of 94 million in the current year represents our reserve adjustments on previously incurred claims. So, these are all prior period claims that we've increased our reserves based on our experience. With that, I will tell you that the reason why we've done this is because our insurance claims costs for the claims experience is dramatically going up. And it's a highly unpredictable environment. We are not planning in 2023 for another one-time charge. But as I said, it's highly unpredictable and we're continuing to watch our claims. Now, I will tell you that we have made some changes to our structure going into 2023. And so, we are going to be taking on more coverage and to contemplate this. And I'll go even a little bit deeper than we normally do just because this is a significant area that we're focused on. I think on a rate basis, our premiums are going to be up around 15% just on the core premiums. But as I mentioned, we're adding in new layers of insurance and so our premium base will also increase. That said, we're expecting our incurred losses to increase as much as 30% to 35% in the next year because of what we're seeing on these, just the movement today on how these claims are being settled. So, a little bit more insight than we would normally give, but wanted to give you a little bit deeper information on what we're seeing in the insurance area. Hey, good morning and thanks for the question. Darren, I think you spoke a couple of times about earnings growth in Intermodal this year, can you just reconcile that with tougher pricing in the truckload market and how that dynamic could impact your yield generation this year? [Now looking] [ph] for specific items there either. Well, I mean at the end of the day, we understand pricing pressure out there. Customers want to save money, but again, there is real cost to come out of our system and there's real efficiency for us to gain with growth. And so, as we grow our intermodal business, there is the opportunity to continue to do more loads with the assets that we have. It may not translate into the same income per shipment, but if we're executing more shipments as we move forward and find a way to drive some cost out, then we're going to be able to grow our income really strongly as we grow volume. And that's the mission, is to get out as this bid season goes and as we're out communicating and displaying to our customers that velocity has improved and the intermodal service product has really improved a ton and can get closer in transit to what truck transit is. We feel like we can really grow our business significantly, which will turn into income growth as the year goes on. Hi, good morning. Just want to get back to dedicating, I think this is probably applicable to the Final Mile as well. On the maintenance cost side, new equipment coming in, maybe less consumer demand need, should we think of that accelerating down pretty quickly this year or is it the customer needs are going to keep some of that aging equipment still in service? Just any kind of thoughts there. Yes. Well, it kind of goes through all fleets, Intermodal, Dedicated and Final Mile. Talking to our OEMs, they're still going to be constrained, they think this year. And so, we've publicly announced that we're going to a third OEM that will help us alleviate some of those constraints, but based on our forecast, we will still be handling a few hundred trucks that are past due at the end of this year that could move forward if the OEMs numbers come up. But we will have some trades that we're going to carry with us the most part of the year. Great. Good morning. Shelley, just can we revisit some of the comments there on bid season? I think you noted that bid season was fully loaded by July 1. So, are we still looking at a March through May industry bid season for part of the business? And if it is then coming up, I guess Brad and Darren, you've each talked about maybe fourth quarter demand weakness and outlook into the New Year. Maybe can you talk about how you're thinking about where contract stands versus spot levels? Hey, good morning Ken. I would say our customers in general are going to be implementing between now and July 1. We still have a smaller portion of our business that we'll implement from July 1 all the way through the end of the year, but the bulk of the business, we tend to look at our business in that July 1 through the next year as how we think about revenue quality, our growth plans. Although we budget for a full-year at the calendar year, we actually review what's happened from a bid season at mid-year. And I would say our customers are largely in-line. We do have a few customers that might have changed some of their bids start, but for the most part, they're in-line with what we've historically seen, and I'll let Darren and Brad comment if there's anything else there. Ken, I'll make a few comments here. We're still very early in bid season, but our strategy is clearly focused on winning contracted business. The spot market and what we've seen in that over the last several months and we can't necessarily count on when or if that may return or if and when it does, does it get back to what it used to be? Is it something less? And so, we are optimistic about our early feedback in bids and what we're seeing there, meeting our expectations in terms of volume growth of contracted business. So, from a â on the transactional side, on highway, that's our predominant focus. I think in years past, we will move around the percentages of what's published versus spot and I would anticipate us being on the highest end of that from a contract standpoint versus spot in highway. Intermodal certainly a little different. They don't play the spot market nearly as much. And so, I'll let maybe Darren comment what he's seen. Well, I think Intermodal contract prices should continue to provide in most corridors a significant saving against highway contract rates, fuel inclusive. And that's been the case forever and there'll be no difference this year. Certainly, there's a handful of markets out there where I think truck spot prices may be applying some pressure at the customer level around their mix of highway and intermodal and we'll watch that and we'll try to adapt and we'll talk to our rail providers and look for ways to take cost out of our systems so that we can be competitive, but at the same time, we're going to be disciplined about our returns and our margin profiles and everything about our business that has been the case forever at J.B. Hunt. Great. Thanks and good morning. I think this has been touched on a couple of different ways throughout the call, but maybe just bringing it together. How do we think about the shape of the quarters and earnings as we move through 2023? It seems like that the volume environment is going to start-off weak in first quarter, but there's an expectation for some inflection mid-year, but at the same time, contract pricing is going to come in. So, how do we think about seasonality? And then if the demand environment doesn't inflect up, what are some of the cost levers that you have that can offset weaker demand? Thanks. Hey, Todd. It's Brad Delco. You hit the fortunate pleasure of me responding to that question. One, we don't provide guidance, but I think maybe one general statement I would say and we've talked about this before, we haven't really seen seasonality over the better part of the last two or three years just based on elevated demand levels that we've seen. Clearly seasonality is come back in to play. You saw that in the fourth quarter. In fact, I think Brad Hicksâ comments and Darrenâs comments suggested that we actually saw atypical seasonality where fourth quarter was overall from a demand perspective weaker than Q3. I'd also just say, I think you heard there probably isn't a lot of expectations from the demand environment changing much at least in terms of what visibility we have here in first quarter. What happens after that, we really â we don't have any crystal ball than anybody else. So, I think giving you any more detail on guidance and how the year plays out would probably not be in our best interest. Great. Good morning. I wanted to ask, John Kuhlow mentioned that you guys might be willing to take up leverage for the right opportunities. I just wanted to press a little bit more on that comment and understand if that was a reference to M&A or if it was a reference to something else and if it was a reference to M&A, what are the types of opportunities that you would be thinking about that would justify that, sort of taking up of leverage? Yes, there wasn't anything in specifically that I was referring to. It was just more commenting on the strength of our balance sheet, our liquidity position, and the ability to take advantage of opportunities that exist. We still continue to look at buyback or excuse me, at M&A as it becomes available we'll continue to do so. But buybacks and dividends are also a core piece of our capital allocation process and we'll evaluate that as well. As you went through the competitive bids with Schneider leaving your rail partner and moving over to the [UP] [ph], can you tell us what you learned about your customers desire to perhaps stay with the BN versus create some competitive or maintain some competitive tension in their intermodal suppliers and how that's inflecting your strategy long-term to grow the business? Thanks. So, I don't know that we have enough details yet to really have a strong position on that. We universally hear from our customers that they want to maintain a significant share on BNSF. They have confidence in our ability to talk them through the service improvements and our ability to provide the capacity that Schneider has taken with them. So, I think there's no doubt out of our customer base that we have the capacity to backfill anything Schneider was operating on BMSF. It's also not the top of mind topic when we're talking to our customers, the first subject is not, hey, can you take on Schneider's business? Our process is to go into a customer and talk about their network and look for solutions with intermodal where it's the right solution regardless of who the competitor might be handling that business. So, we're just out trying to solve for our customers and we think they have real confidence in us. I think that the Schneider exit means a ton in the way we talk to BNSF, how we collaborate together, how we're talking about operations in the terminals, how we're going to market together. So, the Schneider exit from BNSF to me is significantly valuable in the way we're communicating with BNSF. And I'd like to believe our customers will get a benefit out of that. Thank you, operator. Good morning, everyone. One quick one from me. You talked a little bit about expectations for growing intermodal this year. I guess how do you think about contract rates on the truckload side and where they might put some pressure on that. They've held up largely, but we're starting here from some private carriers that expectations are anywhere between let's call it 3% and 8% down? I'll start, Jason. And I think maybe you're asking about what we might see on the truckload side and then how we think about that impacting in any way, shape, or form, Intermodal contract rates, if I understood the question correctly. We certainly have seen and expect to see downward rate pressure on the highway side. The good news is from where we sit in the evolution of our truck line and now with the combination of ICS and JBT, we are for the most part variable on our power and so we're able to ebb and flow with that fluctuation in a much more favorable light than perhaps we were when we were an asset provider. But we do fully expect, you know I'm not going to give guidance on what we anticipate or what we're planning for on the overall rate movement, but we certainly expect it to be down somewhat substantially just as we saw it go up somewhat substantially or abnormally two to three years ago. We are seeing that kind of correction back downward. I think on the intermodal front, the only thing I would say is, historically and then I don't think it'll be any different today. Intermodal will outperform a downturn in truckload rates. I'm not going to ignore that certainly becomes a dialogue and a talking point for our customers, but the savings Intermodal offers against a truckload price continues to be significant and whatever is happening in the truckload contract pricing, Intermodal will continue to be advantageous for our customers for now and for the long-term, particularly when you add the cost of fuel in there. Hey, good morning everyone. Appreciate the time. Maybe another one for you, Brad Hicks on ICS. You talked a bit in the release about a pickup in [tech costs] [ph] in 2022. And I just wanted to get maybe a little bit more color on whether that was tied directly to volumes in that business, you know whether that was a structural investment in the platform or whether that was more inflationary? And then as you think about some of your comments around volumes this year, how much of an opportunity do you have to get more leverage on those costs? Thank you. Thank you, Bruce. Part of that was by design, it was just making the point that it was a step-up from prior year as we look to continue to finish out some of the tech investments that we've made both at ICS and for JBT in Highway. Really focused on our ability to get productivity gains both from our people and also better transparency and visibility of our platform for both our carriers and our shippers. And so, do we feel like there's upside as we continue to move forward? Absolutely. We've started to realize the benefit of those tech investments as we've talked about for the last few quarters, but there's still work to be done. Even inside of 2023, we expect further build out of those technologies that will help us on productivity and overall execution of the business. All focused on really if you think about the platform, it has enabled us to really think about how we would blend what's historically been our live freight business, which is ICS versus our [drop freight] [ph] business in JBT. And through that blending, we're able to make better decisions. The drive efficiencies help improve service and then ultimately can be a benefit to our customers through a low cost. So, that's what our focus is going into 2023 and we expect to make continuous improvements throughout. Thank you very much. Thanks for squeezing me in. Shelley, I want to go back to a comment you were talking about how the weakness is mostly related to a big inventory correction by customers and likely to get better starting in 2Q, I guess really, how do we know this is not something more [nefarious] [ph] going on beneath these weak inventory driven numbers in terms of the economy weakening or consumer weakening? And then, in terms of the inventory reductions, I know a lot of customers have built these inventory buffers last year because of the supply chain issues as we went from, kind of JIT to just in case. Is your sense that the customers are bringing inventories back to where they used to be or is there still going to be a buffer when this inventory adjustment is set and done? I apologize for the two prongs on this, but it's all related. Thank you, Jack. And I like to start with what Brad Delco said, which is our crystal ball is not very good and really not like anybody else's. It's hard and difficult, but we do talk to our customers. And what they're telling us is it's largely an inventory correction happening. I will say, I think they're evaluating part of the flip that Brad Hicks talked about last quarter was really around the capacity side, but also the flip is occurring from an inventory side as we're coming on that back end of COVID, what consumers were buying and what they're purchasing moving into the future. That's part of what's happening from an inventory correction perspective. But I would say, I don't know that we have a great crystal ball, but this is what our customers are telling us. We feel confident, but we're going to be fluid in making sure that we have good conversation around that and apologize, Jeff. It's Jeff, not Jack. Great. Thank you so much. And I'll also hand it back to John here at the end, but I think you heard us open and talk a lot about the challenges that are being presented, but also the opportunities that we think exist for our customers and also for J.B. Hunt. We're going to continue to be fluid and we are cautious based on what we're seeing on the demand side, but we're very confident in our ability to really thrive in this environment and in any environment. And talking about our three priorities, and those really don't change whether that's this year, the next year, or years after. We're going to stay disciplined with our long-term investment around our people, our technology, and capacity, being fluid in those decisions and making sure we stay close with our customers. We will be very focused on creating more customer value. And this year, we are helping our customers with cost savings. You heard Darren talk about we're going to do that through efficiency. We are talking to them about mode conversion, to the most efficient lane transportation available into Intermodal. We're going to continue to build great fleets for them and create a more efficient fleet. We're going to differentiate our customers' experience in the Final Mile segment and we're also going to leverage J.B. Hunt 360 to bring a flexible cost and capacity solution. Finally, we are going to continue to have long-term compounding returns for our shareholders. Those are our three priorities, but before I turn it over to John, I want to make sure that I say, we are so proud of that over 37,000 employees that have delivered really over the last three years, but even in the fourth quarter, a little bit of noise there, but I'll tell you the effort that our people have made through 2022, our customers notice, our customers trust us, and every day we work very hard to be their trusted provider. We want to continue to accelerate with our customers, but without our people, technology and capacity really would be irrelevant. And so, I just can't emphasize enough the great work our teams have done. We're proud of the teams and we're looking forward to 2023. John? Good, Shelley. Thank you. Great comment there. I want to go back to the noisy fourth and just say that this claims event has gotten all of our attention. It's a little bit like a [indiscernible]. We wanted to understand our current position and lean into 2023. I'm confident in John's approach here with the changes that he is making and plan to continue to stay very close to that. And keep an eye on it to be sure we're tracking and adjust maybe more affluently, if that's a good way to think about even this part of the business, because none of us like that kind of surprise or [no worries] [ph]. I want to mention that the OEM position that we're in right now, I'm super confident in. I have worked with Nick and the OEMs to help better position the company as a very strategic buyer. We are a very different types of Class 8 and Class 6 buyer. And our [indiscernible] management and our providers are really understanding that. I think that's got a really good long-term positioning value for us. I would also say that very, very closely aligned with our rail providers like I've never seen. And I have either in this job or my prior job have been able to really see how those relationships work. And being close to them, I'm very confident questions about our equipment additions and those ideas in the near-term are appropriate, but I like what Darren said, this is a long march and we are positioned and as good as I've ever seen us. And so, we will be taking advantage of those corrections. And I think we're going to just kind of coin the term leaning forward into 2023, 2024, 2025. My closing word is the same as Shelleyâs. I'm really, really proud of all of our people, but I'm also particularly proud of our leadership. It has not been easy. No one thinks it has and no one has claimed that in any part of the industry, but I am particularly proud of what happened in 2020, what happened in 2021, and what has happened so far as we close out 2022 that gives me great confidence when we look forward as to our ability to go capitalize on the opportunities here. So, we appreciate you being on the call and we'll talk to you next quarter.
EarningCall_1357	Good afternoon, everyone, and thank you for participating in today's conference call to discuss Concrete Pumping Holdings' Financial Results for the Fourth Quarter and Fiscal Year ended October 31, 2022. Joining us today are Concrete Pumping Holdingsâ CEO, Bruce Young; CFO, Iain Humphries; and the company's External Director of Investor Relations, Cody Slach. Before we go further, I would like to turn the call over to Mr. Slach to read the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead. Thanks, Camilla. I'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements regarding our business and outlook. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Concrete Pumping Holdings' annual report on Form 10-K, quarterly report on Form 10-Q, and other publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, we will also reference certain non-GAAP financial measures, including adjusted EBITDA, net debt, and free cash flow, which we believe provide useful information for investors. We provide further information about these non-GAAP financial measures and reconciliations to the comparable GAAP measures in our press release issued today or the investor presentation posted on the company's website. I'd like to remind everyone that this call will be available for replay later this evening. A webcast replay will also be available via the link provided in today's press release, as well as on the company's website. Additionally, we have posted an updated investor presentation to the company's website. Thank you, Cody and good afternoon, everyone. We closed out our 2022 fiscal year on a record high note posting our fifth consecutive quarter of double-digit consolidated revenue growth. This exceptional growth across all segments was driven by continued market share gains and contributions from recent accretive acquisitions underscoring the strength, operational efficiency, and resiliency of our business and execution of our strategic plan. As a result, we were able to drive financial performance records for annual revenue, adjusted EBITDA and net income for the company. Looking at the full fiscal year of 2022, revenue increased 27% to $401.3 million, adjusted EBITDA increased 14% to $118.6 million, and net income increased $43.7 million to $26.9 million. By reporting segment, revenue in our U.S. Pumping business increased 34% in the fourth quarter, driven by our recent strategic acquisitions and strong performance in our commercial end market. We were successful in growing our commercial market share opportunistically recalibrating rates and capturing pent-up demand driven by the pandemic recovery. Of note, office buildings, data centers, warehouses and distribution centers within our commercial market continue to grow and there has been an encouraging recovery in the hospitality sector. Turning to infrastructure, our expanded national footprint continued to drive results as it allowed us to capture more funds for public project investments. We continue to work to win projects at the state and local levels and look forward to renewed investment in the U.S. with the infrastructure investments in Job Act. At this time, the infrastructure bills benefits to our business remain uncertain and as such has not been built into our 2023 forecast. During the fourth quarter, our residential segment remained relatively stable due to the ongoing structural supply demand imbalance that continues to unwind. We recognize that higher interest rates have created affordability issues in the housing market, but is important to note that majority of our residential work resides in the Mountain states and in Texas which continue to be resilient versus other areas in the U.S. As expected, the moderate change in residential volume in the fourth quarter was absorbed by other high margin work. For example, our residential work volumes traded to growth with our commercial market in the fourth quarter, which typically carries higher margins in residential work. As noted in today's investor deck, at the end of 2022 fiscal year, our mix of U.S. Pumping work was 56% commercial, 33% residential, and 11% infrastructure. The change in the distribution of our revenue by end market and diversity by geography illustrates the advantages of our broad and diverse national platform and the strength of our high value service. In our UK segment, in-spite of foreign exchange headwinds, revenue increased 8% compared to the prior year quarter. Our team continues to secure energy, road and rail projects in addition to the work we have previously announced with the concrete incentive, high speed railway project HS2, which is expected to last beyond 2030. In Eco-Pan, our concrete waste management business we continue to deliver exceptional organic growth with revenue up 42% in the quarter. This continues to be driven by an improved sales approach and the value of our enhanced service offering. Going forward, we expect to maintain Eco-Pan's double-digit organic revenue growth given its penetration to market in its relative size to our pumping business. During the last fiscal year, we are opportunistic with several tuck-in acquisitions and greenfield expansion opportunities. It was an exciting year to welcome new teammates into our family of businesses and the operational and integrations were seamless. Shifting to the cost side of our business, as was the case last quarter, persistent high inflation, particularly in diesel fuel continued to impact year-over-year gross margin comparisons. Despite this headwind, our team has continued to execute cost containment actions and the recalibration of our rates have largely offset these inflationary costs and our margin dollars are in-line with our expectations. As a result, we continue to realize the expected equipment return on investment for the same volume of work performed. As we close out the year and look forward to 2023, we are in a strong position to execute our strategic growth priorities. I will return later to discuss our longer-term growth strategy and provide an updated market outlook. But for now, I will pass the call off to Iain to discuss our results in more detail. Iain? Thanks, Bruce, and good afternoon, everyone. In the fourth quarter of our 2022 fiscal year, revenue increased 31% to $114.9 million, compared to $87.8 million in the same year ago quarter. Strong organic growth, volume growth from recent acquisitions, and ongoing pricing improvement all contributed to the double-digit revenue increase. Revenue in our U.S. Pumping segment, mostly operating under the Brundage-Bone brand, increased 34% to 84.3 million compared to 63 million in the prior year quarter. Excluding the acquisitions of Hi-Tech, Pioneer, and Coastal, revenue increased 17% to 72.4 million on an organic basis due to the higher construction volumes and ongoing price improvements. For our U.K. operations, operating largely under the Camfaud brand, while excluding the foreign exchange translation effects, from the weakening British pound, revenue for our UK operations increased by approximately 25% in the fourth quarter. This was due to strong volume recovery from the region's progress in overcoming the effects of COVID-19 along with the recalibration of our pricing. On an as reported U.S. dollar basis, revenue improved 8% to $14.9 million, compared to $13.8 million in the same year ago quarter. Revenue in our U.S. Concrete Waste Management Services segment operating under the Eco-Pan brand increased 42% to 15.6 million in the fourth quarter. This strong organic increase was driven by robust organic volume growth, market share expansion, and sales conversion by our regional teams. Returning to our consolidated results. Gross margin in the fourth quarter was 42.3%, compared to 42.6% in the same year ago quarter. The slight decrease is directly related to inflationary pressures, particularly related to diesel fuel price escalation. For the full fiscal year, the cost of diesel fuel inflation was approximately $10 million or 240 basis points impact of the 280 basis point change for the full-year gross margin. General and administrative expenses in Q4 were $30.1 million, compared to $25.6 million in the same year ago quarter. In the fourth quarter, we experienced lower amortization cost of intangibles and lower stock-based compensation expense, but this was more than offset by labor cost headcount increases from recent acquisitions. As a percentage of revenue, G&A costs improved in the fourth quarter to 26.2%, compared to 29.1% in the same year ago quarter. Net income available to common shareholders in the fourth quarter increased 170% to $8.1 million or $0.14 per diluted share, compared to $3 million or $0.05 per diluted share in the same year ago quarter. The improvement was a result of substantial contributions from both acquired revenue and organic growth. Consolidated adjusted EBITDA in the fourth quarter increased 28% to 36.3 million, compared to 28.3 million in the same year ago quarter. Adjusted EBITDA margin was 31.6%, compared to 32.2% in the same year ago quarter. As discussed previously, the slight erosion in margin was driven by persistent cost inflation, particularly in the cost of diesel fuel. In our U.S. concrete pumping business, adjusted EBITDA improved 29% to 23.4 million compared to 18.1 million in the same year ago quarter, driven by the throughput from our strong revenue growth. In our UK business, adjusted EBITDA was 4.7 million, compared to 4.2 million in the same year ago quarter, a strong revenue growth was offset by currency translation weakness and significant inflation from diesel fuel costs. For our U.S. concrete waste management business, adjusted EBITDA improved 42% to 7.6 million, compared to 5.4 million in the same year ago quarter, due to strong organic growth and revenue and disciplined operational efficiency. Turning to liquidity. As of October 31, 2022, we had total debt outstanding of 427 million or net debt of 420 million. We had approximately 111 million in liquidity as of October 31, 2022, which includes cash on the balance sheet and availability from ABL facility. As a reminder, we have no near term debt maturities with our senior notes and asset-based lending facility maturing in 2026. Additionally, we delivered strong free cash flow in fiscal year 2022 of approximately $59 million after [divesting] [ph] 36 million in replacement equipment and dispersing approximately 24 million in cash interest. We remain in our strong liquidity position, which provides further optionality to pursue value added investment opportunities like accretive M&A, or investment in the reduction of our fleet age to support our overall long-term growth strategy. As a reminder, during the third quarter of 2022, we initiated a share repurchase program that authorized a buyback of up to $10 million of our outstanding shares of common stock. In the fourth quarter, the company repurchased approximately 416,000 shares for approximately $2.7 million. On October 31, 2022, we had approximately $7.3 million remaining under the June 2022 authorization. In today's earnings release announcement, the Board of Directors have approved an additional $10 million increase to this program and the share buyback program demonstrates both our commitment to delivering value to shareholders and underscores our confidence in our balance sheet, our liquidity and strategic growth plan. Moving now into the 2023 full-year guidance. We expect fiscal year revenue to range between $420 million and $445 million, adjusted EBITDA to range between $125 million and $135 million, and free cash flow, which we define as adjusted EBITDA less net replacement CapEx, less cash paid for interest to range between $65 million and $75 million. We are consistently enhancing our fleet of operating equipment to ensure safety and reliability, minimizing repair downtime, and optimizing equipment utilization, which help us capture additional market share and project wins with new customers. Operationally and financially, we have a solid foundation and we have confidence in executing our growth strategy. Thanks, Ian. In the fourth quarter of 2022, we are pleased to report continuation of double-digit revenue growth and a return to a more normalized operating environment. Looking more broadly in 2022, we took deliberate steps to drive scale through continued organic growth, as well as strategic M&A. Our Eco-Pan business continued to deliver exceptional double-digit growth as we expanded the value of our service offering and grew our Eco-Pan sales force. Additionally, throughout the year, we were able to recalibrate rates in all of our businesses to combat the rapid and persistent cost inflation pressures. I want to thank our entire team for this truly remarkable effort. As we think about where our business is positioned, we have high conviction that commercial and infrastructure will continue to have strong demand due to the factors that we are experiencing today. Given interest rates rising in recent indicators of consumer spending weakening, it's only practical for us to assume our residential business volumes may fluctuate and give some ground to our commercial and infrastructure business in 2023. However, this is an example of the agility and resilience of our business model and fleet management. Where construction volumes change in one region our end market, we adjust our fleet manage to ensure we optimize equipment utilization. In summary, we are very pleased with our fourth quarter and full-year 2022 results against a challenging backdrop and are optimistic about our business momentum heading into 2023. With almost 30% year-over-year consolidated revenue growth in 2022, we are delighted with the 30% year-over-year organic growth in our Eco-Pan business, the exceptional execution and contribution of our M&A strategy, and the expansion into new markets with promising long-term fundamentals. We fully expect expanded federal and state level infrastructure investment and the commercial market recovery to support growing construction activity for years to come. We remain focused on the execution of the growth strategy to continue to drive scale through investing in organic growth and M&A and believe that this is the best path to provide superior shareholder value. Thank you, Mr. Young. [Operator Instructions] And our first question will come from Tim Mulrooney with William Blair. Please proceed with your question. Doing pretty good. We've spoken before about the Infrastructure Act, but maybe it would be also helpful to talk about the CHIPS Act. It seems likely you will be having a lot of semiconductor fabs being built in the U.S. and I guess I'm wondering if you could give us a sense of both the type of needs for facility like this? And if a large chunk of that would come from concrete pumping? Yes. So the CHIPS Act has helped us and there are several large facilities that we are currently working on and several that we're bidding into the future. And those types of facilities are very concrete intensive. And so, yes, that's a very good thing for us. And maybe just as far as like the timing of these projects, I know some of the Infrastructure Act might benefit the fiscal year though you guys don't have in your guidance, but is that something we can also maybe expect from the CHIPS Act or is that maybe â is the benefit from that maybe 2024 at the earliest? Okay. Thanks. And then maybe just one more from us related to the outlook, but in regard to your fiscal outlook, just hoping you can maybe share what customer end market mix, you guys are consequently compared to fiscal 2022? And then maybe what the margin impact of that change might be? Yes. So, as we mentioned in the script, the work is shifting from residential into more commercial market. And with the commercial markets, we're using more of our specialty equipment and our larger booms and pumping higher volumes. So, our revenue per hour is higher and our margins are greater in that market. And we expect that to continue through the remainder of this year. All right, great. Good evening, gentlemen. Thanks for taking my question. First, I guess, I wanted to acknowledge the disclosure here that you have on your free cash flow, including the CapEx footnote here that talks about how you're doing asset purchases and you're splitting out the growth investment? I think that's helpful for all of us to get a better sense of what the underlying cash flow is. So, it also generates questions. So, I wanted to start there. Just footnote here Iain, it mentions $31 million of M&A in the fourth quarter. It was also $31 million called out separately on its own line here, it looks like in the fourth quarter. I'm assuming that's the same $31 million, but I'm not supposed to take 31 of the CapEx line as well. Is that right? Yes. That's right, Andy. And the way to think about it, I mean, looking at the â if we take the full-year, including obviously we have a business combination in there, the way you think about the 124 million investment for the full-year, there's like 36 million in replacement, [37 million] [ph] in organic growth and [51 million] [ph] in M&A. So that's maybe more helpful color as well. Yes, that's just some total of what your footnotes say there. It is helpful. So, I guess then here as it relates to the guidance that you gave for free cash flow, you kind of mentioned the free cash flow definition here being around net replacement CapEx. So, I guess can you give the net replacement CapEx guidance that is the number that gets you to the free cash flow guidance that you've given here? Yes. So, I guess if you take the mid-point for next year's free cash flow, it's â you really subtract call it 36 million in replacement CapEx and 24 million in cash interest. So that would get you to a mid-point of around 70 million for the free cash flow. And then the replacement as you know Andy is largely consistent with the percent of revenue that we've done year-over-year. Got it. Is there â what is the growth CapEx number then that we should be expecting in order to generate the EBITDA range that you've given? [Thatâs] [ph] not all coming for free. There's some growth CapEx and that's going to be needed to fund the range that you're talking about. Yes. So, really the growth CapEx was invested in 2022. So, what we've got for the guide for next year is, 2022 is growth investment into next year. So, another way to think about that year-over-year change, so call it 8%. We have 4% pickup from the full-year of M&A and then we'll get 2% from volume and 2% from price and that volume would come from the growth investment in 2022. So, if there's additional growth investment in 2023, then there would be a pickup to the current guidance range that we give. Sorry, are these the numbers you're talking â I was asking about the growth CapEx numbers. It sounds like you're giving numbers that give income statement lines, what's the growth CapEx needed to drive the income statement range that you've given? Okay. So for fiscal 2022, there's 36 of replacement, 31 of growth capital, and 51 in M&A. So, you're saying that it is going to be around $36 million replacement, no growth capital this year and then whatever you do in M&A is M&A. So, that's a $30 million plus tailwind versus the prior year? Andy, one thing you would add to that is, through all our acquisitions that we did last year, they were all very underutilized and we got a lot of additional assets through those acquisitions that helps that growth in the future as well. Yes. So, thinking about it on the revenue dollar terms, Andy. So, coastal was obviously done at the end of 2022. So, if you just take the percentage given that 8% pickup, 4% on M&A would be 16 million, 2% on volume would be [8 million] [ph], another 2% would be another [8 million] [ph]. So, that's really the bridge from 2022 to the mid-point of 2023 without any growth investment. Okay. Thatâs interesting and I guess specifically with the Eco-Pan business growing so well and that being basically all organic, I'm surprised that there's no CapEx needed for that business to grow it. [Indiscernible]. Got it. Okay. And then I guess just if you could â I want to drill into the margin outlook here. Itâs basically like the EBITDA margin guidance is flat year-over-year, but you're making a definitional change here on adjusted EBITDA, you're now going to not include director's compensation and public company's costs, which is by the way a very positive change and actually a little bit of surprise you've been [excluding] [ph] it to this point. But I guess my question is, what are the other sources of variance? 2022 was a year that obviously had some margin pressures from diesel. It sounds like you're expecting that to â like it sounds like after a year of those challenges on diesel that you're getting the rates up. So, I guess I'm just curious as to if we should be thinking about margin recovery, it sounds like, Bruce you made a comment that youâre recovering dollars, but what about the prospect of recovering margin percentage? What are the variables that are out there that could allow that to occur? Fuel is the biggest one that we deal with there. Everything else is stabilized at a new level and then really it comes down to just getting better rates over time. Got it. Are you seeing â the labor had been somewhat of a challenge as well, has that stabilized, and do you feel like that's under better control today than it was maybe 6 or 9 months ago? Hey, thanks. Bruce, Iain. Bruce, just on the rate increases you've pushed through the business over the last 12 plus months, what is the approach, kind of going forward that now we're seeing through fuel prices flattening out in your operations sound like they're still pretty busy, so, maybe you can continue to push on REIT? How do you approach that going forward with some of these costs leveling out? Well, as you know, our customers all have a responsibility to their owners to get the best rate on all their services so we have to be able to prove out value. I think we've done a pretty good job. I think as you can see the results from last year that we were able to meet with our customers and really partnering with them on what it took to provide the same level of service going forward. And I think we'll continue to do that. I would say that all of our customers knew that inflation was a real factor and they weren't just getting it from us, they were getting it from everyone and they were accommodating to that. I think going forward, they'll be a little more thoughtful about that. And really, we'll just have to continue to prove out our value. And Bruce, are there any other, sort of supply chain and efficiencies that continue to impact the business today that are worth calling out or are we really just talking about fuel when you think about recovery and margin percentage? The only other thing would be from a capital standpoint, the equipment is starting to get more expensive where I think we've talked in the past that we paid in 2020 the same price for it, the same size concrete pump that we would have paid in 2006 or 2007. So, they're really â the pricing on the equipment really didn't go up. Our manufacturers got hit pretty hard through the last couple of years with inflation. So, we're seeing the new equipment costs going up, but everything else is fairly stable. Okay. I mean, it sounds like you guys are pretty confident, what weakness does come from residential, I guess, spending this year up since will ultimately be offset by what you get from the commercial and infrastructure markets? Your comments on sub segments of commercial like the CHIPS Act, which clearly look like a tailwind. Are you seeing jobs on the infrastructure side that you're tracking coming forward that you expect to participate in? Maybe just help us, kind of around the visibility you do see in those two markets that may help offset whatever comes in resi? We do have more visibility on the dollar amount that we'd be going each of the states through the Infrastructure Act. Tracing that down to the job site is still a little bit more difficult, although it's becoming more clear and going forward and there's real dollars, there are significant dollars that should impact our revenues in a very positive way going forward. We're still trying to just sort through that, but it's still a little bit too early to tell and that's what we mentioned in the script that we're leaving any growth for infrastructure out of our forecast going forward, but we think that over this next year that's going to become very clear for us. [Operator Instructions] At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Young for closing remarks. Thank you, Camilla. We'd like to thank everyone for listening in to today's call and we look forward to speaking with you when we report our first quarter fiscal 2023 results in March. Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
EarningCall_1358	Well, good afternoon, and for those of you online, welcome back to Citi's 2023 Communications, Media & Entertainment Conference. For those of you I haven't met, I'm Mike Rollins, I cover Communication Services and Infrastructure at Citi. Before we get started, I'd like to mention that we do have disclosures available at the registration desk as well as on the Citi Velocity page from which we are streaming the audio. We'll also work to incorporate your questions during today's discussion. If you're here with us live, we'll have a microphone and try to get to some questions at the end of our time, and if you streaming this connection, there should be a question box on the page and you could type questions into that. We're also continuing our tradition of live survey questions. And so for those of you in our audience, you've got the QR codes out here and on the tables, and for those online, the live survey will pop up on your screen and we look forward to getting your responses. With all of those details now out of the way, I'd like to welcome Pascal Desroches, Senior, Executive Vice President and Chief Financial Officer of AT&T. Pascal, thank you so much for being here today. And yes, and Happy New Year and I think you might also have something that you wanted to share with our audience. Yes. [indiscernible] would not let me speak without reminding everybody -- the Safe Harbor rules. Some of the statements that I'll make are forward-looking and subject to risks and uncertainties. Refer to our website for more information. Well, great. It's been a busy few years for AT&T and as we start this new year, maybe you could share with us how you're looking at the strategic and operating priorities for AT&T and if there's any notable changes from what the focus was last year at this time? Yeah, short thing. I mean if -- as you said, it's been a busy couple of years since John Stankey took over as CEO. During that time, I would characterize -- our strategy has been fairly consistent. We're focused on growing customers, making sure we're doing so in an effective and efficient way, and we are being very rigorous with our capital allocation approach, and the changes that you -- that you will see going forward are really more around, the first part of John's tenure was focused on let's get the asset portfolio, right. Let's focus the company on wireless and fiber that's going to be the future of AT&T and let's strengthen the balance sheet, delever, and get ourselves to a point where we can continue to invest in our businesses because we think the secular dynamics around wireless and fiber are very strong. So I would say as you go into 2023, I would expect us to continue to invest to generate customer growth in a very disciplined way. You should expect us to continue to drive improvements in our operating leverage through disciplined cost management and continue to delever our balance sheet using all free cash flows after dividends to pay down debt. That -- so the playbook is in a way is very boring, but it's very important. Let's continue to drive earnings growth, pay an attractive dividend, and strengthen our balance sheet. Well, want to dig into all of that. Before we do, I'm going to queue up our first live survey question. And so, we're going to ask our audience, what do you expect for wireless industry postpaid phone net adds for 2023? And the choices are over 2 million to 4 million, 4 million to 6 million, 6 million to 8 million, 8 million to 10 million and over 10 million, and we'll let this brew for a few minutes. And maybe we'll just start talking about the postpaid market. So in 3Q, if I recall correctly, industry phone net adds showed some decline on a year-over-year basis. At an industry level, did you continue to see that in 4Q and can you talk about the promotional environment and how you would describe AT&T's level of aggressiveness? Sure. Maybe let's just start, I think for the last, call it, two and half years the industry has been growing at a rate that we -- that caught everyone by surprise, which was growing much faster. As we got into the second half of 2022, I would say we've seen more of a normalization of growth and I would say that environment remains, it's very healthy. I would expect the industry to continue to grow net adds, but probably at a more modest pace of what you've seen over the last two years. But that's no surprise, and I think what you should look for is an environment where -- where there is competition, but it's going to be done so in a very disciplined way, and you should expect us to grow service revenues, as we updated our guidance last quarter, you should expect us to grow ARPU, and really it's a healthy business. Yeah, there was -- there were the normal Black Friday promotions. But I'd say, if you look at our actions relative to that of our peers we were much less promotional around Black Friday than some of our peers and that's the way we want to run this company as we move forward, it's going to be important for us to grow, but we're going to do so in a disciplined way. And within that growth, do you still expect to drive significant postpaid phone volumes as part of that, you mentioned the ARPU earlier but should investors continue to expect the volume growth as well? Here's the way I would characterize it, AT&T will no longer be the shared donor in the industry. We're going to grow -- commensurate with industry growth or better. I mean, it's we feel really good about our ability to compete and we have -- we provide great products and services and feel really good about it. Here's the thing I think that often gets lost is, AT&T has a massive distribution footprint, whether you think about our enterprise relationships, that's a big source of our wireless net adds, FirstNet, we've generated over the last several years, 4 million or so net adds -- FirstNet subscribers. All subscribers that are not dependent upon the day-to-day promotions, these are the relationships that we have, these are -- these are distribution channels that are very effective for us. And it's that coupled with -- I've mentioned this previously we've -- go back two years ago, there was a management change that was done at the wireless business and where we -- the new management team came in and provided a lot more decentralization of the sales team gone to relying much more on the VPGMs in each of the regions to drive more accountability across the country to generate new subscribers. So all those things coupled with our distribution channels have or help really get us to a point where we are. One other question that we've been getting over the last month, if there was some inventory constraints on high end smartphones or any smartphones in the fourth quarter, and is that creating any spillover effect for AT&T from the fourth quarter into the first quarter? Here's where I would characterize. There was clearly some dislocation and yeah, that probably did impact some volumes. But I would say, over the course of the quarter, things -- the inventories got -- situation got better. But there was clearly points in the quarter where there was some dislocation and the supply was constrained on some of the higher end devices. And just to close this off on just the environment on wireless postpaid, did you see any impact from DISH or incremental competition from cable? The environment has been and remains competitive, but I would say it's really any changes really are a reflection of the fact that the market may not be as hot as it was in the latter part of '21 and early 2022. But it's still very healthy, and demand remains solid. All right. So the survey, so 33% expects industry growth postpaid phones for 2023 to be over 2 million to 4 million, 27% 4 million to 6 million, 30% 6 million to 8 million, 3% 8 million to 10 million, 7% over 10 million. So a distribution, I think going back, there were some management comments from AT&T about base case annual industry growth of 6 million phone net adds a year. Any thoughts on what investors should expect? Is that the expectation for '23 should be 6 million? Is that your expectation or how should investors think about that? I think we've been pretty public about the fact that we would expect at some point to normalize that the phone net adds would normalize to overall population growth. And we've been expecting that. And we've been pleasantly surprised, it hasn't been. I'm not in the business of -- forecasting exactly where it's going to land. But look, so far based on everything we've seen, the market remains healthy. And in terms of ARPU opportunities, can you frame where AT&T is in terms of the penetration of higher value plans? And how the mix of sales may inform where that can go over time? Here I want to be careful not to share anything that we haven't disclosed publicly. Here's what I would say. One, our fastest growing plans are our higher tier plans. I think consumers are finding more value. And we remain really pleased with it to -- so last year, we put in pricing actions to try to move customers to our higher tier plan. And in fact, the uptake to the higher tier plants was a little bit better than we anticipated. So clearly, subscribers are finding more value. Overall, we guided that we were going to start to see a stabilization of ARPU in the second half, and we saw ARPU actually grow, and we would expect that to continue. So, all the things that you would expect for a healthy business, we're seeing that. AT&T touches so many parts of the economy, the consumer businesses you have, the business segments. Are you seeing any change in behavior from your customers in terms of demand, payment behavior, the types of plans and consumption that they're subscribing to. Here is the way I would characterize it, Mike. You go back to late 2020, 2021 we were in an unusual period where savings rates were really high, and customers were paying faster than they've ever had, delinquencies were really low. During 2022, we've gradually seen a normalization of that behavior back to pre-pandemic norms. And I've said publicly that our levels of bad debt are probably slightly worse than they were pre-pandemic. But nothing that I would say that is alarming. It is really more of a normalization of what of what had been an unusually buoyant economic environment. And obviously, with rising interest rates and the Fed's Hawkes posture we're being very attentive to see whether we see any size. But so far, other than the normalization that I previously commented on, so far so good. And just one quick follow-up on this. You mentioned it was a little worse than pre-pandemic levels. When things were starting to revert back to pre-pandemic levels back in the summer, the extension of the DSOs contributed to the reduction in free cash flow in 2022, at least for the guidance for 2022. Should investors consider that things getting maybe a little worse than pre-pandemic levels. Is that a risk to AT&T's free cash flow or a headwind that people should be mindful of? This is - we saw 1.5 days extension of collection cycles. That has not gotten -- that has not gotten worse at all. It's remained the same. So really, there's nothing different from what I had characterized in our Q2 earnings forecast -- Q2 earnings conference call. So I'm going to throw out the second survey question, and then we'll talk about a couple of other topics before we get to it. This is a little bit more of a complicated question, but I think it's an -- it's going to be a helpful question, which is, how should AT&T prioritize fiber investments in the future beyond what's been currently announced. So accelerate investment in the heritage footprint to get to more locations more quickly, divest local operations in markets where fiber deployments are just not prioritized. Employ outside capital to accelerate fiber deployments within its current footprint or expand the use of outside capital for out of reach in deployments, including for the [indiscernible] program. And we'll come back to this, and I realize there was some announcements late December, so we'll get into that in a moment. But before we do, just wanted to stay on the macro for one more moment. What are you seeing from inflation and how that could impact 2023 performance? Well, clearly, inflation has been a headwind not only for us but for other companies, that's why we took the pricing actions that we did. We've been on a transformation journey for several years and that has also helped between the pricing actions and the transformation, we are seeing, we were able to offset over $1 billion of inflation headwinds that we faced. And those were incremental to already pretty conservative inflation assumptions we had built into our forecast. So inflation did definitely impact us, but it's all been factored into the guidance we've previously given. And I feel really good about how the business is performing despite significant headwinds from inflation. And in terms of just responses to inflation to the current cost structure, can you just give us an update on whether there's incremental opportunities to cut cost beyond the $6 billion program that you're on the journey of? And maybe how that program is evolving in terms of the conversion of cost cuts to the actual EBITDA and free cash flow of the company? Sure thing. We had said since late 2021 that we were going to be -- we were reinvesting much of our transformation savings back into the business and that would -- we would begin to drop more and more of the savings to the bottom line beginning in the second half of 2022. You saw that in Q3 and I would expect that to continue for the balance of '22. And we're going to give guidance next year. But look, we have to make sure AT&T has a competitive cost structure. And in my mind, that is a journey, not a destination. We're not going to stop at $6 billion. There are plenty of opportunities, especially, we have an enormous legacy footprint that is declining as that declines, there is lots of infrastructure and costs that are related to it that have to come out of the company, and that is going to be part of the continued journey from hereon in. Also, we're going to continue to use AI, machine learning, digital self-service to help improve customer service to drive efficiencies in customer service and field tech deployment, I would expect us to continue to look at our retail footprint. Are we at the optimal mix of authorized retailers versus self-owned stores, there are opportunities to generate efficiencies through third-party distributors in both our enterprise and our fiber business. So all things that we can do better, and I view those as opportunities that we're going to harvest over the next several years. And maybe you talked about the legacy footprint, moving over to the fiber builds. Can you share where you ended up on locations passed for 2022 and how you're thinking about the opportunities to keep the program going forward and building more locations? Here's -- through the end of Q3, we were at 18.5 million consumer locations pass and about 3.5 million or so of business locations passed and we would expect that to grow each and every quarter. We're not providing quarterly or even annual guidance. What we have said and we remain steadfast on is that we expect to get to 30 million locations plus by 2025. And importantly, with the JV we announced just before Christmas, we expect that number to be incremental to that 30 million plus locations passed. So all-in-all, we feel really good about the pace of our build. Our ability to build out we're doing it at rates that no one has ever done in the industry, and we're able to do it in a cost-efficient way because of our scale. And I feel really good about where we are. And through the JV, we have a unique opportunity in a capital light way to experiment outside of our traditional footprint to see if there are opportunities between the scale that we bring, levered capital and bringing our wireless bundling relationships to bear whether the economics could make sense and whether we can potentially expand outside of our footprint. And we're really excited by the opportunity and the partnership with BlackRock. And look, I think this is an exciting time for the industry. And at a time where timing is of the essence, I think this is a great way to help us accelerate some of our plans. It's a good segue into the survey results. So I realize this is a little bit of a complicated question on how AT&T should prioritize its fiber investments. Interesting results. So 22% want you to accelerate investment inside the Heritage footprint. Another 22% would like you to divest the local operations in markets that you're not investing or prioritizing for fiber. Another 22% wants you to deploy the outside capital to help the current footprint and a third of our audience wants to use outside capital for out-of-region deployments, including the B (ph) program. And so maybe the first question from this is, given AT&T's balance sheet position, and financials, why use outside capital to fund fiber? Clearly, we're not only using outside capital. We are deploying a lot of our own capital. But at the same time, we have a major wireless network. We need to make sure we are continuing to invest as the volume and capacity of that grows. And we've said this, we want to make sure that we're continuing to delever our balance sheet. I think we were really constrained as a result of the various acquisitions that we did. We've taken giant steps forward in delevering, and that has to continue, that it remains a priority and is one that we are committed to. So when timings of the essence, and you also want to make sure you're delevering, the outside use of capital or manage was a great way to start to experiment to see how can you garner additional returns by partnering with somebody. And so we're going to continue to prioritize delevering in addition to investments in our footprint. And the guidance we've given you is through 2025, it doesn't mean we're going to stop in 2025. And when you think about investing inside your footprint and then the incremental opportunities for things like convergence that you can get with the wireless business? How do you think about the returns of going faster inside your footprint where you have some plan already relative to going outside the footprint into Wireline markets that you haven't traditionally been in? How do the returns look between those two? And is -- you mentioned you're going really fast right now in the build. Is there an opportunity to take the inside faster, further than the current plans? It's important that we go quickly, but it can't be at the expense of continuing to delever. And that's really from where John and I sit, it's really important how we do both we don't want to get the balance sheet to a point where it's back where it was 18 months ago. And importantly, with the benefit of hindsight and the higher interest rate environment, we are really fortunate we've gotten to this point in the journey. And right now, with 95% of our debt fixed. We are -- we have a clear path to continue to delever, build fiber faster than anyone else is doing it. And I think it's important that we do both, but we will look for opportunities, whether it be through the government stimulus money, whether it's through partnerships to see if we can go faster, but it cannot be and it will not be at the expense of strengthening the balance sheet. And how do the returns compare inside the footprint versus the outside? Is inside the footprint just naturally a better return given you're already there? I think we will share that information with you over time. Look, it is -- clearly, there are things that are in footprint that are very attractive returns we have kept for ourselves. That's a no brainer. But this is an opportunity to potentially expand our bets, use both third-party equity and debt to create an attractive return for us, well in excess of our cost of capital. So... Relative to prior builds, the build over the last couple of years is penetrating at 2 times the level of historical build in the first year. So it's really -- we have been surprised just how favorably fiber has been received. The long pole tent is getting fiber to the home. Once it's there, it's a product that sells itself. And I think back, I think, forward five years, what do you think consumers are going to demand. Fiber is going to be the only solution that is acceptable to consumers. So given the long lead time, the government stimulus money that's hitting the market, the infrastructure money market. Our actions here, if you -- I believe will be -- will prove to be very timely and produce meaningful returns for our shareholders. What are you seeing in the business segment right now and you've been trying to turn performance there. How is that progressing? Yeah. Business segment is one where it's a work in process, is the way I would characterize it. You are in the midst of a secular downturn for many of the historical legacy communication products. That decline continues. This year, we were hit more significantly than we expected by higher access costs where we are using third-party carriers for some of our enterprise traffic and also some of the public sector business that we have done historically because of the timing of the budget cycle didn't come through in the timing we expected. So those two things caused an acceleration on top of what has been a secular declining business. Fast forward, I would expect this business -- the growth factor to be fiber deployment in small, medium-sized businesses. And over time, I think three years or so, you should see more and more advanced services coming out of 5G capabilities, whether it is through the relationships we have with connected cars. We have more connected cars than any other provider in the country. We have over 100 million IoT relationships. Over time, I would expect as new services are on lease those relationships will prove vital in driving incremental sources of growth. So growth factors, advanced services and fiber in small and medium-sized businesses. Also continued aggressive cost management in the portfolio. I'm going to tease out our next survey question. And while we do that, if you're interested in the microphone to ask a question here in the audience, just raise your hand and we'll get one over to you. So the third and final survey question that we're going to ask is -- and we'll come back to this in a few minutes, how much free cash flow will AT&T generate in 2023? Less than or equal to $13 billion, $13 billion to $15 billion $15 billion to $17 billion, $17 billion and $19 billion or over $19 billion. So we're going to come back to this in a moment. While these results kind of come in, how is AT&T viewing the opportunities to market converged home and mobile broadband bundles. And do you see these bundles creating more lifetime value than what you've traditionally used the family plans and home broadband and video packages? Look, it's an opportunity we think is extraordinary. When we have fiber the customer is really, really pleased with the product. And if you're able to bundle wireless with it at an attractive economic terms. The churn profile is really attractive of that customer. The lifetime values are really attractive. And we've seen a meaningful uptick in wireless penetration, where you have fiber. So really, it goes back to what I said earlier, the long pole in the tent is getting fiber out since many locations as possible. And as you've been deploying mid-band spectrum, any different feelings on the opportunity to market fixed wireless as part of a converged solution. I feel like a little bit of a broken record. And we've been on record from the get-go that fixed wireless is not going to be a priority of ours. We're going to prioritize our investments in fiber, our investments in wireless, but we're not going to prioritize fixed wireless where it could make sense for us areas like some of the rural areas where we don't expect fiber to ever be deployed, and we don't believe it would interfere with our wireless services could make sense as a catch product in an area where we're trying to get fiber to. But outside of those two circumstances don't really think it's going to be a priority for us because once you start to factor in the tax on your network along with the customer acquisition cost, and the price point at which the product is being offered, you look up and you probably -- the returns on that product are just not that attractive. And as part of the expanding fiber footprint, you have the JV that we talked briefly about. Is there anything else about the joint venture that investors should be thinking about for AT&T as well as how the infrastructure, money and these program plays into expanding the fiber footprint. I think it goes back to what we said. We really, really like fiber. We think when you look at the landscape and the consumption trends in the U.S. Fiber is going to be the only technology that is acceptable. And given the amount of investment dollars going after it, our goal was, let's see if there are ways we can go faster without sacrificing our deleveraging goals. And that's really what this is an attempt to look at is to prove that, hey, we can do this and with our wireless product, with the scale contracts we bring to market, we're going to be able to do this even outside of our traditional footprint in a way that delivers attractive returns. And when we prove it, look, there's no reason why we should stop at 1.5 million. So ahead of that, let me share these results, and we'll talk a little bit about free cash flow. So 17% less than or equal to $13 billion, 30%, $13 billion to $15 billion, 30% $15 billion to $17 billion, 7% $17 billion and $19 billion and 17% was over $19 billion. Now the guidance for 2022 is $14 billion. So can you help investors think about some of the pluses and minuses as they try to work through what the free cash flow level is going to be in 2023? First and foremost, we're going to grow earnings. We're going to grow earnings as a result of a bigger and more profitable wireless business, continued growth in our Consumer Wireline business based on the continued really strong fiber growth. You should expect us to continue to take out a meaningful amount of costs, including overall lower headcount across the company. And all those things coupled with lower interest should result in growth in earnings and free cash flow. And are there any unusual taxes? I know you're deleveraging, but is there anything that people should be mindful of that are just sort of don't forget this element, whether it's a headwind or tailwind to free cash flow? A couple of things that I probably didn't mention, but I have in the past one. Taxes, we would expect -- taxes to be up year-over-year. So that's a headwind. And we would expect less -- slightly less distributions from DTV than we are getting this year. The other factor is, we had pretty meaningful 3G and FirstNet cost this year that won't be aggressive next year. So that's also -- that's another tailwind. So those are the main factors that you should think about as you think about 2023. And you mentioned a few times the focus on deleveraging the balance sheet. Can you remind us what the net debt leverage target is that AT&T wants to achieve and when you expect to arrive at that target? Our goal is 2.5 times net debt to EBITDA, where we will use all free cash flows after dividend to reach that goal between now and the next -- and when we provide the updated guidance in terms of when we think we will get there. We haven't provided -- updated guidance on that, so stay tuned. You should expect that from us in a couple of weeks. And in terms of free cash flow, can you remind us where you are in the capital cycle for the mid-band investments? And what the opportunity is to bring down CapEx over the next few years? Here's the way I would characterize it. One, we came into this year, we expected to be -- to have 70 million's POPs covered by the end of 2022 and around 200 million by the end of 2023. We are well ahead of that -- the pace. And the last guidance we gave is, we expected to end 2022 at almost twice the initial guidance of 70 million homes. 2022 and 2023 are peak investment cycles for us because of C-band deployment as well as investments in transformation. Those should begin to moderate as we get to 2024 and beyond. And importantly, we plan those peak investment cycles at a time where we knew we would have meaningful distributions from DIRECTV to help subsidize those. So it's 22 and '23 peak investment cycles that should moderate over time to the more normalized around $20 billion of capital spend. And we have a question from our audience. The joint venture that you announced during the holidays, will that focus on just builds or could that also include acquisitions of fiber in the future? And obviously, as a policy, we never comment on acquisitions. It is a vehicle whose priority right now is to build out in regions that we think are economically really attractive that we may have potentially be underpenetrated in wireless. And could it provide us with an uplift in wireless, also provide us with attractive returns and to reach a group of customers that we otherwise may not have reached and generate meaningful returns. So it's -- that's all I will say about the JV. And just lastly, as you think about the addressable market for revenue across the products that you offer, how are you thinking about the expansion of that opportunity over time? Do you expect B2B IoT 5G applications to contribute substantially? Are there other areas that investors should be thinking about in terms of just growth prospects for the addressable market that may be underappreciated. Here's the way I think about it. I think we are a company that is great at providing -- at building connectivity networks. And there are a whole class of connectivity services that I think we can unleash through the power of 5G and through the continued evolution of fiber. I wouldn't expect us to run far afield of that. But there is within that, if you think about the number of scale players that have the ability that have owners' economics that could deliver those services, there aren't that many of them. So I think if you look at it in that context, there's plenty of opportunity when you look at the consumption trends, you look at who can provide those services. There is plenty of opportunity in the road ahead without running far field of our core capabilities.
EarningCall_1359	Thank you for standing by, and welcome to Mesa Airlines Q4 and Full Year Fiscal Year 2022 Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Doug Cooper, Head of Investor Relations. Mr. Cooper, you may now begin. Thank you, Ted, and welcome everyone to Mesa's Earnings Conference Call for its Fiscal Fourth Quarter and Fiscal Year ended September 30, 2022. On the call with me today are Jonathan Ornstein, Mesa's Chairman and Chief Executive Officer; Brad Rich, Executive Vice President and Chief Operating Officer; Michael Lotz, President; and Torque Zubeck, Chief Financial Officer; and other members of the management team. Following our prepared remarks, there will be a question-and-answer session for the sell-side analysts. We also want to remind everyone on the call today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that could cause actual results to differ materially from those reflected by the forward-looking statements, including the risk factors discussed in our reports on file with the SEC. We undertake no duty to update any forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our fiscal fourth quarter earnings release, which is available on our website for the reconciliation of our non-GAAP measures. Thank you, Doug, and thank you, everyone, for being with us today. Since we spoke on last quarter's results, several significant transactions have occurred at Mesa. Collectively, these new agreements transitioned our business from American Airlines to United, addressed the industry-wide pilot charge and its financial and operational impacts and created a much stronger liquidity position and balance sheet. Combined, these initiatives have transformed our business. Let's walk through what has been accomplished. As we announced on December 19, as a result of ongoing unprofitable operations due in part to utilization penalties and uncovered increases in our pilot wage structure, we initiated and finalized an agreement to wind down our contract with American Airlines by April 30, 2023. Unfortunately, while American initiated dramatic wage increases at their own subsidiaries, they were unwilling to reimburse Mesa for similar pay increases at our American Eagle operation, leaving us vulnerable to unprecedented pilot attrition. This led to an untenable situation and required us to take action. Fortunately, based on our strong relationship with United Airlines, combined with our consistent operational performance over many years, United took a different view and quickly stepped in to take over the American CRJ-900 flying. Given the industry-wide shortfall in regional jet block hours, United supported higher wages in both our E175 and CRJ-900 operations and intends to increase service to many of the smaller and rural cities that have lost flying due to the pilot shortage. As a result, on December 27, we finalized a new 5-year capacity purchase agreement with United that covers up to 38 of our CRJ-900s depending on the number of E175s we are operating. While there is a very clear business case for United's decision, this view was made possible because of a strong relationship that has developed between United and Mesa over the past 30 years. To ensure a smooth transition, our CRJ-900 crew and maintenance bases in Phoenix, Dallas, El Paso and Louisville will remain in place with an additional CRJ-900 crew base we had in Houston, along with a new pilot base in Denver to expand services to Western states. Other incremental crew bases will be potentially added. Mesa will continue to utilize all of its pilots and crews in the existing locations through the transition and beyond. In addition to these actions, our new pilot pay scale has had an immediate and significant impact on attrition as well as our ability to attract qualified candidates. We currently have approximately 400 pilots in our training pipeline. Concurrently, United is providing financial support to Mesa under two additional agreements that we also finalized on December 27. One to provide Mesa a new $41.2 million liquidity facility, of which $25.5 million will be additional liquidity and another to purchase 30 spare engines from Mesa for $80 million, generating over $50 million of net cash proceeds. As part of the transaction, United will also receive a 10% equity position in Mesa and a seat on the Mesa Board. We thank United for their support, and we look forward to capitalizing on the substantial demand for regional jet flying together. This is an important reversal of momentum for the regional airline industry as [Mesa and I] will work to restore service to neglected smaller and rural markets, 3/4 of which have seen service reductions in the past 3 years by adding over 100 daily regional jet flights to the United network. We look forward to leveraging our previously announced co-investments with United on new technology and electric aircraft to further address the needs in smaller and congested communities. Moreover, after the transition, Mesa will be the only exclusive regional carrier for United operating large regional jets. We believe our strong relationship with United will provide significant opportunities in the future as a preferred carrier. In particular, we believe Mesa's participation in the Aviate program, combined with United's industry-leading growth plan will provide the most reliable, fastest path for aviators to transition to a major commercial care. Once our operations are fully integrated with United, Mesa will be the most attractive career path in regional aviation for pilots as well as all of our other employee groups. In the quarter, we also signed a new 2-year agreement with our flight attendants. I would also like to note that our operation with DHL was unaffected by the American and United agreements, and we continue to maintain a strong relationship with DHL. Additionally, we have completed a number of transactions to strengthen our capital structure. In mid-December, we renegotiated improved terms and conditions with EDC, Export Development Bank Canada on debt associated with 7 next-gen CRJ-900 aircraft, reducing debt service by approximately $14 million from January 2023 to December 2024. The junior noteholder, Mitsubishi, has also agreed to forgive 50% of the outstanding note balance or approximately $4.2 million if the notes are fully repaid prior to December 31, 2023. Additionally, we negotiated an agreement with RASPRO, a Canadian special-purpose finance company on our leases of 15 CRJ-900 aircraft, which reduces the effect of purchase price at or prior to March 2024 lease termination by approximately $25 million. Concurrently, Mesa plans on closing on the sales of the remaining 8 CRJ-550s to United in January 2023; and 11 surplus CRJ-900s to a third party, resulting in net cash proceeds of $16.2 million. These sales are expected to reduce Mesa's U.S. treasury debt by approximately $65 million and reduce annual interest expense by approximately $4.5 million at current rates. With that, I will hand over to Brad Rich to go over more of the details of an update on our operational performance this quarter. Thank you, Jonathan, and good afternoon to everyone. I'd like to start by reviewing our quarterly operating results. In the September quarter, we flew 56,533 block hours, 11% below the June 2022 quarter in line with our forecast on last quarter's call. Our December quarter block hours are projected to be 52,000, roughly 9% below the September quarter. For the March quarter, we are currently forecasting 53,000 block hours, a slight increase over the December quarter. Consistent with the challenges throughout the regional industry, our block hour production has been limited due to the pilot shortage. As mentioned previously, attrition has come down materially, and we are filling our classes into the future. Our pilot training production is a major focus, and we continue to expand our capabilities with an additional E-Jet simulator coming in the spring of 2023 and additional instructors in both the E-Jet and CRJ fleet. In addition to our own hiring, we have contracted with CAE to provide additional support for our training efforts. We are focusing on our transition out of American and working cooperatively with United in making preparations for facilities, crews and maintenance. We expect to operate our current American schedule through February 28 for approximately 24 lines of flying. From March 1 through April 3, we will reduce the schedule by 50%, and our operations with American will cease on April 3. Beginning March 1, we will begin operating 9 lines for United and expect to have 24 lines operating by May of 2023. As part of the transition agreement with United -- as part of the transition agreement, United will pay the expenses to reconfigure and rebrand the CRJ-900 aircraft. As we transition our CRJ-900 flying to United, we look forward to maintaining the same level of schedule integrity associated with our ERJ fleet. Great. Thank you, Brad, and thank you to everyone on the call today for your patience as we work to release our quarterly and fiscal year results. As you can see, the delay was due to a number of transactions that were being finalized that meaningfully restructure our flying agreements as well as our debt and lease obligations. As Jonathan has already covered most of the transactions, I'd like to just touch on a few items and summarize our expectations. First, our performance in the fourth quarter. Revenue in the fourth quarter of fiscal year 2022 was $125.6 million, a decrease of $5.1 million or a negative 3.9% from $130.8 million for Q4 2021. Our contract revenue fell by $5.3 million year-over-year. Pass-through and other revenue remained relatively flat to last year, rising 1% primarily due to pass-through maintenance expense. And as a reminder, the pass-through maintenance expense has no P&L impact. Mesa's Q4 '22 results include per GAAP, the deferral of $1.3 million versus the recognition of $1.3 million of previously deferred revenue in Q4 2021. The remaining deferred revenue balance of $24.1 million will be recognized as flights are completed over the remaining terms of the contract. On the expense side, means overall operating expenses for Q4 2022 were $266.8 million, up $141.1 million versus Q4 2021. This increase was driven by $132.3 million expense for impaired assets related to the American Asset Group, the relatively short duration of the remaining contract with American Airlines and the relative uncertainty around longer-term utilization of CRJ-900 fleet and supporting assets. General and administrative expenses of $12.4 million, primarily driven by a onetime tax adjustment of $7.1 million. Maintenance expenses continued at below normal levels as we passed the high number of engine overhauls and heavy C-checks that were deferred at the beginning of COVID. Maintenance costs was $45.9 million in Q4 2022, down $15.1 million or $24.8 million versus Q4 2021. On an adjusted basis, Mesa reported a pretax loss of $16.4 million for Q4 '22 compared to a pretax loss of $3.1 million for Q4 '21. The year-over-year decrease of $13.3 million was primarily due to lower block hour production and the net impact of the PSP program. It's important to note that the adjusted pretax loss for Q4 excludes $132.3 million impairment loss primarily related to the group of assets that are supporting the American CPA. Excluding this item, adjusted net loss is $13.5 million or $0.37 per share compared to a net loss of $2.1 million or $0.06 per share a year ago. And for the fourth quarter of fiscal year 2022, we reported a net loss of $115.6 million or $3.18 per diluted share compared to a net loss of $7.5 million or $0.21 per diluted share for Q4 2021. So let me turn to cash and liquidity. Cash for the quarter, excluding restricted cash, increased by $3.3 million from the prior quarter, June 30, 2022, to $57.7 million. Based on United funding the $25.5 million loan this week, our projected December 31 cash balance is $55 million. This includes any other proceeds from the sales that are not expected to close until the new calendar year. Total debt at the end of the quarter was $599.7 million, down $36.3 million from the prior quarter. During the quarter, we made scheduled debt payments of $42.9 million. Most importantly, combined, our sales transactions will reduce debt by $84 million by as early as March 2023. We also have $80 million of scheduled principal payments in 2023 resulting in projected end of fiscal year '23 debt of approximately $435 million. So looking to full year 2023, given the major developments at Mesa that we discussed today, we will not be providing specific financial guidance at this time other than the block hours that Brad discussed earlier. Thank you, Torque. In summary, 2022 was a challenging year for the regional industry and for Mesa in particular. But we made many important strides in the past few months towards turning our business around. To recap, we reached major operational and financial agreements with United, we shed our loss-making business with American, we implemented a new pay scale for our employees and seized opportunity to shore up our balance sheet through significant reduction in debt and increases in cash. To end this call, I'd like to again thank United for its continued support over the past 3 decades as well as our other shareholders -- stakeholders, such as the U.S. Treasury Department, Export Development Canada, RASPRO and Mitsubishi as well as the assistance of Sidley Austin representing United and FTI representing Mesa. We are especially thankful for the efforts of all our employees towards helping us rebuild and optimize our operations, setting Mesa up for future success. This is actually Shannon Doherty on for Mike. Just a couple of quick ones here. How quickly can you guys stabilize the operation and transition from American to United? And once finalized, how many airplanes will be expected to fly to United in total? This is Jonathan. Our plan is to begin the transition basically in March and be done by April -- mid of April. And we're going to be operating the CRJ-900s for as long as we still have CRJ -- excuse me, the E-175 in the training cycle with pilots. We don't know when that will be finalized, but we do have 80 aircraft that would be in the American operation, and that's just -- excuse me, in the United operation, pardon me. And that would just be our first -- step 1 of the -- going forward in the relationship with United. That's helpful. And maybe Jonathan can you explain any implications that may exist due to scope limitations? From my understanding, United doesn't have any more room for 76 seaters in its fleet. So how are you exactly moving the synergies over without violating scope restriction. There's a misunderstanding there. I mean no one's going to violate a scope restriction. It's just that there are aircraft parked throughout the United system. Our own, for example, where there are aircraft that have been pulled out of the CPA and are not counted towards that scope. And that's due to the lack of pilots as a result of the pilot shortage. And we're just basically filling the breach as ourselves and others spool up those aircraft. And it's obviously taking time. Training is not something that happens in the short term. And that's why having these aircraft move over are very valuable to fill that gap that exists today. I was curious, I know you're not kind of giving commentary on earnings kind of guidance. But I was curious, as I -- thinking about both kind of earnings and then kind of cash flow. With this transition, how should we think about like what changes in the cadence that you saw here in the fourth quarter of the fiscal year versus what you'll see going forward? It seems like you're just basically replacing some of the American flying with United flying. So all those equal, should we see kind of a similar trend until you can get the pilot -- the captain supply up to levels where you can start increasing utilization? No. And I'll tell you why. I mean, primarily, a couple of things that have changed the dynamics at first. The United flying, I mean, obviously, there'll be a transition period but the United flying on a run rate basis will not lose money. I mean we're losing roughly $5 million a month in the American operation, which based on the numbers that we have and where we're going to get -- how we view the United contract will not be loss-making, will be, in fact, profitable. In addition, we are shedding quite a bit of debt through this process and just the savings alone of U.S. Treasury debt, I believe, is $5 million -- $6 million a year. That also obviously will help add both benefit cash flow and earnings. But I think it's fair to say that there is a transition period that's going to require some time, and there are training expenses, which are still extremely high, and it's going to take some time to work through that. But again, shedding the loss-making operations, like I said, which was about $5 million a month, is actually pretty significant. And remember that as part of the transaction, which really was the heart and soul of the transaction is that United has agreed to pay the same wage rates that we offered the -- that were offered at United throughout the system as well as to the American -- the former American pilots that will now be flying on behalf of United. I mean that is singularly the biggest reason that this deal moved forward the way it did, and we're just very pleased and thankful that United has seen obviously some value for themselves as well to see this additional flying being done as we head into March and the summer of 2023. So we are focusing solely on operational performance in terms of a successful transition. And moving forward, I think it's fair to say that we believe the numbers will take care of themselves. I appreciate that color. That makes sense, Jonathan. And if I might, on the attrition side, you said you just kind of slowed down. This is a bit of a question on what your views are. And obviously, it's not something you'll see yet is you saw the Spirit TA that put a fairly big increase and now that would move kind of the pay rates again away from regional airline pay. Is there a risk that you'll start to see attrition pick up again after more ULCC start to reflect that level of pay? Or just any views on how the kind of the pilot dynamic moves forward in the industry? I absolutely think that there could be an impact. I think pilots are really good with numbers. And I think most of them will realize that the proposition that Mesa offers coming here with rates maybe a little bit lower than those new rates but with the ability to move on to United in a very short period of time. That's not just a crapshoot but actually part of their agreement that we will be moving people to United on a specific schedule. I think anyone that looks at that over the long term, particularly over the term of a career, there's no doubt that they are going to be far further ahead by coming to Mesa and transitioning to United. And I also think it's fair to say that there are strategic reasons why United does not want us to lose pilots to the ULCCs and does not feel that this should be a farm team for the ULCC. And frankly, we'll take action if in fact that becomes the future reality, I don't think that we would be sitting idly by and allowing that to happen. So United has acted very decisively in this particular circumstance. And I see no reason why they won't continue to act decisively to ensure that there's a pilot flow that goes from Mesa and into United. I mean, United has now literally the greatest growth plans in the history of commercial aviation. I heard that in the past, Ryanair has been one of the fastest-growing airlines and having some familiarity, what they did was remarkable. They put 52 airplanes on in 1 year. United is looking at years in the future of double that. So there is a big demand for pilots. I think United views Mesa as their farm team, and we intend to do everything we can to see that happen. And I don't think anyone intends to let the low-cost carriers get in the way of that. So we'll do what it takes. And I think United would be supportive of that. Just a couple of questions. So Mr. Jonathan, I noticed in the 10-K the auditors do not give you a qualified opinion. Is that just because of all the liquidity that's coming in and they are comfortable that there are no issues going forward? Yes. I think that the auditors looked at the breadth of the agreements that were put in place, whether it was the new flying agreement with United eliminating the losses, the pay down of the debt with the U.S. Treasury. The enhanced agreement that we had with the other lessors and debt credit or the debtors. I think a big part of it was undoubtedly the sale of 30 of our 51 engines for proceeds that will net over -- well, $50 million, we think is a conservative estimate and the pay down between the engines and the aircraft that will now finalize the sale with United in the 11 additional aircraft. I mean we're talking about a lot of debt coming off our balance sheet. And I think that, that -- all those things combined is why the going concern issue would go by the wayside because I think from their perspective, seeing what restructuring was done, I think, is pretty significant. And again, I can't overemphasize, we went on a very, very distinct path 5 or so years ago, where we decided that we were going to go into effectively the engine business and started buying engines. We own a lot of engines. Some of those engines are now paid off or close to being paid off. And as I said, we did sell 30 engines to United out of the 51 engines. And on those 30 engines, you can see the proceeds. And I think that we probably will be looking at additional sales -- what's that? Yes, we have 20 more engines to sell. And I think that all the -- these are all access to our requirements now. So I think that we continue to see opportunities for enhanced liquidity. That's very helpful. Is there -- just one question unrelated to everything we've been talking about. What about the European operation? Is that moving forward? Is that going on hold? How are you thinking about that? Well, the European operation is very interesting because initially, we thought that it was a way for us to do something with excess CRJs. We've now proven that we can actually sell the CRJs here and be able to not only pay off our debt, but maybe generate a little bit of cash. But now the opportunity there has been -- there is clearly demand for regional flying there. And I think that having that foothold there and being able to put CRJs into service there, I think, ultimately, will be very successful. I do not have the same pilot issues, which I think makes sense. And I also think it's fair to say that we take this green technology seriously. And it may be down the road, but it's still down the road. And I think given what's going on in Europe and to the extent that they move a little bit quicker in the environmental issue and the fact that just demographically that the geography would be easier to navigate with the early electric aircraft. We think this also could be a great platform to launch some of these electric and new technology aircraft as well. So I think it obviously plays a role. It may be small now, but the future comes. And I look back and you know, I mean, when I first joined Mesa, we were flying 15 passenger, unpressurized turbines on 130-mile stage length. We are now flying 1,000-mile stage length and 76 passenger jets. The future comes faster than you think. So I think it's all part of a big strategy, and I think that the European operation will continue to be important part of our moving forward. Thanks for the followup. Just on the unencumbered assets, there's a lot of moving parts here. Are there any other unencumbered assets other than the kind of the 20 engines that you have to sell? And just tied to that a little bit; on the CRJ-900 fleet, what's the white tail risk there? Because I'm guessing, again, United, the contract doesn't increase your overall flying. So the funds from there really cover your E-175 fleet. So I was kind of curious what the CRJ-900 tail risk is. Well, I mean, first off, I think we should clarify. Some of that assets are unencumbered or close to being unencumbered on the engines, but most of the engines do have debt. It's just that we basically pay down the debt, as a rule of thumb, twice as fast as they depreciate. So by the time we finish paying off the debt on those engines, which is 5 years, the engines are worth at least half of what we paid for them, and there's no debt and generally, a little bit more to the residual value in the course of the engine. On the other aircraft, I mean, obviously, it will be different tail-by-tail. But the 11 aircraft that we sold, I think it's kind of important to note that those aircraft were sold, had literally 0 engine time remaining on them. So potentially the worst of our aircraft, and we're still able to pay off the debt associated with those aircraft and actually generate a little bit of cash. So I think we feel pretty good about where we stand on the CRJ fleet, particularly given the environment being so bad right now. But again, all that debt is associated primarily with the government debt, which is interest only and gives us some time to work our way through those. And we did just negotiate these new transactions with RASPRO and with EDC. And again, that also gives us some time to sort of work our way through. And with the reduction, for example, in RASPRO, I think we feel pretty confident that when those leases terminate, we're not going to be looking at a significant amount of tail risk in terms of the value of those aircrafts at that time. That's helpful. And just thinking longer term, captain supply issue or pilot supply issue is not going to last forever. So what level -- is there kind of a new normal of profitability if you kind of get back to the levels that you were kind of utilizing the fleet previously? Is there kind of any insights on that kind of the new normal? Well, I think that we basically have an agreement with United that if we were flying the number of hours that we generally projected, I think our level profitability will be roughly the same because they have, in fact, increased the payments to us by the amount of the new labor cost. To give you an idea, I was talking to Mike and just in a nutshell, we've made a lot of improvements. And yet again, we're still going to have to work hard to get the company back to profitability. When you look at the big picture, 2 years ago, we flew 38,000 block hours a month. And last month, we flew something under 16,000. So you can see there's a lot of room for us to go here, a lot of pilots to hire, a lot of pilots to train, a transition to go through for us to return to profitability. But clearly, there's a pathway. There's a liquidity to support that. And most importantly, I will say, we have United who clearly has made -- demonstrated that we're an important carrier to them going forward, and I think will be there to help us through this transition. Okay. Well, thanks, Albert. Let me just close in this, and I think it's really important that people appreciate. Look, we are now having the opportunity to really focus on these operations and focus on our partnership with United. United is committed to growing their company. It will help us grow our company. They're committed to regional aviation. They too have witnessed just dramatic cutbacks throughout regional aviation in terms of rural cities. And I know that the leadership at United really would like to see that improved and see things turn around. Mesa has always been a rural aviation carrier. We'd love to be a part of that. United's also committed to green technology and doing the right thing for the planet, and we've co-invested with them now on a number of deals. And I think that we would like to think that we could be at the forefront along with United in terms of the implementation of that technology. So we have a long road to hold for sure. But I can't tell you how strongly all of this feel that this is just a great step for Mesa. Hopefully, a great step for United as well and that we feel that our people will clearly be the beneficiaries of this with enhanced security, job security, enhanced opportunity. The Aviate program, I mean I don't think there's going to be a better place to go than Mesa Airlines for folks looking to get into the aviation industry. So overall, we're very enthusiastic about it. We are very thankful for all the parties that help make this happen, and we look forward to seeing some of that value reflected back to our shareholders as well. So thank you very much, and have a great Happy New Year.
EarningCall_1360	Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome you to the Optical Cable Corporation Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Thank you, Chelsea. Good morning, and thank you all for participating on Optical Cable Corporation's fourth quarter and fiscal year 2022 conference call. By this time, everyone should have a copy of the earnings press release issued earlier today. You can also visit www.occfiber.com for a copy. On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC; and Tracy Smith, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties. The actual future results of Optical Cable Corporation may differ materially due to a number of factors and risks, including, but not limited to, those factors referenced in the forward-looking statements section of this morningâs press release. These cautionary statements apply to the contents of the Internet webcast on www.occfiber.com as well as today's call. Thank you, Aaron, and good morning, everyone. I will begin the call today with a few opening remarks. Tracy will then review the fourth quarter and full-year results for the three-month and 12-month periods ending October 31, 2022, and some additional detail. After Tracy's remarks, we will answer as many of your questions as we can. As is our normal practice, we only take questions from analysts and institutional investors during the Q&A session. However, we also offer other shareholders the opportunity to submit questions in advance of our earnings call. Instructions regarding such submissions are included in our press release announcing the date and time of our call today. In fiscal year 2022, our OCC team executed well in an evolving marketplace, focusing on initiatives to grow and demonstrating OCC's strength and resilience in the process. I'm pleased to report that our net sales and results from operating activities significantly improved during every quarter of fiscal year 2022 compared to the respective prior year periods. Our sales and production volumes grew even as we experienced the lingering direct and indirect impacts of the COVID-19 pandemic on our supply chain, including the availability of materials, increased lead times and increased costs and labor constraints, including recruitment of sufficient production personnel and increased costs. We are particularly pleased with our strong finish to the fiscal year and the results we achieved during the fourth quarter of fiscal 2022. Specifically, we delivered double-digit percentage growth in net sales and gross profit, the highest gross profit margin of any quarter of fiscal 2022, and net income of $1.2 million or $0.15 a share. I'm incredibly grateful for the OCC team members and their dedication and tireless efforts this past year, the resilience, perseverance and hard work have enabled OCC to successfully navigate unique and challenging market dynamics and deliver for our customers and shareholders. I'd like to extend my sincere and continue thank you to every member of the OCC team and their families. Our successful execution of our ongoing initiatives are reflected in OCC's financial performance this past year. We delivered strong sales growth. Net sales for fiscal year 2022 increased 16.8% compared to fiscal year 2021. We delivered net sales growth year-over-year during every quarter of fiscal year 2022 and ended fiscal year 2022 with net sales of $20.1 million during the fourth quarter, an increase of 26.3% compared to the fourth quarter of fiscal year 2021. We believe that the demand of our products continues to be robust and we are poised to build on our momentum. Our sales order backlog forward load was approximately 3x to 4x higher than typical levels throughout fiscal year 2022. We improved gross profit and gross profit margin during fiscal year 2022 as a result of increased production, improved efficiencies and strong operating leverage. The team achieved gross profit of $20.5 million for fiscal year 2022, an increase of 26% compared to the prior year. Gross profit margin increased during the year as well and we finished the year with a gross profit margin of 33% during the fourth quarter. These significant improvements were achieved through increased production volumes, successful execution of efficiency initiatives and our operating leverage as fixed product costs were spread over higher production volumes. We successfully added new production team members during the second half of the year, many of whom finished their training as we ended the year. As material and personnel costs increased, we were able to pass on necessary price increases on new orders to recover associated increased costs with a greater positive impact being realized during the fourth quarter as sales backlog orders received early in the year were filled at original agreed-upon prices. We continue to focus on operating as efficiently as possible in controlling expenses, including SG&A expenses during fiscal 2022. Our fixed SG&A expenses, including public company costs are substantial. And as net sales grow, our SG&A expenses tend to increase at a slower rate than sales. SG&A expenses as a percentage of net sales were 28.9% during fiscal year 2022, down from 30.8% during fiscal year 2021 and were 25.9% during the fourth quarter of fiscal year 2022. These results were possible as a result of our successful efforts to operate efficiently and control costs as well as a result of our operating leverage. OCC remains uniquely positioned in the fiber optic, copper cabling and connectivity industry with differentiated core strengths and capabilities that enable OCC to offer top tier products and application solutions and to compete successfully against larger competitors. OCC's core strengths and capabilities are a competitive advantage of our company, and I'd like to take a moment to mention them. OCC has enviable market positions, brand recognition as well as the loyalty of our â and our relationships with customers, decision-makers and end users across a broad range of targeted markets. We benefit from our wide range of fiber optic and copper cabling and connectivity products and solutions that enable us to deliver products and solutions to meet our customers' unique needs and they are well suited for the applications in our targeted markets. The range of OCC's product offerings is extensive with OCC often successfully going up against different competitors in our varied targeted markets. Additionally, we have a broad and diverse geographic footprint, with OCC selling into approximately 50 countries each year. Importantly, OCC also has extensive industry experience and experience and expertise with our engineering, sales and business and development teams, well respected for their product and application experience and expertise that enables OCC to create its portfolio of innovative, high-performance products and associated intellectual property. And finally, OCC has impressive manufacturing knowledge and experience of our manufacturing quality and engineering teams and the significant production capacity of our facilities. Any of the costs we incurred to maintain and build upon our strengths and capabilities, along with our public company costs are fixed whether those costs are included in the cost of goods sold line or in the SG&A line on our statement of operations. As a result, as OCC grows net sales, gross profit and profitability tend to increase at a faster rate than the rate of increase of net sales. This creates strong operating leverage for the company as fixed production costs and fixed SG&A expenses remain relatively stable and is spread over higher net sales levels. We remain committed to levering our core strengths and capabilities and executing our strategies and initiatives to create long-term value for our shareholders. Looking ahead to fiscal year 2023, we are optimistic about OCC's opportunities, encouraged by our strong sales order backlog/forward load and are excited to build on our momentum. We continue to be focused on executing our strategy to meet demand and capture additional growth opportunities. At the same time, we are monitoring changing macroeconomic trends and believe we are prepared to make appropriate business adjustments as necessary as 2023 unfolds. We remain confident that we are well positioned to capture growth opportunities, execute on opportunities to operate more efficiently and deliver enhanced value to shareholders in fiscal year 2023 and beyond. And with that, I'll turn the call over to Tracy who will review in additional detail our fourth quarter and fiscal year 2022 financial results. Thank you, Neil. Consolidated net sales for fiscal 2022 increased 16.8% to $69.1 million compared to net sales of $59.1 million for fiscal year 2021. Consolidated net sales for the fourth quarter of fiscal 2022 increased 26.3% to $20.1 million compared to net sales of $15.9 million for the same period last year. We experienced an increase in net sales in both the enterprise and specialty markets, including the wireless carrier market during the fourth quarter and fiscal year 2022 compared to the same periods last year. We believe the increase in net sales is primarily due to both increased demand for our product and increased production throughput as well as increases in product pricing taking effect for new orders. During fiscal year 2022, we continue to see product demand and sales and production volume increase compared to fiscal year 2021. Our sales order backlog and forward load has been approximately 3x to 4x higher than typical levels throughout the fiscal year as product demand continues to be robust. Our sales order backlog and forward load exceeded $12 million at the end of fiscal year 2022 and is a bit higher since the end of the fiscal year, exceeding $14 million. At the same time, we believe continuing and lingering direct and indirect impacts of the COVID-19 pandemic have created challenges that have affected production volumes and sales despite increased demand. Our production volumes continue to be tempered during fiscal year 2022 as we continue to experience supply chain challenges for certain raw materials as well as challenges recruiting additional personnel. Turning to gross profit. Our gross profit increased 26% to $20.5 million in fiscal 2022 compared to gross profit of $16.3 million in fiscal 2021. Gross profit margin increased to 29.7% in fiscal 2022 compared to 27.5% in fiscal 2021. Gross profit increased 31% to $6.6 million in the fourth quarter of fiscal 2022 compared to gross profit of $5.1 million for the same period last year. Gross profit margin increased to 33% in the fourth quarter of fiscal 2022 compared to 31.8% in the fourth quarter of fiscal 2021. Gross profit margins during fiscal year 2022 were impacted by increases in production labor and material costs, offset by necessary prospective price increases on new sales orders for many of our products. We experienced improvement in production personnel recruitment during the second half of fiscal year 2022 needed to increase production capacity to meet existing product demand. However, training of new production employees impacts labor costs and production volumes until those employees are fully trained and operating at capacity. Our gross profit margins tend to be higher when we achieve higher net sales levels as certain fixed manufacturing costs are spread over higher sales. This operating leverage, which is beneficial at higher sales levels, positively impacted our gross profit margins in both the fourth quarter and fiscal year 2022. SG&A expenses increased to $20 million during fiscal 2022 compared to $18.2 million for fiscal 2021. SG&A expenses as a percentage of net sales were 28.9% in fiscal 2022 compared to 30.8% in fiscal 2021. SG&A expenses increased to $5.2 million during the fourth quarter of fiscal 2022 compared to $4.8 million for the same period last year. SG&A expenses as a percentage of net sales were 25.9% in the fourth quarter of fiscal 2022 compared to 30.3% in the fourth quarter of fiscal 2021. The increase in SG&A expenses during the fourth quarter and fiscal year 2022 was primarily the result of increases in employee and contracted sales personnel-related costs. Included in employee and contracted sales personnel-related costs are commissions, which increased due to the increase in net sales, new hires, net of terminations and increases in compensation expense including increases in response to changing labor market conditions, all when compared to the same periods last year. OCC recorded a net loss of $347,000 or $0.05 per basic and diluted share for fiscal 2022 compared to net income of $6.6 million or $0.87 per basic and diluted share for fiscal 2021. Our recorded net income of $1.2 million or $0.15 per basic and diluted share for the fourth quarter of fiscal 2022 compared to a net loss of $6,000 or no cents per basic and diluted share for the fourth quarter of fiscal 2021. As of October 31, 2022, we had outstanding borrowings of $6 million on our revolver and $5.9 million in available credit. We also had outstanding loan balances of $4.5 million under our real estate term loans. Thank you, Tracy. And now if any analysts and institutional investors have any questions, we are happy to answer them. Chelsea, if you could please indicate the instructions for our participants to call in any questions they may have, I would appreciate it. Again, we are only taking live questions from analysts and institutional investors. Hi. Good morning. Can you spend some time trying to quantify or help us quantify what the price increases were or what you expect price increases to be whether it be by segment or product lines? And also how much of the revenue growth was price versus unit volume? I missed the first couple of minutes of the call, so if you can cover that, I apologize, but I would like to hear the answer. Sure. I appreciate the question. We don't give specifics about our price increases other than what we announced in the industry. We made a couple of price increases sort of in mid-year, but they weren't really taking effect until later in the year. Most of it mostly impacted the fourth quarter. I don't believe that, that significantly increased our sales dollar numbers. The price increases vary depending on product type and what we were seeing from a material standpoint. And we're really based on making sure we're recovering that cost. And I think that really is the best I can tell you. I don't have a percentage saying that this is what the exact impact was on sales and we didn't see it as significant during the year. Are you getting much pushback on price? And do you think you're ahead or behind on price at this point, at least in general? I think typically, in our industry, people have been able to â have needed to and are able to increase the prices to recover the increased costs that have been occurring within the supply chain. So is there still a lot of inventory that needs to be repriced as it goes out. So there will be some excess margin there? Not really. I mean what happened during the year was we were seeing demand and getting backlogs. We also had some challenges in supply chain and getting materials. We did our best to try to get the materials in as we could, but not really at any continually increasing price. I mean, the prices were increasing as we are buying them, but I don't see those prices continuing to increase, at least at the moment. And so while we've increased our raw materials a bit and you'll see that in our Form 10-K in the annual report that will be filed later, that's not â we don't have a lot of sort of built-in profit sitting or unusual profit sitting in the materials we have on hand. I would not describe it that way. We've also been focusing on trying to make sure we're keeping up with the demand we have been experiencing, which is the part of the reason why our backlog has been â backlog sales orders have been higher than unusual all during the year. I don't have that precise percentage, but we've described what the dollar number is in our filing that we're making later today. So you can see that described in the MD&A. Okay. Will there be any opportunity to follow-up on that once it is filed, if we have further questions, your Investor Relations effort is quite poor at the least. So trying to have some contact or some insight on follow-up questions would be helpful. Any thoughts on that? If you â we work through our Investor Relations firm. I think that they've done a good job. I think we're â we try to be as responsive as we can to shareholders. We're also very careful to make sure we're complying with the Reg FD and not disclosing something to one shareholder that we're not making public to others. So we can generally... That's totally understandable. But there seems to be no effort to contact shareholders. I don't know if you talked at [indiscernible] or not, but getting information or responses even as a â even if you said, don't â I can't talk to you, that would be helpful, but I get nothing from the IR firm or from you, itâs frustrating to say the least as a shareholder. On the other side is what's the... I apologize for that, and we're happy to do better to return your call. I didn't think that we were â had a call from you that hadn't been returned, but my apologies. That will be disclosed in our â everything that we can disclose about that is disclosed in our annual report, which will be disclosed and filed later, hopefully, today. All right. Thank you. [Operator Instructions] All right. We have no more questions via the telephone. I'd like to turn it back over to Neil. Thank you, Chelsea. I appreciate it. I would like to thank everyone for listening to our fourth quarter and fiscal year 2022 conference call today. As always, we appreciate your time and your interest in Optical Cable Corporation. We hope everyone has a safe and happy holiday season. Thank you. Thank you, ladies and gentlemen. This does conclude today's conference, and we appreciate your participation. You may disconnect at any time.
EarningCall_1361	Welcome to the quarterly earnings conference call. At this time all participants are in a listen-only mode. [Operator Instructions] Todayâs call is being recorded. If you have objections, please disconnect at this time. Thank you, Ted. And as usual, before we begin, Iâd like to remind you that KMIâs earnings release today and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934 as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release as well as review our latest filings with the SEC for important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. As we begin 2023, it seems to be an appropriate time to look both backward and forward. Through the rearview mirror of todayâs earnings release, we see that 2022 was a very good year for Kinder Morgan. We again produced strong cash flow well in excess of our budget and used that cash flow to pay our investors a healthy and growing dividend, fund our expansion CapEx, maintain a strong balance sheet and buy back shares on an opportunistic basis. In short, we are continuing to follow the financial philosophy that we have stressed for years. Looking forward, we released in December, our preliminary budget for 2023 and shows another year of living within our means, even in the light of increased interest costs and an expanded set of expansion CapEx opportunities which should drive nice growth in 2024 and beyond. We also announced today our plan for management succession. Our CEO, Steve Kean, will transition out of his role effective on August 1st of this year. Let me just say that Steve has been a superb CEO for the last eight years, and we thank him for the dedication, the hard work, confidence and honesty heâs brought to this job. On a personal note, heâs been a real pleasure to work with during all his years at the Company. While we will be sorry to lose him as CEO, we are delighted that we have him in his present role until August and that thereafter, he will continue to be a director, and I know he will contribute in that role to the future success of the Company. The Board and I have great faith in Kim Dang, who will transition from her present role as President into the CEO slot, and then Tom Martin, who will succeed her as President. Both have been with Kinder Morgan for approximately 20 years, have made extraordinary contributions to our results and culture, and we expect great things from them in the future. To sum it up, we expect a smooth transition later this year. Steve? Iâll give you a brief look back at what we did in 2022 and how well we have set ourselves up for the future. Kim and David will cover the substance and the details of our performance, and then weâll take your questions. Next week, we have our comprehensive annual investor conference. So, as usually is the case on this call, weâll defer to next week the more detailed questions on the 2023 budget and the outlook and business unit performance. As Rich said, we had a very strong year in 2022 and wrapped it up with a great fourth quarter. Late in the fourth quarter, for example, we saw some volatility in the gas market, and that creates opportunity for large transmission and storage operators like us and for our customers who procure transportation and storage services from us. We performed well operationally for our customers financially for our company. Thanks, as always, to the tireless preparation and execution of our commercial, logistics and operations teams. We saw that come through, especially during the holiday weekend, when our teams work seamlessly across organizational lines to prepare, respond and recover and deal with the upsets along the way. That requires a committed workforce and a strong culture, and weâve got that at Kinder Morgan. Our work in 2022 also set us up well for the future. We added to the strength of our balance sheet, finishing the year at 4.1 times debt to EBITDA better than our 4.3x budget for the year and well inside our long-term target of approximately 4.5 times. We originated new business, which has grown our backlog to $3.3 billion made up of high probability projects at an extremely attractive EBITDA multiple of about 3.4 times. These investments are weighted toward our lower carbon future in natural gas, renewable liquid feedstocks and fuels in our products and terminals businesses, and investments in our Energy Transition Ventures business. And these lower carbon investments are all expected to yield very attractive returns well above our cost of capital. Thatâs how we told our investors we would approach these opportunities, and thatâs exactly what we are doing. There are no loss leaders here. We also returned value to shareholders in the form of a well-covered modestly growing dividend and additional share repurchases. For 2022 alone, weâve returned nearly $2.9 billion to shareholders in declared dividends and share repurchases. On the share repurchases, we have used a little under $1 billion of the Board authorized amount, and the Board has now upsized the total authorization from $2 billion to $3 billion. As always, those will be opportunistic repurchases when we use that capacity. Also, as we talked about throughout the year, weâre starting to see nice uplift on our base business, on renewals in our natural gas business and built-in escalators in some of our products and terminals, tariffs and contracts. We are putting behind us the contract roll-off headwinds in our gas group. Bottom line for investors, what we do today will be needed for decades to come. And as we are demonstrating in our products and terminals businesses, the assets we have today can accommodate the energy forms of the future. We are making the gradual pivot that the gradual energy evolution dictates, and weâre doing it at attractive returns for our investors. With the cash our businesses generate, weâre maintaining that strong balance sheet, we are investing in projects with good returns, which adds to the value of the Company, and we are returning the excess to our shareholders in the form of dividends and opportunistic share repurchases. We all appreciate Richâs comments at the beginning, and Iâm grateful to Rich and the Board for their support and confidence in us. Iâm grateful to my 10,000 colleagues here who have been proud to come to work with every day. And Iâm grateful to you on the call who I have interacted with over the years, I learned from you and benefited from your questions and perhaps your occasional criticisms and your ideas. Thank you. As youâll hear more about next week, we have our balance sheet in strong shape. We have a bright future with rich opportunities before us. And most importantly, we have a great experienced leadership team around this table who are always ready to step up and all of our investors benefit from that. We look forward to seeing you in person at the conference next week. Kim? Okay. Iâm going to start with our Natural Gas business unit. Transport volumes on our Natural Gas Pipelines increased by about 4% for the quarter versus the fourth quarter of â21. We saw increased volumes from power demand and LDCs as a result of weather and coal retirements, and that was somewhat offset by reduced LNG volumes due to the Freeport outage and exports to Mexico as a result of third-party pipeline capacity added to the market. Physical deliveries to LNG facilities off of our pipes averaged approximately 5.4 million dekatherms per day. Thatâs down about 450,000 dekatherms per day versus Q4 of â21, and thatâs due to the Freeport outage and somewhat offset by increased deliveries to Sabine Pass. If we adjusted for the Freeport outage, LNG volumes would have increased approximately 5%. Deliveries to power plants and LDCs were robust in the quarter, up approximately 7% and 13%, respectively, driven by the weather. Our natural gas gathering volumes were up 6% in the quarter, driven by Haynesville volumes, which were up 44%. Sequentially, volumes were flat. In our Products segment, refined products volumes were down a little under 1% for the quarter, slightly outperforming the EIA, which was down 2%. Road fuels were down 3%, but we saw a 10% increase in jet fuel demand. Crude and condensate volumes were down 6% in the quarter due to lower Bakken volumes. Sequential volumes were down about 3%, and that was driven by lower HH volumes. Thatâs a pipe coming out of the Bakken due to unattractive locational pricing differentials. In our Terminals business segment, our liquids utilization percentage, think about that as a percentage of our tank capacity contracted, remained high at 93%. Excluding tanks out of service for required inspection, utilization is approximately 96%. Rates on liquids tanks renewals in Houston and New York Harbor were slightly lower in the quarter. Our tankers business was up nicely in the quarter as we benefited from both, higher rates and higher utilization. On the bulk side, overall volumes were down 2%. We saw increases in pet coke and coal volumes, but that was more than offset by lower steel volume. In our CO2 segment, prices were up across the board. On the volume side, oil production was flat, but itâs up 8% versus our budget. CO2 volumes were up 12%. NGL volumes, which are much less impactful to results were down 4%. Overall, both Steve and Rich have said, we had a fantastic quarter and year. For the quarter, DCF per share was up 13% and for the full year, it was up 14% when you exclude the impact of Winter Storm Uri. We exceeded our full year planned DCF and EBITDA by 5% and DCF per share by 6% coming in at or slightly above the numbers we have given you in the interim quarters. This is an amazing year for a stable fee-based cash flow company like Kinder Morgan. For sure, we benefited from higher commodity prices but our underlying business of specialty natural gas performed incredibly and the fundamentals look strong for the future, which we will cover with you next week at the investor conference. So for the fourth quarter of 2022, weâre declaring a dividend of $0.2775 per share, which is $1.11 per share annualized and up 3% from our â21 dividend. Iâll start with a few highlights on leverage, liquidity, growth and shareholder value. Thereâs some repetition here with earlier comments, but itâs worth it. On leverage, we ended 2022 with the lowest year-end net debt level since our 2014 consolidation transaction, and we have plenty of cushion under our leverage target of around 4.5 times. For liquidity, we ended 2022 with $745 million of cash on our balance sheet in addition to our undrawn $4 billion worth of revolver capacity. Growth for full year 2022 versus â21 excluding the impacts from Winter Storm Uri, as Kim mentioned, we grew nicely. On a net income basis, we were up almost 3 times 2021. Thatâs partially due to an impairment taken in 2021. And on EBITDA, weâre up 10%, and on DCF per share weâre up 14% year-over-year, very nice growth. For shareholder value for full year 2022, we repurchased 21.7 million shares at an average price of $16.94 per share and our Board just authorized us to do more of that, should the opportunity present itself. Weâre seeing healthy growth across our business. Our balance sheet and liquidity are strong as they ever have been, and weâre creating shareholder value across the Company in multiple ways. So moving on to our quarterly performance. In the fourth quarter, we generated revenue of $4.6 billion, up $154 million from the fourth quarter of 2021. Our net income was up -- was $670 million, up 5% from the fourth quarter of last year. And our adjusted earnings, which excludes certain items, was up 16% compared to the fourth quarter of â21. Our distributable cash flow performance was also very strong. Our Natural Gas segment was up 11% or $138 million, with growth coming from multiple assets, higher contributions from our Texas Intrastate systems, MEP and EPNG, increased volumes on our KinderHawk system and favorable pricing on our Altamont system. Those were partially offset by lower contributions from our South Texas gathering assets. The Products segment was down $29 million, driven by higher operating expenses as well as lower contributions from our crude and condensate business, and those were partially offset by increased rates across multiple assets as well as strong volumes on our splitter system. The Terminal segment was flat to the fourth quarter of â21 with slightly lower New York Harbor and Houston Ship Channel liquids refined product renewal rates, unfavorable impacts from the 2022 winter weather and unfavorable property taxes, offset by greater contributions from our Jones Act tanker business, nonrecurring impacts from Hurricane Ida in 2021 and contributions from expansion projects placed in service as well as other rate escalations that the segment experienced. Our EBITDA was $1.957 billion, up 8% from last year, and DCF was $1.217 billion, up 11% from last year. Our DCF per share of $0.54 was up 13% from last year. Moving on to the balance sheet. We ended the fourth quarter with $30.9 billion of net debt and a net debt to adjusted EBITDA ratio of 4.1 times. Thatâs up from 3.9 times from year-end â21, but thatâs due to the nonrecurring EBITDA contribution from Winter Storm Uri we experienced in 2021. Excluding that Winter Storm Uri, EBITDA contribution that year-end 2021 ratio was 4.6 times. So we ended the quarter and the year nicely favorable to the metric excluding Uri contribution. Weâre also nicely below our long-term leverage target of around 4.5 times. Our net debt change for the full year of $278 million was driven by a number of things. So, hereâs a high-level reconciliation of that. Our DCF generated $4.97 billion. We paid out $2.46 billion in dividends. We spent $1.1 billion on growth capital and JV contributions. We repurchased stock in the amount of $368 million. We made two renewable natural gas acquisitions for around $500 million. And we received $560 million approximately from the sale of a partial interest in our Elba Liquefaction company. Finally, we had a working capital use of around $825 million from several items, and that gets you close to the $278 million reduction in net debt year-to-date. Okay. Before we start with questions, I am very excited about the opportunity ahead. A large part of my job is going to be about continuity. This is a great company and great business with a great future. As Steve said, our traditional business will be around for a long time to come. Energy is a $5 trillion global industry that is ingrained in every aspect of our lives. We will continue to invest wisely as we position the Company to turn slowly over time with the transition in a profitable manner. Iâm also excited to work more directly with Tom. We work well together and have complementary skills, which will help the Company into the future. We have an experienced cohesive senior management team with Dax and John and Anthony and Sital and David and Kevin and others sitting around this table, and we expect to make this a seamless transition. All right. Okay. Ted, letâs open it up for questions. And as usual, we have a good chunk of our senior management team around the table. Weâll make sure that you get a chance to hear from them as you have questions about their businesses specifically. Just want to say congratulations to everyone, and Steve, best of luck going forward. And maybe just starting off, I guess, with capital allocation, wondering if you could touch on any updated thoughts there. It seems like the dividend uptick might have been a little bit less than expected. And then, at the same time, the share authorization levels were increased when it wasnât fully utilized before. So just wondering, is it signaling any kind of shift in capital allocation or any other thoughts there on return on capital? Yes. Iâll start. I mean, it doesnât imply any shift or change in approach at all. We look to maintain the strong balance sheet as all four of us have said, and we look to fund projects at attractive returns. And as mentioned, we have some very good ones, $3.3 billion at a 3.4x EBITDA multiple. Those add to the value of the firm. Those are attractive returns to us. But then, we have -- weâve produced cash beyond that. And that cash takes the -- gets returned to shareholders in the form of a modestly growing and well-covered dividend and share repurchases. The capacity -- the reason for upsizing the capacity is not a change in terms of how weâre thinking about it. Opportunistic, as weâve all said, and weâve been saying for a long time. But weâve used about $900 million since the original authorization, a little over $900 million. And so, weâll be ready to take advantage of opportunities we upsize -- the Board upsize the authorization. And so, weâre in a position to take advantage of opportunities as they arise. But overall, bottom line, we havenât changed our capital allocation philosophy. Itâs worked. Itâs been the same for quite a while. And it adds value for our shareholders. Yes. And on the dividend, what I would say is that itâs important -- we believe itâs important to increase the dividend when the Company is growing. And -- but we do -- we are one of the top 10 dividend yields in the S&P 500. And so, we already have an attractive yield on the stock. And so, itâs a small increase so that we continue to increase in terms of being a good dividend paying stock, but also recognizing where the yield on the stock is. Got it. Makes sense. Thatâs helpful there. And then just wanted to shift to the weather impact during the quarter, if maybe you could unpack that a little bit more as far as pros and cons. Were there any marketing uplift during the quarter? Just trying to see, I guess, what was the impact from the storm in the quarter. Yes. Itâs -- so look, we had uplift primarily in our Natural Gas assets. And thatâs attributable to what I said at the beginning, which is that when you have storage and transport capacity, particularly in this case, storage where -- Kim, I think the peak was 160 Bcf and we had some supply degradation. This is a nationwide look down to a little over 80 Bcf. The difference had to be made up with storage and people who had those assets and have the capability were able to do well in those. The net, though, we did have some operational upsets and repairs we had to make, et cetera. And so, we netted those out. And itâs not -- the storm itself is not a huge incremental contributor. Itâs on the order of $20 million or so when you net everything. But I think just overall, experiencing the winter weather and the volatility that occurred in pricing both before and after that winter event, if you have storage and transport, youâre able to take advantage of that, and we did. I wanted to talk maybe just a little more on some of the regional gas movements on the gathering side. Can you just touch again on, I think Kim, you mentioned Haynesville volumes were flat quarter-over-quarter. Just wondering if you could comment on if thatâs producer-driven or takeaway issues? And then, anything else you can share maybe on what youâre seeing across the Rockies in terms of production. Thanks. So yes, the KinderHawk volumes were basically flat from quarter-to-quarter, but we do expect a nice uplift as we move into 2023, and that is -- it is largely capacity constraints, both on our gathering system, weâre spending some capital in 2023 to create some additional capability there and then also a downstream capacity comes online as well. So, we see some really nice opportunities to continue to grow on KinderHawk and in the Haynesville play overall. And thatâs not limited to just our gathering and processing opportunities, but we also see some nice interstate rate increase and utilization opportunities as we go forward. So yes, a nice story. Haynesville is a nice good story for us. And then, as far as the Rockies, I mean, yes, thereâs -- weâre not seeing a whole lot of growth there. Thereâs a few a few pockets of green shoots in the DJ. But overall, weâre not seeing a great deal of growth there, although on our Altamont gathering system, we certainly, the Uinta, weâre seeing some nice growth there and expect that to grow as we go into 2023 as well. Great. Thanks for that. Maybe just shifting gears to the Red Cedar announcement. Curious on how much else could be out there in terms of shifting away from, I guess, what we call natural CO2 sources to kind of recovered CO2. I mean, how much of the mix of your overall CO2 kind of EOR business, either your own or selling to third parties could be the recoveries end up making up over time? Yes. So, the Red Cedar deal that weâre talking about thatâs up to 20 a day, put it into context, weâre currently moving over 900 a day down our Cortez pipeline to West Texas. And so, thereâs a ways to go before effectively that those natural resources get replaced. Really, when youâre talking about opportunities around kind of the Permian and the infrastructure there, thatâs largely gas processing assets, which are going to be lower. And so with regards to, I guess, replacement of our existing source capacity be a very long time before that would be replaced. All right. Weâll save [the big] (ph) ones for next week. Thanks for the time. And congrats, everyone, on the new roles. Hi. Can you remind us where Kinder Morgan is on rate case settlements? Which ones have been settled and are incorporated into 2023 guidance? And which pipes, if any, could still see rate case this year or next? Really, weâre past the big ones for now. I mean, weâve got the NGPL, EPNG, those are the big ones and all the Rockies pipes and Iâm saying this over the context of the last year. Those are the big ones that have been addressed. And so, weâre pretty clear now for 2023. And thatâs all been baked into our budget for 2023. Okay. Thank you. And then whatâs the latest on El Paso restart? I think you had a release that noted some positive progress last week. Yes. And so, our information on this is going to be consistent with and stick closely with what we post on the EPNG electronic bulletin board. And so, we did post an update there. And what it says is that we anticipate completing the physical work on Line 2000 before the end of January. And then we will submit a request to PHMSA on behalf of EPNG to lift the pressure restriction and return to normal commercial service. So as PHMSA will need time to review the information that we provide, but our work we expect to be completed by month end. Great. Thatâs all for me, and congrats to you, Kim, and thank you, Steve, for all the time and thoughtful answers over the years. Best of luck. Congrats. Two-part question, and my first one here is just along the Permian pipeline. First part, just between GCX and Permian Pass. Curious if one of those is kind of in the front of the queue and if maybe it would make more sense to kind of bring Permian Pass back up to the front. And second quarter, I believe last quarter -- or sorry, last quarter, you mentioned the possibility of maybe phasing the Permian Highway expansion in over time. I think you needed to do more engineering work to figure out if that was feasible. Just curious if thereâs an update you can share on that. Yes. So I think you mean Permian Pass, right, not Permian Highway? So, the Permian Highway expansion is under construction and expect that expansion to go into service in November. Weâre really working on two other opportunities, as youâve noted. One is GCX expansion. That hasnât been very active, although with lower gas prices now, there may be some opportunities there. As you recall, fuel cost was a bit of a headwind for us on that expansion project. So again, as gas prices are lower, that may bring that one more into an actionable opportunity. But as far as Permian Pass, really, I think what we are hearing from our customers is that the next need for incremental capacity out of the basin is sometime in late 2026, maybe early â27. And so, as we work with our producer customers and also align them with their desired customer, which I think largely are going to be LNG related along the Gulf Coast, it helps -- we need to figure out exactly where and when those volumes need to be there. So I think thatâs still out there. The overall market still needs that capacity. But nothing really new to announce as far as anything that weâre going to accelerate at this time. I think the PHP, there was some discussion last time about when we put our compression in, once we get pretty close to the end, is there any channel. A little bit of capacity thatâs available before the November in-service date. And so, I assume that itâs late in the going. Got it. Perfect. Thanks for the color on that. Second question, maybe for David. Just maybe an update on how youâre thinking about maturities and the overall interest rate exposure for 2023 and beyond. Just kind of curious what options are available to you to perhaps maybe exceed the DCF budget by outperforming on interest expense? Weâll continue to evaluate different alternatives. Weâll talk more about this next week, but weâve locked in some of our floating rate exposure for 2023 in order to reduce some of the downside risk for the year. But with regard to the overall maturities, we do expect to access the debt capital markets during the year 2023 in order to refinance the large amount of maturities that are coming due this year. The $745 million of cash on the balance sheet coming into the year certainly helps with that. And weâve got our $4 billion worth of revolver capacity. So, as I said last quarter, and this is still the case, we will await for favorable market conditions before we access the market, and we have the luxury of being patient. Thank you. Congratulations, everyone. Steve, we will miss you, and Iâm glad you came to our conference here. So, thank you for that. I wanted to ask back on the Red Cedar CCS project. Just wanted to see if you could talk about what type of return you expect to generate on a project like that, and just to confirm that this will be entirely fee-based from your perspective? Yes. I mean the -- weâre not going to talk specifics on returns, but I would say they were very comparable with our traditional businesses. So, weâre doing the right things from a return standpoint. And Iâm sorry... Yes. And this is primarily on the ETV side of things, and maybe Tom wants to talk about the Red Cedar JV part of it. But ETV will have minimum volume commitments in place on that transaction. And on the Red Cedar, itâs G&P volumes. So there is a variable component to that, but their volumes have been growing and expect them to continue to grow, so. This is a good opportunity, for CCUS, itâs going to have to be part of the solution over the long term, and we have the capability to transport it put it in the ground and keep it in the ground. And so, thereâs a good longer-term opportunity there, and this is a highlight that you can do these things and you can do them economically. And so, weâre happy about this transaction. Itâs the first we hope of many -- but there are a number of things that have to be worked out. I think, the biggest is getting Title VI permitting for the sequestration through the EPA or having that authority delegated in Texas and Louisiana and other places, so that we can speed up the permitting process. Anthony and the team have found a way to use a different kind of permit in a different kind of well situation to enable us to do this. And there may be more of those to do as well. But this is a sign of things to come we hope and believe, but it is dependent upon an accelerated permitting process from the EPA. Got it. I appreciate all that. Second question, I just wanted to ask was on the lower gasoline and diesel volumes year-over-year. Can you just maybe just talk to what youâre seeing there? I know your overall volumes, I think, were a little better than overall industry averages. But just kind of whatâs driving that? And do you think this is sort of a recurring pattern that weâre going to see throughout the year? Thanks. Yes. Iâd say a couple of things. So first of all, we had one operational issue in December that. As Kim mentioned, we were down 0.7% compared to the prior year. We had one of our major lines in California, the one that serves San Diego down for 12 days. And if that hadnât been down, we would be back up to close to flat sort of quarter-over-quarter. And so, looking at 2023 and where we stand right now, and weâll get into the budget more next week, weâre budgeting an increase of about 3.4% in aggregate. For gasoline, weâre looking at something below that, but for jet fuel and diesel together, weâre looking at something above that, close to 6.5%. But if you look at, starting with kind of jet fuel recall, weâve been slower to recover in jet fuels and EIA given our weighting towards international flights. EIA for the quarter was down about 14% to 2019, whereas -- Iâm sorry, EIA was down 10% to 2019, whereas we were down 14%. So, we still got a better recovery on the jet fuel front to close with the rest of the country as we see international, particularly Asian flights come back, we think that will help us. And recall, weâve got our renewable diesel projects coming on line on the West Coast at the end of the first quarter. And those have take-or-pay contracts for north of 30,000 barrels a day. So, we think that will help with the diesel picture, so. And looking at what weâre seeing right now midway through January, we seem to be, from a refined products perspective, on top of budget. Good afternoon, everyone, and congrats to you, both Steve and Ken. Maybe to start off on the Kinder-based business, which performed pretty well in the quarter. And I just wanted to talk a little bit about future growth opportunities there. Over the past few years, weâve just seen a lot of competitors come into the market looking to erode that Kinder market share on LNG supply from the Permian and Louisiana. I was just curious if you could talk broadly about how Kinder has a competitive advantage there and whether you guys see yourselves well positioned for new LNG supply projects going forward, or whether effectively, the competition has made returns not attractive at this point? Thanks. Yes. So I mean, I think as we said all along, the proximity of our network along Texas, Louisiana, including our storage capabilities there, I think gives us a great advantage, whether weâre directly building into new LNG export facilities or serving other lines that are doing those connections. Just when you have access to as many basins as we do and as -- and the mix of both, reservoir storage and salt stores that we have across our footprint, I think weâre still in a great position to participate in the LNG export story. Weâve talked about 50% as being our market share. Thatâs where we are today. We definitely believe our volumes are going to continue to grow, but itâs hard to call balls and strikes on whether weâre going to meet or exceed 50% going forward, but I feel really good about our position to participate in that whole growth story. Yes. Youâll see a little bit more of this, Brian. But, what youâre seeing when we have a backlog thatâs $3.3 billion, and weâre executing it at 3.4x EBITDA multiples is that our network is well positioned, and weâre able to make relatively modest capital efficient investments in our grid to expand, to serve the supply and demand growth that weâre seeing across the network. And so, thatâs -- in the past, we had big long-haul projects that might have been done at a slightly higher multiple, still attractive returns. But I think this shows you the fact that we have dozens of projects that weâre doing and a relatively modest capital expenditures each but with really nice returns that we are finding that our network is extremely well positioned for the growth along end. Great. I appreciate the color. And as my one follow-up, I just wanted to get a little bit of an update on just the RNG projects and the CapEx that are progressing through 2023. How are those projects progressing? And just as the RNG market starts to mature in the middle of the decade or end of the decade, curious if you continue to see new opportunities within that Kinetrex business and if you see continued CapEx for the next few years. Yes. So, we have three of our original RNG projects that came through the Kinetrex acquisition, that will be in service this year. Two of them really in the first half of this year. There is one on EPC contract. So that capital is fully baked into our 2023 budget. And then, with regards to future opportunities, weâve -- obviously, weâve made three acquisitions to date. I think we are looking to grow fairly organically at this point in time. I think, there are opportunities out there to grow, and weâll be looking at those on an individual basis. The EPA did come out with a new proposal recently, which opens up a new demand market for us. And so, there may be some opportunities there to convert some of these assets into electric service as well. So, I think thereâs lots of different opportunities that weâre looking at right now in that space. Weâre excited about growth. Congrats to Kim and Steve as well. I wanted to start, Steve, you said the backlog is at $3.3 billion now. So, thatâs up another $600 million or $700 million since last quarter, which presumably, thatâs why the growth CapEx of $2.1 billion for this year was higher than what you kind of pointed to initially. Can you talk to any of the specific projects youâve added since last quarter because that is a decent amount? Yes. So, we have some -- most of it is going to be in gas and in RNG, on a percentage basis, I think I can give you that. 64% is in gas and in RNG related, a little bit more than that maybe. And so this is -- itâs a mix of power demand, LDC demand, LNG transport and G&P and well connects. And as I said, itâs a collection of a lot of smaller projects and mostly buildups of the existing network, which again makes them capital efficient. It reduces the execution risk on them. And it tends to give us -- we get as best return as we can thatâs available for the market. We tend to end up with better returns on the capital we deploy when thatâs the composition of the project. So, yes, $3.3 billion and again at 3.4x and kind of concentrated in our low carbon, including natural gas. Yes. And a number of the projects that got added to the backlog are in the other news, like part of the Evangeline Pass project, the TVA project, the terminals renewable diesel projects. So those are some of the projects that got added to the backlog in the quarter. Got it. Thanks. Separate question. Just on the buybacks and how youâre thinking about it for this year. So, itâs a little bit more of a growth year in terms of spending in 2023. So your DCF is only a little bit above, I think, your CapEx and your dividends. So, when you think about buybacks and obviously, youâre opportunistic, but would you be willing to increase debt or issue debt more short-term borrowings in order to buy back stock if the opportunity was there since youâre well under your leverage target for this year? Yes, we would. We think about our capacity for buybacks or other opportunistic opportunities as being our balance sheet capacity as well as the excess cash that we generate in the current year. And so, we would be willing to increase our leverage a little bit. Weâll be real cautious around it, weâll measure and make sure that weâre being -- weâre using that capacity in an appropriate manner, but that is the way that we think about our available capacity. You all hear it mostly, Iâm just -- my question is around first on the renewable diesel specifically. Just what future opportunities you see there beyond the Carson terminal and the committed projects? And you touched around this as well, maybe the second question, just hit this now as well, just the same thing on opportunities you see around the CCS. Yes. So Dax, if youâll comment on the R&D part of it, and John, if youâll talk about the upstream, the feedstock part of it as well. Yes. So just to comment, I mean, as weâve said before, right now, every drop of renewable diesel in the United States wants to go to California. I think we expect that as additional state governments later on a third level of the tax credit similar to the one that California has in other states have them, Oregon, Washington, British Columbia that there will be more enthusiasm for projects there. Weâve got terminals there. We are having conversations with people. And so, I think thatâs probably other areas in the West Coast or probably next places to potentially develop. And then certainly, with the two hubs that weâre developing in both Northern and Southern California, I think there are additional opportunities to potentially expand those. So, thatâs the majority of it from the refined products perspective. Sure. I mean we said last year when we announced the Neste deal that we felt that all boats would rise and there has created a number of opportunities to high-grade our assets, high-grade our customers at Harvey bring additional products in their raise rates, but it has also attracted other customers. And this is what we hope is the second of many projects weâll be looking at, great opportunity to connect with a neighboring facility thatâs involved in an expansion project, where weâll be handling all the feedstocks into the facility under a long-term10-year take-or-pay. The other area to actually help us too is on our Jones Act vessels. Weâve seen a lot of movement as it relates to renewable diesel from the Gulf Coast to the West Coast and interest in that, which we think will further tighten an already tight Jones Act market.
EarningCall_1362	Good morning, and welcome to the Simmons First National Corporation 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 Ed Bilek, Director of Investor Relations. Please go ahead. Good morning, and welcome to Simmons First National Corporation's fourth quarter 2022 earnings call. Joining me today are several members of our executive management team, including our Executive Chairman, George Makris; and our CEO, Bob Fehlman. Before we begin the Q&A, I would like to remind you that our fourth quarter earnings materials, including the release and presentation deck, are available on our website at simmonsbank.com under the Investor Relations tab. During today's call, we will make forward-looking statements about our future plans, goals, expectations, estimates, projections, and outlook, including, among others, our outlook regarding future economic conditions, interest rates, lending and deposit activity, credit quality and net interest margin. These statements involve risks and uncertainties, and you should, therefore, not place undue reliance on any forward-looking statement as actual results might differ materially from those expressed in or implied by the forward-looking statements due to a variety of factors. Additional information concerning some of these factors is contained in our earnings release and investor presentation furnished with our Form 8-K today, our most recent Form 10-Qs and our Form 10-K for the year ended December 31, 2021, including the risk factors contained in that Form 10-K. These forward-looking statements speak only as of the date they are made and Simmons assumes no obligation to update or revise any forward-looking statements or other information. Finally, in this presentation, we will discuss certain non-GAAP financial metrics we believe provide useful information to investors. Additional disclosures regarding non-GAAP metrics, including the reconciliations of these non-GAAP metrics to GAAP are contained in our earnings release and investor presentation, which are included as exhibits to the Form 8-K we filed with the SEC and are also available on the Investor Relations page of our website, simmonsbank.com. Hey, thanks. Good morning, guys. I wanted to start with the tax rate. The tax rate has been a little volatile this year. And it was abnormally low in the fourth quarter. Where should we expect, kind of the forward tax rate to be? Any color on why it was lower in 4Q? Hi Brady, this is Jay. Let me jump in on that and give a couple of initial remarks. First of all, you're exactly right. The effective tax rate came in low in the fourth quarter. I'll speak to that latter question first. Couple of drivers there, but really the biggest one, we call it out on our materials is a tax credit that we were able to, sort of complete the project and recognize in the fourth quarter. As a result, we're able to take a full-year of that credit. The way that works from an accounting perspective is, you get the tax benefit sort of grossed up down in the tax line item and then there's an amortization of that tax credit up in the non-interest expense area. And we call both those out there. So, sort of that full-year benefit recorded in the fourth quarter was the biggest driver to the tax rate, sort of being below expectation in the quarter. I think going forward to your initial question, I think I would think of 2023 tax rate, sort of ranging in that 18% to 19% area. Okay. That's helpful. And then I noticed you guys were pretty active in the share buyback for the first three quarters of the year, but no buyback in the fourth quarter. So, any color there and how we should think about you guys potentially repurchasing stock in 2023? Brady, this is Bob. I'll go ahead and take that one. You're right, early in the year, we did a lot of stock buyback. Our focus really right now is growing tangible book value per share through EPS and organic growth. Doesn't mean we won't do stock buyback if the timing is right, but right now we're really focused on building our capital position going into 2023. So, as you saw, we really did very little, if to no purchases in Q3, and in Q4 we did none at all. We're going to be very selective going forward in this environment we're in, just uncertainty of just holding on to capital and building tangible book value per share. All right. And then another good quarter of double-digit loan growth, which I know you guys kind of messaged on the conference call last quarter, but I think I remember after that you guys expect loan growth to really slow down in 2023, is that still the right way to think about that? And where do you expect loan growth to be this year? Hey, Brady, this is Matt. I'll jump into the first. Yes, you're â we had a nice fourth quarter, good diversified loan growth, itâs about a footprint. As you can see in the material on the pipeline, there's technology, [economic conditions] [ph] where rates on the pipeline is slowing. We still see moderated loan growth. A lot of that improved our unfunded commitment. Still seeing demand, kind of at mid-single digits is what we're seeing 2023 so far, but it is, kind of an economic environment. Also, Brady, just like the rest of the industry, we have slower paydowns in this environment with rates going up. So, you have less cash flows going out on paydowns and refinancing. And so that helps all of us in the industry build there, but it really bodes well for the unfunded commitments pipeline we had earlier in the year too that we're still funding those over a period of time. All right. And then finally for me, the net interest margin was stable if not down a few basis points linked quarter. How are you thinking about the trajectory of the net interest margin into 2023? So, Brady, Jay again here, let me jump in with some initial remarks there as well. I think the thing to point to here for Q4, we had some deposit leakage, I'll call it late in the quarter. We've had what I felt like was a good third quarter on the deposit side and candidly early in the fourth quarter as well. You may recall in Q3, NIVs actually grew. We gave some of that back in the fourth quarter, kind of fell more in-line with the industry in the fourth quarter. You couple that with some strong loan growth continued in the fourth quarter. And we increased the reliance on wholesale funding. I think that's, sort of cash flow timing as much as anything. I sort of think that the thesis for us from a margin perspective, from an NII perspective remains fully intact candidly. So, when I think about, sort of go forward expectation for margin, some of that wholesale funding reliance in fact came late in the fourth quarter. That will be a bit of a headwind early in 2023 for us from a margin perspective, but as we continue to expand our loan to deposit ratio, sort of reinvestment of investment and other cash flows back in the loans, which we think we've got plenty of loan demand in the foreseeable future to do. Some of that moderation in loan growth that Matt spoke to that we expect, that'll help sort of reduce any reliance on wholesale funding going forward. And so, I think that all is, kind of sort of tailwinds for us in 2023 from, sort of a built-in margin perspective as time moves on. I'm going to mention one other item. We call this out in our slides, but just one thing that is important as we move later into 2023, remind you all that we have about $1 billion of our bond portfolio fixed rate that is swapped. And that was on a two-year forward contract and that will come into play in September of this year, sort of late September. And so that basically goes from fixed to variable late in the year and current rates would certainly be a boost to margin at that point as well. Hi. Good morning, everybody. I was hoping that maybe we could touch on the deposits that we were just talking about, maybe talk about some of the competitive dynamics in some of drivers of the core outflows. I mean, how much do you think is surge deposits versus seasonal dynamics versus clients just using excess cash to pay down higher cost debt? And are you seeing any differences from a geographic or regional perspective where competition is more intense? And do you think most of the surge deposits, if you will, are out at this point? So, let me again jump in David on that and Bob or Matt may also or others may have some comments here, but I do think that there is likely some seasonal impact for us in Q4. I don't think there's any doubt about that. And again, we saw some of the outflows pretty late in the quarter, which would, kind of sync up with that outcome or that expectation. When I think about â and I've spoken about this in prior quarterly calls, when I think about excess funds, that surge deposits, funds that we're laying around whether they're consumer or commercial or otherwise, I think most of that moved out of the bank earlier in the year last year. What it feels to me like when I'm looking at our data, sort of daily, weekly, monthly right now, it feels more like just an overall competitive dynamic. That's why I used the word leakage earlier. I don't see, sort of wholesale shifts out of deposits. Certainly don't see, sort of customer loss. It's really just more, kind of that retail leakage out there across the footprint from a competitive dynamic or alternative opportunity for funds. So, those are some perspectives I have, but Matt, if you've got anything or Bob that you'd like to layer in, you got to have some additional comments there? No, Jay, you hit that right on. I think [indiscernible] I'd add to that just on the retail linkages, what we're seeing also alternative opportunities, money markets with a Smith Barney or somebody to that effect, Charles Schwab, but also we're seeing in the small community markets, rural markets, that is getting very competitive and seeing some really irrational pricing and that's where we're also seeing small retail customers kind of leak out [indiscernible] customer losses, Jay said, but just real competitive [indiscernible] on the time deposits. Okay. No, I guess, if we â how do we think about funding loan growth? And if there are additional pressures, I guess, how do you think about funding that? I mean, it looks like this quarter was primarily CDs, but how do you think about CDs versus borrowings and even potential securities sales? And if you could just remind us of the cash flows off the securities book, that'd be helpful as well? Yes, on the cash flow piece, David, I think weâre guided to 160 million to 180 million per quarter of principal roll-off. I'll tell you Q4 that statistic was 185, sort of toward the high-end, slightly above that guide. So, I think that guide, kind of rings through as we go forward in terms of quarterly cash flow, not a lot of appetite to, sort of do a broader balance sheet restructure in [my mind] [ph] right now with the securities portfolio or otherwise. I think we've got adequate cash flow, particularly relative to what we expect is moderating again continued loan growth, but moderating loan growth throughout the year. And so, that's sort of the expectation from funding perspective, you asked a bit about the, sort of alternative funding out there. To us right now, the most advantageous funding from a cost perspective to the extent we're relying on wholesale has been in the brokered CD market or brokered market, a little more advantageous rates there than FHLBs or otherwise. We've got plenty of capacity there, certainly not our first option. We can fund it off our own balance sheet. That's what we'll do. But those are, sort of the relative opportunities and costs that are out there right now. Okay. And then maybe just circling back to, kind of the loan discussion. Just wanted to touch on the pipeline. It's still healthy down a bit. Kind of fits with the dynamics that you've talked about. But just maybe could you talk to us a bit about the pulse of your markets from a demand perspective? What geographies and segments are you still seeing healthy demand? And what's your appetite for credit here? Just kind of given the economic backdrop in funding challenges and where do you still see good risk adjusted returns at this point? Hey, David, great question. I'll start there. I'm sure [indiscernible] may have comments, but first kind of top of the house on our pipeline. It is stable. And I think we're very focused on pricing discipline in these conditions and also credit conditions and what â our resulting pipeline due to those disciplines is well-diversified across all of our segments is not concentrated in any specific product type. We want to see good middle market C&I. We want to see public sector banking. We want to see selective long-term CRE client. Across the board is very diversified right now. Your comment on this, we're just staying to our knitting around credit fundamentals. And question is, is there a demand in the marketplace? Yes. Moderated for sure with these â especially with this yield curve, it can make it a challenge, but people are doing business, but we're going to be taking care of relationships every day, bringing in new deposits with those relationships. I think that's indicated what the pipeline looks like for us moving forward. But there is demand, but it is moderating. Are there any segments or geographies that you're seeing more demand and conversely that the ones that have maybe pulled back the most? As always â not as always, but our usual suspects on where even in this climate, the DFW, the Texas market overall, weâve had a lot of success with our integration of Spirit of Texas. They've done over a billion dollars, $1.3 billion in new originations since April. So, that Texas market community to metro is continuing to see demand, but still you have moderated. You're seeing demand in Northwest Arkansas, you're seeing demand in Nashville, but really honestly, David, all of our metros are still seeing demand just moderated. And there's no one market that I'm saying, hey, their completely pulled out [of the game] [ph], I would say, the contraction that is, we're experiencing due to the interest rates and inflation is similar throughout all of our markets. Hi, good morning everyone. Thank you. I guess, if we could talk a little bit further about some of the inner workings behind like the funding duration extension strategy you guys have referenced. In your release and, kind of what you're having to price CDs that on a lot of that was nearly a billion dollars in growth in the quarter. Just kind of what, sort of duration you're taking, most importantly thinking about could that really relieve pressure over the next couple of quarters as a result of what you did this quarter? Yes. Thanks, Stephen. So, a couple of remarks on that. First thing I'd say is, don't read it as, sort of going out multi-year and strategy or anything in terms of extending duration. I think we extended duration and, kind of laddered out in the fourth quarter over, sort of think of like 3, 6, 9, and 12-month type basis. And so, I think we disclosed this. The duration went from something like the end of the third quarter 6.8 months to 8.4 months. So again, still a ladder of cash flows on the wholesale side, but a bit of an extended ladder relative to where we were late in the year. We had done the same thing earlier in the year last year, just a lot of that kind of repriced in the fourth quarter, again, particularly later in the fourth quarter. And you're seeing handles â four handles on that in a lot of instances in terms of your questions around cost. On the wholesale side right now. And that's kind of all across that ladder is where we're seeing costs. Okay. That's helpful Jay. And is the â are the costs on the wholesale based on what you guys are seeing â are the cost on the wholesale better than what you're seeing in your markets and in your branches on the CD side or is it just that in terms of filling the gap in terms of the volume that you need that brokered CDs are better than the FHLB? Yes. It's really â certainly, anything we're doing on the CD side, whether it's what I'll call core versus brokered is more advantageous than anything we could do FHLB or otherwise right now. And so, our first preference and priority is always on the core side and that's where we're focused again to Mattâs earlier comments, but the competition across all of our geographies is pretty fierce there. And so, to the extent we need to fill the bucket further that's where we go wholesale. Yes. And Matt's comment was really interesting and I think something we've been seeing a lot maybe to my surprise this quarter especially is in the more rural market. Where are you seeing that? Is that like a lot of credit union competition that's popping up or what's driving maybe more competition in rural markets than I feel like we've seen in the past the upgrade cycle? What we're seeing and I can't speak to other competitors seeing, but really throughout our community markets, not any specific state, what we're seeing is a result of the [indiscernible] Bank's balance sheet. And there's somewhat maybe potentially not [indiscernible] with, but from their bond or investment portfolio and so they're trying to fund in a new way that they're not used to and itâs laser focused on funding right now and resulting in what we're seeing on the special [indiscernible] deposit side what we're seeing the most interesting rates are offering. Yes. And I'd say something we've talked about too on that. It's certainly been other community banks. Stephen, I think you called out one we're seeing. I mean, we were looking at a flyer, I think late last week that we saw from a credit union and footprint in one of our footprints with really aggressive CD rates. So, it's across the board from a competitive point of view in that area. Yes, that's interesting. And maybe brings up another point too there is stress on some smaller community banks, I think, in particular, on their balance sheet, on TCE, on the funding side of things, when you guys have been a little less aggressive in terms of your commentary around potential M&A, but is that something you guys have a greater appetite for in 2023 if there's some, I don't know, weakness in potential targets? Sure, Bob. I'll take that. Stephen, we would always consider a strategic opportunity with regard to M&A, but we are not actively pursuing that at this point in time. You'll hear a lot more going forward about our Better Bank Initiative. And I think maybe an appropriate time just to talk about where we are in that regard. In the fourth quarter, we announced some management changes and that is very specific to our next three to five year plan. Bob Fehlman is now our CEO. Congratulations, Bob. And Jay is our President and CFO. Congratulations to Jay. We're in a period of time where we've [toddled] [ph] together over the last 10 years, 14 acquisitions. And I would say those have been very, very successful and our financial metrics sort of bear that out. We're at a point in time now where we need to step back, further integrate processes, systems and take a look at our people across our entire footprint to make sure that we position ourselves for success over the next three to five years on what we can control and that is organic growth. So, that's our primary focus today. As we go forward, you'll hear a lot more about technology plans, our process plans, and so forth, but we would never say that we would never consider another acquisition. We're just not aggressively pursuing that today. When you take a look at our footprint and our potential for growth within that footprint from an organic perspective, I think it is just tremendous. So, we've spent the last 10 years positioning this company for today. And I'm very confident that under Bob and Jay's leadership and their expertise in the areas that we need focus, we're going to be very, very successful. Yes. Stephen, this is Bob. Just to kind of add on to that. If you look at our slide deck on Page 3, it really tells the story of what we've done over the last 10 years and you go back to 2012 when George came on as CEO, we were really focused on Arkansas was our footprint primarily. In fact, we had $2.6 billion and 94% of our deposits were in Arkansas. And we really had a focus on growing the bank so we can make additional investments whether it's in the IT area, whether it's in people, whether it's in our market outside and branding. And over that period of time, as George said, we've had 14 bank acquisition and today at the end of the year in 2022, we have $22.2 billion and the geographic diversification over that period of time is significant. And now in Arkansas, 35% deposits are here and 22% are in Missouri, Tennessee and so forth. We have a really good diversification in some really good growth markets in Middle America. So, we're very pleased with where we're going. And as George said, again weâll not turn away from an acquisition if it is the right one, but our focus today is what we have called is a Better Bank Initiative and it's really focusing on people, processes and systems. And that is what we're focused on. And our end result is really focused on growing earnings per share and tangible book value per share. Great. That's a lot of helpful color and thanks for the call out on that pie chart. That's a pretty aggressive transformation. It's nice to see it there visually. Thanks a lot. Hey, I wanted to just ask one more question on the funding side. It looks like a good bit of the wholesale time deposits that came on were later in quarter unless I missed it, had you provided or could you provide the, kind of [12/31] [ph] spot rate on deposits? I don't have that number off the â right off the [indiscernible] here for you, Gary, but I think you can suffice it to say, I think to maybe get to the point of your question, if you unpacked the quarter, certainly as we layered in on the wholesale side and made a decision to extend maturities, margin or cost of deposits, cost of deposits was higher, margin was lower late in the quarter, compared to early in the quarter. I think that as I tried to say earlier, as I did say earlier, is a headwind early in the year and a tailwind as we continue to move through the year next year? Okay. And then just to be clear again, make sure I understand it. The decision to, kind of layer on some of that is more of an issue with timing of funding in that, you didn't really have a lot of excess liquidity that was, even though you have a low loan deposit ratio you were pretty well invested in the securities portfolio. So, there [indiscernible] loan growth that stayed strong in the quarter. Is that kind of the thought for the fourth quarter? I'd say it's two-fold. That's a part of it. And the other part, again, if we'd have the same sort of third same, sort of fourth quarter as we had third quarter in terms of some on the core deposit trend side, we wouldn't have had near the reliance. I think that's part of it as well, but it is timing of cash flows. We knew we were going to have at least a decent loan growth fourth quarter, it came in better than expected, maybe some seasonality and other headwinds that impacted us on the core deposit side. That's all a moment in time for me. The cash flow off the securities portfolio is what it is day-in and day-out, quarter-in and quarter-out. And so, I think as time moves on, again, all things being equal with the deposit portfolio on the core side, our reliance on wholesale funding should diminish over time as well. Great. Appreciate that. And then just to go on the credit side for a second, it looks like you're waiting is in terms of the Moody's scenarios, the S2 was about 30%. And I think even later in the year, S2 hadn't become â has not become, kind of the Moody's baseline forecast, could you give us a sense of the sensitivity of your ACL as that kind of maybe if the S2 waiting were to increase? I'll just say a couple of comments. This is just our management input. Keep in mind, we're putting the scenarios in for the markets we serve. This is not on a national basis. So, we really look at the markets we serve. And over time Moody's changes there. The baseline changes. At one point, the baseline was more positive. Now, it's turned a little more negative. So, I would say, I feel very comfortable, wasn't a lot of change in what we did from Q3 to Q4. We all feel really good about where we are today, but we all have a little bit of concern on the economy just because the rates have continued to go up and we just don't know where it's going to go, but you know asset quality continues to be at its best level historically. It's just â we just continue to look at the market, the macro environment we're in, and our markets more specifically. Yes. And therefore, yes, we also have a pretty large reserve in unfunded commitments that didn't change this quarter. Our unfunded commitment level was relatively close to Q3. So, there's a pretty significant reserve in there that when those loans fund over we'll move over to the ACL. Gary, this is George. One other thing. In our presentation on Slide 13, we specifically deal with our portfolios and office, retail, and constructions. And I think when you take a look at that, you'll find that our portfolio is well diversified, smaller loans, more rural in nature and those three categories seem to be the ones that are top of mind with regard to credit risk. Our portfolios are a little bit different and very reflective of the conservative underwriting and the community bank nature of our bank. So, if you wouldn't mind, just take a look at Slide 13 to understand a little better the three highest areas of credit risk with regard to investors perception across the country. All right. Thank you for that. And just last question on the expense side. The comp line has kind of bounced around a little bit the last couple of quarters dipped in the third quarter back up here again in the fourth quarter. I think you called out some incentive comp accruals that were recorded in the third quarter, but that comp line moved up higher this quarter. So, had there been reversals in the third quarter that now, kind of reset in the fourth quarter? Just want to make sure I understand that clearly. You got it. That's exactly what it was, Gary. So, you had reversals in Q3. We called that out in the third quarter. And that sort of more normalizing back in the fourth quarter. And keep in mind, Gary, one other point is, we always like to remind people Q1 is going to be a little higher as we get all the [FICA] [ph] to payroll taxes and 401(K)s and all of that is the first quarter is always higher. One other comment we should have said earlier on just on our logistics here, we apologize for the loud banging noise. There's a lot of construction going on in downtown Little Rock, which is good, but they happen to start the banging just as our call started today, so we apologize for that. Additionally, not sure if you've noticed, but we have two of our staff that is working remotely trying to isolate and keep everybody else safe. They're all doing good, but we're having to logistically handle that today. So, hopefully none of that interfered with the call today, but just wanted to call that out logistically. I want to drill down on the construction portfolio and the funded piece continues to increase and obviously it's moving from unfunded to funded. It looks like the unfunded portion moved down slightly. I'm curious if you think that unfunded piece has now peaked, it will move lower. And then if so, you expect the funded portion to peak here shortly as well? Thanks. That's a really good question. Yes, you're correct. And I would say, we have peaked on construction unfunded commitments, not our overall unfunded, but the construction unfunded commitments, I'd say we saw that peak this quarter. Now, your question [indiscernible] the peak coming on the construction funding near? No, it's not. It's actually due to the equity that is [indiscernible] in the average equity within most of our CLD loans at around 40% if not more on occasion. So, really that ramp up peaks much further out. I would say that's something that we're very focused on analytically of where those peaks arise and where do we need to start originating more CLDs, always thoughtful on credit for us, but you're right â we believe it did in the fourth quarter, but the outside where it funds up, I think is far into the future. Okay. Appreciate that, Matt. And then I guess, Matt sticking with, kind of the loan growth theme, I think you talked about that mid-single-digit growth, any more thoughts about, kind of how we could see that play out during the year, if that's more front half loaded or back half loaded? I would say, it's going to be even best guess at this point, Matt. There's no â as I said, the unfunded construction that is layered month-over-month. We project those calls to come to fruition, but then also we'll also do a new business every day. And I'd say, it's more of an even number than versus one front-end or back-end. Yes. And I think Matt â hey Matt, Jay here, just maybe one footnote there as well that I think is important, Bob or Matt, one probably stressed this earlier in the call, but just to remind you, durations on the asset side or loan side are certainly extending here. And so, payoffs are a lot slower in this environment. And I think that's one thing to keep in mind as you think about sort of loan growth throughout the year. We're not in the environment. We were a year ago where it was just, sort of pay down, pay down, pay down all the time. We've sort of moved beyond that, their stickiness that, sort of builds in that sort of loan growth. I think we couple that with sort of the timing of the projects that are underway on the C&D side. And it's never going to be even throughout the year, but we don't really see it loaded front or back. We see it more, kind of coming in systematically throughout the year. Okay, appreciate that Jay. And then I guess, kind of similar discussion on just the loan repricing of the fixed rate loans that you call out in the slide deck. I think you mentioned just over a billion dollars weighted average rate of 4.86, any color on, kind of those reprice dynamics where we stand today? Well, Matt, [indiscernible] from a standpoint of, kind of that [indiscernible] of what we see kind of nearly definitely much better rate environment to reprice those loans and we are doing that and we're opening a [7 handle] [ph] in our pipeline now and that has included [indiscernible]. So, we're very moving, very disciplined to where rates are overall, but I will also take the yield curve, it creates a challenging environment with where treasuries are. So, we've got to fight for every basis point, and it's all about bringing new deposits to the bank as we do new originations with four clients. Hopefully, that makes sense to you. Matt? Yes. Thanks for that. I guess just lastly on â George made the comment about the last few years, as far as acquisitions and where the bank is today and it seems like you successfully completed a number of expense initiatives over the last several years. As you step back, I'm curious where the bank is today on the expense side and are there more opportunities that we could hear about in during the year? Sorry, guys. I was trying to come off mute there, Bob. So yes, I think absolutely, Matt, at one of the â when George spoke earlier and Bob about our focus going forward, never say never on acquisitions, but our focus is on this Better Bank Initiative and it's very internally focused. We think we've got a lot of opportunities. Matt, I don't want to overpromise and under deliver on, sort of timing of when we might come out, what some of those initiatives mean, but I'd tell you we've got everybody rallied around, sort of those initiatives internally. Everyone's excited about where our focus is. Focus on organic growth, making sure we've got the scalability in our business to, sort of capture that. And that's absolutely going to lead to a number of efficiencies across the board for us. These are harder to get efficiencies than, sort of that first phase coming out of an acquisition, but they're still very meaningful in my mind. And I think we've got a lot of work to do and I think they'll be promising efforts ahead in that regard. Okay. Thanks for that Jay. I guess just following up on that on the Better Bank Initiative. What are the primary metrics the bank is focused on within the initiative that we should appreciate maybe from our end? Well, my answer to that would be, there's probably a lot of internal metrics we're most focused on right now in that regard that will lead to what you're focused on Matt, but it's not going to be anything you haven't seen before. I mean, to me at the end of the day, as we optimize our balance sheet, which is sort of priority number one in my mind as we just kind of continue to do that over time, remix the balance sheet to where we want it to be, that's going to be obviously advantageous to revenue. We're doing a number of things that I think are going to gain us some additional economies of scale as we execute on that and grow. And so, the number one metric I point you to, if you think about both the revenue and the expense side is going to be the efficiency ratio. And I think we've got a lot of opportunity to continue to drive that down into â over time to drive that down into the lower 50s. I would love to see us and this is a more intermediate timeframe comment, but optimistically I'd like to see us put a [forehand] [ph] along our efficiency ratio and that's going to take us to execute on both sides of that equation. Okay. Thanks for the commentary guys. Appreciate it. This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks. Well, thanks again for joining us on our quarterly conference call. Once again, I'd like to congratulate Bob, Jay, and their teams for recognition that they have a great say in the future of Simmons Bank going forward. I think we're in a great position today as we've talked about with our Better Bank Initiative. One of the things that I'd like to point out is that as we go through this people processing systems evaluation, our staff has been very busy over the last 10 years with their day jobs and integration of 14 acquisitions. We are currently evaluating what our capacity is without those acquisitions. And I think what you're going to see is a very pleasing result. So, more to come on that. I think Jay hit some high level metrics that we're taking a look at. I can't remember if it was Bob or Jay that said, we're absolutely focused on increasing earnings per share, tangible book value per share, we believe that's really what's going to drive shareholder value going forward. And why we spent the last 10 years developing the bank that we are today. So, thank you very much for joining us today and I hope you have a great day.
EarningCall_1363	Good day, and welcome to the MSC Industrial Supplyâs Fiscal 2023 First Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Chironna, Vice President of Investor Relations and Treasurer. Please go ahead. Thank you, Allison, and good morning to everyone. Happy New Year as well. Erik Gershwind, our Chief Executive Officer; and Kristen Actis-Grande, our Chief Financial Officer, are both on the call with me today. During today's call, we will refer to various financial and management data in the presentation slides that accompany our comments, as well as our operational statistics, both of which can be found on our Investor Relations web page. Let me reference our safe harbor statement, a summary of which is on Slide 2 of the accompanying presentation. Our comments on this call, as well as the supplemental information we are providing on the website contain forward-looking statements within the meaning of the U.S. securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. Information about these risks is noted in our earnings press release and our other SEC filings. In addition, during this call, we may refer to certain adjusted financial results, which are non-GAAP measures. Please refer to the GAAP versus non-GAAP reconciliations in our presentation or on our website, which contain the reconciliations of the adjusted financial measures to the most directly comparable GAAP measures. Thank you, John. Good morning, everybody, and thank you for joining us today. I'll start by wishing everyone a Happy New Year and I hope you had a restful and a happy holiday season. On today's call, I'm going to reflect on our first quarter performance. I'll offer my perspective on the current demand environment and update you on our accomplishments against our mission critical initiatives. Kristen will then provide more specifics on the quarter and our reaffirmed fiscal 2023 framework and I'll then wrap things up and we'll open up the line for questions. Before I get into Q1, I'm excited to announce that we produced our first ever ESG report at the start of our fiscal year in November, actually. You can view this report in the Investor Relations section of mscdirect.com. Our ESG journey has been one of continual improvement and we look forward to receiving your feedback as we enhance our reporting each year. On a related front, we continue to make progress on our DE&I journey by adding diversity to our senior management and our Board of Directors. Most recently, we welcomed Rahquel Purcell as our newest Board member and she brings with her more than 30 years of supply chain, strategy, and digital experience and we're very happy to have her on board. This is the latest in what has been a series of moves to infuse new energy and new excitement and intensity into our company's leadership. Turning to our performance, I'm pleased with another strong quarter that continues our string of success in the face of uncertain conditions. Our primary goals for fiscal 2023 are gaining market share, expanding adjusted operating margins, and improving adjusted return on invested capital or ROIC. Our fiscal Q1 demonstrated success on all of those dimensions. Looking beyond the quarter, our five growth levers and for the productivity momentum that we're seeing, have us set up to continue achieving our mission critical targets. Our manufacturing centric end market exposure also provides us with strong resiliency in the event of economic softening. Manufacturing verticals like aerospace are not yet back to pre-COVID levels and therefore have plenty of room for continued growth. Additionally, we stand to benefit from reshoring in the future as we are just beginning to see the positive impacts from those activities. In addition to our focus on market share capture and productivity, we are pivoting our emphasis within category management. Since COVID began, our priorities were securing product availability for our customers, and staying ahead of the rapid cost inflation that we all experienced. And I'm proud of our team's efforts on both fronts. Our inventory position allowed us to service customers, keep plants running, and drive revenue growth. And thanks to our strong value proposition, we were able to keep pricing ahead of purchase costs and improved gross margins during a challenging time. As the world now returns to a more normalized state of moderating inflation and stabilizing supply chains, we are initiating a fresh look at our supplier and assortment strategy. Our priorities will migrate towards reducing purchase costs, streamlining operational efficiencies, improving the customer shopping experience, and channeling more market share to those suppliers who partner with us. We will accomplish these objectives through a formalized category line review process that will begin over the next couple of months led by our new COO, Martina McIsaac. [She] [ph] will cycle through our product lines in WAVE's, [indiscernible] the better part of the next year. We expect most of the benefits to accrue in fiscal 2024 and beyond with some benefit hitting the latter portion of fiscal 2023. I'll now turn to the specifics of the quarter. Results continued to be aided by strong pricing contribution, our recent bolt-on acquisitions, and execution of our growth drivers. We achieved average daily revenue growth of 12.9% well above the IP index. We expanded operating margins by 140 basis points over prior year or 100 basis points on an adjusted basis, driven by the continuation of our mission critical initiatives, which yielded additional savings of $6 million in the quarter. We remain on track to achieve our goal of at least $100 million of savings by the end of fiscal 2023. Our mission critical initiatives and efforts of our entire team on cost containment and productivity has also boosted our adjusted ROIC into the high teens and now stands at 18.3%. We've now already reached our original fiscal 2023 goal and we aim to continue improving that number over time. Our growth formula remains anchored in the five priorities that we've discussed as part of mission critical, solidify metalworking, expand solutions, leverage the portfolio strength, grow e-commerce, and diversify customers in end markets with an emphasis on public sector. I'll now update you on each one of those. Our expertise in metalworking remains the cornerstone of our value proposition, driven by the depth and breadth of our product portfolio, our large network of technical metalworking experts and our focus on innovation as a tool to elevate productivity and lower cost for customers. In many cases, we also help our customers to reduce waste and energy consumption. Here's a recent example from the aerospace end market. One of our customers who is a Fortune 500 company was using a four step drilling process that took them 2.5 minutes to 3 minutes to machine a certain part that goes into an airplane. After an in-depth review by our metalworking experts, we were able to take that four-step process and bring it to one-step and reduce cycle time from the 2.5 minutes to 3 minutes to just 10 seconds. We also improved quality along the way and by the customer's own calculation, they're now expecting to save over $4 million annually. Our solutions growth driver is anchored by our vending and implant programs, both of which have been fueling market share caps over the past several quarters. Vending signings remain strong with Q1 signings comparable to Q4. Vending machine revenues grew in the mid-teens and now represent over 15% of total company sales. Implant signings also remained strong with Q1 again running at a similar pace to Q4. Implant customer revenues were up over 20% year-over-year and now represent 12% of total sales, up a 100 basis points from the prior quarter. We will continue to push on this growth driver and would expect implant to be at 15% of total sales by the second quarter of fiscal 2024. Sales to customers with our solutions offering now represent 56% of the company's total sales, up over 200 basis points from prior year. Importantly, our solutions capabilities are also bringing us into diversified end markets. With recent wins coming in industries spanning from medical manufacturing, packaging, and even the hospitality sector. The third priority is selling the portfolio, which is about increasing share of wallet through ancillary products, especially our CCSG business. Here, we provide an outsourced vendor managed inventory service for the high margin C-Part consumables that keep plants running. Momentum in this business continues building with Q1 ADS growth in the mid-teens. Our fourth priority is digital, which includes all aspects of MSC's digital engagement with customers, suppliers, and associates. John Hill and his team have completed a comprehensive review of our entire digital offering and have built a roadmap for our evolution in the space. For example, in e-commerce, recent work is focused on improving the customer experience on our website by enhancing product discovery, and enriching product data. This investment is producing early returns as e-commerce sales grew mid-teens in the first quarter. On an ADS basis, we reached 61.9% as a percent of total company sales, up roughly 150 basis points compared to prior year. Our fifth growth driver is customer diversification through our public sector business. Over the past few quarters, I've described significant contract wins such as the 4PL contract serving U.S. Marine bases, where we supplemented that win with others at the state and federal level. And these have helped to produce continued strong growth with Q1 ADS coming in over 20% and we expect that momentum to continue throughout fiscal 2023. Each of our five growth levers are not only powering growth, but they're positioning MSC as a productivity partner to our customers expanding our historic role is spot by supplier. In Q4 of fiscal 2022, we expanded our portfolio through two acquisitions in areas that we consider important to our business. In June, we acquired Engman-Taylor, a premier metalworking distributor in the Midwest that expands our network of technical experts. We also bolstered our OEM fastener distribution business through the acquisition of Tower fasteners in August, which broadens our end market exposure and increases our geographic footprint in the high touch DMI inventory category. Both businesses are running ahead of their original case in their early days. We expect both to produce ROIC above our weighted average cost of capital by the end of their first full-year of operations. Kristen will discuss our capital allocation priorities in more detail, but we remain committed to seeking out bolt-on acquisitions that fit our strategic, financial, and cultural filters. Turning to the external environment, the picture remains similar to last quarter with sentiment readings declining and IP readings moderating. The majority of our customers are seeing stable order levels, demand, and general activity. We are hearing though continued talk of softening among a portion of our customers. More recently, we experienced a higher prevalence of extended holiday shutdowns along with weather disruptions during the second half of December. As Kristen will describe, this resulted in a strong start to the month, but a slow finish, as activities saw a sharper decline, than in the last two weeks of prior year. Zooming-out though, the need for our customers to find productivity to offset their cost headwinds is as strong as it's ever been. And this plays nicely into our value proposition. So, we remain focused on delivering that productivity for our customers. I'm going to now turn things over to Kristen. Thank you, Erik, and good morning, everyone. On Slide 5 of our presentation, you can see key metrics for the fiscal first quarter on a reported basis. Slide 6 reflects the adjusted results, which will be my primary focus this morning. Our first quarter sales were up 12.9% versus the same quarter last year and came in at 957.7 million. Our first quarter acquisitions represented roughly 3 percentage points of the growth and FX was a 30 basis point headwind year-over-year. Looking at growth rates for our average daily sales by customer type, public sector sales increased over 22% fueled by fulfillment under our 4PL contract for the U.S. Marine bases and other public sector spending. National Account growth was low teens and core customers grew high-single-digits. Our gross margin for the fiscal first quarter was 41.5%, down 10 basis points on a year-over-year basis and up 30 basis points organically driven by increased price more than offsetting product cost inflation. Sequentially, gross margin ticked down as expected due to the ongoing realization of previously incurred product cost increases, some mix impact from our growth drivers along with a small impact from a full quarter with tower fasteners in our numbers. Looking forward, we continue to see new cost increases from our suppliers although not at the fast and furious pace of last year. As a result, we anticipate taking a small pricing adjustment within the next month. Our ability to deliver continual cost savings and tangible productivity gains to our customers continues driving solid realization rates. Reported operating expenses in the first quarter were 280 million versus last year's reported operating expenses of 257 million. Adjusted operating expenses were also 280 million or 29.2% of net sales versus last year's adjusted operating expenses of 257 million or 30.2% of net sales. This yielded a 100 basis point reduction in adjusted OpEx to sales year-over-year. Our reported operating margin was 12.1%, compared to 10.7% in the same period last year. Adjusted for restructuring and acquisition-related costs, adjusted operating margin was 12.3% as compared to adjusted operating margin of 11.3% last year, a 100 basis point improvement year-over-year. That resulted in an adjusted incremental margin for our first quarter of approximately 20%. Reported earnings per share were $1.45 for the quarter as compared to $1.18 in the same prior year period. Adjusted for restructuring and current year acquisition-related costs, adjusted earnings per share were $1.48, as compared to adjusted earnings per share of $1.25 in the prior year period, an increase of 18%. This continues to reflect strong execution at all levels, sales performance, gross profit, and operating expenses. Turning to the balance sheet. At the end of the fiscal first quarter, we were carrying 726 million of inventory, up 10 million from Q4's balance. The inventory build is consistent with our double-digit revenue growth, advantageous year-end buys, and continuing inflation. We are targeting an annual cash conversion rate of at least 100% for fiscal 2023 and we are pleased with our performance this quarter at 94%, despite double-digit revenue growth and the related receivables growth. Our capital expenditures were 26 million in the first quarter and included elevated vending installations, new warehouse automation, and continued investments in digital. Our capital spending is frontloaded this year and we currently expect annual CapEx spend in the range of 70 million to 80 million in fiscal 2023. You can see on Slide 7, our free cash flow is up year-over-year at 51 million for the current quarter as compared to 43 million in the prior year quarter. Note that we also spent about 19 million buying back shares during the quarter, just over 200,000 shares at an average purchase price of [79.60] [ph]. We currently have 4.5 million shares remaining on our current repurchase authorization. Our total debt at the end of the fiscal first quarter was 780 million, reflecting a 15 million decrease from the fourth quarter of fiscal 2022. As for the composition of our debt, roughly 55% was floating rate debt and the other 45% was fixed rate debt. Cash and cash equivalents were 26 million, resulting in net debt of 754 million at the end of the quarter, up slightly from 751 million at the end of the fourth quarter. Our net leverage at the end of the first quarter was 1.3x, in-line with our target range of 1x to 2x. I would also like to highlight that subsequent to closing our fiscal Q1, we closed on a 300 million receivables facility, which is a committed senior secured revolving trade receivables facility that we will use to reduce our debt and overall funding rate. It will bring our leverage ratio to just under one-time. Before updating you on our mission critical productivity goals, I would like to spend a few minutes to refresh our capital allocation strategy, which you can see on Slide 8. Our top two priorities remain investing into the business and turning capital to shareholders through our ordinary dividend. From there, our next two priorities are tuck-in acquisitions and share buybacks at the right valuation levels. We are de-prioritizing use of special dividends as we see higher return prospects and other uses of cash. Let me now update you on our mission critical productivity goals and I'm now on Slide 9. In our fiscal first quarter, we achieved additional gross savings of 6 million and invested another 1 million. We are targeting our fiscal 2023 goal to be at least 15 million in gross savings. Warehouse automation remains an area of focus as evidenced by our recent capital investment. We're extending new automation technology through our fulfillment centers to strengthen our operations and mitigate the effects of labor inflation. For the total program to date, we have achieved gross savings of 91 million and we remain on target to hit at least 100 million of gross cost savings by the end of this fiscal year. Now, let's turn to the fiscal year 2023 guidance, which is shown on Slide 10. We are reaffirming our 2023 guidance as introduced during our fiscal fourth quarter 2022 earnings call last October. We're estimating average daily sales growth of 5% to 9% and an adjusted operating margin between 12.7% and 13.3%. A few reminders as it pertains to our estimates for the year. Specific to the ADS growth range, fiscal 2023 has 252 days, 6 fewer than fiscal 2022. The full fiscal calendar can be found on our website. Our Engman-Taylor and Tower Fasteners acquisitions are included in the guidance and add roughly 200 basis points to our ADS growth for the year. When we introduced guidance last quarter, forecast indicated a softening economic environment and we factored that into our annual guidance range. As of now, we would characterize the environment and our growth trajectory as tempering a bit, but still solid. At the gross margin level, we remain on plan and expect fiscal 2023 to be down 40 basis points to 70 basis points versus prior year, which is inclusive of the 30 basis point to 40 basis point acquisition headwind. As we think about the cadence of our gross margins for the remainder of the year, we expect the back half of the year to be flat to slightly higher than the first half. This is due to several factors. First, the realization of product cost increases in our P&L is expected to peak over the next quarter. Second, freight costs should subside beginning in Q3. Third, we have several gross margin initiatives in play whose contribution builds in the back half of the year. Erik mentioned one, which is a new category line review process, but there are others with a near-term time horizon. On the operating expense line, we expect a slight increase in operating expense as a percentage of sales in Q2 consistent with our typical seasonal pattern with sequential declines thereafter. Our mission critical productivity efforts will allow us continue investing in our growth strategy despite ongoing inflation headwinds. Factoring in those assumptions, we expect adjusted operating margin to be in the range of 12.7% to 13.3%. Excluding the 20 basis points benefit of the extra week from fiscal 2022, this would reflect operating margin expansion at nearly all points within our range. As a reminder, our fiscal 2022 fourth quarter acquisitions dilute operating margins by approximately 20 basis points in fiscal 2023, their first full-year with us. While dilutive to operating margins in the first year, both acquisitions are accretive to EPS and on-track to achieve an ROIC above weighted average cost of capital in their first full-year of operations. Holding fiscal 2023 debt constant with current levels, we would expect roughly 8 million to 10 million of interest and other expense per quarter and tax rate is slightly under 25%. Given our expectations for an operating cash flow conversion of roughly 100%, we will have flexibility to deploy free cash flow into debt reduction, buybacks, or accretive acquisitions. During our last call, we introduced our downturn playbook that we have [indiscernible] should we experience a significant demand slowdown. We have clearly defined triggers for changes in our actual or forecasted revenue and operating profit that initiate a series of actions we'll take across the business. This includes everything from pullbacks on discretionary spending, changes in staffing levels and reprioritization of investments. In addition, our balance sheet remains strong and when the economy slows, we generate high levels of cash flow as working capital becomes a source of fund. This will enable us to pay down debt and/or strategically invest through the downturn. We are not in that mode as of now and we [remain] [ph] well-positioned to navigate a change in the environment if required by enacting these levers to control costs. Thanks, Kristen. We are pleased with our first quarter performance, which is on the heels of a strong fiscal 2022 in what remains a complex operating environment. We remain on-track to achieve each of our mission critical goals for the end of fiscal 2023. And we are seeing momentum build quarter-over-quarter inside of the company. This is an exciting time for MSC as we position the company as a partner of choice among our customers. We see a bright future ahead and we'll continue to reinvest into the business. Regardless of the macro environment, we remain squarely focused on what we can control. Capturing market share, growing above IP, and translating that growth into profit expansion. I'd like to thank our entire team for their hard work and dedication and we'll now open up the line for questions. I wanted to start by circling back on some of the macro commentary that you both offered. Erik, I took note of your comment about a pronounced slowdown in the second half of December; and Kristen, I think the keywords from your prepared remarks were the tempering a bit and just in terms of the macro and growth outlook. So, I was hoping you could give us any more insight you have there in particular if there's any difference across some of the end markets that would be helpful? Thank you. Yes, Tommy, sure. Look, I think the headline in terms of the macro is pretty much more of the same. On the last quarter, we talked about some pockets of softening in-line with some of the readings coming down. And I think that's what we're still experiencing. So, we would characterize the environment as very solid. Look, I mean, we're still talking about nice growth levels. Most of our customers are still talking about solid demand and solid order patterns. There are pockets though. And it tends to be the closer you get to consumer facing industries, the more extensive you're going to hear the pockets of softening. So, you know, in general, I think we're not seeing anything that suggests like anything falling off a cliff. The words I think Kristen referred to are tempering, which would be an appropriate characterization. With respect to December in particular, from what we could tell, the back half of December is an isolated phenomenon. We saw a really strong start. So, to put some context on that, the first couple of weeks, the growth rates would have been better than Q1. The back half definitely slowed. And we did hear from our sales team that customer holiday related shutdowns were more widespread than the last couple of years and then throw in [whether] [ph] that disrupted things that week before Christmas. So, it appears to be what we saw back half of December isolated and nothing systemic. Thank you, Erik. That's helpful. As a follow-up, I wanted to touch on the pricing environment. It sounds like you've continued to see some supplier price increases. I think you said you've got another one of your own plan for next month. So, any context you could give there? And then just thinking through how that ties to your 2023 outlook for ADS? On my math, you saw about a 700 basis point contribution this quarter, presumably the range of expected contributions for the year would be significantly lower than that, just given the comps, but if there's any way you could frame what's reasonable for the full-year, that'd be helpful as well. Yes, Tommy, sure. I'll start out. I'll touch on the environment. I can give you a little context on our numbers and Kristen can fill in anything I missed. So, in terms of the environment, it's an interesting time because on the one-hand, like the whole world is suffering from inflation fatigue. And our customers, our suppliers, we're all not immune from that. At the same time, the reality of the situation is that there's still inflation. And while it is definitely moderating, there's still inflation and there's still cost increases as evidenced by the fact that yes, we're still seeing suppliers coming to us with increases. And so that is what drove â what I described is going to be a pricing adjustment coming up in the next month. So, it's a reality that we all have to deal with even though there's a bit of fatigue. And I think the message for us is, we're really focused for our customers on making sure we're generating productivity for them. That's going to offset it. I think that's how I characterize the macro. Yes, in terms of our numbers and I'm pretty sure this is all sort of baked into what we gave as the guidance range at start of the year, we did anticipate that we would lap the very high pricing of prior year and that's going to happen during our fiscal second quarter in the next month or so here. So, yes, as a percentage of sales, pricing contribution will absent some radical change in the environment, pricing contribution will come down because of the math of the comps. Great. Good morning, everybody. Thanks. Erik, I noted in your prepared comments that you actually said, you were starting to see some of the benefits of reshoring, poking their head up. Can you just expand on that a little bit? Yes, sure, Steve, and good morning. I would say very, very early. So, we're not so much yet seeing it in our revenues â youâre not seeing it in our revenues, what we are starting to see from our sales team is lists of new construction and projects that are going up, buildings being put up. And so, as you can imagine, our business development team and we're all over that. It's fairly widespread in terms of geography and in terms of industry type. I would say heavy emphasis on manufacturing obviously, but the tangible evidence now is it's going from talk into new construction. So, it's a bit early to see it in our numbers, but if we do our jobs right and we get involved with those customers from the ground up, that should translate into the numbers in the coming quarters. Okay. That's helpful. Thanks. And then maybe a Kristen question. I think you've mentioned 20 basis points is the expectation for operating margin dilution from the acquisitions in 2023, historically, I guess I'm still kind of new to you guys, historically as you go out into 2024, 2025, would you expect that to narrow or even reverse and ultimately you get margin accretion? Yes, we would definitely expect it to narrow and it eventually does become on par with the core business. So, 2024, I don't think you're going to hear much about the noise from those two acquisitions. And then as we run our integration playbook, there are a variety of levers we're pulling that get those businesses on par with the core MSC overall business. Yes. As it relates to deprioritizing special dividends, if I look back over the past say 10 years, it looks like it's well over $0.5 billion, and how should we think about the re-allocation of capital? Is that higher CapEx? Is it investments in the P&L? And or is it just more share repurchase to keep you in that 1 to 2 leverage range? Any details on what your thinking would be appreciated? Yes, Dave, sure. I'll take this one. So, I would say this, over time, we have had a capital allocation framework that began with two top priorities that are sort of 1A and 1B. And those are reinvestment into the core business to the extent we see high return projects and right now we're pretty bullish there. And then two is continued steady growth in the ordinary dividend and no change there. I think the change in emphasis you heard from Kristen is on the next two priorities. The next two priorities are going to be share buyback at the right valuation levels and tuck-in acquisitions. Along the lines of what you saw from us in the last quarter, so tuck-ins to existing business is like a metalworking and OEM fastener. And I think the reason there, if you want to â why the change is, just the return prospects. We've always sort of never been led to one tactic. It's more been about where we see deploying the next dollar to its best use. And I think that we feel good about the prospects for the company and when valuation levels are low in the stock, that's a good use of capital. And I think you're also hearing from us our confidence growing in the tuck-in acquisitions based on our track record in the past few years. We feel good about the businesses we bought and the results that they're producing. And so, that makes us more bullish on that as well. Sounds good. Thank you. Could you talk about how the benefits of the line review will manifest in your results? What should we be looking for? Yeah, Dave. So, a little early to say, but in general, and maybe what I'll do and Kristen you can fill in any missing pieces. Just sort of step back and talk a little more about the strategy, the philosophy here and then that will [translate to how yields benefit] [ph]. But as I mentioned in the prepared remarks, Dave, if I think about the focus of our category organization for the past really three years now since COVID, it's been two things. Number one, getting product to make sure we have product on the shelves to keep plants running; and number two, staying ahead of the crazy cost inflation that we've all been experienced. From our perspective, it was check, check, really good job by our team on both of those. The world is beginning to migrate to a new normal now, moderating inflation, stabilizing supply chain. This becomes the next natural evolution in the story. So, you know, what we're going to be looking to do is, we're going to be looking at our assortment and you're going to not see us deviate from our idea of having a really broad and really deep product assortment that's very important to our customers. But what we are going to do is look for opportunities for efficiencies. I think you can expect to see the benefits accrue in the form of purchase cost improvements and that could either be the straight price we pay for products, it could be in the form of rebates or other adjustments, but that's certainly one area. I would expect to see benefits accrue in the form of operational efficiencies to the extent we see potential to collapse at the fringe, at the margin, collapse some product lines or suppliers, etcetera, that theyâd be operational, whether that's inventory savings or some OpEx and productivity improvements through our supply chain. That would be another area where I would expect to see benefit. Dave, the only thing I'd add to that is, we contemplated that process when we set the framework or the guidance ranges. I alluded to some initiatives coming online in the second half. They're going to change the sequencing of gross margin throughout the year. That would be one of those, but attacking a lot of different things across price, cost, and mix as we think about the second half in particular, but all kind of within that original operating margin framework of [12.7% to 13.3%]. So first question from me, Erik, reflecting on the supply chain environment and the disruptions we've seen over the last couple of years, is there a way you can qualify for us how you think that the tight supply chain that we saw [aided] [ph] in your share gains over the last couple of years? Is there a way to parse-out how big of an impact your internal initiatives had in taking share? Paul, what I would say, look, qualitatively, what I would say is the past three years created a fairly unique opportunity for large well-capitalized distributors that were able to â I was talking earlier about getting product on the shelf. In a tight supply chain environment, a couple of things happen. Number one, obviously scarcity of products. So, having product becomes paramount. And then, the second thing is obviously tight supply chain means inflation. And I think the successful distributors, those that fared well through this crazy period were able to stay ahead of that, and maintain or improve margins through what was a historic time. And I feel good about our performance on both of those fronts. I think as we move forward and things normalize if the question is, okay, does that opportunity â the share capture opportunity go away, our view on it is that like our North Star has become generating productivity for our customers because particularly â almost any environment you can think of, if their booming, if things get slow productivity. And productivity could mean cost down or it could mean increasing manufacturing throughput to allow them to get more products into their customers' hands faster, that is becoming paramount. And that's where â if you listen to each of our five growth levers, I tried to get this point across they're not just about increasing dollar volume. They're intended to all serve a purpose and it's all around positioning MSC as a partner to our customers to generate productivity. That's our North Star for the next several years. Got it. That's very helpful. I appreciate that. The other question for me and I appreciate the color you guys gave on the macro environment, but are you seeing here in early January any bifurcation in the order rates between some of your larger customers and the small customers and maybe if not even on order rates and how they're talking about the year ahead, how would you characterize your conversations with each? Hey Paul, I'll take that one. So, nothing different than what we've been experiencing for the last few quarters. We're not seeing any deviations there and we do that is kind of one of the things we tend to watch for any early leading indicators. So, nothing notable to report there. As Erik mentioned, kind of the macro sentiment, pretty consistent. We're looking more for pockets [of softening] [ph] per end markets at this point, but generally still feeling good about the year, solid about our expectations and within that 5% to 9% ADS guidance range. Good. I'm doing well. A quick one to start on inventories. Just wanted to get a sense of how you're feeling about current levels of inventory? And you talked about supply chain pressures and inflation easing, just and then, as well as some advantageous buying you've done maybe at year-end, but you've probably been doing that all along. Just curious how you think about inventories moving forward? Do you expect some destock now that the situation has kind of normalized around supply chain and inflation? Any color on that? Yes, sure, Pat. I can take that one. So, as youâve mentioned at the end of your question, yes, the year-end advantageous buy, thatâs pretty typical for us. We're just, it's part of the normal playbook that we would run. I think more holistically if you look at inventory, obviously the last few years and we've been in this constraint supply chain environment. We've been flexing the balance sheet and certainly not skimping on inventory as that's been a way that we've been able to support our customers somewhat uniquely relative to the local distributors in that time period. But going forward, we're definitely taking a closer look at inventory. We're kind of monitoring levels, looking at where it makes sense to adjust things given the environment, but certainly not doing anything that would compromise our ability to support the customer and to support our continued growth. Based on your standing outlook for ADS growth, I mean, do you think current levels of inventory are appropriate. Do you think you're over stocked a little bit, under stocked, like how would youâ¦? I want to say we're over stocked anywhere and there's definitely been some differences in how we've been seeing kind of inventory levels in certain different product categories. Like if we think about, kind of metalworking inventory versus MRO, but I wouldn't give you a specific range at this point, but I'd definitely say if you think about the 100% operating cash flow conversion there's sort of a range of inventory contemplated within that that we feel confident in. Pat Maybe another color Iâd add on inventory is, there's times and youâve followed us for a while here, like, when we go into a different mode, right now we're still in growth mode. And in growth mode, even if things are moderating, whatever, the growth percentages, we're still in growth mode. And that means keeping inventory on the shelves for customers. If there comes a point at some point, there'll be a point at which things change and we go into a different mode and we â that's a lever we can turn pretty quickly as part of the downturn playbook, we're not there though. Understood. Then next question is on OpEx. Can you just help me understand the year-over-year moving parts? I mean, you went from 257 million of OpEx in last year's first quarter to 280 million this year. I think acquisitions maybe add a little bit, but you have some gross savings of 6 million, like I think you talked about a million of investments. It just seems like a pretty big increase. I'm guessing a lot of that's inflation related, but any color on the key moving parts in that year-over-year dollar number would be helpful. Yes, sure, Pat. So, few things on the big drivers on a year-over-year basis. You're right, inflation absolutely one of the biggest buckets there that was around $9 million. We did also have an increase from having those two acquisitions Engman-Taylor and Towers in the numbers for the first full quarter, that was around [6] [ph]. Year-over-year, we're still seeing kind of T&E normalize for our associates, as we get kind of back to normal and how we've been out in the field, that was a couple of million of pressure, little bit of noise on the variable OpEx. And then you've got some things in there on higher D&A, some of the investments carryover from the prior year. And then to your point, you got 5 million in that mission critical savings. And that 280 million like as you think about it, you know moving forward for the rest of the year, is that kind of a â how should I think about that absolute dollar number in the second quarter and the balance of the year? I guess I'm thinking in context of pricing contributions that are probably moderating, would you expect, kind of â I would expect the year-over-year to moderate on the OpEx growth as well, is that the right assumption? Yes. So, second quarter on a dollar basis, probably down a little bit, but on a rate basis it'll still be up a tad from Q1. And then going forward in Q3 and Q4, kind of given some of the dynamics you described, I think 280, low 280s is probably a pretty reasonable, probably a good range for Q3 and I'd say ticking down even a bit there from Q4. The OpEx rate following Q2 will sequentially decline. Good morning. Maybe I'll just give a dig into the metal working demand. Obviously, you talked a little bit about activity being relatively stable within your industrial side of your business, but obviously, the [GBI] [ph] has kind of been â the middle working index has kind of been a contraction now for seven months, Iâm curious have you seen any weakness within that portion of your business and how do you view that part of the portfolio going forward? Yes, Ken. No question. Look, you look at the MBI, you look at the PMI, the sentiment indices are dropping considerably. I would say inside of the company, I would characterize metalworking as a microcosm of what I characterized for the for the overall customer base, which is moderating and certainly some pockets of softening, but not dropping like a rock and not dropping as the indices would suggest. I think part of the story, Ken, is, you know, were a lot of â if you take some of the end markets that drive metalworking consumption, many of them, several of them have been really beat up during COVID. And so, they still have room to grow. So, I mentioned aerospace being one. Another that drives metalworking consumption through the economy, oil and gas with oil prices being high activity levels are up, so thatâs sort of buoying things. So, I mean, nothing really to speak of out of the ordinary or out of what we've described for the total company as it relates to metal working. Okay. Are you concerned at all about a potential lag impact of that sentiment index or has there been enough structural changes you think that you can help to offset that? Because obviously you've outperformed in the last six months relative to that sentiment index? Yeah. Look, Ken, I mean, I wouldn't say concerned. Weâre watching it. And if you go back and you run historic patterns, typically there's a pretty good correlation with the sentiment that is like the MBI and our revenues, but really that's why you saw â when we gave the annual guidance of 5% to 9% that's down considerably from where we're running in Q1. And part of that was â there's a little bit of comps in there from the pricing that we talked about. And then part of that is contemplating some further softening. So, we think it is going to happen. So, do we watch it? Absolutely. Are we modeling and planning? Yes. Do we worry about it? No. Because from our standpoint, we can make strides almost no matter what happens in terms of capturing share from local distributors. So, yes, that's our assessment. Got it. And then my last question is probably more for Kristen, but Kristen, you mentioned some warehouse automation investments towards the end of your prepared remarks. I'm curious if you could just give a little bit more color of what exactly that entails and maybe the timing of the benefits that you expect to see out of those? Yes, sure. So, we obviously have a lot of automation in the warehouses today. We're looking at kind of extending that further, modernizing some things. Generally in response to a lot of the pressure that we've seen around labor inflation recently, but certainly always just looking for opportunities to be more efficient, provide better service levels to the customer. In terms of when the benefits come online for those, Ken, I'd say, it's really not materially until 2024, some of those are definitely longer-term investments. But when we think about, kind of like the ongoing opportunities around mission critical and what that looks like post-2023, this would be kind of one of the big rock projects that start to kick up again that deliver savings in operating expenses going forward. And at this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to John Chironna for any closing remarks. Thank you, Allison. As a quick reminder, our fiscal 2023 second quarter earnings date is now set for April 4, 2023. And we will be attending at least one investor conference over the next few months, as well as conducting several roadshows. So, we look forward to seeing you in-person. Thank you for joining us today.
EarningCall_1364	I am Nicolas Bornozis of Capital Link and I would like to welcome you all to Capital Links Corporate Presentation Series. We are delighted to have with us today, the management of Star Bulk Carriers, who is going to make a presentation on their development, strategy and sector outlook. A very quick message of a disclaimer that this is not an offer to buy or sell securities. This is not for investment advice or advice of any kind. And this presentation is for purely informational purposes. Just a quick note on logistics, we will have a presentation a slide presentation, followed by Q&A. Please submit your questions using the Q&A button at the bottom of your screen. And your questions could be answered by the management after the end of this live presentation. And with this, I'd like to thank you all for joining today. And I would like to turn over the floor to Mr. Hamish Norton, the President of Star Bulk Carriers. Hamish, the floor is yours. Thank you. Thank you very much, Nicolas. So let me introduce the team we have online. We have Nicos Rescos, who's Chief Operating Officer. We have Simos Spyrou, who's co-Chief Financial Officer, Christos Begleris, Co-Chief Financial Officer, Charis Plakantonaki, Chief Strategy Officer; [Konstantine Anapolis] [ph], Deputy CFO; Constantinos Simantiras, who's Head of Market Research. And what you see is our forward-looking statement disclaimer. And let's go to the next slide. This is from our Q3 company highlights I won't stick to it very closely, but there are a few items that are helpful. So Star is the largest publicly traded dry bulk shipping company. We have 128 ships, about 441 Cape and Newcastle Max, 50 Panamax and Kamsarmax, 37 Supramax and Ultramax. 120 of our 128 ships are equipped with scrubbers which have been very beneficial both for the environment and for our bottom-line. The one thing we take great pride in is the quality of our governance. It's not just governance for governance sake, but its governance because it helps our business. Since about 2018, we've doubled the size of our fleet through small M&A transactions, which have depended upon having ship owners wanting to take our shares in payment for their fleets. And so we have a very serious board of directors, composed of institutional investors, shipping experts, ship owners who have taken shares in the company. Everybody you see from Star Bulk is an employee of Star Bulk. The people who manage our ships are employees of Star Bulk. And we don't pay commissions to affiliates. As a result of this strong governance, management is incentivized to focus on shareholder returns. We act like shareholders. We think like shareholders in part because we are shareholders. And being shareholders, we focused very, very strongly on costs. We have the lowest average daily OpEx per vessel in the industry. We have as far as we can tell the lowest cash G&A expense in the industry. And we have excellent chartering results. At the same time, with low OpEx and low overhead per ship per day, we have among the highest Rightship ratings among our peers. Rightship being a dry bulk betting organization. One thing I do want to focus on a little bit is our dividend policy. Basically, what our dividend policy calls for is that to the extent we have accumulated on our balance sheet, cash per vessel of 2.1 million or more we basically every quarter payout, the excess over that 2.1 million per vessel as a dividend. That leads as you might imagine, to some very large dividends. In Q3, for Q3, we declared a dividend of $1.20 per share. And our latest 12 months, adjusted EBITDA was just over a billion dollars 1.03 billion, our adjusted net income for the latest 12 months was 819 million. And in that same period, we've distributed dividends of $6.5 share, or 669 million in total. And just for reference, our OpEx for the third quarter was $4,769 per ship per day. And our average cash G&A per vessel was $950 per ship per day. And I think if we go to the next slide, I think that's something you can study. Slide five is interesting only insofar as it tells you what our coverage was when we reported Q3, but of course, these are Q4 coverages, which has gone to 100%. So why don't I introduce Christos Begleris, who will talk you through some of our financial information. As we are reporting, as of November 15, our total liquidity is at 417 million and total gross debt is that 1.3 6 billion. Now, we have 130.2 million of course, we've created working capital and market [indiscernible] of September 30, 2022. During the last two years, we have focused extensively on refinancings and those refinancings have had the goal to essentially reduce our cost of debt. And through essentially 800 million of refinancings, we have managed to reduce our average spread in senior debt facilities to close to 1% thereby saving around 15 million per year of interest costs. Here we should also say that, essentially in Q2 of 2020, we entered into close to 1 billion of interest rate swap facilities at an average cost of 46 basis points. And as of today, given that our debt has an amortization schedule, the outstanding notional balance is at 755 million, again at an average rate of 46 basis points with an average remaining maturity of 1.4 years. The mark-to-market of these swaps was at 37.2 million as of October 31, 2022. So essentially, in the last few years, we have taken down net debt from 1.67 billion as of the 30 September 2019 to 946 million as of November 22. a reduction of 43%. Cash and liquidity has increased from a low of 117 million in September 19 to 417 as of November 2022. Moving to next slide, our COO, Nicos Rescos may want to go through the banker benefit analysis as well as potentially talk about OpEx which are the next two slides. Thank you, Christos. Yes, fleet of Star Bulk is fully scrubber fitted will have [indiscernible] that are not scrubber fitted. As of June 11, 2022, we have repaid in full scrub investment, including the [indiscernible] cost of $250 million. And since then, we're basically generating free cash for the benefit of the company. We are ending the year probably around the $300 mark realized, scrubber differential, high five differential, you see here as of Q3 was a 311. And we typically consume about 700,000 tons of HSFO per year, always subject to the speed that the fleet will operate in the industry. What we also have here is a small sensitivity analysis of what is the benefit, the scrubber benefit for the company on different high five state levels. We are currently hovering around $200 per ton. We do the majority of our bunkering more than 60% in Singapore, which is representative the figures you see here on a $200 mark. And we have a full utilization of the scrubber systems on board with minimum of hire time. We believe that due to the continued energy prices, and the difference in facts and the demand for HSFO. We believe that the high five differential will be sustainable throughout 2023. And typically through the employment strategy, we fall on the fleet, we capture more than 95% of the differential. On high level figures on our operating costs, as of Q3, we have reported $4,769 per vessel per day, as Hamish mentioned, this is still the leading management team in terms of operational costs for that particular segment, which is dry bulk. Our net G&A for Q3 was $950 per day. And importantly, together with low costs, we still attain the highest ranking on Rightship rating. This has been consistent throughout the past three years, ranging between number one or two or three out of the 70 largest dry bulk companies and out of the five peers that we compare ourselves with. So as I mentioned before, the majority of our fleet is scrubber fitted, we are the largest listed dry bulk player in the market. There is a significant diversification, however, we split typically between the big ships, Newcastle Max and Capes around 50% and the rest of the ships are the geared ships, the Ultramax and Supras and the gearless Panamax and Kamsarmax vessels. We have embarked on a big plan for continuing the capital expenditure of ballast water systems, according to the international regulations. And by the end of this year of 2022, we are almost done with a program we just have three left that will be installed within the next one or two years. Operating leverage was 46,700 days in 2022. And on the bottom part of the page, you can also see how is our CapEx evolving between the end of 2022 and throughout 2023. We'll have basically include the majority of our CapEx on ballast water and energy saving devices already. So within the scope of our ESG strategy, we are committed to reporting transparently on our ESG performance, why overall contributing to the industry's efforts towards a transition to a sustainable net zero future. And within that scope for a fourth consecutive year, we have published our annual ESG report. This report provides a transparent and comprehensive account of our ESG strategy, objectives, performance. It is in accordance with [indiscernible] and ability standards. It outlines our commitment towards the United Nations Sustainable Development Goals. And it also highlights the company's ESG issues, as those have been identified by our stakeholders both internal and external. Within our government's principles, we also report on a wide range of ESG key performance indicators. And we present how the company manages its impact on the environment people in society. Now highlighting some milestones from our ESG efforts in 2022. We continue to prepare timing for greenhouse gas emission reduction regulations. In that respect, we use advanced better performing systems, which report the emissions of our fleet. We also leverage technical and operational measures to improve the energy efficiency of our fleet, such as technologies related to house cleaning, product optimization but also energy saving devices. We also participate in the research and development on green energy and technology for example, R&D on carbon capture and storage but also on different zero emission green fuels. And we also participated in environmental alliances, for example, green corridors, we tend to deploying zero emission fleet specific trade areas of the world. And as a result of these efforts for a second year in a row, we have participated in the carbon disclosure project, and we have achieved a score of B, which indicates that our company is at the management level, which means a maturity of taking coordinated action on climate issues. This means that our rating is above the industry average, which is a C, but also is above the global average which again is the C and indicates awareness levels. On the people front following three years of the pandemic, we are implementing an employee wellbeing program. This includes among others flexible working schemes, mental health support trainings, as well as employee engagement activities. We also continue to focus a lot on the performance management of our people, but also on a professional development of our team's members. We also continue to support our communities. This is done through donations [indiscernible] work, including but not limited to contribution toward education, towards the environment, but also support for the refugees fleeing to Greece due to the ongoing war. And last but not least on the governance front highlights of 2022, we did set up a [indiscernible] committee at the board level. We also engaged with the climate related risk assessment, and we continue to invest in high [indiscernible] technology but also advanced cybersecurity systems. And we now pass on the floor to [indiscernible] for an update on demand and supply. Thank you. Thank you, Charis. So on page 11, we provide an update on the supply front -- the supply fundamentals for the dry bulk sector are very positive, fleet growth during 2022 ended up at 2.8%. And this is an increase of approximately 26 million deadweight. During the year, we had a decrease of Capesize congestion in July, August which to pre-COVID levels and this had the negative effect on the market and especially Capesize rates. Smaller sizes â congestion in smaller sizes continues to stay at inflated levels and is likely to remain above pre-COVID levels due to inefficiencies and redistribution of trades. And furthermore on the supply from supply side, steaming speed had experienced a strong decrease during 2022. And as a result of higher bunker costs and relatively lower freight rates. Looking into 2023, 2024 fleet growth is unlikely to exceed the 2%. With the Orderbook stands at approximately 7% of the fleet. There was a minimal ordering taking place during the last two years as a result of the uncertainty on future propulsion, high costs and limited the yard capacity. And looking further down the road and on the medium to long-term, we see new regulations and an aging fleet is expected to tighten supply significantly and has the potential to create huge renewal needs post 2024. Let's now turn on to page 12 for a brief update on the demand side. Dry bulk trading tons during 2022 was down approximately 1%. The weakness was mainly on the iron ore and grain trades due to the strong correction that began mid 2021 in Chinese steel production and the war in Ukraine have affected the export volumes. And as a result, strong contraction in grain trade. Looking into 2023 and 24, we expect the relaxation of the strict zero COVID policy and the reopening of the Chinese economy to have a very strong positive effect for dry bulk ton miles and should benefit specially larger sizes. During 2023, at the start of the year, we expect the growth from the rest of the world to be affected from the fight against inflation, the macro uncertainty and rising interest rates. However, we do believe that this will lead into net positive ton miles and especially during the second half of 2023, as China is likely to want to take advantage to increased stocks and result into more than 2% growth year-over-year in 2023 and 2024. Okay. So we have -- I see some questions. So we have one question on dry docking. It says with charter rates near lows now, would you push forward more of your dry docking costs? Will that cause monies for dividends to be reduced? And Nicos Rescos maybe you want to talk to that question? Sure. It's a good question. Because what we did -- what the question describes actually what happened in 2022, decided actually to accelerate dry bulks in Q4, which was a pretty soft water despite what we expected of the market. So for calendar 2022, we carried out 35 dry bulks. Many of them with ballast water, which is as I said before, we're basically done with that program. And for 2023, we have about half of dry dock plan about 18 dry dock. So we expect the expense to be significantly lower than 2021. Okay. So here's another question, probably for Nicos. Do you expect CII ratings to have a commercial impact? If yes, how? And I guess the answer is yes. But what do you think? I'll try and be very brief here. Because the entire team has been working on CII for the past year and a half. We have completed the mapping of each and every vessel in the fleet. So we know exactly where we stand commercially, with every single one of our ships. So we've done everything that is needed to ensure that they can trade well beyond 2026, which is the first main milestone for the regulation. To the specific question, we don't think it's going to have an impact today, because there is a pretty serious issue with the clause that has been suggested to be incorporated in charter pilots. So we think there will be some changes to the formula calculation. Because some parts of it do not make sense as to the practical use of vessels when you get penalized if your ships are actually laden, rather than being ballast. So I'm not going to dwell on what the formula is, we think is going to have an impact if you prepare. And that's what we're doing is you're going to be able to deal with it as the limits continue to increase over the next years. But we think it's practically possible even before new technology hits in carbon capture as others mentioned before. Our new fuels that can make the existing vessels trade well beyond the 2026. Okay. And then we have a question. Longer term, how do you intend to renew your fleet orders, vessel acquisitions, corporate acquisitions, maybe I can take that. Right at this moment, we don't see that it's the right time to renew the fleet. We think new buildings are relatively expensive, and also don't offer the technology that we would want for the environment of decarbonization, that's going to be more and more important as time goes on. But soon enough, we will have to renew the fleet. And we can do that through ordering, or corporate acquisitions. And we would intend to finance that with equity and some debt. But, we think it's important that we get the right technology and the right pricing. Current, TSI stands below 9000, the lowest over the last two years. Do you think the market will recover after the Chinese New Year, Constantinos Simantiras? Yes. Well, the indeed the Supramax market is extremely weak. It's definitely the weakest sector in the dry bulk industry right now, and especially in the Pacific, in the Atlantic market is slightly better. And the dry bulk levels that were mentioned, we do believe that there will be a recovery after the Chinese New Year and the Supramax and the gear trades. Dry bulk is extremely seasonal, and during the first half -- the first quarter, and especially during February, this is the weakest spot of demand seasonality and especially on the smaller sizes, the demand starts to go through the seasonal downturn beginning around November and bottoms out by February. This year, the Chinese New Year is at the end of January. So we do expect that demand is going to increase as we enter the Latin America grain season. We have a recovery of minor bulk trade and minor bulk consumption. So we do expect the smaller sizes to recover first, over the next two months. Okay. And then we have a question what supply contraction is expected from CII compliance up until 2026? And I think the answer there is, 2026 is probably early, where there to be a supply contractions lead from compliance with CII but Nicos, you agree with that? I think Constantinos also has some data points, we feel that until 2026, we will probably see the older, less efficient vessels that were built in the early 2010, 2012. The ships that have mechanical engines and variable haul forms, that whatever you do to them, whether it's fitting an energy saving device or putting [indiscernible] will not solve the issue. And the only solution is to trade at a significantly lower speed that becomes commercially unattractive. So we believe that assuming there's some balance found to the formula, and there is widespread acceptance of the clause for trading, then we're going to see a big number of these older Supras and Capes go, but Constantinos maybe you want to add a couple. I think Nicos, I agree with your comments, it's going to be a speed cap. Some vessels are already slow steaming so this is likely to lead into whenever the market increases substantially and demands speed to go up. These vessels won't be able to speed up and will have a cap and it will affect especially Panamaxes, it will also affect the older VLOC fleet. So it will also benefit Capes indirectly. And this is likely to start in a couple of years from today. Yes. And then we have a question, what is your view of share repurchases when the shares sell at a discount to NAV? And the answer is if we can sell ships at a price which is significantly higher than the price at which we can effectively buy back shares. We will do that. But we don't intend to use cash from operations to buy back shares because we want to defend the dividend. But you know, we are in principle happy if we can sell ships at a big price and buy shares at a lower price. That in practice is usually hard to do but we've done it and we will do it again, if the opportunity should arise. And then here's probably another one for Nicos Rescos. How should we think about the portion of the fleet that could attain a D or an E CII rating in 2023? And I think that is probably referring to the whole dry bulk fleet? I have seen various studies on this particular question, primarily generated from classification societies. Well, as far as Star Bulk is concerned, we should strongly say that we have no vessels that will fall below a zero d on CII. And more importantly, we'll be able to maintain it will be on 2023. I think the rating and below for 2023 is probably relative as to how this will be implemented and supervised, meaning how each company will report its information. I think if we push this question for the 24th, and 25, I think we could see at least 15 to 20% of the dry bulk fleet being below a derating. And again, I turn the question to Konstantinos, who also follow the data very closely. Yes. Nicos, what exactly the data was, between 15% and 20%, according to different studies, but those are based on various assumptions that are not certain yet. And then we have a question what vessel types are of most interest for fleet expansion? And the answer is we really like our fleet mix. We like having about a third of our ships, Supras and Ultras about a third, Panamax and Kamsarmax and about a third cape and Newcastle max. So that when we expand our target, frankly, is to try to keep that same sort of vessel mix, obviously, on an acquisition-by-acquisition basis, we can't do that. But on average over a period of time, that's what we would want to do. And then any consideration in a hostile takeover, if you can buy vessels at below NAV. And the answer to that question is, it's almost impossible to do a successful hostile takeover in the shipping industry. Because the Board of Directors of the target will always correctly say, you should give me net assets at you, and you should give it to me in cash. And it's very hard to overcome that objection. So in theory, it's a great idea, but in practice, it just almost never works. And then I see a question for Constantinos Simantiras, what percentage of the dry bulk demand for iron ore and coal shipping is derived from China? Okay. That's a good question. Iron ore, almost 80% of iron ore that is being exported end up in China, and China is responsible for about 24%, 25% of coal, most of their own. Approximately 80%, again, of the iron ore trade is transported on Capes, so you do understand how important the iron ore markets are for the Cape size. Okay. And then we have a question, Will Star Bulks cargo carrying capacity decrease to comply with CII? And I think that's a Nicos Rescos question. Sure. The answer is no. What we're doing is we're making sure that we can trade the entire fleet well above the present operating speeds of the fleet, which means that we cannot just -- do not only comply with CII, but even if dry bulk market average speed increased, we would still comply. We are making sure that we're taking all the measures on the fleet, and we can actually achieve that. Yes. I mean, one was more general, which I think we've answered overall dry bulk market prospects. But maybe more specifically, Constantinos could talk a bit on what we see on the Chinese opening and how that affects kind of short-term and second half of '23. Yes. Well, it's clear that the Chinese have pulled off the strict zero policy. The last one month, there has been a major wave of COVID cases. And there is a lot of uncertainty on that front. So this has indeed affected demand. As we mentioned before, we do expect demand to be relatively low during the first quarter for seasonality reasons, but also as we have the Chinese New Year approaching. There has been significant stimulus announced to support the real estate market This is something that we expect to have a stronger effect as we approach the second half of 2023. It's worth noting though, that since mid-November, Chinese imports have experienced a major rebound and we are definitely at the early stages of the demand recovery. China in mid 2021, went through a major slowdown especially on the crude steel industry. Their production was down 10%, which is an enormous amount. And during the last two years, they've mentioned that they've postponed the cap on steel emissions from 2025 to 2030 and for building materials. In our view, this is an indication that steel production has not peaked yet. And this provides a significant upside over the next years in a very strong demand case for the dry bulk industry. And now I see another question for Constantinos Simantiras. How are average trip length changing? And I suppose that could apply either to Star Bulk or is it the fleet as a whole? Yes, well, this 2022 was a very mixed year because there have been many inefficiencies. And one of events at the start of the year, we had the Indonesia export ban, then the war in Ukraine. However, there have been supply shortages on the export front, that had the negative effect on demand. We've seen shorter trips, especially on the iron ore front as it was, Brazil has underperformed this year. And we are now seeing a redistribution result resulting in longer trips on the coal trade as Europe have disruption on the Russian to Europe trade. And this also applies on steel products trade. At the same time, there has been a strong expansion of exports of bauxite from Guinea with a strong positive effect. But because of the war in 2022, we had such a major loss of grain trade, which is a very, it's so one of the carbons that produces the highest ton miles. So distances during the 2022 were mixed, depending on the site but net negative. Going forward, we do expect that this will be one of the factors that will benefit the market. Because we expect that the Chinese imports are much more ton mile intensive. Okay. So another question come in, it says the first quarter of the year is usually the lowest quarter due to Chinese New Year. But will this year be different as China reopens? Or will China not reopen in time? Well, the reality is that first quarter of every year is not -- is the lowest quarter and especially in February, not only due to China, it also because of seasonality on the export side, I mean, Brazil exports of iron ore go down by almost 20% between December and February. Then you have disruptions in coal exports in Australia, and Indonesia affecting January, February. And we are also in between grain season, so especially this year, we've had a relatively weak U.S. grain season and the loss of the Ukrainian ton miles. So because during January, February, the North American season transitions into the South American season this is also another reason why volumes are low. I think that going into March, April, the export seasonality will assist significantly and this is something that will lead in higher demand irrespective of how strong the Chinese reopening will be. I mean for the Star Bulk fleet, the main differences are basically geared ships that require more expenses for maintaining cargo gear and the gearless ships. So everything else is relative to the age of the vessel, of course, and the shipyard built. So if we're going to say that, let's say the average age of Star Bulk fleet is around 9.7 years, and we have Supramax/Ultra, Kamsarmax, Capes and News. I would say that the range is between at least for Q3 2022 is between 4300, 4600 that's how I would split the three groups in general. Yes. And so now I think probably this is likely to be the last question we're going to have time to answer. But for Constantinos Simantiras, this is looking at your crystal ball. We have, I guess, two questions. Can you speak about spot versus time charter rates for the various vessel types? And most importantly, how you see this evolving over the next 12 months? And together with that, what is the single biggest risk for the sector in 2023? Okay. So from the first question on the spot versus time charter, I think that the last two years where there have been a limited chances to retire out the fleet, they are no longer on long-term time charters without having to accept a major discount, as the forward curve has always traded at the steep backwardation. rates right now are very low in spot rates have corrected substantially compared to seven months ago. However, we do believe that the FSA curve is a good representation of the trends that are coming. We do expect a strong recovery above FSA rates during Q2 and Q3, especially on the smaller sizes. And as the year progresses, we do believe that capes will strengthen and overperformed smaller sizes and especially compared to 2022. And this will be as Brazilian ton miles come back into seasonality during the second quarter. Capes demand usually peaks around June and then again around November, December. So we should have a very volatile market with speaks with rallies and corrections which will also be related both to the demand side, but also to ballast flows, the LOC flows and various other factors that affect the market. Single biggest risk for the 2023, I think that the most difficult factor is, always the demand side. But I think that also people do not place a lot of focus, especially on the labor side on oil prices and the effects that bunker costs have on dry bulk. So a very strong recession in the rest of the world, boosting oil prices to very low levels probably would be the biggest risk I see. On the other hand, I think that this has a very, has a relatively low probability of taking place, mainly due to the Chinese coming back. Yes. And I think probably it's counterintuitive for many people, but high oil prices are very good for the dry bulk business because they basically tend to put pressure on the fleet to slow down. And that is in effect, reducing the size of the fleet. So we like oil prices to be as high as possible. And I think we're out of time. So thank you very much, Nicolas, and the team at Capital Link. Thank you. Well, thank you very much for a great discussion. And in closing, I would like to remind everyone that this presentation will be available for replay. So we look forward to more people visiting and listening to this great discussion. Thank you very much, everybody.
EarningCall_1365	Good day, and welcome to Micron's First Quarter 2023 Financial Call. At this time, all participants are in a listen-only mode. After the speaker's 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, Farhan Ahmad, Head of Investor Relations. Please go ahead. Thank you, and welcome to Micron Technology's Fiscal First Quarter 2023 Financial Conference Call. On the call with me today are Sanjay Mehrotra, our President and CEO; and Mark Murphy, our CFO. Today's call is being webcast on our Investor Relations site at investors.micron.com including audio and slides, in addition, the press release detailing our quarterly results has been posted on the website along with the prepared remarks for this call. Today's discussion of financial results is presented on a non-GAAP financial basis, unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures may be found on our website. We encourage you to visit our website at micron.com throughout the quarter for the most current information on the Company, including information on the financial conferences that we may be attending. You can follow us on Twitter at MicronTech. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, our expected results and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. We refer you to the documents we filed with the SEC, including our most recent Form 10-K and 10-Q for a discussion of the risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements to conform these statements to actual results. Thank you, Farhan. Good afternoon, everyone. Micron delivered fiscal first quarter revenue and EPS within our guidance range despite the pricing environment, which deteriorated significantly from our prior call. The industry is experiencing the most severe imbalance between supply and demand in both DRAM and NAND in the last 13 years. Micron is exercising supply discipline by making significant cuts to our CapEx and wafer starts while maintaining our competitive position. We are also taking measures to cut costs and OpEx across the Company. Customer inventory, which is impacting near-term demand, is expected to continue improving, and we expect most customers to have reduced inventory to relatively healthy levels by mid-calendar 2023. Consequently, we expect the fiscal second half revenue to improve versus the first half of our fiscal year. We expect our days of inventory to peak in our current fiscal Q2 and gradually improve over the next few quarters as our bit shipments improve and our supply growth is significantly reduced. Despite this improving bit shipment and revenue trajectory, we expect industry profitability to remain challenged through calendar 2023. The combination of our technology leadership, manufacturing expertise, diverse product portfolio, a strong balance sheet and our decisive actions provide a solid footing to navigate this challenging near-term environment. I'll start today with an overview of our technology position. Micron continues to lead the industry in both DRAM and NAND technology. We are first to market with 1-beta DRAM and 232-layer NAND. While both on 1-beta DRAM and 232-layer NAND offer strong cost reductions, we have slowed their ramps to better align our supply with market demand, as we previously indicated. Yield trajectory for these nodes is on track, and we are continuing to qualify these nodes across our product portfolio and will be well positioned to ramp these nodes when industry conditions improve. Our 1-beta DRAM node, which we introduced in fiscal Q1 delivers around a 15% power efficiency improvement and more than 35% bit density improvement versus 1-alpha. 1-beta will be used across our product portfolio, including DDR5, LP5, HBM and graphics. Now turning to our end markets, across nearly all of our end markets, revenues declined sequentially in fiscal Q1 due to weaker demand and steep decline in pricing. Shipment volumes were impacted by our customers' inventory adjustments, the trajectory of their end demand and macroeconomic uncertainty. We believe that aggregate customer inventory while still high, is coming down in absolute volume as end market consumption outpaces shipping. In data center, we expect cloud demand for memory in 2023 to grow well below the historical trend due to the significant impact of inventory reductions at key customers. End demand at cloud customers is not immune to macroeconomic challenges, but should strengthen once the economic environment improves. DDR5 is extremely important for data center customers as the industry begins to transition to this new technology in calendar Q1. As modern servers pack more processing cores into CPUs, the memory bandwidth per CPU core has been decreasing. Micron D5 alleviates this bottleneck by providing higher bandwidth compared to previous generations enabling improved performance and scaling. Feedback from our customers across the x86, and ARM ecosystem suggests that Micron leads the industry with the best D5 products. We expect server D5 bit shipments to become more meaningful in the second half of calendar 2023, with crossover expected in mid-calendar 2024. Building on our existing D5 products, in fiscal Q1, we began qualifying 1-alpha 24-gigabit D5, and we announced availability of D5 memory for the data center that is validated for the new AMD EPYC 9004 series processors. In addition, we are also making progress on CXL, and in fiscal Q1, we introduced our first CXL DRAM samples to data center customers. In data center SSDs, we are continuing to proliferate our 176-layer SSD, and in fiscal Q1, we nearly doubled the number of customers where we are qualified. We have also completed qualification of our 176-layer QLC with an important enterprise customer. In PCs, we now forecast calendar 2022 units to decline in the high-teens percentage and expect 2023 PC unit volume to decline by low to mid-single-digit percentage to near 2019 levels. Client D5 adoption is expected to gradually increase through calendar 2023, with crossover in mid-calendar 2024 and we are well positioned for this transition with leading D5 products. We also continue to lead the industry in QLC, and it is an important competitive advantage for us. In fiscal Q1, client and consumer QLC SSDs had very strong growth which helped increase our NAND QLC mix to a new record. Earlier this month, Micron began shipping the world's most advanced client SSD, featuring 232-layer NAND technology. As the world's first client SSD to ship using NAND over 200 layers, the Micron 2550 NVMe SSD demonstrates superior speed, density and power savings enabled by our industry-leading NAND node. In Graphics, we expect bit growth to outpace the broader market in calendar 2023. Micron continues to drive the industry's fastest graphics memory with 24 gigabit per second, 16-gigabit GDDR6X shipping in high-volume production. In mobile, we now expect calendar 2022 smartphone unit volume to decline 10% year-over-year versus our high single-digit percentage decline projection last earnings call. We forecast calendar year 2023 smartphone unit volume to be flattish to slightly up year-over-year driven by improvements in China following the reopening of its economy. Micron continues to build on a strong product momentum in mobile. As of fiscal Q1, 1-alpha comprised nearly 90% of mobile DRAM base and 176-layer made up nearly all of our mobile NAND bit shipments. We are also well positioned for the LP5 transition and in FQ1, the majority of our mobile DRAM bit shipments were LP5. In fiscal Q1, our LP5X was validated for Qualcomm's latest platform and integrated into Snapdragon 8 Gen 2 reference designs. In addition, we shipped the industry's first 1-beta DRAM qualification samples with our 16-gigabit LP5. Last, I'll cover the auto and industrial end markets. Micron is well positioned as a leader in automotive and industrial markets, which offer strong long-term growth and relatively stable margins. In fiscal Q1, auto revenues grew approximately 30% year-over-year, just slightly below our quarterly record in fiscal Q4 2022. The automotive industry is showing early signs of supply chain improvement and auto unit production continues to increase. The macro environment does create some uncertainty for the auto market but we see robust growth in auto memory demand in fiscal 2023. This is driven by the volume ramp of advanced next-generation in-vehicle infotainment systems as well as the broader adoption of more advanced driver assistance systems. Over the next five years, we expect the bit growth CAGR for DRAM and NAND in autos to be at approximately twice the rate of the overall DRAM and NAND markets. The industrial market saw continued softening in Q1 as our distribution channel partners reduced their inventory levels and end demand weakens for some customers. The fundamentals of industrial IoT, AI, ML, 5G and Industry 4.0, all remain intact, and we expect volumes to improve in the second half of our fiscal year. In our fiscal first quarter, Micron continued to collaborate closely with customers and achieved advanced product sampling and design-in across automation, OEMs, ODMs and integrators with our latest generation of D5, LP5 and 3D NAND solutions. Now turning to our market outlook. We expect calendar 2022 industry bit demand growth in the low to mid-single-digit percentage range for both DRAM and NAND. For calendar 2023, we expect industry demand growth of approximately 10% in DRAM and around 20% in NAND. For both years, demand in DRAM and NAND is well below historical trends and future expectations of growth largely due to reductions in end demand in most markets, high inventories at customers, the impact of the macroeconomic environment and the regional factors in Europe and China. Near term, over the next few months, we expect gradually improving demand trends for memory as customer inventory levels improve further, new CPU platforms are launched and China demand starts to grow as the economy reopens. Longer term, we [Audio Gap] have declined from our expectation earlier this year primarily due to lowered growth expectations from PC and smartphone markets and some moderation in the strong long-term growth in the cloud. Turning to industry supply growth. Industry supply growth in calendar 2022 for DRAM and NAND is closer to their respective long-term demand CAGRs and well above the industry demand growth in calendar 2022. Given the current pricing and resulting industry margins, we expect a significant decline in industry capital investments as well as a reduction in utilization rates for the industry. We expect that DRAM and NAND industry supply growth in calendar year 2023 will be well below their long-term CAGR and also well below expected demand growth in 2023. Due to the significant supply/demand mismatch entering calendar 2023, we expect that profitability will remain challenged throughout 2023. The timing of the recovery in profitability will be driven by the rate and pace at which supply and demand are brought into balance and inventories are normalized across the supply chain. We believe that negative year-on-year calendar 2023 industry DRAM bit supply growth and flattish year-on-year calendar 2023, industry NAND bit supply growth would accelerate this recovery. Micron is taking a number of decisive actions in this environment to align supply with demand and to protect our balance sheet. First, we are reducing our CapEx investments to reduce bit supply growth in 2023 and 2024. Our fiscal 2023 CapEx is being lowered to a range between $7 billion to $7.5 billion from the earlier $8 billion target and the $12 billion level in fiscal year '22. This represents approximately a 40% reduction year-on-year and we expect fiscal 2023 WFE to be down more than 50% year-on-year. We are now significantly reducing our fiscal 2024 CapEx from earlier plans to align with the supply-demand environment. We expect fiscal 2024 WFE to fall from fiscal 2023 levels even as construction spending increases year-on-year. Second, we have reduced near-term bit supply through a sharp reduction in wafer starts. As we have previously announced, we reduced wafer starts for DRAM and NAND by approximately 20%. Through a combination of these actions, we expect our calendar 2023 production bit growth to be negative in DRAM and up only slightly in NAND. Given the manufacturing cycle times, the full impact of the wafer start reductions on supply will be realized starting in our fiscal Q3. Due to our reductions to our fiscal 2024 WFE CapEx, our bit supply levels in 2024 will be materially reduced from the prior trajectory. We continue to target a relatively flat share of industry bit supply. Third, in response to the decline in expected long-term CAGR for DRAM and NAND bit growth, we are slowing the cadence of our process technology node transitions. This change will help us align our long-term bit supply CAGR investments. Given our decision to slow the 1-beta DRAM production ramp, we expect that our 1-gamma introduction will now be in 2025. Similarly, our next NAND node beyond 232-layer will be delayed to align to the new demand outlook and required supply growth. We expect these changes to the technology node cadence to be an industry-wide phenomenon. With our industry-leading technology capability, we expect to remain very well positioned. Fourth, we are taking significant steps to reduce our costs and operating expenses. We project our spending to decrease through the year driven by reductions in external spending, productivity programs across the business, suspension of 2023 bonus company-wide, select product program reductions and lower discretionary spend. Executive salaries are also being cut for the remainder of fiscal 2023, and over the course of calendar 2023, we are reducing our headcount by approximately 10% through a combination of voluntary attrition and personnel reductions. We expect to exit fiscal 2023 with quarterly OpEx of around $850 million with additional savings and cost in our P&L. Although we have taken these aggressive steps, we are prepared to make further changes and remain flexible to exercise all levers to control our supply and manage our cost structure. Thanks, Sanjay. Fiscal Q1 revenue and EPS came within our guidance ranges despite worsening market conditions over the course of the quarter. Total fiscal Q1 revenue was approximately $4.1 billion, down 39% sequentially and down 47% year-over-year. Fiscal Q1 DRAM revenue was $2.8 billion, representing 69% of total revenue. DRAM revenue declined 41% sequentially with bit shipments decreasing in the mid-20% range and prices declining in the low 20% range. Fiscal Q1 NAND revenue was $1.1 billion, representing 27% of Micron's total revenue. NAND revenue declined 35% sequentially with bit shipments declining in the mid-teens percent range and prices declining in the low 20 percentage range. Now turning to revenue by business unit. Compute and networking business unit revenue was $1.7 billion, with weakness across client, data center, graphics and networking. Embedded business unit revenue was $1 billion, with automotive staying stronger than consumer and industrial markets. Storage business unit revenue was $680 million, while QLC mix increased to a new high. Mobile business unit revenue was $655 million, a low level, partly due to the timing of shipments between fiscal Q1 and fiscal Q2. We expect mobile revenue to grow through the rest of the fiscal year. The consolidated gross margin for fiscal Q1 was 22.9%, down approximately 17 percentage points sequentially, primarily due to lower pricing. Operating expenses in fiscal Q1 were down roughly $50 million sequentially to $101 billion. We are taking significant additional actions to reduce our operating expenses through the remainder of this fiscal year. We reported an operating loss of $65 million in fiscal Q1, resulting in an operating margin of negative 2%, down from operating margins of 25% in the prior quarter and 35% in the prior year. Fiscal Q1 adjusted EBITDA was $1.8 billion, resulting in an EBITDA margin of 45%, down 9 percentage points sequentially. Fiscal Q1 taxes were $1 million as a result of profit before tax being close to breakeven. Non-GAAP loss per share in fiscal Q1 was $0.04, down from earnings per share of $1.45 in fiscal Q4 2022 and $2.16 in the year ago quarter. Turning to cash flows and capital spending. We generated $943 million in cash from operations in fiscal Q1, representing approximately 23% of revenue. Capital expenditures were $2.5 billion during the quarter, and we see CapEx trending down from these levels through fiscal '23. Free cash flow was negative $1.5 billion in the quarter. Under a 10b5-1 plan in place during the quarter, we completed share repurchases of $425 million or 8.6 million shares at an average price of $49.57. Our ending fiscal Q1 inventory was $8.4 billion, and average DIO for the quarter was 214 days. The rapid decline in bit shipments in fiscal Q4 and fiscal Q1 has driven inventories well above our target levels, and our actions reflect our intent to work these down. We expect our DIO to peak in our fiscal Q2 and then gradually improve. We ended the quarter with $12.1 billion of total cash and investments and $14.6 billion of total liquidity. Given macroeconomic uncertainty and the market environment, we bolstered our liquidity in the quarter through $3.4 billion of added debt, bringing our total fiscal Q1 ending debt to $10.3 billion. With this additional debt and net of income on our deposits, we project net interest income of approximately $15 million in the fiscal second quarter. We project and intend to maintain ample liquidity while maintaining leverage consistent with our investment-grade rating. Now turning to our outlook for the fiscal second quarter. The near-term market environment remains challenging and negatively impacts our profitability outlook. For both DRAM and NAND, we expect bit shipments to be up in fiscal Q2, but revenue to be down. Included in the fiscal second quarter guide is an insurance recovery of approximately $120 million, most of which will be recognized as revenue. This insurance recovery is related to an operational disruption in 2017 and settlement occurred in fiscal Q2. Beyond fiscal Q2, we expect revenue and free cash flow to improve in our fiscal second half as we anticipate a continued recovery in demand. Related to announced wafer start reductions, we forecast approximately $460 million of headwinds to our cost of goods sold in fiscal '23, most of which we expect to incur in the second half. Excluding these underutilization effects, we expect fiscal 2023 cost per bit reduction to be healthy in DRAM but to be challenged in NAND, primarily due to inflation and energy costs unique to Singapore. As higher cost inventory sell-through, we expect these underutilization impacts to continue into fiscal 2024. In this environment and considering the outlook, we continue to aggressively manage costs. And as Sanjay mentioned, we see OpEx trending down from approximately $1 billion in fiscal Q1 to around $850 million by fiscal Q4. Below the operating line, we will have lower net interest income, as previously mentioned. While there is still a fixed level of tax, as we discussed last quarter, due to the geographic mix and level of income, we now see fiscal 2023 taxes coming in at less than $250 million. We are reducing our planned capital expenditures in fiscal 2023 to be in the range of $7 billion to $7.5 billion with the spending weighted towards the first half of the fiscal year. Fiscal 2023 CapEx includes an increased level of construction for long-term capacity planning. WFE CapEx will be down more than 50% year-over-year. We are also significantly reducing CapEx in fiscal 2024 compared to prior plans. Until market conditions and our cash flows improve, we will focus our capital return on dividends and have suspended our share repurchases for now. With all these factors in mind, our non-GAAP guidance for fiscal Q2 is as follows. We expect revenue to be $3.8 billion, plus or minus $200 million. Gross margin to be in the range of 8.5%, plus or minus 250 basis points; and operating expenses to be approximately $945 million, plus or minus $15 million. We expect tax expense of approximately $60 million. Based on a share count of approximately 1.09 billion shares, we expect EPS to be a loss of $0.62, plus or minus $0.10. As we work through this period of challenging market conditions, Micron has the benefit of best-in-class technology, a competitive product portfolio, strong operations, a solid balance sheet and most critically, a tenacious team. Beyond this downturn and over the long term, we are confident that memory and storage revenue growth will outpace the broader semiconductor industry. This is supported by the combination of strong secular trends, memory content growth and better supply-demand balance. Micron is focused on operating and investing in a responsible and disciplined manner to achieve profitable growth and free cash flow generation consistent with our long-term model. Thank you, Mark. In the last several months, we have seen a dramatic drop in demand. Micron has responded quickly to reduce our CapEx and supply output, and we are taking strong enterprise-wide actions to control our expenses. We have increased liquidity on our balance sheet and adjusted our operational plans. While the environment remains challenging, we currently expect second half fiscal 2023 revenue to improve from the first half. We are confident that the broad advantages enabled by data-centric technologies will create long-term growth for our industry and expect the total available market to reach approximately $300 billion by 2030. Sanjay, I had a question about the market outlook for DRAM. You have already said that your DRAM production will be down mid- to high singles year-over-year in calendar '23. And then you said in your remarks, you said that if the industry production was down, this would accelerate the recovery in profitability. But at this point, I guess, I have two questions. One, do you think the industry will be down in terms of production for DRAM? There's some concern about what your big core income competitor is going to do. So I'm just sort of curious, do you think that they are cutting such that the industry production in DRAM will be down just like yours is down year-over-year? So Tim, I would like to point out that what we said is that our DRAM supply growth would be slightly negative in fiscal year '23. So not mid- to single high single digits -- supply growth for Micron would be negative. That's because we have taken the actions. We are taking the actions in terms of supply -- wafer output reduction reducing supply through underutilization in the fab. And as you know, we have also CapEx reduction. We have pushed out our 1-beta DRAM production in the fab so that we can bring our supply closer to demand. So the industry is oversupplied, and we do believe that actions need to be taken as reflected in Micron's actions with respect to supply reduction. And of course, the rate and pace of the industry supply cuts would affect the recovery of the industry in terms of bringing supply and demand balance closer together. So look, I mean, we cannot specifically comment with respect to the -- our competitors. But what we can tell you is that if the industry supply is -- supply growth in calendar year '23 is negative, and for DRAM and flattish for NAND, it will accelerate the recovery in the industry. Thank you. One moment for our next question and that will come from the line of C.J. Muse with Evercore ISI. Your line is open. I guess the question is your -- you've -- in the last few years, really taking the leadership role both in DRAM and NAND. And so as you think about hitting the worst downturn in 13 years and taking the appropriate reductions in supply and cost. How can you, at the same time, make sure that you maintain your leadership? What are you doing on that front? Such that when we do go into the next upturn that you are in that lead position, lead role and can really take advantage of technology again. Thank you, C.J. Of course, Micron is in a strong technology position. We feel very good about our technology capabilities and our road map. Our -- if you look at our 1-alpha DRAM that compared to our prior 1-z node gave us a 40% bit efficiency gain per wafer. And now if you look at our 1-beta, industry, you would expect less, but what you see in our 1-beta node is a 35% improvement in terms of bit efficiency per wafer versus our 1-alpha node. And our 1-beta DRAM node is well designed for D5, DDR5 deployment as well with good performance and good power efficiency improvements over prior products. So it's really 1-beta is a very good node when you compare it to any other even EUV nodes that are out there in the industry. So it's an industry-leading node. We are well positioned with our 1-beta node. And of course, our 1-gamma node will be well positioned as well. And we are timing the production of these nodes to maximize the ROI in our R&D and manufacturing. And of course, to bring supply and demand in balance overall and keeping in mind the longer-term CAGR for DRAM growth and adjusting our technology cadence accordingly. So I think we are managing our technology node development and manufacturing plans our supply plans in a highly responsible fashion, and we'll be well positioned with our technology. And same thing on NAND side, our 232-NAND is in very good shape. Both 1-beta and 232-layer NAND in terms of cost, in terms of quality and in terms of, of course yields, we are well positioned with them and continuing to work with customers in qualifying those products. So not only just 1-beta and 232 layer, we feel good about our technology road map, capabilities and position with our plans for 1-gamma and the node beyond the 232-layer in NAND. And just to point out that Micron, I was recently talking to a leading customer and executive there, and the customer was facing Micron's as being the best in the industry. And same kind of accolades we get from customers on LP5, on GDDR6 on our QLC NAND. And of course, we are broadening our portfolio of products too. So not only with respect to technology, we are well positioned. I think we are well positioned with respect to our product momentum as well. Thank you. One moment for our next question, that will come from the line of Chris Caso with Credit Suisse. Your line is open. Question is on the pace of gross margins as you go through the year. And you spoke about revenue and free cash flow being better in the second half. Do you believe that's the case for gross margins as well? Do you think gross margins are bottoming here? And if you can comment about some of the impact of the unutilization charges and how they flow through the year and beyond Q2? Chris, this is Mark. I'll take that. A few comments on the profile. We did say that Q1 would be the bottom for bits, and we expect bits to be up in the second quarter and revenue down. So that points to continued challenges around the market conditions. We also expect 2Q to be peak on DIO, but 3Q will be the peak on inventory dollars. So the industry remains in an oversupply situation. But customers are depleting inventories, and we expect them to be in a better position by the second quarter of the calendar year. But profit is going to be challenged through the year, and that will challenge gross margins. Now the utilization effects specifically maybe I'll talk just costs generally first. In FY '22, and historically, Micron has strived and achieved cost downs in line or better than the industry, node advancements, manufacturing, productivity and other factors. But fiscal year '23 is going to be challenging in the near term as these utilization effects and low volumes weigh on the cost per unit and weigh on margins. And there are three principal drivers that will help explain that. One is maybe an overlooked factor is just simply the effects of routine period costs that run through the business on a normal basis, scrap preproduction volumes, pre-qual volumes, freight, royalties, these sort of things. And when you add this sharp decline in volumes and revenue, those period cost effects are going to impact margins. And so we're seeing that. The second driver is the much lower volumes are creating underload issues in the back end. And of course, that creates higher cost inventories that some is period cost, but most of it still hangs up in inventory and creates higher inventory costs. And that also is a significant factor early in the year, especially weighing on our costs. And then third, most visible has been our announcements to lower utilization on the front end. And that is a significant cost -- and we have -- most of those costs are going to be in inventories also versus period cost. And we said that $460 million of -- which is over -- just over half of the total fixed costs that will need to be applied will impact FY '23. Now the rest of those costs will flow through in FY '24. Now if our volumes are better than expected, those higher cost inventories will be pulled through earlier, if volumes are less than expected than more of those costs will flow through in FY '24. But right now, we're seeing about $460 million in FY '23. So in summary, we expect cost per bit to be up modestly in Q1. Again, that's mostly just the period cost effects that are normal and then some back-end effects and that's related to just low volumes. That's going to be a bit more cost in the second quarter. Again, and this is more back-end effects as those inventories clear. And then the third quarter, we're going to have the back-end effects of underutilization and the front-end effects as that inventory starts to clear. But then in the third quarter and then especially in the fourth, we have offsets. In fact, we get -- we resume cost down in the fourth quarter, as volumes have been -- as volumes pick up and absorption occurs. It's not a permanent condition. This is just a function of volumes that are unseen drops in volumes, and you see -- and actually the steps that we're actively taking to reduce supply. And I think it's worth noting that cost is certainly important. It's a great focus. We're managing the details. But the largest impact to the profitability and financial outlook for us is the supply-demand balance -- and the rate and pace of this improvement is going to be a function of aligning supply with demand, and we're taking decisive actions on CapEx and utilization to address it. Thank you. One moment for our next question, that will come from the line of Tom O'Malley with Barclays. Your line is open. My question is really on the demand side. I think that you did a good job of calling out what you saw from an end market perspective into next year. But I just wanted to ask specifically on the data center. You've called out inventory in the past, but versus where you guys talked about the data center last quarter, do you think that inventory at customers was worse than you initially thought? Or do you think that you're seeing a weakening in terms of data center and demand? So inventories with data center customers including cloud is higher than what we thought. So that inventory adjustment has begun, and it has some wood to chop in that area. And of course, the end demand for cloud operations that are driven by consumer-related activities given the overall consumer environment and the macro trends, some portions of cloud and demand may be weaker as a result of that as well. And also in the macro environment that exists today, there is -- given the higher interest rates and other macro trends, companies do become somewhat cautious in terms of managing their overall expenses and any long-term agreements, et cetera. So that can impact some of the current environment for end demand in cloud. But what I would like to point out is that digitization trends ultimately do remain positive. Cloud definitely helps drive that efficiency that businesses seek in an environment like this. We do absolutely expect that once we get past the current macroeconomic environment and macroeconomic weakening, longer-term trends for cloud will remain strong. In terms of the current environment, yes, inventory adjustments and some impact of cloud and demand weakening as well. that's impacting our overall data center outlook. Thank you. One moment for our next question, that will come from the line of Krish Sankar with Cowen. Please go ahead. I just have a quick question for Mark. Mark, you said inventory base to peak in the second quarter and inventory dollars in F3Q. What kind of inventory days should we expect in F3Q? And what is the risk of inventory write-down? Kind of wondering what is your inventory write-down methodology? Sure. I think I got the question. So the -- as mentioned, the DIO peak, we expect to be in 2Q, the dollars in 3Q. And from both those peaks, we expect it to gradually improve, which is consistent with profiles that we've said before, though the conditions have worsened and volumes are a bit lower. Yes, we do expect customers to be in better shape by the second quarter of calendar year, and that's encouraging. And then you've seen the steps we've taken on supply to get inventories down. But I did cover this recently at a conference, bears repeating. Inventory is -- it's obviously a risk where we carefully and thoroughly monitor and with the lower utilization we have and the higher costs associated with that per unit. And then the weak market conditions we have, the margin of safety we have has decreased from where it was. We did a thorough quarter-end analysis as we always do. And of course, that includes the outlook. And in that, we determined that there are no write-downs to the lower of cost or net realizable value warranted. We perform extensive reviews of project -- projected pricing. We analyze customer trends, and there are a number of other factors. If our estimates did change, further, there could be risk of write-off in future quarters but none this in the November quarter. I do refer you to our inventory policy that's disclosed in our 10-K. We have a long-standing policy of evaluating inventory as a single pool, and we evaluate this policy regularly, and we apply consistently. Thank you. One moment for our next question, that will come from the line of Mehdi Hosseini with Susquehanna. Please go ahead. Yes. Sanjay, I want to go back to your, the color you provided on the demand trend by end customer or by end application. You've highlighted that the PC unit are expected to be down 5% to 10%. If I just take the current build rate in December and apply a seasonal decline in Q1, it suggests to me that PCs as the end market application would bottom by March, April time frame, let's say, post-Chinese New Year. Could that be a catalyzed -- could that actually catalyze a more improved visibility with pricing for DRAM and NAND? And I asked you because it was the PC end market that rolled over. And I'm just trying to better understand whether PCM market could help stabilize certain part of the DRAM and NAND segments? Well, of course, the markets where DRAM and NAND are well diversified. PC is one of the markets. And we already talked about the decline in PC units. Actually, in calendar year '22, high teens decline in PC units. This is the sharpest decline in the history of the PCs, and smartphones, another area where unit sales of smartphones globally down 10% as well. And that, too, historically, in terms of a decline is high. So these are, of course, impacting the end consumer demand and then inventory adjustments on top of it impacting the demand. And of course, as I spoke about earlier, that inventory adjustments are happening in other parts of the market as well. I think with respect to our outlook for next year in terms of demand, we expect about 10% demand growth for DRAM in calendar year '23. And when you look at mid-single digits, low- to mid-single-digit demand growth in '22 and approximately 10% in '23 that over a two-year time period is really significantly lower growth rate compared to the years in the past, the CAGRs that have been prevalent over time. So, I think what's important here is that the supply has to be reduced. The biggest factor here really would be the supply reduction. Of course, once inventory adjustments, we are able to get past and the macroeconomic environment improves. The long-term trends for demand, driven by all the factors we have spoken about before, AI, 5G, industrial IoT, autonomous, all of those long-term factors will drive that demand along the lines of the CAGR that we have discussed today. But in the near term, the biggest factor to really address the demand supply is a reduction in supply in the industry. And of course, the rate and pace of the financial performance improvement will very much depend on how fast supply comes into balance. And as we have discussed, we have taken our actions in terms of CapEx reduction, in terms of underutilization, in terms of adjusting the technology node cadence. And we do believe that with the supply actions, the industry environment will improve. I do see that in fiscal year '24, the revenue, the profit and the free cash flow profile would be much better than '23. And of course, again, will be a function of how quickly the supplier just to demand. Thank you. One moment for our next question, that will come from the line of Toshiya Hari with Goldman Sachs. Your line is open. I had one quick clarification and then a question, clarification for Mark. You talked about the $460 million of headwind related to the underutilization of your fabs. When you throw out that estimate, what assumptions are you making for utilization rates for the next couple of quarters? You obviously talked about the 20% cut as of today. But are you assuming you stay at that 20% rate for Feb, May and perhaps August? Or are you assuming production rates or utilization rates kind of step up as you progress through the remainder of the fiscal year. And then the question is on the demand side. Sanjay, in your prepared remarks, you talked about customer inventory normalization and new server CPU platforms in China reopening as some of the key drivers for bit growth over the next couple of months or few months. How much visibility do you have into those three dynamics? You talked a little bit about inventory, but we're hearing customer inventory in some cases, might be increasing given some of the deals, not just you specifically, but the industry is striking, the server platforms could be a little bit more skewed to the second half of calendar '23 and China reopening still seems pretty gray. So curious what kind of visibility you have there. Yes, Toshi, I'll just briefly touch on the first one. We're expecting these elevated underutilization levels through most of -- well, through fiscal year '23. And beyond that, we're just going to always be evaluating the market conditions and then we'll update you and the market accordingly. And on your questions regarding customer inventory, what I would like to point out is that customer inventory in aggregate -- and that means in terms of volume in bits, we believe it has come down, although still at high levels. And you can see that in Q2, we are guiding to increase bit shipments. And just keep in mind that where demand used to be in terms of or the industry shipments used to be a few quarters ago versus now, they have come down substantially. And even though there may be some end market weakening in demand that points to that some of the inventory is being consumed by the customers. Basically, some of the inventory that the customers are holding is being consumed by them to address their end demand. So basically, the ship out by customers is greater than the ship in, in terms of purchases by customers from suppliers. And this trend of inventory improvement, gradual inventory improvement we believe will continue. And by mid calendar '23, we are projecting even though we don't have perfect visibility, but based on all of our discussions with our customers, we are projecting that inventory at customers will be in relatively healthier position by that time. And that's where we say that our second half of fiscal year revenue will be greater than first half, and we would expect continued improvements beyond the second half as well. And regarding the question on China, of course, China reopening has to be monitored closely, and it may be choppy. In terms of the near term, we are assuming that China is reopening for the second half of the calendar year, will result in benefit in terms of increased demand coming from the China markets. And of course, China reopening is not just issue to be monitored in terms of Chinese customer demand, but also any impact on global electronics system supply chains. And of course, we have assembly and test operations in China as well, and we are continuing to monitor those as well with respect to some of the recent COVID cases there. So, I think China, COVID cases and reopening will have to be -- continued to be closely monitored. So our products are well positioned, and we expect that these will be ramping during the course of '23 and, of course, continue to ramp in '24 as well. And these are the ones that will drive a greater D5 attach with the servers. And as we said, we expect that for servers, D5 in 30s percentage range in terms of deployment by end of calendar '23 and somewhere around 50% by mid-calendar. So our products are well positioned, and we are looking forward to deployment of those new CPU platforms and that will drive healthier dynamic with respect to D5 deployment. These new processors, they work with more cores. They increase the attach rate for memory because they are bandwidth hungry and that just points to greater adoption of DRAM, particularly D5 memory with those processors. So of course, it has been pushed out. I mean compared to the plans last year or over the last few months, some of those new processor deployments have been pushed out, but we look forward to them getting broadly adopted as the year progresses in '23. Thank you. And we do have time for one final question. And that will come from the line of Aaron Rakers with Wells Fargo. Your line is open. I'll make just a quick question. I'm just curious, as you guys kind of thought about the guidance for this current quarter and given the pace of change that we saw in the pricing environment through the course of this last quarter. I guess, when you roll up your assumptions for DRAM and NAND, is it as simple to think that you guys are assuming kind of a similar pricing environment our pace of pricing declined this quarter as we saw last quarter? Or are you kind of factoring in any kind of acceleration of price degradation? So look, we don't comment specifically on pricing, but I can certainly tell you that both DRAM and NAND are experiencing challenging environment. And again, it is about oversupply in the market and decisive actions that we have highlighted today are the kind of actions that are important to make progress towards bringing supply and demand into balance.
EarningCall_1366	Good day, and welcome to the Allkem Limited December Quarterly 2022 Results Briefing. [Operator Instructions]. Finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Martin Perez de Solay, Managing Director and Chief Executive Officer, to begin the conference. Martin, over to you. Thank you, Paulie. Welcome, everybody, and thank you for joining us for Allkem Limited December 2022 quarterly results briefing. As usual, I will be providing an update on our business; and Christian Barbier, Chief Sales and Marketing Officer, will be providing us with a market update. Also joining us for the Q&A today is James Connolly, our Chief Project Development Officer, leading the development of our significant growth project pipeline; and we also have Liam Franklyn from Mt Cattlin; and Christian Cortes, our Deputy CFO. Firstly, the lithium market remains robust, and we continue to navigate through global challenges and remain fully committed to deliver an execution of our growth pipeline. At our operations, we continue to produce consistent quality and product with Olaroz achieving record production of 4,253 tonnes during the quarter following excellent operational performance. At our development and expansion projects, we have progressed construction at Sal de Vida, permitting at the James Bay project with JAC approval of the ESIA, resource extension drilling at Mt Cattlin and commissioning activities at Naraha with first production achieved during the quarter. At all our Stage 2, we have successfully reached over 96% completion and we are now working to install some key final components that have been delayed late last year. We have commenced pre-commissioning activities, and we'll move to full commissioning later in the March quarter with first production in the June quarter of 2023. We continue to be in an extremely strong financial position. This quarter, we generated Group revenue of US$265 million and achieved significant Group cash operating margins of 82%. Group net cash at the end of the quarter was US552 million and our teams remain focused on advancing the development of our project pipeline as we are clearly set out to triple production by 2026. During the quarter, we have also completed a strategic deal to acquire the Maria Victoria tenement located 10 kilometers north of our Olaroz facility, while divesting our Borax operation. The acquisition complements our extensive lithium brand holdings in the region and will allow a more efficient development of the Olaroz salar. I also want to advise shareholders that we are aware the government of Argentina has communicated its intention of removing the export tax benefits that currently apply to lithium chemical production. While the timing of implementing such a change is -- on its full effect is not yet known, it is anticipated that it will result in the loss of incentives in the average of 1.5% to 4% of revenue. We will continue to monitor this and aid [ph] with the government to minimize the impact. Starting with sustainability, the core pillars of our business, we continue to be recognized for our leading practices and enable to increase our transparency and performance across our operations. During the quarter, we were again included in the Dow Jones Sustainability Indices based on our strong performance in recent ESG assessments. Allkem recorded a 12-month moving average TRIFR of 1.9 at the end of the December quarter and a 12-month moving average Lost Time Injury Frequency Rate of 0.3, representing strong performance across both metrics. Unfortunately, we did incur six recordable injuries during the quarter: four at Mt Cattlin, one at Olaroz and one in the divested Borax business. Investigations have been carried out and effective corrective actions have now been implemented. We continue to maintain regular and positive engagement within all the communities we work as our development and construction activities advance. Of particular note was the finalization of an updated easements and participation agreement with the Olaroz Chico community, which now incorporates production from Olaroz 2. At the end, the receipt of all final approvals for the expansion of the Sal de Vida project to 15,000 tonnes per annum. Moving on to our operations, Olaroz production at the quarter reached a record of 4,253 tonnes of lithium carbonate, 66% of which was technical grade in preparation for providing feedstock for the Naraha plant. Production was up 17% from the prior corresponding period due to good brand performance from outstanding mechanical reliability and asset utilization. Lithium carbonate sales were 3,131 tonnes generating record revenue of US$151 million with a gross cash margin of 90%. Excluding shipments to Naraha, third-party sales were completed at US$53,013 per tonne FOB basis, up 23% quarter-on-quarter. With regard to the expansion, by the end of December, Olaroz Stage 2 expansion have reached overall physical progress of approximately 96% completion. Olaroz operation pumps were completed and commissioned. Lime plant 3 and 4 are now fully commissioned. Soda ash facilities are in the final stages of commissioning. The carbonation plant has reached 86% completion. Annual activities in the carbonation plant are now progressing to plan. Pre-commissioning activities are underway with full commissioning activities starting later in the March quarter and progressing through the June quarter for planned startup of production. As expected, our Mt Cattlin production during the December quarter continued to be impacted by previously noted delays in exposing the main ore body, coupled with temporary fine grain mineralization that negatively impacted processing. Mitigating actions have been successfully implemented, including mobilizing a larger mining fleet with additional mining contractor, which saw mining volumes increased by 24% on the September quarter to 2.6 million BCM. During the quarter, 16,404 dry metric tons of spodumene concentrate was produced at a 5.3% lithium oxide grade. Production was limited by ore availability and grade related to patchy mineralization intersected at the top margin of the main ore lens. Mining is now progressing beyond this zone and the ore grade is forecasted to increase in the March and June quarters, which will be a key driver of higher production for the second half of the year. We shipped 15,702 dry metric tonnes and generated revenue of US$83 million, with a gross cash margin of 72% based on cost of production and average pricing of US$5,284 per dry metric tonne CIF for spodumene concentrate up 5.3%. Additional US$32 million of revenue was generated from the sales of 53,715 DMTs of low-grade spodumene concentrate. Allkem commenced a three-phase resource extension program in mid April 2022 with the aim of achieving a multiyear mine life extension. Phase 1 and 2 of drilling was completed during the quarter and results to date are generally in-line with expectations and indicate resource and reserve extension potential. An open pit cut-back feasibility study, including a revised mineral resource and reserve estimate, scheduling, mine planning and detailed pit design is expected in the end of the March quarter. Third phase of drilling commenced this month and it is focused on the area to the South West of the current mine to test additional targets and prospects. Moving on to our development assets, that will underpin significant growth at Allkem at Naraha, first production of lithium hydroxide was successfully achieved in late October utilizing technical grade lithium carbonate from Olaroz. The technology has been proven and utilization rates of 85% were achieved. Product quality exceeded expectations enabling approximately 200 tonnes of technical grade lithium hydroxide to be sold to third-party customers. The next production run commenced earlier this month with the next key milestone being steady state operations. At Sal de Vida, during the month of December, the government of Catamarca issued the environmental impact approval to construct the 3rd string of ponds fully enabling the 15,000 tonnes per annum production capacity. Additionally, a resolution was issued permitting the construction of the solar farm that will provide the Sal de Vida project with a 30% renewable energy generated on site. Water easements were also authorizing -- were also issued authorizing back-up sources of industrial water for the project. All permits for the Sal de Vida project are now in place. Construction of the first two strings of ponds reached 82% completion with the first six ponds completed and filled with brine. The main brine pipeline is complete and 7 out of 9 production wells have been commissioned. Camp expansion activities and procurement for long lead items continue. Detailed engineering on the process plant has advanced and mobilization of site workshops and concrete plant is ongoing. The EPC contract for the process plant was awarded during the quarter. Data received during the tender and award process, together with learnings from COVID and a Board review is being incorporated into the project schedule with first production estimated in mid-2024. At James Bay, we are advancing the project on a number of fronts and in anticipation for construction commencement as soon as permits are issued. Detailed engineering continues alongside procurement activities including ordering of long lead items and equipment packages for temporary camps, primary sub-stations and process equipment. Engineering was 54% complete by the end of the quarter with engineering of the process plant package at 75%. Hydro-Quebec early works are complete and construction crew mobilized to install the powerline to site. Material progress has been achieved in the permitting of James Bay with recent approval by the Joint Assessment Committee, the Federal government of the ESIA. Comex approval, Quebec government and CREE Nation of the ESIA, agreement of the IBA and procedural construction permitting remain in progress. Once timing for commencement of construction is known, the Company will update guidance for first production. Positive engagement with community stakeholders continues including additional community consultations, meetings with previous stakeholders and discussions with the Eastmain community economic development branch to agree the local economic benefits. Work is ongoing with engineering contractors to evaluate opportunities to accelerate the construction schedule, including the use of prefabricated modules. At 19,255 resource extension drilling program commenced in late November to test open mineralization around the current ore body. Drilling progress was 24% at the end of the quarter and a Mineral Resource update is targeted by the end of the first half of calendar year '23. Thank you, Martin. 2022 was a pivotal year for the lithium industry with record demand and pricing seen far beyond everyone's expectations. The main driver of this growth electric vehicles continue this breakthrough into the mainstream. We've global full year sales estimated to be approximately 10.5 million units, representing year-over-year growth of 56% or plus 3.7 million units. To put this in context, the EV market grew more in the single year last year than the entire market in 2020, 2 years prior. This growth is expected to continue into 2023 despite some concerns about the lingering impact of COVID-19 and the potential for global recession. Consensus EV unit sales growth in 2023 is forecasted to be similar to 2022 at around 3.6 million to 3.7 million units with an increasing proportion of this expected to come from Europe and North America. This is an encouraging sign as both EV and the [indiscernible] demand growth becomes more diversified and widespread and [indiscernible] government support for EV and the EV battery supply chain continues to be announced with growing calls from other regions to follow the U.S lead in announcing significant programs and incentives in order to remain competitive in a global market. Despite some recent easing of domestic Chinese lithium spot prices from the record highs, largely due to seasonal demand, destocking and an earlier Lunar New Year, we expect demand to rebound and resume its historic annual growth trajectory following these periods. Our customers continue to request additional volumes and accelerated shipment schedules with pricing outcomes for our long-term contracts continuing to trend upwards. As a whole, we remain confident that 2023 will be another strong year for Allkem and the lithium markets. Hi, good morning, all. Thanks for the opportunity. Look, firstly, congratulations, obviously, a very strong production result at Olaroz. I just had some questions around the cost base, if I can, please. So we saw production rise about 30% from the previous quarter. Battery grade production is also lower at about 34%, yet costs are up about 3%. So I just wanted to get a sense of where the actual underlying costs are sitting in terms of fixed and variable components at the moment. And then second part of that cost question is around the revenue credit that you mentioned. Am I correct in understanding that that revenue credit currently sits within your cost base? And if it is cancelled by the government, then your cost base will rise by an equivalent amount. Thank you, Rahul. I will leverage on Christian. Thank you, Rahul, and I will leverage on Christian Cortes to answer your detailed questions. Bear in mind that with inflation in Argentina being very high and the valuation rate, we do have volatility from quarter-to-quarter in terms of the impact of peso-based costs on our numbers. So 3% valuations are kind of reasonable nonetheless Christian can give you a lot more detail on those questions. Thanks, Martin. Hi, Rahul. Rahul, I guess the key explanation is around timing. We report a carbonate performance-based on what we sell. So you would have seen that we had a lower volume of sales in the quarter in comparison will be produced during the quarter. What you're expecting to see, I assume, is a reduction, it's likely that you'll see that reduction when we sell the product that we produced in this quarter in the following quarter. So it's purely coming down to timing. There is also a slight product mix that it's pushing a little bit higher the cost of what we sold in this quarter, and that's predominantly on more volume of battery grade product being sold in comparison to what we sold in the previous quarter. So it's largely coming down to timing. Now, your second question with regards to the incentive that we had benefit over the time at Olaroz, yes, the percentage has fluctuated over time and gradually it's been reduced to the point where they're now suggesting that will be phased out. We're yet to understand the cut-back or the elimination of that benefits and its preliminary regulation and still yet to be enacted. Nonetheless, as we disclose now, that's going to be somewhere between 1.5% and 4% equivalent to the unit sales price. And since it's been a benefit associated with investing in both mining as well as in the region, we've taken the view that it's an offset to the operating costs. Once we understand the details, we'll be able to talk to exactly how does that flow through profit and loss in the future. Just a quick follow-up, Christian. In terms of the current credit that you're getting, are you able to put a number around it? I mean, I personally use a 3% credit in the cost base. Is that in the ballpark? Or like you said it's been reducing over time? Or is it sitting at close to 1.5% that you're currently getting, assuming that all of it is up for elimination? Okay. So today, we are getting 4%. It's a combined benefit, again, between just generally exploring and investing in the region. So hence while we can't give you a specific percentage today, but if everything was to be removed, it would be 4%. That's right. Yes. The Federal and the Puna credit. And I mean, it's effectively removing 4% of your margin from your profit before tax. Gotcha. Perfect. Okay. And quickly my second question is on James Bay. Obviously, the ESIA is awaited there. I just wanted to understand from the time since you did the initial study, have - has there been a change in terms of the requirements around environmental controls, et cetera? That was a feasibility level study that you did in 2021. Have you seen a change on the ground? What kind of a scope change can we expect for this to be approved? Thanks. We haven't seen a significant change in the approval that was issued by JAC, some updated of some studies that want to get the baseline, but no significant changes in the scope from what we submitted on discussing 2021 when we started the submission of information. It is just that it takes tremendous bureaucracy in Canada to get this approvals through and we've been through, I think, we covered this in previous call doesn't make sense. But we've been impacted by an engineer strike that delayed all of the analysis and process by several postponements on Comex meetings and else, but fortunately, it's all coming to an end. We're very close to completing this cumbersome and bureaucratic process that they have, and I think the JAC approval is a very good news, meaning that the federal government is really committed to support the project. Now we're in the final stages of the approval at the provincial level, this Comex, it's a joint provincial and Cree Nation body that issues final approval and after that we secure the permits, which are issued at the provincial level. Permits have already been prepared and pre-submitted nonetheless until the final approval is issued. Focus on the permits will not be guaranteed. Okay. And just a quick follow-up. In terms of the hydropower availability, is a potential conversion facility at site or close to site also something that you're considering? We are looking at several options for downstream facilities, maximizing the availability of renewable energy and minimizing the carbon footprint on the transportation of the product. And that is -- James is analyzing a variety of options as he's putting together the pre-feasibility study. James, can you comment a bit on this in more detail? Yes. Rahul, good question. I don't think James Bay the site itself lends itself well to a downstream conversion facility at this time. But we are conducting citing studies around multiple sites in North America to evaluate what is best, and we have to be mindful of what we need there, good power, good access to LNG or natural gas and good logistics. So those citings will contemplate that, but we're not looking to disturb James Bay site at this time. Rahul -- yes, no, sorry, I was just to complement that the head of the power line that's being conducted to site enables us to be between 45% to 50% of total energy consumption from the site. So this line wouldn't be enough for our commercial facilities, not yet enough for the full consumption of the site. Thanks. Good morning, Martin and everyone was pushing is on Sal de Vida. You've put through or advise us all of a likely 6 months delay on your prior guidance to first production. You mentioned COVID and some learnings that is made you make that revision. But what have you learned specifically that has led to that online revision? Is there anything specific to the assets, specific to the design or the project or the build to the permitting that forced you to push that timeline at 6 months? Good morning, Reg and thank you for your question, I have to tell you that there are no specifics engineering is processing engineering is complete. And James can comment to you on the detail progress of the engineering of the project. But the learning is that the whole supply chain of major equipment was significantly disrupted after COVID. We faced a lot of transportation issues, and we're just impacted by late arrival of some equipment in Olaroz not long ago. So we are factoring in all of that. And we have a thorough discussion with the Board trying to you -- to have clear expectations set aligned with what we can deliver and ensure that we meet what we are committed to. So factoring in all the things inside to be able to get this all done by the end of this year, the team will work with that objective but [indiscernible] to be able to complete everything when we factor in recent experiences. Understood, understood. Shooting over to James Bay, very interested to see how the exploration drilling goes. There your resources, 40 million tonnes, it's open in pretty much every direction. What effect on the James Bay project design and or production scale might we expect if you are able to deliver a dramatic increase in that resource at James Bay? Could you increase production easily and with relatively little capital above the 330,000 tonnes in your feasibility study? A couple of things. Additional production will have to be approved in terms of ESIA [indiscernible], so the project is as of today short-term. It's frozen at its capacity and that's what we will do, but provides tremendous advantage to increase production capacity, because we will leverage on fixed costs and existing base facilities. So it's a loss for that, that we can do not only in terms of life extension, but also production capacity increase, provided that we go through all the procedural approvals that we have to so. At this point in time don't want to factor in any additional production. We want to get everything approved as we have and get the project up and running and incorporate decreased production once get everything done, focus now it's been full time on accelerating the rate of the project and an increase in the resource. Okay. No, that's excellent. Lastly, shooting down to Argentina, you guys are undertaking studies on the potential for an upside purification facility and let's just call it DLA to make things simple on site. Are you able to say how things are progressing with those? And can we still expect results of that study work as the previous guidance? Yes, good question. We're making good progress on the studies. Obviously, we'll speak about the expansions initially at Olaroz. We are a conventional evaporation shop, per se. Great experience on that with the carbonation process. We do at the moment have several studies that are looking at maximizing that capacity. We've made really good progress with those, our process development group has. And we're in the final phases of technology selection on that site, and looking forward to take one or two of those technologies to piloting. At the same time, our studies around the geohydrology and brine management, [indiscernible] brine as well as brine extraction are advancing well, and we're looking to issue these results as soon as they're ready as our previous guidance. So we're nothing down and getting the work done. And as soon as we know, you'll know. Reg, just to complete your question I think the potential expansion agenda is huge in terms of what we have seen and the potential extension for the ore buddy. I'm not focusing on speeding it up immediately, because the focus now with simple agenda project on stream, but the potential up there is quite significant. Yes, so it's my turn, I guess that's where I was going at. I presume, given the time it's taken to permit the project as it's currently designed, would -- not necessarily. Actually, he's a [indiscernible] quick -- very, very quick follow-up question. Once the project is up and running would [indiscernible] or supplementary approval to add incremental capacity be faster than a greenfield approval scenario, like what you're facing at the minute? Definitely. That's why I want to get it up and running and then expand it. But that's your tactics more than a strategy to strategies to increase production capacity on the potential at James Bay have. Good day, Martin and team. Just wanting to get a bit of an update on the Olaroz resource review. Obviously got Maria Victoria to come in, but I guess the resources are already pretty large there at Olaroz. Just wanting to get an update on what modifying factors you might be looking at there. How we think about subsequent stages. Maybe even beyond Stage 3, how you think the ultimate size and scale of Olaroz could shape up? It is a good question. Yes, the potential of your resource is huge. This study will come with two main impacts. One is the addition of Maya Victoria, as you mentioned, the second one is a bit more of definition based on the drilling that have happened for Stage 2. And some day I'm [indiscernible] that we've also completed to be more definition to the reserves. So you should see not only improving total reserves, but also in categories. It is important to highlight the potential of the Olaroz space and, as you say, difficult to tell you today what would be the maximum capacity. It's a 100 year base resource that that we're talking there, and we have an opportunity to continue to grow. And if we maintain our development strategy in good relationships with local authorities, local communities, is a significant focus on ESG as we currently do. I wouldn't say it's an endless resource because there's not such a thing that's an endless resource, but it's several stages of development and lots and lots of years of production capacity at [indiscernible]. The quality of the brine And just a quick follow-up there, Martin. What is the limiting factor is at -- spice for evaporation ponds? Is that kind of what we cap it out at this point prior to any DLS technology At this point it is -- there's not enough a state for operation factor for all of the production capacity of the basin. So that's why we are looking into habit technologies that will enable us to maximize the productivity from not only from the pump brine minimizing impact on non-[indiscernible] but also maximizing the potential of operation for [indiscernible]. So that is -- those are the studies that I think somebody else was referring to before that James is conducting for all levels. Yes, sure. Thanks. Thanks for that clarification. And just to Mt Cattlin, obviously, still seeing a few issues with fine grained material and few differences in the broader geology there. I know you've done some work on it, or distribution and the fine grained mineral size on the pegmatite boundaries as though you'd kind of reviewed the drilling and were mainly through this. I was just wondering if any more work has been done on that, how you're thinking about the mine plan over the next couple of months where you're expecting to hit more of this fine grained material. And I guess just on top of that, the broader resource update for the open pit and study how will that sequencing with potential underground there and other expansions at [indiscernible]? Yes, but listen, a lot of work is being done. I was on Monday at site with Liam and the team and tattling on person [indiscernible] reviewing the -- how the exploration programs going. And I let Liam comment on what he's doing and how he sees it, but a lot of work is being put behind this asset. Liam? Yes, absolutely, Martin. So in terms of the first query around the mineralization, we're certainly into a more favorable part of the ore body now as expected, and that's already demonstrated in the performance out the back end of the plant. So we're feeling very positive about the position we're out in the mining sequence now. Cattlin was always going to be a game of two halves this financial year. So certainly exposing that first lens of the ore body and some of the challenges in the opening [indiscernible] we've experienced, and now we're going to, I guess, a better part of the ore body. And we will be for the next foreseeable future, certainly for the remainder of the financial year. In terms of the MRA, the drilling programs completed. And really, it's just analyzing the results and looking to release that this quarter. That then feeds into the information required for an appropriate mining study, which will then lead to that, that next phase of growth, or loss of mine extension to Mt Cattlin, which were just going through the motions of putting that through the phases now. There's always potential for there to be a natural tipping point to underground, and we're putting it through the right level of study now unlikely to be in this next stage of mining, but that remains to be seen. Great. Thanks for that. And might just sneak one more and just following up on the James Bay construction schedule. I know you said could be expedited with prefab modules. Is -- we're still seeing tightness in supply chains for the kind of long lead items or do you think that really could be brought forward maybe even ordered relatively soon and speed things up quite substantially? We are already working on the long lead items and we replaced all the -- for some of these equipment engines they particularly large crushing and that stuff that took us longer. We are progressing with the installation of the power line from Hydro Quebec and everything that could be done before hitting the ground. It's being done analyzing of using precast concrete structures is also being incorporated into the engineering in order to minimize the impact of winter period. It is very difficult to give an exact timing because it depends on whether you initiate operations in winter or whether you initiate operations in summer, you would do -- you would use a different strategy to maximize in order to minimize the timing of a project. So all of those things are being incorporated. And we hope we're in the final stages of development, getting permitting. And once we get all that we know exactly what, what's the best alternative to speed up the delivery of the project. Hi, good morning, Martin and team. Perhaps a question for Liam on [indiscernible]. Can you give us an indication of the grades that you've been milling at, please? I guess last quarter, you said you expected to mill at a 900,000 tonne per annum run rate, the current [indiscernible], so just working through the math, I guess for the guidance that you've retained, please. Sure. I think the number you're referring to might be BCM as opposed to run rate through the plant. The mining volumes were very favorable for the quarter. So record BCM throughout the quarter with at least one month over the 900,000 mark to get that 2.6 million for the quarter that was really favorable. In terms of the grades, we've got a range of grades that have been in the lowering leading into the plant this quarter. And that's certainly looking more favorable in line with traditional norms going into the next half. Okay. No more granularity there? I mean, I guess you just have to have two cracking coming quarters to hit back [indiscernible]? That's right. And look, everything we're seeing with our great control program is indicating that we should see the half that we expect to see. We've certainly seen it in the past. However, we continue to get more definition with that grade control drilling going forward. Okay, cool, because I think I'm on prior calls, you might have given us great guidance of 0.93, 0.94. Is that still there? Okay. Okay, cool. I work with that. And then secondly just moving to Olaroz through, a good production number. You mentioned some positive factors contributing to that earlier mostly. And should we expect that to continue into the coming quarter? Or was there a lot of positive environmental or weather factors driving that evaporation last quarter? And then if I can just tack another one here the difference in production and sales at Olaroz? Is that just timing given you produced a lot in December and with the holidays? So should we expect a similar lag going forward? I guess I'm just trying to work out if sales will be more mix quarter and having normalized. Helping with the production, I will let Christian answer the -- Christian Barbier give you an update on the sale. On the production, clearly this quarter is from a climatic perspective is a very good quarter because we enjoy high winds and good temperatures. As you know we are going through spring and the high radiation because it's a low cloudy in a quarter. So typically there's a significant improvement in brine concentration due to climatic factors, that we do have prime volatility through the year and that impacts positively on the past quarter. Nonetheless, the performance was quite significant compared to other quarters and what I want to focus on the things that enable that increased performance which is basically plant availability and plant recovery and throughput has improved significantly. The team has proven its ability to continue to improve from previous quarters and you see at Olaroz you have seen a significant trend of improvement in production and quality over the last 3 years continuously, which is something that will stay in there. And it's not a function of the climate. So it's a basket of both. Yes, it's a support from a good season. Typically this quarters is highest. But when you compare it with previous quarters -- you get previous comparable quarters, you get to see the operational improvement that has gone through in Olaroz and we'll continue to be there. Christian Barbier can help you with the discussion between production and sales. He's more up to speed with that. Yes. Thanks, Martin and thank you for your question, Kate. Actually, as you hinted in your question, the answer is a timing difference mostly. So we had a high-level of production during the quarter, but we did not have the possibility before the end of the year in a busy Christmas period to ship [indiscernible]. But these will be invoiced during the first quarter. There's an additional factor, which is that we have allowed for a little bit of buffer inventory in order to ensure that we have the quantities necessary to respond to Naraha to the startup of our plants in Japan, the hydroxide thatâs in Naraha. So again, this is a timing difference. Okay. So there'll be some, we will see some of those December numbers go into March quarter and then moving forward, production will look more similar to sales as long as we don't have any of these big movements before end of month? This question is a derivative of Kate's question. So can you just quantify the amount of inventory built at Naraha to date and then how much further there's got to go? I guess I'm just trying to quantify that lag effect and how long it will -- how many quarters it will impact sales? Obviously it washes out over time, but if you could quantify that, that'd be appreciated. I don't have any information with me, but any of the Christian's can you -- do you have the detail? Christian Barbier or Cortes? Yes. Mitch, good morning. Thanks for your question. Look, yes, I'm not sure how much inventory there is in total in Naraha. We have carbonate sailing from Argentina to Japan. And we have an inventory on sites as well as we have enough site inventory in Japan. We don't consolidate and Christian Cortes can give more color. We don't consolidate all the details of the Naraha counting. As far as Olaroz is concerned, I think you can see from our figures -- from memory, we have about 1,800 tonnes of inventory at the end of December, and that's why there is -- that's why we said there are some quantities that were not invoiced in December and that are being invoiced in January and that includes also the buffer for additional quicker ramp up in Naraha. Sorry, I'm just trying to, I guess, trying [indiscernible] my head around how much of those are delayed shipments versus how much of that is earmarked for Naraha? I can jump in and provide a bit more detail as I have inventory numbers in front of me. So look, there's probably three things that occurred at this -- at the end of this period. Firstly, we had some rollover issues with volumes of products on the carbonate side that amounted to about 400 tonnes that we just couldn't get there with the shipments and therefore they'll be accounted for. In January, in addition to that your question specifically around Naraha, the planning between Olaroz and Naraha is for them to have approximately 2 months of stock at site. And as Christian alluded to, you have to effectively keep that shipment flowing through on a monthly basis to replace that stock that has been utilized. There's about a 2-month delay between us getting the report and that that carbonate arriving to Naraha, so that will give you some perspective around that logistic side of things. And the last effect that is worthwhile flagging is ultimately the planning of commissioning with Naraha is quite agile, and therefore we're continuously speaking to them to understand what their needs are. And yes, ultimately, this is something that when you look at balance sheet date or when you look at 31 December would have an element of anomaly as to what we believe it will be business as usual once the plant is commissioned and its operating adequately. Hi, Martin and team. Thanks for the update. I guess just following on from Al's question just around the Olaroz resource, appreciate you still working through acquisition at Maria Victoria, but I was wondering if you'd give us an update on how the groundwater modeling for the reserve is going and should we expect an update around the same time [indiscernible]? Thanks. That resources is coming with not only the inclusion of the property at Maria Victoria, but it's based on an updated groundwater model that James is working through with the team. James, you can give more color on that. Yes, we're in the final phases of that static model, so that the hydrogeologic model is essentially finished and we're going through our final internal review phases and approvals. And then after that, we will be looking at a dynamic model, which to a previous callers question goes to that productive capacity. So really good update to this resource model, or the key benefits that my team spoke about, improved drilling, more drilling, more information as well as bigger area extensions are all going to positively impact both on volumes as well as classification and we look forward to bring to that that to you as soon as we can. Thanks and good morning, Martin and team. I'll be quick -- one question just. Wondering if it's appropriate to assume that delays the first production to Sal de Vida possibly changed by, will that result in additional development costs being incurred? If so, can you maybe share quantum, if not maybe an expected update on CapEx when that's coming? Thanks. We review the CapEx item for the projects in the case of Sal de Vida, where we feel comfortable with where we are now James has looked at that and can give you more detail on that in the case of James Bay. Once we get approvals and we recast final timing for the project and first production, we'll see whether there's an impact in cost. Please bear in mind that lots of things, lots of costs for projects have already been locked in. Because we've been working placing all those and developing works. So significant amount of costs on both sides have already been logged in, I said that. James, you can get more color on both. Yes. In terms of cost guidance, with the EPC contract award we do not see material change to our guidance at the moment. We're quite happy with the costs. It is scheduled that we reevaluating based on the construction schedule proposed. There are opportunities for us to improve that schedule. We will be working with our EPC contractor to see how reasonable those are. But at the moment, we're going to -- we felt its prudent to update the market that December was not going to be realistic and we will look forward to bring better guidance at a closer range so that we can keep you informed. Yes, good morning, Martin and team. Thanks very much for the call. Well done in the quarter. Just a question on pricing. So the [indiscernible] assume the technical to battery grade discount you're seeing for carbonate is around 25,000, 30,000 tonne level at the moment. That if not, what sort of discount you're seeing for technical grade in the markets? And then last part of the question, do you think that discount widens as we see more supply of technical grade carbonate come into the market Ag an electrical thing project that could [indiscernible]? Thank you. Yes. Thanks, Martin. Good morning, Lachlan. Look the -- on the face of it, I would say that the discount that you're stating is higher than what we see in the market, we don't really communicate on the spreads between technical and battery grade carbonates, because it depends on a range of factors. It depends on the exact spec of the product and there are different specifications. It depends also on the type of contract that we have. So we have some large contracts in one and in the other products. And obviously, that also affects the pricing as well as the type of formula that you have, which means that not all prices are have the same spreads in a given quarter. Now having said this and to your question about where you think -- where we think that prices will go in the future. Look, the demand that we perceive in the market at the moment remains quite sustained. And beyond the relative weakness on the Chinese market ahead of Chinese New Year, which has been I think well documented over the last few weeks, underlying demand remains strong. And as I mentioned in my opening presentation, the EV update is expected to continue. At the same time, the level of inventories in the supply chain remains quite low in the upstream part of the business and it seems with converters and cathode produces the inventory level in battery and at OEM is a little bit higher. But as you probably have seen since the beginning of January, EV sales have started to pick up again very strongly in China. And we do expect that demand overall in the supply chain in terms of volume will continue to or will resume to a significant level of growth for the rest of the period. And after Chinese New Year this should be apparent. And as a consequence, demand for both carbonates and for hydroxide is expected to be sustained. We also are mindful that a number of projects are experiencing startup delays. So again, it's a long answer to your question, Lachlan, but we don't see any reason for the carbonate price from Latin America to have any weakness compared to battery grade or to hydroxide. Okay, great. And just last part was the spread that battery technical grade spread given the entrance of new supply just that stable or do you think that how do you think that spread might move notwithstanding you've described the overall environment Look, that [indiscernible] really to one part depends on the converting capacity that there is. There is ample capacity in China to upgrade technical into battery grade. There is also increasing capacity being installed like ours in Japan to convert technical grade carbonate into hydroxide. Demand for technical grade as a consequence is there to support or to complement the supply of battery grade carbonate. So again, I don't see any reason why the spreads would materially change in the next few months. Thank you. Good morning, Martin. Just quickly on James Bay, great to see that federal environmental approval come through and particularly noting some of those [indiscernible] comments from the Federal Minister. Is it fair to assume that those remaining approvals the Comex and then the standard construction approvals are more procedural in nature from this point? And obviously, you've been running those approval streams in parallel. So can you give any indication about the best case of timing for the final approval of the project. And then the second part is the minister is imposed 271 operating conditions for James Bay. It's probably not unusual, but from your perspective, was there anything particularly punitive or might give you a cause to rethink the design of the project or the placement of the non-process infrastructure, et cetera. Thank you. Thank you, Ben, for your question. I'll answer that quickly for the sake of timing. Lesson number one, it's not abnormal to see those many conditions from project. We haven't identified a new one, that makes us change the project. There is a request to update some of the baselines which we can understand because [indiscernible] were to be told. We have progress with both studies in parallel, in terms of the federal and provincial level, and I don't foresee problems other than the longer [indiscernible] process in -- at the Quebec provincial government. So despite I don't foresee any reason for not securing the permits relatively quickly. I have to tell you that I have missed on any expectation that I have had on timing for [indiscernible] from the Quebec government. So I rather don't run any risk on that. And once I get a final approval, which I expect they should come soon, we'll update the market on that. But it has been a lot more bureaucratic than I expected. Sure. Thanks, morning, Martin and team. Just one on Olaroz. If I can, you haven't given any guidance to date on what you're expecting from either production or sales perspective in FY '23 from Olaroz? Clearly if we annualize the December quarter, that's a very strong run rate and pretty close to your nameplate capacity on Stage 1. And you talked earlier in the call through the plan availability and throughput improvements that have been able to drive that result in the December quarter. So if we think about the outlook across FY '23, if we can put aside the ramp up to Stage 2, which is obviously only going to come in towards the end of the financial year, is it fair for us to expect a similar production rate in the second half versus third half? Should we be expecting further improvements on the December quarter? Or is that run rate that you achieved in December quarter only really sustainable while you're producing the lower levels of battery grade material? Thank you very much for your question. It's a good one. Annualizing the December quarter would be [indiscernible] because it's impacted by many things. And as we said several times before, the amount of battery grade and technical grade product that we produce impacts on the total throughput of the plant. So for the -- what I said before in December quarter, we've been impacted by good climatology by a significant volume of technical grade that was produced to create the feedstock for the Naraha plant and was also impacted by operational improvements. We continue to see the impact of operational improvement throughout the year. And as I said before, the key manual level has continuously been able to improve its performance in terms of volumes and product quality. So we will continue to see steady increases in the product -- in the production capacity of Olaroz approaching to the original expected at nameplate as we produce more. Producing total focus Olaroz as I said in a couple of goals before for 2023, it's a bit difficult because we have the ramp up of Stage 2 happening at the same time. So it is from Stage 1. I said before we should see steady production with continuous improvement as we have seen throughout the last 3 years in Olaroz that will continue to be the case. Do not extrapolate the quarter because it has many things that make it particularly good. But yes, you can extrapolate on operational improvements when you compare it to previous quarters. No, unless significant climatic impact of changes in the mix data, some customers may require an increase in battery grade product. And I said before we are managing the production for [indiscernible] off Stage 2 to meet our customer requirements. Thanks Martin and teams. I just wanted to ask a quick follow-up on James Bay, maybe to just in one combined here, too to play by the rules. But one, the last update for CapEx was with the last feasibility study. Do you anticipate or one I guess what's your confidence on how stale or fresh that number is for full construction of the initial capacity? And then to within that is it still reasonable to expect the timeline from construction to first commissioning within 12 to 18 months? Listen, it is the -- the first question is, we are developing the project that exactly the project that we put together in the [indiscernible] size of Qatar and that remains exactly the same. And as I answered in the previous question, increased resources from exploration will be analyzed in further expansions of the project in terms of life of mine extension and increased production. But the original project is within the NF43101 and the DFS that we put together. With regards to timing, [indiscernible] what you say is within the ranges that we're currently working. But again [indiscernible] confirm on a detailed production guidance once we secure all of the approvals. We are quite progress with the -- with engineering, we're almost 60% of engineering for the project. So it's going to be once we get the approval as we move really quickly into construction. Hi everyone. This is Joseph on for Joel, I'll just keep it quick with one question and interest in the interest of time. So what do you guys think of the realistic for prices for [indiscernible] Spider Man over the mid to long-term, if bear case scenarios do end up materializing? Yes, we're just curious on what you guys think would be the realistic floor prices for carbonate and splodge mean over like the mid to long-term [indiscernible] scenarios to end up materializing? Yes. Look, I'm not going to give price forecasts or such sets of data. And the reality is that nobody and everybody's going to get it wrong. What is clear, I think is that the levels that we had in the past very unlikely to occur in the future, because we have completely changed the economic model and the level of consumption as well as the level of production costing for both carbonates and for spodumene. Now, I mentioned our views in the -- our views on the market and the sustained demand, it is for carbonate as I mentioned earlier, but it is true also for spodumene. The constraints in terms of production, for a variety of reasons are expected to continue and also the pressure on costs are expected to continue. So what we had as flows in the past is not relevant at all for the future. Now, if you're trying to also to see where prices could go into the future, I again, I don't really want to go in that area. But what is clear is that for the next foreseeable future and these are not straight lines, the line of production and the line of consumption. But for the next foreseeable future, which are probably by 2030, what we see at the moment, demand will be constrained by supply. At this stage we don't see any reason why if we were to indicate a flow, we don't see any reason why the markets would actually reach those flows, because there is constrained production. Does that answer your question? Good morning, Martin. Just a quick one on Argentina and you've obviously spoke about the export benefits being removed. You've obviously spoken with the government, I suspect they're doing this because they've got inflation running at almost 100%. Are there any other discussion points where we could be blindsided by the Argentinean government taking a hit at what is obviously a very profitable mining industry? And based on Christian's comments going to remain quite profitable. Anything we should be aware of that you're having discussions with the government over? No, Glyn, I'm not aware of any the government is quite creative in Argentina to tell you that they have to process many times, but I don't foresee any other indication of I don't see any indication that would tell us of potential further impacts other than this reduction in the incentives, which is clearly motivated by the high profitability of the industry and the current inflation rate and no situation in the local economy in which the government needs to get funds from everywhere. So basically [indiscernible] the top one on some subsidies in an industry that is highly profitable. That's what they are doing. And I don't foresee anything beyond that. The government continues to rely a lot on the export from the industry on the other important. Hi, Martin. Just quick question on Mt Cattlin shipments of low grade concentrate stockpiles. Just wondering if you could provide some guidance as to whether they're going to continue or not. They're above the sort of 50,000 mark for this quarter again? How much do we have left? Roughly, what grades are they in? And also if you haven't seen any interest or having an interest in DSI material from that column? Yes, listen, they will continue. And I will ask Christian Barbier to give you a more detailed and quick answer on those questions that will continue in this quarter. Christian? Yes, thanks, Martin. And thanks to you. As we mentioned in the past, the logo aids that we are shipping is a byproduct from our production process. It contains links in credit that we are not in the position at the moment to further process. So to improve in impurity, we've proposed those quantities to some customers as a short-term assistance, while it's got to mean [indiscernible] difficulties. So again, this product is not [indiscernible] that would not make any sense for us to sell [indiscernible] when we can upgrade it into concentrate ourselves and realize that value for ourselves. So we haven't yet caught up with the with shipping backlog with these customers. And that's why the shipments of low grade material will continue in the next few months. Oh, yes. Thanks. Morning, Martin and everyone. I've got one quick question about Mt Cattlin's pricing. You mentioned 5% expected increase in Mt Cattlin pricing in the March quarter. So may we know what's the basis for this expectation in the house of visibility, given that we have already seen some decline in the stock market? Is your [indiscernible] negotiated on a shipment by shipment basis? Or is it sort of linked or referring to any pricing [indiscernible]? Yes. David, the first part I would say to your question is that we have not really observed any decrease in spodumene pricing in the last few weeks. And the decrease, the drop in market or in spot prices on the Chinese market has been well documented, and it relates to mostly carbonate and hydroxide. But we have not seen that is having an impact on the spodumene market. And that shows how strong the underlying demand is for lithium hydroxide and for high nickel batteries. So that's the first part. The second part is a pricing for spodumene has been relatively strong in the last few quarters, but in the last December quarter, the increase has been more moderate than what we would have liked because some of the terms were priced in the September quarter. And we believe we still have a little bit to catch up with the optimal pricing for our times. So this is why we believe and we have a high-level of confidence. We believe that in the March quarter our weighted average realized price for spodumene will continue to increase. Thank you very much, Paulie. And as I said before, we are committed to delivering scale and product visibility required by the customer as the world transitions to an [indiscernible] economy. In achieving this, we must remain focused on strong operational performance, project execution and managing costs in this environment. Thank you for joining our quarterly results briefing today. If you have any further queries, please don't hesitate to contact our Investor Relations team.
EarningCall_1367	Good evening. Thanks for joining us today. Iâm joined by Andi Owen, Chief Executive Officer; and Jeff Stutz, Chief Financial Officer. Also available during the Q&A are John Michael, President of Americas Contract; and Debbie Propst, President of Global Retail. Before I turn the call over to Andi, please remember our Safe Harbor regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties and other factors which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in todayâs press release. The forward-looking statements are as of today and assume no obligation to update or supplement these statements. We may also refer to certain non-GAAP financial metrics, which are reconciled and described in our press release posted on our Investor Relations website at millerknoll.com. Thanks, Kevin. Good evening, everyone, and thanks again for joining the call. As MillerKnoll, we know that one of our strongest assets is our collective of design brands offered across multiple channels to customer segments around the globe. Our second quarter results speak to the benefits of the strategic emphasis that we have placed on diversifying our business model over the past few years and the resilience of that model and shifting economic conditions. This strategic direction includes both the expansion of our global retail business to now over $1 billion in annual revenue and the combination of Herman Miller and Knoll, which creates even further opportunities to bring our collective of brands to new channels and geographies. Weâve led the way on industry consolidation with our acquisition of Knoll, which has created the opportunity to leverage our increased scale to capture synergies, further build capabilities and refine processes and organizational structures to maximize efficiency and agility. Continued synergy opportunities ahead will help us further optimize our cost structures as we navigate softer order levels across our business segments. Across the globe, different regions are in varying phases of return to office compounded by varying economic conditions and a general slowdown in the housing market. Our teams continue to focus on contract wins, retail success and delivering on our commitment to our shareholders. In the Americas Contract segment, we saw strong operating margin expansion over last year. While uncertain macroeconomic conditions pressured order levels for the quarter and we saw customers take longer to make decisions and also take on smaller return to office projects, our price increases and cost synergies have helped improve profitability. Our International Contract & Specialty segment delivered sales growth and meaningful operating margin expansion over last year. The International business complements the Americas with different market conditions, including a faster return to the office, an opportunity to capture new regional accounts. Weâve onboarded nearly 50 dealers to cross-sell the MillerKnoll collective of brands in Europe and will emphasize Asia-Pacific and Middle East dealer onboarding during the back half of this year. Similarly, our Specialty businesses also contributed to sales growth for the quarter and offer further opportunities to expand in new markets and channels around the world. Turning to Global Retail, as I mentioned earlier, weâre seeing a slowdown in the housing market, particularly in luxury. Despite this, our Retail segment also contributed organic sales growth for the quarter. While orders were down overall, we finished the quarter by delivering our best Cyber Week on record with an increase of 22% over last year. Investments in our digital capabilities, excellence in customer service and reliability, and strategic promotion management all helped to bolster the sales period. Weâll continue to reach customers through our direct-to-consumer channels and have continued investment in technology with more robust customer data and metrics coming online in the latter half of this year. These improvements will help us attract new customers and drive repeat business through our broader collective of brands and products. Turning to product. We continue to innovate, launching several collaborations across Hay, Maharam and Knoll Textiles. Our collective of brands also pushed design boundaries with new launches, including Herman Millerâs Eames Sayl Chair with recycled material, Geiger's Loop Chair and Holly Huntâs new lighting fixtures. In addition, our newest performance gaming chair was launched Vantum and time for the holiday gift-giving season. Weâre attracting new customers with gaming and weâre working to further expand the gaming category globally. As MillerKnoll, we know we can do more with our brands and our associates. This quarter, we held our company-wide Day of Purpose, giving our employees a day out of the office to ensure they have time to vote on the U.S. elections and also give back in the communities around the world. Our associates held over 150 Day of Purpose events around the globe, bringing greater purpose and support to our commitment to better our local communities and our planet. We aim to service the model for the future of work, and this quarter, our retail headquarters in Stamford, Connecticut received WELL Certification at the Platinum level, the highest level possible alongside receiving the WELL Health Safety Rating. This award is only given to facilities that go through rigorous performance testing in 10 different categories. Iâm proud of our commitment to our associates and also to building spaces that promote wellness, inclusivity and productivity. Despite uneasiness in the current macroeconomic environment, I remain confident in our ability to reach customers in a variety of channels and markets, and to deliver further results in our innovative products, personal customer service and dedicated associates and dealers. We continue to find synergy in our integration, leading to meaningful cost savings and opportunities to maintain a strong balance sheet and cash flow. We remain flexible and nimble in this environment, while continuing to focus on serving our customerâs needs. Thanks, Andi, and good evening, everyone. Our results for the second quarter highlight the power of our diversified business model, which has helped to mitigate some of the pressures from the current macroeconomic environment. As we look forward, we will continue to focus on those things that we can control, providing solutions to our customers across multiple audiences, channels and the regions that we serve. Now turning to our results for the quarter. Consolidated net sales in the second quarter were just under $1.1 billion, an increase of 4% on a reported basis and 8% organically compared to the same quarter last year. Consolidated orders of $1 billion were 12.5% below prior year levels on a reported basis and 9% lower organically. While partially due to the current economic uncertainty in our end markets, I think itâs fair to say we also had a difficult prior year comparison due to pandemic-driven pent-up demand last year at this time. In the Americas Contract segment, sales in the second quarter were $530 million, an increase of 6% compared to the same period a year ago. Order levels in the second quarter decreased 17% to $474 million compared to the same quarter last year. The decline was due to the factors Andi mentioned earlier and included a particularly challenging prior year comparison. Positive price cost dynamics and synergies contributed to a meaningful 560-basis-point increase in adjusted operating margins compared to last year. Within our Global Retail segment, sales in the quarter were $272 million, a decrease of 3% compared to the same period last year on a reported basis and up 1% organically. New orders totaled $298 million in the second quarter, down 8% compared to the same quarter last year on a reported basis and down 4% organically. As we expected coming into the quarter, we had some near-term inventory-related costs affect our operating margins as we work through excess inventory from supply chain issues earlier this year. We expect retail profitability to steadily improve over the next two quarters and exiting the fiscal year with high single-digit operating margins. Turning to our International Contract & Specialty segment, sales for the quarter totaled $265 million, reflecting an increase of 7% on a reported basis and up 15% organically. New orders in the second quarter of $242 million were down 7% year-on-year on a reported basis and essentially flat compared to last year organically. Strong order growth in India, South Korea and the Middle East was balanced by softening in China, France and Ireland. The International Contract & Specialty segment also delivered strong year-over-year profit improvement with an adjusted operating margin increase of 180 basis points. Consolidated gross margin in the quarter was 34.5%, which is 10 basis points higher than the same period last year on a reported basis. Adjusted gross margin declined 40 basis points compared to the comparable period last year. The decline in adjusted gross margin was primarily driven by inflationary pressures and the near-term elevated inventory-related costs for retail and that was partially offset by further realization of price increases and synergy capture. Operating margin for the second quarter was 3.6% and on an adjusted basis came in at about 6%, which was 20 basis points lower than the prior year. Higher sales and well-managed operating expenses helped partially mitigate the near-term pressures on gross margin. We reported diluted earnings per share of $0.21 in the quarter and adjusted diluted earnings per share came in at $0.46 in the quarter, compared to $0.54 in the same period last year. Turning to the balance sheet. At the end of the second quarter, our liquidity position reflected cash on hand and availability on our revolving credit facility totaling $428 million. We generated $60 million of cash flow from operations during the quarter and ended the period with a net debt-to-EBITDA ratio of 2.8 times. Regarding our guidance for the third quarter, we expect sales to range between approximately $980 million and $1.01 billion and adjusted earnings per share to be between $0.40 and $0.46. This forecast contemplates the relative seasonal slowdown in factory production that we normally experience around the holiday period and in the month of January. As announced last quarter, we are also proactively taking additional steps to improve our near-term profit and cash flow outlook as we navigate the current macroeconomic environment. As a result of these actions, we expect to realize annualized expense reductions between $30 million and $35 million. These savings begin gaining traction during the third quarter and will be more fully realized in the fourth quarter of this fiscal year. To close, we have a strong collective of brands and a unique and diversified business model that provides resilience for our business going forward as we navigate the current economic climate. Thank you. [Operator Instructions] Your first question comes from the line of Steven Ramsey with Thompson Research. Your line is now open. Hi, good evening. Maybe a couple of questions to start with on the Retail segment. These inventory issues being at peak challenging points right now. Maybe can you talk through kind of why that is and if itâs resolved by the end of the fiscal year or you see it being an improving point, but maybe the improvement drags into FY 2024? Yeah. Hi, Steven. Thanks for the question. As we said on our last call, as most retailers experienced, we had such high demand and such a difficult supply chain going into this quarter that we have built up our inventory to compensate for that and demand dropped off pretty rapidly. So we were faced this quarter with moving through some of that inventory buildup that we have put in place to sort of safety stock to get us through what we thought would be much higher demand. That inventory came with much higher storage costs, much higher freight costs. And so to the retail teamâs credit, we really did experience an amazing November, a great Cyber Week, as I outlined before. So we really leaned into a promotional strategy that was not aggressive, but really coupled with the desirability of our product helped us move through a lot more of that cost weighted inventory this quarter than we had anticipated. Based on that, we expect the beginning of this quarter, weâll see a little bit of that still shaking through, but we will see in Q3 that dissipate down to nothing and in Q4 that will be gone. So back to our original point, we should see single-digit operating margins in the high-single digits by the time we exit the quarter. So no, it will not continue through the rest of the year. Okay. Helpful. And then maybe can you go through the order strength picking up in the Retail segment, maybe it was covered in what you said there, Andi, but if thereâs anything additional on retail order strength in the quarter? Yeah, I think orders have softened in the residential home furnishings market. I think a lot of that is tied to macroeconomic uncertainty, Steven, I think, also with home sales slowing down. I think weâll continue to see a softening in demand. But I think we captured more than our fair share of the market with how we positioned ourselves in the quarter and I think weâre outpacing our competition. Debbie, I donât know -- Debbie from Retail is on, would you like to add anything to the order trend? Hi, I think beyond the trend we experienced during Cyber driven by our agile personalized approach to promotions. Coming out of that, given the strong acquisition we had during that same period, we have more momentum in our business now and so the trends coming out of Cyber are stronger than the order trends we had going into that period. Helpful. And then last question for me, a peer of yours recently talking about a lower total addressable market in U.S. core office furnishings, I guess, how do you feel about that perspective, if you do think the market over the next few years maybe is lower than prior peaks, what do you need to do in various verticals or internal strategies to reach prior sales and profitability levels for yourself? Thanks. Yeah, I donât know if I can predict the future, but I would say, Steven, as we looked several years ago at what was happening in the office kind of workplace, we saw hybrid coming. Itâs been coming for the better part of the decade. This is the main reason why we acquired Knoll and we believe that the industry would consolidate and we believe that becoming one company would actually be a much better strategic position to be in, so we can capture the synergies, we can capture the strength of both of us as one. In addition to that, weâve really worked hard to diversify our business model. So we have a strong and growing billion dollar Retail business. We have multiple channels and new products that we can explore in the residential side of our business, as well as our digital forays into not only Contract but Retail. So when you look at our business model with the B2B and B2C side, as well as really pretty extensive international expansion that we can pursue, which has been a very profitable and strong business for us, we feel that we are kind of a one of a kind in our industry and that we really have set ourselves up to win. Maybe can we talk about the progression of order patterns in North America through the quarter and then what youâre seeing of late? Has there been any noticeable change in either direction after the soft patch kind of hit earlier in the year? Hey, Reuben, this is Jeff. Yeah, let me start and then Iâll open it up for John to add any color if you have anything to add. So maybe start with a big important caveat. One of the things you got to bear in mind is that, last year in January, we put in place a 10% list price increase in the Contract business in North America. And as you probably know, just from your history, that -- at least for our business, that might be the single largest ever price increase certainly in my time with the business. So that pulled forward some order activity into the month of December. So youâve got a bit of a -- right there, youâve got a bit of a non-comparable activity period. But in intra-quarter, in the second quarter, we saw things kind of started off kind of flattish and then weâre somewhat consistently down in October and November to get us to that full quarter down, I think, 16% organically in the Americas segment. And then as weâve moved into the early part of Q3, it really hasnât moved too far off of that, albeit a year ago, we had particularly strong order entry levels. And I donât know, John, if you want to add any color, feel free. I think thatâs a good summary, Jeff. I would say, if you look we are only two weeks, obviously, into the quarter. But even in the last few days, weâve actually had some of the best days weâve had since the start of the quarter. So I think the patterns are bouncing around a little bit as expected this time of year. But weâre seeing -- continue to see a fair amount of activity. Got it. Thatâs very helpful. And then on the same kind of progression type question and on the price cost and margin side, can you talk about where price cost kind of stands today and what kind of expectation is embedded in the guidance for next quarter and when you think youâll kind of get back to whether itâs neutral on a dollars basis or back to neutral on a margin basis, Jeff? Sure, Reuben. Yeah. So for the quarter, year-on-year, I would say, if I gather all the buckets that I think would fit into your category of price cost, we had a net positive year-on-year to the tune of about 160 basis points and I can break that out for you, if youâd like. In terms of just net price increase flow through at the consolidated level, we had about 350 basis points of net benefit, which at long last weâre seeing some momentum pick up on the margin front, particularly in the -- on the contract side of the business, which we were very encouraged by. Now obviously, weâre still comping against elevated commodity costs from a year ago. So that drove about 100 basis points of year-on-year margin pressure still. Itâs still a little bit of a mixed picture, but Iâd say, in general, weâre feeling like the trend is in our favor from an input cost perspective as we move forward, anything can happen. But based on kind of the -- our experience throughout the quarter, that feels like itâs actually perhaps a tailwind going forward. Labor and overhead costs were also a bit elevated against last year. You can -- you just think of things like all the wage inflation that weâve experienced last year. That was about a 60-basis-point negative on margins and then freight and transportation year-on-year was down about 30 basis points. When you net all those together, thatâs cost price of about 160 basis points positive and then the balance to get to the kind of the full quarter gross margin, you had some adverse product and channel mix, as well as those Retail inventory costs that largely hit us in Q2, a little bit in Q3 going forward. So let me pause there. Thatâs kind of the walk on the Q2 cost price picture. â¦ if you wouldnât mind kind of like you have to be fine [ph] piece by piece, but what kind of high level are you expecting for the third quarter? Yeah. Yeah. I wonât go quite as granular, but I will say the guide implies or our assumption is that sequentially going from Q2 to Q3, thereâs going to be some incremental positive -- benefit from net pricing, somewhere on around 50 basis points, it would be my general expectation and I think commodities should flip to a positive. Now the one negative that we have to acknowledge is that, with order pacing being a bit depressed in Q2, thatâs going to have a negative effect on our production leverage in Q3, which, as you know, tends to be the case anyway sequentially from Q2 to Q3 in this business. So that will be a head -- a bit of a headwind from a margin perspective and then youâre going to get some -- the sequential benefit of those inventory-related costs rolling off out of the Retail business. So thatâs kind of the big picture expectation. Okay. And Iâm going to take one more if thatâs all right, on the Retail side. So just to be clear on the margin, so high single-digit margin exiting your fiscal year, is that a normalized forward run rate to use at this kind of volume level? I think in the past, there was some higher targets than out there, are those targets based on maybe what the previous volume assumptions were? Can you just kind of walk us through how youâre thinking about that as we get into your next fiscal year and beyond? Yeah. No. I donât think theyâre normalized. I so think thereâs tons of opportunity for upside here. And as you know, as you can have been with us for all these years, the Retail team has really been working and investing to build up the infrastructure of this business to support what is essentially a business thatâs doubled in size over the last 24 months. So when you think about fulfillment capability, digital capability, customer data capability, all those things are schooling up in the background, which will enable us to make faster decisions, move more quickly, get product to market more quickly. So we see expansion going forward. Debbie, what would you add to that? I would agree. I think there is continued OpEx improvement as we bring some of those investments to fruition and start to leverage them and continued revenue upside opportunities that will help us leverage that OpEx in a better way. â¦ bringing together of the two companies, we have opportunity on the Knoll side, specifically in Retail, because it is one of our largest brands in our Retail business to really get more efficient with margin there. So there are several things pulling up the background around bringing these companies together that will improve the margin picture, as well as operating income. Thank you so much. Congrats. Happy holidays and good luck in the New Year and you guys stay safe and I know you got some snow headed your way, but stay safe and enjoy the holidays. Good afternoon. Can you just talk about the relative strength in the International segment? Where -- whatâs driving that relative to maybe North America and then what are some of the growth opportunities that you have internationally? Thanks. I think thereâs a few things and Iâll invite Jeff to add in here. But I think internationally across the Board, we, in some cases, never saw a leaving of the office, and in most cases, weâve seen a much faster return to office. So that kind of normalcy of how people are working and have worked hasnât really changed internationally. Talk about our business is a little bit more nascent and it is very diversified. So thereâs so many different, as you know, we all know, regions and things that are happening across Europe and whether youâre talking about Southern Europe or Mainland Europe. So we really do when we have a business trend that is strong in one part of International, we may have one is weaker and another. So I think that diversity is really, really important, coupled with the fact that we still have growth opportunity. We have a dealer network that is capable, but we could actually still grow. So thereâs quite a few things that are happening in International. What would you add Jeff? Yeah. I agree with all that. I think that geographic diversity helps us tremendously. We talk about this and sometimes itâs easy to forget that youâre talking about massive distances in varied geographies and fragmented markets that all behave and act a little bit differently. And so when one is down, weâre at a scale now where we benefit where another one might be stronger. Weâve certainly seen that now for the past several years. Andi your point on the white space, I think, thereâs opportunity to grow into spaces where -- in markets where we simply just donât have the presence or even the dealer presence to really capitalize on projects and weâve done -- weâve had a big focus on that for a number of years. The other thing that I might mention, even pre-COVID, one of the biggest themes in the International business was this notion that companies were -- it was a fierce battle for talent in a lot of these businesses and thatâs been true in North America as well. But I think one of the key differences are that, so many of the customers in some of these regions had always kind of opted for a lower cost facility type of a solution. And when that war for talent really began to heat up, I think there was a real recognition on the part of first global multinationals and then, ultimately, localized companies that investing in spaces was a strategic way of attracting talent and I think that continues even through COVID. So that would be the other bit that I would add. The diversity market share ability to grow. And I would also say with the acquisition of Knoll, weâve missed in major markets in Europe and the Middle East had the ability to really bring a much stronger ancillary collection and now with Knoll not only do we have manufacturing in Italy, but we have the ability to bring that to a wider selection of dealers, so. Greg? Good afternoon and thanks for taking my questions. I want to quickly return to the question about the Retail freight costs and the impact on gross margins there. First of all, it sounds to me like any of the issues that you once had in terms of demurrage and storage costs at the port has been now solved that thatâs been resolved and now itâs just a matter of working that inventory through the system, is that the right what Iâm hearing? Okay. And can you quantify for the quarter, what that impact of that -- those freight costs were this quarter? Can you help us kind of understand what might have been excluding the impact of that? Sure, Rex. So what would -- the costs that weâre referring to that you think about it, I mean, thereâs a number of factors there, but they all fit in that inventory handling and storage related costs, including the demurrage fees that you referred to. That was meaningful. It was to the tune of about $15 million in the full quarter. Okay. Thatâs very helpful. The other question I wanted to address was, particularly in the Americas segment, revenues or sales have been running ahead of order levels, which means youâre working down backlog. How much longer can you continue to do that before sales and order levels start to match up more closely? Yeah. Rex, so this is Jeff and John, give your perspective if youâd like to add. I would tell you that you are absolutely right. We have had an elevated backlog really across all of our segments through really all of last year, but the majority of last fiscal year and in through the Q1 and really through Q2. The -- so to your point, weâve been eating into backlog. The Americas backlog is down year-on-year about 21%, stands at about $456 million, I think, at the end of Q2. I think weâre very close to nearing, what I would call, a normalized backlog level for this business. I expect that our revenue picture going forward is nearing a more historic relationship to the order trends that weâre seeing in a quarter. John, feel free to add to that. I totally agree, Jeff. I think the reduction in the backlog is to some degree related to order levels, but itâs also production and efficiency in the plants and lead times coming down. So the throughput is that much better, which is obviously bringing it more to an equilibrium from a production level. Okay. So thatâs -- thereâs good news and bad news there. Okay. But thanks. I appreciate that. It sounds like you are now kind of at the inflection point where you get to more historic relationships between orders, backlog and sales. Is that right? Actually if you look at last elevated backlog and say that, that was more bad news, because we had more disappointed customers with production and supply chain issues. Thank you, guys. I would like to thank everyone again for joining us on todayâs call. In closing, we are so proud of the resilience demonstrated by our collective of brands and the progress we are making, sorry, in the traditional world [ph] and also product innovation. We really appreciate your continued interest in MillerKnoll and we look forward to updating you again next quarter. On behalf of all of us here, I want to wish you and your families a wonderful and restful holiday season. Thank you.
EarningCall_1368	Good morning, everyone. Welcome. I'm Robbie Marcus, medtech analyst at J.P. Morgan. Really happy to introduce our next session with Abbott Labs and the CEO Robert Ford. Robert, thanks for joining. So I want to start out. 2022 was an interesting year for everyone. Turn the calendar page, we're now in 2023. That'd be good to start off with how you see the world, the outlook for Abbott this year? Sure. I mean, I think you change from one month to the other, one day to the other, it doesn't all go away. I'd say, I'm not going to give any kind of specific guidance for Abbott today. We'll do that in a couple of weeks. But I can give a general sense of that macro piece, which we've been talking so much about in 2022 and the trajectories of Abbott and the businesses. I'd say, obviously, tough environment over the last two years, especially the last 12 months, whether it's such for U.S. multinational companies, whether it's FX and the movements we saw there, especially for certain currencies we haven't seen that movement in decades. Supply chain, inflation, labor shortages. I mean, we all know those. I think what I can say about those that kind of had an impact for us, they still remain headwinds, but if you look at where we are today versus the trajectories on these topics, where we were in Q3, for example, for me and our business in terms of what we're seeing is definitely an improvement in terms of trends and what we're seeing with those factors. So I am seeing positive momentum, still headwinds for us without a doubt. But if I look at where we were in Q3 and where we are now, I think the momentum on those is starting to kind of move on the positive side. And we'll have to see. I think from an Abbott perspective as we go into 2023, there's a lot of opportunities for growth. And I see a lot of growth for Abbott going forward. If you look at our device portfolio, for example, we made a lot of investments during the COVID period, taking advantage of our position with COVID testing, and made investments in a lot of great new technologies that are either just about to launch in the early stages of launching or launching into 2023. So I think that provides us great growth momentum. I look at our branded generic pharmaceutical business focused in emerging markets, that has sustainably driven top line growth in the double digits, low double digits, high single digits. And I expect that kind of growth to continue just because of the attractiveness of those markets. In our diagnostics portfolio, yes, and I'm sure we'll get into this somehow during the day here. But, yes, COVID testing will come down. There's no doubt of that, but there will still be COVID testing, there'll be still be pockets of demand, and we're seeing that now. So there's still a need for COVID testing. What I do like about our non-COVID diagnostic business is, we've been able to make the investments and they come out of COVID stronger than actually where they were pre-COVID, whether it's investments we've done in R&D, the capital that we've invested into those business. So that's been a great strategy for us over COVID. And then on the nutrition side, obviously, we're working through all the supply disruption that we had in last year on the infant formula side. The team has done an incredible progress, working incredibly hard. The number one focus that we had during that process was really to make sure that we could get the product back on shelves. We're starting to see product getting back on shelves. Inventory levels are starting to build, they're not where they need to be. But I can see that normalizing itself here as we go into 2023. But also on the adult side of our nutrition business, a lot of growth opportunity in the adult side. We saw a lot of acceleration of new consumers coming into the category over COVID and that was a category that Abbott has on average 60% to 70% market share around the world. So that's a great opportunity also for us in terms of growth acceleration. So overall, you put all that together, Abbott going into 2023 has got great momentum across all of its business units. And we used to really kind of look at that kind of high single digit growth pre-COVID. I kind of see that same high single digit growth as we go into 2023. So very positive there. On the P&L side, there's obviously challenges, as I said, in the beginning here regarding input costs with inflation, some supply chain disruption that occurred in 2022. And there's been some friction on the gross margin line, but the team's done a really good job at attacking that, those cost increases, whether it's in our operations or in areas that we could pass on some of that increase in costs on our pricing. We've been able to do that too. I think I would say on the investment side, I mean, that's the key part of our strategy during COVID, which is, it's a lot of leverage that we'll see in the P&L into 2023 where we'll be able to have this strong growth rate going into 2023 with all the different elements that I just described. But because we did a lot of investment into those business during COVID, we'll be able to see -- we don't have to put the same amount of investment into the R&D and SG&A to be able to deliver that top line growth, because we somewhat forward invested during COVID. So we'll see a lot of leverage on the P&L on those investment areas. And then on top of that, we've got a very strong balance sheet that is going to provide us a lot of strategic flexibility as we go into 2023. So I look at -- yes, 2022 was a difficult year. Some of those factors are still headwinds, but I don't see them right now as intense as they were maybe when we're talking about them in Q3. And we've got a lot of growth opportunities across these four business units at Abbott. So I'm looking optimistic to 2023. Great. Abbott is pretty unique and that it touches a lot of different aspects of the healthcare system. So maybe you could talk to what you're seeing in the healthcare environment today, both in the U.S. and around the world? And probably good to loop in COVID testing, you talked about how it's probably going to come down. How do you see the future of COVID testing for Abbott and in general? Well, I think we played a really important role during the pandemic with what we did. The partnerships we had with regulators, with researchers and with governments across the world. I think testing played a key role. And I'm very proud of what the team has put together and intensity and the intentionality of how we put that COVID portfolio together. Listen, it's going to transition from what I would call pandemic testing to more of an endemic normal respiratory, seasonal kind of testing portfolio, right? And one of the challenges that we had in that process is, okay, we know that this is going to come down. The question is, how fast and what's the rate? And if you look at what many expected to happen last year, it didn't happen, right? Lot of projections about how testing was going to really kind of go down in 2022. We actually probably had a same size yearâs 2022 as we did in 2021. So it's really about, okay, how do we factor in that transition? And the reality is, it's still going to be important. It was important pre vaccines. It's going to be important post vaccines. And I think one of the real drivers there that when we put the strategies together is, we knew that it would require scale. We knew that it would require a different technology of just relying only on labs and we made a big bet on the rapid test side, not only here in the U.S. but internationally and that's worked out very well. So I think the view that the rapid test was the platform has kind of really worked out. And I think we'll still see some testing, either because of variants that will escape some of the immunities that people have or quite frankly, increasing in respiratory testing around -- really around whether it's flu, RSV, certain CVS now talking about that. When those increases it actually brings long all testing. I want to make sure that I want to know what it is, right? If it's not COVID, what is it? And I also want to make sure that it is -- that it is not COVID, right? So I think we'll still see the human behavior of just wanting to know before I go anywhere, I think that that's probably where it starts to transition to. To know before you're going to go somewhere, just to make sure that there's not an infection there. And then you'll have the seasonality of that business, Q1, Q4 also. So I think that's where we're heading. Obviously, it's had an impact on healthcare systems. But I think a lot of the healthcare systems have ultimately figured out how to manage it and deal with it or obviously different situation versus where we were in 2020. So I think the leadership position that we've built in testing and not just COVID testing as I say, I think we need to start thinking about more respiratory. So flu, RSV, Strep, COVID, we've got a full portfolio of products. So we test for all of those. We have lab based systems, we have urgent care systems, we have at home testing platforms too. So whatever this market will look like and whatever this market it will be, I'm pretty confident that given the portfolio of products that we have, the position that we have, the scale that we've built, the economic value that we do bring that Abbott will be a leader in whatever market is going to be. I mean, I think it's very difficult to kind of pinpoint exactly what it's going to look like. But I still -- now I think we can start to model what's that -- what that transition from pandemic testing to endemic testing is going to look like. So we will be a leader in this segment. And ultimately, as we think about risk mitigation, it provides us a little bit of that hedge. And I've talked about this also where, okay, if COVID testing and if for some reason COVID gets worse, yes, it could have an impact on those healthcare systems, which then have an impact on procedures, but on the flip side then you've got -- weâve got a COVID testing portfolio that we'll be able to offset that and vice versa. If we see very less COVID, I think then we'll start to see even more an acceleration on the non-COVID part of Abbott too. So I think we're well positioned there and I think that our portfolio really is market leading. So we feel good about it. Well, we were joking. We didn't know what a rapid COVID test was in 2020 when we are here. So -- and just piggybacking off that, I mean, I think that's a really important part is that, we didn't -- this notion that we've now as consumers learn to understand that we've got more accessibility to rapid testing, testing you could do at home. I think that opens up a whole new testing channel. I think that's one of the benefits that we've taken advantage of during the COVID is, how do we then continue this transition of being able to open up this new testing channel, pharmacies, urgent care clinics, airports. I mean, there's just a great opportunity for us and we've seeded that market during COVID. So now it's about how do you bring more assays and more tests into that channel that you've created. Maybe switching gears a bit, one of your largest and fastest growing businesses at Abbott is Libre. Diabetes is still an underpenetrated market around the world, fast growing and the Libre CGM platform is the leading device within this market. So maybe you could talk about Libre today, the future of Libre? And would also love to hear about Lingo, your new product that's using the same form factor to look at different analytes antibody? Well, I think the Libre story is still very early. I mean, there's been -- we've written a lot of chapters, but I think the book is still very long. I think fundamentally, we have to go back to how we thought about this. We had to really change our mindset to think about the opportunity that we had with this platform and to think a little bit differently about how we traditionally would go after, medtech companies would go after and when you got 400 million people around the world living with diabetes, 90% of them outside the United States, over 100 million of them doing testing. You're not talking about the population sizes that we usually talk about in medtech, a couple of hundred thousand single digit million patients. So we really had to think differently about it. And our strategy here was really simple. We wanted to build a consumer friendly, intuitive, one piece disposable sensor, invest a lot in manufacturing technology and scale that we could then have a cost profile that would allow us price for affordability and accessibility in a very different way than what we would traditionally go after the market. And that's proven to be, as he said, very successful. I think that if you look at the growth of the CGM market before Abbott, you could probably extrapolate it and say, hey, this is a very good growing segment in healthcare. But if you look at Abbottâs entrance into the market back in 2017 and look at what that's done to the category, it significantly increased the category. And I think the team has -- the Abbott team has done a really good job at executing that and you could see it in our numbers. I always -- obviously, there are things that we're going to do better. My team knows, they never get the full high five, it's always a high four, because there's always something that we can always do better and we kind of continue to push ourselves because we need to, but 4.5 million users roughly at an annual recurring revenue of just under $1,000 a year and you can do the math on that in terms of where we're at. We've made significant -- our bottom line grows just as faster than our top line. And that's putting in the CapEx investment, putting in the R&D investment, putting the SG&A investment. So it's doing very well. And like I said, it's still -- when you think about that 100 million population segment, we're here talking about 4 million to 5 million and being the leader there. I think that there's a lot to do. We've built a strong portfolio. We've just launched Libre 3 into the U.S. during Q3. It's our third generation one piece disposable sensor. Our competitor is on their first generation. And I think that we've got a lot of opportunity here for growth. And I've said this a couple of times, I think Libre will be a $10 billion product in the next five years. And that, obviously, implies roughly a 15% annual growth rate and there's really kind of three areas that I see that drive that growth rate. First of all, is really continuing to have the leadership position that we have in the patient segment that has historically benefited the most from CGMs and that is the heavy insulin user, whether it's MDIs or pump patients. We are the leader definitely when it comes to the MDI population. So those injecting insulin without the use of a pump. And I've talked about how we are going to be working to be able to bring a product, to be able to look at that pump segment, albeit a smaller segment, but nonetheless an extremely important segment. So we've already announced at the end of last year, our first pump integration in Europe. We've done all of our clinical work to support our filing with the FDA on our Libre 2 system. And we'll be able to then -- once we work through that approval process, we'll then be able to work with the different pump companies and bring that technology. But I think that strategy really just kind of puts us in a catch up mode. One of the things that we've learned how to do and do very well is, how can you actually put more analytes on a single sensor. And we announced this at the ADA last year. We're working on a dual sensor, a glucose plus ketone sensor. And as I talk to a lot of the key opinion leaders in terms of the go to sensor for a pump connected system is if you can be able to bring that ketone measurement that continuous ketone measurement into the algorithm it provides additional safety features because when, let's say, you've got an interruption in insulin delivery, the number -- the first [indiscernible] to pop is ketone, so -- and up to about 30 minutes before. So I think that's going to be a great opportunity for us to be able to look at that heavy insulin user segment. The next segment in the strategy then is really the Type 2 and the basal segment. And that's the majority of people with diabetes and I would say this is a great opportunity to be able to not drive growth, but also to be able to bring outcomes. We've got -- if you do a lit search on all the clinical trials that have been done with Type 2 basal patients, you'll see Libre predominantly in those studies and we're able to show reductions in A1C, reductions in time, in hyperglycemia and great opportunity here. There's probably a couple key milestones next year. I think the first one is, CMS has been public about its common period to be able include basal patients for Medicare reimbursement. So I think that'll be more of a second half event in 2023. There's about 1.5 million people in the U.S. Type 2 basal in -- on Medicare, and then there's another 3 million patients on the commercial side. So if you think about that in the U.S. it's a huge opportunity, I would say, for the category to be able to show the benefits and expand its use to different patient segment. And the clinical data that we've been working on not only in the U. S. but also internationally has kind of shown those outcomes. And I think that's going to be the case, not just in the U.S. but I think it's also going to be the case internationally. Where you'll see more and more governments start to see the success of this technology, the real outcomes and benefits that they're delivering to that patient population and start to expand that to the Type 2 population. And then the third part, the third leg of that stool of growth of getting to $10 billion by 2028 is really looking at Libre as more than just diabetes, but as a platform. And knowing that, okay, we've built a successful, we've shown that we can make it work with diabetes, can you use that platform, the investment that we've made in R&D and in the capital side on the manufacturing network to be able to broaden the use of the technology outside of diabetes. And I cannot tell you the amount of people that have either sent me letters that I bumped into that don't have diabetes or fairly healthy individuals. And I have just given glowing feedback about the impact of being able to see their glucose levels on a regular basis. So we announced this last year at CES that we're going to launch a whole new platform called Lingo. It's going to look at expanding beyond diabetes, not just with glucose, but with ketones, with lactate sensors and other types of measurements. We have a whole separate team that's dedicated and exclusively focused on only driving that opportunity. And I think that's going to be a great opportunity and it falls right into this trend of consumers wanting to empower themselves with their health information so that they can actually modify their behaviors and they can use that data to be able to either motivate them or provide insights for that behavior modification. So I think this is a great opportunity. We're going to launch the first version of Lingo into Europe. I'd say this year, let's call it like that, probably in the first half. And we're really excited about what we're going to do with that. It's a whole different go to market strategy. I think that's another part of the innovation that we're going to bring in terms of how we approach a healthy individual, a healthy consumer with this kind of technology. So I think we're very early in this kind of biosensor, bio-wearable book. Libre has been an incredible growth driver and quite frankly, it has been an eye opener for us in terms of what we can actually do when we address costs through our manufacturing technology, through designing costs into the product and the opportunities that we have to be able to really broaden access to healthcare. So I think this is a great opportunity for us and I'm very excited about executing on those three strategies. If we look out down the road, Abbott is always investing today for tomorrow, what do you think are the most exciting pipeline products you have that investors should be on the lookout for? Yes, my team will always kind of look at this kind of question if I'm going to have favorites, I love them all. I think we've got great opportunities here. But I would say just as a step back, I mean, I've been coming to this confidence for about eight years now, including the two hiatus ones, the two virtual ones, right? But just walking around, going to meetings, this one here, just how exciting health care has becoming. And it's just incredible. And I'm sure a lot of companies are coming up here and talking about their pipeline and talking about how great they are and they should because it is just a really exciting time in healthcare with the technologies that are developing and our opportunity to target diseases in a completely different way. So I think this is very, very exciting. Obviously for Abbott, it's no different. So I will talk about our children. I think what's a little bit unique about our pipeline, our portfolio -- our pipeline is that, it mirrors a lot of our -- of the portfolio of Abbott, right? We're diversified. We have different segments, different patient segments, different geographies, different R&D cycles, et cetera. And I think that derisks a little bit when you think about your pipeline going forward, it derisks a little bit. We have a mix of, what I would call, iterative pipeline and then some more transformational pipelines. And I think it's important to have both of those because it provides that sustainability in your growth and reduces a little bit of that risk. If you look at our established pharmaceuticals on our nutrition business, I'd put those more in that iterative side where they're less capital intensive in terms of bringing these new technologies -- these new products to market. The key here -- there's less technical risk. The key here is just great consumer insights and speed. And I think the teams here have done a really good job. I'll high four to them, but a good example of that, I'd say, when you think about, okay, does that look -- what does that look like? Pedialyte is a great example of that where for many years it was a rehydration solution for pediatric patients that are in an infection. The teams expanded that use to more on the adult side and came up with interesting products like Pedialyte immune support, Pedialyte zero sugar, Pedialyte Sport, and that has accelerated the growth in that product. So, iterative R&D work is just as important when you look at some of the portfolio that we have in the product. In diagnostics, as I said in the beginning, we made a lot of investments during COVID. The number one investment that we can make. I mean, we placed a lot of instruments out into the market. The number one R&D investment we can make, the best return is to be able to increase the menu and the assays that will go on to those instruments. So I'm excited about some of the assays that we have been developing to be able to broaden our pipeline, our assay menu there. I think one of them that I'm very excited about is our traumatic brain injury assay. It looks the first blood biomarker that will be able to determine whether somebody's had a concussion and probably needs to go get it checked on a CT perspective. There's some work that we still need to do to be able to move that from the lab into a handheld prick your finger kind of blood test. But you can imagine the opportunity that we have there and the impact that that can have to society if you could be able to find out at any high school, college, sporting event, etcetera, whether somebody's had concussion and you can -- or you can at least rule out the concussion in 15 minutes. On devices across all the portfolio, I mean, we've got exciting innovations across all of them. I'd say probably more notably to your question. I'd say [indiscernible] on the LAA side. I mean, this is a fast growing market. We launched our product into the U.S. -- our generation one product into the U.S. last year, we're seeing great -- good momentum with this product. We're already investing in our generation two version of this. We've made investments on generating more clinical trials, clinical evidence, so we're currently enrolling in a trial to be able to compare the device versus [Novax] (ph) and that will obviously open up the market also and the use of the product. So I'm excited about that investment and that product Aveir, which is our leadless pacemaker. This is an incredible technology. It only represents about 15% of the low [indiscernible], the peso market. But it's off -- we launched it in the second half of last year and seeing great results from it. Obviously, the bigger market, the dual chamber market is, obviously, where the opportunity is for us. And we've actually enrolled -- completed our enrollment in a trial for a dual chamber leadless pacemaker. And this will be the first device where you have two implantable devices communicating to each other at the same time as they're implanted in your body. And the results that we've seen are fantastic. So I think this has an opportunity to really reset our growth trajectory in the CRM space. TriClip, I've talked a lot about that. And bring an innovation to the tricuspid valve. There's not a lot of options to treat tricuspid regurgitation. And we've launched the TriClip in Europe, had seen great success. We made some modifications to the delivery catheter from the micro product, but seeing great success in Europe. We've completed our ID trial for FDA approval. We'll be presenting the results of that in a couple of months. So I'm very excited about that opportunity in terms of what it can bring in terms of care for patients. If you think about CardioMEMS, I'd say that's probably one of those Iâm very excited, because I don't think we're able to really take advantage of the potential that this product has during COVID and as COVID starts to subside, I think there's a great opportunity here. We completed our trial. We've got a label expansion. And so, I think there's great opportunity here. It's not Libre -- it's not entirely Libre for the heart, but there's the opportunity is significant to be able to bring that kind of monitoring of the pulmonary artery pressures and provide early warnings for heart failure. So I think that's another great opportunity Iâm excited about. And then Navitor on the TAVI side. This will be our second generation product. We've launched it in Europe. It's doing incredibly well. And we submitted it to the FDA last year. We'll work through the process, but I think it really is -- given the data that we've seen, the kind of impact that it's had in the European systems, I truly believe that we have a real shot here accredible third player into this still very large market. So -- and then, I mean, we can talk about a bunch of other things like on the EP side, we're going to be launching our TactiFlex ablation catheter together with our new mapping system that we launch last year. We've been making investments on PFA, on an internal program. On the vascular side, we'll be having readouts on imaging and using OCT imaging for coronary procedures. We'll be seeing some data come out towards the end of the year on that in terms of the impact that that can have on outcomes. A lot of focus on the endovascular side also. So we got into mechanical thrombectomy last year. We're looking -- we're currently in a trial where we're taking our bio absorbable scaffold and actually looking at its application on below the knee. So we have trial enrolling there. So really looking at our endovascular portfolio as an opportunity to bring innovation and bring more alternatives for patient care there. So, a neuro -- just launching new systems, new indications. So it's a pretty rich pipeline. It's a pretty rich portfolio. And I can talk about maybe some of the other technologies that are probably three, four, five years out, but there's also R&D work that's being done across all of our business just to think, okay, what's next after three, four years. So I think it's a very balanced pipeline, again, between iterative and more transformational. And that's one of our key focus is how can we use our organic pipelines and the proximity we have with our customers to drive the top line. So I guess one of the benefits of COVID is that, you now have a very large cash pile on the balance sheet from selling COVID tests and love to hear your thoughts on how Abbott can use the capital to maximize shareholder value and its priorities? So we've always taken a balanced approach. So we think about investing in both the Abbott business to deliver long term kind of growth prospects and at the same time balancing that with driving value to shareholders. So if you look at between 2020 and the first nine months of 2022, we've delivered about $14 billion back to the shareholder in the form of dividends and buybacks. And that's -- critical to us is our commitment to a strong and growing dividend. We've increased it 40% versus 2020, just announced 9% increase in 2023. And that's important for us. Buybacks, we've historically really just focused on offsetting dilution, I think with the St. Jude and the [indiscernible] acquisition. We didn't do a lot of that. So I'd say over the last couple of years, we've done a little bit of catch up there. First nine months of this year of 2022 we did about $3 billion of buybacks and we got the flexibility do more if it makes sense for our shareholders. But you balance all of that within, okay, we can also still invest in our business, right? And we're investing capital to be able to build manufacturing capacity on all these great opportunities that I've talked about, whether it's Libre, whether it's cardiovascular, whether it's neuromodulation. We just announced at the end of the year a $0.5 billion investment in a new infant formula facility here in the United States. So we can balance this. We can deliver to the shareholder and we can still invest in the long term by fortifying our positions in our business. And then that leaves us plenty of firepower for M&A. And I think we are in that position where we've got a lot of strategic flexibility. I've talked about this quite a bit in terms of we'll -- two kind of key factors in terms of making those decisions. Obviously, strategic fit talked about we don't want to do anything that's going to dilute our growth rate, our top line. And so anything that's kind of fits strategically into these areas probably a little bit more focused on devices and diagnostics. That's where we see a lot of opportunity, a lot of group targets to be able to add and then got to make sense financially for our shareholders. And that's another key gate here to be able to make it happen. Like I said, there's a lot of great targets out there that maybe in '21 and '22 didn't at least to the first half of '22 didn't make a lot of sense financially, but a lot of those targets now start to make a little bit of sense. So I think we'll always have this balanced approach in terms of how we deploy our capital. And if we see targets that make sense for us strategically, financially, we are in that position where we've got plenty of firepower in our balance sheet to be able to do that. But I don't think that when we talk about our long term growth plan, I don't feel that we need to do M&A to be able to get there. I think we've got a whole lot of organic opportunity. So then that just puts us an opportunity to be a little bit more opportunistic in terms of seeing these opportunities that come our way. So with the last few minutes, I'll leave you with a question. People are concerned about the economic environment around the world. Abbott has a really unique set of businesses that a lot of other companies don't have replicated in one. So how do you think your company would weather a difficult economic environment given the mix of businesses? Yes. Well, I mean, I think healthcare in general has been a little bit more resilient to those recessionary periods. I think that we've always talked about -- when we talk about the diversity of the Abbott portfolio, we've always talked about it in terms of being able to have a lot of shots on goal for growth and then protect on the downside. Right? We really didn't have a moment of downside until COVID happened to be able to kind of prove that out. And I think that the portfolio moved from a nice bullet point or talking point to really showing in essence what it can do during a shock to the system. Obviously, we had our institutional based businesses, our diagnostics our device portfolios, those got more impacted. But on the flip side, our consumer facing business got actually accelerated. And that was able to kind of offset, of course, that wouldn't have been enough and COVID was a great opportunity. COVID test was way to kind of offset that. But I think in general, it's proven to be very resilient because of that diversity. And it's not just diversity of technologies or business, it's diversity of geography, it's diversity of we're not overly reliant on a single product, on a single platform. We have a diversity in our payer mix where we still have a nice portion of our business that is consumer paid. So that diversity I think is what really has set us apart in terms of being able to kind of navigate those more tougher times. And yes, there's a lot of forecasting of what could happen, I think that we're well positioned because of that diversity and everything that I've outlined here in terms of the pipeline and the products that we have.
EarningCall_1369	Good afternoon, and thank you for standing by. Welcome to the Western Digital Fiscal Second Quarter 2023 Conference Call. Presently, all participants are in a listen-only mode. [Operator Instructions]. And as a reminder, this call is being recorded. Thank you, and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer; and Wissam Jabre, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements, including expectations for our product portfolio, cost reductions, business plans and performance, demand and market trends and financial results based on management's current assumptions and expectations, and as such, does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10-K filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. Thank you, Peter. Good afternoon, and thank you for joining the call to discuss our 2023 second quarter results. The Western Digital team worked diligently within a dynamic market and delivered revenue at the high end of the guidance range we provided in October. We reported second quarter revenue of $3.1 billion and non-GAAP operating loss of $119 million. Our non-GAAP loss per share was $0.42. Our ongoing efforts to control expenses, optimize working capital and deploy capital judiciously helped us manage cash flow amidst a challenging flash pricing environment and larger-than-expected ACD underutilization that pressured gross margins. Before we discuss the details of our second quarter results, I wanted to cover two other announcements that we are making today. First, we disclosed that Western Digital has entered into agreements with Apollo Global Management and Elliott Investment Management for convertible preferred equity investments totaling $900 million. In connection with the agreement, Reed Raymond, a partner at Apollo, will join our Board starting immediately. On behalf of the Board, I am pleased to welcome Reed, a leading technology investor who will provide us with additional financial and strategic expertise, which will be critical as we continue to execute on our business strategy and complete our strategic review. Second, on January 25, we secured access to $875 million of financing through a delayed draw term loan. When combined with the actions we undertook to structurally lower our cost structure, these financings provide valuable financial optionality and flexibility to Western Digital as we continue our strategic review. Regardless of the outcome of the strategic review, our goal is to ensure the business is in a solid financial position to invest in innovation and create long-term shareholder value. Given the ongoing nature and confidentiality of the process, we will not be answering any questions about the strategic review process or making comments on market rumors. We will provide updates as we have them. Over the past three years, we have worked continuously to reinvigorate innovation and bolster business agility for both our flash and HDD organizations, which enabled the Western Digital team to stay ahead of the market. Over the same period, we paid down $2.7 billion in debt and arranged for settlement of a long-standing tax dispute. Since the beginning of fiscal year 2023, we have taken additional actions to reset the business in response to the post-pandemic environment. These actions include: first, we have further reduced our capital expenditures across Flash and HDD to moderate our supply. As a result, our projected cash capital expenditure for fiscal 2023 has declined nearly 40% from six months ago. Second, we have decreased supply bid growth across both Flash and HDD. In Flash, we reduced wafer starts by 30% in January. In HDD, during the fiscal first quarter, we consolidated production lines across our manufacturing facilities and idled certain media production lines in Asia, reducing client hard drive capacity by approximately 40%. During the fiscal second quarter, we continued to optimize our capacity enterprise manufacturing footprint to align our supply with the new demand environment. Third, we have reduced our quarterly non-GAAP operating expense by over $100 million since the close of fiscal year 2022, driven by lower headcount, discretionary spending and variable compensation. We are targeting to reduce quarterly non-GAAP operating expense level to below $600 million by the time we exit the fiscal year. And lastly, in December, we successfully executed an amendment to the existing financial covenants under our credit agreement. Turning to end market demand during the fiscal second quarter. Demand for consumer-oriented products stabilized as we discussed in October. In Consumer, we experienced a seasonal uptick across both Flash and HDD. In client, channel demand for both SSD and HDD have improved. However, commercial PCs are now being impacted by tightening budgets and spending across corporations, which is negatively affecting client SSD shipments. In cloud, we experienced a decline in nearline shipments as our customers were undergoing inventory digestion and ongoing subdued China demand. I'll now turn to business updates, starting with HDD. During the fiscal second quarter, our HDD revenue declined significantly as cloud inventory digestion intensified, while demand for retail and client HDD improved. We continue to successfully execute on our product road map as we completed qualifications and commenced shipments of our latest generation 22-terabyte CMR hard drives at multiple cloud and major OEM customers last quarter. We are aggressively ramping this 22 terabyte CMR product this quarter and expect this drive along with its SMR variants to be our growth engine going forward. Qualifications of our 26 terabyte UltraSMR drives are also progressing well. Our major customers remain committed to adopting SMR drives as the 20% capacity gain that UltraSMR drives over CMR offers multi-generation TCO benefits to the most complex data centers worldwide. We expect sequential growth in revenue and margin into our fiscal third quarter and continued recovery as we move through calendar year 2023. Turning to Flash. Thanks to our broad portfolio, diverse routes to market and leading retail franchise combined with strong seasonal demand, bit shipments increased 20% sequentially, exceeding our forecast. While we continue to experience pricing pressure in the market, our premium brands, including SanDisk, SanDisk Professional and WD_BLACK continued to deliver strong share and profitability to support the business. Our premium WD_BLACK client SSD, which is optimized for gaming continues to be well received in the marketplace. It achieved a record exabyte shipments, unit shipments and average capacity per drive resulting in exabyte shipment increase of 73% sequentially and 41% year-over-year for this product. On the technology front, BiCS5 represented 70% of our flash revenue in the December quarter, while BiCS6 will reach cost crossover in the fiscal third quarter. Our next-generation 3D NAND node BiCS8 has entered productization phase. BiCS8 incorporates several groundbreaking 3D NAND architectural innovations to deliver a major leap in performance and cost-effective solutions to a broad range of exciting products, demonstrating the benefits of Western Digital's strong partnership with Kioxia and our innovation leadership in 3D NAND architecture. As we look into the fiscal third quarter, in hard drives, overall demand in cloud has stabilized, and we expect modest improvement in near line to offset a seasonal decline in client and consumer hard drives. We expect stronger improvements in the second half of this calendar year, led by the aggressive ramp of our 22 and 26 terabyte hard drives. In flash, we expect enterprise SSD product demand for the fiscal third quarter to be sharply reduced as certain large cloud customers have entered a digestion period. In addition, a reduction in commercial PC demand is expected to impact client SSD shipments in the near term. Driven by the lower customer demand forecast in enterprise and client SSDs, we anticipate bit shipments to decline in the fiscal third quarter and return to growth in the fiscal fourth quarter. As I mentioned earlier, Western Digital lowered wafer starts in January, and we remain flexible in adjusting the magnitude and duration to restore our flash supply and demand balance. As noted, for calendar year 2023, we expect reduced capital investment and lower utilization in response to the new demand environment. Our initial estimate is for flash demand bit growth to be in the low 20% range with production bit growth to be well below that of demand. With that, let me turn the call over to Wissam, who will discuss our second quarter results in greater detail and provide an outlook for the third quarter. Thank you, David, and good afternoon, everyone. Total revenue for the quarter was $3.1 billion, down 17% sequentially and 36% year-over-year. Non-GAAP loss per share was $0.42. Looking at our end markets, cloud represented 39% of revenue at $1.2 billion, down 33% sequentially and 36% year-over-year. Sequentially, the declines in capacity enterprise drives sold to our cloud customers and smart videos were partly offset by an increase in Flash shipments. Nearline bit shipments were 61 exabytes, down sequentially, driven by inventory digestion. The year-over-year decline was also primarily due to inventory digestion in hard drives. Client represented 35% of total revenue at $1.1 billion, down 11% sequentially and 41% year-over-year. Sequentially, the decline was driven by pricing pressure across our Flash products, which was partly offset by an increase in hard drive shipments. The year-over-year decline was also due to pricing pressure in Flash as well as lower client SSD shipments for PC applications. Finally, consumer represented 26% of revenue at $0.8 billion, up 17% sequentially and down 25% year-over-year. Sequentially, the increase was driven by a seasonal uptick in both retail hard drives and Flash shipments. The year-over-year decline was driven by lower retail hard drive shipments and pricing pressure in Flash. Turning now to revenue by segment. We reported HDD revenue of $1.5 billion down 28% sequentially and 34% year-over-year. Sequentially, total HDD exabyte shipments decreased 35% and average price per hard drive decreased 21% to $99. On a year-over-year basis, total HDD exabyte shipments decreased 33%, and average price per unit increased 2%. Flash revenue was $1.7 billion, down 4% sequentially and 37% year-over-year. Sequentially, Flash ASPs were down 20% on a blended basis and 13% on a like-for-like basis. Flash bit shipments increased 20% sequentially and remained approximately flat year-over-year. As we move to costs and expenses, please note that my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal second quarter was 17.4%, down 9.3 percentage points sequentially and 16.2 percentage points year-over-year. Our HDD gross margin was 20.7%, down 7.8 percentage points sequentially and 9.9 percentage points year-over-year. On both a sequential and year-over-year basis, the decline was due to underutilization related charges of approximately $100 million. Our Flash gross margin was 14.5%, down 10 percentage points sequentially and 21.6 percentage points year-over-year. We are continuing to reduce our costs with operating expenses at $659 million for the quarter, down $30 million sequentially. Operating loss was $119 million. Taxes were a benefit of $48 million. Taxes are influenced by several factors, including the projected quarterly profitability for the rest of the year and our corporate tax structure. Earnings per share was a loss of $0.42. operating cash flow for the second quarter was $35 million, and free cash flow was an outflow of $240 million. Cash capital expenditure which includes the purchase of property, plant and equipment and activity related to our Flash joint ventures on our cash flow statement was $275 million. Our gross debt outstanding remained at $7.1 billion at the end of the fiscal second quarter. Our trailing 12 months adjusted EBITDA at the end of the second quarter, as defined in our credit agreement, was $3.3 billion, resulting in a gross leverage ratio of 2.1 times compared to 1.5 times a year ago. As a reminder, our credit agreement includes $0.8 billion in depreciation add-back associated with the Flash Ventures. This is not reflected in our cash flow statement. Please refer to the earnings presentation on the Investor Relations website for further details. As David mentioned, during the fiscal second quarter, we executed an amendment to the credit agreement that temporarily increased the covenant leverage ratio for the next seven quarters. Our liquidity position continues to be strong. At the end of the quarter, we had $1.9 billion of cash and cash equivalents and a revolver capacity of $2.25 billion for total liquidity of $4.1 billion. Today, we announced multiple agreements to further enhance our liquidity position by $1.8 billion as follows. On January 25, we closed the delayed draw term loan agreement with our lenders in the amount of $875 million. In addition, as David mentioned, Western Digital entered into an agreement with Apollo Global Management and Elliott Investment Management for a convertible preferred investment of $900 million. Together, these actions significantly increase our ability to access liquidity and provide additional financial flexibility and optionality as we manage through this challenging downturn and execute on our strategic review. Before I go over guidance for the fiscal third quarter, I'll discuss the business outlook and the financial impact associated with the actions we are taking to rightsize our cost structure. In HDD, we expect revenue to increase modestly in the fiscal third quarter as growth in nearline shipments outpaces decline in consumer. In Flash, we expect both shipments and ASP to decrease sequentially. We expect bit growth to resume in the fiscal fourth quarter. For the fiscal year 2023, we are reducing our gross capital expenditures to approximately $2.3 billion compared to our prior forecast of $3.2 billion entering this fiscal year. We are also aiming to reduce our cash capital expenditure to $900 million which is about 40% below our forecast six months ago. The primary drivers of our lower capital expenditures are the delay of the BiCS6 transition in flash and reduced investment levels in both client and capacity enterprise hard drive manufacturing. We have reduced our quarterly operating expenses by over $100 million compared to six months ago. We are targeting to exit this fiscal year with quarterly operating expenses below $600 million. These actions will allow us to weather this cycle while also enabling us to continue advancing our innovative product road map going forward. I'll now turn to guidance. For the fiscal third quarter, our non-GAAP guidance is as follows: We expect revenue to be in the range of $2.6 billion to $2.8 billion. We expect gross margin to be between 9% and 11%, which includes underutilization charges in Flash and HDD totaling $250 million, with Flash driven by a 30% reduction in wafer starts. We expect operating expenses to be between $600 million and $620 million. Interest and other expenses are expected to be approximately $90 million. We expect tax expenses to be between $60 million and $70 million for the fiscal third quarter and approximately $240 million to $260 million for the fiscal year. We expect loss per share of $1.70 to $1.40 in the third quarter, assuming approximately 319 million shares outstanding. Thanks, Wissam. Before we open up for questions, I wanted to reiterate our view of the long-term opportunities for both Flash and HDD storage. Importantly, our efforts have enabled us to regain architectural leadership in both Flash and HDD, and we are preparing these technologies to address the meaningful long-term growth for data storage from client to edge to cloud. With our diverse portfolio, broad go-to-market engine, an enviable retail franchise and a lower cost structure, we remain confident in our ability to deliver long-term shareholder value. Yes, good afternoon. Thank you for taking my question. Obviously, we're kind of in a perfect storm here. But curious, as you think about maintaining your technological competitiveness in the NAND side, while at the same time, significantly slowing down CapEx for both you as well as what we've heard from Kioxia for BiCS6. I guess, how do you balance those two things? How do you set the stage into a recovery and maintaining that leadership? And how much longer can you squeeze the requisite kind of 15% cost down out of BiCS5. C.J., thanks for the question. Good to hear from you. So yes, that's a balancing act. There's no doubt. I mean one of the things we talked about in the script and we feel really good about is BiCS8, I think BiCS8 has reached productization. We'll have more to say about BiCS8. Siva will do -- I think we'll do a webinar during the quarter on all the technological innovation there. There's been an enormous amount of R&D going into that. So, we feel very good about where we are from a technology road map. I'm actually in my hand right here I'm holding a BiCS8 USB, one of the first ones. And so, we're putting enough capital in the system to move BiCS6 along. I mean, BiCS6 will be a shorter node for us. It won't go into all products. We'll be making choices about what we take it into or where we need BiCS6, BiCS5 will serve us well for the rest of the portfolio, and then we'll move right into BiCS8, which quite frankly, is ahead of schedule as far as production, and we feel very good about it. So, we'll balance all of that and have enough capital to accelerate, have enough BiCS6 there that we need it and then accelerate BiCS8 when we see the growth come back. As far as the cost downs, look, I mean, in the second half of the year, cost downs are going to be very difficult because we are far along in BiCS5 and BiCS6 is not ramping that much. We'll return to those as we start to ramp BiCS8. But we'll still have some, but not to the level, especially with the underutilization of fabs. So, all of those mixed in, we're going to -- we will have gotten most of our cost downs in the first half of the year, and then we'll see them come back as we ramp up BiCS6 and especially BiCS8. Very helpful. If I could follow up, Wissam, can you confirm that for the March quarter is just $150 million incremental underutilization charges? And then how are you thinking about that rolling off through calendar '23. Thank you so much. Yes. C.J., so the -- for the March quarter, we're projecting $250 million in total. That's between both Flash and HDD. We expect the probably, I would say, 3/4 of those to be in the Flash -- on the flash side and 1/4 in the HDD business. As we roll into the fourth quarter, I expect HDD to become minimal. But Flash will depend on how long we continue with the underutilization. The way to think of it is typically we -- as we under or as sort of we reduce the wafer starts, given the cycle time, we expect approximately 60% to 70% of the impact to come in the first, let's say, 90 days and then the remaining impact would be in the following quarter. So, the way to think of it is the March quarter would have around 60% to 70% of the impact from the underutilization for -- that we've taken -- the actions we've taken so far. Now that said, it could be that, depending on how the demand picture evolves, we haven't yet decided how long the underutilization is going to be, and we'll manage this in a very dynamic way as we continue to look at market inputs and so on. My comments were around assuming, let's say, a one-quarter event. Thanks for taking my question. I'll try to slip in two as well here real quick. First of all, on the 30% reduction of the wafer starts starting in early January. I'm just curious in the context of what you had outlined, you still -- it sounds like I think that NAND Flash bit demand growth is somewhere in the 20% plus range. With that 30% reduction, how has your bit production changed as you look at calendar '23, how much -- what's your assumption as far as your own bit supply growth as we move forward? So first of all, let me talk about the kind of how we're thinking about it. It is a very dynamic situation. I think when we were looking at our CQ1, we've seen some demand drops. We've come off a very strong quarter of bit growth. We just delivered 20% sequential bit growth. That's why we didn't cut wafers earlier. When we look at our fiscal Q3, we're seeing some drop in both client and enterprise. The enterprise SSD side of it is more a digestion issue. So, to make sure we manage our inventory and we don't get things to build up. And so that's why we're -- we've decided to cut wafer starts in the first quarter. Again, as Wissam said, that's a -- it's literally a decision we can make every week about how do we load wafers into the fab. Right now, that's a one quarter decision to make sure we keep our supply and demand balanced as best we can. I see Wissam looking up -- do you have a number on the overall bit growth for the year. Yes. I think the -- from a supply perspective, I would say, it will be in the lower -- I would say, it's probably given the CapEx situation, we're looking at this to be in the single-digit growth from a supply perspective. That's helpful. And then as a quick follow-up, on the hard disk drive side, I mean, looking at 61 exabyte capacity shift, that's down 40%, 45% sequential. What gives you the confidence that, that's just a transitory digestion thing? And maybe there isn't anything going on competitively? Just any kind of visibility you want to share in that business? Yes. I think we signaled this a little bit last quarter. We knew there was going to be some variability in demand across the industry and across customers. Quite frankly, when you're at these revenue levels, which are the lowest we've seen in the long time, orders from big customers make a very big difference. So, if you go back for the last couple of quarters, the way different big cloud customers, the way either LTAs were restructured, the way big orders came in one way or another, you're seeing some pretty large share shifts quarter-over-quarter. But when you look at it on a sex month basis, you look at it on a 12-month basis, you see pretty consistent share. I think we've gained a little bit. But again, we're managing for profitability. We think share is going to be over a multi-quarter period, pretty stable, and that's actually the way it's working out, you're just seeing some pretty big swings here quarter-over-quarter. So, we feel really good about the competitive situation. The 22 terabyte drive shipped significant volume this quarter. We expect to ramp that throughout the year. We've got big customers very committed to SMR. Our UltraSMR technology gives us a unique position of an additional 20% gain over CMR. And that is in qualification across a number of very large customers. So, we feel like as we ramp throughout calendar year '23, we ramp into a stronger and stronger portfolio as we move through the year. Thank you. I just wanted to make sure I understood the mechanics of the underutilization charge. Is that sort of the cost of just higher cost per bit because you're running underutilized? Or are you -- I mean it sounds like you're pulling some of that forward in time, but maybe not all of it. Can you just talk about what exactly that charge will represent and how that's going to play out this quarter and next? Yes. Sure, Joe. I should have clarified when I talked about the underutilization that we don't necessarily have a similar approach to the accounting for underutilization as some of our peers. For us, the underutilization charges are taken as a period expense. And so, any portion of the factory that's not being utilized is basically expensed within the quarter. And so, it does not flow through the inventory and back to the P&L, if that helps. Okay. It does. I guess, how are you guys thinking about the signals of like when that goes back to full utilization? I mean do you wait for pricing to stabilize? Or is there something you can see beforehand that will tell you and it's time to kind of keep to move the fab back to full. Yes. Well, we're always talking to our customers, right? So, we have a very good sense of where they're at and what the demand signals are going to be. I mean as we talked about, we expect volumes to increase going into our fiscal fourth quarter. So, as we get closer to that and we understand what that looks like we'll make an incremental decision on when and how to ramp back up the fab. This is Jason on for Tim from UBS. I have a couple of questions. So, my first question is on your -- on the NAND segment. Sorry if I misunderstood, but I believe you said single-digit bit growth for NAND in calendar year '23. So, I was just curious which end markets are driving this demand weakness this year. Also, I was just curious whether we should expect any potential risk for NAND inventory write-downs in March quarter or June quarter. Thank you. Yes. So, Jason, my comment was around the supply side. I would say, single digit, let's call it, high single-digit percentage growth. I didn't necessarily make any comments on the demand side. On the demand side, it'll probably be in the low 20% range in calendar '23 versus calendar '22. As for the second part of your question, which is related to inventory. Look, we go through the process at the end of every quarter as part of our quarter close. We look at the various demand signals versus the inventory on hand and the costs, et cetera. And we're comfortable with where we ended at the end of calendar Q4. Got it. Thank you. And my second question is, apart from your comment on the utilization charges, do you guys also see any potential additional risk or purchase order cancellation fees for any type of pay agreements you have with your suppliers if it remains weak in the near term? Thank you. I mean we typically don't forecast these things and we manage the business in a dynamic way. So, I don't expect anything major there. Yes. Again, going back to Wissam's prior comment, that's part of our normal quarterly close process. And if there were any adjustments that were needed to be made, we would have made them at that time. But of course, you got to remeasure it and take a look at it every quarter. Hi, thanks for taking my question. To first one, David, you mentioned nearline HDD could improve. I'm kind of curious how to think about pricing trends for nearline HDD in the March and June quarter? And also think about the nearline exabyte growth in the first half of this year in calendar '23 overall. And then I had a follow-up. Yes. I mean, I think the pricing environment has been pretty good throughout this whole cycle. I mean any time you're seeing this kind of underutilization, you're going to see a little bit of pressure on pricing, which is not surprising, I would say we're seeing a little bit more. I mean I think as we look at exabyte growth is -- I think it's pretty clear to say it will be stronger in the second half than the first half. I mean we're going to now ramp back off of this very low in calendar Q4, and we expect growth as we move throughout the calendar year. As we said, we're anticipating modest revenue growth, maybe low to mid-single digits quarter-over-quarter here going into calendar Q1, our fiscal Q3, we expect margin improvement is, of course, the volume comes back and the underutilization charges drop, and we'll see that continue as we go throughout the calendar year. So -- but we are coming off of very low levels. I think that exabyte growth in the full calendar year will probably be below 20%, something around that. But again, we got to see how it plays out. We got -- we still got big customers going through inventory digestion, some are coming out of it. We'll know more as we work our way through the calendar quarter. And we also have a very dynamic situation in China. The China market has been very subdued for quite a long time now. I would say there are some signs of things getting better. We'll see after we get past the new year, how that progresses. But that could be that -- depending on how that comes back, will have an impact as well, of course. Got it. Very helpful. And then as a follow-up, just kind of curious, you mentioned the cloud inventory digestion. And you also mentioned that for HDD in March, the cloud business stabilized. So curious on the NAND side or even HDD side, when do you expect this digestion to bottom? And then when you think things start improving from a demand standpoint or maybe your own inventory standpoint. Thank you. Yes. That's a very difficult question given how dynamic the market is. I mean I think we're coming off of a very strong quarter of bit growth, 20% sequential bit growth in our FQ2 was a good result. Obviously, it's a very challenging pricing environment. Going into our fiscal third quarter, we see a drop in both bits and pricing. So that's a pretty significant impact on the business. And then current forecast is going into our fiscal Q4, we see the volume pick back up. So that's a little bit a little bit of how we see the dynamics. The pricing environment will change as supply and demand come more into balance. And we're doing everything we can to manage our supply situation, demand balance so that we keep our inventory situation under control, very important in this kind of cycle. And we'll continue to be very dynamic of how we manage it. It literally changes week over week. And again, one of the things I'm very happy about what we've built in the organization over the last several years is a tremendous amount of agility in the organization to react. It's important that we react faster than the market is moving. Otherwise, we just get carried along with the market. And I think we're doing a good job with that to get the best result we can out of a difficult market and prepare ourselves from a technology and portfolio position that when things get more in balance and we get to the inevitable upturn that we're very, very well positioned, and we feel good about that from Flash technology. I talked about BiCS8. Again, we'll talk more about that throughout the quarter. I think you're going to be impressed about the innovation that's in that. I certainly was and also about where we're at in the product portfolio. Thank you. If I could just follow up on your comment on underutilization charges will be minimal in HDDs in fiscal 4Q. What's giving you the confidence there that this inventory digestion and particularly in the high cap price will largely be done? I know you're coming off low levels, but it also seems like some of the broader cloud customers are starting to tick down as well in terms of their own demand. So, any color you can share on what you're seeing in the market that's giving you the confidence that those underutilization charges will go away in HDDs by fiscal 4Q. And I have a follow-up. Well, let me start with the answer, Wamsi. When we look at our inventory exiting the fourth quarter, our inventory appears to be in a better position than our peers. And so obviously, when we consider the utilization and where the demand is and the improvement in demand over time on the HDD side, that's really what drove my comment. And so, based on what we see today, this is how we anticipate things to unfold. Ok, thanks Wissam. And Dave, you noted in your prepared remarks a lot of different things that you're doing all the things that are kind of under your control, right, negotiating covenants, cutting costs, lowering CapEx, OpEx. And despite all of these, you are sort of doing these converts. So maybe you can just talk about why this incremental liquidity is needed as your view on the market changed materially or your share assumptions changed materially? Or is this more of a strategic investment and just optionality? Just -- maybe any color you can share around that would be helpful. Yes. It's a number of things. So first of all, it is to give us the flexibility to manage through the depths of the downturn. It's important that we look at -- we have a blend of different kind of financing, both debt and equity. We can't just take all debt. We've got to watch our debt to equity our EBITDA to debt ratios and make sure we manage it all as one package. And I think so that's part of it. A big part of it is kind of facilitating the execution of our strategic review. These. You'll see in the 8-Ks that are filed. These agreements are very complicated and they're very well thought through to give us the ability to execute a range of outcomes and make sure that we can be in a good position as we move to that stage of the process of not putting a time line on that, but these are set up in a way that give us a lot of optionality and flexibility to facilitate that outcome. And then third thing it brings additional capability to our company. Reed Raymond is a very sophisticated technology investor that will join our Board. Elliott will have the right to join our Board under an amended letter agreement with them when they clear some issues at their choice. So, it brings a lot of capability to us as well. So, we feel good about people investing in the business about the opportunity to do this, and it puts us in a very strong position to continue to execute the business, invest in innovation as well as set ourselves up for the next phase of our strategic review. Thank you very much. I have a follow-up to the last question and then an additional question. I just want to -- should we assume that you're not going to initially draw down the term loan that you have and that's kind of an insurance policy? And how should we -- I'm just trying to figure out interest expense on that. And then I have a follow-up. Yes, Shannon. So, the one thing to keep in mind is the -- we still have the IRS settlement payment that's expected to be in the fourth quarter. And so, when the time comes for that, we will make a decision based on what's the most efficient way to pay. If we don't need to draw down on our new facility, then we won't do that because obviously, the additional investment also gives us flexibility and optionality from a liquidity perspective. Okay. Thanks. And then I'm curious, what changes are you looking at to get down to OpEx at about $600 million a quarter just as you look across your cost basis? Thank you. Yes. So, when you look at where we ended the December quarter, we were down versus also the September quarter, which was also down versus the previous quarter. So, in other words, from the beginning of the fiscal year until now, we've taken down approximately $100 million. And we guided to be $600 million to $620 million. We continue to take similar actions going through the typical focusing on exiting or reducing all sorts of discretionary expenses. But more importantly, we're basically focusing on maintaining the critical R&D investments so that we continue to invest in our technology and drive the long-term growth. So more of a similar type of actions as we've taken so far. And that should get us close to the $600 million and below that by the end of the fourth quarter. Hi guys. Thanks for taking my question. My question is on the preferred equity convert. We've seen different companies handle them from a dilution perspective where sometimes even out of the money, you'll see them come into the non-GAAP share count. Can you just talk about what you're expecting from dilution there and how you're handling that and the guidance given I really don't see shares getting moved around at all? Thank you. So, Tom, maybe I'll start with the latter part of your question. as we're guiding for a share loss for this quarter, including the dilution of the preferred -- the convert would be anti-dilutive. And so that's why you don't see them reflected in the share count. However, as we swing to a profit, I would expect us to include them as part of our fully diluted share count. So, they'll have some limited dilution impact. Helpful. And then just on the recovery side into the fourth quarter on some of the bit shipments or the [indiscernible] can you just -- are you just thinking that it will inflect higher? Or are you expecting a material step-up because you outperformed your peers in the December quarter with the growth you saw there. You're obviously expecting a step down in March. But just talk about the cadence. Is it an extreme step down in March with a small step up? Any kind of color on how you're looking at that forecast given you're giving some color there. Yes. I think one of the things we're seeing is one of our big enterprise SSD customers go through a digestion phase in our FQ3 and I think they'll get through that in a quarter and be back to buying. So that should be -- that will get back to a good guy instead of a bad guy as far as the volume. And then we'll -- this is a very seasonally weak quarter for consumers. So, we'll see some step-up there. Client is a little bit TBD is now commercial and enterprise is a little weaker. The consumer side has stabilized. So, I don't want to put too much of qualification on it. But again, we feel good about our ability to have a very diverse portfolio, very diverse go to market engine. We've talked about this from the channel to consumer to the big OEMs to the web players. And I think, quite frankly, we saw last quarter that go to market engine performed really well. And when we get past a few seasonality things and a few things that are idiosyncratic with big customers, we'll see it kick back in and perform well. Thank so much, David. It sounds like with the charge of $250 million now, and you mentioned NAND underutilization starts to kind of go away in Q4. That kind of you're seeing a bottom or the worst of the utilization charges kind of in the March quarter. Is that fair to say? I know you still have to do some adjustments for NAND and wafers based upon how the market goes. But is that fair to say kind of the worst of it and the digestion and equilibrium are kind of hitting in the March quarter? So, Jim, thanks for the question. My comment around underutilization going away was more related to the HDD side of the business. On the flash side or on the NAND side, I would say it is a dynamic situation. We will continue to assess as we see the demand signal coming. And so, the example I gave earlier was on the assumption that we don't -- that we have only one quarter of underutilization. I wanted to make sure that's well described, so that -- for modeling purposes. But yes, the comment around underutilization disappearing was mostly related to the hard drive side. And look, on the NAND side, also when we exited Q4, we -- our inventory position was better than some of our peers. And we're taking this action to continue to manage our inventory given where the demand picture is today. but that's an evolving situation, and we will be -- we can -- as David said, this is a decision that we can take on a weekly basis if we need to change the approach. Thank you. I was wondering -- I wanted to talk about NAND for a second. Does the capital infusion from the convertible stock and draw on your revolver change your approach to ramping BiCS6 and BiCS8. I asked because 90 days ago, you indicated you'd be pushing out to BiCS transition to reduce your CapEx for fiscal '23. But today, you're also indicating BiCS6 will reach cost crossover with BiCS5 in March, and you're also currently in production of BiCS8. And so, I guess, specifically, when should we expect BiCS8 should reach volume crossover to your NAND business? Thanks. Yes. I don't think we're that far along to say -- to issue that kind of guidance, I guess, I would call that. But I think what we're saying is BiCS8 is well along in its technology evolution and it's reached production phase like I said -- I wish we had -- on video, I can show you the BiCS8 product I'm holding in my hands and playing with. But yes, I would say the investment doesn't change the way we're thinking about our supply situation. What we're trying to do is match our supply situation to our demand and make sure we can manage our inventory and it doesn't get out of control as we go through this process. We're trying to be very dynamic. And obviously, when you're slowing down the fab. And one of the ways to do that is to slow down the nodal transition. It brings in this whole question of how long we're going to stay on BiCS6, how fast do we transition to BiCS8. And we're working through all of that. Again, that's a bit dynamic. A lot of it depends on what BiCS8 looks like and how it's being productized. And I think one of the things we're seeing here today is it has reached the productization stage ahead of schedule. And so, we'll have more to say about what that fab mix looks like as we go forward. It's clear we're going to have BiCS6 will be a shorter node. It won't go into every single product if it will go into the products that it needs and then we'll move other products straight to BiCS8. I appreciate that. If I may because you are discussing an improvement in HDDs beginning in March, could you discuss whether you need to take further action to rightsized your own inventory of components? Thank you. The quick answer to this, Karl, is we don't see the need to do that. And so, this is why we don't project it. We continue to manage the inventory situation on a dynamic basis. But as of the end of the quarter, we were comfortable on where we are. And from where I stand today, we don't see the need to do that. Thanks for taking my question. I just want to follow up on that last question about the inventories. Can you expand on the strategy from here? Because I'm looking at your inventory days and they're up from 102 a year ago to 133 days. And you mentioned there's still some demand question. So, I'm trying to understand why start ramping back HDDs next quarter versus taking an inventory write-down versus other strategies to sort of get your inventories in better alignment and generate some better cash flows? Thank you. So, let me maybe just clarify on the HDD side, to be clear, when we look at the inventory movement in the December quarter that just ended, we did reduce the HDD inventory quite a bit. In fact, the increase came from the Flash side. So, when we look at the numbers, I think quarter-to-quarter at the company level, we saw around $90 million reduction in inventories. And those were more than $200 million of reduction was in the HDD side. That was partly offset by some of the growth in Flash. And so, we don't think the inventory situation on the hard drive side is bad. We obviously will continue to monitor as we do on a regular basis. We also are, as part of the $250 million underutilization that we talked about for the March quarter, there are some continued underutilization on the hard drive side, which would allow us to continue to manage inventory very tightly and maintain that discipline on the supply side until, obviously, the demand growth accelerates. And that's what my comment was about the next quarter, not necessary, in other words, the June quarter, not necessarily seeing as much of hard drive underutilization charges. I hope this clarifies. A couple of quick ones. On the gross margin side, if I think about fiscal third quarter, if hard drive underutilization charges goes down quarter-over-quarter and revenue goes up modestly, is it fair to assume that gross margins for hard drive goes up. And if that's the case, does that mean NAND gross margin could go below zero in the quarter. Obviously, there's a onetime charge involved. So, Sidney, this is a fair way of looking at the transition from Q2 to Q3 with the improved utilization or, let's say, smaller -- lesser underutilization on the hard drive side, we expect to see some improvement in the gross margin quarter-to-quarter. And unfortunately, with the high underutilization charge related to the 30% supply cut on the Flash side, we're anticipating the gross margin there to be slightly negative. And so that sums it up. Great. And then my quick follow-up here is just maybe you have covered this already. But how would you characterize the inventory level in the channel and the customers for both hard drive and Flash. It sounds like hard drive is in decent shape. But curious, more curious on the flash side. Yes. I would say it's -- actually, the channel has been pretty good on the client -- on SSDs this past quarter. So, I don't think there's anything particularly unusual in the channel. I think the channel performance has been -- was actually one of the bright spots last quarter. So, I don't think we see anything too unusual there. Thank you, Sidney. Hi, everyone. Thanks for joining us on the call. We look forward to talking to you throughout the quarter. Take care.
EarningCall_1370	Good day, and thank you for standing by. Welcome to the Fulton Financial Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll 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, Mr. Matt Jozwiak, Director of Investor Relations. Sir, please go ahead. Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the fourth quarter and year-ended December 31, 2022. Your host for today's conference call is Curt Myers, Chairman and Chief Executive Officer. Joining Curt is Mark McCollom, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the Presentations page under the Investor Relations section of our website. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, and actual results could differ materially. Please refer to the safe harbor statement on forward-looking statements in our earnings release and on Slide 2 of today's presentation for additional information regarding these risks, uncertainties and other factors. Fulton undertakes no obligation other than as required by law, to update or revise any forward-looking statements. In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday in Slides 10 through 13 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Well, thanks, Matt and good morning, everyone. For today's call, I'll be providing some high level thoughts on the year, as well as some comments on our quarterly business performance. Then Mark will share the details of our financial results and step through our outlook for 2023. After our prepared remarks, we'll be happy to take any questions you may have. Our results for the fourth quarter and year were very good and we were pleased with our overall performance. Operating earnings for both the quarter and the year represent all-time highs for us. Some key highlights for 2022 were that net interest income grew significantly, reaching an all-time high of $782 million. Our loan portfolio had strong growth across most categories. We grew nicely in both commercial and consumer businesses. In the fourth quarter, we eclipsed the $20 billion mark in total loans. Wealth management had another record year despite the market volatility, and our commercial fee business delivered double-digit revenue growth year-over-year. In addition, we completed the Prudential Bancorp acquisition in the third quarter and successfully handled the conversion and full integration in the fourth quarter. Our Board of Directors declared a special dividend of $0.06 to supplement our quarterly common dividend, returning $0.65 per share in dividends for the year. These positives were offset by some of the operating headwinds that materialized throughout the year. Mortgage banking revenues continued to be pressured by the effects of a rising interest rate environment. And expenses continued to migrate higher due to inflationary pressure and elevated incentive compensation accruals. Overall, we are pleased with the performance and the results that our team generated this year. We look forward to continuing to execute on our corporate strategy to grow the company by delivering effectively for customers and operating with excellence, so then we can serve all of our stakeholders. So, now let me turn to our quarterly performance. Overall, total loan growth was strong for the quarter at $584 million, or 12% annualized. We experienced solid originations, an uptick in-line utilization and saw continued declines in paydowns and prepayments. Turning to deposits. We saw a decline in overall balances during the quarter due to average balances per household declining. We did see continued growth in our overall customer count, and we remain committed to growing our customer base. As always, we are focused on deposit growth over the long-term. Turning to our fee income. We continue to benefit from the diversity of our businesses as the macroeconomic environment challenges certain business lines, and we continue to grow other business lines. Mark will share more details in a moment. Moving to credit. The provision for credit losses of $14.5 million was an increase from $11 million last quarter, when excluding the CECL Day 1 charge related to the acquisition of Prudential Bancorp. Factors contributing to the $3.5 million increase were predominantly loan growth and the changes in the macroeconomic outlook, as we saw credit metrics remained relatively stable. Linked quarter, we saw improvement in NPLs, NPAs and criticized and classified assets. Finally, we continue to actively manage our financial center network. We plan to open four new locations in 2023 and have recently announced the consolidation of five existing financial centers. We continually evaluate how and where our customers choose to connect with us. So now let me turn the call over to Mark to discuss our financial performance in 2023 outlook in a little more detail. Great. Thank you, Curt, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the third quarter of 2022. And the loan and deposit growth numbers I will be referencing are annualized percentages on a linked quarter basis. Starting on Slide 3, operating earnings per diluted share this quarter were $0.48, on operating net income available to common shareholders of $81.2 million. This is consistent with $0.48 of operating EPS in the third quarter of 2022. Our operating results exclude $1.9 million of merger related charges recorded during the quarter for our acquisition of Prudential Bancorp, and $514,000 in core deposit in tangible amortization. At this point, we believe all the costs for our acquisition of Prudential Bancorp had been incurred. Moving to the balance sheet. As Curt noted, loan growth was very strong for the quarter at $584 million or 12% annualized. Commercial lending contributed $349 million of this growth or 10% annualized. C&I lending grew $244 million, led by automobile floorplan increases, agricultural lending and an overall increase in-line utilization, which increased from 22.5% last quarter to 23% this quarter. Commercial real estate lending grew $139 million, or 7% annualized. Consumer lending produced organic growth of $240 million, or 15% during the quarter. Mortgage lending was still the largest component of our consumer loan growth and increased to $163 million with the majority of this growth coming from adjustable rate products. Total deposits excluding customer repo accounts declined $727 million during the quarter. Approximately, one-third of this decline was attributable to anticipated outflows within our municipal deposit portfolio, consistent with prior year trends. Our investment portfolio was relatively flat for the quarter, closing at $4 billion. Putting together all of those balance sheet trends on Slide 4, net interest income was $226 million, a $10 million increase linked quarter. Loan yields expanded 59 basis points during the period, increasing to 4.8% versus 4.21% last quarter. Our total cost of deposits increased 24 basis points to 42 basis points during the quarter. Cycle to date, our total deposit beta is only 9% cumulatively. Our increase this quarter puts us where we expect it to be at year-end, and we continue to believe a cumulative through the cycle total deposit beta of approximately 30% is achievable. Our net interest margin for the third quarter was 3.69% versus 3.54% last quarter. The 15 basis points of improvement resulted primarily from loan betas being higher than deposit betas during the period. Going forward, I would expect our net interest margin expansion to be more modest with additional rate increases, due to higher deposit betas and changes in our funding mix. Our loan-to-deposit ratio increased from 92.1% at September 30 to 98.2% currently. Turning to credit quality. Our NPAs declined $21 million during the quarter, which led to our NPA to assets ratio improving from 76 basis points at September 30 to 66 basis points at year-end. Net charge-offs of $12 million were driven by a $12 million write-down on one commercial office loan due to credit related concerns. Overall criticized and classified loans continued trending lower with a decline of $26 million or 3% during the quarter, following a $251 million or a 24% decline from the second to third quarters of 2022. Despite these positive trends, changes to our macroeconomic outlook and strong portfolio growth led to the increase in our provision for credit losses this quarter. Turning to Slide 6. Commercial banking fees declined $2.2 million to $18.6 million, with decreases in cash management revenues driven by higher interest rates and capital markets declines driven by reduced interest rate swap activity. Consumer banking fees declined $1.2 million linked quarter to $12.1 million led by decreases in overdraft fees. As a reminder during the prior quarter, we implemented changes to our overdraft products and services to improve our customers' experience. Wealth management revenues were effectively flat with the prior quarter at $17.5 million. New business activity continued and the market value of assets under management and administration increased to $13.5 billion at year-end compared to $12.7 billion for the prior quarter. Mortgage banking revenues declined and were driven by a decline in mortgage loan sales as well as a decrease in gain on sales spreads 266 basis points this quarter versus 202 basis points last quarter. Moving to Slide 7. Non-interest expenses excluding merger related charges were approximately $167 million in the fourth quarter, up $4 million linked quarter. As a reminder, many of the cost savings from the Prudential Bancorp acquisition will not be recognized until the first quarter of '23 as many impacted employees of Prudential Bank had worked through dates of mid-December. We also had certain expenses occurring in the fourth quarter of '22 that we expect to reset to lower levels in the first quarter of '23. Included in this list, our incentive compensation related accruals of $3 million due to strong earnings. Expense accruals of $800,000 for branch consolidations planned for 2023. And lastly, $1.9 million of legal expenses and related reserves for a contingent liability. Turning to Slide 8. As of December 31, we maintained solid cushions over our regulatory capital minimums and our bank and parent company liquidity remains strong. Accumulated other comprehensive losses improved $57 million during the quarter. Along with strong earnings, this improved our tangible common equity ratio and drove linked quarter growth of 6% and our tangible book value per share. Our tangible common equity ratio was 6.9% at quarter end, up from 6.7% last quarter. Excluding the impact of AOCI our tangible common equity ratio was 8.2% at December 31. During the quarter, we did not repurchase any common shares. However, our Board has approved a new $100 million share repurchase authorization, which is available and in place until the end of 2023. On Slide 9, we are providing our first iteration of guidance for 2023. Our guidance assumes a total of 75 basis points of future Fed funds increases occurring in 2023 as follows, 50 basis points in February, and 25 basis points in March. With that, our 2023 guidance is as follows: we expect our net interest income on a non-FTE basis to be in the range of $895 million to $915 million; we expect our non-interest income, excluding securities gains to be in the range of $220 million to $235 million; we expect non-interest expenses to be in the range of $645 million to $665 million for the year; and lastly, we expect our effective tax rate to be in the range of 19% plus or minus for the year. Many of you also look at pre-provision net revenue or PPNR as a key metric to assess the profitability of our core operations. Our version of this metric is included in the financial tables of our press release. PPNR has increased 48% year-over-year as a result of earning asset growth over the past year, as well as net interest margin expansion from our asset-sensitive balance sheet. Just wanted to see, if I get a little more color on components of outlook. Just -- I don't know how much you can share in terms of your expectations on deposit flows from here and loan growth in 2023. Yeah, Frank. I would say for loan growth in there, I mean, weâve -- as you know, our long term average for loan growth has been kind of in that 4% to 6% range on an organic basis. So I think you can assume, we're kind of in that range for 2023. And on the deposit side, clearly, it will be lower than what our long term averages have been with some of the industry-wide challenges right now on deposit growth. I guess when you think about the loan-to-deposit ratio, if you could just remind us where you'd allow that sort of to, or where you expect that or target that to get to? I assume, given your commentary, you assume that will continue to tick up from here. Frank, as you look at the long term, we've really operated in to 95% to 105% over the long term. So we're comfortable with where we're at. We are focused on growing deposits and funding. We think it can comfortably drift a little higher, but we are very focused on growing the balance sheet equally as we move forward, really as we have done in the past. This year was a definitely a different year with the excess liquidity and deposits coming off the balance sheet that has been built up throughout the pandemic and strong loan growth. So it was a different dynamic this past year. We see next year returning to more of a normal trend where we focused on balanced growth between loans and deposits. Okay. And then just wondering, I know, Mark, you mentioned the new buyback program that was announced that you guys tend to have a program out there to be opportunistic. Just wondering maybe your general thoughts given the macro picture, given outlook for 2023, your general thoughts on buybacks as we sit here today? Yeah. We're going to -- we do think it's just good corporate practice to have that optionality in place. And we're going to continue to weigh earnings growth and interest rates and credit and evaluate all of that. And there's a possibility we could tap that line throughout 2023, and there's a possibility we could not, depending on how those factors play out. Okay. And then just lastly, if I could, just on credit. It seems like generally, you're seeing -- continuing to see good trends. Any concerns in the CRE book outside of office here today. Do you see more challenges in the near term, in terms of that office portfolio? And any additional color in terms of the loan that you charged off in the quarter? Yeah, Frank. From an overall CRE standpoint, I think the portfolio has been pretty stable. Underlying metrics are stable. We're monitoring it very closely from an overall CRE standpoint. Specifically on the office portfolio, we continue to work hard to understand that portfolio and just to confirm a couple of balances in that portfolio. We've talked about it over the last couple of quarters. Originally, we talked publicly about our office over $5 million and that balance is roughly about $550 million with the acquisition of Prudential, it added a little bit to that. So the office over $5 million is about $590 million. And then we referenced a little higher number later when we had time to go through the entire portfolio. And the entire portfolio is about $1.50 billion. And it is geographically diversified. It's tenant diversified and very granular. The average note in that portfolio is $1.8 million. We have about 585 notes. So we monitor that and can monitor that portfolio really closely. So we do have this credit that was previously identified. We allocated for it last quarter. And as we review that credit, we decided to charge that allocation down this past quarter. We are monitoring office very closely, and we see stable trends there right now, but we're monitoring it very closely. Okay. Great. Just for clarification, Curt, you mentioned a couple of numbers there in terms of $1 billion, I think $1.50 billion and $550 million. The difference is, the $550 million is office over -- office loans over $5 million. Is that what you said? Correct. And then the $1.50 billion is all office. So the difference between those is really the smaller credits through our footprint. Maybe first, just a clarification. In the slide deck, I think it says the NII guidance, the $895 million to $915 million is fully tax equivalent. I thought I heard you say, it was non -- not fully tax equivalent in your comments, Mark. I just wanted to make sure we're on the same page there. Yeah. To clarify that, we had actually filed an amended 8-K this morning, correcting that footnote, Danny, it should say nonâ¦ No, not a problem. Then I guess, just on the fee income guidance, if we take the midpoint of that guidance, it seems to be about stable from 2022 considering the headwinds in mortgage banking and overdraft with your recent policy, what are the items that you're kind of expecting to see offsets to those headwinds in 2023. Yeah, Dany. We see wealth management, as we look forward, it's somewhat market dependent, but that business continues to grow and I think will be positive. And the underlying treasury management and commercial and the payments overall, those activity-based fees in commercial and consumer, we see positive momentum there. So those are the -- we see mortgage stabilizing year-over-year, and we see those positives potentially giving us growth opportunity, but overall, a pretty stable year-to-year. We're going to have pluses and minuses. As I referenced in my comments, we really see the diversification of all of our different fee income business lines helping us as you're always going to have things going up, things going down. Great. Thank you. And then switching gears to credit here. I know that things seem to be really strong still overall. But just curious on reserves, they came down a bit, if I'm not mistaken this quarter. And thinking about through the rest of the year with the potential for a recession coming, how you're thinking about? Where that number could go if things do worsen a bit from a macro standpoint, kind of putting aside what happens with the charge-offs? Well, I mean, well, Daniel, I would say that, again, under an expected loss model, I mean, we've already assumed that things are going to get a little bit worse, which is the basis for a lot of the provision that we took this quarter. When you look at the total allowance and basis points, it went down just a couple of basis points but that's a function of -- I mean we did have a charge-off of $12 million on a loan that was on non-accrual that we charged down. So that's going to then have -- our portfolio did get better. So I mean underlying credit trends are better, which then maybe allowed the total allowance to go down a couple of basis points. But that was offset by changes to our macroeconomic outlook, which does assume that things are going to get a little bit worse over time, hence, with the allowance staying relatively stable linked quarter. Understood. Yeah. No, it's -- there's a lot going on there for sure. And just a clarification finally, the expense numbers that you gave that are going to be coming down in the -- from the fourth quarter with the $3 million and the $0.8 million and the $1.9 million. Are those annual or quarterly and what's the timing we would expect on that? Yeah. Those are all quarterly numbers and all of these quarterly numbers, I would expect to see reset immediately in the first quarter. Great. Thanks. I just want to go back to the office portfolio â hey, good morning, everybody. Just wanted to go back to the office book for just a moment. In the release, you talked about this one credit driving the majority of the $10 million or $11 million. Do you have a size of like the largest exposures, I mean you referenced the $5 million. How big do you guys go in office like for a particular relationship? Yeah, Chris. So we have five -- stratification is we have five credits over $20 million with 23 credit exposures between 10 and 20. And then we have 23 between 5 and 10. So we have 48 credits over $5 million. So it's a pretty small book and we monitor it very closely. Okay. So this would be in the $10 million to $20 bucket. Okay. In terms of what -- I guess, what changed. You talked about reserving the last quarter. I guess what -- number one, what market is this in? And then I guess, what changed? Because I think most of the banks, your peers talk about how these credits were underwritten with 50%, 60% LTVs, good debt service? Like what changed to drive loss? Yeah. So this credit was underwritten consistent with our overall portfolio. It's in the Washington MSA. It's a large single tenant. There's a few other tenants in the building, and you have a lease termination. So we're trying to understand current values of that property as it's released. It's really the details behind that. So we identified that, allocate it, trying to understand what we think is current value of that underlying property with that event and decided to take the charge down versus just the allocation. Okay. But I guess based on that math, it would imply that the value of the building dropped fairly dramatically from where you underwrote it? Correct. We would think that the release of office space in that metro would be at a much lower cash flow and lease amount then was in place. Okay. Great. And then just taking a step back, I mean, aside from office, which is getting a ton of attention, I guess, where else is the wall of worry, if there is one in terms of particular portfolios going into the year? Yeah. We're monitoring all of our portfolios on the consumer side and commercial side. So we're looking diligently at the consumer portfolio on rate resets on adjustable rates and just the overall performance in the commercial mortgage and consumer or residential mortgage and consumer portfolio again, underlying credit metrics don't see any emerging trends but diligently monitoring that. Specifically on commercial office is what we're really, really focused on, and the overall trends are still pretty stable when you look at delinquency and underlying credit metrics. But moving into a credit environment, we're being very diligent on all portfolios. Perfect. Thank you for that. If I could just getting back to the NII guide. Mark, I think in your prepared remarks, you said the rate of change would slow, which is fairly consistent with most banks given the catch-up on the liabilities. But it would imply that the margin begins to roll over, call it, second quarter into the end of the year, if I take the balance sheet comments at face value. I guess, number one, is that a fair assessment? And then maybe, two, could you just talk about opportunities to perhaps offset that through security shrinkage, moderating loan growth, that would be great. Thanks. Yes. So answer is, correct, Chris. I'm saying for the last six months when people ask that question, when do you think your margin is going to peak out in the cycle? And my answer is, one month to one quarter after the Fed stock raising interest rates, right? So depending on what your bias is on that, I think that's going to drive when we max-out on our margin. In terms of opportunities going forward, we are -- we have -- to date kept a lot of dry powder from a liquidity perspective on certain wholesale channels, which could potentially be lower than some of our current overnight borrowings costs. So we've looked -- there are some dips in the intermediate part of the curve right now, where I think there are some opportunities to go out a little bit in duration. And depending if you believe in the forward curve, I think there's some opportunities to extend out liabilities a little bit as well. And then lastly, I mean, we just had a year with 11% year-over-year loan growth, I would expect that to moderate in 2023. Okay. Great. And just the monthly cash flows or the quarterly cash flows off the bond book, if you have it, and thatâs 30% beta that was total, just to make sure that's not interesting, that's total beta, right? Correct. Yeah. That's our estimate for total deposit beta. And roughly for us, our interest bearing deposit beta would be about 50% higher than that. So just because we have roughly about one-third of our deposits are non-interest bearing. And I'm sorry, what was the second half of your question. Thank you. [Operator Instructions] Our next question will come from Feddie Strickland of Janney Montgomery Scott, Research Division. Your line is open. Saw that HLB advances rose by about $1 billion linked quarter. Assuming that has occurred near the end of the quarter, just given where average balances were. Mark, I know you said before that we should expect some level of FHLB just given that's kind of where you guys were before we had all this liquidity. But is that kind of at the level you want to be at or do you have a target level? Or is it just going to kind of follow different loan opportunities, you'll just augment the funding base with that? I was just curious what your strategy was with the FHLB funding? Yeah, I think it's really more the latter, Feddie, than the former. You saw FHLB grow more than, say, Fed funds would because there was opportunities to just maybe do some one-month, two-month, three-year kind of laddering and very short-term FHLB advances and pick up some funding advantage over overnight, but that's -- we're going to be opportunistic on all of those wholesale funding sources. But I would anticipate in the near term, certainly for that number to be higher than what it was certainly as an average for 2022. Got it. Along those same lines, I was just curious, how do you view FHLB advances versus broker deposits just in terms of how you look at what types of wholesale funding to use? Yeah. I mean, generally, we're looking at both rate, but also then depending on what we have in terms of collateral for those advances as well. No, sorry. So I mean I was just going to add that as of right now, our immediate overnight available liquidity is well in excess of $7 billion to $8 billion. Got it. And then just one last modeling question. Look like Wealth Management held up pretty well. Do you happen to have the market value of AUM handy just for modeling purposes? Most of my questions have been asked. But curious, Mark, in terms of the operating expense guide, it looks like at the high end, that's basically annualizing the fourth quarter run rate, maybe what are the opportunities to hit the lower end or maybe where you can more easily more achievable carve-out expenses to hit the lower end of guidance? Yeah. So if you take the -- if you take our $168.5 million in the fourth quarter, subtract down $1.9 million for one-time merger charges on Prudential, take out $3 million for incentive compensation and other accruals. Take out $800,000 for the branch closures that are planned in 2023 and then 1.9 million between legal and reserves that we set aside for a contingent liability during the fourth quarter. You take those numbers out, you get just below $161 million, which then that times 4 kind of does get you to that low end of the guide. Now I would say that you've got offsets to that, you've got wage pressure, and you've got annual [indiscernible] increases and things like that, which is why we have a range. And then additional things to then get you back down to the lower end of that guide are going to be -- we've been investing a lot in technology over the past five years and to start to see some of that technology pay-off to allow us to leverage and grow without them having to add the expense basis on a maybe we've added in the past. And then lastly, I would also comment that while this is maybe more of a 2024 event, we, like everybody else are taking a hard look at corporate real estate. And we think there's going to be some opportunities there over a multiyear period of time to reduce our spend there as well. Got it. And then from a macro perspective, obviously, it remains in a healthy capital position you've got in the Prudential cost saves, and let me, from an M&A appetite, just curious taking your pulse there, what's the appetite for additional M&A from here? Yeah. Our M&A strategy would be the same. We do think we'll have M&A opportunities as we move forward. We'll see if we would pursue any of those, but we do think it's an opportunity for us and our strategy is consistent. From a size perspective, is there a minimum target size of these days not mature (ph)? Well that $20 billion, $2 billion, $3 billion. Just curious how do you think about the size and maybe what markets have the best opportunities, obviously, some exposure in Maryland and Virginia and Delmarva, is that a key infill opportunity? Yeah. We definitely want to focus on infill in our existing footprint. We feel we have opportunities in all five of our states. There could be market increases or cost and synergy opportunities depending on where they are. Acquisitions in that $1 billion to $3 billion really add to our organization. They had talent, they add scale and their acquisitions that we can easily integrate, just like we did this past year with Prudential. So that $1 billion to $3 billion is the primary focus. But as we get opportunities above that, we would certainly consider it.. Thank you. [Operator Instructions] Our next question will come from Manuel Navas of D.A. Davidson & Company. Your line is open. A lot of my questions have been answered. But just in contemplating the PPNR outlook and your growth. Is there -- is it more front-end loaded when we look at 2023 and for loan growth? Is that -- is there any real difference between the front half of the year and the back half of the year with how you are looking at it beyond just the ranges? Is it -- do you kind of have a little bit more uncertainty for the back half of the year? Any kind of color on that thought process with your guidance. Yeah. Couple of things, one is, I mean, we did have a strong fourth quarter in terms of earning asset growth, which did set up the table nicely for first quarter NII. And then also with our loan betas have consistently been in kind of the low to mid-40s versus deposit betas, which have been cumulatively, it looks more like 9% on a total deposit cycle to date. We do expect deposit betas to increase. If we're going to get to 30% through the cycle beta, you could expect in the back half of the year then that would imply that we would probably have a sequential deposit betas that are in excess of 30% to get back to that cumulative number. So that would -- like there was an earlier question about margin, again, we would expect to see our margin if we're right, and the Fed stopped to raise the rates after the first quarter, we would expect to see our margin peak soon after that. And then as deposit betas catch up, you would expect to see NII come moderate a little bit more on the half of the year. I think that the deposit betas analysis makes a lot of sense to me. Do you -- how do you see it progress in the fourth quarter? I've heard some of the increased deposit costs were a little bit stronger maybe in October versus December. Obviously, you're still keeping the same type of through the cycle of deposit beta assumption. But has there been any shift during the quarter in the aggressiveness of competitors? Yeah. Well, yes, and what I would say for us as well is, I mean, we had -- for the third quarter, our total deposit beta was around 5%, and our interest-bearing deposit beta in the third quarter was 8%. And again, I know each of you calculate a little bit differently. We actually use kind of a weighted average Fed funds rate for the quarter. And then -- but then for the fourth quarter, our interest-bearing deposit beta went from 8% in the third quarter up to almost 25% in the fourth quarter for us. So I mean, we did see our interest-bearing deposit costs went up 37 basis points, kind of spot to spot. But we saw more of that in the back half of the fourth quarter and would expect, again, that to continue here into the first half of the year. On the -- that's great. On the loan side, have you seen much pushback yet on pricing -- on higher loan yields? Well, the markets remain competitive for good loan opportunities, but it is not a more aggressive from a margin standpoint than it has been. I think it's a more conservative stance in the marketplace as we kind of pick and choose the right growth opportunities for us. That's helpful. And I think my last question is, I think last quarter, you brought up the loan to value ratio on some of that office exposure. I think it was more on the small on the $500 million bucket was about 65%. What is it on the full $1 billion bucket? Do you have that type of data? Yeah. What we had referenced before is one of the larger deals. It is that 65% that was referenced fee before the overall portfolio has a lot of small deals in there granular. And the loan-to-value we referenced at that point of origination or a point of an appraisal or update. So it's a moving target. Underwriting criteria has been conservative in the same over time. And then without reduction in asset value would reduce from that point. But the 65% specifically is for those larger credits I referenced before. [Operator Instructions] And speakers, I do not see any further questions in the queue. I would now like to turn the call back over to Mr. Curt Myers for closing remarks. Well, thank you again for joining us today. We hope you'll be able to join us when we discuss the first quarter results in April. Have a great day.
EarningCall_1371	Good day, ladies and gentlemen, and welcome to the Agilysys Fiscal 2023 Third Quarter Conference Call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Senior Director of Corporate Strategy and Investor Relations at Agilysys. You may begin. Thank you, Josh, and good afternoon everybody. Thank you for joining the Agilysys fiscal 2023 third-quarter conference call. We will get started in just a minute with management's comments. But before doing so, let me read the Safe-Harbor language. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although, the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to vary materially from these forward-looking statements include the effects of global economic factors on our business, our ability to continue profitable growth, our ability to execute required product development and other deliverables before our PMS system can be rolled-out to Marriott. Our ability otherwise, to expand PMS market-share and the risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed within the Securities and Exchange Commission. As a reminder, any references to record financial or business levels during this call refer only to the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014. With that, I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead. Thank you, Jess. Good evening. Welcome to the fiscal 2023 third quarter earnings call. Joining Jess and me on the call today at our Atlanta headquarters is Dave Wood, our CFO. Let me first cover sales before discussing revenue and other details. We measure sales and our selling success based on annual contract value of sales agreements signed. Please note that the recent Marriott PMS selection that we announced a few weeks ago, is not part of any of the sales and backlog numbers being discussed today. All the sales and backlog numbers being discussed, do not have any benefit from that major win. I will come to the Marriott announcement, a bit later in this commentary. During the last earnings call, we mentioned that after five consecutive solid good sales quarters, the July to September Q2 of fiscal 2023 was a great sales quarter. That's what we reported last time. Well, October to December, Q3 of fiscal 2023 was even better. Q3 was our best sales quarter since the current management team started turning this company around about five to six years ago. We reported last time that our sales trends had picked-up significantly since the beginning of August. That positive trend has remained consistent even through the month of January so far. January is normally our slowest sales month of the year coming out-of-the holiday season. From a selling success standpoint. Even with one more week remaining, this is already our best January by a fair distance. And even better than December, which is normally a good sales month for us. And all of that despite the APAC and managed food services sales verticals being well short of previous pre-pandemic peak levels. The gaming casinos, resorts, and EMEA sales verticals were operating at exceptionally high levels. In Asia, the number of prospective customer meetings and product demo requests continue to be at good levels, but such positive activities have not translated to good sales results yet. Mainly due to greatly delayed technology purchase decision-making. Many prospective and current customers in Asia, are preparing for the expected upcoming travel surge and are looking at various software solution sets they need today and for the future, but continue to be hesitant to finalize purchase decisions. Given the long way, we have come with our software solutions during the last three years since the pandemic started seriously affecting business in Asia, we think our business levels in Asia will pick up steam soon. We have not seen any significant effects of the recent negative macroeconomic environment. In our view, the hospitality industry has been underserved with respect to world-class software solutions for a long-time. This industry has lacked a technology provider who is willing and able to invest in end-to-end state-of-the-art cloud-native integrated software solutions, which can also work on-premise when required. Industry-focused product innovation has fallen short of operator and guest expectations for far too long. On-top of that the operators in this space are also facing escalating pressure from their guests who are increasingly seeing the benefits of modern technology across many areas outside the hospitality. They are enjoying the benefits of technology-enabled self-service and get service across all channels, including mobile devices and integrated systems, wherein they don't need to enter the same piece of data, multiple times. They now expect the same from hospitality as well. Over and above this, hospitality operators are also faced with the need for integrated systems to make it easier for their staff, to serve guests well, across all amenities offered within their properties. Creating great experiences, and increasing guest loyalty now requires both a superior guest service staff culture and integrated technology and solutions, which are easy-to-use. It is now all about the returns, operators can get from creating better experiences for their staff and for their guests. From our viewpoint, those needs are now imperative and urgent in the hospitality industry and should overcome any macroeconomic headwinds. Once they see relevant product demos and get to discuss future product plans with us, many customers seem pleasantly surprised by the breadth and depth of what we have to offer today and how much our products and end-to-end integrated software solutions vision can help them operate more efficiently, and serve their guests better now and in the future. Further, we continue to operate in an enormous total addressable market relative to our current size. Now that we have made the required R&D investments and have done the hard yards, to create an end-to-end set of state-of-the-art solutions, while keeping our focus entirely on one industry, we think we are well-positioned and we have been seeing the selling success benefits starting around August last year. We remain cautiously optimistic in our expectations to continue to do well, no matter what the Wall Street Journal news headlines say each day. During Q3 fiscal 2023, October to December, we added 18, 1-8. We added 18 new customers of which 16, 1-6, of which 16 were fully subscription-based. The deal size per new customer sales agreement during the quarter was the highest we've seen and was more than 50%, -- that is 5-0, was more than 50% higher, than the sequentially preceding Q2 quarter. Compared to a couple of years ago, new customers who sign-up with us now, have a lot more products they could potentially license from us which meet their immediate and future needs. And many of them are using this opportunity to buy more from the same vendor partner thereby reducing the number of vendors they have to work with and lower the cost of interfaces and deployment complexity. This was our best quarter in six years, with respect to total annual contract value of sales agreements signed with new customers. We also added 87 new properties, which did not have any of our products before, but the parent company was already our customers. Business levels and the pace of technology investments among multi-property bigger current customers are improving, but still not back to pre-pandemic levels. Of the 105 new properties added during the quarter across new customers and new properties of current parent customers more than 85%, were either partially or fully subscription based. With respect to new product sales, there were 58 instances of selling at least one additional product to properties which already had at least one of our other products currently in use. These 58 instances involved sales of a total of 117, that is 1-1-7, sales of a total of 117 new products. With respect to overall competitive wins, which is a sum of new customers, new sites of current customers and new products sold to current customer sites in annual contract value terms. This was our best quarter for total sales value surpassing in Q2 by about 17.7%, 1-7% and the next best previous quarter by nearly 8%. The average deal size for competitive win during the quarter was also the highest we have seen so far. We continue to have a long runway of growth available to us within our existing customer base through additional product sales. The number of products installed per customer property improved during the quarter, but it's still only at about two now. There were seven new core property management system, PMS wins during the quarter. We are now a credible presence in the PMS space. And an increasing presence in most PMS-RFP processes. We've had a solid presence in most point-of-sale, POS, RFPs during past years, but that's not been true with PMS projects. Once included in the RFP shortlist, our end-to-end PMS guest journey product presentations, increase our chances of winning exponentially. In addition, the number of credible reference customers on the newer state-of-the-art core PMS products and additional software modules has increased during recent months. Increasing property management system PMS sales will also help us sell more additional software modules, because there are about four times more such modules available for PMS compared to POS. With respect to sales across product categories, October to December, Q3 fiscal 2023 was our highest-ever sales quarter for services sales, software sales in general, and subscription software sales in particular. Q2 and Q3 of fiscal 2023, taken together has been our best to quarter six-Month period of subscription software and services sales. The high level of sales success this quarter also drove the combined product, services and recurring revenue backlog back to record levels. Before moving to revenue, and financial performance during the quarter a quick note on the recent Marriott PMS selection announcement. As mentioned in the press release. We were selected for a majority of Marriott's premium luxury and select-service properties. Across U.S. and Canada based on our participation in a global RFP for property management systems that is PMS. As one would expect, we went through the highest level of scrutiny and analysis possible across product, people, implementation support, and other processes, culture, financial strength and all other organizational aspects, before being selected as the PMS providers for a majority of the 900,000 plus rooms across Marriott's luxury premium and select service properties in the U.S. and in Canada, replacing, for the most part several proprietary systems, which have been in use at these properties for many years. We think this selection was a commentary of not just the current state of our PMS offering, but also our ability to work with one of the biggest and most innovative hospitality operators and execute well on their specific needs and overall future industry vision. The product development effort during the next one and a half years or so will include a mix of general features and Marriott's specific integration and other needs. This is a transformational win for us and adds immense credibility to what we have been reporting to you all these years about increased R&D investments and enormous advancements in our PMS and related modules, making us an increasingly compelling player in the PMS space to add to our traditional strengths in the point-of-sale, POS area. As we have mentioned before, our current PMS products are connected to approximately 300,000 rooms currently. If Agilysys and all others involved in this Marriott project execute well during the next 18 or so months along with all the other PMS market-share expansion success we expect to achieve, we think there is a high probability, the number of rooms connected to our PMS products should expand to about three times that size during the next three years. In summary, on the Marriott PMS selection topic, I cannot overemphasize the fact, there is a lot of focused execution during the next approximately 1.5 years, that will be required from our product development services and other teams by Marriott and by other involved third-party partners that will have to go well, before the system can be rolled-out at any of the planned properties, that is before this win can get translated to real and substantial subscription revenue for us. Everyone involved in this project are working on it with the greatest level of diligence possible. And there is a lot to get done and get done, right. Assuming all goes well, we expect this project to drive major subscription revenue growth for us beginning sometime during fiscal 2025. While we do expect to recognize services revenue directly attributable to this project during the next few quarters, it is possible that's the extent of investment increases required to expand our customer support help desk, software monitoring tools, cloud engineering operations, information security, and other internal systems infrastructure to support the next phase of major revenue growth could happen ahead of the subscription revenue increased timeline, which could reduce our EBITDA by revenue percentage profitability levels by two or three percentage points during the short-term. Now onto revenue and profitability. Fiscal 2023 Q3 revenue was a record $49.9 million. The fourth consecutive record revenue quarter. 26.5% higher, than the comparable prior year quarters and sequentially, 4.6% higher than Q2. We are on track to exceed our full-year -- full-fiscal year revenue guidance provided at the beginning of the year. We now expect full fiscal year 2023 annual revenue to end up between $195 million and $198 million. One-time product and services revenue, combined, was $19.8 million, that is $19.8 million, 38% higher than the comparable prior year period and 5.7% higher compared to the sequentially preceding second-quarter of fiscal 2023. Services quarter, revenue crossed the $9 million mark for the first time. Services sales booking had been at a record or close to record levels during the past couple of quarters, making us cautiously optimistic about future services revenue and margin levels. Fiscal 2023 Q3, recurring revenue grew to $30.2 million, that is $30.2 million driven by 28.8% year-over-year subscription revenue increase. Overall, recurring revenue was 3.9%, sequentially higher compared to Q2, and 20% higher than the comparable prior-year quarter. We've now added more than $1 million and recurring revenue sequentially quarter-over-quarter for five consecutive quarters. Subscription revenue generated from add-on experience, enhanced software modules, most of which were developed internally ground-up during the past few years constituted 17%, 1-7, 17% of total subscription revenue this quarter compared to 11% during the full previous year fiscal 2022. These innovative additional software modules, which are becoming increasingly better integrated with the core POS, PMS, and inventory procurement systems are driving additional sales from existing customers and expanding deal sizes with new customers and new properties. Based on Q3 fiscal 2023 numbers it feels good that the overall revenue and total recurring revenue annual run-rates are now reaching 200 million and 120 million levels, respectively. We've worked hard and smart to reach this stage from where we were five to six years ago and in many ways are only getting started on the next growth phase now. Like I mentioned before, while we remain confident that EBITDA by revenue for full-fiscal year 2023 will remain better than 15%, 1-5, better than 15%, in-line with our annual guidance provided. There is a possibility of a bit of margin compression over the next few quarters as we increased resources across various support internal systems, information security, and cloud infrastructure areas. Getting ourselves well-prepared for future major cloud subscription and other revenue growth. Our progress towards previously planned increased adjusted EBITDA levels could get delayed by a few quarters. Such a margin compression may or may not happen. And even if it does happen should not be more than 2% to 3% EBITDA by revenue. Though there could be a delay of a few quarters in our ability to get adjusted EBITDA as a percentage of revenue level into the 20s, the current reality makes that kind of profitability level a far greater certainty than before. So delayed yes, probably yes but probability of significantly higher profitability levels in the medium-term, far higher. We will provide fiscal 2024 revenue and profitability guidance during our fiscal 2023-year end and fiscal 2024 beginning earnings call around mid to late May. Taking a look at our financial results, beginning with the income statement, third-quarter fiscal 2023 revenue was a quarterly record of $49.9 million a 26.5% increase from total net revenue of $39.5 million in the comparable prior year period. All three-product lines increased compared to the prior year periods with product revenue up 32% and professional services revenue, up 45.7% over the prior-year quarter. Recurring revenue was also up 20%, with subscription up 28.8% over the prior year period. Sales momentum continued into fiscal 2023 Q3, with sales up sequentially over Q2 FY '23 and at our highest level for a single quarter and well over six years, including another record subscription sales quarter. Onetime revenue consisting of product and professional services increased by 38% over the prior year to $19.8 million in Q3 FY '22. The product backlog decreased slightly compared to last quarter, but is north of 80% of record levels. Professional services revenue increased sequentially by 11% to $9.1 million with sales and backlog at record levels. Total recurring revenue represented 60.4% of total net revenue for the third fiscal quarter compared to 63.7% of total net revenue in the third quarter of fiscal 2022. Increased revenue, professional services implementations, and product revenue coming back into the business drove the change in revenue mix compared to the prior fiscal year. We are also happy with our continued subscription revenue growth, which grew 28.8% during the third-quarter of fiscal 2023. Subscription revenue comprised close to 50% of total quarterly recurring revenue compared to about 46% of total recurring revenue in the third-quarter of fiscal 2022. Add-on software modules comprised 16.8% of subscription revenue in Q3 fiscal year 2023 compared to 11.5% on the comparative prior year quarter and continue to be a meaningful contributor to subscription revenue. As previously mentioned, the penetration levels of add-on software modules still has significant room for growth within our existing customer base. Moving down the income statement. Gross profit was $30.8 million compared to $24.7 million in the third-quarter of fiscal 2022. Gross profit margin decreased to 61.7% compared to 62.6% in the third quarter of fiscal 2022. The gross profit margin decrease was primarily due to product and professional services revenue coming back into the business, causing a shift in revenue mix. Combined, the three main operating line-item -- the operating expense line items, product development, sales and marketing and general and administrative expenses, excluding stock-based compensation, was 45.6% of revenue compared to 45.9% of revenue in the prior year quarter and in-line with our FY '23 plan. Product development has reduced from 22.8% to 20.6% of our revenue. General and administrative expenses have reduced from 14% to 13.7% of revenue, while sales and marketing has increased from 9.1% of revenue to 11.3% of revenue due to our recent investments. Stock-based compensation as a percentage of revenue in Q3 FY '23 is 6.9% of revenue compared to 9.7% of revenue in Q3 FY '22. Operating income for the third-quarter of $3.5 million, net income of $3.4 million and gain per diluted share of $0.13 all compared favorably to the prior year third-quarter gain of $1.6 million, $1.1 million, and $0.04 per diluted share, respectively. Adjusted net income normalizing for certain non-cash and nonrecurring charges of $6.7 million and adjusted diluted earnings per share of $0.26 compared favorably to adjusted net income of $4.9 million and diluted earnings per share of $0.19 in the prior year third-quarter. Fiscal 2023, third-quarter adjusted EBITDA will was $8.1 million compared to $6.6 million in the year-ago quarter. Q3 adjusted EBITDA was 16.1% of revenue and in-line with our FY '23 plans. Moving to the balance sheet and cash flow statements. Cash and marketable securities as of December 31st, 2022 was $105.8 million compared to $97 million on March 31st, 2022. We generated $9.6 million in cash during the third fiscal quarter. Free-cash flow-in the quarter was $11.7 million compared to $9.9 million in the prior year quarter. The change in free-cash flow from the prior year is mostly driven by the increase in cash from operating activities, partially offset by the increase in capital expenditures related to the Las Vegas new office build-out. CapEx expense of several million dollars, that the new office build-out will continue into our fiscal Q4. In closing, we are pleased with our third-quarter financial results and are trending above our stated revenue guidance of $190 million to $195 million. We expect our Q4 results to put us in the $195 million to $198 million range for revenue and adjusted EBITDA was slightly above 15% of revenue for the full-fiscal year 2023. In summary, the breakthrough inflection point we have been building towards during the past five-plus years. That breakthrough inflection point does feel like started becoming a reality during the second half of last year. We continue to run Agilysys with a healthy dose of paranoia and remain cautious and conservative with all our decision-making. Despite our naturally cautious nature, we do have many reasons to feel bullish about our future. We now have the self-confidence to manage with optimism -- cautious optimism despite all the sobering macroeconomic headlines we read and hear about. Among the reasons for our bullish outlook are the following. One, we are operating in a total addressable market which is huge relative to our current sites. Two, we think the hospitality industry has been clearly underserved with respect to its technology needs for a long-time and is hungry for such solutions regardless of how challenging the macroeconomic environment gets. Three, our current record pace of selling success is the reality despite a few sales verticals like Asia managed food service providers and hotel chains not being back to pre-pandemic peak levels. Those verticals are also beginning to show good signs of improvement now. Four, we've created multiple growth path for the future. Our recent expansion of sales and marketing continues to add a steady stream of new customers and new customer properties to the Agilysys family each quarter. Operating expenses attributable to sales and marketing increased by about 60%, during the first three quarters of fiscal 2023 compared to the first three quarters of fiscal 2022. The recent PMS election-related partnership created with the world's biggest hospitality Corporation gives us major subscription revenue growth opportunities in a couple of years from now. With more than 25 cloud-native state-of-the-art software modules in our bag now, which create high-value for customers and current average presence of only about two such products in each customer property, selling more software modules to our current customers remains another big possible growth area for us. Five, our property management systems, PMS journey is only in its first or second inning now. And these PMS wins come with the possibility of high deal sizes, driven by the availability of many add-on software models. Six, our overall product services and recurring revenue backlog levels are again back to record sizes. Seven, we are now in the process of adding research strength across various areas to ensure we take good advantage of the outsized growth opportunities in front of us. Eight, the competitive environment at worst remains the same as it has been for the past few years and at best has possibly become better for us. Seems like we remain a fairly isolated example of serious investments in cloud-native end-to-end hospitality-focused software solutions, innovation. If anything, our R&D investments are underestimated, given how cost-effective our current development efforts up. And nine, a solid balance sheet with no significant debt helps keep the door open for other possible relevant and appropriate growth options. So all that together, overall in terms of the state-of-the business and future prospects, we just could not ask for anything more. It is not every day one comes across in enterprise software unit, with this kind of revenue growth visibility across multiple future years. Despite all the pressure, the current transformation brings all great challenges to have, we remain a disciplined growth business unit. We will remain focused on customer partnerships across all customers around the globe to drive the business forward based on a solid foundation of great team members compelling products and world-class customer service. Hi, good afternoon, thanks for taking the question. Nice job on the quarter. I guess first question, as probably expected. A couple more clarifying maybe comments on the Marriott deal and appreciate all the color you gave and the potential for some near-term margin headwinds. I wonder if you could just dive in a little bit more there. How much of that should be sort of headcount related to build-out the project and potentially deliver it from more of a services component? And how much is sort of longer-term structural R&D or other components that presumably leveraged along the way? Hi, Matt. So think of the Marriott deal Matt, in sort of three major blocks. The first block of work is over the next 18 months or so which involves a lot of additional development work, which will make the product a lot stronger and also within that is a lot of Marriott-specific needs. And services work preparing for the conversion that will happen at high-speed, once the first property goes live. So the first block of work of development and services should be a profitable part of work for us. Meaning the services revenue, that gets paid for that work should make it profitable for us. So no margin compression there with that block of work. The second block of the project or call it Phase two is when after the property start going live. There, of course, the subscription revenue will increase rapidly and significantly. And the company grows along with that. So that part is also profitable. So block three is preparing the company for being a much bigger cloud SaaS operating company. There's a whole lot of infrastructure buildup that has to get done in customer support, in help desk, in internal systems, in software monitoring tools. So we just are going to a much higher-level now in the next 18 months or so. That work could be margin compressing. Now the rest of the revenue growth that's going to happen during the next say two to six quarters should provide enough provision for that, but we are just warning you, that there could be some margin compression, 2% to 3% of EBITDA by revenue, nothing more than that and, that margin compression, may not happen as well due to the infrastructure and other buildups, as we get prepared to be a much larger-scale cloud SaaS company. So think of it as three blocks. The first block of work development services will be profitable. That's more or less paid, so that's not an issue. The second phase of work is once the go-live starts, subscription revenue will grow up substantially. So no issues there. The third block of work is getting the company to be a far larger-scale cloud company, that work may have to be done earlier, costs incurred earlier before the revenue starts clicking -- it starts coming through. So that's what could cause a 2% or 3% margin compression. Okay, very helpful. And then when you look at 900,000 plus rooms across their network that you're looking at what would exclude some of those rooms from moving to the Agilysys system -- and I guess, how much visibility do you have today versus maybe what you expect to gain further over the next couple of quarters? Yes, I think it's important Matt, we don't get too far ahead of our skis in this. This was a global process for selecting a PMS product. But we were selected for a majority of luxury premium select-service properties in the U.S. and in Canada. So that's what we were selected for a majority of the 900,000-plus rooms. So that's what we have been selected for. That's where our focus is and we want to keep our heads down, focused and make sure we execute about as perfectly as any software project has been executed and keep our focus on that. Now, these kinds of big customer partnerships don't happen every day Matt. You know that better than I do. So we are going to focus on the task given to us, deliver on that as well as possible, and like all customer partnerships, we will see where the next steps go. But our focus currently is on delivering well on what we have been selected for. Okay, understood. And then, I guess on sort of the rest of the business you highlighted some areas of strength, I guess where -- where do you feel like in terms of the recovery of business travel, is that impacting maybe the continued momentum especially in the gaming and resort space or is this -- is this really just still kind of pent-up demand that's finally working its way through the system and it's maybe not as reliant on. What could swing back the negative way if the macro impacts travel further? Yes, so in our opinion, Matt the pent-up demand is more related to the fact that this industry has been underserved with the kind of integrated technology solutions it's always needed the pent-up demand comes from there. Not just from a temporary pandemic-related travel coming back or not coming back. This is a much larger story in a way it is more and more looking to us as we do product demos and we see how customers react to that. Then, a lot of the companies, lot of the vendors who have dominated the space for decades have sort of not carried that innovation ball forward and that is the gap that we saw, which is why we invested so much in R&D, and created an offshore development center. We did all of that, because we saw that gap. The pent-up demand in this industry, we don't think, it's just related to whether travel comes back or goes down, it is a much larger question. They desperately need the kind of integrated tools to keep their staff happier and provide for much better guest experience. That's where the pent-up demand this and that I think is long-term. That I think is here to stay, regardless of whether travel goes up and down a little bit on that. And also, Matt, it's a big total addressable market. Relative to our size, relative to our size, it's a huge total addressable market. So what we are seeing now is the parts of the total addressable market that is hungry for these solutions. There could be a part of that market that we are not seeing, where probably technology decisions are not being considered, but the part of the market that we are seeing is big enough for us. It's huge for us. So we are seeing increasing opportunities, mostly driven by the fact we have improved our products, we have created, like 25 to 30 software modules. We can now cater to-end-to-end hospitality solutions, that's where the pent-up demand is coming from. Thank you, Ramesh, you gave a very compelling outlook relative to the number of PMS rooms that you will touch or you currently touch. We believe around 300,000 you suggests that number could triple, which by our math would assume another Marriott size addition, in addition to the Marriott room. So with that as context, I wondered if you could talk about the pipeline outside of Marriott, anything that has changed relative to the discussions you are having with hotels and in particular we are all pretty conscious of the fact that there are other large operators with proprietary systems that have been heavily criticized in terms of capabilities, are those the kinds of targets you're talking to? Hi George. So our current number of PMS rooms, like you said is 300,000. And we expect that to probably triple in the next three years or so and we expect a good portion of that to be based on the Marriott deal now. A good portion of that, but there is also a whole lot of PMS deals we have beginning to win now or are being strongly considered in our traditional strength areas like gaming casinos, and resorts, many of them are seriously considering our PMS products. And also remember, there are many of our current customers who are moving from the old products, they were with, whether it is our own old products or other old products have been using for a long-time. Those conversions to PMS is also beginning to happen more now that they see world-class PMS products that they can choose from. Now as far as the other large operators are concerned, I think there have been underserved with technology for a long-time and as and when they come up for their own RFP processes, the good news now is there is a very-high probability we will be included. Couple of years ago, there was a high probability we will not be included in those. So now as and when those large operators come up with the next cycle of software replacements, we expect to be a player there, right. It would be very unlikely that we have not included in that. And once we are included we fancy our chance is quite high. Because of the state-of-the products now and how impressive those demos are. But this calculation of tripling our number of rooms connected to in the next three years is largely based on the PMS deals we are working on now, plus of course the huge Marriott opportunity. That calculation does not take into account any possibility of another large operator running a similar RFP. Those will only be additions to the Marriott. Understand. I wanted to hone in on your Block 3 spend that you referred to and you're effectively saying we are going to be a much larger organization, we need to build an expense base and capability based to meet that. I'm curious with this spend specifically what kind of ability, it gives you to serve other customers in particular and also to cross-sell modules into the Marriott and other basis? Yes, so this Block 3 spend that we talked about, is to make us ready for being a far bigger cloud SaaS company than we are today. So that is to make sure that the number of rooms connected to PMS, the number of terminal endpoints connected to our POS system, with most of them going to the cloud as a subscription-driven SaaS operation that is going to be an enormous increase in our business all towards subscription revenue. That requires taking on infrastructure-level support. Information security, for example. Cloud monitoring tools, it takes a lot of those tools and beefing up our internal systems department. That is going to be a combination of CapEx and operating expenses. To kind of finally take the transformation to becoming a true cloud SaaS big company that requires an order of magnitude jump-in our infrastructure. Those are the expenses, I'm talking about and that prepares us not only for this Marriott hundreds of thousands of rooms going live also for the rest of the business and also for possibly other large operators looking at us like you mentioned. It prepares the company to go to an entirely different level of a cloud SaaS-based software company. For the second part of your question, George that has got nothing to do with selling more to Marriott. Like we are saying, we were selected for luxury, premium, select service in U.S. and Canada and our entire focus is on that. And it's a big partnership, it's a huge partnership. So far there seems to be an excellent culture fit of the two companies working well together. Our focus is on executing what we have been selected for well, what that leads to in the future, we have no idea and that is not our concern now. Yes, thank you, and congrats on the strong quarter and a Marriott deal. That's incredible. With respect to Marriott, are you already seeing any halo effect from the validation that this one should bring? Yes, Nehal. I mean nothing transformational, but the simple fact that we are getting included in PMS-RFPs now, that possibly before the announcement, we may not have been included in those RFPs because now we have to be taken seriously in the PMS space as well, when the world's largest and most innovative hospitality operators select you, you asked the question, how can we not include them when we do a PMS election. So we are getting those kinds of inquiries that are more than it was before. So how does that going to impact your OpEx spend, because presumably, that's going to, materially, increase your opening pipeline here. You only had 3% Q-over-Q increase on your OpEx here in the December quarter, albeit, your sales and marketing was up 11% Q-over-Q. So just how should we think about that from that perspective then? Hey Nehal. We don't expect a much of increase in our sales and marketing spend. If you're looking at it as a percentage of revenue. I mean, the way to think about the businesses, we'll stay-in the 10% to 12%. We don't think the halo effect through the increased bookings is going to change that. I mean, obviously, the revenue number is going up, so the absolute dollars will go up, but we'll keep sales and marketing in the 10% to 12% range. So no major increase there. Yes, I mean. Good. No, one thing just to keep in mind that we talked about. I mean, with the expansion of sales and marketing this year, going from 9% up to 11% to 12%, we still have a lot of capacity level in our sales team, we haven't hit any kind of capacity where we feel more than incremental hiring is necessary at this point. But sales and marketing, Nehal, it's going to continue to expand and -- but as a percentage of revenue, we think we'll stay-in that range for now. That's how it seems like. And I don't think we are leaving much demand on the table, Nehal. Because we are constantly watching, right. The capacity level and how much the current sales teams are contributing and if we need to expand that, if it is very clear that we need to expand that we will not hesitate to do that, Nehal. This RFP, Nehal was a global RFP for PMS. And that's it. And in that RFP, our PMS product was selected for the set of properties that we already described. That's all this process was. And therefore we got selected for that plan. Got it, what is the opportunity to get your add-on modules included and would it be on a per-property basis or would it be coming through a corporate mandate that opportunity does exist? We have no idea, Nehal. I mean, we have no way of answering that question, like I said, this was a particular selection process for a particular product PMS, we participated in it and did extremely well with it. That's all we know at the moment. Okay and then for the portion of the Marriott properties that are not on a proprietary built with some -- on or in-house build systems that are on a third-party system to no micros, I think they won the deal back in 2013, when does that portion of the Marriott properties come up for renewal and therefore presumably an RFP for you guys as well. We don't know Nehal, right. We don't know again, we were selected for hundreds of thousands of rooms across premium, luxury, and select service in U.S. and Canada. And that's all we're focused on at the moment. Thank you. And I'm not showing any further questions at this time. I would now like to turn the call-back over to Ramesh for any closing remarks. Thank you, Josh. Thank you all for your continued interest in our progress. Our next earnings call will be in about four months from now around the middle to end of May when we will be reporting Q4 and full-fiscal year 2023 results, and also provide guidance for fiscal 2024. Until then please be safe, healthy, and happy. Thank you.
EarningCall_1372	All right. With that, I believe we're good to go. Thank you, everyone, for joining us today. This is a day earlier for our 25th Annual Growth Conference. I appreciate some of these time today, where I'm sure most people on the call here know Cynthia Gaylor, DocuSign's CFO, but for those that donât, Cynthia, why don't you give a quick background of yourself and maybe the company before we get started. Yeah. Sure. So I'm Cynthia. I'm the CFO at DocuSign. I've been here for about two years. I was on the board for two years prior to that as Chair of the Audit Committee and the M&A committee. Prior to that, I was the CFO of another public company, Pivotal Software that we took public and then eventually sold to VMware. And then prior to that, I was an executive at Twitter and everyone's strategy and development for a while. And prior to that, I was a partner at Morgan Stanley. So I started my career in investment banking focused on mainly software, Internet, mobile, e-commerce advising lots of companies in that space over the years on some of the most strategic initiatives that those companies undertook. So very embedded in San Francisco and based in Sunny not so sunny San Francisco today. And then in terms of DocuSign, I guess, it's hard to believe that many of you wouldn't be familiar with us, and we're the category leader in e-signature. We have over a billion users and over 1.3 million customers. We really created and defined that category. We have a powerful brand with a very high NPS score. Many of you who I've chatted with in the past, know customers love us because their customers love them for using DocuSign. And so we have quite a high ROI product. We have a big untapped market opportunity. We have about $50 billion plus market opportunity, and we're really going after the broader agreement workflow and we talked a lot about that on our Q3 call. We've doubled the size of the company over the last several years. We're still in the early stages. The environment has certainly gotten more competitive from where it was three years ago, but our biggest opportunity is really pen and paper. And so customers and companies still moving for more manual ways of doing agreements and doing signature to more automated ways. And then, I think our goal is to be the leader in the agreement category in the same way we did for eSignature. So we're really focused on moving forward and helping define that category of the strong base that we have. Great. Yeah, I figured there might only be one person that's not familiar with DocuSign, that's a great overview. I appreciate that. We have lots of topics, but let's start with product. Product is my favorite area or at least tends to be and it's really the long-term driver of the business. I view -- or at least I've always viewed historically eSignatures is a relatively straightforward product, but one that has significant more complexity than the average investor appreciates. Where does the e-signature market go or evolve to over time? You all have added things like notary or a virtual notary solution, but are there any similar products or opportunities to maybe expand the platform over time? Yeah. Product is super important. I mean the company was built on innovation, right, and innovating around a category, and that's really core to kind of how we'll move forward. We have a new CEO. You may have seen Allan Thygesen joined the company about 90 days ago. And so really focusing on innovation around the product is important. And so let me give you some examples. Like when you think about do DocuSign, many people think to about signature. I think more and more people are thinking about the broader agreement, workflow as we've built out the platform and the products around it. When you think about signature alone, it is a very unique product in the sense that the basic eSignature is a basic use case, but what we've built around product innovation and what people can do with the product is quite large. And so not only is it easy to use, it has a comprehensive application set where we're embedded. We have embedded APIs with over 400 partners. So we're embedded in other workflows. That's a lot of where our innovation is. The ecosystem is quite important to that. And then we're really innovating around kind of the trusted brand kind of across the board. And so making sure that identity, things like identity products like notary can really succeed. And so when we think forward, we're really thinking about how do we continue to innovate to really stay ahead of the innovation curve. And many of you may have heard us talk on our Q3 call and acknowledge that other companies out there are starting to ship features and functions that we shipped multiple years ago. And so it was a good reminder that we can't rest on our laurels. We need to continue to innovate around the product. You heard us talk a lot on the last call as well about self-serve and self-serve really being a critical component to reduce friction for customers, but also reduced friction internally as we continue to grow and scale, and I'm sure Scott will talk about that more. Absolutely. We both kind of mentioned notary just because I think that's probably the most tangible touch point over the last couple of years in terms of new product or platform expansions. But -- how is that -- how is your success that work like? Does it gained any real traction to date? Any sort of color there I think would be helpful. Yeah. So I think notary is a very interesting market. It is a regulated market in most places. And so I think we have a lot of advantages in that market just based on the core eSignature. And the way we think about it is, it's really an extension of signature and what we can do in Signature -- versus a standalone product. There would be very few companies that would use our notary products who weren't already signature products. So we really look at that as an expansion opportunity. When I think about kind of -- if I were a stack ranking the different things across the agreement process, notary would certainly be in that category. But I would say something like CLM be a bigger, broader opportunity. There's only a certain set of customers that are interested in notary. So we have an innovative product around that. We've done a couple of small tuck-in acquisitions around it. But something like CLM, you may have seen the recent Gartner report that put us in the upper right of the -- as a leader in the leaders quadrant. And so when we think about broader agreement workflows, notary is certainly part of it, but I would say we have some other things that are probably going to become a bigger part of it sooner, just given the relevance to the customer. Got it. And then while we're talking about the eSignature. market, you talked about the [indiscernible] billion TAM earlier that you all are attributing today. I believe these signature is roughly half of that or $25 billion. Your revenue level is being close to $5 billion level on that $25 billion level today. So obviously, the number suggests that the market is not saturated. But question I get from investors all the time is the company is slowing growth. Is that -- does that suggest that -- I don't know that the market has reached some sort of saturation point because if it's not, why is it adoption occurring further if you have such a low penetration today? Yeah. I think you summarized it well. When we look across the cohorts of customers, we still have fairly low penetration pretty much across the board. And so there's lots of opportunity. I think there's a couple of dynamics at work. One, I would point to the macro environment, we're certainly being impacted the last several quarters from the macro environment. But I think even more so, our growth numbers at scale are somewhat skewed because of the peak growth rates we saw during the height of the pandemic. And when we look across the customer base and we look at the cohorts of customers, the expansion growth is probably one of the biggest drivers of our growth rates, and that's why we've been talking about that a lot with internally, but also with investors and with customers because we know when customers come to the platform and they use our products, they see higher ROI, and they want to do more in that ilk over time. But we're also starting off a much higher base with customers. So if customers in the beginning of the pandemic, bought fairly conservatively. They were new to the platform. We have very much a land and expand model where customers start even some of our largest customers have started very small and expanded over time. And the expansions are moderate over time as well. But what we saw during the pandemic was we doubled the size of the top line in a very short period of time. When I joined the company, we were just over $1 billion of revenue. We'll finish this year over $2 billion of revenue, right? And so that's quite a bit of growth in a very short period of time. But what it means is the expansion economics have slowed, and we think there's still lots of opportunity within the customer base, but it will take some time for those expansion rates to catch up with the book of business base, as customers move forward. And so that's why you've seen some things out of us around pricing and packaging, talking to customers about different use cases. They can use the products for. Many people think about us at Signature, but there's lots of different use cases within different verticals. We have a very diversified vertical set where customers can expand their use of envelopes, which is how one of our pricing mechanisms as well as receipts. But we've run a bunch of pricing and packaging experiments through bundles this past quarter, which is really taking basic eSignature and adding premium features and functions to those bundles. And what we know is customers who use three or more features, functions, products, expand at a higher rate than customers that don't. So we're really focused on reducing friction with customers, making it easier for them to buy and consume our products and realize that high ROI. Because we also realize customers get somewhat of a halo effect by using DocuSign because it is so easy to use for their customers that we think the value proposition is there and the ROI is super clear and in a belt-tightening environment, that will become more and more important. Got it. You mentioned the CLM market a few minutes ago. And I think we all know that you acquired SpringCM several years ago that really helped spearhead your efforts there. I know it's a smaller part of your business today, but it's kind of a really large end market. How are you currently thinking about your opportunity within CLM because I think the average investor would probably suggest that maybe your opportunities there or kind of the growth there has been a little bit muted compared to the eSignature opportunity that you've seen? Yeah. It's a good question. So I think we did acquire -- we acquired a handful of companies prior to the pandemic and then during the pandemic as kind of add-on to the broader agreement process and see SpringCM was one of them. And I think when the pandemic hit, we had just acquired the company, we were still in the process of integrating it. And I think what you saw was customers had an urgent need for signature, particularly customers who maybe had a new signature or we're using signature plus still doing a lot of manual. And so they didn't necessarily have appetite to talk about broader agreements or what they could do with a product like CLM. And so that really led to the growth and the acceleration of our top line with Signature predominantly, which also means that CLM as a percent of the business, even though it was doing okay, was not growing. It's going to take a lot longer when you have a really fast growing thing. That's really big, it's going to mute a fast-growing thing that's really small. The other thing I would say is, as we came out of the pandemic, I think the last three or four quarters, we have highlighted CLM as a bright spot in the business, but it's still a pretty small percentage of the revenue. And my hope is that as we look to the future and we're talking about broader agreements, we're looking at all the pieces of the agreement process, which is CLM is certainly one of them, but we're also able to articulate how different pieces are doing, which may not be a percent of revenue, but it may be a different way of describing agreement workflows and measuring -- better measuring our success there, but I think it's still pretty early. So CLM is doing well. It's certainly been a bright spot. Customers who use Signature are eager to find high ROI products and expand with us. But it's still early days. It's still pretty small, but it's a big market opportunity. And similar to Signature it's a big untapped market opportunity. So even though there's competitors in the space, there's lots of untapped TAM. So it's more a greenfield because we're -- that is a category on its own. That's still digitizing or digital transforming within companies, and it does at the customer level require change management and processes. We even see that for ourselves internally. Got it. I guess lastly, on product, you mentioned, Allan, just starting with the company a short time ago. But how is he shaping the product platform today? I know it's early in his tenure with the company. But how should we expect the product side of the business to maybe evolve under his view? Yeah. So I think Allan has been now in 90-ish days, 90-plus days. And so it's really been focused with customers, partners and employees on kind of helping define our key priorities, understanding the points of pain and then really helping drive the business forward. So that's really where his primary focus has been. I think when we think about product and you think about his priorities, innovation is at the top of that list. And it also touches some of the go-to-market pieces. So I know we're talking about product. But when I think about things like self-serve, that is a product, very important product-led growth type of motion, but it also will bring, hopefully, over time, top line growth in our go-to-market as well as make the business more efficient. So I think there's kind of pieces like that, that particularly given his background and his tenure at Google, I think he really understands kind of that long tail of the customer base and what's required from a product set, but also from a go-to-market to really drive that type of business. So I think that's a great partnership with our new sales leader who really comes from a big enterprise background, right? And our enterprise motion is still, what I would say, immature like even though we have enterprise customers, I think how we go after the enterprise is not mature. And I think there's lots of opportunity there as well. Got it. Sticking with the leadership change, I guess, what else should investors expect from Allan's point into the CEO spot? Any change in strategy versus how [indiscernible] the overall opportunity or is there maybe something more settled that we should all look for? Yeah. I think on the Q3 call, Allan arcuate his key priorities. And at that point, he was, I think, 70 days in the seat, but it is around innovation and go-to-market. And if you were to parse those more finally, it would be things like the self-serve motion, pieces around customer success and make sure that we're helping drive customer success, reducing friction for customers, international remains a very big opportunity for us. And so in some ways, every customer can be a digital customer. About 13% of our revenue comes from the digital channel. And I think he will bring, as I mentioned earlier, kind of a new lens to how we think about digital and self-serve, not just for small customers, but also kind of for our land and expand motion and how can even direct customers self-serve in some areas of their business. And then I would just follow up that list with partners. Our partner ecosystem is very important. So I'm thinking about how do we expand that and leverage that, both from a product and a go-to-market perspective. And then lastly, would be reducing friction in operations. He talked about that a bunch we did on the Q3 call, which is both reducing friction for customers, but also just internally. As the business scales, there's just required investments, as we've talked about in the last several calls across our systems and processes. So those are the handful of priorities that I think we're really driving towards. And as we go through our annual planning process, really making sure that we have our people and our investments lined up against those pieces. You talk about people and investments now that Allan walked into a hefty 9% reduction of force effectively on his first day. I always look at changes of staffing levels like that, it can be important for a variety of reasons, but they're tough mainly because they can alter the culture of a company. Culture is something I tend to be really focused on within software companies because growth companies needed culture to sustain that growth. It's something that I've seen a lot. Can you talk about the current culture within the company and maybe what Allan's message has been on this topic? Yeah. And thanks for that, Scott. I think I mean, doing restructurings are always difficult. DocuSign has never been through one before, but I'm sure you all are following the press on many of our software peers, but also kind of the broader technology market and broader corporate market. Unfortunately, the macro environment right now, a lot of companies are going through the same thing. I think for us, with the changes in management, that's probably a bigger factor than something like the restructuring, even though those are difficult. And so I think really, working with employees, and that's why one of Allan's big priorities has been spending a lot of time with customers and employees. We have seen and we talked about on the Q3 call, attrition has stabilized across the employee base. I think part of that is having some of the executives in seat now for a couple of quarters, plus having a permanent CEO named and now off and running and defining priorities, not just culture but also strategy and mission of the company. So that provides a lot of good call it, tea leave (ph) reading. And I guess, philosophically, on culture, I couldn't agree with you more. People come to work because they want to make a difference, but they also want to work in a culture that's conducive to their core beliefs and how they want to move forward. But culture is up to every employee at a company and cultures evolve over time. And so I would say, we're probably evolving just with all of the new people on board. But I'd also say at the peak of the pandemic, we were evolving because we were adding so many people. So I think, again, culture is a living, breathing type of thing. And I think the management team as well as the employee base is really rallying around kind of the key priorities and driving the business forward. And I think that will help define the culture of the company in the future. I did fail to mention one thing before we got started. We will be taking Q&A from the audience at the end here. My questions go for roughly 10 more minutes, and then they'll 10 to 15 minutes for writing the Q&A. And if you'd like to ask a question, feel free to enter it into the messaging feature within the Zoom here, or feel free to email me myself at sberg@needhamco.com. We already have several questions in there, so I do look forward to taking those in a minute, at least. Let's talk about financials a little bit. We have a CFO on the call. We have to talk financials, at least one or twice here. I guess as you look at the third quarter results in, billings accelerated for the first [indiscernible] quarters, and you called out early renewals is benefiting how you blew away the guidance number. But I really view the quarter, it was really more about the company regaining its ability to call the quarter as it's kind of the second quarter in a row where you've been able to outperform your billings guidance. Is that a correct view in your mind or is there may be more something more to it than that? Yeah. I think we think about it a little bit differently. So billings is one of our metrics. It's certainly an important metric. I think we've been talking for many quarters now about our visibility into the business is not where we would like it to be. And I think that is still a true statement. I think when we look at the dynamics around billings for Q3 and specifically, we did talk about early renewals. So I wouldn't say we blew away the guidance, but I think there was a balancing between Q3 renewals and billings and Q4 renewals and billings, and that's why the Q4 guide looks like it does. So we kind of wind up in a very similar spot. Independent, it's really around the timing of deals and when they came in. That being said, there are customers who were at or near their capacity and so they renewed early, right? So we are seeing some dynamic there, but I wouldn't extrapolate that into the future. I think the outlook we provided stands on its own. But I'd also just, Scott, say we've -- on the last four quarters, we've made the billing guide the Q plus one out. And it's really been more a dynamic of the quarters further out as the business has changed as the leadership has changed as some of the customer dynamics and macro have changed. So we've had decent visibility on the Q plus one for billings, but we've had some trouble earlier this year on the further out outlook. Okay. You talked about some of the renewals there, which brings us to my next question around net revenue retention. It's been falling. You all have talked about on the last quarter call and you expect it to fall a little bit further -- and following that revenue retention can happen, of course, for two reasons. Customers may be falling capacity and they just don't need to expand in the short term or customers may have overbought and now down sell might occur. How do we think about kind of balance between those two portions on the [indiscernible] that might be driving the deceleration in net revenue retention? Yeah. We talked about this a bunch on the call, but also it's one of the key questions that we do get from investors. So we don't guide to dollar net retention, but we do try to give color on it each quarter as well as what we expect for the one quarter out. And we did say we expect that the trend line -- the downward trend line would continue in that metric into Q4. I think when we kind of unpack it, it goes back to the beginning part of this meeting where we were really talking about those expansion rates and the dynamics we're seeing in the cohorts of customers and kind of the flattening of the expansion rates. So in dollar net retention, there is embedded churn. But if you were to point to one thing, or the top thing driving that dynamic, it's probably the rate of expansion. So overall, customers are still expanding. They're just expanding at a slower rate. And that doesn't mean we don't have churn, but it means that, that's the bigger driver of the trend line right now. No, that's a great viewpoint because obviously talks about our highlights the value that customers are getting from the product versus having to trend down because of the change in business. Yeah. And I also think it points to, Scott, that the -- when you think about the customers and what was -- what we were talking about earlier on penetration rates, and how we're underpenetrated in some pockets or there's still lots of opportunity, untapped opportunity within the installed base. It also points to that over time, there are things in our control to expand within the customers because they're not fully penetrated. So I think that's a dynamic when we look at those different cohorts. It feels like something very much between product innovation and go-to market, we can do more around. Great. I guess it would be a good color right now if we didn't talk about the macro, at least a little bit, given what's going on. Can you remind us how the macro is impacting the business. Is this just typical lengthening of sales cycles that many of the software vendors are seeing out there or is there another dynamic that might be at play and I don't know whether it's your industry or product set? Yeah. So I think the macro -- I mean we're not immune to the macro environment similar to our software peers. I think given our products have ROI, there's still demand, but it's probably muted demand in the current environment, and we talked about that some on the Q3 call. We're focused on the things in our control. There's certainly verticals that are more impacted right now by macro similar to at the peak of the pandemic, there were certain verticals in financials, mortgage is maybe a very obvious one, where when interest rates were very low. Customers who had a lot of exposure to mortgage, we're expanding at very high rates because they were doing a lot more mortgages. And now in the current environment where interest rates are higher, there's maybe not as much mortgages. So if the customer is a pure mortgage provider, that would be an example of a vertical that is being impacted more by the macro. But again, we have a pretty diversified vertical base and mortgage would hit financial vertical overall. But then even within pockets of financial, we do see some really promising expansions within those verticals for other use cases. So customers who have diversified use cases themselves, maybe moving their vertical usage of our product to other areas of their business, right? And so that interesting within itself. But I think we do have customers impacted by macro. We will be impacted by macro. The outlook we gave for fiscal '24 doesn't assume improvement in the macro or deterioration. It's kind of what we're seeing now is what we would expect to continue into next year. My last question were actually on your initial I wouldn't call it guidance, but view on fiscal '24. Can you talk about what drives, I guess, the comfort or visibility into the growth level that you [indiscernible] just talked about in game on the third quarter call there. You talked about earlier on the out quarters, maybe a little less visibility earlier in the year. You seem to have a fair amount of visibility at this point or at least a fair amount of comfort in terms of the initial guidance you get for next year. Yeah. And I would just say like, look, we were really pleased to be able to give an outlook. We thought in the current environment, particularly with what's going on in the macro as well as the additions to our management team. It was important to give at least an initial outlook. I'd caution you, it's not a guide, right? Hopefully, when we get to that point next year, we'll be in a position to be more specific. But we thought it was important to put out there what we're currently seeing. We are in the midst of our fiscal '24 planning cycle. -- that will come together. Allan in his role, as I said, about 90 days. So really focusing on where our priorities are for next year, where we're going to put more or less investment against those priorities. So I think in general, I think putting out the outlook was probably more -- we wanted to be clear on what we're seeing. And I think that's what it represents versus more or less visibility than what I was talking about earlier. Last question for me, and then we will take in to Q&A. We've got several coming in. Just on the operating margin, kind of, I guess, initial view that you gave on the third quarter call, you talked about operating margins will likely be on the lower end of your kind of long-term 20% to 25% guidance range. I guess with the changing workforce and the 9% reduction in a single-digit revenue growth rate, why would we not see operating margins to trend maybe towards the higher end of that because your investment levels are likely to be, I guess, a little bit lower knowing that the growth, at least in the near term, isn't as hyper as what you've seen previously? Yeah, for sure. So I think the restructuring in some way gives us room to invest in the in the key priorities. But given where we are in the market and our leading market position, I know Allan and our team feels strongly that we need to invest in the right ways, but we want to do so in a disciplined way. So I think there are arguments for higher margin or lower margin, we think the lower end of that range for next year is reasonable. We wanted to make it clear that we were committed to the lower end of the target range that we had communicated at the time of the IPO before I was even on the board. So we're committed to profitable growth at scale. But I think we also have to prioritize some of the growth areas, given the greenfield space in our market and our leading position. And as we go across -- after the broader agreement workflows, I think we need to make sure that we're making the right investments in order to be the category leader there as well. All right. Well, with that, let's take some Q&A here. First question is on the self-service motion. What is the opportunity for cost savings by moving SMB to self-serve? Yeah. So I think the self-serve is not solely about kind of cost savings, as I touched on earlier. I think there's a multifaceted opportunity. One is around product innovation and make sure we're innovating around the products so that all customers across direct and digital can self-serve doing more things. We also think it's a good landing spot for international to further grow international, but it does require product investment, which is a key focus area. We also think it can drive top line growth kind of across the business if more customers can self-serve across more different activities. And then third, I do think it is a -- it can provide some operating leverage over time, but I wouldn't anticipate that's kind of an immediate piece because we do have some product things we need to do before we would necessarily see that leverage in the business model. Okay. Next question is around your net revenue retention. You talked about seeing early renewals with many customers at capacity. If so, why is that dollar retention coming down then? Yeah. So when customers are at capacity and their contract is coming up for renewal, they could be at capacity in doing a flat renewal, they could be at capacity and doing a slightly down renewal or an up for renewal, right? And so they could be expanding, they can be contracting, they can be flat. And so just because they're at capacity doesn't necessarily mean they're expanding or contracting. I think also the dynamic we talked about the early renewals, we saw a slight uplift in the Q plus one type of renewals, which we think also speaks to the macro environment. Customers may not be renewing as many quarters out. But also our field is developing better hygiene around how we are looking at the renewal base and the renewals coming due. So if the field is going through their checklist and saying, hey, these customer is due in two weeks, two weeks after the quarter closed, but look, they're like they're just approaching capacity, let's talk to them now. and talk to them about renewing a couple of weeks early. Maybe we're selling them additional products or expanding them. Maybe they're going to try out the new pricing and packaging. There's all different kind of dials in that discussion. So I think it points to two things. One, I think the go-to-market piece and just some of the enablement initiatives we've been talking about and our team doing better. I also, on the flip side though, I would say it points a little bit to the macro climate and some of our other peer companies have seen a similar dynamic in kind of that Q plus one early renewal, which, again, we're pleased to be to take those deals off the table and bring them into -- but that dollar net retention, again, it's around that expansion rate over a bigger book of business. And so it takes more expansion dollars to move the dollar net retention than it did 2 years ago when we were a much smaller company. Next couple of questions are on CLM. The first question is, if you're number two in the market, who's number one? And with that vendor, where are you lacking or behind in terms of product and go-to-market? I don't think we have to name who number one is they're actually presenting at our conference here if anyone is not familiar with them, certainly, I can take that one later. But from a feature functionality or go-to-market, why are they ahead or what gaps do you need to fill? Yeah. And I'm not sure like what measure the number one or number two is, like I think we would say we are the leader in the market. Gartner, I think the folks can look at what they published I think everybody is called a leader in the market. So I would maybe debate number one, number two, I don't want to get into that debate. But I think we would say like we're the leader in the market and not just in CLM, we're kind of across broader agreements, and we have a really big installed base where we think we can go win and define the category there, of which CLM is a big piece of that or a core component, I should say. So again, I think different people are attacking different slices of the market. We don't think there's winner takes all in that market similar to Signature. There's not a winner take all. We think others can succeed. But what we're doing is looking ahead and how are we going to innovate around broader agreement workflows and be the category leader across that broader initiative. Okay. On the CLM adoption, how would you characterize the customer profile of someone who adopts the CLM offering, maybe by headcount or vertical, et cetera.? And is every single Docu customer addressable for CLM? I'll take the second one first. So the answer is no. I don't think every single DocuSign customer is addressable for CLM I think the -- given it's a fairly nascent market. And again, it requires -- I talked about change management in -- within the customer base in terms of how do you think about agreements, how do you think about contracts -- how do you think about the process and the automation around them. It does require change management. And as I said, we're going through that journey internally ourselves. So I would say every customer is not a CLM customer, but I would say the profile of a customer, who's prime to be a CLM customer is a customer, who is a signature customer and they are likely in certain areas of verticals, financials is a good example. Manufacturing would be a good example. Healthcare/Life Sciences could be another example, technology sector would be some examples, not the only examples but just some that are kind of top of mind, who have used signature, who have seen the ROI and now want to expand what they're doing with DocuSign in that same high ROI way. And so those would be some of the pieces. I would say likely it's probably more in kind of what we call our mid-market majors and enterprise-type customers than our VSMB or SMB type of customers. That doesn't mean some of them don't use the products. There's different features and functions even within those products. that folks -- customers find value. But I would say that would probably be the -- how I would articulate that. Last question. Pardon me, at least on CLM at the moment is -- how much does the average customer's ACV increase when they adopt CLM? Yeah. So similar to signature, it's a land and expand model. So customers tend to start small and then expand over time. There's also more customer success required around CLM. So while we don't disclose kind of the deal sizes, what I would say is when we're thinking about things like dollar net retention, and we're talking about the expansion rates, adding products like CLM can expand -- expands that book of business. And so we are very focused on making sure that customers have exposure to these other products to help with those expansion rates. Next question is on the early renewals. Can you provide some color into the magnitude of the early renewals for Q3? Yeah. So I mean we have early renewals. We have some level of early renewals in every quarter. And I would say the dynamic -- and we've talked about it, I remember my first couple of quarters here as the CFO during the peak of the pandemic, we had early renewals that were a different dynamic. It was customers who had bought conservatively and then expanded way before their contract expired because they needed more. And so the expansion rates were quite high, and that was reflected in both our revenue growth, our billings growth and our dollar net retention. I think what we're seeing now in early renewals, and again, we always have we always have a certain level of early renewals. And in Q3, it was that Q plus 1 dynamic. And so I think we're looking at that. But remember, Q4 has more renewals, just given the cycle of contracts. Q4 tends to be a stronger quarter in software. And so we wouldn't expect that dynamic to continue into next year, into Q1 or into Q4 just because there's not the same base of renewals coming due in those quarters. I like the next question here just because I think just the way it's worded a little bit. But how can investors know, aside from when you tell us on a conference call when the COVID hangover effects have ended? What is the management team at the company looking at to help better understand where this is at? Yes. So I think the -- on COVID, I mean, I know some pockets of investors talk about the COVID hangover. I think we had acceleration in our business due to COVID, and we're kind of coming off of that. And there's these dynamics around we grew our book of business, we grew our customer set -- very, very quickly. And I think that is a testament to what the market opportunity is. But it's still a really big market where, believe it or not, a lot of companies don't use an electronic signature product, and they don't use DocuSign. We only have 1.3 million customers. There's tens of millions of companies around the world. So I think -- we think about it less as like the COVID hangover effect, and we think it's more about how do we continue to expand within our installed base. How do we continue to land, which we've been pleased with our lands on net new customers and make customers successful so that they're expanding across the innovation that we're delivering in the products and the features and functions as we've been talking about. Well with that, we are [indiscernible] Cynthia, I wanted to thank you so much for joining us and everyone on the call, thank you so much for joining us. If there's any other follow-up questions, please feel free to reach out to me directly or to Cynthia and the entire team of DocuSign. Thank you so much, everyone.
EarningCall_1373	Good morning. Welcome to today's conference call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 18, 2023, and PNC undertakes no obligation to update them. Thanks, Bryan, and good morning, everybody. 2022 is a successful year for our company, and our strong performance during the year reflects the power of our Main Street bank model and our coast-to-coast franchise. For the full year, we reported $6.1 billion in net income or $13.85 per share. Inside of that, we grew loans and generated record revenue during a rapidly rising rate environment while at the same time we controlled expenses, resulting in substantial positive operating leverage for the full year 2022. Turning to our results for the fourth quarter, we generated $1.5 billion of net income or $3.47 per share. Growth in both net interest income and fee income contributed to a 4% increase in revenue. Our expenses were up 6% this quarter, primarily due to increased compensation from elevated business activity, particularly in our advisory businesses. Rob is going to provide more detail on our fourth quarter expenses as well as our outlook in a few minutes. Average loans grew 3% during the quarter, driven by growth in both commercial and consumer. For the full year, average loans were up 15%, and we continue to grow our loan book in a disciplined manner. As we look ahead, we are operating our company with the expectation for a shallow recession in 2023. Accordingly, this outlook drove an increase in our loan loss provision in the quarter and a modest build in reserves under the CECL methodology. Importantly, as the credit environment continues to trend towards normalized levels our overall credit quality metrics remain solid. I'd add that with charge-offs having been so low, it's not surprising to see volatility quarter-to-quarter and we saw this in the fourth quarter with an outsized loss on one commercial credit pushing us outside of our expected range. We continue to manage our liquidity levels to support growth. Our deposits remain relatively stable, and we've increased our wholesale borrowings to bolster liquidity. During the quarter, we returned $1.2 billion of capital to shareholders through share repurchases and dividends, bringing our total annual capital return to $6 billion. Our progress within the BBVA influence markets continues to exceed our expectations, and we see powerful growth opportunities across our lines of business in these new markets. We continue to generate new customer relationships, and we have been thrilled with the quality of bankers we've been able to hire. In summary, it was a solid fourth quarter as we further built on our post-acquisition momentum, delivered for our customers and communities across the country, generated strong financial results for our shareholders and put ourselves in a position of strength as we move into 2023. As always, I want to thank our employees for everything they do to make our success possible. Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is presented on an average basis. Loans for the fourth quarter were $322 billion, an increase of $9 billion or 3% linked quarter. Investment securities grew $6 billion or 4%. Cash balances at the Federal Reserve totaled $30 billion and declined $1.5 billion during the quarter. And our average deposit balances were down 1%, while period-end deposits remained essentially stable. Average borrowed funds increased $15 billion as we proactively bolstered our liquidity with Federal Home Loan Bank borrowings late in the third quarter, and these are reflected in our fourth quarter average balances. On a spot basis, we increased our total borrowed funds by approximately $4 billion compared to September 30. The period-end increase was driven by $2 billion of FHLB borrowings and $3 billion of senior debt, partially offset by lower subordinated debt. At year-end, our tangible book value was $72.12 per common share, an increase of 3% linked quarter. And we remain well capitalized with an estimated CET1 ratio of 9.1% as of December 31, 2022. We continue to be well positioned with capital flexibility, during the quarter, we returned $1.2 billion of capital to shareholders through approximately $600 million of common dividends and $600 million of share repurchases or 3.8 million shares. Slide 4 shows our loans in more detail. Compared to the same period a year ago, average loans have increased 11%, or $33 billion, reflecting increased loan demand as well as our ability to capitalize on opportunities and our expanded coast-to-coast franchise. During the fourth quarter, we delivered solid loan growth. Loan balances averaged $322 billion, an increase of $9 billion, or 3% compared to the third quarter reflecting growth in both commercial and consumer loans. On a spot basis, loans grew $11 billion, or 3%. Commercial loans grew more than $9 billion at period end, driven by strong broad-based new production in both our corporate banking and asset-based lending businesses. Importantly, utilization rates within our C&IB portfolio remained stable linked quarter. Consumer loans increased $1 billion compared to September 30, driven by higher residential mortgage home equity and credit card balances, partially offset by lower auto loans and loan yields of 4.75% increased 77 basis points compared to the third quarter, driven by higher interest rates. Slide 5 covers our deposits in more detail. Throughout 2022, deposit balances have declined modestly, amidst the competitive pricing environment and inflationary pressures. Fourth quarter deposits averaged $435 billion and were generally stable linked quarter. Given the rising interest rate environment, we continue to see a shift in deposits from non-interest-bearing into interest-bearing. And as a result, at December 31, our deposit portfolio mix was 71% interest-bearing and 29% non-interest bearing. Overall, our rate paid on interest-bearing deposits increased to 1.07% during the fourth quarter. And as of December 31, our cumulative beta was 31%. Slide 6 details our securities portfolio. On an average basis, our fourth quarter securities of $143 billion grew $6 billion or 4%. The increase was largely driven by elevated purchase activity late in the third quarter, which included $3 billion of forward starting securities that settled in the fourth quarter. On a spot basis, securities were $139 billion and increased $3 billion, or 2% linked quarter. The yield on our securities portfolio increased 26 basis points to 2.36% driven by higher reinvestment yields, as well as lower premium amortization. And during the quarter, new purchase yields exceeded 4.75%. At the end of the fourth quarter, our accumulated other comprehensive income improved to $10.2 billion reflecting the accretion of unrealized losses on securities and swaps. Importantly, we continue to estimate that approximately 5% of AOCI will accrete back per quarter going forward without taking into account the impact of rate changes. Turning to the income statement on Slide 7. As you can see, fourth quarter 2022 reported net income was $1.5 billion, or $3.47 per share. Revenue was up $214 million, or 4% compared with the third quarter. Expenses increased $194 million, or 6%. Provision was $408 million in the fourth quarter, reflecting the impact of a weaker economic outlook as well as continued loan growth, which resulted in a $172 million reserve build. And our effective tax rate was 17.7%. Turning to Slide 8. We highlight our revenue trends. In 2022, total revenue was a record $21.1 billion and grew 10% or $2 billion compared to 2021. Within that, net interest income increased 22% due to both higher interest rates and strong loan growth. Non-interest income declined 5%, as lower market-sensitive fees more than offset strong card and cash management growth. Looking more closely at the fourth quarter, total revenue was $5.8 billion, an increase of 4% or $214 million linked quarter. Net interest income of $3.7 billion was up $209 million, or 6%. The benefit of higher yields on interest-earning assets and increased loan balances was partially offset by higher funding costs. And as a result, net interest margin increased 10 basis points to 2.92%. Fee income was $1.8 billion and increased $75 million, or 4% linked quarter. Looking at the detail, asset management and brokerage fees decreased $12 million, or 3% reflecting the impact of lower average equity markets. Capital Markets and Advisory revenue grew $37 million, or 12%, driven by higher merger and acquisition advisory fees, partially offset by lower loan syndication activity. Lending and deposit services increased $9 million or 3%, primarily due to higher loan commitment fees, reflecting our strong new loan production. Residential and commercial mortgage revenue increased $41 million, driven by higher RMSR valuation adjustments, partially offset by lower commercial mortgage banking activities. Other non-interest income declined $70 million linked quarter, reflecting a negative fourth quarter Visa fair value adjustment compared to a positive valuation adjustment in the third quarter, resulting in a change of $54 million. Turning to Slide 9. Our fourth quarter expenses were up $194 million, or 6% linked quarter. The growth was largely in personnel costs, which increased $138 million reflecting higher variable compensation related to increased business activity. Fourth quarter personnel costs also included market impacts on long-term incentive compensation plans, as well as seasonally higher medical benefits. The remaining balance of the increase in expenses linked quarter included higher marketing spend as well as impairments on various assets and investments. The majority of these impairments will lower our expenses going forward and are included in our expense guidance. As you know, we had a 2022 goal of $300 million in cost savings through our continuous improvement program, and we exceeded that goal. Looking forward to 2023, we will be increasing our annual CIP goal to $400 million. This program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 10. Non-performing loans of $2 billion decreased $83 million or 4% compared to September 30 and continue to represent less than 1% of total loans. Total delinquencies of $1.5 billion declined $136 million, or 8% linked quarter. Net charge-offs for loans and leases were $224 million, an increase of $105 million linked quarter, driven in part by one large commercial loan credit. Our annualized net charge-offs to average loans was 28 basis points in the fourth quarter. Provision for the fourth quarter was $408 million compared to $241 million in the third quarter. The increase reflected the impact of a weaker economic outlook as well as continued loan growth. During the fourth quarter, our allowance for credit losses increased $172 million, and our reserves now total $5.4 billion or 1.7% of total loans. In summary, PNC reported a strong fourth quarter and full year 2022. In regard to our view of the overall economy, we're now expecting a mild recession in 2023 resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis point increase in Fed funds in both February and March. Following that, we expect the Fed to pause rate actions until December 2023, when we expect a 25 basis point cut. Looking ahead, our outlook for full year 2023 compared to 2022 results is as follows: we expect spot loan growth of 2% to 4%, which equates to average loan growth of 6% to 8%. Total revenue growth to be 6% to 8%. Inside of that, our expectation is for net interest income to be up in the range of 11% to 13% and non-interest income to be stable to up 1%. Expenses to be up between 2% and 4% and we expect our effective tax rate to be approximately 18%. Based on this guidance, we expect we'll generate solid positive operating leverage in 2023. Looking at first quarter of 2023 compared to fourth quarter of 2022, we expect spot loans to be stable, which equates to average loan growth of 1% to 2%. Net interest income to be down 1% to 2%, reflecting two fewer days in the quarter. Fee income to be down 3% to 5% due to seasonally lower first quarter client activity. Other non-interest income to be between $200 million and $250 million, excluding net securities and Visa activity. We expect total non-interest expense to be down 2% to 4%, and we expect first quarter net charge-offs to be approximately $200 million. Good morning. On the managed income side, I wonder to see if you can give us a little more thought around the deposit costs potentially maybe if you can give us your updated thoughts on where the cumulative beta, I know you're in that 30 -- just over 30% now 31%, where is that going to trend to? What's your updated expectation there? And then also maybe on the non-interest-bearing mix, I know it's 29% of total deposits now. How do you expect that trending over the course of the next year? Sure. Why don't I take the second one first in terms of the mix. Consistent with our expectations in a rising rate environment, we expect the mix to go more into interest-bearing, and we're seeing that. But it's right on track. No big surprise there. We're right now at 29% non-interest-bearing. I'd imagine that over the course of '23, will go down a bit our previous low in previous cycles was around 25%. So I think that's a good way to sort of think about it. In terms of the betas, you're right. We finished the year right on top of where we expected. As you know, betas lagged past historical increases for most of '22 for us and for the industry. And going forward, we expect maybe that lag to sort of compress a bit, and we'll start tracking to historical rises, but nothing particularly unusual. And of course, we don't control that that will be an outcome. John, if you're trying to dig into -- I made a comment at Goldman that we thought our NII might track to an annualized fourth quarter and in our guide, we look a little light to that. All of that pressure. It's not coming from funding. It's coming from the spread on loans. So, we're -- we've been surprised, I've been surprised. We just haven't seen spreads widen in corporate credit. So, I guess what I would say to you is -- there's this disconnect that something is going to give. Either corporate spreads are going to widen or our current scenario that we have forecasted for CECL is wrong. So right now, we basically guide against kind of where spreads are. Maybe we get some widening and we put in this mild recession in CECL. So, we have a little bit of disconnect in the numbers, but they are what they are. Yes. And that gets, of course, to our guidance for the full year in terms of NII. So the upside would be, to Bill's point that loan spreads would widen as they should, if we get into the economy that everybody is prepared for. Yes. So, none of the change in kind of thought on NII is driven by any change in our assumption on betas or deposit growth. We had pretty healthy deposits this quarter. We think continue that. It's all on this. We have an ability, particularly in the new markets to grab a whole bunch of new clients, make new loans that are good credit loans, kind of invest into this as we've done in our new markets for years, invest into client growth. The problem is the return right now struggles because we haven't seen spreads gap the way we've seen in the public markets, the way we might expect given the economy, we're kind of forecasting. Got it. Okay. And then separately on the credit side, can you give us a little more color on the $100 million increase in charge-offs. What was the size of the commercial credit? What is the industry? Are you seeing any other developments related to that credit or other areas of your portfolio were flagging just given the lumpiness and the size of that one issue? Can jump in here, right? That one credit has been staring us in the face for a while. We've been working on it. It's a credit that both BBVA and PNC we're in. So it shows up as outsized. We had big reserves against it. As you've seen in our non-performers and our delinquencies there is going down. This is kind of I don't know what you call this something going through a snake, but we've been staring at it and we charged it off and that's showing the elevation this quarter, but I wouldn't read into that. Rob, I wanted to just follow up on the NII question from John there. Can you just remind us where you are on kind of interest rate positioning? Building in small rate hikes in the beginning of the year, maybe cut later, how do rate hikes from here kind of impact you? And -- just a reminder of where you are on the swap book and how that's influencing NII today and how it rolls off would be helpful? Well, sure. Let me -- I'll try to cover some of that, and then we can follow that up. I mean, definitely, we're positioned to benefit from the two rate hikes that we expect 25 basis points each in February and March. We do have a 25 basis point cut in December, but that won't play largely in the '23 performance. So, we're positioned well against that, and we'll grow our NII. We're pointing to between 10% and 13% in terms of that range year-over-year. I will say, when we jumped into this right away, forecasting for a full year in terms of guidance is always difficult. This year, in particular, it's more difficult than most. You've heard that sentiment from some of our peers that have already reported. Really difficult because of all the uncertainties that we all know about. So we put out what we think we can achieve. That's -- Bill and I talked a little bit about maybe some upside to that in terms of loan spreads. But everything that we know now with all the uncertainties, that's where we're positioned. No big change in terms of our rate management in terms of the swaps we've disclosed at around $40 billion or so. But of course, that's all part of how we manage the balance between our fixed and variable. The simplest way to think about that, John, is we -- through the course of the year, the DV01 or the sensitivity we have for our long positions as if anything, decreased. So think about that in terms of both the securities book and the swap book. So we remain largely asset-sensitive, happy with that position. I mean that over time, changes with the mix of swaps and securities. The swaps themselves it's kind of irrelevant to look at them separately, but they're very short, and they roll off in big bulk -- a couple of years. Okay. And Rob, maybe as a follow-up, could you unpack a little bit of the outlook for the fee revenues that you gave for 2023, just some of the headwinds and tailwinds that are leading to that outcome on the non-interest income? Yes. Yes. Sure, John. So just in terms of the categories where we expect to see growth capital markets, we do expect mid-single-digit growth, which is good and consistent with our expectations. Our steady Eddie, card and cash management will probably be up high single digits and then those two will be offset by continuing headwinds in our asset management, given the equity markets as well as lower mortgage production. So, you put all that together, and that's how we get into our stable to up 1% for the full year. Bill, coming back to your thoughts on the spreads that you guys just referenced on the commercial loan book relative to the CECL outlook. I'm glad you framed it that way because I think many of us are in that camp that you just described. But in terms of the spreads, is there any capacity issues, meaning there's too much lending capacity, which has kept the spreads maybe lower than normal? I'm not sure what's going on, to be honest with you. I mean there's -- on the smaller end in certain retail categories, which really isn't our focus. There's -- there's just irrational competition in certain asset categories. In the larger corporate space, where we have this opportunity to grow clients, particularly in the new market and ultimately cross-sell, there just hasn't been any sort of gap the way you've seen in the public markets, there hasn't been any real change. Spreads aren't going down, but there hasn't been any change at all with respect to kind of the outlook in this economy. And until -- and if there's real defaults and charge-offs, there probably won't be. So one of these things is going to give, I just don't know which one it is. Very good. No, I noticed in your Table 10 in the supplement, the inflows of non-performance had been pretty steady. So, there's real -- excuse me, real evidence yet. And then as a follow-up, can you just remind us your outlook for returning capital to shareholders in the upcoming year with dividends and share repurchases? Yes. Gerard and just to finish up on that on the credit spot, to your point, in the supplement, the non-performers, but also you take a look at our NPAs and our delinquencies, which are down. So the leading indicators are still very strong. Yes, on the share repurchases, a couple of things. One is we are going to continue our share repurchase program into '23. Secondly, it will be at a reduced rate relative to what we did in 2022 and likely to be less than what we did in the fourth quarter of '22, which was $600 million. A couple of things about that, one is, why lower? One is, given all the uncertainties that we're seeing, obviously, we need to be smart and tactical in terms of our capital deployment as the year plays out. But secondly, and just logically, the rate of repurchases slows when your capital ratios go from 10% to 9%. So, we still have a lot of capital flexibility. But by definition, as we get closer to those operating guidelines, we slow the pace of repurchases. All that said, there's flexibility, as you know. So, with the stress capital buffer, we're allowed a lot of flexibility around it. And we plan to use that flexibility as circumstances present themselves. Bill and Rob. Following up on your swaps commentary, could you speak broadly to how you're thinking about downside protection in this environment? Any color you can give on where you'd expect your NIM to settle if the Fed ultimately pushes the economy into, say, a mild recession cuts rates and Fed funds normalizes, say, somewhere in the 2.5% to 3% level? That would be great. I have to write all that down in terms of your assumptions there. The -- I would say in terms of NIM -- obviously, we get that question a lot. It's obviously an outcome. So we don't guide to it. We don't necessarily manage to it. I think when you just take a step back, you can see that we finished the quarter and finished the year at 292 -- 2.92%. That's up from all of '21 where we lived at 2.27%. So that a 65 basis point jump or so, that's occurred. We don't expect those kinds of swings going forward. So going forward, we're now probably more like 5 or 6 basis point swings off of these levels. And that's sort of the way that I think about it. Got it. Separately, there's been some concern that we could see the mix of time deposits and non-interest-bearing deposits return not just to pre-COVID levels. But perhaps back to even pre-GFC levels in this environment. Can you speak to that risk, both broadly at the industry level and more specifically as it relates to PNC? I mean, look, we're in a bit of an unknown environment. We have the Fed going through QT. We have the Fed absorbing deposits through their reverse repo facility. We have, at least in our case, the ability to grow loans. So you could see a scenario where deposits get scarce. We've priced some of that that's in our forward guide in terms of our best look on that, you can draw upside and downside to that kind of to Rob's point, this coming year and the years after that are -- are harder to forecast and model than some of the stability we had pre-COVID. So, we're doing our best, and you've seen our best expectations. Yes, I think that's right. And in regard to the mix between non-interest-bearing and interest-bearing so far, the shift that has occurred is perfectly consistent with what we've seen historically and consistent with our expectations. That's helpful, Bill and Rob. If I may squeeze in one last one. I wanted to dig in a little bit into your expectation for a weaker economic outlook and mild recession and sort of square that with your reserve rate having been basically unchanged sequentially. So it suggests that most of the reserve build was really growth driven. Maybe if the economic outlook does grow more challenging, consistent with that mild recession scenario, would it be reasonable to expect that your reserve rate could actually hold your current levels? Or would it still likely drift a little bit higher from here? Any thoughts around that would help. Yes. So a lot of moving pieces here, but start with the basic notion that we are fully reserved for the book that we hold today against a forecast that we just -- we more heavily weighted the recessionary forecast than we had in the third quarter. And remember, the charge-offs that we took this quarter particularly the lumpier ones, we mentioned one. Those were in a large way already reserved. So our build, right, is actually more than you think. The ratio ends up the same, but we have kind of less -- we have lower non-performers inside of that total book as a percentage, maybe think of it that way. In terms of coming to that 17, and then I'd also just to remind you of our -- wherever we sit today at 17 both first day CECL to now or what we have now relative to others against the composition of our loan book. We've been at this in a fairly -- we think correctly, but nonetheless conservative process approach using CECL. I wanted to talk a little bit about the expense side. And I know you mentioned that there was a part of the expenses this quarter that was associated with revenue generating activities like capital markets, and so that is a net positive to PPOP. So let's leave those expenses aside. I wanted to dig in more to the expenses that did not come with commensurate revenues and understand what the drivers were behind those increasing and then talk a little bit about your outlook for 2023 off of what is now higher based on what people have been expecting coming into today. Sure. I can start there. So in regard to the fourth quarter expenses, the biggest driver of the increase was personnel expense. And to your point, inside of that, the variable comp associated with the higher business activity. In addition to that, we did have some medical expenses that we expect seasonally, but they came in a little bit higher than what we would have expected. Outside of that... The deductibles. Yes, the deductibles and then like the Company takes over after that. So -- and that happens, that happens seasonally this season, it was a little bit higher than what we expected. Outside of that, when you look at the marketing spend, that's sort of timing in terms of how that falls in the year, but the impairments that we took on various investments and assets, which is part of your question. There wasn't anything singular that would stand out. It was a. Well, that was part of it. That was part of it. So maybe Bill wants to answer these questions. But I would say there wasn't anything single. There's a handful of items that we took down in technology, and that shows up in our equipment expense in occupancy, with or were some facilities that we right-sized for our space needs going forward, that kind of thing. So, on the marginâ¦ Yes, sure. And then on the margin, the -- I'm sorry, just going into -- Bill's giving me another question, but I'd say on the margin going into '23, those impairments reduced some of our expense rates, so that sort of helped. So our guide is 2% to 4% in all of '23. That's how that all stays connected. But it's kind of frustrating because none of the stuff in our expense line in the fourth quarter has anything to do with how we spend money. I mean the comp with new business is great. Everything else was kind of we flushed a couple tech projects that didn't work out. We right-sized occupancy, marketing went up a little bit. And then we get hit this quarter on charge-offs, which are -- I'm not going to call them artificially high. They are what they are, but they're kind of lumpy as a function of something that we've been staring at for a while that finally hits the books. Okay. So as I think about the guide into next year for total expenses up 2% to 4% that is really related more towards your revenues of 6% to 8% and the crypto thing, whatever is a onetime one and done gone, that's down to zero. Okay. All right. And then separately, I know we talked a little bit earlier about the capital and the fact that your CET1 has been migrating down as you've been doing some nice lending, et cetera. Just wanted to understand the RWA density, it looks like it's gone up a bit. And I just wanted to understand, is that just loan growth? Or is there something else going on there? Is there some changes in how you think about RWA factors? And then I'm just wondering like how -- what is the low on CET1 that you're willing to drive to as we think about demand for borrowing is still pretty robust. Well, so a couple of things on that. I would say in terms of the RWA increase, it's entirely loan driven. So, we've had a lot of loan growth in '22, a lot in the fourth quarter with that 3% growth in average loans. So that's the key driver of the RWA increase. Our CET ratio is at 9.1%. We've talked about an operating guideline of between 8.5% and 9%. So, we're still above our operating guidelines and that's a good place to be. I was wondering if you guys could talk about the still potential for the TLAC rules that come down to the category threes and how you would be thinking about either getting ahead of that or starting to issue? Or do you just have to wait for the final notice and then consider a phase-in period? I mean a lot of people talking about this, not a lot happening around it. Where it to happen, by the way, we disagree with it, but let's walk down the path and say somehow down the road people suggest that this should happen and there'd be a phase-in period. Practically, as we look at the growth opportunity in our company new clients loan growth against what it is likely to be a constrained ability to grow total deposits, right? You're going to see our wholesale borrowings increase. And in the course of our wholesale borrowings increase in the ordinary course of business, we're going to fulfill all our parts of that TLAC requirement. All of that is in the numbers we're talking to you about -- it'll take more than next year. But in the way we think about. Yes. So -- and the simplest way to think about that maybe is our wholesale debt historically ran. I don't know, in the mid... Yes, mid-teens, I was going to say, and we're running 5%. So if we normalize that's what home loan in there. As we normalize our borrowings through time, it's likely we're going to get -- and fulfill that requirement without purposely trying to do it. Just because that's the way we and other people will be funding institutions. Yes. I'd just add to that, that's -- we see it on our path. It's not particularly problematic, but there's a lot to be played out. We still don't think it's necessary and there's also a reasonable chance there'd be some tailoring to it, which would be reduced in our case. Yes. And as a follow-on to that to your point about wholesale borrowings, funding loan growth incrementally, can you just talk about how you're thinking about the securities portfolio? I know you saw some growth this quarter. I know you're getting good front book, back book on it. The percentage of earning assets is still around 28%. So how would you expect that to go vis-Ã -vis the use of wholesale borrowings to continue to support that growth as well? Look, you wouldn't purposely borrow wholesale and then invest in a security to hold in your securities book. However, inside of all the requirements that we manage ourselves to, we also have liquidity requirements, LCR and the need to hold high-quality liquid assets. So, the securities book will likely fade in terms of total percentage over time simply because of loan growth that we see in some of the roll down. That securities book is part of what we have in terms of cash and liquidity to satisfy LCR. So it's -- we're not going to say, "Hey, let's borrow some money to buy more treasuries," right? That isn't going to happen. But practically, we use that book to hedge the value of our deposits. We'll continue to do that, and we'll continue to do that inside of the lens of LCR and other liquidity stresses that we run. Well, I guess in the category of no-good deed goes unpunished, I mean you did have positive operating leverage last year of 300 basis points. You're guiding for positive operating leverage this year between I guess, 200 and 600 basis points, your charge-offs were below 30 basis points every quarter. You're buying back some shares yet, your guidance from one month ago was off and your results fell 1.8 below consensus. Now don't stop giving your guidance or anything like that and were all subject to the uncertainties out there. But just a little bit more about what's changed in the past month. So I guess, unemployment, your end rate assumption, you're saying it's over 5%, maybe where that's going to. And I guess that drove some of the CECL-driven reserve part of reserves, the NII and maybe your decision to lean into the securities purchases maybe because you think this is a relative top on yields? Yes. So, you're overcomplicating it. One thing changed from a month ago and one thing only. And that was basically the spread we thought we'd earn on new business, right? We know, Mike, that we can go out and grow loans. Our ability to gain clients, cross-sell those clients, we've never been more bullish on that. The process of doing that is not earning what we would otherwise expect in the moment because spreads have not widened, and of course, you take a full life of the loan reserve when you book that loan. That's the only thing that's really changed. The expenses this quarter are noise. The guide for next year is tempered simply by that question of whether spreads are going to rise on loans, maybe they will or our CECL analysis will be wrong. We haven't we never guide on what our provision is going to be. We talk about charge-offs and the charge-off this quarter we felt was a bit anomalous. So nothing's really changed other than the sweat factor of, hey, can I actually earn what I thought I was going to earn on new loan production. That's it. Well, but I haven't given you a number on my CECL reserves -- right? So -- but we put in -- we worsened our economic forecast. And the simple sound bite is either spreads are going to widen or our economic forecast is wrong. I think that's a fair statement. You give -- by the way, the CEO gauge turn out maybe to come to the economists because this is such a detailed outlook in your release about what you expect the economy and interest rates and everything else. So you give a lot of detail. You asked a question on the securities book. It's just -- we basically stayed pretty much in the same position all year. We get to re-price the book, and you see the income coming out of the securities book growing nicely. We haven't invested into it. It's a tough market to invest into. If you are -- in effect a deposit-funded institution, right? If you want to go out and buy something today, against your marginal cost of money, you're basically carrying flat to negative. Today on the theory that the Fed is going to cut to what down the road and you got to believe that the Fed is going to go back into 2s on Fed funds, which I just fundamentally don't believe. So I think kind of the market is just on investable at the moment, and I think that's going to be figured out through the course of the year. And so, there's upside my view on that plays out in the way we run our securities book. But at the moment, there's no choosing to go along in this environment, I think, is a mistake. One more clarification, you are reserved for your existing book of business, assuming an unemployment rate of what level? I know it's above 5%. On the NII guide, so I think you've spoken extensively about the spreads. Wanted to get how much of the inversion in the yield curve was a factor in impacting the NII outlook? And tied to that, like with the 10 years sub-340 this morning, like do you just not invest right now and wait for things to shake out? Or how do you think about balance sheet management in a world where maybe the 10 years headed to 3%, not 4% next? Yes. So, that impacts the NII guide a bit only in terms of what our reinvestment yield is and will be when we -- when the existing security book rolls down. So you've seen the book yield on that rise from wherever to what is now 260-something. And that continues to increase as we -- as things roll off, we're reinvesting with high fours, five handles on securities. Look, if the 10-year goes to 3%, if you look at the five year and five years, the implication of where long-term rates really have to head for that to be true. I just don't buy. I don't think we're going to be in an environment where the Fed is bounce in short-term funds around 1%, which I just don't think it's going to happen. I think we're going to -- I think we will get inflation under control, but I think it's going to be a struggle to get it under three long-term, and I think front rates will rise will stay higher they might cut and likely will cut from some 5% level. But this assumption that they're going to cut and therefore, rates are going to go back to two or one. I just think is absurd. So therefore to me, the back end of that curve is on investable. You're right, it could rally to there. Good for the people who own it as long as it's not me. Yes. No, that's fair. And again, I'm not saying it makes sense, but is the world we live in. And I guess tied to that, I'm not sure if you gave explicit guidance in just some of those terms of deposit growth outlook. I mean still a lot of room when we look at the loan-to-deposit ratio. Just give us a thought around how you're thinking about letting additional sort of rate-sensitive deposits run off, having a smaller balance sheet, creating more excess capital? Look, there's obviously -- we could, in the near term, increase earnings by being less competitive with deposits and let deposits run off. We have the liquidity to do that. We could increase our loan-to-deposit ratio. The challenge with that is, in the course of doing that you're damaging your long-term franchise. So, if you're losing deposits that are not core relationship deposits that maybe that makes sense. But if you're losing customers in the process of that runoff, that's a mistake. And that's the -- that's the logic we use in figuring out how we price deposits and how we grow or maintain deposits. That's fair. And if I may, one last question, Bill. In terms of just the macro uncertainty, how do you assess like the difference between credit normalization and whether or not we're getting into some version of a recession? Like -- can you conclusively think about that over the next few months or we're not going to know that until we are well into the depth of a downturn a few quarters from now? We've given you our best forecast. Yes. I mean, look, there's a lot of unknowns here. Technically, we could see ourselves heading into a full employment "recession" because you'll have stale GDP for a couple of quarters, but unemployment not ticking up to high levels. And I don't even know how to think about that environment in terms of what charge-offs might be. I mean that's probably really low charge-off environment. Well, it's just to your point in terms of what I said at the beginning, it's really difficult for the full year, particularly this year. We've put together what we think we can do. We could just circle back on some of the lumpy costs. I guess, just in aggregate, like how much were the impairment? And then I think there was also -- you had called out some lumpiness from the long-term intense plan, which I think impacts both fees and comp. If you could just kind of flesh out the aggregate lumpy costs, that would be helpful. Yes. Without -- we don't have specific numbers. You can see them as they break down in terms of our impairments within the occupancy line and the equipment line. The long term it was just the effect of a benefit in the third quarter and then it swung against us in the fourth quarter. So not big numbers, but just the delta between the two quarters drove the increase. Okay. And then separately, I mean, I heard you earlier kind of reiterate the 8.5% to 9% CET1 target over time, and just any thoughts on the regional banks kind of just below your size? It seems like they're all kind of building capital close to 10%. And I don't know if it pressure behind the themes from rating agencies or regulators or just conservatism for where we are in the cycle. But any thoughts on the Company your size being able to run 9% when the ones -- obviously, the banks that are bigger are running higher, but it's just been interesting to note that the ones below you, kind of $200 billion in assets, all seem to be building closer to 10%? Do you want to answer? Well, the only thing -- the only -- the only thoughts that I have just reacting is the guidelines are typically drawn for all banks in terms of the stress capital buffer. So how they stress -- you got to look at that. And then, it's the relative capital level to the stress levels as opposed to the absolute levels. But that's just my reaction. Okay. But I guess the point is like you feel comfortable with whatever kind of behind-the-scene stuff that's going on with the rating agencies, regulators, the 9% and maybe drifting down a little bit over time, but at 9% you feel hopeful with in the current environment? And Bill, just not to beat a dead horse to death, but the whole sort of question on NII and swaps and protection, given that you think of swaps and securities sort of synonymous later in terms of expressing your view on rates. I would expect that you're going to hold off, therefore, even on the swap side in terms of adding protection yet until you see clear signs of a lot more potential for rate cuts? Yes. It's -- I mean it's strange to me Vivek, you're a bit of a fixed income guy, this notion of protection, I mean, what a lot of banks are doing is they'll put on forward starting swaps and they'll not have to eat negative carry in the course of doing that. And they'll hope sometime by the time those come due that there is a negative carry because there'll be a cut. So, you effectively -- I mean everything is priced at the forward curve when they do that trade. It makes no sense to me. It's the same as choosing to invest at the moment on where the yield curve is. That's my downside protection. I can buy -- we can sell it, we can use options and sell away upside and buy some downside protection. As a practical matter, we're not widely out of bounds in terms of while we're asset sensitive. We're not wildly asset sensitive. And it just doesn't feel like the moment when you're supposed to be long. Particularly, if you have a view that rates in the go-forward decade are not going to look like rates during the 2012 to 2020 year. And there are no further questions on the line at this time. I'll turn the presentation back to Bryan Gill for any closing remarks. Well, thank you all for joining the call today. If you have any other follow-ups, please reach out to the IR team, and we'll be happy to help you out. Thank you.
EarningCall_1374	Ladies and gentlemen, thank you for standing by. Welcome to Enerpac Tool Group's First Quarter Earnings Conference Call. As a reminder, this conference is being recorded, December 21, 2022. It is now my pleasure to turn the conference over to Bobbi Belstner, Senior Director of Investor Relations and Strategy. Please go ahead Ms. Belstner. Thank you, operator. Good morning and thank you for joining us for Enerpac Tool Group's first quarter fiscal '23 earnings conference call. On the call today to present the company's results are Paul Sternlieb, President and Chief Executive Officer; and Tony Colucci, Chief Financial Officer. Also with us is Barb Bolens, Chief Strategy Officer. Our earnings release and slide presentation for today's call are available on our website at enerpactoolgroup.com in the Investors section. We are also recording this call and will archive it on our website. During today's call, we will reference non-GAAP measures such as adjusted profit margins and adjusted earnings. You can find a reconciliation of GAAP to non-GAAP measures in the schedules to this morning's release. We also would like to remind you that we will be making statements in today's call and presentation that are not historical facts and are considered forward-looking statements. We are making those statements pursuant to the Safe Harbor provisions of federal securities laws. Please see our SEC filings for the risks and other factors that may cause actual results to differ materially from forecasts, anticipated results or other forward-looking statements. Thanks, Bobbi and good morning, everyone. Thank you for joining our Q1 earnings call. I am pleased to discuss our fiscal 2023 first quarter results with you this morning. But before we jump into the quarterly results and strategy update, I want to spend a few moments recapping our recent Investor Day that we held in November in New York City. The theme of our Investor Day was raising the bar and the event was a great opportunity to showcase our new management team, share our focused growth strategy, provide an update on our ASCEND transformation program, launch our new long term financial targets and interact with both investors and analysts. We thank all of you that joined us both in person and virtually. If you were not able to attend, we encourage you to watch the replay of the event that is available on our website under the Investors section. Based on the updated growth strategy that we laid out, which includes a focus on four growth verticals including infrastructure, wind, rail and industrial MRO, our digital transformation program, our updated innovation approach and our Asia Pacific growth strategy along with the benefits of our ASCEND transformation program, we issued updated full year financial targets, including 6% to 7% organic revenue CAGR, 25% adjusted EBITDA margins as we exit fiscal 2024 and greater than 25% adjusted EBITDA margins in fiscal '26 and greater than 100% free cash flow conversion in the latter years of the plan as we continue to invest in ASCEND over the next two years. The compounding effect of these targets creates a robust recurring cash generation model that is driven by our strong sales and our solid game plan to achieve margin expansion and we remain confident in our ability to grow and execute. Now moving on to the first quarter, I want to start by thanking our employees across the globe for their hard work in helping us deliver another solid quarter. We experienced strong top line results that were consistent with our expectations with core growth in all four regions. The team's execution of driving sales and implementing ASCEND can be seen in our adjusted EBITDA margins and over 60% incremental EBITDA profit in the quarter, well in excess of our historical 35% to 45% incrementals, resulting in merely 600 basis points improvement year-over-year. Tony will provide additional details on the financial results, but I just want to reiterate how excited I am about the progress that we're making across the organization to unlock the full potential for Enerpac Tool Group to create value for all our stakeholders. Moving on to Slide 5, as we announced in March, we launched our ASCEND transformation program focused on driving organic growth, operational excellence improvement and greater efficiency and productivity in SG&A to enhance shareholder value. We have made very solid progress on ASCEND and we've now reached a mature late-stage funnel of opportunities in excess of our target. We continue to expect $40 million to $50 million of adjusted EBITDA benefit as a result of the program as we exit fiscal 2024, including $12 million to $18 million of benefit in the current fiscal year. An additional overview of the ASCEND transformation program can be found in the appendix of today's presentation. Now, before we move on, I did want to take a few moments this morning to highlight some of the great progress that our team continues to make on a few of our various ASCEND initiatives. On the commercial side, we've taken actions to simplify our distribution network and we are refocusing our efforts on and disproportionately investing behind our partners that are focused on helping to grow the Enerpac business and we're best positioned to win in the marketplace. In addition, we've simplified our distributor discount structure to a tiered approach that rewards the growth of Enerpac sales. As it relates to procurement, we are consolidating both our direct material and indirect spend using an 80-20 approach and key supplier negotiations. We've also tightened the controls around discretionary spend to drive greater visibility and additional cost savings. And on SG&A, we started to take actions to move some back-office functions to shared service intermodals in lower cost regions. And last but not least, by reducing the number of legal entities across Enerpac Tool Group, we reduced the complexity of our business and the associated costs of maintaining an overly complex legal entity structure and all the additional work associated with this from an accounting, tax and legal perspective. These are just a few examples for the exciting initiatives within ASCEND, which demonstrates the broad reach of the program across our organization. Of the $12 million to $18 million of adjusted EBITDA benefit that we anticipate in fiscal 2023 related to ASCEND, we experienced a benefit of approximately $6 million in the first quarter, which will be partly offset by future additional costs, for example, to backfill some roles for an estimated net recurring benefit of approximately $4 million to $5 million and we saw roughly 300 basis points of improvement in our SG&A as a percent of revenue, excluding adjusted costs as a result of the ASCEND actions taken to date. Again, ASCEND is much more than a restructuring program. There is a high degree of focus and discipline associated not only with our cost structure, but also organic growth and operational efficiency and productivity. Also, as we highlighted at Investor Day, innovation is a key aspect of our growth strategy. So I wanted to spend a moment to touch based on our NPD activity in Q1. I'm excited to share that we launched our new battery powered machine skates for industrial movers in the first quarter and we have already received several orders. Moving heavy industrial machinery is always a challenge, especially in confined spaces where conventional methods are either labor intensive or unsafe. These innovative machine skates are self-propelled, eliminating the need to manually push or pull the load. They also ensure the safety of the operator by allowing them to work at a safe distance away from the load. These battery powered machine skates keep the load close to the ground, reducing the overhead clearance required to move below through the facility and more importantly, increase overall safety. This is just one example of how we are driving customer back innovation to help make complex often hazardous jobs possible safely and efficiently. Turning to Slide 6, as it relates to our markets, we continue to see solid demand across all four of our regions with particular strength in Americas and Europe and notable year-over-year total core growth of 14% for our products. While there continues to be macroeconomic uncertainty in the first quarter, we did not see signs of a recession or pending recession within our business and order rates have remained solid the first few weeks into the second quarter. We've continued to see slowing in the rate of commodity price inflation and our path through backlog decreased slightly quarter-over-quarter, though component availability remained a challenge. When Tony walks through the waterfalls, you'll see that the pricing actions we've taken have more than offset the impact of inflation and I'm pleased that we've begun to see the benefits of our ASCEND initiatives positively impacting our EBITDA margins and our incrementals in the first quarter. Moving on to the regions, the Americas experienced solid core sales growth in the high teens percentages in the first quarter. This was primarily driven by year-over-year product growth. In particular, standard product sales were solid and showed demand across most manufacturing sectors. The Americas experienced some nice activity within rail due to ongoing maintenance and rolling stock and ASCEND had solid shipments as a result of demand for our digital turning tools. Our heavy lift business or HLT is seeing some interesting opportunities around wind. As towers are getting bigger and bigger and moving offshore, wind turbine OEMs are looking for ways to streamline the transportation and build process for those turbines, creating future opportunities for HLT. The modest year-over-year growth within service was driven by rental demand within oil and gas, but was partially offset by the push-out of some projects in the marine space. While stocking orders were in line with expectations and demand was steady within the channel, distributor sentiment remained cautious, driven by the concern of the potential recession. Moving on the Europe, this region delivered year-over-year core growth in the low double-digit percentages, driven by both product and service. From a vertical market perspective, the region benefited from continued government investment in both infrastructure and rail with additional future opportunities. The ongoing government investment to address aging infrastructure is also creating some good opportunities for our HLT business in Europe. Oil and gas was favorable due to the pent-up demand created by the Russia-Ukraine crisis and work that was previously being deferred is now taking place. In particular, our leak sealing services are in very high demand. Overall, distributor sentiment is generally neutral with caution in some areas due to the current macroeconomic environment. In Central and Eastern Europe, this is of course a direct consequence of the Russia-Ukraine conflict, driving energy prices up and investment sentiment down. Now moving on to Asia Pacific, the region had a year-over-year core growth percent in the low single digits. Unfortunately, COVID continues to be a challenge specifically in China with COVID restrictions creating some supply chain disruptions in the quarter. As of December 01, some of the local governments are gradually easing the COVID test and travel restrictions and China is now moving from no-COVID to living with COVID. From a vertical market perspective, mining continues to be favorable in the quarter, driven by demand for iron ore, coal, and some precious materials in Australia and coal in China. Shipbuilding in Korea and Japan was also positive, primarily driven by the transportation of liquefied natural gas. Turning to the MENAC or Middle East region, MENAC experienced year-over-year core growth in the low single digit percent. As we've seen the last few quarters, overall spending on oil gas activity in the region has continued to ramp up. Energy producers continue to make large investments into downstream activity and maintenance work that was previously being pushed out the past few quarters has begun to be action in the first quarter and we expect will continue into our fiscal Q2. From a vertical market perspective, oil and gas continues to be favorable and the region continues to make investments in new projects relating to infrastructure and power generation, including significant investments in renewable energy. And moving on to Cortland, our Cortland business delivered core growth of 26% year-over-year in the first quarter. On the medical side of the business, demand and order rates for commercial products remain stable and we launched two additional orthopedic products that moved from development into production in the first quarter. With over 20 projects in the development phase, we have a very healthy pipeline to fuel future growth. Moving on to the industrial side of the Cortland business, overall, it was a strong first quarter with solid performance across nearly all Cortland's end markets. In particular, oil and gas and seismic, aerospace and defense and oceanographic were favorable in the quarter, driven by federal funding for government related arrow and defense and oceanographic projects. Overall, improved lead times enable Cortland's to be more responsive to customer requests and capture additional orders in the first quarter. I'll now turn it over to Tony to walk us through the Q1 financial results as well as an update on operations. Tony? Thanks, Paul. Turning to Slide 9 for our adjusted Q1 results; net sales of $139 million, which is a 13% increase in core sales over Q1 2022. IT&S product core sales were up 14%, service core sales were up 3% and Courtland core sales were up 26%. Adjusted EBITDA margin was 19% in the quarter, which reflects a currency-neutral incremental profitability of 64% and provided a solid bottom line increase to begin our fiscal year. The adjusted tax rate for the quarter was 16% compared to 15% in the prior year first quarter. This resulted in an adjusted EPS of $0.29, up $0.13 from the prior year first quarter, which is greater than an 80% increase year-over-year. Turning to Slide 10 for details on our sales performance in the first quarter; reported year-over-year net sales were up 6%, including the FX headwind of $7.1 million, driven by the strengthening of the US dollar, primarily related to the euro and GBP. Product core sales increased 15% with over 80% of the increase from our IT&S products and the remainder to Cortland. All regions except MENAC experienced year-over-year double-digit product core sales growth, reflecting continued strong demand for our products. Service core sales grew 3% over Q1 2022, driven by double-digit growth in ASCEND and single digit growth in the Americas and MENAC with MENAC driven by strong oil and gas opportunities. This was partially offset by declines in APAC. Lastly, pricing actions contributed approximately $8 million to the top line. Turning to Slide 11, reflecting a consistent trend from prior year IT&S product net sales significantly exceeded the peak range of the four years prior to COVID and fiscal 2022, driven by strong demand, new product launches, pricing and the execution of our ASCEND strategy. Transitioning to first quarter adjusted EBITDA on Slide 12, we delivered $26.6 million of adjusted EBITDA in Q1, which is approximately a $9 million year-over-year improvement. Similar to sales, the stronger US dollar had an unfavorable impact of profitability, reducing EBITDA by $1 million versus the prior year. Higher product sales volumes contributed roughly $3 million of growth to EBITDA. Pricing actions resulted in net price cost realization in the quarter, increasing margin by $3.5 million, along with the mix of Cortland medical sales and improved industrial profitability, which contributed an additional $2 million of EBITDA improvement in the quarter. Excluding the favorable impact to largely European costs resulting from the stronger US dollar, SG&A was up approximately $1 million when compared to the prior year. The increase was primarily driven from higher accrued incentive compensation, an increase in travel and entertainment, and a non-recurring insurance expense, partially offset by savings tied to restructuring actions taken in the prior year, along with ASCEND initiatives. As Paul previously mentioned, first quarter adjusted EBITDA was favorably impacted by the execution of our ASCEND strategy, which positively impacted the quarter by approximately $6 million. However, due to timing differences between recurring benefits and recurring costs, there will be future additional expense for an estimated net recurring benefit of approximately $4 million to $5 million. We incurred approximately $1 million in restructuring charges in the quarter associated with our ASCEND transformation program and the associated savings from those actions will be recognized throughout fiscal 2023 and beyond. Moving on to operations; as discussed over previous quarters, we continued to see some easing of the post-pandemic supply chain challenges. Most notably, our past due backlog is beginning to show signs of improvement, but component availability, particularly for some plastic parts and electronics remains a challenge. We continue to see easing and commodity price increases during the quarter and freight costs are trending positively as well, back to a normalized level. As we highlighted last quarter, European energy costs also remained a close watch as rate increases are planned for January. Our procurement team is actively negotiating new contracts to help minimize the impact. Despite the positive signs that we are seeing, we do expect that some headwinds will continue into calendar 2023. Lastly, in the first quarter, we continued to evaluate pricing in the face of inflation and benefited from previous pricing actions taken in response to the inflationary environment. In Europe, we announced additional pricing actions effective December 01 on certain products and the Americas had price increase effective mid-November for standard distribution. Going forward, we will continue to monitor inflationary pressures and react with additional pricing actions as necessary. We'll wrap up the financial summary with liquidity on Slide 14. We generated positive free cash flow of $16 million during the first quarter compared to negative free cash flow of $8 million in Q1 2022. Excluding the impact from foreign currency translation, working capital decreased by approximately $6 million in the first quarter, primarily driven by $10 million of lower receivables due to strong collections and approximately $2 million of incremental payables, partially offset by $6 million of increased inventory. Capital expenditures were approximately $3 million in the quarter. Our leverage is at 0.7 times remaining well below our target range of 1.5 times to 2.5 times and compare to 0.9 times as we exited fiscal 2022. Finally, we made a cash payment of $2.3 million for the annual dividend we declared last quarter. With strong Q1 cash flows contributing to our solid overall liquidity, we believe we are well positioned to support our balanced capital allocation priority, which includes our ASCEND transformation program along with other internal investments, returns to shareholders and disciplined M&A growth. We remained committed to leveraging our capital position to drive long term value for our shareholders. Okay, thanks Tony. In the first three weeks of the fiscal second quarter, demand remained solid and we have not seen a change in order trends from the fourth quarter of fiscal '22. There are no changes to our previously announced fiscal 2023 guidance, which continues to be full year net sales of $565 million to $585 million and an adjusted EBITDA range of $113 million to $123 million, including an ASCEND EBITDA benefit of $12 million to $18 million, with improvement in our typical adjusted EBITDA incremental margins as ASCEND progresses. This is based on foreign exchange rates as noted in September and assumes that there is not a broad based recession. Before I wrap up, I would like to reiterate that I am extremely proud of the work that we have accomplished as an organization since I joined Enerpac Tool Group just over a year ago. We are focused on transforming the business and despite the uncertain global macroeconomic environment, we believe that our strong balance sheet, diversity of end markets and the work that we have done related to our ASCEND transformation program has us well positioned to manage through economic uncertainty, which was evident in our first quarter results. With that, thank you for joining our Q1 earnings call. We hope that everyone has a safe and enjoyable holiday season with your loved ones and we look forward to catching up with you in the New Year. Thank you. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
EarningCall_1375	Good morning, and welcome to the Olin Corporation's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this is being recorded. I would now like to turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve. Thank you, Anthony. Good morning, everyone, and thank you for joining us again today. Before we begin, let me remind you that this discussion, along with the associated slides and the question-and-answer session that follows, will include statements regarding estimates or expectations of future performance. Please note that these are forward-looking statements and that actual results could differ materially from those projected. Some of the factors that could cause actual results to differ from our projections are described without limitations in the Risk Factors section of our most recent Form 10-K and in yesterday's fourth quarter earnings press release. A copy of today's transcript and slides will be available on our website in the Investors section under Past Events. Our earnings press release and other financial data and information are available under press releases. With me this morning are Scott Sutton, Olin CEO; Damian Gumpel, President, Epoxy; Patrick Schumacher, President, Chlor Alkali; Brett Flaugher, President, Winchester; and Todd Slater, Olin CFO. The leadership team will make some brief remarks, after which we'll be happy to take your questions. I'll now turn the call over to Scott Sutton. Yes. Thanks, Steve, and good morning to everyone. In 2022, Olin generated $12 per share of levered free cash flow, repurchased more than 25 million shares and reduced our net debt by $200 million. It was a massive team effort after generating $9 per share of levered free cash flow in 2021. As we head into 2023, our markets are not healthy, yet our focus on levered free cash flow remains the same and we expect to generate approximately $7 per share of levered free cash flow in this recession year. From an EBITDA perspective, we worked in the $2.4 billion to the $2.5 billion range the last 2 years and we expect to generate at least 2/3 of that average in the trough that is 2023. For Olin, the key features of early 2023 include continuing to idle our complete global epoxy resin business due to suspended demand in the largest consuming regions of China and Europe, rectifying a transient fat supply channel in commercial ammunition via lower Olin participation rate, kicking off the operation of the blue water... I understand that we dropped. I won't repeat the first part of my comments, but I'll start where I think we dropped off. So for Olin, the key features of early 2023 include continuing to idle our complete global epoxy resin business due to suspended demand in the largest consuming regions of China and Europe, rectifying a transient fat supply channel in commercial ammunition via lower Olin participation rate, kicking off the operation of the Bluewater alliance with Mitsui to manage much more the world's liquidity in chlor alkali and recognizing another solid pricing lift in our merchant chlorine business. While some of these features of the first quarter of 2023 are already impactful in a slightly negative way, it is still possible that we may have to take more drastic action in a subsequent quarter to recoil further and preserve product values for the rebound toward the latter part of the year. In 2023, expect us to hold our current net debt position, keep buying shares throughout the year, gain an investment-grade rating, complete our asset footprint adjustment decisions and prepare for a quality growth story in 2024. We've also updated our 2022 ESG scorecard progress on Page 10 of the presentation. This is a growing theme for Olin, and we look forward to showing the results from our focus in this area. Now Damian, Patrick and Brett will each make a few brief comments on both the situation and our initiatives across all 3 businesses and then Todd will follow with additional commentary on our 2022 accomplishments and 2023 outlook. Thank you, Scott, and good morning. On Slide 4, Epoxy Q4 results are partly a reflection of seasonal demand, but principally our disciplined approach to water the most challenging landscape in 14 years which led us to deeply pull back resin production that would have otherwise harmed the landscape. While anticipating improvement in the back half of '23, we focus today on productivity, optimizing our asset base, enhancing our sustainability profile and positioning for value-based growth. On this last point, we supercharged the business during Q4 of 2022. Putting our differentiated systems product portfolio under seasoned leadership in new product commercialization. I look forward to sharing on future calls the role Olin epoxy plays in addressing global energy, mobility and infrastructure challenges in a sustainable way and how that translates into shareholder value growth. I'll now turn it over to Patrick Schumacher for chlor alkali. Thanks, Damian. Even though 2022 was an all-time record year, the second half of 2022 brought significant challenges which we are likely to continue into the first half of 2023. Pricing in the vinyls chain remains weak and continues to necessitate lower Olin operating rates. On the positive side, our merchant chlorine ratchet continues to turn only one way. Chlorine pricing is expected to step up through 2023 as legacy contracts end. Bleach has been another success story and we expect both products to show substantial earnings growth again in 2023. Our Blue Water Alliance is now one of the world's largest traders of EDC and caustic and will be an important part of the Olin value creation for years to come. I'll now turn it over to Brett for an update on Winchester. Thanks, Patrick. The Winchester team continued to maximize value throughout 2022. However, during the second half of the year, we started to experience a transition in our commercial ammunition business from refilling depleted inventories to filling inventories to the rate of our customer sales. And in some cases, especially small caliber rifle, inventories became high. So we decided to manufacture and sell less to preserve value for both Olin and our customers. With nearly 15 million new participants entering the recreational shooting sports over the past few years, we believe demand for our leading Winchester ammunition products will remain stronger than historical levels. We continue to see opportunities within our military segment with demand increases from current and new international military customers as well as increased government funding to modernize the Army Lake City facility. As we manage through this commercial ammunition transition, our focus will be on growing and preserving value for the #1 brand in the ammunition industry. I will turn it over to you, Todd. Thanks, Brett. Throughout the last 2 years, Olin has generated $3.1 billion of levered free cash flow. Our capital allocation was initially focused on the balance sheet, whereby we reduced outstanding debt by $1.3 billion over the 2-year period. With our investment-grade balance sheet set, we primarily deployed our remaining levered free cash flow towards share repurchases totaling $1.6 billion over the last 2 years. In fact, during 2022, we reduced our outstanding shares by approximately 16%, all from cash flow. In 2023, despite the challenging global economic conditions, we're forecasting to generate recessionary trough level levered free cash flow of approximately $1 billion which equates to about a 13% free cash flow yield. Our 2023 cash flow includes a couple of unusual items. Our cash tax rate is expected to be higher than normal due to deferred international tax payments of approximately $80 million that are forecast to be paid this year. Also, we are expecting a peak payment level under our long-term energy supply contracts of approximately $75 million. Finally, our investment-grade balance sheet and cash flow should enable Olin to continue to deploy a substantial portion of our 2023 levered free cash flow towards share repurchases. That concludes our prepared remarks. And Anthony, we are now ready to take questions. Got a question around the 2023 guidance you guys gave, obviously sort of in line with sort of the trough range that you guys have been talking about, the $1.5 billion to $2 billion. So look, I mean I take a look at the Q4 adjusted EBITDA, $442 million. I annualized that, and I get to $1.77 billion, which is squarely sort of the midpoint of the trough and 2023 guidance that you guys have given. And you guys obviously achieved this sort of the Q4 EBITDA in the face of extreme adversity, right? I mean a massive destock, most of your end markets being as weak as they were, the epoxy business doing what it was doing. And on top of that, obviously, Q4 being a seasonally weak quarter. I guess the only tailwind you guys have had in the quarter and it seems on a go-forward basis is chlor alkali pricing, right? So as I sort of sit there and talk to investors, some of the cynics may turn around and say, hey, look, one of the things that has been dropping up EBITDA and -- is chlor alkali pricing, and it just can't go on rising forever. So it may crack. Again, I'm not in that camp, but what could you tell us to sort of give us a little more confidence that even with the macro looking the way it's looking, you're not really going to see any cracks in chlor alkali price. Yes. Thanks, Hassan. I mean that's a good summary. I mean, I would also urge you to think about what's the cause and effect here, right? I mean Olin is absolutely the leader here and is setting the value equation. It's no doubt that pricing in chlor alkali, especially in some of the derivatives can go up from here and they can go down from here as well. But we have some very solid footing there. And I'll ask Patrick to add a little color on Olin's footing. Sure. Yes, Hassan. Thanks for the question. It's definitely possible, as Scott said, that you could see lower prices, maybe caustic goes down from records but other -- we're going to run to the weak side. We've baked in or locked in a lift in chlorine prices for this year over last year of at least $100 million, and vinyls prices have been very, very weak for at least half of the year. So there's been a recent uptick in prices there. So maybe those prices start to tick up. So we expect a mixture this coming year of maybe some higher prices and maybe some lower prices. Fair enough. Fair enough. And as a follow-up, just sort of trying to get a lay of the land with regards to inventory. I mean you guys, obviously, on the chlorovinyl side pointed towards certain end markets being sort of particularly weak, be it TiO2, be it the urethane side, be it the vinyl side. I mean as I'm sort of sitting there and looking at, call it, certain TiO2 producers, they're talking about volume declines as high as 30%, right? So I'm just trying to get a sense of if you could sort of give us a sense of where inventories are for you guys, for the industry? And if at all, there is a restock, how sort of impressive could that snapback in demand. Yes. Sure. 30%, I'll take your word for that. If you look at our chlorine business year-over-year, volumes are definitely down. But netbacks are definitely way up. Chlorine and the chlorine side of the ECU has been the weak side of the ECU because we've been talking to you guys for the last -- well, this would be the third quarter. So we're running to that weaker side, and we're managing rates for that weaker chlorine side of the ECU and that is lifting netbacks, which is offsetting those lower volumes. Just curious on your outlook for chlorine, particularly in the second half of the year, there's been a couple -- one big paint company who sees the second half weaker in housing. So just your thoughts on how that would affect that part of the ECU. Yes. Mike, it's Scott. Yes. I mean we -- we see the same thing. I mean, the trend in U.S. housing isn't great. And it's not impossible that trends like that change which side of the ECU has the better fundamental conditions. And again, we'll set our market participation according to that bad weak side. But when you go all the way to merchant coring, just as Patrick said, Mike. I mean that's something that -- we've had contract resets. Patrick already mentioned $100 million a year. And looking beyond 2023, we would expect additional resets as well. So chlorine has a very nice runway. Got it. And then I guess when you think about your operating rates for the rest of the year, do they sort of stay at these levels for most of the year? Or is there an assumption that they would improve a little bit as the year unfolds? I guess my question was, where are your operating rates now? And do you think they will -- based on your guidance, stay similar through the rest of the year, given the outlook for demand? Well, look, I would say overall, I mean, we're certainly running lower operating rates. I mean, the highlights of those lows really are that if you went all the way down into our epoxy resin, you'd find that we're running below 50% capacity. And that situation is certainly going to continue because we're just not going to sell too much volume into an undervalued marketplace. In the fourth quarter, we had to adjust Winchester's rates quite a bit as well because the supply channel got a bit fat and that's trending the right way. And that's why we've said in the first quarter, that business will improve over the fourth quarter. So first off, on that note of operating rates, it says you can run at 50% for 1 year. I think we've been at these low rates now for a little while. Are we -- how long does that year last? I mean, how much time do we have left in that? And then I had a couple of questions on Blue Water and hydrogen as well. Yes. Sure. Yes, I mean, that 50% rate was across effectively the whole company for a whole year. If we ran at the pricing levels established in the middle of last year, that would still deliver our recession case. So against that standard, there's still quite a bit of room left, Arun. And on Blue Water, is there any way we can quantify the impact -- financial impact and benefit to you? I know that you noted that you'll control a greater amount of the industry supply or at least be in a position to manage it. So how does that translate to EBITDA benefit? And when do you start seeing that? Yes. Sure. I mean keep in mind, that's a consolidated joint venture for Olin. So Todd will make a couple of comments on the direct impact that you'll see. Yes. Thanks, Arun. It will be consolidated in our results will come up into the Chlor Alkali Products and Vinyls segment. In the first year, you should expect overall revenue to increase $500 million to $700 million. And as it is the first year, you should expect from that joint venture minimal EBITDA impact. Got it. And then similarly for hydrogen with the third unit starting up, is that in commercial operation? And similarly, when do you expect to get any EBITDA benefit from your sustainable activities there? And how should we think about how that contribution flows into Olin? Yes. I mean, this is Scott. I mean, we only have one hydrogen arrangement into the fuel cell application operating today. The second one is our venture at San Gabriel and that one is under design and under construction, and it will take us to the end of this year to get that started up. And the point we wanted to make that I think you saw in the slides is that we're starting discussions around a third venture as we try to get our hydrogen out into these new sectors. Even the first 2 are only about 5% of our hydrogen. I just wanted to clarify your comments on Epoxy, just I had it clear. You said a global idling but naming just Europe and Asia markets is the reason. And I ask only because U.S. resin prices are still holding up fairly well. So is this really all epoxy resin assets are going down in the first quarter? Well, I would say we've been running those at a lower level, but I'll let Damian give a little more color on where we are right now. Sure. Thanks, Scott. Vince, on Epoxy, what we've said is that this is a globally challenged situation, the worst that we've seen in 14 years since the financial crisis. Most of epoxy consumption does take place in China and in Europe. And so that's where we've seen the greatest impact on the landscape. Now as a result, we've been -- for over a year now, we've been adjusting our production, our market participation in order to preserve value, that's led us to continue to successfully challenge ourselves to operate at lower rates across our portfolio. We're going to continue to do that as long as it takes and frankly, we can still go further. And it's -- for us, it's a question of taking this opportunity to rightsize our global epoxy portfolio to focus on the assets that our customers value the most. And we've done a lot of that already, but we still have a lot more that we are going to do here under this challenging environment. Okay. That's helpful. And then just kind of returning to [Blue Ocean]. So I always had kind of penciled Olin in as already the largest participant in the globally traded merchant markets for caustic and EDC. So is there any more detail you'd be willing to give around what that looks like now with Mitsui at the table? Well, I would just say that we've expanded our capability there. Remember, the way that joint venture was formed was a merger of the 2 international businesses in caustic and EDC. So we've just enhanced our capability there further. Okay. And then as I think about the market share expansion benefit is pretty self-explanatory. But if I think about partner not being a producer, the way you are. Can you talk about how that might change your approach to the international markets that you're not caught in a position where you'd otherwise be looking -- having to run your assets even lighter than you would want to. Does that involve a more significant investment in storage capacity, dedicating balance sheet capital to inventory builds in the right situation. Can you just talk through that. Well, I would just say that, look, it's not a market share gain there. If you think about what's going on, you're merging 2 existing businesses that didn't emerge business is essentially going out and expanding its trading capability. So while the joint venture will be managing more molecules in the future than it does today, those molecules are already produced and sold today. It's just that they end up under a different umbrella in the future. Okay. All right. That's fine. I can work with that. And then just one quick one. Todd, you said $500 million to $700 million of revenue, minimal EBITDA impact in your one specifically. This isn't some kind of big fixed cost asset that we're ramping up into. So what turns out to EBITDA positive? You should expect that this business as it continues to grow and it's more molecules under its umbrella, that revenue will continue to grow and then we would expect that EBITDA performance would improve. Scott, natural gas prices have plummeted perhaps 65% or 70% over the last 6 months in the U.S. Would you talk about the impact that you would expect that to have on your chlor alkali and vinyls business or the overall company for that matter, taking into account any hedge positions that you may have? Yes, sure. I mean, I would just say, look, I mean, the impact is a bit muted, right? We do hedge and we always have hedged. So we moderate that. We don't necessarily see the peaks. And because of that, we don't necessarily see the value -- I mean, the valleys either. So for us, it's really generally moderated. Okay. And then for the Winchester business, what sort of volume trends would you anticipate in 2023 for commercial versus military? Yes. Well, I mean, Brett is going to add a good bit of color because we have of actions there, particularly in the military business. We're going to start out slow in commercial as adjustments are taking place and military is off to a good start. Brett? Scott is correct that we'll start off slow from a commercial standpoint. It probably will look a little bit better in the fourth -- in the first quarter versus the fourth quarter, but still slow. From a military standpoint, the one benefit that we have from the military, we get a long runway visibility on demand from the military, from our U.S. military customer, and we have that visibility and it's very consistent from what we've experienced in the past. The big change is that we are starting to see some of our international military customers acquire about some needs that they haven't had in a long time. Yes. Just wanted to drill into the hydrogen project at San Gabriel, I assume that you'll have to consume more natural gas just because that hydrogen presumably was previously being used for power production. And just curious whether you can alter the operations of your ECU units to increase hydrogen production, i.e., from changing the brine concentration running into the units. Yes. I mean, look, not all of that hydrogen is necessarily used for our own energy production. We have a lot of large offtake arrangements with the gas companies, and we're working our way out of those. We also just vented a lot as well. So absolutely no use. What's happening in San Gabriel, for the most part is we're taking hydrogen into a new application, and there's no real meaningful offsets anywhere in our system. So this is -- CO2 offsets without a corresponding penalty. That's generally the way these first projects are set up. And maybe another question on Winchester, is it fair to assume that your EBITDA margins between military and commercial are significantly different. And you may have a volume shift more towards military, just given what's going on in the world, but it's not an EBITDA benefit. Is that fair? Well, I think when you look at the overall position of the Winchester business, certainly, we gained something on the military side. There are some challenges on the commercial side right now. You may have may have noticed that we did improve overall pricing in that business in the fourth quarter relative to the third quarter. And in fact, we expect to do the same thing in the first quarter. okay. Sorry, apologies to everybody. I mean, for some reason, our line keeps dropping. But I'll just repeat the answer to that last Winchester question on pricing. And we were able to lift overall pricing in the fourth quarter versus the third quarter, and we expect to do the same thing in the first quarter. Import ammunition pricing has always been low. But at the moment, we faced the additional challenge that the major domestic brands are actually pricing lower than the imports. But still, Winchester is the leader there and our trend will continue. So just a follow-up on the chlorine pricing side of the equation. So when you talk about more pricing through this year, I mean how much of that has already been negotiated and it's going to flow through versus you need to renegotiate those contracts? And just as we look at your mix of portfolio today, how much of it still has room for renegotiation versus 1, 2 years ago? Yes. I mean, Patrick will give the right answer here. You gave the summary, right? We've implemented a $100 million run rate more in 2023 versus 2022. What's the rest of it? Yes. So that $100 million is locked in. So that's not a hope that's locked in already negotiated lift and then there's going to be more to come this year. As Scott said, it is opening that will flow through in '24. Order of magnitude, probably I'm not going to peg it, but it's another substantial lift in '24 for new stuff to negotiate in '23. And just on cash deployment, I mean, given the step-up in interest in some of your variable rates, has any of the calculations changed on buybacks versus debt paydown? Josh, thanks for the question. Our -- we would expect interest expense in 2023 to be between $150 million and $160 million. You have -- 30% of our debt is variable rate. We will continue for our free cash flow to prioritize share repurchase. I wanted to follow-up on Winchester. Obviously, Russia came out of the market as a supplier midyear. So I would have thought that the supply side wouldn't have been an issue, but you've obviously been making adjustments there. What has been the impact of Russia coming out of the market that you've seen so far. And obviously, the expectation is they'll be out of the market for a while as well. So wouldn't that bode well down the line? Frank, this is Brett. You're correct. It should. What we're seeing right now is, I think it's been since May of last year, that we saw any imports come into the country from Russia. However, we continue to see some inventory that's out in the marketplace across a couple of different calibers of ammunition. So we do anticipate that to sell through. It's taken a little bit longer than we expected, but we should benefit when that gets always sold through. Got you. Got you. Okay. And then if -- a follow-up on chlor alkali. Obviously, it was impressive that you kept the fourth quarter relatively flat profitability-wise in the third quarter. There seems to be a bit of a disconnect in terms of profitability between the upstream doing pretty well in the downstream, not doing so well. So I was wondering if you could kind of walk through the third quarter to the fourth quarter in terms of upstream versus downstream profitability and what your near-term outlook is. If you could parse the Chlor Alkali segment in that fashion? Yes. I mean this is Scott and Patrick may add to it. I mean we assume when you say upstream, you mean close to the ECU and downstream, you mean some of the derivative chains like coordinated organics and vinyls. Is that right? Okay. So when you asked the question, I was thinking you were talking about Epoxy as the downstream because we don't really use that terminology within our chlor alkali business. So can you just reframe your question, I'll have the -- now that I kind of know what direction you're heading. I assume that there's some analysis of the profitability of caustic soda and the profitability of EDC and the profitability of coordinated organic, profitability of merchant chlorine and so on that you're doing internally, although I do understand that you're probably moving molecules up and down. So can you speak to the strength? I -- my assumption is that the ECU, chlorine and caustic was the more stable and the bigger part of the profitability in the downstream. But I'm just curious as to how you would parse that. Sure. Yes, as we've been talking about for, I think, 3 quarters now, that downstream chlorine chain, specifically through vinyls. EDC and VCM has been weak. That weaker downstream in that vinyl chain. And that has overall set caused us to set our run rates or operating rates to the chlorine side of the ECU because of weakness downstream in those PVC -- in that PVC chain. And we continue to do that today, and we're going to do that until things start to improve. When you look at public data for caustic prices, maybe caustic prices were [$950] a short ton in November. It's a little hard to see where they are today. Are they at [$800]? Or what's been the move in caustic prices from, say, November to today? And can you account for the reasons for the movement. I mean -- this is Scott, Jeff. I mean in general, it's been fairly flat. But it's not impossible that you see some product lines like caustic drift-off in the future. But again, remember, we make value out of imbalances between the 2 sides of the ECU. So when you see that drifting, it's likely because of value coming somewhere else. We won't go down, I don't know. It almost doesn't matter whether it goes up or down, right? We have a position to take in either case. In fact, I would sort of remind everybody that we actually delivered a higher level of quarterly EBITDA in our chlor alkali business, when caustic pricing was much lower than it is today. And secondly, Scott, can you remind me when do the contracts with Dow expire? Is the beginning of '25 or the end of '25 and is that a big event for the company? Okay. Well, then I'll ask a different question. With Winchester, is the oversupply in ammunition because demand was weaker than expected or because the competition just simply ramp up their volumes. We did see in the second half of the year, some lower demand, but yet much higher than what our historical outlook or preview has been. As I mentioned in my opening comments, we were actually shipping more to our customers than they were selling as we were putting -- filling up a pipeline. When that pipeline got full, we decided to pull back, reduce our run rate and not oversupply the market. As far as others, you'd have to take a look at what they're saying about their business. But as far as we're concerned, making those adjustments in the market going forward were necessary to preserve value.. First question, can you just talk through your full year EBITDA guidance framework? It looks like we can basically annualize 1Q levels to get to the midpoint. So is that roughly what you're assuming that first quarter conditions hold for the year? Just flesh out how you're thinking about that. Yes. No, I mean I would say that we're expecting slightly lower performance in the early part of 2023. And that's the way we've called it out for our chemicals business, a little bit better in Winchester. Look, I think when you look at a 12-month basis, that's our target. I would say that we really reserve the right to take any actions that we need to, to make sure that we keep that whole 12-month trough as high as possible. And that may mean that we need to have one quarter that's not as good as the one that we just credit. I don't know when that quarter might come, but it certainly could be in the next 12 months. Got it. Makes sense. And then second for Todd, just 2 quick ones on cash flow. First, I think in the prepared remarks, it sounds like there's about $150 million or so of abnormal cash uses this year. Is that correct? And then second, on the $1 billion of free cash, I know it can be difficult to predict how or when some of these JV opportunities come through. But just how much of that $1 billion would you expect gets returned to shareholders this year? Yes. Thanks for the question, Mike. Yes, you're right on the onetime items. There are basically $80 million of cash taxes that are inflating our -- the tax number on that slide. So more normalized is in that 25-ish percent range. And then there is a peak level of payments for some power supply contracts this year. So you're right on, on the one-timers. When we think of those joint ventures, the investments during 2023 probably are less than $50 million. And so therefore, when you think about that cash flow, we can really be deployed for share repurchases. Your EBITDA in Q4 was down by about $100 million. Do you have a breakout on just the moving parts here, like how much would you attribute to destocking, how much to seasonality and I think you had some turnaround activity, too. So was that material? Well, I mean we've quit calling out a turnaround activity as we sort of leveled that across quarters. So it's really a nonissue and any variability of our earnings going forward. I mean, look, most of that decline, you called it out well. It was a big decline. Most of that decline is from our own actions to make sure that we get set up to have the right shoulder coming out of this recession and make sure that we the highest 12-month trough result that we can going forward. The other things that you mentioned are really just drivers of that. Yes, there's some level of destocking. But yes, demand still doesn't look great. In fact, there's really suspended demand still in China and still in Europe. If you think about it, all 3 -- if you think about all 3 businesses year-over-year in the fourth quarter, volumes were down significantly. I know in the press release... Matthew, sorry, we got cut off again, maybe the fourth time will be the end of it. What I had said was if you look at all 3 businesses, volumes are down year-over-year in the fourth quarter, 29% chlor alkali, 36% epoxy, clearly, Winchester was down [5%]. But offsetting that to a big extent as well, was improved pricing across the board in all 3 businesses. Got it. And on caustic exports, so some spot prices in Asia for caustic have started to roll over. Is that filtering into your U.S. caustic export pricing yet and just how would you characterize demand and volumes for your U.S. caustic exports? Yes. I mean, this is Scott. I mean, look, I mean, there's going to be impacts from that, of course. I mean, I would characterize demand generally not great. But it's not isolated demand on cost. What it is, is the relative demand strength between caustic and the chlorine side of the ECU. And I would say those imbalances keep in place and keep forming. So even though demand may come down, it's not necessarily an indicator that our direct results follow that. Just wanted to get I guess, level set you used to give sensitivities for your key products in your slides. And as we think about how the world has evolved, both your chlorine ratchet pricing strategy as well as just your hedging strategy around natural gas. Could you just update us on what -- as we think about those key commodities, whether it's chlorine and caustic or inputs like natural gas. Where are the key sensitivities for that from an EBITDA per kind of MMBtu or dollar per metric ton basis. Angel, thanks for the question. This is Todd. I think historically, we've talked in the $1 per MMBtu in North America was worth about plus or minus $50 million to our annual P&L. I think directionally, that still is a good metric for you to think about. But as Scott mentioned earlier about gas, you know we're a hedger, so those high-priced numbers you saw during 2022, those sort of got paired off we didn't experience them. And maybe here in the very short run, because we're a hedger some of the dips in gas, you won't see that benefit running through immediately in our system. Yes. I mean that was -- our model really is a dependent on cost or cost variability at all. So I wouldn't model any impact from gas, especially with the fact that we hedge. Yes. No, I appreciate the question, but I don't think we're going to go through and probably exactly quantify what difference a certain change in price of a commodity and a public index might have on our bottom line. First of all, we don't -- all of our business certainly doesn't follow the index. And second of all, normally when something is going down, we're getting the value somewhere else. Understood. No worries. And then second question, just going back to some of the discussions around the macro and some of the demand picture of what you've been seeing. You noted, I think, in the slide, vinyl troughing here in the first quarter and epoxy improving in the second half. I was curious, one, as we think about the 2023 outlook, how much of this -- are you seeing anything in orders that gives you confidence in those rebounds? Is it more just destocking abating? Or anything that -- how do you get kind of comfortable with those factors? And then as you think about just overall kind of recovery in some of that, how much of it is macro versus your ability to pull levers in parlay? I mean we'll start with epoxy. I mean it's -- of course, it's very challenged right now as we've tried to lay out. But Damian, do you want to give a little guidance on back half. Sure. I mean when we look at some of the factors in the back half, we're seeing some improved demand. I think you see the news. China, as I said, being the largest consuming region of epoxy, it's looking like it's emerging from its almost a year-long slumber. But we also see other areas that are starting to pull epoxies as well. If we highlighted our growth platforms and our macro trends around wind, infrastructure, electrification, mobility. Those are all that -- we're already starting to see some of that demand profile improved with our valued customers. So it's a combination of what we see in the landscape, but more purposely, our participation in some of these platforms that are going to look to drive some improved demand recovery in the second half. And because we're running out of time, I'll just shortchange the vinyls answer. And there has been some light improvement in EDC pricing there. So thanks. What's embedded in your earnings outlook in terms of China and domestic consumption and at the end of last year, we saw a ramp-up of exports in epoxy as well as caustic soda. So any comments on those export levels into 2023 and impact on earnings? Yes. No, what's embedded is still that demand stays fairly muted, suspended for the better part of the first half of the year and then recovers. Specifically in epoxy by trade flows actually reversed out of China. But even when China recovers, still the amount of imports going into China is likely to be less than it was before because there have been some structural capacity adds there. And what this has taught us knowing that we really didn't expect sort of the worst conditions in 15 years. But what it has taught us here is that we certainly have more trough minimization footprint work to do there. So we're working on that. Helpful color. Secondly, on decarbonization, how are you thinking, Scott, about carbon sequestration versus buying renewable power? And does building out these hydrogen plants impact that decision tree? Can maximize the IRA credit. Yes. Yes. I mean, look, I mean, there could be some IRA credits for us with regard to hydrogen. I mean we are the largest electrolysis grade hydrogen producer in the country today. So we'll see where that goes. As far as other activities to minimize our CO2 footprint, most of them are centered around our own efficiency and productivity programs. It's not impossible that we get some recs in the future. Will we do more CO2 sequestration like we called out in our slides, I think those opportunities are more limited for us. This is [Matt Sharansky] on for John. Scott, while Epoxy has been down or operating at lower rates, have you made any structural changes such as operational or with your customer base? So when demand finally returns, Epoxy will look different than it has previously? Yes. The answer is yes, but completely in process now. When I said we're going to do more trough minimization footprint work, that's something that we're analyzing right now. So when demand does return yes, that business is going to look a little different. It's going to be more focused on systems where we've had staying power even through these really sloppy recessionary conditions. Got it. Thatâs helpful. And Todd, in Winchester, can you describe what the impact to margins was from lower operating rates versus higher costs. The margins in the segment have just been a little bit volatile since Lake City contract started. So just trying to figure out what the normalized level would be? Yes. Thanks for the question. I think that what you saw in the fourth quarter because of the significant pullback in volume to address, Iâll say, the supply chain, the [Fadison] supply chain and Scott would have said, you saw margins come in significantly compared to where they had been. Overall, we had a higher level of military sales in the fourth quarter compared to where had been over the last 12 months. So that also will slightly affect the margin, a little bit lower on average margin there. One is, can you comment on how much of your merchant or total chlorine was sold on below-market legacy contracts as of December 2022? We won't give you a specific number, but I would say that that's turned into the minority share now. As Patrick said, we still have an uplift coming in 2024 that will essentially place almost 100% of our are chlorine on a different standard, likely the Olin chlorine index. Got it. The second one was -- this may seem a little late, but how -- can you say how much, if any, of your ECU production you sell as cell liquor, meaning versus finished product? I'm not exactly sure what you mean by that. But we have some site partners where we may not fully take the product to an in-state that would be sold in merchant transportation equipment, and we won't quantify that. Yes. No, I would just say thanks to everybody for joining. Sorry, we had so many technical difficulties this time, but looking forward to the next call. Thanks.
EarningCall_1376	Hello, and welcome, everyone, to the First Quarter Fiscal 2023 Earnings Call for Commercial Metals Company. Today's material, including the press release and supplemental slides that accompany this call can be found on the CMC Investor Relations website. Today's call is being recorded. And after the Company's remarks, we will have a question-and-answer session and we will have a few instructions at that time. I would like to remind all participants that during the course of this conference call that the Company may make statements that provide information other than historical information that will include expectations regarding the economic conditions, effects of legislation, U.S. steel import levels, U.S. construction activity, demand for finished steel products, the expected capabilities and benefits of new facilities, the Company's future operations, the time line for execution of the Company's growth plan, the Company's future results of operations, financial measures and capital spending. These and other similar statements are considered forward-looking and may involve certain assumptions and speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. These statements reflect the Company's beliefs based on the current conditions that are subject to certain risks and uncertainties, including those that are described in the risk factors and forward-looking statements section of the Company's latest filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K. Although, these statements are based on management's current expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to be correct, and actual results may vary materially. All statements made only of this date, except as required by law. CMC does not assume any obligation to update, amend or clarify these statements in connection with future events, changes in assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise. Some numbers presented will be non-GAAP financial measures and reconciliations for such numbers can be found in the Company's earnings release, supplemental slides, presentation or on the Company's website. Unless otherwise stated, all references made to the year or quarter end are references to the Company's fiscal year or fiscal quarter. And now for the opening remarks and introductions, I would now like to turn the call over to Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Good morning, everyone, and thank you for joining CMC's first quarter earnings conference call. I hope each of you had a wonderful holiday season. As we reported in our press release issued this morning, fiscal 2023's first quarter was another outstanding period, marking the second best core EBITDA performance in our company's history. I would like to thank CMC's 12,000 employees who made these results possible. Your hard work and focused efforts are appreciated and are the driving force behind CMC's success. I will start today's call with a few comments on CMC's first quarter performance, then discuss our key strategic growth investments and sustainability efforts before providing an update on the current market environment. Paul Lawrence will cover the quarter's financial information in more detail, and I will then conclude with our outlook for the second fiscal quarter, after which we will open the call to questions. Before starting my prepared remarks, I would like to direct listeners to the supplemental slides that accompany this call. The presentation can be found on CMC's Investor Relations website. As I noted, CMC's first quarter fiscal 2023 earnings were among the strongest in our company's 108-year history. We achieved net earnings of $261.8 million or $2.20 per diluted share on net sales of $2.2 billion. Excluding the impact of mill operational start-up costs incurred at our Arizona 2 project, adjusted earnings from continuing operations were $266.2 million or $2.24 per diluted share. CMC generated core EBITDA for the quarter of $425 million, an increase of 30% from a year-ago, which produced an annualized return on invested capital of 23%. Results for our North America segment were again exceptional, as our team capitalized on strong demand. Segment adjusted EBITDA was within 1% of its record, excluding the impact of our second quarter 2022 California land sale. We continue to experience strong margins on sales of steel and downstream products during the quarter, which drove meaningful year-over-year earnings growth. Our Europe segment performed well despite a challenging economic backdrop, generating adjusted EBITDA more than double the past 10 years' quarterly average. Facing well-publicized economic headwinds associated with the ongoing energy crisis, our team in Poland leveraged their excellent cost structure to profitably win share and maintain strong volume level. Reflecting on the quarter as a whole, CMC encountered sharply different market environments within its two segments with tailwinds in North America and headwinds in Europe and demonstrated that we are capable of performing well in both environments. Our business model and well-aligned strategies have provided us the ability to fully capitalize on opportunities when they are available or adapt and adjust quickly when challenges arise. I would now like to discuss CMC's strategic growth investments, specifically our exciting greenfield mill projects. Our Arizona 2 Micro Mill project is on track for a start-up later this spring. As I mentioned previously, we incurred start-up costs during the first quarter as we train and build our crews and begin to commission the new equipment. We are excited to begin commissioning and look forward to providing updates as the process evolves. Once AZ2 is ramped up, CMC will be operating one of the most unique steelmaking complexes anywhere in the world. Not only will we achieve another industry first by producing merchant bar on a micro mill, but we will also have co-located two of our micro mills in a unique configuration. We expect this arrangement of the two steel plants will provide synergies, including shared staff support, production optimization, improved production scheduling and shared site infrastructure. Arizona 2's commissioning looks to be well timed with the Infrastructure Investment and Jobs Act, which should begin to increase public infrastructure construction later this calendar year. We intend to focus initially on ramping up rebar production with the commissioning of merchant products to follow soon after. Currently, we expect to produce a mix of approximately two-third's rebar and one-third merchant bar on an annual run rate basis. Of course, as we have mentioned previously, Arizona 2 will have the operational flexibility to seamlessly adjust its production mix based on market demand. Turning to CMC's other organic growth projects. We announced in early December that our fourth micro mill will be located in Berkeley County, West Virginia. The site selection process took longer than anticipated, but we are confident that CMC has chosen an excellent location within a state that is supportive of manufacturing innovation. I'd like to thank Governor Jim Justice and the entire West Virginia economic development team and the dedicated Berkeley County staff for their support during the site selection process and their ongoing assistance as we become an important member of the community. During the planning phase, we have been referring to this growth initiative as MM4. I'm happy to say that after formalizing our site choice, we will now rebrand our mill as CMC Steel West Virginia. The mill is expected to have an annual capacity of approximately 500,000 tons and will be capable of producing both straight length and spooled rebar. The new plant will feature the latest productivity-enhancing technologies for micro mill steelmaking including Danieli's Q-One power system that we first deployed in Arizona, making CMC Steel West Virginia one of the cleanest and most energy-efficient mills in the world. The planned site location on West Virginia's Eastern Panhandle will provide excellent access to the dense rebar consuming markets of the Northeast and Mid-Atlantic. Nearly 60 million people live within a standard shipping radius of this site, providing a variety of commercial opportunities across a number of major metropolitan areas. As can be seen on Slide 6 of the supplemental presentation, the site is also ideal for optimization of CMC's existing operational network in the Eastern United States. We expect to generate synergies through reduced logistics cost, optimized production mix across mills, lower levels of safety stock and improved customer service capabilities. The project is budgeted to have a net cost of approximately $450 million. Based on anticipated time lines for permitting and construction, the plant is scheduled to begin operation in late calendar 2025. These two projects strongly advance CMC's strategy of leadership in early phase construction reinforcement. We also believe they will provide meaningful value accretive earnings and cash flow growth for our investors. In addition to our organic growth projects, we continue to be very encouraged with the integration process of our Tensar acquisition and Paul will discuss the financial contributions a little later. During the quarter, we acquired two scrap recycling facilities and we are happy to welcome these employees to CMC. Both acquisitions support our captive scrap strategy to provide an economic supply of metallics for our mills. Before I turn to [market] (ph) commentary, I would also like to take a moment to emphasize the advancement of CMC's sustainability efforts. Our fiscal 2022 sustainability report published last month illustrates CMC's leadership position in environmental performance and our ongoing commitments for continued improvement. In fiscal 2022, CMC's Scope 1 and 2 greenhouse gas emissions stood at just 0.413 tons of CO2 per ton of steel produced, representing a 14% reduction from a 2019 baseline and a decline of 7% from fiscal 2021 levels. These Scope 1 and 2 emissions in intensity levels are nearly 80% below the global industry average. It may surprise some to learn that despite the heightened focus on ESG, the global steel industries emissions per ton have actually increased steadily over the last several years. However, CMC is going in the opposite direction using innovation, process improvements and energy sourcing to make greener steel with less impact on the environment. CMC's micro mill projects will further improve our environmental footprint as this technology consumes 32% less energy and emits 30% less greenhouse gas compared to standard mini mills. Once AZ2 and Steel West Virginia are fully ramped up, roughly one-third of our products will be produced using the world's cleanest steelmaking technology. These investments are yet another example of how at CMC good business decisions and good environmental stewardship go hand in hand. As you can also read in our 2022 sustainability report, CMC is poised to meet its or exceed its 2030 environmental goals related to Scope 1 and 2 greenhouse gas emissions intensity, water usage and energy consumption intensity and renewable energy sourcing. Soon, we will be reevaluating these goals and setting new targets. I would now like to turn to CMC's market environment starting with North America. Hopefully, it will be encouraging that my comments sound very similar to our recent updates as we continue to experience strong market conditions and see signs that strength will remain. We are well aware that recessionary concerns are growing in the investment community and being reported in the financial press, and we are monitoring conditions closely. However, looking at our business, we see no meaningful signs of a slowdown. Demand in the first quarter was stable at strong levels across our product lines and major geographies. Most key indicators that lead rebar consumption by nine to 12 months point to growth ahead. These indicators include both external and internal metrics that have been historically reliable in our indices we've referenced in past market commentary. Let me review several of these key external indicators. The Dodge Momentum Index, which measures the value of non-residential projects entering the planning phase, reached a record high in November. The reading highlighted strong growth in both the commercial and institutional components of the index, rising 28% and 21%, respectively, from the prior year. We recently began monitoring a separate Dodge indicator that tracks the value of infrastructure projects entering the pre-design and design phases. The value of these projects is up significantly from the prior year, likely signaling that federal funding is working through the pipeline and will soon began to impact on the ground construction activity. To give a sense of magnitude, the value of projects tracked by Dodge's Design Phase Index over the last three months was double the prior year and was 12 times higher than two years ago. CMC's own internal view also gives us confidence going forward. Our downstream bidding activity remained at historically high levels during the first quarter, driven by a broad range of project types in both the public and private sectors. As can be seen on Slide 9, our downstream backlog continues to grow on a year-over-year basis when measured in terms of both value and quantity. Beyond the near-term, we believe there are structural trends underway that will support strong domestic construction activity. The first, which I've already mentioned, is the federal infrastructure package signed into law a year ago. At full run rate, this plan is expected to increase federal funding for core rebar consuming projects such as highways, bridges and related structures by 65% compared to the FAST Act that it replaced. We estimate the impact will be 1.5 tons of incremental annual rebar demand within a domestic market of roughly 9 million tons, representing an approximately 17% increase in consumption. Spending is expected to ramp up over five years and assuming typical time frames for project approvals, bidding and awarding, we should begin to see some impact on construction activity in calendar year 2023. The Dodge data I discussed earlier supports this view. Another meaningful structural trend is the reassuring of critical industries. We have previously mentioned the massive scale and pace of construction of new semiconductor facilities. Currently, there are at least 11 facilities planned to be constructed with related total investment of over $275 billion. CMC is already shipping to several of these projects, but most are yet to break ground and impact rebar consumption. Semiconductor chip and wafer plants are the highest profile examples of reshoring, but other industries are also experiencing increased activity or project planning. These include LNG facilities for the export of natural gas, chemical and plastic plants as well as the automotive supply chain with a particular focus on electric vehicles and battery production. The last three years have exposed the vulnerabilities of concentrated global supply chains structured to operate under stable conditions and cooperative political regimes. The pandemic and geopolitical turmoil have reminded us of the need for a more distributed set of sourcing options, ensuring reliability and flexibility in securing critical materials and equipment. Eventually, we expect reshoring to extend well beyond the areas we just discussed. Turning briefly to merchant bar, underlying demand conditions and end use OEM markets are generally stable. Following the destocking event that occurred during our fiscal fourth quarter, shipments to service centers stabilized at improved levels during the first quarter. We would expect real underlying demand to continue at a steady rate in the quarters ahead. As I indicated, market conditions in Europe are more challenging. Overall, construction activity continued to grow on a year-over-year basis during the first quarter. However, residential activity, which has been strong for more than a year, is now showing signs of a slowdown due to the impact of rising mortgage interest rate. New mortgage origination has declined meaningfully over the last several months. However, programs are being developed to support first time homebuyers, which should attract more market activity by mid-calendar 2023. In addition, as a result of the ongoing energy crisis, industrial activity in Central Europe has been in contraction since the summer of 2022. This has impacted demand for merchant bar and some wire rod products. On the other hand, energy prices have moderated somewhat from recent market peaks and the current mild temperatures should also provide some relief. As illustrated on Slide 10 of the supplemental presentation, the European energy crisis, combined with trade sanctions, have has impacted historical trade flows in the region, which has benefited Poland on a relative basis. Poland has recently moved into a net rebar export position compared to a fairly large net import position a year ago. Electricity price volatility relative to the broader EU has tended to be less extreme in Poland over the last year due to a variety of factors, which has created a favorable cost dynamic for Polish producers. Energy costs have been both lower and more stable, providing some protection from imported materials originating from other European Union countries. With regard to rebar trade with countries outside the EU, little foreign material has entered the Polish market to offset the loss of Russian and Belarusian rebar. Imports have increased into the broader EU, but this material has gone to countries that are more logistically accessible and are experiencing higher energy costs. So while European demand is challenging at the moment, the supply side of the economic equation is helping to offset much of the detrimental impact. Within this environment, CMC has leveraged its strong relative cost position and operational flexibility to profitably win market share. Shipments of rebar, merchant bar and wire rod in the first quarter were all well above the long-term quarterly average despite a lackluster demand backdrop. We would expect these advantages to continue to favor CMC. Finally, as stated in our press release, our Board of Directors declared a quarterly cash dividend of $0.16 per share of CMC common stock for stockholders of record on January 19, 2023. The dividend will be paid on February 2, 2023. This represents CMC's 233rd consecutive quarterly dividend, with the amount paid per share increasing 14% from Q1 of fiscal 2022. With that as an overview, I will now turn the discussion over to Paul Lawrence, Senior Vice President and Chief Financial Officer, to provide some more comments on the results for the quarter. Paul? As Barbara noted, we reported fiscal first quarter 2023 net earnings of $261.8 million, or $2.20 per diluted share compared to prior year levels of $232.9 million and $1.90, respectively. Results this quarter include a net after-tax charge of $4.4 million, which was related to start-up activities at CMC Arizonaâs project. We expect to continue to incur start-up costs for the balance of fiscal 2023. Excluding the impact of this item, adjusted earnings were $266.2 million, or $2.24 per diluted share. Core EBITDA was $425 million for the first quarter of 2023, representing a 30% increase from the $326.8 million generated during the prior year period. Slide 13 of the supplemental presentation illustrates the strength of CMCâs quarterly results. Our North America segment drove the significant year-over-year earnings growth, while Europe experienced some pullback. Core EBITDA per ton of finished steel reached its second highest rate ever coming in at $273 compared to $223 per ton a year ago. Now I will review the results by segment. CMCâs North American segment generated adjusted EBITDA of $378 million for the quarter, equal to $348 per ton of finished steel shipped. Segment adjusted EBITDA improved 41% on a year-over-year basis, driven significantly by increased margins on downstream and steel products over their underlying scrap costs. Downstream products were a particularly impactful contributor on a year-over-year basis as the average selling price improved by over $300 per ton compared to the first quarter of fiscal 2022. Partially offsetting these benefits were lower margins on sales of raw materials as well as higher controllable costs on a per ton of finished steel basis due primarily to increased unit pricing for alloys, energy and freight. On a sequential quarter basis, controllable costs per ton were relatively unchanged with signs of pricing on some key consumable inputs have peaked and could begin declining in the quarters ahead. As we look forward, we have a number of planned maintenance outages that will not impact shipment volumes, but will result in higher controllable costs in coming quarters. Selling prices for steel products from our mills increased by $44 per ton on a year-over-year basis, but declined $84 per ton from the prior quarter. Margin over scrap on steel products increased $147 per ton from a year ago. Comparison to our fourth quarter, metal margin decreased by $22 per ton as a decline in average pricing outpaced the reduction in scrap costs. Shipments of finished product in the first quarter were virtually unchanged from a year ago and followed a typical seasonal pattern compared to the fourth quarter. End market demand for our mill products remained healthy. Rebar consumption as tracked by the Steel Manufacturers Association is growing on a year-over-year basis. They are likely still moderated by constrained supply of labor and material in certain geographies. Demand for merchant bar is stable at good levels. Turning to Slide 15 of the supplemental deck. Our Europe segment generated adjusted EBITDA of $64.5 million for the first quarter of 2023, which included the receipt of an annual energy credit that totaled approximately $9.5 million. The first quarter results compared to adjusted EBITDA of $79.8 million in the prior year period. The decline was driven by higher costs for energy, the negative P&L impact of selling higher cost inventory into a contracting price environment; a reduced energy credit, which was over $15 million last year as well as the weakening of the Polish Zloty relative to the U. S. dollar. CMCâs energy hedge position once again paid significant dividends as actual costs were well below the levels that would have been paid had we purchased solely on the spot basis. Europe volume increased 30% compared to the prior year due to the market share gains mentioned by Barbara, as well as the impact of a planned major maintenance outage taken during the comparative period of the first quarter of fiscal 2022. Demand conditions within Central Europe are challenging. However, the Polish construction market continue to grow by mid single-digit percentages, while industrial production has entered into contractionary phase as a result of the ongoing energy crisis. We believe CMC is well positioned for this current period of volatility in Europe. We are a low-cost industry leader with operational flexibility to adjust to and serve changing market conditions. Tensar generated $11.4 million during the first quarter, yielding an EBITDA margin of 18.9%. Margins were temporarily hampered by production issues encountered at our Morrow, Georgia geogrid plant. These issues have been addressed with equipment upgrades. However, during the first quarter, we incurred increased logistics costs and slower delivery time as a result of bringing product from our overseas operations. As a reminder, Tensar performance is included within CMCâs existing segments. Of our $11.4 million of EBITDA, $8.1 million was included in CMCâs North American segment, with the remaining $3.3 million recorded in our Europe segment. Turning to the balance sheet. Moving as of November 30, 2022, cash and cash equivalents totaled $582 million. In addition to cash and equivalents, we had approximately $915 million of availability under our credit, term loan and accounts receivable facility, bringing total liquidity to $1.5 billion. During the quarter, CMC took a few financing actions worth noting. First, we repurchased $115.9 million of CMCâs 2023 senior notes through a tender offer process, leaving $214.1 million outstanding, which will mature in May. Second, our revolver was upsized to $600 million and concurrently, we canceled our U.S. accounts receivable program, which resulted in a net $50 million increase in availability. And lastly, CMC established a $200 million term loan facility that can be utilized to refinance the maturing notes if we so choose. During the quarter, we generated $372.4 million of cash from operating activities, with working capital being relatively neutral factor. Our free cash flow amounted to $239.3 million defined as our cash from operations less $133 million of capital expenditures. Our leverage metrics remain attractive and have improved significantly over the last several fiscal years. As can be seen on Slide 19, our net debt to EBITDA ratio now sits at just 0.4x. While we believe our robust balance sheet and overall financial strength provides us flexibility to finance our strategic organic growth projects and pursue opportunistic M&A while continuing to return cash to shareholders. CMCâs effective tax rate was 22.7% in the first quarter. Looking ahead to fiscal 2023, we currently expect a full-year effective tax rate of between 23% and 25%. Turning to CMCâs fiscal 2023 capital spending outlook, we expect to invest between $500 million and $550 million in total. The $50 million increase to the range compared to prior guidance is driven by spending related to CMC Steel West Virginia that we now view as likely to occur this year. Lastly, CMC purchased roughly 1.3 million shares during the fiscal first quarter at an average price of $38.53 per share. Transactions since the initiation of the buyback program through Q1 have amounted to roughly $211 million, leaving $139 million remaining under the authorization. Thank you, Paul. We remain confident that fiscal 2023 will be another year of strong financial performance. Downstream backlog and bidding activity are at historically high levels and should support volumes over the near-term. Additionally, we look forward to the start-up of our newest micro mill, Arizona 2, in the spring, which will greatly enhance CMCâs ability to capitalize on the strength we see in construction markets. We anticipate good financial results in the second quarter compared to historical standards, though seasonally down from the first quarter. We expect healthy demand for our products to continue in North America, while conditions in Europe are more challenging and could be impacted by customer pessimism and general uncertainty. However, as I discussed earlier, CMCâs operations in Poland are very well positioned to compete given their cost leadership position and operational flexibility. While we anticipate margins over scrap in both North America and Europe to remain elevated in relation to historical levels, they are likely to compress from the first quarter levels. Thank you. And at this time we will now open the call for questions. [Operator Instructions] And our first question today will come from Emily Chieng with Goldman Sachs. Please go ahead. Good morning, Barbara and Paul. Thank you for the update this morning. I'd like to start off by asking around the Europe segment there. Volumes were certainly much higher than anticipated. Perhaps could you share how much of that is taking share versus some of the still steady Polish construction market strength that you're seeing? And then perhaps if you've got a sense of what volume expectations could look like there for the remainder of the year? Yes. Thank you, Emily. Happy New Year. So I would say the following. If you look at our strategy in Europe, we've had a deliberate strategy over time to strengthen our Polish operations by creating a situation where we have tremendous operational flexibility and expanding the product range of products that we have to offer. So if you go back 10, 15 years, we were highly dependent upon construction products, rebar and wire rod. And there's been a deliberate investment strategy to invest in merchant and even into some SBQ ranges. And what that does for us is it gives us the flexibility as market conditions change to shift the product mix to the markets with good demand or better demand. In addition, we've worked really hard to have a cost structure that is advantaged relative to other options in the region. And those two factors combined have really allowed us to shift to the markets that have the strongest demand. So I would say we are encouraged, as I said earlier, about the construction fundamentals in Poland going forward, albeit some reduction in residential, but still good growth and good â there's positive GDP in Poland as compared to other parts of the region. There's â as I indicated, the trade flows have changed as a result of the war. That has created opportunity for CMC to step in and fill demand that was filled from Russia and Belarus. So all those factors combined, we're going to continue to take advantage of our low-cost structure and take advantage of our operational flexibility to shift to where the best market opportunities are. And that will allow us to have good operational results going forward. Great. That's very clear, Barbara. And as a follow-up, would love to sort of dig deeper around the cost commentary that was provided. It sounds like things may be peaking and you might be starting to see some early signs of certain costs coming down, presumably some of the warmer weather might have brought down the energy cost structure as well. But could you perhaps share what you're seeing in each of the different components in the controllable cost calculation? And then maybe when we should be expecting that maintenance activity to hit this year? I'll leave it at that. Thank you. Let me make a couple of broad comments, and then I'm going to let Paul give some more specifics. If you look at â and you go back and look at what happened when COVID hit, there was just a severe supply chain disruption and severe economic reaction because there were so many unknowns. If you fast forward to when the war broke out between Russia and Ukraine, you saw a similar situation where â in the example, I'll use energy just skyrocketed because there was all this uncertainty around how Europe would source their energy and what would the price be. You also saw a massive increase in a number of raw materials, alloys and other things that were a result of that disruption. And much the same as we saw during COVID after supply chain started to readjust and things calmed down, there was an abatement in that supply chain disruption. The COVID is probably not as good of an example to the war because it was just so far reaching, and we had such concentrated supply chain sourcing. But in the case of the war, as time has gone on, we've seen the supply chain begin to adjust and in particular, alloy costs have continued â have started to abate and prices have adjusted downward as we found other sourcing options and as the uncertainty is â has started to become clear. So inflation is still broadly an issue around the world, but there's definitely abatement going on due to that initial reaction and then everybody figuring out how to adjust their supply chain. But I'll let Paul make some further comments. I think Barbara's comments really hit the nail on the head as far as what we're seeing in North America on the cost side. Really, the only comment I would add to our cost generally is on the natural gas side in Europe, the natural gas contracts reset, essentially twice a year in the October and May time frames. And so through until October, we were operating on natural gas prices that were pre-war and then they reset. Thankfully, our natural gas is limited to the reheat furnace. And so not a major cost, but the cost increased around 6x what it was previously. And so that's the one area in which we've seen some increase in costs. And it's really specific to the European operations. With respect to your other question regarding the maintenance outages, we've got a couple major outages coming in the back half of this year. And in fact, starting later this week, our Seguin, Texas facility will be down for a while as it replaces the furnace. There will be a large period of time in which we will not be melting steel. However, we have a lot of billets on the ground, and we'll continue to roll product, continue to serve customers throughout that period of time. But coming out of the outage, we will have more efficient facility and get some benefits coming out of the new technology that is being put in. So excited about that. It's a furnace that has produced well in excess of the normal service life, just a testament to the maintenance and ongoing operations that the team does down there. Following that, in the third quarter, we have another outage, and I just named that just simply because it's in our Alabama mill. And again, it's a â some new refurbishment to some of our roughing and rolling mill stands, which not only increases the reliability of those, but also provides us to enhance our product mix. And so we get benefits out of that going forward. So those will be significant, but look forward to ensuring the ongoing reliability and provide us opportunities as we move into the future. Reliability of this equipment is critical. We've been running hard as we've been enjoying these hard period â these hard market conditions, these good market conditions. And so we need to ensure that we continue to do the necessary maintenance to continue to ensure that the reliability is there. Yes. Hey, good morning, guys, and Happy New Year. Wanted to ask a bit more, if I could, about Slide 9 and the trends that you're seeing in the downstream side. Just trying to reconcile the decline in bids and backlog with the comments about the upward price trend in downstream products. Is there like a some explanation of why it seems to be rolling over, but also comments about higher prices? I'm just trying to reconcile those comments. Thanks. Happy New Year, Timna. Thank you for the question. We have seasonality in the bidding activity in â on the fabrication side of the business. And normally, as we move towards the end of the year because there's lower construction activity through the winter months, we tend to see some changes in lower activity during that time frame and then it ramps up when you get past the first of the year. The other thing I would say is we're seeing a little bit more lumpy activity in bidding and booking in fab because of these very large jobs that I spoke of, like the semiconductor and some of those, they're out there and they're in the pipeline, but there can be a job that we anticipate booking and it just happens to miss one quarter and fall over into the next quarter. So we've had some very large jobs that just it's all about the timing. Overall, we are monitoring it carefully because we're all familiar with all of the economic concerns. And we continue to see a very, very strong pipeline of bidding and confidence in the owners of these projects that they're going to move forward, the industrial projects in particular, balance sheets are really strong. Companies have the cash. They're not dependent upon financing to move those projects forward. And those types of projects, once they get booked and they're funded, they will get completed. So we are not seeing an increased activity in rebids. We are not seeing increased activity in cancellations, and we remain quite encouraged going forward. Okay. That's helpful and makes sense. I guess as a follow-up, if I could. Can you talk a little bit to the cadence of ramp-up of Arizona 2? I know it's supposed to ramp up in the calendar year, but just thinking about where we should be a year from now and the cadence? And then similarly, any cadence comments on what you're seeing in terms of any infrastructure stimulus timing would be great? Thanks. Yes. Thank you. The best I can point you to, Timna, on AZ 2 is to go back and look at the ramp in Oklahoma. This is our third micro mill. And while this oneâs more complex because we're adding merchant to the product mix. We are, by design, starting with rebar because that's something that we're supremely familiar with. And so I would expect the ramp to be very similar to what we experienced at Oklahoma. I don't have that exact ramp in front of me, but it was quick within three, four quarters. We were at three crews and building the fourth crew. And I would anticipate a similar situation here and the merchant will follow and be layered in and enhance the productive capability. And so I would just point you back to the trajectory that we saw for Oklahoma. As it relates to the Infrastructure Bill, it was very encouraging and eye-opening to see the trend in the preplanning and design phase numbers that I believe I quoted Dodge reports those. And there has just been a massive increase year-over-year in infrastructure, preplanning and then moving into the design phase. And once it's into the design phase, then, of course, it moves into active projects and bidding and then orders for steel. The exact timing, Timna, is hard is to predict. But if you look at the magnitude of that increase and you use kind of those historical references as it takes 12 to 24 months for those projects to translate into activity on the ground. We think the back half of 2023, those are going to start moving into the backlog and starting to come to fruition and then build from there. Hi. Thank you, operator. Happy New Year. Nice to hear from you all, and thank you for the update. I would like to ask about Slide 16. You mentioned opportunistic M&A. Can you provide any color on the type of target companies you might be looking at, whether it might be downstream or diversifying into other products or perhaps different geographies? Thank you. Thank you, Lawson. I appreciate the question. Unfortunately, historically, we haven't provided an enormous amount of color on specific targets. So I think if you go back to our Investor Day a couple of years ago, we were pretty clear on what we are and what we aren't. And I think you will whatever you see us do, it will build off of the base that we have today. Clearly, we're excited about our foray into geosynthetics with the Tensar acquisition. Clearly, that's one that you can look toward. But I would say we see so much opportunity from an organic perspective with Tensar, and we're highly focused on proper integration and really leveraging our commercial organizations to grow that really superior product that they have, and we're encouraged every single day with what we're seeing on that front. But if you look at the base business that we have, which is â we have the full value chain, recycling and rebar, merchant, wire rod and then downstream. And we look across that full gamut. As it relates to geography, if we are strong, as you know, in North America, and that is a key and core market to us. We also feel very, very strong in Europe with our Polish operations being beachhead. And so we don't rule out opportunities there, although Europe is a bit more complicated with all the various countries and differences and different growth in different countries throughout Europe. We do see Europe as going through this whole energy transition, which is going to create massive change and opportunity in our industry. And we're a leader in this area. And so to the extent that we can leverage that leadership, that's something that could be interesting to us. Beyond that, we can't really get into specific targets. Yes, I know that was fantastic. Very helpful. You mentioned Tensar several times in your response, which maybe I think I actually wanted to ask a question about the production challenges you're having. Would you be able to provide some color on the remediation plan for that and the time frame to an improvement in performance? Thanks. Yes. Thank you. This is one where there is a great synergy and a synergy we didn't necessarily identify through our due diligence. But bottom line, we lost a press. And those things happen. They happen all over other operations and in our steelmaking operations from time to time. They already had a press on order because they knew that they needed to refresh this. But then there were supply chain challenges, which delayed the delivery of that press and the installation of the press. So that was the challenge. The press is in, it's installed, it's performing. And so that issue is behind us. The synergy really comes in from Tensar is just superb at innovation and new product development and commercialization of new products. But their core expertise is not necessarily on the manufacturing side. We are superb at manufacturing. And so when we saw some of the challenges that Morrow was undergoing, we were able to dispatch a number of our technical experts to be on the ground and help them muscle through it or find other productivity improvements and safety enhancements and all kinds of things that just leveraged our strength and added to their capabilities. So the problem is behind us, and we would expect to see some fairly immediate abatement of the added costs that we had to incur to just move product differently around the world. Fantastic. Now hopefully, I'm not pressing my luck too much to maybe ask one more question, but I just wanted to follow up on that Slide 9, the downstream backlog and bidding volumes. Thank you for providing that. That's extremely helpful. Could you maybe provide a little bit of detail on the makeup of that? Like, for example, what proportion is warehousing and what proportion is reshoring? Thank you so much. I don't think we're prepared to give that granularity. What I would say is it's a strong balance between infrastructure and nonresidential. And we would expect infrastructure to increase over time. It's going to be a well-balanced mix. And I don't think it's heavy weighted towards any one segment. And the projects once they're in that backlog, they're going to get concluded and completed. I think the real beauty or message in the material that we provided is there is an enormous margin opportunity in the backlog that is going to evolve and play out going forward as we service that backlog. Lots of good questions were asked that we're basically already focused on what I was wanting to hit on. But what's the openness to further M&A as it relates to your strategic longer-term growth framework? Phil, I think you have followed us through the good, the bad and the ugly, and our balance sheet has never been in condition that it is extremely strong. It gives us the flexibility to do a lot of things. As you know, of late, we've been returning more to shareholders through the share repurchase and the increase in the dividend. We think about that in terms of just a balanced capital allocation strategy. And we have complete confidence that we can continue to do that as well as look at and fund the organic growth that we've talked about and leave the opening and the flexibility to consider M&A if the right thing comes along. And I think you've also followed us long enough to know that we're very disciplined in terms of our capital allocation, and we're very disciplined acquirers to ensure that it's the right strategic fit and that we have something to offer when we do combine and when we do acquire. So we remain open, and I think the balance sheet can support that kind of activity while still having a pretty balanced capital allocation strategy. Thank you. And then just a follow-up. You had mentioned something about a 13 â excuse me, a 12x increase in something. I think as it related to perhaps infrastructure quoting or something like that. I missed exactly what you said around that? Versus two years ago for infrastructure projects, which is really the leading indicator for the new Infrastructure Bill to begin to translate into orders and backlog for us. So that's an incredibly encouraging sign that, indeed, we are going to see that coming to the market here in the near term. Yes. Hi. Thanks for taking my questions. Maybe I'll start off with a follow-up regarding the supply and demand outlook for rebar consumption in U.S. If you look at the medium-term picture there, there's been a number of projects announced domestically maybe around 3 million tons of new rebar capacity potentially ramping up by 2026. You flagged the 1.5 million ton rebar impact from the Infrastructure Bill. But could there be a scenario when this is not enough. And just wanted to have your thoughts on how do you feel that the medium-term balance there for the U.S. rebar market? Are you really worried that there's maybe too much capacity being built? Yes. Thank you, Tristan. I don't know that our numbers would be quite as high as three because I think some of that has already been absorbed in the market. If you go back to the Oklahoma investment that we made, there was a very heightened concern at the time that we were introducing new capacity that couldn't be absorbed by the market, and it was fully absorbed. And as far as I can say and see and I think what you observed was it was not disruptive to the market. I acknowledge Nucor has made some investments. And certainly, we have Arizona, which really is â it's an offset to the difficult decision that we made during COVID to shutter the California facility. And so I'm not overly concerned at this time. I think what I've seen and what our numbers would tell us is that it's â you're not going to see a significant overbuilding of capacity, unlike maybe some other products where there's been substantially more new capacity brought online and not necessarily the same demand increase for that capacity, but we always monitor it. And I think the other point I would make is many mill or micro mill capacity is very flexible and can adjust when demand changes. We have a very low fixed cost portion to that model, unlike blast furnace capacity, which does not flex as easily as mini mill or micro mill capacity. All right. That's very clear and helpful. Thank you for that. My second question is more on the spot market development. Do you think the structural adjustment you've seen in the U.S. rebar market Pre Infrastructure Bill, the one you mentioned in your presentation, are currently being fully reflected in spot rebar metal spread that are premium to flat products, meaning that we should now see a return to a more normal cost price relationship moving forward for U.S. rebar prices and cost compared to what we've seen over the past two years? So just wanted to have your thoughts on the current developments? Thank you. Yes. Thank you, Tristan. It's a complicated question. There's many factors. But I think the consolidation of the long side of the market, particularly the rebar space, has provided a lot of stability. I do think that there is a structural shift upward in long, medium-term margins through a cycle. I would also highlight that you really should look at and compare metal margin between long products and flat products. Long products have had a much more stable margin structure over â it fluctuates, but over a much tighter band than the peak to trough that you tend to see for flat plate products. And I don't see anything that would suggest that, that stability will be disrupted. So we have known for a long period of time that even before consolidation, rebar and long products, metal margin was much more stable than what you see on the flat side of the equation. And this will conclude our question-and-answer session. I'd like to turn the conference back over to Barbara Smith for any closing remarks. Thank you, Cole. And thank you, everyone, for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Have a great day. Thank you.
EarningCall_1377	Please refer to the conference call section of the press release for the link to the company's Investor Relations website where you will have access to the presentation. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] Good morning, everybody. Bruno Carbonaro, speaking. Welcome to our conference today. I'm joined by Rishi Sharma, our CFO and we will present the results of our Q3 -- F Q3 for the fiscal year 2023. I'll comment the highlights of the Q3 with the sales amounting to $95.2 million which is an improvement of more than $10 million versus the second quarter. But it's less than the same quarter last year as its shown on the right of the slide. In terms of EBITDA, $6.1 million, which is obviously better than $1.4 million, we reported during the previous quarter, but lower than also the same period of last year. It's important to notice that when we that explanation is on the volume of sales in terms of gross profit. We have gross profit in Q3 this year is comparable to the same quarter last year. This EBITDA of $6.1 million translate in to $2.7 million of net income for the quarter. In terms of backlog, which is extremely important for me, we keep a backlog, which is shy of $500 million at $488 million. The decrease of the backlog is mainly due to the variation of the foreign exchange between these euro and the dollar because most of our bookings are written to our European operations booked in France and Italy. In terms of net cash, we are at $29.3 million so we were able to protect that position during Q2, even if we would have expected [indiscernible] in terms of gross debt. (ph) Great. Thank you, Bruno. Good morning to everyone and Happy New Year to you all. I will walk you through our key financial metrics for the quarter and provide some color on where we landed for Q3. Backlog for the quarter closed at a solid $488.3 million or $11 million and 2.3% higher than the prior quarter as a result of strong bookings at $99.2 million at a book-to-bill of 1.04 for both the quarter and year-to-date. The strong bookings in the quarter were driven mainly by securing a large order in the Marine business for the North American operations. Our continued growth in bookings for our Nuclear business in France and a slight improvement in the bookings for our oil and gas operations, mainly in Italy. Of the current backlog of $488.3 million, $336.2 million of this is shippable over the next 12 months gives us confidence in our short-term revenue stream. Furthermore, although, we have seen some improvements in the euro to USD rates, the backlog was nonetheless negatively impacted on the translation to USD by $21.6 million coming mostly from our euro-based operations and backlog. If you look at Page 7 for sales. Sales per quarter as mentioned by Bruno amounted to $95.2 million or an improvement of $10.2 million or 12% compared to the second quarter. Although a decrease of $14.7 million or 13.5% versus the same quarter in the prior year. For us, in Q3, continued focus on shipments and deliveries, while managing the now stabilizing headwinds in logistics and supply chain allowed us to recover from the slow start we experienced in the first half. Our North American operations continue to ramp up with $62 million of sales improving both quarter-over-quarter and year-over-year, while our French Nuclear operations assuming a constant currency also grew year-over-year. Our Italian oil and gas sales continued to be affected by the softer bookings experienced in the sector at the end of full year '22 and the first half full year '23, but as mentioned on the previous slide, we have seen some improvements in the booking activity. The currency impacts on our revenues were $4.9 million negative for the quarter and $15.9 million negative year-to-date, driven mainly by the average rate used to convert the euro to USD transactions. If we move to Page 8, on our profitability, Evolution. Gross profit for the quarter amounted to $29 million, or 30.4% which is an improvement of $5.5 million or 280 basis points compared to the second quarter, but a decrease compared to last year's 35.9% or 32.6%. Although, we are very happy with our performance in Q3, we understand and acknowledge the amount of work that remains for us to continue on to steady positive improvement. It is, however, important to note that the gross profit for the nine month period of the prior year was 30.1% net of government subsidies related to COVID-19, which we did not collect this fee. Our administrative costs net of asbestos continue to trend in the right direction with our continued focus on cost control and have contributed in part to an EBITDA and adjusted EBITDA improvement of 480 or 400 points respectively compared to Q2, the current year and compared to prior year. If you look at Slide 9 on the net cash analysis, our net cash amounted to $29.3 million at the end of the quarter, which was stable versus the last quarter, but a decrease of $24.2 million since the beginning of the fiscal year. The decrease in the net cash is primarily attributable to the lower net income combined with the ramp up as you can see on the working capital items and ongoing repayment of our long term debt. In the year, we have repaid $4.8 million down of our long term debt. However, in the quarter, the company did draw on its credit facilities in the amount of $5.4 million to support the very strong ramp up expected to see in the fourth quarter of the current fiscal year. During the quarter, the company was also better able to manage its cash flows through various AR and AP initiatives and the negative impact from the customer deposits related mostly to revenues relating to one large order as well as the timing effect of receiving advances from customer bookings secured in the later part of Q3. The overall liquidity remained strong at $137.6 million available cash on hand and facilities. Thanks, Rishi. I think as the closing comment, I think we are still in a world, which has certainly very low visibility. So it's extremely important for us to be prudent and to make sure that we navigate the times with caution and then making sure that we can benefit from some good things and protect against the [indiscernible]. We have two big protections. A, thatâs the size of our backlog, which help us to organize the future and help us being more disciplined and provide visibility to you. B, the strength of our balance sheet. So that's extremely evident that we continue to protect that because that's really what will help us navigate through uncertain times. We are focused on being prudent and execute probably seen the discipline and execution in a key word in my discussion with my teams. We've seen a lot of progress in Q3 and we will continue to progress in Q4, which is absolutely needed for us to deliver a strong Q4. As you saw on my previous -- on my first slide, I think Q4 is always A, very strong quarter in the year and we expect [indiscernible] of the same year. But with B, it will have a stronger stage for a slow start of the year we acknowledge that our Q1 wasn't as good as we would have expected, but basically we put all our efforts to [indiscernible] a strong end of it. My question, gross margins are quite nice and you're moving in the right direction, but my question is really about the balance sheet. Last year, you begun putting aside provisions. And as I understood, they were largely in anticipation or to allow for asbestos issues as they arise. And correspondingly, you have current provisions and you have non-current provisions. Am I safe in assuming that, that is largely or exclusively for asbestos expenses? Okay. And so to the extent that the ones in the current category of almost $15 million, those are for the next 12 months. And the one in the -- one current of about $16 million or $16.5 million, those are for oneâs going out after 12 months. So far, so good? Yeah, we did. I just tried to correct myself. So on the long-term portion for the provision, yes, that's path specific, and I'll get back to your -- to answer your questions. On the current portion on the financials and the balance sheet, there's an embedded portion within there related to asbestos. And then there's normal provisions related to warranties and so on and so forth. So I just want to make that clarification. To your question on the long-term portion, it's long-term, so beyond 12 months. I mean the information available to us on hand with the number of claims that we know of, does not determine a point of settlement. So we understand it could be beyond 12 months, which is why we then classified it as long term. Okay. And I guess where I'm headed is to ask whether you believe that is sufficient for all current and future or whether that is sort of what you can see when you look at -- that's what you are aware of or have been filed today, so to speak. Okay. And as you set up the provision, the provision flows through your administrative costs on an annual basis. So when I see $25 million, I'm sorry, I don't have the... Okay. And so if we put aside $50 million a year on sales, that's part of your administrative expense, okay. Thank you. I'm just trying to get some clarity on issue. Appreciate it. And good luck as you go into the fourth quarter. The foreign exchange is a lovely thing, but it's certainly hard to -- for me to predict. [Operator Instructions] Gentlemen, there are no further questions at this time. Mr. Carbonaro, I don't have further questions at this time. Okay, because at the -- because there is clearly an opportunity at the about 0.5 the book value. So is there something that you'd consider? Yeah. Understood your comment. It's -- obviously, we've always considered various options that we discuss. But at this moment, there's no repurchase plan. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. [Foreign Language]
EarningCall_1378	Good day. Thank you for standing by. Welcome to Cognyteâs Third Quarter Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] Please be advised that todayâs conference is being recorded. I would now like to hand the conference over to your speaker today, Dean Ridlon, Head of Investor Relations. Please go ahead, sir. Thank you, operator. Hello, everyone. I am Dean Ridlon, Cognyteâs Head of Investor Relations. Thank you for joining us today. I am here with Elad Sharon, Cognyteâs CEO and David Abadi, Cognyteâs CFO. Before getting started, I would like to mention that accompanying our call today is a presentation. If you would like to view these slides in real-time during the call, please visit the Investors section of our website at cognyte.com, click on the Investors tab, click on the webcast link and select todayâs conference call. I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on managementâs current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call and except as required by law, Cognyte assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause Cognyteâs actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal year ended January 31, 2022 and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods and among our peer companies that publish similar non-GAAP measures. Please see todayâs presentation slides, our earnings release and the Investors section of our website at cognyte.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for, or superior to GAAP financial information, but is included because management believes it provides meaningful information about the financial performance of our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. Thank you, Dean. Welcome everyone to the third quarter conference call. In Q3, we continued to win large orders. Our booking came higher than revenue and our backlog increased sequentially, at the same time slow backlog conversion drove a sequential revenue decline. We believe Q4 will be a turning point and we expect to resume sequential revenue growth. We also expect fiscal â24 revenue to grow by approximately 5% compared to current year. I will discuss the trends driving our growth outlook in a few minutes. Revenue decline year-to-date drove significant losses. As a result, we took actions to reduce our losses and cash burn and we are targeting to achieve about breakeven cash flow from operations in Q4 and for next year. Operationally, we improved the focus of the company during a period of tough macroeconomic conditions. In that regard, as previously announced on December 1, we successfully completed the divestiture of our Situational Intelligence Solutions, which we refer to as SIS. Looking forward, we believe our differentiated technology and strong customer relations position us well for long-term growth and profitability. We have been navigating the business with the current storm and continue to closely engage with our customers to drive new business and to improve visibility by firming up the backlog conversion schedule. With that, let me now give you a little bit more color about Q3 trends. In Q3, like in previous quarters, despite the challenging macroeconomic environment, we continue to win multiple large deals. We operate in approximately 100 countries and saw different demand dynamics across countries. We currently see that in some countries there are customers having temporary challenges related to budgets operational readiness. At the same time, we continue to operate in many countries that are not significantly disrupted by these challenges. I would love to view some of the large deals we won during Q3. Our investigative analytic solutions help customers address a variety of security use cases across national security, law enforcement, national intelligence and cyber security agencies. The first deal is for over $20 million with a government agency to combat cyber security threats. This is a new customer for Cognyte. Our solutions will enable the customer to view, analyze, enrich data to investigate cyber threats. We were selected due to our superior technology and domain expertise. The second deal is for approximately $3 million from an existing National Intelligence Agency. We were selected based on the strength of our technology and the deep relationship with this customer. The customer is using our solution to investigate and combat organized criminal activities. The third deal is also for approximately $3 million and we present the follow-on order from an existing National Security Agency. We were selected based on the value our solution generates. The customer is now adding new capabilities to address anti-terror and border security. We have increased ourselves focus in the geographic areas we believe the best opportunities exist. We make these decisions on a country by country basis, focus on customers with budgets and operational readiness and are pleased with our booking activity, an another quarter of book-to-bill ratio of greater than 1. Next, I would like to discuss the dynamics we see in our backlog conversion. As you know, while our backlog has been growing this year, some customers have been delaying deployments. We have been actively engaged with all of our backlog customers to discuss the firm commitment to the delivery schedule. I am pleased to report that as a result our visibility into backlog conversion has improved positions us to provide guidance for Q4 and for next year. We believe the improved visibility due to customersâ progress in budget planning as well as prioritizing their urgent needs to deploy innovative technology to address the evolving security threats. The work we have done with our customers provides us with better understanding and more confidence with the timing of backlog deployments. Turning to our cost structure, over the last few months, we took actions to reduce our expenses level in line with our outlook. We started the year with non-GAAP OpEx excluding SIS of about $70 million in Q1 and expect to end the year with Q4 OpEx of $55 million. These cost saving actions will continue to gradually reduce our OpEx in the next two quarters across R&D, selling and marketing and G&A. We believe these actions are necessary in the current environment and with this other cost structure to support our outlook for growth. Turning to our Q4 outlook, given the divestiture of SIS, we are providing pro forma results, excluding SIS, which David will discuss later. Excluding SIS non-GAAP revenue, we are currently expecting Q4 revenue in the range of $63 million to $72 million, up from $61 million in Q3. On this basis, we expect revenue for the year ending January 2023 to be in the range of $275 million to $294 million. The combination of higher Q4 revenue and lower expenses is expected to result in improved profitability. Our cash flow from operations for Q4 is expected to be above breakeven. For fiscal â24, we expect revenue to grow approximately 5% year-over-year year. Our view is based on current expectations for similar demand environment next year and the discussions we have with our customers on timing of backlog deployment for next year. While we are not assuming better macro environment conditions, our backlog has been growing this year and the conversion of this backlog supports our revenue growth outlook for next year. Turning to margins, our cost reduction actions this year will benefit next year profitability outlook. As a result, we are targeting above breakeven cash flow from operations next year. In summary, we are pleased to regain visibility and to be in a position to provide guidance. We expect sequential revenue growth in Q4 and the year-over-year growth in fiscal â24. We believe that the actions we took to focus the business and these costs position us for growth next year with significantly improved profitability and cash flow. We also believe security threats are pervasive and customers need our market leading solutions to address the growing threats. I would like to thank our employees for their strong dedication to customer success. We are managing the company to the current storm and look forward to returning to profitable growth. Thank you, Elad and hello everyone. Our discussion today will include non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available, as Dean mentioned, in our earnings release and in the Investors section of our website. Our website includes a financial dashboard with a tab that details our historical results, excluding the recently divested Situational Intelligence Solutions. Revenue for Q3 came in at $71.3 million. Looking at the revenue mix, software services came in at $43 million reflecting strong renewal rates. Total revenue came in at $22 million, a significant decline from last year, reflecting backlog conversion delays as Elad explained. Professional services and other revenue came in at $6.3 million impacted by our software revenue level. As a result of the SIS divestiture, I will discuss our results for the current year without SIS. Non-GAAP revenue for Q3 came in at $61.5 million. During Q3, our booking activity came in higher than our reported revenue and drove an increase in our backlog. Q3 RPO was $527 million, an increase of approximately $20 million from the end of Q2. RPO for the next 12 months is $248 million. The RPO reflects all adjustments to our contractual obligations. Turning to gross margin, Q3 gross margin was 61.1% on a non-GAAP basis, primarily due to a loss of professional services. We expect to improve the margin on professional services as a result of our cost reduction initiative and improved deployment efficiency due to better visibility. Our Q3 non-GAAP operating expense was $59.6 million, $5.8 million lower than Q2 and $9.5 million lower than Q1 reflecting our cost control activities. Despite the improvement in OpEx, the lower revenue level in Q3 resulted in a non-GAAP operating loss of $22 million for the quarter. Cash used in operation was mainly driven by EBITDA loss and an increased level of inventory. Turning to the balance sheet, we ended the quarter with net cash of about $11 million. Following the divestiture of SIS, our current net cash increased to about $55 million. Next, I would like to provide more detail on the SIS divestiture. Historically, SIS was about 10% of Cognyteâs consolidated non-GAAP revenue. During FY â22, SIS generated non-GAAP revenue of about $35 million and during the first 9 months of FY â23 SIS generated non-GAAP revenue of about $28 million. Our dashboard provides further information on Cognyteâs results, excluding SIS. As result of this divestiture during the fourth quarter, we received $42.3 million in cash. We expect to receive an additional few million dollars next year related to the holdback and other price adjustments. Also, there is a potential to earn future payment over the next 3 years related to an earn-out. At this time, we cannot be certain whether and to what extent any earn-out will eventually be received. Turning to Q4, we are currently expecting revenue to increase from $61.5 million in Q3 and be in the range of $63 million to $72 million in Q4. Our cost reduction efforts are expected to result in further decrease in our operating expenses for the Q3 level. As a result, we expect Q4 operating expenses, excluding SIS, to be about $55 million. The combination of higher Q4 revenue and lower expenses is expected to result in improved profitability. As a reminder, Q4 will also include 1 month of contribution of SIS of approximately $2 million of revenue and about $1.5 million of incremental OpEx. Letâs turn to Q4 cash flow from operations. We expect improved profitability and also sequential improved working capital due to better collection activity and reduced inventory level. This will result in about breakeven cash flow from operation. I would like to add more color about our FY â24 outlook. We expect next year revenue will grow approximately 5% from FY â23 level and you can assume in your model modest sequential increase throughout the year. Our revenue outlook is driven by our current view of backlog deployment schedule for next year best customersâ dialogues. Our cost structure will continue to improve from Q4 level into the next year. During our next earnings call, I will provide more detail on our profitability expectation for FY â24. We expect next year cash flow from operation to be about breakeven, primarily driven by projected revenue growth and our lower cost structure. In addition, we expect about $10 million of payment for CapEx partially offset by additional receipts from the SIS divestiture. We believe security threats are pervasive and our customers need our innovative solutions to other evolving trends. We are a market leader in investigative analytics and have a strong track record with customers around the world. We have long-term opportunity in front of us and we are managing the business through the current environment to return to growth and profitability. Thank you. [Operator Instructions] Our first question comes from the line of Mike Cikos with Needham & Company. Your line is now open. Hey, guys. Thanks for taking the question. You have Mike Cikos on the line here. So appreciate you guys calling out this visibility in the guidance that you have. But maybe can you just provide us a little more color? I know you have been working with customers on better understanding the deployment of that backlog thatâs been building this year. But can you can you provide additional details as far as what gave management the confidence to reinstate guidance at this time? Yes. So, hi, Mike, this is Elad. Yes, we are in the turning point. We expect to grow sequentially in Q4 and very next year. In the past few quarters, we are working with our customers to confirm the deployment schedule. Remember, we were able to increase backlog and RPO each and every quarter this year. However, we experienced some backlog conversion delays related to customers readiness of budgets. So we spent a lot of time with our customersâ intensive meetings and discussions to better understand what are the reasons behind it and then also try to be helpful and prioritize with them the deployments going forward. And then we have also to remember that at this time, they usually also plan the budgets going forward. So, the results of the discussions were that today we have visibility towards the deployment schedule for the next quarters and for next year. And this actually provides us with a confidence level â with high confidence level in the outlook and thatâs the reason we resumed guidance. Just a little bit more color, if you look at our RPO, so we had an RPO of â total RPO of about $530 million more or less. And if you look at the short-term RPO after the discussion with our customers, it stands on about $250 million, which is more or less 50% of the total RPO, but also reflects more than 80% of the outlook for next year. So, this gives us the confidence that we have in order to provide guidance this time. Thatâs great. I appreciate that. And if I could just ask one more question with respect to that confidence that you guys have in the guidance here. Itâs just interesting to me. Like I know this year, we have obviously seen delays to that backlog conversion, is it fair to think that customers are behaving differently or thinking differently about next year now, just because I am trying to understand why that backlog convert â why we would have more confidence in that backlog conversion for next year, just given maybe some of the delays that we have experienced this year? Yes. So we have to remember that the macroeconomic environment affected also our customers. Also for them, it took time to digest and they now plan the budgets again. They looked into their availability and readiness. Our discussions with them gave us the confidence level that we now have the deployment schedule that is more realistic. And thatâs actually the baseline for the short-term RPO that we believe will be converted. So itâs a combination of strong backlog that increased over the year, together with many discussions we have with them to reconfirm the deployment schedule and prioritize it. And also to remember that not all countries were affected by that. There are certain countries that were affected more, some affected less, some were not affected at all. So overall, now we have a very good view about the deployment schedule. And obviously, when market turns and revenue hopefully will go up, once this storm is behind us and given the high software margins, I would also expect the growth rate to increase and the margins to expand. So this is it in a nutshell. I hope I answered. You did. Thatâs great. Thatâs great. And a final question before I turn it over to my colleagues, but I just wanted to make sure I was clear on the gross margins. Obviously, we saw that professional services and other, I think was below what we had been forecasting on our side. So can you help us think about what led to the professional services gross margin contracting this quarter? And then the other comment is historically from Q3 to Q4 gross margins have compressed. And I just wanted to see, should we expect a similar pattern as we think about Q4 gross margins? And thatâs all. Thank you, guys. Okay. Hi, Mike, itâs David. So, when we look at the gross margin, and the main driver for our gross margin is actually the software revenue, which that affect our ability to improve gross margin over the years. When you look at the Q3, we had professional services with the negative gross margin, and it was mainly driven by two things. One of them is that low level of software revenue. And the other one is because of like the cost structure associated with the deployment schedule that we were planning. Giving now that we have much better visibility and the cost reduction that we already made, that will allow us to improve the gross margin on professional services over time. And on the long-term, we will be able to return back to the level of software gross margin of overall 70%. When you look at the â as for your question about Q4 and the future period, so overall, we believe that it will take some time to do the recovering, in the end, from a gross margin perspective, I would assume slight improvement from the current level that we are seeing right now. Great. Thanks for taking my question here. Maybe just to follow-up on the prior question is, can you kind of just help us understand like whatâs the recession playbook for you guys. Obviously, we have seen other companies take steps in terms of employees willing to kind of dial that back. Obviously, you have kind of built in some efficiencies this year. But obviously, if the economy gets worse, like whatâs the recession playbook? Like, what cards you have in your back pocket to kind of offset, I think some additional call it headwinds that you guys might face next year? Yes. So, I assume you are asking, I just want to make sure I understand the question, Peter. I assume you are asking what are our assumptions for next year in terms of the macro environment thatâs the question? You are right. Yes. I am assuming, obviously, no one knows whatâs going to happen. But I think you have still the guide for next year. But whatâs the offset to that, right, like, where is the risk? And then what do you see as the risk in terms of you may perhaps not hitting those numbers? Yes. So, when we built our guidance, we assumed similar macro environment conditions as this year. So, we didnât assume that the situation will be better. We also donât have any signs that it will be worse. So, the assumption was that it will be similar to this year. Obviously, we took some actions related to cost structure to make sure that, we are aligning the organization to the outlook and generate breakeven cash flow from Ops. This was the goal. And the thinking behind it was that first, we have to stand behind the commitments to our customers. And second, that we preserve the opportunity to resume growth when market conditions improve. So, overall, the assumption is a similar macro environment as this year. Okay. And then maybe can you kind of touch upon like the competitive landscape? And maybe what your customers are doing today? I think the deals that are getting deferred, are you seeing more companies compete in RFPs? Are these customers just pulling back completely, or you get a sense that maybe they are allocating their budget elsewhere? Can you just kind of give us a sense of the appetite from your customers in terms of their budgets and where that allocation is kind of heading towards? Yes. Sure. So, we still demand also this year, if you look at the bookings and RPO, it was increasing. The problem was not actually â the main issue was not the bookings, but it was the backlog conversion, mainly the backlog conversion. So, actually POs that the customers gave us, and when customers â that when customers give bills, they do it because they need a product and they need a solution that they have to address their challenges. So, this is something that gives the confidence that the demand is there. We run the company in tough situation â macro environment, having said that, we do have very good relationship with our customers. We maintain market leadership in terms of product differentiation. We are global, work in more than 100 countries. So, overall, the leadership position remains. Of course, some customers are having budget issues, and they have to slowdown either buying or to push or delay backlog conversion. And thatâs what we are focusing on. About competitors, I tend to believe that competitor will face the same challenges that we do. Different competitors operating in different parts of the market, not all of them have the rich portfolio that we do and address the many use cases. So, it depends on what competitor and what area he is serving. I do believe that by the end of this macroeconomic storm, some of the competitors will be struggling and maybe it will be â though it will be interesting for us to go to consider M&A in the future. Okay. Thatâs very helpful. I can squeeze one last one is, we talked about backlog convergence. But can you talk about maybe what you are seeing at the top of the funnel today meaning like net new RFPs coming in on top? Are you seeing an uptick in activity when looking at the funnel today, call it versus six months ago, or even three months ago? So, as part of our decision to focus our efforts on areas where we can maximize opportunities because we know that in certain territory â certain countries, they are suffering budget constraints and not ready, etcetera. So, our decisions are to focus the business on where the opportunities are and maximize the ROI. And what we do now is we are focusing on subset of the funnel that will generate the highest potential for us. And the funnel we have today is big enough to support book-to-bill greater than one alternative, it was that way this year, book-to-bill was greater than one this year. We expect the same to be next year. Great. Thank you very much. Couple of follow-up questions along the lines of guidance, for fiscal â24 with the divestiture and you are talking about 5% growth back of the envelope, I come up with a $270 million to $280 million number, if thatâs the right ballpark to be thinking about in terms of total revenue? So, we share the guidance for Q4, which give you a range between $63 million to $72 million. If you take from the midpoint 5%, you will be around $290 million. So, this should be like around the number that you should get. Okay. Thank you. So, itâs roughly ballpark $290 million, I didnât know how things will ebb and flow quarter-to-quarter, because certain seasonality in there. So, thatâs why I was trying to get clarity on that. So, roughly $290 million in revenue, gross margins should be in the low-60s. I didnât catch it should be up from previous high-60s, what was the number on gross margin? So, letâs separate the discussion about, overall gross margin. So, gross margin is driven by our software model. And as revenue will grow, we will be able to drive more dollars with higher profitability. When we look at the Q4 and next year, we expect a slight improvement on the gross margin due to the increase in the top line. So, I would say low-60s, like for modeling perspective. Okay. And then there should be a decrease, and I saw a drop in R&D from second quarter to third quarter. I am just trying to understand the breakdown of those operating expense, SG&A and R&D, going forward, now that you have completed the divestiture, just trying to understand what kind of levels we are looking at in terms of R&D and SG&A moving forward? So, in general, we will provide much more color on our cost structure during our next earning calls. We do think that, overall, Q4 OpEx will be around $55 million, and we will continue to benefit from our cost saving initiative over the next year. Okay. Is there a percentage breakdown? Itâs roughly historically close to 50-50, but a little bit higher SG&A versus R&D? And thatâs how â of that $55 million, I am just trying to put in buckets. Is that how it should be still weighted, like historical? Perfect. And then you also said cash flow breakeven in 2024. Is there a specific, second half of 2024 is, or is it all going to be fourth quarter, any kind of guidance along those lines? So, well, cash flow from operation, we expect it to be breakeven in Q4 this year and also for next year. As you look at next year, we think that, there will be sequential growth on revenue throughout the year. And the OpEx benefit we will enjoy also during the year. So, giving this trend, you should expect that H2 will be better than H1 from cash flow from operation. Thank you. And I am showing no further questions. At this time, I would like to hand the conference back over to Mr. Ridlon for any closing comments. Thank you, operator and thank you everyone for joining us on todayâs call. Should you have any additional questions, please feel free to reach out to me and we look forward to speaking with you again next quarter.
EarningCall_1379	Good morning, and welcome to the Verizon Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Brady Connor, Senior Vice President, Investor Relations. Thanks, Brad. Good morning, and welcome to our fourth quarter earnings conference call. I'm Brady Connor, and I'm joined by our Chairman and Chief Executive Officer, Hans Vestberg; and Matt Ellis, our Chief Financial Officer. Before we begin, I'd like to draw your attention to our Safe Harbor statement, which can be found on Slide 2 of the presentation. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. This presentation contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials posted on our website. Earlier this morning, we posted to our Investor Relations website, a detailed review of our fourth quarter and full year results. I hope you all had a chance to read the material. I'm going to briefly discuss the financial highlights before turning the call over to Hans to lead a discussion on our strategy, guidance and forward-looking view of the business. Slide 3 shows a summary of our results. Consolidated total operating revenue was $35.3 billion in the fourth quarter, up 3.5% year-over-year. Wireless service revenue grew 5.9% year-over-year in the fourth quarter benefiting from unlimited plan migrations, our best fourth quarter total postpaid net additions in seven years, pricing actions that we began implementing in June of 2022 and a full quarter contribution from TracFone. Consolidated adjusted EBITDA was $11.7 billion for the fourth quarter, down 0.2% year-over-year. Wireless service revenue growth was offset by higher promotional expense, declines in our high-margin legacy wireline business and inflationary cost pressures. Adjusted earnings per share in the fourth quarter was $1.19, a decrease of 10.5% compared to the similar period in 2021, driven by higher interest expense, depreciation and lower pension-related income. Finally, we delivered $14.1 billion of free cash flow for the full year 2022 and exited the year with a net unsecured debt to adjusted EBITDA ratio of 2.7x. Thank you, Brady, and good morning, everyone. On today's earnings call, I will focus on our strategy, guidance, expectation for the business and why I'm so excited about the opportunities for the year ahead. Let me start by saying that we deliver against all of our revised financial targets provided in July, including 8.6% wireless service revenue growth, $47.9 billion of adjusted EBITDA and adjusted earnings per share of $5.18. Last quarter, we said expectation of a positive consumer phone net adds in the fourth quarter, and we delivered against that expectation. Although we have more work to do, I'm encouraged by the improvement and expect to build on the momentum in 2023. The improvement in the consumer performance was complemented by yet another strong mobility quarter in Verizon Business Group as well as continued success in fixed wireless access with net adds up sequentially in both consumer and business. Together with FiOS result, we added 416,000 broadband subscribers in the quarter, our best total broadband performance in over a decade and approximately 1.3 million total broadband net adds for the year. Regarding our guidance, we have positioned ourselves to improve on our performance in 2023 and expect to build a good underlying operational momentum, although that will be offset by the impact of the noncash factors, such as promo amortization in our revenue growth and adjusted EBITDA. Additionally, we're seeing some impact of high interest rates. At the same time, we expect our capital spending to reduce significantly in 2023 as we reach the end of our incremental C-band spending, which will be a tailwind for free cash flow. We're striving to make further improvement and take even more actions that will ultimately lead to better performance than the guidance we have outlined today. Matt will discuss the guidance in more detail later in the call. The industry entered 2023 with continued macroeconomic uncertainty as elevated inflation and interest rates impact the broader economy. Still, demand for our service remains strong, given the growing importance of mobility and broadband to both consumers and businesses. The combination of our network reliability, diverse portfolio of products and services and the industry's strongest customer base provides us the flexibility to meet the changing customer needs even in a difficult economic environment. We measure our success in maximizing value across stakeholders by our ability to grow service revenue, EBITDA and cash flow. Taking these three metrics together is how we hold ourselves accountable. We're well positioned to improve our performance and accelerate growth on a go-forward basis with network quality as the foundation for our strategy and growth. We expect the wireless mobility and nationwide broadband will be the most significant contributor to Verizon's growth for the next several years. In 2022, we made important progress in each of these businesses. Our growth in these areas will be driven by extending our network advantage using our C-band spectrum, which we expect will strengthen our network leadership in the coming years. We are taking a balanced approach on how we run our business, adding the right customers and generating ongoing profits from them is how we maximize value. We remain focused on our cost reduction and efficiency actions, while also maximizing our return on invested capital via better monetizing our assets to put us on track to improve free cash flow going forward. We're proud of being the strongest in the industry in terms of generating cash and want to preserve that while also continuing to strengthen our balance sheet. We're executing with discipline and will continue driving a strategy which produces sustainable long-term growth and profitability. As connectivity plays an increasingly important role for consumers and businesses, it is the quality of the connectivity that matters the most. Not all networks are architected and built the same, nor have the same quality. We have seen these differences in the past and expect that 5G will be no different. Our engineers have the best track record for designing and building networks that produce the best experience. Our network will continue to evolve with a relentless commitment to quality and reliability, adding capacity where needed and filling service gaps where they exist even as capital intensity declines in the coming years. In the shift to 5G, we have been rapidly building out our C-band spectrum with the most aggressive deployment plan in our company's history. We are tracking to 200 million POPs this quarter and are well ahead of schedule to reach our 250 million POP targeted by year-end 2024. C-band propagation is very similar to that of AWS and PCS spectrum, which covers more than 300 million POPs today. This gives us a clear path to scale C-band quickly and efficiently, including in the 330 markets where we expect to gain complete access to the C-band spectrum later this year. Due to the timing of spectrum availability, our deployment strategy targets the highest user areas first with the capability to deliver the most distinguished experience in places where the majority of our customers consume mobile services. As additional spectrum is cleared, we will have access to many new markets. As with prior generations of wireless technology, customers in all areas can expect to receive the best network experience. And where we have built out the C-band, we're only getting started. Early deployments have limited to 60 megahertz or 100 megahertz in some early clearance markets. Consumer performance in this market has been encouraging as is evidenced by better retention, more favorable gross add trends and higher premium uptake. In addition, the majority of our consumer fixed wireless net adds are on C-band. With the final trends of spectrum expected to be available in late 2023, we can deploy an average of 161 megahertz and up to 200 megahertz in certain markets across the entire Continental U.S. When we turn on the full breadth of spectrum, we expect peak download speeds to reach 2.4 gigabits per second, up from the 900 megabits per second we see with 60 megahertz deployed, all while supporting far more uses and applications. At the same time, we're also deploying our 5G standalone core. So by the end of the year, you should see a network with incredible speeds, both downlink and uplink and position to deliver 5G capabilities such as network slicing, voice over 5G and/or among others. We believe our network will allow us to maintain our premium position with our wireless mobility customers and provide reliable fixed wireless access services to consumers and businesses across the country. This is an example of how we can monetize our multipurpose network by scaling several revenue streams on the same infrastructure to enhance our return on investment. We're adding far more capacity to our network than the peak usage increase were expected in fixed wireless markets. We continue to expect there will have 4 million to 5 million fixed subscribers by the end of 2025, and those subscribers will be enabled by our current build and capital plans. Our mobility and broadband plans are supported by our deep fiber position and ongoing fiber investments. Approximately 50% of our sites are now served by our own fiber, up from 45% last year. We believe we are the only provider serving the level of its wireless network with its own fiber. This supports superior quality of services and end-to-end owners' economics. That means better reliability and higher margins and look for us to continue to expand the percentage of sites on our own fiber. We also expanded our FiOS footprint by over 550,000 locations in 2022, extending our FiOS open for sales to more than 70 million locations. You can expect continued fiber expansion in the years ahead. In summary, network quality is the foundation of our strategy and growth. And all of the moves we are making are focused on ensuring we continue our network leadership in the future. As I mentioned earlier, Verizon's success should be measured against three important metrics: service revenue, EBITDA and free cash flow. Let me now cover each of these in detail and tell you why I'm so confident in our ability to deliver against all three of these benchmarks. We expect that our network differentiation will be the cornerstone of our service revenue growth and that it will allow us to continue to attract the highest quality customer base in the industry and maintain our market-leading share of the B2B market. Our fixed wire access is also expected to contribute more meaningfully to service revenue as we enter the year growing rapidly with a base of more than 1.4 million subscribers. 2022 demonstrated to us that we need to be even more agile and responsive in the consumer market. This is one of the reasons I assume leadership of the business late last year. We are moving into 2023 with momentum and expectation for improved performance based on recent actions and planned initiatives. After integrating TracFone over last year, we now have a full complement of offerings from entry-level prepaid all the way up to premium unlimited postpaid plans for the first time in our history. This will enable us to better attract new customers while also retaining customers through their mobile journey. You have already seen us take more segmented approach to the market through the Welcome Unlimited and One Unlimited plans in postpaid and the launch of Total by Verizon in prepaid. We're already seeing the benefit from these actions. In 2023, our plans will continue to evolve as we look for the best ways to cater to our customers, whether through network experience, content or other product offerings. Each new offering gives us an opportunity to engage with the prospective customers and ensure they receive a plan that best fits their needs. We remain disciplined around our core pricing and continue to perform well with our premium customers on retention and step-up activity. As we move into 2023, we're taking a more localized approach with our network and go-to-market strategy, providing greater autonomy to the teams on the front line and speeding up the pace of decision-making. This will allow us to compete more effectively across geographies, particularly where dynamics may differ by individual market. Finally, we continue to revise our sales compensation structure, ensuring we have the right incentives in place to drive sales growth. The customers we have and continue to attract represent the highest quality customer base in the industry. Based on our customer payment patterns, which are at or better than pre-pandemic levels, and the low delinquency rates in our securitized device payment plan portfolios, we continue to see only a limited impact from the macroeconomic environment on our customers. While we are watching this closely, we have a lot of confidence in the resilience of our customer base. Scaling of new business, such as private 5G networks and edge computing will also be a strategic focus in 2023. Our funnel is strong, and we're making the appropriate investment to ensure such services provide a meaningful contribution to future growth in the years ahead, which differentiates us in the industry. You can expect Verizon to compete, but I want to underline again that we will not sacrifice financial for volumes. We continue to focus on improving our cost of acquisition and retention and believe current promotion incentives are not sustainable for the industry in the long run. Although we have participated, to some extent, in this dynamic, expect us to pursue more ways to move away from the aggressive handset subsidies with offers like Welcome Unlimited plan, which offers attractive headline pricing for customers while reducing device subsidies. We manage the business for profitability and such actions drive healthy lifetime value for the business. Moving to Business Wireline. We're taking several actions to reduce the financial impact of the unit and are scaling back on pursuing low margin revenue in order to gain drive improved profitability. While this may result in missing out on revenue, it is a right move and one that will lead to higher margin and cash flow over time. At the same time, we are focused on further improving the cost structure through greater efficiencies. You may recall that we embarked on a new cost-cutting initiative late last year. The component of this initiative is the formation of Verizon Global Services. This organization is accelerating efforts to drive cross-functional efficiencies, enabling us to reinvest savings in network superiority and customer growth while contributing to long-term profitability. Additional opportunity exists in sourcing, sales and marketing and corporate system, among others. The heavy lifting is now underway as we execute against our goal to deliver $2 billion to $3 billion of run rate savings by 2025. So our EBITDA strategy is clear. Grow profitable volumes in both consumer and business based on our increasingly differentiated network and manage our expenses the way you would expect us to do. By growing service revenue and EBITDA, we believe that we will be able to provide our shareholders with increasingly healthy free cash flow, which will support the strength of our balance sheet and fund our dividend growth. Our current streak of raising the dividend 16 years in a row is unmatched in the industry, and we intend to be able to continue that trend. Because our mobility and fixed water access products leverage the same infrastructure, they provide a capital-efficient path to future cash flow growth. We believe that we will become increasingly efficient with our capital, using less capital to generate every dollar of revenue for years to come. That will enable us to produce expanding cash flow that we can both reinvest in our business and return to our shareholders. And as you know, we're doing all of this as our capital spending budget is expected to decline from $23.1 billion in 2022 to under $19 billion at the midpoint of our guidance range this year, a reduction of nearly 20% year-over-year. In 2024, we expect our CapEx to be around $17 billion, which we expect to represent the lowest capital intensity in over a decade and among the lowest in the industry. We expect we will deliver a best-in-class network experience while reducing our 2022 CapEx leveraged by more than $5 billion over the next couple of years. Thank you, Hans, and good morning. I want to spend some time walking you through our 2023 guidance while also commenting on our longer-term outlook. Our 2023 guidance reflects momentum we have exiting 2022, which we expect to drive wireless service revenue growth. For 2023, we expect total wireless service revenue to grow between 2.5% and 4.5%, driven by increased penetration of premium unlimited plans, scaling of fixed wireless, continued growth in products and services, such as content and device protection plans and the full year impact of our pricing actions taken in 2022. As noted in our earnings materials, our wireless service revenue growth outlook includes an approximately 190 basis point benefit from a large allocation of our administrative and telco recovery fees, which partially recovered network operating costs to wireless service revenue from other revenue. In addition, we expect promo amortization to be approximately $1 billion higher than last year. We expect adjusted EBITDA to be within a range of $47.0 billion to $48.5 billion. This outlook reflects expected higher wireless service revenue offset by wireline and other revenue declines and higher marketing and network operating expenses. Full year adjusted earnings per share is expected to be $4.55 to $4.85. As noted on our third quarter earnings call, high interest rates are expected to result in approximately $0.25 to $0.30 of interest expense pressure in 2023 due to higher floating rate debt costs and higher securitization costs for our growing device payment portfolio. We continue to believe we have the right debt structure for the long term and have managed the balance sheet appropriately by keeping short-term maturities to a minimum in this higher interest rate environment. Higher rates of pension and OPEB, in addition to the lower pension asset base resulting from negative returns in 2022, are also expected to impact our adjusted EPS by approximately $0.12 to $0.15 compared to 2022. This flows through other income and expense on our income statement. Finally, we expect approximately $0.03 to $0.05 of impact from higher depreciation expense primarily driven by the C-band equipment being put into service across '22 and into '23. Our adjusted effective income tax rate is expected to be in the range of 22.5% to 24.0% based on current legislation. Capital spending for the full year is expected to be between $18.25 billion and $19.25 billion, including the final approximately $1.75 billion of the incremental $10 billion of C-band-related capital spending and we continue to expect total capital spending to be approximately $17 billion in 2024. The reduction from the $23.1 billion CapEx in 2022 is expected to drive higher free cash flow in 2023 despite increases in cash interest and cash taxes. As previously discussed, we will complete our accelerated $10 billion C-Band program this year after which all C-band capital expenditures will be part of our business-as-usual capital program. Looking beyond 2023, given our exit rate from 2022 we don't expect to hit the long-range outlook as we projected at the Investor Day last year. However, due to the way we have positioned our network and service offerings coming into 2023, we do expect increasing growth in revenue and cash flow in subsequent years. Thank you, Matt. Let me summarize the Verizon opportunity in a few key points. We are making the necessary improvements to drive better performance. We have the best network, and it's only getting better even as capital intensity improves. We have the largest EBITDA base in the industry and a clear path to free cash flow expansion. And finally, we have one of the most attractive dividends in the market and we intend to be able to continue the trend of growing the dividend each year. I had a couple of questions on the guidance. The first one is how are you thinking about your confidence and the visibility of this guide as compared to a year ago. Obviously, we had the war and stuff like that. But I think the reductions in guidance, obviously, were a concern for investors. So as you went through this process was the deliberate conservatism that you were trying to bake in to make sure that you could hit, and I think, Hans, you might have mentioned exceed the guidance with additional steps. So that kind of setup would be great. And then I guess for Matt, you called out some of the pressures on the bottom line, but you had a $0.30 range on your EPS guide. I think it was $0.15 a year ago. And it sounded like on the items you gave, the range wasn't that wide. So perhaps you can just give us some color on what caused you to be as wide this year on the EPS? Thank you, Simon. I can start. I mean when it comes to the guidance, I mean, we -- of course, it's a little bit uncertain, as we said, coming into the year, but we're laser focused on the service growth and on the EBITDA expansion and hence, also the cash flow expansion. And that's how we are running our business, and that's how we take decisions. And as I said, I mean, our job is, of course, to see that we are meeting or exceeding the guidance we've given out, and that's how we're going to work all the year. And our teams are set up to work like that. We are in the beginning of the year, so we're going to see how it turns out. But clearly, we have a super laser-focused in the whole company, how we're executing right now and how it hangs together. And as I said before, we have now all the assets all the way from the network to our -- to the prepaid to the postpaid, all that. And from us, it's a lot of execution in a competitive market, but we definitely believe we can compete very well in that market. Matt? Thanks, Hans. Good morning, Simon. So look, as you think about the guide for the year, obviously, there's a number of items in there, as I think about the range. We can get to the top end of the range there with strong execution, the activity around the cost program scaling, that flywheel moving faster than our base assumption. And just if we see more volumes come through the business there. Obviously, the low end will reflect the promo environment, the overall competitive environment and then we'll save items like inflation and so on. So the range of the EPS guide, I think very similar to the EBITDA guide that we've given. And I think it reflects as we come into this year, when you think about some of the unknowns will play out here in the macro environment and the competitive environment, we feel it's the right range to have for 2023. As Hans said, there's a lot of things for us to stay focused on, and make sure we produce the best result possible. Can we talk about consumer margins within the guidance. They were down about almost 400 basis points in '22. And Matt and Hans, you guys gave some good color on some puts and takes around promotions around Verizon Global Services and I think, I guess, higher marketing and network operation cost. But I guess any other puts and takes to call out. And as we look into '23 as part of the guidance, should we expect the consumer margins to sort of flatten here? And do you guys have visibility that as you guys -- a lot of these initiatives take hold that we can start to see some improving margins on the consumer side? Thank you. I mean, I can start. I mean, of course, we're doing quite a lot in the consumer segment right now, all the way from addressing areas where we have softness in our portfolio with Welcome, for example, in order to create growth. But also, we are regionalizing our business, both on the network side and the consumer side in order to take quicker decision, but also that the network is so strong in local markets where we're building out the C-band. We want to take advantage of that. And as we said before, we have the chance to -- or we now have a chance. We see the correlation between C-band deployment and step-ups and of course, fixed wired axis and the majority of fixed wired axis customer coming on C-band right now. So that's why. And finally, we have also worked with the spending, the consumer investment, I call it, all the way what we're doing above the line on promo, what we're doing below the line on retention and how much we do in media. We're doing that much more agile. I think that will help us to manage and continue our clear path and a clear target of growing our top line and expanding our EBITDA. That's our job. Then there are some headwinds that Matt has talked about, but obviously, the underlying should be improving with the cost cuts and the way we're working in the consumer group. Matt? Yes. Thanks, Hans. So as you think about the year-over-year reduction in '22. Remember, at the start of the year, we said that we expected about a 200 basis point impact because of the inclusion of TracFone in the business for the year. Obviously, accretive in absolute terms. But from a margin standpoint, we did expect to see that. So then obviously, there's some other items in there. We talked a little bit about the inflation impact last year. Obviously, the competitive environment and the promo piece in there as well. So there will be some things that we have the opportunity to improve on this year's synergies from within TracFone as we move more customers over to our own network will be an upside. But then as we mentioned in the prepared remarks, obviously, the promo amortization is expected to be up on a year-over-year basis as the delay between being at these higher levels from a cash basis and then that flowing through on an accounting basis. So when you net those things out, expect something initially on a probably a similar type of level in '23 to '22 with some opportunities to push that as we go forward into subsequent years. I'm actually going to stick with consumer. And I was hoping we can get a little more insight into two different tools you're using to go to market. The first is Welcome Unlimited, you've been advertising it quite a bit, and you've mentioned it a couple of times during your prepared remarks. I'm wondering to what extent are you finding that Welcome Unlimited is indeed a popular plan with new consumers versus the extent to which it's driving wireless shoppers into your channels where you're actually more frequently converting them into a higher-tiered plans? That's the first question. And then it seems like you have been reluctant to make greater use of device promos. Obviously, you were using them to some extent last year. How are you thinking about the role of device promos as you go to market this year and you look to sort of sustain these positive consumer phone net adds? The Welcome Unlimited is working exactly as we wanted. I mean it creates the store traffic. We bring our customers in and we see that the customer gets the plans they want. We have not seen any step downs of -- that is coming from that. We are more seeing an opportunity for our customers to have a conversation with them. And of course, remember, that's a bring-your-own-device. It's for 4 lines, and that's the way we've been dealing. And we learned a lot from the first Welcome we started with somewhere in the third quarter, I remember or beginning of -- end of the second when we saw a little bit -- and that was an area where we were soft. That's where we clearly saw that customers were going to others. These we now have diverted and they come to us. And if you then add that, you see our premium unlimited continue to do well. We went up now to 45% actually from 41% in the third quarter, I think. So we added 4% more on unlimited premium. So that is working for us. Just need to be agile, stay close to see which segment and then be aggressive in the segment we need and the segment we're performing well and we let them continue to perform well. And when it comes to device promos, yes, we understand that's part of the competition and in part of the market. We will be in part in that as well. But we will continue to be cautious and see that we actually are using device promos in the right moment for the right customers. And you saw us last year coming in and now sometimes we're a little bit more aggressive and others, we were actually the least aggressive. And I think that's how we will continue this year depending on where the market is going. But what you can expect from us in the consumer unit is to be agile, take quick decisions and see if they're working, then we'll continue. If they're not working, we're pulling them. That's why I'm into this basically every day myself nowadays. And I think this has proven that we get the momentum with the team, and the team is actually executing well. We have more to do. I mean I always say that. I mean, it's going to take a long time before I feel that I'm 100% satisfied or happy, but definitely, it's a work to do here, but I've seen the good momentum. Sticking with wireless on service revenue, when I pull out the definition change from other to service revenue, you're guiding to roughly 1% to 2% wireless service revenue growth in '23, which is a big deceleration from almost 6% this quarter. How should we think about this in regards to phone adds and ARPU and the impact of promotions on service revenue? Can you just put the pieces together for us? And do you expect that service revenue will stay positive each quarter this year or actually flips to negative at some point? And just on top of that, typically, we see things much slower in terms of subscribers from 4Q to 1Q, while I don't expect you to guide on subscribers, do you think we'll see sort of typical seasonality this quarter? Or do you anticipate sort of better performance? I can start, and then Matt can break down the numbers you're talking about. I mean, yes, on the premium segment, there is seasonality in the first quarter, and I don't think that's going to be different this year. However, our work is to keep up the momentum that we had from the fourth quarter into this year, where we had good store traffic quarter-over-quarter and also high conversion rate. But it also means that we need agile and see what's happening in the market. And it's a little bit early to do any guidance or something like that, which we're not doing on net adds. But clearly, there is going to be seasonality, but we have good momentum, and we're going to continue to execute and be very close to the market. Matt? Yes, Phil, so kind of unpacking some of the piece parts of your question there. So seasonality, absolutely, we expect that to look reasonably as you would expect throughout the year from an overall standpoint. In terms of the service revenue guide, your math there is correct. When you think about the fourth quarter, you said close to 6%. Remember that included a full quarter of owning track in 4Q this year versus only part of 4Q last year. So as we get into '23, finally on a year-over-year basis to talk about stuff on an apples-to-apples basis and not with and without M&A items, which is nice. So once you remove that very similar. In terms of the piece parts within wireless service revenue guide, think about you got the positive impacts of the price ups. Obviously, we had six months impact last year, approximately, you get a full year impact this year. Also the benefit of the FWA momentum we had and having 1.4 million subscribers in the base at the start of this year that we're building throughout the year. But that's offset by the promo amortization, which, as I mentioned in the upfront comments will be higher in the income statement year-over-year, with the timing of the recognition of that. And then also the impact of the volumes last year, offsetting some of the ARPA benefit we had. So the task for the team going forward is to continue the momentum that we started to see in the second half of last year, as Hans mentioned, and that will put us in a position to continue to push service revenue in the positive direction going forward. The first one, maybe, Matt, could we refresh the free cash flow outlook for 2023? I think the midpoint was $21 billion for 2023 from last year's Analyst Day. I think if we look at the EBITDA guidance, which is roughly flat; interest expense guidance, which is up $1 billion; the CapEx, which is down $4 billion, it feels like it should be roughly $17 billion, unless there's other things in taxes and working capital related to some of these promotions. So if you could kind of refresh that a little bit, that would be awesome. And then Hans, you called out three things as it relates to the C-band deployment. And this has been a big success for Verizon is getting this build done. I think that some people have been asking themselves like where the return is from all the money that's been spent. And you highlighted higher retention, better gross adds and higher premium take rate. Are there numbers that you can put around that, that we could grab on to and say, "Oh, when in 2024, Verizon doubles their footprint in C-band with the new spectrum getting cleared, we can put a number on that and say, "Oh, this is going to be the return that Verizon gets from this build?" Yes. So on the free cash flow, David, obviously, last year, we said that we expect -- you had the right number expectation of where we said free cash flow might be for $23 million. As I think about what we see the business today versus where it was a year ago, a couple of factors that are different. CapEx very much in line with where we thought it would be at this point. Team did a great job last year deploying C-band. And obviously, we spent most of the $10 billion. So you get a nice year-over-year benefit. Offsetting that cash taxes will be higher this year as we have less benefit from a higher CapEx number and also both appreciation dropping down. That was in our expectation last year. Interest rates were obviously very different than we expected last year. You touched on those. And then the jump-off point from the EBITDA and the business at the end of '22 to '23 lower than we hoped to be at the Investor Day a year ago. So you've got the right moving parts there. We're not guiding specifically to a cash flow number. We historically haven't. But you've got the right moving pieces in there. So net-net, the CapEx reduction year-over-year gives us a good tailwind to think about cash flow for this year. So with that, I'll hand you to Hans for the C-band question. Yes. And it's, of course, a focus for us to continue to grow the cash flow, as I said so many times. So we will continue on that work. When it comes to the C-band, first of all, we have said from the beginning, the C-band acquisition we did is a multi-decade spectrum. It's going to -- it's so much and in so many years. And of course, that was a deliberate decision because we believe we're going to be in wireless business for the eternity of Verizon's history. So that's very important. However, when it comes to C impacts, and I think I mentioned some of them, if you think about fixed wireless access, the majority of all new customers are coming on the C-band right now. That's a clear indication. Without the C-band, we couldn't grow the broadband right now. We did a history high 1.4 billion net adds in the year of broadband subscribers. So of course, a lot of contributor to C-band, and that's a clear metric to have. The other metrics you have is, of course, unlimited premium, where we say that actually, we're performing very well where we have deployed a C-band in order to get customers to step up. And the step-up is very important. We are in a multi-subscription business or we are in a subscription business. And the more you can see that you're upgrading the price, the P on that quantity, it's enormously important for a long-term value for our customers, important. The third one that is coming, and I mentioned also when I opened is, of course, private 5G networks, mobile edge compute, all that is, of course, going to be very much supported by the C-band as well. There we will come back and start reporting on that when we feel that, that is coming into the play from a more significant portion. But mobility -- and remember also that we had the wireless business side, the business side actually growing because of the reliability of our network and the resilience of our network, which is how our enterprise customers are buying from us when it comes to wireless business. So I think there are many metrics that you can see already now that is really connected to the C-band. Then I just want to remind you it's almost less -- I think it's one year since we got -- since we launched the C-band. It's only one year, and we're going to cross 200 million POPs. We have never built so fast in the entire history of the company, and we're well ahead of the plan to hit the 250 million POPs that we said at Investor Day by end of '24. So I think that this is really a game changer in the market. And we see performance-wise, we're outperforming. We have the most resilient 5G network in the nation and we are just starting, just starting with 60 and 100 megahertz. And as you heard me talking, we have 160 in average, it's going to be 200 later on. It is a game changer, and we can already see it right now, and we see already metrics right now that is proving it. Two questions, if I could. The first one, as you mentioned earlier in the discussion that you pulled back from some of those longer-term targets that you had previously you added the 3-plus percent service revenue and other growth for this year and 4-plus percent for next year. Can you unpack the categories that are at or above the plan from a few years ago? And then the areas of shortfall and if those areas, do you view those as temporary or more permanent changes in the opportunity for Verizon? I can start. I mean, first of all, we're more confident than ever that we have the right strategy and we have the five vectors of growth. All of them are going along. Some are actually exceeding our expectations, some are a little bit slower and some have a little bit different jump-off points. That's where we are. But there's no difference how we see the market and how we believe we can compete in all the five vectors of growth that we outlined in the last time. It's more a push in time than something else because of this year or this year, in '22, I guess, I should say, had some jump off that is not really helping us. But all in all, the whole strategy, where we're going, I have a lot of confidence in our team. The team has a lot of confidence that we're executing. We're eliminating the things that have been distracting us, all the ways from Verizon Media Group, et cetera. Then we have some headwinds that we constantly work with as well that we don't talk so much about. On the wireline side, I talked about that today. I mean everything from the cost out. But not only that, we're going to be even more prudent, what type of business we're taking, which will reduce our top line probably, but it will improve our profitability and cash flow. So you're going to see us taking many actions to see that we are delivering on the long-term plans, but there are some shifts in it. Matt? Yes. Thanks, Hans. So Mike, as you think about the conversation we had last year and we talked about the long-term outlook, we provided the piece parts. Maybe if I go through some of those and where we are. Some of them were absolutely where we expected to be. Think about nationwide broadband with the year we had on FWA, but also FiOS and the expectation to continue to see very good progress there. That's very much in line with the expectations we outlined a year ago. Also, our business segment mobility results with six consecutive quarters above 150,000 net adds, very much in line with the expectations that we had at the Investor Day. A couple of areas where we are behind versus our expectation at that point in time. Firstly, you need to think one of them, the mobile edge compute and 5G private networks. You're talking about the technology adoption there on a new technology, that adoption curve. A little slower than maybe we would have liked, but as you heard from Hans in the prepared remarks, feel enough we're starting to see some momentum there. So I still feel good about the opportunity there, but the pace of the adoption curve a little different than we hoped it might be. But the upside there still looks very good. And then, of course, the other one, consumer mobility at this time a year ago, we had higher expectations for '22 than where we ended up. Obviously, a lot of that variance occurred in the first part of the year, and you saw the actions taken, but as you think about the piece parts of the long-term outlook that we described a year ago and then how those have played out in the past 12 months. Hopefully, that gives you a little more color in terms of where things are moving along very much in line and where we also saw some areas where we had to -- we have opportunity to see further improvement as we go forward. Sorry, I hope you can hear me. So Hans, I wonder if you could just talk a bit about your bundling strategy, particularly on the consumer side, with both the strength now in fixed wireless, but also FiOS. Is it your view that going forward, the consumer is going to buy wireless and wireline or fixed access together? Or is that more of a sort of a financial bundling strategy rather than a real product bundling strategy? Craig. No, I think it's a really good question. Of course, we have seen this has a very strong consumer movement in Europe that is, to a high degree, have convergence in the U.S. where, I would say, much lower. But clearly, it is something that our customers are asking for. So it's actually a consumer feedback. And I spent a lot of time in the stores, meeting a lot of our consumers. And they see a clear advantage to have the same provider on the broadband as on the wireless. I don't think we will get into any European levels. But clearly, this is a movement and Verizon is super good positioned here. We have owner's economics on our broadband and on our wireless nationwide, both of them. And that's, of course -- we're going to meet the customers here. If the customer thinks that is what they need, we're going to offer it, and that's why we have this bundles in the market. If they want to have them separate, we can do that as well. We have all these economics on both of them. But I think that trend will continue given the consumer research we're doing and the consumers weâre talking to. That's something that is actually -- and it's not only consumers, you need to think about small and medium business as well, make it convenient for them, both having the wireless and the broadband. Because any SMB today -- and you know we spend -- we probably serve half of the SMBs in the country. Any SMB today need a digital front door and then being mobile first. So this is really good for us. And if you look at our numbers this year on both on fixed wireless access and mobility in the business segment, SMB has been very important for us. So yes, I think there's something in there definitely, and it's a consumer desire, and we're going to meet that desire as we continue. No, it's not different. We see it in the same way if the customer, of course, we're much more mature historically in the FiOS footprint. On the other side, when we do fixed wireless access, it's a much more natural discussion with the customer as we have it from the beginning. So I would say that we probably have a big opportunity on the FiOS segment to have customers, both on the fixed and the mobile. On the fixed wireless access, I think that there, you start actually on a strong position when you start offering fixed wireless access with many of the customers sort of coming in either or cable provider and have our wireless, and that's how they move over to us. Hans, when we think about the balance between unit growth versus pricing, and obviously, there you have made a deliberate choice not to chase unit growth in near term. But could you help us think through how you think about this longer term? Because once you see market share, obviously, it can be pretty expensive to get it back. And so when we think about this balance between pricing and unit growth, how important is unit growth, not just for short term, as you look at 2023, but also longer term, especially when it comes to postpaid phone growth. Thank you. No, good question. I think that as you heard us at least, I mean, we think that the profitable growth is the most important, both to have the right customers retained with us and the ones we're getting. So that's an overarching measurement we need to have. Then, of course, it's always going to be new customers that are important for our base. But remember also, this market right now, if you talk about the premium segment, there are, of course, a certain amount of switchers in the market, and then there are a certain amount of people going from pre to postpaid. That is no infusion of new customers in the system. So they're coming from two sources. And you need to think about how you do that. And I think we have great opportunities right now with the TracFone brands we have to see and total wireless to see that we are taking care of that pre to post migration, which we've not been part of before. We still have some work with the IT stacks and all of that. But clearly, today, we're running on both sides. And on the switcher pool, yes, there we're going to be seeing that we're prudent and disciplined, but we will go for the units we think are the right. It's a subscription model long term that is even more important to increase the P sometimes than increasing the Q because this is long term that you stay with the customers to get the long-term value from them. But it's a balance of it all the time and that we will continue to have. You talked about amortization being up $1 billion for phone subsidies to catch up with cash spending. Embedded in all your guidance is cash spending at peak levels? Is there a scope for it still to go higher? I know it depends on the competitive environment that it could eventually improve. But are we at peak levels, and it's just a question of amortization catching up. And I'm curious, when you think about the service revenue guide for wireless, are there any price increases anticipated in that guide? And kind of what level of price increase? I know it's a sensitive topic, but just curious how we should think about that revenue growth. Now if we talk about the price increases, I just want to come back to what I said before. I mean we will be surgical and segmented in our approach. There are certain segments we need to be more aggressive on. There might be areas where we see opportunities for price increases. There are no major price increases included at this moment. We need to see where the market is going and also where the cost levels are going. But we will always look at that, but it's nothing right now that we have in our plans. Matt? Yes. On the promotion piece, you've got the understanding of the accounting treatment versus the cash there, Doug, and certainly, our assumption is that the marketplace will continue to be competitive, but we're not going to go into the 100% details of what's in the guide there. But we do assume that we'll continue to see competitive level in line with the past couple of years. And then as Hans said, we'll continue to look for ways to put plans in the marketplace to reduce the level of subsidy out there as well, and we'll continue to push those opportunities. Matt, can you talk about your goals for free cash flow? And specifically, how much do you think you can reduce the debt buy per year kind of going forward at this point? And then secondly, can you talk about the gating factor for fixed wireless growth it seems like you're implying with your '25 guidance that this is kind of a good run rate, but yet your speeds are going to be increasing threefold and coverage, you're going to basically get a massive amount of capacity kind of going out there. But do you think this is a good run rate for fixed wireless or can accelerate? I can start with fixed wireless access. First of all, we just reiterated what you said in Investor Day, 4 million to 5 million subscribers on fixed wireless access. Our job is always to try to beat that, but that was -- we just reiterated that, and we are well ahead on that plan. Then the second is, of course, when it comes to our capacity, we have definitely capacity for that and much more. And again, we have a multi-usage of our network that has been sort of the basis for this, meaning the same radio base stations are serving mobility, fixed wireless access and mobile edge compute, and we are not doing separate. In the distant future way above the 4 and 5, we can always come into sort of decisions of splitting cells in order to get more fixed wireless access but thatâs very far away from now. We have ample capacity for the guide and much more than that. So -- and of course, our team is doing everything to see that we can continue to exceed our targets. Hey, Tim, on the free cash flow question. So absolutely, one of our goals is to continue to grow cash flow. Hans mentioned that you should measure us on revenue growth, EBITDA growth and cash flow growth and that cash flow growth is something we expect to be able to continue to generate going forward. Obviously, the capital reduction from the high point in '22 to the guide we gave for this year and then an even lower amount next year will be a positive towards that as we continue to obviously make progress on the income statement as well. You should see that contribute there as well. So that puts us in a position where we can start to see accelerated levels of debt reduction versus what you've seen in the past year or so. So that's the targets we have ahead of us and look forward to discussing progress against as we go forward here. I wanted to ask you about business postpaid phone net adds. They seem to be a bit lighter this quarter than they've been in the past four or five quarters. And I'm just wondering if you're seeing trends there soften due to macroeconomic factors such as corporate staff reductions or if it's competitive reasons? Or is it any slowdown in the secular trend toward company-issued devices? And then related to that, can you talk about what you're assuming in the guidance at a high level for the macroeconomic environment. For example, are you assuming soft landing scenario with small macro impact? Or are you baking in a more protracted downturn in the guidance? Yes. So it's a multifaceted question on the fourth quarter. Of course, on the business-to-business side, SMBs continue very strong. And as I said, they need store digital storefront and a mobile-first strategy in today's world after COVID. So I think that we have been performing very well. On the enterprise side, it's a little bit different, but we see that bring your own device is going down, and we see more companies saying that they want the company phone, which is of course, helping us here. And that we -- that trend we have seen for a couple of quarters. So I think both of them are pretty solid. On the consumer side, as I said, we had positive net debt. We had also, as I said before, a little bit speed lower from the churn from the price increase at the beginning of the quarter. And then there was actually fewer days of sales in the fourth quarter than a normal quarter. So I don't think there are any new things more than what I said. Customers were a little bit later in the holiday season to do. They had higher intent when it comes to consumers, but it was nothing macroeconomical different than I talked about. Matt and I talked about the bad debt and the delinquency being like pre-COVID or equal or better than pre-COVID. So no, there's nothing there. We are, of course, watching it. But so far, we continue to progress well. Yes. Just to add on a couple of points. As you think about the VBG net adds, you're always going to see a little bit of volatility up and down from 1 quarter to the next just because of the size of some of the transactions there. So all in all, though, jobs numbers continue to be good; business numbers, good. Obviously, there's been some high-profile layoff announcements, but overall job numbers are good, and you see that show up in the overall numbers that we produced throughout the year and look forward to continuing to have best-in-class market share within the broadened business group space as we go forward. In terms of the macroeconomic assumptions in the guide, I wouldn't say we have anything too dissimilar to what you've heard from a number of other people during earnings season. But one of the things I come back to is the resiliency of our customer base. We've been through different types of economic environments in the past. We know customers pay their phone bills before they pay other bills and other outgoings. We fully expect that to continue. And so we're obviously watching the macroeconomic environment. But as Hans said, the payment patterns continue to be very strong, and we'll stay close to that, but so far, so good. Ladies and gentlemen, this does conclude the conference for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.
EarningCall_1380	Good morning, and welcome to the AngioDynamics Fiscal Year 2023 Second Quarter Earnings Call. At this time all participants are in listen-only-mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. The news release detailing our fiscal 2023 second quarter results crossed the wire earlier this morning and is available on the company's website. This conference call is also being broadcast live over the Internet at the Investors section of the company's website at www.angiodynamics.com, and the webcast replay of the call will be available at the same site approximately 1 hour after the end of today's call. Before we begin, I would like to caution listeners that during the course of this conference call the company will make projections or forward-looking statements regarding future events, including statements about expected revenue, adjusted earnings and gross margins for fiscal year 2023 as well as trends that may continue. Management encourages you to review the company's past and future filings with the SEC including, without limitation, the company's Forms 10-Q and 10-K which identify specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements. The company will also discuss certain non-GAAP financial measures during this call. Management uses these measures to establish operational goals and review operational performance and believes that these measures may assist investors in analyzing underlying trends in the company's business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to financial reporting measures prepared in accordance with GAAP. A slide package offering insight into the company's financial results is also available on the Investors section of the company's website under Events and Presentations. This presentation should be read in conjunction with the press release discussing the company's operating results and financial performance during this morning's conference call. Thank you, Rob, and good morning, everyone, and thanks for joining us today for AngioDynamics' Fiscal 2023 second quarter earnings call. Joining me on today's call is Steve Trowbridge, AngioDynamics' Executive Vice President and Chief Financial Officer, who will provide a detailed analysis of our second quarter financial performance. Turning to our results. We ended the quarter with revenue of $85.4 million, representing growth of over 9% year-over-year led by growth of about 30% from our Med Tech segment over the second quarter of last year. I am pleased with our second quarter performance as we generated strong financial results and continued to make meaningful progress in our clinical initiatives that support our long-term goals. Our Med Tech segment continues to drive strong year-over-year growth, led by Auryon, AlphaVac and NanoKnife, reflecting our ongoing investment and commitment to building out leading technology platforms in attractive end markets. During the second fiscal quarter, we generated over $5 million of net cash and delivered adjusting earnings per share of $0.01, continuing to illustrate solid execution of our strategy to invest for the long-term growth of the company. As has been the trend in recent quarters, hospitals and care locations are managing through staffing issues that continue to impact procedural volumes. As expected, we are seeing hospitals become more adept at managing through these issues, and we anticipate that this trend will continue to slowly but steadily improve. Auryon continued its impressive performance during the quarter, growing approximately 61% over the prior year and growing $1.3 million sequentially over our Q1. To date, we have treated more than 25,000 patients since launch. During the quarter, we initiated a limited market release of our hydrophilic coated catheters in the quarter which provide for improved steerability and deliverability and we plan for a full market release in the second half of this fiscal year. This launch further demonstrates our commitment to innovation in the PAD market and our ability to deliver these innovations to our customers. We believe that the hydrophilic coating will be an additional driver of continued share growth for Auryon. Our mechanical thrombectomy business, comprising AngioVac and AlphaVac, declined 1% during the quarter. AlphaVac revenue for the quarter was $1.6 million. We are very pleased with this performance following the full market release of our F18 product last quarter. Our launch is progressing according to plan and we are on track to meet our AlphaVac revenue expectations for the full year. With respect to AngioVac, there are two key dynamics at work. First, AngioVac treats complex situations and requires perfusion, anesthesia and nursing support. Staffing challenges during this period have led some customers to choose alternative treatment options. And second, we are still evolving our commercial use case approach with AngioVac and AlphaVac now on the same sales bag. Our NanoKnife disposable sales grew approximately 45% during the quarter with strong growth globally. We saw strong performance from prostate in the U.S. driven by increasing visibility within urology practices stemming from the PRESERVE trial. During Q2, physicians completed 111 prostate cases with our NanoKnife, up from 100 prostate cases treated in the first quarter and an increase of more than 80 cases over Q2 of last year. I'm also thrilled to announce that we have surpassed the halfway mark in enrollment of our PRESERVE clinical trial during the quarter which I will discuss in more detail later in my remarks. Our Med Device segment grew 3% and remains an important part of our business. We have solid product platforms and excellent business teams that enable us to be successful while also leveraging this segment to fund other investments, including our key Med Tech platforms. International markets had a strong quarter, growing 7% year-over-year, primarily driven by strong NanoKnife capital and disposable sales. We expect our international business to be a positive growth contributor in FY '23 as our team continues to strengthen our sales network and expand our global scientific presence. During the quarter, our team hosted our second life science symposium which brought together global thought leaders who are exploring and supporting the use of our technologies. Generating clinical data plays a key role in our ability to effectively develop our Med Tech platform technologies and expand into larger, faster growing, higher margin addressable markets. Our teams continue to execute on our clinical trials, including our 3 IDE studies, our PRESERVE study for the treatment of prostate cancer with NanoKnife, our APEX study for the treatment of pulmonary embolism with our AlphaVac F18 and our DIRECT study for the treatment of pancreatic cancer with NanoKnife. As I noted earlier, we achieved an important milestone in our PRESERVE study during the quarter, surpassing the midpoint of our enrollment goals. We believe PRESERVE will demonstrate that NanoKnife can be an effective focal treatment option for men with intermediate risk disease and provide favorable quality-of-life outcomes when compared to other focal treatment options or radical prostatectomy. We estimate that the total potential market for focal treatment of prostate cancer that can be addressed by NanoKnife may exceed $700 million in the U.S. alone. With respect to our APEX study, we are pleased with the pace of enrollment and are particularly encouraged by the feedback we are receiving about our technology from the treating physicians. We believe that our APEX study will prove that our unique AlphaVac products can be an effective treatment for PE, providing ease of use while unlocking an opportunity in a large addressable market that we estimate to be in excess of $1.5 billion in the U.S. alone. When discussing our PRESERVE and APEX studies, I highlighted the total addressable markets that our technologies and associated solutions are targeting. We believe that this is a clear illustration of our strategy of leveraging our proprietary technology platforms to deliver disease state solutions in attractive markets. Our robust R&D pipeline is a further illustration of this. For example, Auryon has proven to be a disruptive technology entrant into the PAD market. Auryon is the only atherectomy device that can treat hard and soft calcifications above and below the knee and can be used to treat in-stent restenosis. We believe that this versatility has the potential to be equally effective on the venous side. Our AngioVac and AlphaVac portfolio currently provides clinicians with versatile options to treat large vessel DVTs and complex right atrium cases utilizing various cannula sizes as well as on-circuit and off-circuit options. Because of what we and our physician partners have learned about the effectiveness of Auryon, we believe that the technology can complement this offering with the potential to provide a solution for small vessel DVT that takes advantage of Auryon's precision and aspiration capabilities. Given those advantages and the versatility of the Auryon platform, we've shifted development efforts to Auryon from the 14 French [ph] AlphaVac because we see a compelling opportunity to drive better patient outcomes in small vessel DVT. We are currently targeting a commercial launch by the end of calendar year 2024 which would give us a portfolio of three platform solutions with different modalities for the treatment of VTE [ph]. Let me share another example of our robust R&D pipeline and platform opportunities with you. We believe that the unique mechanism of action of AngioVac that makes it safe and effective in complex right atrium cases has the potential to be a disruptive technology solution for left atrium interventions. We estimate that this addressable market makes c [ph] $400 million, and we are targeting entering this market by the end of calendar year 2023. Before turning the call over to Steve, I'd like to thank our team here at AngioDynamics for their continued persistence and commitment to achieving our goals. Their hard work is essential to the success of AngioDynamics as we continue to build leading medical technology platforms that improve patients' quality of life. With that, I'd like to turn the call over to Steve Trowbridge, our Executive Vice President and Chief Financial Officer, to review the quarter in more detail. Thanks, Jim, and good morning, everyone. Before I begin, I'd like to direct everyone to the presentation on our Investor Relations website summarizing the key items from our quarterly results. Our revenue for the second quarter of FY '23 increased 9.1% year-over-year to $85.4 million, driven by continued strength in our Med Tech platforms, including Auryon, NanoKnife and Thrombus Management. Med Tech revenue was $24.5 million, a 29.7% year-over-year increase, while Med Device revenue was $60.9 million, an increase of 2.6% compared to the second quarter of FY '22. For the quarter, our Med Tech segment composed 29% of our total revenue compared to 24% of total revenue a year ago. Year-to-date, for the first half of our FY '23, our revenue increased 7.5% year-over-year driven by Med Tech segment revenue growth of 29.7% and Med Device segment growth of 0.7%. Our Auryon platform contributed $10.1 million in revenue during the second quarter, a 60.6% increase compared to last year. We're very pleased with the continued growth of the Auryon platform, and we remain on track to generate full year revenue in the range of $40 million to $45 million. As of today, our installed base is approximately 370 lasers. Mechanical thrombectomy revenue, which includes AngioVac and AlphaVac sales declined 1.1% over the second quarter of FY '22. When including Unifuse, thrombus management revenue declined 0.3% year-over-year. AlphaVac revenue for the second quarter was $1.6 million. We remain very pleased with the performance of our AlphaVac products, including the F22 and F18 versions. Physician feedback continues to be very positive with respect to usability, features and outcomes. Year-to-date revenue for AlphaVac is $3.4 million, and we remain on track to generate AlphaVac revenue for the full fiscal year of $7 million to $9 million. AngioVac revenue was $6 million in the quarter, representing a decline of 16.2% over the prior year as a result of the two dynamics that Jim mentioned earlier. Year-to-date, AngioVac revenue was $12.9 million, a decline of 4.6%. As I stated previously, we expect mechanical thrombectomy to be a significant contributor to our growth strategy and we will continue to prioritize investments in this platform. We currently anticipate our mechanical thrombectomy platform, led by growth in AlphaVac, to grow 25% to 30% in fiscal 2023, below our prior expectation of 30% to 35%. NanoKnife disposable revenue increased 45.4% year-over-year as our clinical studies continue to drive enrollment and increase awareness of the platform. Year-to-date, sales of NanoKnife disposables grew 28.9%. U.S. NanoKnife disposable sales grew 44.2% during the second quarter and are up 24.3% year-to-date. International NanoKnife disposable sales grew 46.8% during the second quarter and are up 35.8% year-to-date. Turning to our Med Device segment. Our angiographic products, ports, dialysis and microwave all achieved solid growth in the quarter. This growth was partially offset by modest declines in other areas of the segment, resulting in an increase of 2.6% for the segment overall. During the quarter, we reduced our backlog from $7.1 million to $5 million as operational capacity and supply chain strategies continue to provide positive results. Year-to-date, our Med Device segment has grown 0.7%. Moving down the income statement. Our gross margin for the second quarter of FY '23 was 52.8%, an increase of 100 basis points compared to the year ago period and up sequentially from Q1 by 90 basis points. Gross margin for our Med Tech segment was 63.7%, a decrease of 290 basis points compared to the year ago period but an increase of 50 basis points sequentially over Q1. The year-over-year decrease was primarily driven by increased depreciation costs from growing Auryon installed base. Gross margin for our Med Device segment was 48.4%, a 130 basis point increase compared to the year ago period, driven by improved operational capacity and our supply chain strategies as we've managed through the ongoing inflationary environment. Med Device gross margins were up 90 basis points sequentially over Q1. Our consolidated corporate gross margin in the quarter was positively impacted by increased efficiency in our manufacturing operations and product sales mix. These improvements were partially offset by headwinds from costs associated with the continued tight labor market, raw material inflation and increase in freight costs. In the second quarter, on a year-over-year basis, the increase in production capacity from our initiatives and increased efficiencies provided a benefit of approximately 465 basis points. The impact on gross margin from product mix was a benefit of approximately 35 basis points. These benefits were offset by approximately 140 basis points versus the prior year period due to increased labor and manufacturing costs. Inflationary pressures on raw material prices resulted in approximately 120 basis point negative impact and higher freight costs had an approximately 35 basis point negative impact. Foreign currency fluctuations and hardware depreciation reached roughly 50 basis points of headwind. Our research and development expense during the second quarter of FY '23 was $6.8 million or 8% of sales compared to $8.2 million or 10.5% of sales a year ago. We continue our disciplined investment in R&D focused on driving our key technology platforms, including the clinical and product development spend for our Med Tech portfolio. For the full year FY '23, we still anticipate R&D spend to target 10% to 12% of sales. SG&A expense for the second quarter of FY '23 was $36.8 million, representing 43.1% of sales compared to $33.3 million or 42.5% of sales a year ago. The year-over-year increase in SG&A spending was primarily driven by the annualization of investments in our sales teams, particularly Auryon. For FY '23, we continue to anticipate SG&A spend to target 40% to 45% of revenue. Our adjusted net income for the second quarter of FY '23 was $356,000 or adjusted earnings per share of $0.01 compared to an adjusted net loss of $856,000 or adjusted loss per share of $0.02 in the second quarter of last year. Adjusted EBITDA in the second quarter of FY '23 was $7.5 million compared to $4.4 million in the second quarter of FY '22. In the second quarter of FY '23, we generated $7.5 million in cash from operating activities and our net cash position increased by $5.3 million from the end of Q1. Capital expenditures were $1.3 million and additions [ph] to Auryon's placement and evaluation units totaled $1.2 million for the quarter. As of November 30, 2022, we had $29.9 million in cash and cash equivalents compared to $28.8 million in cash and cash equivalents on May 31st, 2022. We continue to expect our net cash position, which is cash net of debt, by the end of our FY '23 to be flat to slightly up from where we exited FY '22. As a reminder, during the back half of our FY '23, we expect to achieve the aggregate revenue milestone target for Auryon which would trigger a contingent consideration payment of $10 million. This contingent consideration payment is excluded from our operating cash expectations. Turning to our FY '23 outlook. We are reiterating our full year revenue guidance in the range of $342 million to $348 million as well as our FY '23 adjusted earnings guidance in the range of $0.01 to $0.06 and as we continue to invest in driving sustainable growth in our key Med Tech platforms while also managing cash and profitability. I want to wrap up my comments by thanking the entire AngioDynamics team for all of their hard work and commitment as we continue our growth as a platform-focused medical technology company. Thanks, Steve. We are a company with a diverse portfolio and we will continue to try to communicate with you in a transparent and clear manner. I hope that this call gave you insight to our performance and our future opportunities for value creation. We are a company that has continued evolving our platform technologies. We will continue to develop pathways to prove that our products make a difference in the lives of patients around the world. We have worked hard to earn the trust of caregivers who choose us as their care delivery partner. We have built upon a foundation that are centered by our products and our people, they are the source of our strength. We are a really good company. I'm proud of our teams and how they deliver to the patients and customers that we serve. I thank them for their steadfast commitment to our mission. Thank you. [Operator Instructions] Our first question comes from the line of Jayson Bedford with Raymond James. Please proceed with your question. Maybe just a couple of questions here. First on AngioVac, the down 16. You mentioned staffing challenges, competitive inroads. Do you expect these dynamics to improve? And then just how are you thinking about AngioVac growth from here? So Jayson, it's Jim. Thanks for the call. A couple of things. The dynamics are improving, as we sit and we talked about that. Dynamics are proving with our customers that will affect AngioVac. And as you noted, it is a complex product. It's really, really vital for removing clot in severe cases and the burden remains high but to use it requires, again, a little larger team. So sometimes hospitals in this environment have looked for other alternatives, which include continued lytics. Sometimes a patient may get released or their status may change before we can treat them. So that's part one. Number two, we're also learning how we're selling now AlphaVac and AngioVac in the same bag, some of the same call points and some different call points. So we'll get better at what we do. The dynamics are improving in our customers. So we expect the second half to be stronger than the first half for AngioVac. Okay. On NanoKnife, I haven't worked through the math here, but I'm assuming that the strong growth that you're generating in NanoKnife is more than just contribution from the ongoing study. So the question is, what seems to be driving this renewed growth on NanoKnife? So a couple of things. The study and the excitement around PRESERVE and how we can hopefully become an effective focal treatment is real. We see that now with what's happening with our urology partners coming and joining. That's great. Let me put that aside for a minute. So our international team has done a really good job getting us back into China. So we've got some business out coming up and running again in China where it's been soft for the last period, Jayson, as well as in the Central Europe again where we have a lot of folks that really believe in what NanoKnife does and how it works. And they are able to sell and treat prostate in parts of Europe today, in the U.K. and other places as well as their commitment to using Nano for a lot of liver treatments. So we're seeing the strong kind of rebounds across the board globally again but also drive - I think the excitement around PRESERVE is really creating a halo effect around what we can do with NanoKnife globally. And Jayson, I think just to add to what Jim said, that halo effect, as we've always said, we were listening to the marketplace and it was our clinicians that were telling us that there was an unmet need in prostate and that NanoKnife had a role to play in that. So that was the driving force for us to getting into PRESERVE was the market was telling us that there was a role for Nano to play. And that's what we're seeing. So when we talk about the halo effect, it's really that continued push of the market saying there's an unmet need. NanoKnife has a role play. We think this is good. Our study is there to continue to support that. But it's really a full market shift that we're continuing to see of adopting NanoKnife as a focal treatment option in prostate. Okay. Just two quick follow-ups, and then I'll jump back in queue. On PRESERVE, when do you expect to complete enrollment in that study? So we expect to complete enrollment during the first half of this calendar year in 2023. So we expect the next 6 months, Jayson, we should be able to complete that study, there's good momentum there. And then second, we've not yet talked to you guys about our commercial plan beyond that. I'll remind folks on the call, PRESERVE has a 12-month follow-up. It requires us to do a 12-month follow-up and then work with the FDA for clearance. We expect some point by the end of 2024 to have that clearance. And by that point, we'd probably - we'll talk to you in more detail about commercial investments that we'll make to bring that product to market, we think, with that indication that we'll receive. Great, thanks. Good morning and thanks for taking my questions. I don't think you addressed with the litigation with Bard. I was just - what are the next steps? How is that going to impact the P&L and cash flow? And any timing for any events or news that we should expect? Hey, Bill, this is Steve. I can take that one. So we have put out the 8-K earlier during the quarter indicating the decision on the litigation. As we said at the time and as we've talked about at conferences then, this is a long ongoing war. We don't see this as the end, and it's going to continue. So it's really business as usual, it's not anything that's going to be materially impacting how we're running our business. It's been ongoing for a long time. So when you're asking about the P&L implications, for the most part, they've kind of been baked in there and so I wouldn't see any material deviations going forward from what you've seen in the past. As we've said, timing, there's appeals on our case, there's appeals on other cases that are very similar. They may come up within the course of our Q3. For the other case, we're still waiting for some scheduling on the other questions that have to be answered in our case. So still ongoing. As any material things happen, we'll certainly be telling you. But for the most part, it's not something that's impacting how we run our business day to day. Okay. Thank you for that. And then just on the Auryon that was pretty strong in the quarter. You mentioned that you launched the hydrophilic coating. How much of the quarter was sell-through versus maybe initial purchases on the limited market release? So Bill, not a lot of limited - not a lot of purchases on the limited market release. Really, that was just confirming what we'll use the LMR process for, to confirm that the product meets our customers' expectations. So - and now we're ramping up our production shifting from the non-coated to the new hydrophilic process, that's why I mentioned the second half of this fiscal year when we make that flip over. So it's really just - we're meeting demand, Bill. Really strong demand still for the product just by how it performs. And we're pleased with the customer contacts we have, hearing stories every day of how much confidence they gain when they use it. We know there'll be a lot of data presentations during the course of this calendar year where physicians will present data on how well Auryon works and treats safely and effectively in the anatomy. So continued confidence in the platform, Bill, and it's really just normal organic growth. Okay. And then last question for me if I may. Just you mentioned that the backlog went from $7 million to $5 million. Is it - should we expect that to go down further? Or are you kind of now at a steady state kind of normal business? How should we think about that as you move forward? That's it for me. Thanks. Good question, Bill. So yes, we're going to continue to work to get it down to what we would call a normal operating back order level, which is far below that $5 million level here. We're pleased with our teams and how they've done it. We've got better participation and our labor force is now stabilized, our labor forces and our operations teams here in the U.S. And as you're aware, we opened up our Costa Rican operation about a year ago. So now we've got a calendar event, we're cycling back and we're expanding capacity there and efficiencies are growing. So we're pleased there. We'll get the back order backlog back to a normal operating level. And even from there, Bill, we're even doing things like speaking to our customers who had some products in order for a long time, double checking that they want them and they need it and it's clear. So we're going to clean it up. The pandemic has thrown a lot of curveballs at everybody in our industry and we work hard with our customers to make sure we're serving them to the best of our ability. We learned a lot here and our teams responded and we'll get that backlog down, hopefully close to normal, by the end of this fiscal year. No, we always have a backlog, Bill. We try to target about half -day sales is a target we do. So if you look at that, you call that you know, three quarters [ph] $1 million in that range is what we kind of target as a normal backlog, back order. So we'll probably - you never get it to zero. We have a complex diverse portfolio, as you know, with over 1,000 SKUs. So we get into that half day sales and a target that we feel comfortable with our customers. Thank you. Good morning, guys. Clemmer if I could follow up on small vessel DVT. So I guess a couple of things. Should we assume that 14 French [ph] AlphaVac is not going to come to market now and the shift that's been completed toward Auryon? Or is that perhaps just pushed later? And what else do you need to do regulatory wise or data wise on Auryon to go after small vessel DVT with that platform? Hi, Steve. Thanks for the question. So a couple of things. You're right, so we've suspended really the development efforts on our 14 French AlphaVac because we've just seen such a kind of demand and interest from our physician partners who've used Auryon that have really told us the power of how it works, how our 355-nanometer wavelength delivers energy and protect the vessel wall. The reason why it's safe and effective in the arterial parts of the body, we believe now can offer the same benefits in the venous structure. So we're now shifting that development for that small vessel DVT. Whereas we thought the 14 French AlphaVac would have been our best option a couple of years ago, now the learnings that we've gained and the conversations with our partners made us believe that Auryon can really fill that gap better because of how it can deliver the energy, also the aspiration capabilities which are mechanical here with Auryon. So we'll get back to you with a little further time lines. But we think, as we said earlier, we've got a potential plan to launch technology by the end of calendar 2024 which also obviously includes the regulatory pathway clearances that we need. Okay. And we should expect in the interim some additional data around the efficacy of Auryon in small vessel DVT, so we'll get some visibility on that in the coming periods? Yeah. We're not currently marketing the Auryon to small vessel DVT today. We're going to make some changes. You'll see some stuff. As we get closer to launch, we'll share with you some design iterations we'll make, different products, different sizes that we'll offer to fit the venous structure. So you won't see much in data there. I can't predict what a physician may do on their own, but we're targeting really today Auryon to be used in the arterial component targeting PAD. That's still where our main targets are outside of the development efforts now for the venous option. Got it. Okay. And then shifting to APEX underway here. Can you give us any sort of color in terms of sort of the pace of enrollment? Any thoughts in terms of timing relative to completing enrollment in that trial? Yeah. So we haven't given specifics in terms of the enrollment number on APEX. We're pleased with the pace that we're seeing. As far as these clinical studies go 12 to 18 months kind of from now is when we expect to finalize the enrollment and move forward. So we've been pretty pleased with the pace that we're seeing there, particularly in the current environment. Okay. Got it. And then lastly on Auryon, is the expectation for this year that you will continue - I mean the continued expectation that you'll see a bit of a slowdown in terms of new placements and really trying to drive utilization within the current base? Has anything changed with respect to your thoughts on how that will play out in fiscal '23? Steve, back what we said back in July when we kind of kicked off this fiscal year, we mentioned to each of our investors that our plan was to shift slow down a bit of the new placements because we want to make sure we're also maximizing our efficiencies in the ratio of the patients that we serve and the cases that we receive where we already have Auryon lasers placed. So it's really a combination then we're still going to place lasers. Don't expect as many places this year as last year, as we've already said, because we want to manage our capital base as well. It's a really great product, but it's an expensive base, as you know. We want to make sure that we're getting the efficiencies that we need from our customers who use it. They're working on that. We think the hydrophilic coating will be a real big enabler of that as more physicians now have confidence in the product, how they can steer it deliver to the lesion, get it to where they want in a really cool fashion. So we're really excited hearing the comments that they've given us. So we'll work with each quarter, Steve. But that balance will continue, and we will place less lasers this year. Doesn't mean there's less interest or demand, but we're going to manage the business. Still going to grow dynamically, but we're just shifting the business as well in a normal maturation phase. Right, right. And just a clarification, did you guys increase the selling reps for Auryon this quarter sequentially? And what are your thoughts in terms of adding there through this fiscal year? There was maybe one that was - one head that was added during this quarter. So as we've talked about, we're being very thoughtful about how we continue to invest in that business. We felt that we had a pretty well staffed team for the rest of this fiscal year. And as we move into the next fiscal year, we'll assess continued investments to support the overall trajectory. Good morning. Thank you. Good morning. To start off, it seems like Mechanical Thrombectomy and AngioVac are a little bit below expectations for this year. I just want to fully understand kind of what is the offset to that in guidance? Hi, Matt, it's Jim. So we can both answer. But again, we gave you a little - the walk-through. AlphaVac's been terrific off the expectations that we have. AngioVac slightly under. I mentioned a couple of reasons why and what we're doing about that, A, working very close with our customers. And then B, number two, always looking at our sales approach. We've learned a lot since June 1 when we launched AlphaVac AngioVac together in a combined exclusive sales bag. So we'll get better at how we go to market. And we brought down slightly the number, as you saw, in that category, but we're well within the comfort of our guidance range. We've seen some other things. We didn't talk about NanoKnife a lot here, but you saw that's already outperforming the guidance range expectations that we gave there. So you can look at expectations we have. Our international business has done a terrific job. We have some new exclusive distribution partners that are helping us with clinical pull-through, the customer level. So other things we've talked about a little bit, we haven't given a lot of detail on, but we're really confident still in that range we gave you for total guidance. Okay. And does the reaffirmation of guidance sort - is it a sign that you are more confident in the stability of the current environment? You're halfway through a year. Like is the macro - you're unique and one of the first companies to kind of report after November and December. Are you seeing the level of steadiness like in the marketplace? Good point, Matt. And we mentioned on the prepared remarks, we have seen a slow gradual uptick and kind of confidence at that delivery level. But I talk every day, as you do, to hospital CEOs and customers, they still aren't clear in all cases. There's some regional effect, but there's clearly a shortage of some staff levels, nursing being the most appropriate that we see. But it's gotten better. It's baked into kind of the confidence I just talked to you about why we're confident in the guidance range that we have with one [ph] piece of that confidence. Others are our products are being received, the good work our team has done to bring the backlog down. Still the great work on our Med Device platform, getting that back to growth, our teams there are doing a great job. All those are together, Matt. But yes, back to answer your question, our confidence that our customers are getting a bit more stable is part of that. Yeah. And Matt, in Jim's remarks, he talked about the ongoing staffing pressures that hospitals are facing but that, as expected, our experience has been that hospitals are finding ways to manage through that. I think that is really the theme, both hospitals as well as businesses, and we fall into that, too, are understanding the current environment, we're managing through it. So there isn't an expectation in the back half to hit our guidance that things have to completely change from where they are or snap back to pre-pandemic or pre-disruption levels. Our expectations are that we're going to continue to manage through the environment as we see it. And as Jim said, we've got the confidence in our guidance range based upon that. Okay. Thank you for that. And then a follow-up on the shift in development from the F14 to Auryon. Are those the same doctors in office based labs? Or does that require you to make a bigger push in Auryon into the hospital? Yeah. Great call. And we'll give you guys more kind of a commercial plan look over the coming quarters and months. But we're going to say, we think there's a lot of care that's going to be delivered in OBLs. We already know other centers outside the hospital over time and being thrombectomy maybe one of those things that gets care delivery more in OBL like setting. Today, it's not driving this though, Matt. It's really because this technology is so special in Auryon. We believe so deeply in the science and how it performs. So we're going to make the commercial shifts necessary to make sure we can also accommodate the use of it to be really successful for small vessel DVT treatment, the bulk of which we believe will occur in a hospital setting at this point. And then just a last question. Maybe I missed it over like the last quarter or two. Just what happened to - what's happening with pancreas with NanoKnife? Is there any update on where enrollment is in those DIRECT trials? So we haven't given any specific updates on where the enrollment is. It's moving forward. It's continuing to go. As we've talked about, that was a trial that had the two arms, the registry side as well as the RCT. The RCT is going to be very difficult. That's proven to be true in terms of the enrollment there. The other thing that we said is that given the structure of the PRESERVE trial, we expected that PRESERVE would outpace DIRECT even though it started later. We're seeing that as well, that enrollment is really outpacing it. So we're still focused on DIRECT. We're still pretty happy with what we're seeing given all of the contextual things that are going on in today's environment and moving forward. And then as we continue to get more - hit milestones and things like that, we'll let you know. Thanks, Rob and investors. Thanks for joining us today. And as I said earlier, we're a company committed to our platform technologies and to ensuring that we can be a care delivery partner with our customers and the physicians that trust us. Thanks again to our AngioDynamics team for working in a really challenging environment and delivering for our customers. Have a great day.
EarningCall_1381	Ladies and gentlemen, good day, and welcome to the Wipro Limited Q3 FY â23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dipak Kumar Bohra, Senior Vice President, Corporate Treasurer and Investor Relations. Thank you, and over to you, sir. Thank you, Inba. Warm welcome to our Q3 FY â23 earnings call and wish you all a happy new year. We will begin the call with our business highlights and overview by Thierry Delaporte, our Chief Executive Officer and Managing Director; followed by a financial overview by our CFO, Jatin Dalal. Afterwards, the operator will open the bridge for question and answers with our management team. Before Thierry starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of Private Securities Litigation Reform Act 1995. These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause the actual results to differ materially from those expected. The uncertainties and risk factors are explained in our detailed filings with the SEC. Wipro does not undertake any obligation to update the forward-looking statements to reflect events and circumstances after the date of filing. The conference call will be archived, and a transcript will be available on our website. Thank you, Dipak and thank you, everyone. Hello. Good morning, good afternoon, good evening to you all. Thank you for joining our third quarter results. From our entire leadership team, I'd like to wish you, first, a fantastic year ahead. We are optimistic about 2023 to deliver ground-breaking work for our clients and continue on a growth trajectory. We'll talk about some of the opportunities that are ahead of us. Joining me today is our CFO, Jatin, you know him well; our Chief Growth Officer, Stephanie, our Chief HRO, Saurabh and I'm pleased to introduce you to our new Chief Operating Officer, Amit Choudhary. Earlier today, we reported our third quarter results as you know, I'm pleased to share that we have delivered; one, another quarter of double-digit revenue growth. Second, record order bookings of over $4.3 billion, led by large deals signing of over $1 billion, a margin expansion of 120 basis points, a huge surge in cash conversion and a fourth straight quarter of lower attrition. Looking at the macroeconomic evenironment -- the macroeconomic uncertainty, we had discussed last quarter continues with no doubt. However, tech spending remains the robust, so here it is, our clients, they're looking for value-driven transformation, tighter governance and improved return on investments. Cloud transformation continues to be a priority even as we see a higher focus on returns. It's against this backdrop that we have delivered our highest ever bookings in total contract value terms. Clearly, the investments we've been making in our clients, our efforts to bring about a shift in our portfolio and proactive deal shaping- are all paying off now. On a year-on-year basis, our bookings in total contract value terms grew 26% in Q3. We signed 11 large deals with a total contract value of over $1 billion. This strong booking trajectory translates into a 50% year-on-year growth in our large deal bookings on a year-to-date basis. And by the way, our pipeline of large deals is both strong and diversified. Looking at the market, three of our four markets grew more than 20% year-on-year in total contract value terms as well. Some interesting insights worth mentioning here. One, our strong bookings were driven by Wipro's FullStride Cloud Services and Engineering Services. These grew at 25% and 45% year-on-year, respectively. Second, our large deals include new and existing clients seeking a transformation partner or going through vendor consolidation. Renewals with existing clients are often accompanied by services expansion, taking market share from others and expanding into new areas of our clients' businesses. The deepening of our relationships with our clients is driven by our innovative solutions, by improved delivery execution, higher customer satisfaction scores and finally by strong ecosystem partnerships. In fact, our Customer Satisfaction Score has improved versus the previous such audit by 10 percentage points. The strong order bookings proves, frankly that our business strategy is working. Third, our expertise in business transformation, coupled with decades of experience in delivering cost optimal solutions is the combination our clients are seeking in this market. A good example of this is a recent deal we signed with a U.S. based financial information, analytics and ratings agency. The project involves integration and management of their infrastructure and security estate. As their transformation partner, we will help them improve their future readiness at a lower cost. Now, let's turn to revenue growth. And first, I'd like to note that over the last 10 quarters, we have grown at a very rapid pace. Our revenues have grown 45% and headcount has grown by 40%. We are now much bigger in size with a breadth of service offerings and deeper client relationships. In Q3, we recorded our seventh straight quarter of double-digit revenue growth. We grew 10.4% on a year-on-year basis and 0.6% sequentially in constant currency term. Our sequential growth was impacted by furloughs as expected and lower discretionary spending by clients. We have continued to turn the tide on margins. The hard-work we've put into improve our supply chain, into delivery excellence, operations automation has actually resulted in greater efficiencies. All this has contributed to a margin expansion of 120 basis points quarter-on-quarter. Our operating margin therefore is now at 16.3% versus 15.1% last quarter. A little later I'll ask Jatin to talk to you in more details about margin, but I do want to mention that this margin expansion is after absorbing the impact of three full months of salary increases that we've offered to our colleagues. It also factors quarterly promotions, as well as the restricted stock units with granted to our senior employees. Another good news has been on the cash conversation side. We saw robust cash conversion for the third quarter at 143% of net income. I will now share some details on our service offerings and sectors and how we are continuing to increase market share, market-by-market. Our Americas one business grew 11% year-on-year in Q3 inside the fastest-growing sector in that market was Communication, Media and Information Services which grew at 14% year-on-year. Looking now at Americas two business, which grew 9% year-on-year in Q3, and their manufacturing led the pack with more than 18% year-on-year growth. But besides, Energy and Utilities, Securities, Capital Markets and Insurance also recorded good growth of more than 12% each. Order bookings grew 40% yearon-year. Our business in Europe also has continued to be a strong growth pillar, double-digit growth for seven quarters in a row. Europe delivered a year-on-year growth of 12% in this quarter. Almost all the markets in Europe grew double-digits, led by the Nordics, U.K. and Ireland, Germany and Southern Europe. The order book in total contract value terms grew also at 25% on a year-on-year basis. Finally, our APMEA, which stands for our Asia-Pac, Middle East and Africa region grew at 7% year-on-year in the third quarter. Regions that did, I must say, particularly well during the quarter were Southeast Asia, but also the Middle East. Our transformation efforts in this region have started yielding results. It's very visible. This quarter, we closed one of our largest deals in this market. The order bookings, they grew 22% and are looking forward the pipeline is strong. Overall, Iâd say we've continued to strengthen existing client relationships and I'm pleased to share that our top 10 clients grew 15% year-on-year, which also confirm our strategy around growing large accounts. Now let's look at the service offerings: iDEAS and iCORE. First, our iDEAS Global Business Line grew 12% year-on-year in Q3. This growth was led by; one, cloud. The Cloud Transformation part, which grew 27% year-on-year Applications and Data, which grew 18% year-on-year, Digital Experience, which grew 16% year-on-year and finally, Engineering Services, which grew 12% year-on-year. Now looking at the iCORE part of the house, this global business line grew 8% year-on-year in Q3. Cyber Security led the growth at 16% year-on-year, followed by digital operations and platform growing at 9% year-on-year for Q3. From a total contract value standpoint, Cloud Infrastructure, our CIS business line grew over 50% year-on-year. CIS revenues now are lower as we continue to rotate our existing portfolio and move towards the cloud, which is very in line with our strategy, as you know. At the same time, we are signing long-term deals with clients in this business. We are continuing to evolve our FullStride Cloud Services business, creating new industry offerings, working together with partners which is in fact, helping expand our market coverage. FullStride Cloud Services continue to be a high-growth area for us, contributing over one-third of our total revenues today. Our cloud expertise spans the entire spectrum of cloud services, from cloud strategy, migration, modernization to full stack industry solutions and running and optimizing cloud. Partnerships continue to be a source of growth as well. Bookings with Hyper Growth Partners in Q3 continued to be strong, nearly $2 billion, that's a 35% year-on-year growth. Bookings through hyperscalers today stand at 44% of Wipro's overall booking in terms of total contract value. Besides cloud, we are expanding capabilities in artificial intelligence, in data and engineering, increasingly going to market as, One Wipro. And these investments are getting noticed. A U.S.-based energy company has selected us to build an end-to-end greenfield fully automated warehouse in Europe. The project will allow the client to manage large sums of chemical storage, while maintaining strict health and security requirements. This win, if we look at it brings together our domain, our engineering, digital, cybersecurity and health and safety capabilities. But it also underscores, how our advisory capabilities, technical and engineering expertise are differentiators for us in the market. Let me now turn to our most important asset, our people. I am pleased to share that attrition continues to drop for the fourth straight quarter. In Q3, attrition dropped to 21% on a trailing 12-month basis. Our quarterly annualized number, which dropped 360 basis points quarter-on-quarter are now at 17.5%. And we are confident that our focused talent strategy will result in continued moderation of attrition in the coming quarters as well, frankly. Second, we are recognizing and rewarding our talent, promoting a record number of colleagues in FY '23, the highest ever, in fact, with numerically 30% more promotions than in FY â22. Our leadership teams, breadth of experience, high performance standards and strong collaboration continues to fuel our growth and our transformation. And finally, I'm encouraged to see more diversity in our leadership ranks, which has been a focus for the past several years. And definitely, we have more work to do here, we know that. But one promising change worth sharing with you is that we have more than doubled the number of women senior leaderships roles at Wipro. As these visible impactful leaders progressed their career, they demonstrate the impact diversity has on our clients, on our business and on our people. We've been strict about maintaining that focus on talent quality, high performance orientation and inclusion in our graduate hiring as well. Year-to-date, we have hired and onboarded more recent graduates than the whole of previous years and actually ever before. Now as always, I'll close with an outlook for the full year. We expect full year revenue growth to be at 11.5% to 12% in constant currency terms. On margins, our Q3 number is now the new base, and we will look to improve it further. In summary, I'll say that we had an excellent quarter with record bookings, sustained growth and delivery excellence. Our strategy continues to pay-off and we will remain on course. Thank you very much, Thierry. I will quickly summarize the financial highlights for the quarter. We grew 10.4% year-on-year on constant currency terms, our margins expanded 120 basis point to 16.3 percentage points. If you see our ETR, it was 22.9%, compared to 21.5% last year. So that impacted a little bit net income conversion. But despite that, sequentially, we delivered 14.8% growth in net income and 2.8% on a year-on-year basis. Cash flow remained strong at 143.5% of operating cash flow as a percentage of our net income. Our cash at the end of the quarter was 4.6 billion gross and 2.7 billion net. This is a volatile year and quarter on ForEx. We had about $4 billion of forex hedges and our realized rate for quarter three was 82.24. As Thierry mentioned, we have guided for 11.5% to 12% growth in constant currency terms for the FY â22-23 at the exchange rates, which are mentioned in our PR. Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We take the first question from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead. Yes, sorry. I have two questions. One of the first ones for Thierry and Stephanie if she's there. I just wanted to better understand, how should we look at the TCV number, the total number, not just a large deal because if you look at the Q3 print, your TCV of 4.3 billion implies a book-to-bill of almost 1.5 times. You have been growing the TCV number quite handsomely over the last few quarters as well. How should we think about the duration of the deal wins, which obviously will convert into revenues and when should that impact start flowing through? And B, the revenue in last four quarters, the incremental revenue has been barely about 80 million, whereas your deal wins continue to grow in 25% to 30% range. So, is there something which is impeding the conversion of these bookings into revenues over last four quarters? So, Mukul, itâs Thierry, I will take your question. And Stephanie if you want to add, of course feel free. But Mukul, you're right. I think the performance in bookings has been good for several quarters. This quarter has been outstanding. I think we've really done a great job of not only developing our pipeline of deals, but also converting them into deals contracts for us. We've shown two things during this quarter, two confirmations if you like. One is that we continue to see a lot of opportunities for us in the market, which confirms that this is still a robust market for us. And second, that we continue to win well over competition. We continue to show healthy levels of win rate if you like. From a type of deal standpoint, I would say, yes. The investment made on large deals now when was that 18-months ago is paying off a little more every quarter. It's the reality. It started with one big deal. And then few quarters later, another one. And then we are gaining in volume, but also in consistency. And you will hear from Stephanie that it's across the realization now. So, this is really reassuring because that we get a lot of comfort from that. And I would add that there's also a promising volume of a large deal in our pipeline. The conversion question, so the conversion of the revenue to -- of bookings to revenue that you are asking? I think this is a reflection of a couple of points. Point one is, there is no doubt that while the market continues to be good and the investment in tech continues to be good. There is a change that I called last quarter, macroeconomic environment, drives a certain volume of uncertainty. And that exists. There are sectors, everybody will not be surprised to hear that the tech sector is a sector that has certainly felt the impact of this change in microeconomic environment. Second is probably the fact that there is a potential slowdown of, or more, I would say, volatility of the discretionary spend from clients. Third, what we are seeing is that there is not necessarily a slowdown of the decision process. If that was the case, maybe we wouldn't have had such a good quarter in terms of bookings. But I think the time it takes to ramp up, to launch and ramp up those programs behind may take a little bit of time. And we have to go with the pace of our clients in this context of uncertainty. An example of that is typically deals where there has been a consolidation of vendors that we have won. And then there's a period of transition for the business to go from one partner to another. And I think it is a fact of life that we have reflected in our projection. But certainly, the performance in bookings, the volume of deals but also the quality of our pipeline gives us quite a nice level of confidence for the next year as well. Stephanie? Yes, Thierry. I would just reinforce your comment in terms of the health of our pipeline, the types of deals that we're winning. It is a mix of new clients. It's a renewal of existing clients who are expanding our scope, we're taking market share and vendor consolidation. And it's also a pivot of our portfolio to the new. And you heard us talk about the growth in FullStride Cloud Services, so very happy with our pipeline, the health of our pipeline for Q4 and even going into next year. So, think our growth will continue, and we'll start to see the revenue converts in future quarters. Understood. Thanks. And I had one quick one for Jatin. Jatin I was a little bit confused with the employee cost number, which you printed this quarter. If you look at the cost per employee, excluding the subcontracting expenses, this was a quarter where two months of wage hike was flowing through. We also had promotions, which stand off which took place. But your employee cost per employee in INR terms has been flat and actually declined almost 2% versus last quarter in USD terms. So, what really is leading to this flatness kind of a cost which actually has been managed quite well? What are the drivers which are helping you keeping this under check given that I think last few quarters have been exceptionally tough in terms of overall expenditure of on employees? Yes. So, I think the most foundational reason Mukul, and there are three reasons. I will go through each of the three. The one is the most foundational reason is that we have improved the way we manage our supply chain. We have far more freshers, who are part of our pyramid. So, pyramid has continued to improve quarter-on-quarter. Second is the attrition is lower which helps us manage the cost better, because to that extent there is the impact of premium, which reduces of lateral hires. So overall, the most foundational reason is that we have managed our cost structure much better. The third and of course, the other third component is that we have released a lot of efficiency gains from our fixed price projects and those get redeployed for our T&M and other work. And therefore, you don't need your employee cost remains the constant, whether you are able to add revenue. So, these are the most foundational, as I said, the cost structure improvements that we have made. The second is also that if you look at it from a considered at Wipro limited standpoint, there was a restructuring cost which was sitting in the employee cost line which was not counted towards the segment margins of 15.1% in quarter two, but it was sitting in consolidated line which is not present now so that shows a downward path on the employee cost so that is the second. And third is quarter three typically the employee cost also has certain amount of accruals related with leave and other provisions, which it takes it up or down. But if you want to model it, you model it based on the first reason that I've shared, which is the more foundational improvement in the cost structure of our employees, and we'll continue to work on that. The second and third factors, the second factor was one quarter impact, which will not recur, and the third impact is seasonal, which will come back in next December, but won't recur in the future quarters. Mr. Bhandari, I'm sorry to interrupt, your audio is a bit muffled, sir. If you're on a speaker phone switch to handset, please? It looks like Mr. Bhandari's line has just got disconnected. If he joins the queue, we will take his turn. In the meanwhile, we'll move to our next question. That's from the line of Sandeep Shah from Equirus Securities. Please go ahead. Your line has been unmuted, please go ahead with your question, sir. There seems to be no response from this line. We'll take our next question. That's from the line of Gaurav Rateria from Morgan Stanley. Please go ahead. Hi, thank you for taking my question. Happy New Year Thierry. First question, any colour on the percentage of renewals in TCV. Is it consistent with the historical last few quarters or anything has changed? And how should one think about timing of ramp-up of the deals that you have signed in the current quarter, would it be like a 1Q phenomenon? Would it be more like a 2Q phenomenon? How should one think about the timing? You know, this is -- so Gaurav, so first of all, happy New Year. And I -- to your questions, I would say, first of all, the yes. Regarding the balance, I was trying to remember the balance between the new and renewal, what I would say, this is a -- as expected. There's a healthy balance, I would say. From one standpoint, the deals that we managed to extend them to sometimes widen the scope, increase our presence. That's also, in particular, when we've been able to consolidate some positions, but we've also had a good volume of new deals, and which is quite comforting, because we know that we will be able to continue to expand and grow in those new accounts as well. So, this is good balance, I would say, a good balance between the two. The second question that is about the timing, things will take to ramp up. It's a difficult question if we are sticking to the rule that we're only guiding for the next quarter. But what I would say is that for sure, we are seeing growth ahead of first quarter. So, this projection for Q4 certainly reflects for the reason that I mentioned before, a little bit the way we are seeing ramp-ups happening, but it can only go up. Got it. Secondly, we made a very interesting point on percentage of the order book coming through hyperscalers. How should one think about the nature of these deals? Is the contract profitability similar to regular deals, or there are different nuances one has to keep in mind? Well, so the first point, Gaurav, remember, back mid-2020 when we started to lay out our strategy, partners was at the centre of it. And the way we grow was connecting and engaging at the strategic level with partner, who was insufficient. And so, we've clearly, we organized ourselves to be able to be a lot more relevant with them. And so, we have built these teams globally with local connections under the leadership of our CGO function. And this is paying off every single quarter ever since. At that time, I remember that the revenue we were getting from our top five or six partners was not exceeding one-fourth of our bookings. And today, as you heard, we are not that far from half of the bookings coming from our hyperscalers only. So, it gives you a feel for the volume of growth that we've been driving with them. But in a very strategic way, so going to clients together, developing solutions together, literally developing strategy and going after the market as real close partners, and that is now you can ask what type of deal, typically, obviously, hyperscalers are involved in most of our cloud transformation deal. So, the whole strategy that we've developed around FullStride has been paying off as well. And so how you should see it as a relation that is accelerating, that is gaining muscle every day, and we'll continue to drive growth. The margin profile actually is rather good. As you can imagine, if we are improving our operating margin, so significantly, it's because the margin we are getting from our deals is going in the right direction. I think it's also, we all know that, and it's actually visible in our books that every time we are taking winning a deal that is more where it's more value-based, if you like, we are able to deliver better margins as well. Great, thanks for great expansion. Lastly, if I can squeeze one on FullStride, TCV grew 25%. This is in context of what we are hearing in the market that cloud spend is likely to moderate, because of the macroeconomic involvement. So, would it be more a phenomenon of market share gain for you, or you fundamentally believe that slowdown in cloud spend may not necessarily have happened as it was feared? Thank you. It's interesting. Your question is a good one, Gaurav. I have a view on that. And let me tell you, what I've observed, and I spend a lot of time with the hyperscalers personally. Is that there was a gap in our, there was a shortage in our ability to deliver there on their demand, just because of the magnitude of the size of this market. And so, the fact that they are slowing down doesn't necessarily mean much in terms of impact for us. I believe that with the size of these are hyperscalers, even when they are growing a few percentages less, we can still grow more or less at the same speed. I remain very bullish that what, what we're talking about cloud and what is representing today north of one-third of our business will continue to gain grow in terms of proportion of our revenue mix, if you like, going forward. So, market may slow down, we may not slow down around cloud. Thank you. I had a couple of questions. First is on Europe. So, I think it's been a little counterintuitive almost everyone has been sort of showing very solid growth out of Europe. And the geographies which we thought were relatively stronger are actually much weaker. If you could give some colour on what exactly are the dynamics at play here? That's the first question, and I had one more after this? You know, Nitin, indeed, I am aware of -- and I should not necessarily comment on relative trends versus the competition. I think in the case of Wipro, what is clear is that over the last years, we have completely changed speed, focus, attention -- and our impact in Europe is different. There's no doubt. I think the organization we've put in place with a focus on key strategic market, the leadership that we've either hired or promoted in these regions the organization that we have reinforced the connections that we have built with our clients, the intimacy, the ability to combine the power of our global network and very strong impactful legal leaders in this market is making a difference. And yes, Wipro is a different competitor in Europe today than it was some years ago. Is it paying off? I'm assuming, yes, it's clear that, yes, we continue to grow. We continue to see nice deal. We have a nice portfolio of clients in Europe, and we will continue to gain market share in Europe. Sure. The second one was more of a clarification. So, I think, the deal wins have been sort of pretty -- in the last three quarters have been pretty decent compared to the earlier quarters. And you mentioned that the conversion was low because of the environment. And then if I just look at how we typically grow in the Q1, apart from one of the years where we had large deals and we grew pretty well. Is the understanding correct in terms of the commentary that you think the level of build in terms of the deals won is sort of sufficient enough that despite those headwinds, you'll actually see an improvement next year from a trajectory perspective, on a sequential growth rate if you look at in that way? Or alternatively, maybe the flip side of the question is, do you think the cautiousness by clients and the view on discretionary spends and all of those, do you think that cautiousness should sort of dissipate maybe as we get into the new year in the next fiscal? Yes. So, Nitin, this is Jatin, Thierry and I are smiling, because this is one way to talk about Q1 numbers that we don't want to talk about, so we will give it a pass. We understand your question precisely. It's a great question, but we are not at a point in time we would answer that. But directionally, the fact that we are winning large deals, the TCV, the revenue, the backlog is improving, and it will convert into revenue. It's difficult to pinpoint a specific quarter that will get the boost out of it. Hi, thanks for the opportunity. First on the overall deal with it, it looks like that's really strong. So how do you think about the market demand, especially, do you say north of 50 million discloses large deals. So, would we continue to see that momentum even over the next quarter? Or do you think that is making is largely going to be on hold? Ravi, your voice came a little muffled, so I hope I understood the question. But I believe you are asking some of our views on the market itself, okay? Am I correct? Yes, Thierry, that's right. I was just asking about the deal pipeline. Do you think the position making could slow and therefore deal wins could get a little softer next quarter? When it comes to projecting bookings, you can certainly base your level of confidence on the quality of the pipeline and on your trend of win rate over a certain period of time. If I base my judgment on that, I see that we have another solid quarter of bookings coming ahead of us. Will it be as good as the one this quarter -- that I don't know. I cannot tell sometimes it depends on one deal, and it makes a big difference. So, I think very confident that it will be another solid quarter in terms of bookings. Let's see how it goes, okay? But a little bit of reflection on the market. again, the softness of the economy, the uncertainty of the macroeconomic environment is a reality. I said it in this room three months ago, Ravi, at the time, we are not necessarily others were saying it. But this hasn't changed. This hasn't changed. In this context, I can only recognize looking at the performance and the activity in the field from our sales teams, that the tech spending remained robust. That's clear. I take obviously comfort from the fact that we are winning and that we are winning nice type of deals. And if you look at being a little bit more, looking at the type of deals, you probably have noticed that we are talking about total contract value. We also look at the annual contract value. What's interesting is that the total contract value has been our highest ever. The annual contract value performance has been also our highest ever. And what it says to me is that we have a good volume of large deal, good volume of medium deal and good volume of smaller deal. I think this tax-on, this good pyramid of size of deals also, reflect also the fact that our backlog for the quarters to come is reinforcing and is getting stronger. So, reasons for us to be optimistic for the next year. And next is a question, it's a bit of a revenue and margin question. If the demand is strong, why are we looking at Middle East as a geography, we talked about investing in it. I mean historically, we used to think about the Middle East as a relatively lower billing rate at lower profitable geography. So why not focus on the developed markets if supply is still tight there? This, Middle East is a very important market for us. A very important market. In fact, by size, Wipro is one of the big players in the Middle East. So, we are very proud of our business. We continue to invest in this business, such that we've decided to establish the headquarter of the region in Dubai for APMEA region in Dubai. And so, we have invested in innovation lab in capabilities. We have just decided to launch our Capco business in the Middle East also a few weeks ago. And we are very bullish about our, the outlook of Wipro in the Middle East over the next quarters. It will continue to surprise. Yes. Hi, Thierry, just one question. How should we think about the correlation between TCV and growth? And the reason I asked that question is for the past six quarters, whatever metric you have disclosed ACV or TCV is up greater than 24% year-on-year, while growth in that period has gone from 25% plus Y-o-Y to a guidance of around 8% at the higher end in the coming quarter. So just wanted to understand how we should think about the correlation between TCV [Technical Difficulty]. Thanks. Okay, Surendra. I would, I meant it, it didn't have a demand color but more conversion point, so I would take it. The key issue is that we have mentioned in last three quarters that in the first quarter, we said our TCV growth is 32 than 28, and this quarter also has been very robust growth. The conversion has two components. It has a future timing component, when does it convert? And second is clearly the immediate component, which is it converts into next quarter or in two-quarter phenomena, et cetera, you have to appreciate the fact that we have won a very large component of TCV and something that we also covered in Thierry's speech is that a large component of that is in Cloud and Infrastructure Services, which are typically long-ended contracts over four to five years. So, we can give you comfort that as we enter every quarter, we are entering with a superior backlog than what we are carrying in the previous quarter and the uncertainty around discretionary spend or the conversion of large deal continues to pay out in the immediate quarter. So, you are not seeing this correlation in an immediate three quarter period that of â22, â23 that you have seen the results of -- but as we model it for future, we feel very comfortable that we are moving in the right direction of securing a better book to carry as we enter â23,â24. Jatin, the ACV that you were disclosing in Q2, Q3 and Q4 of last year was all in excess of 24% also? So, this question was more around like -- I'm sure deals would have been gone, then should have converted by now. So just wanted to understand it better if you want to kind of take it offline thatâs fine. Yes. And we take your point, Surendra, we can -- even in next quarterly commentary, we can cover this point specifically, but we feel comfortable that the bookings in the current environment is the only way to continue to grow, because uncertainty will always mean that in our business, there is always -- there is certain amount of projects coming to an end and only way to continue to grow is to add more on the top. So, we feel comfortable, but we can cover it as we go forward. And just one clarification. On your comments on the margin walk. You mentioned like something in the employee cost, which kind of moved away from the cost of employees -- per employee cost for IT services. Could you just kind of elaborate on that? And could you also quantify it for us? Yes. So, Surendra it is quite straightforward, when you see our employee cost numbers, you see it on a consolidated basis for entire Wipro Limited. As you know that we had a restructuring cost, which was sitting in the company book. So, it was sitting in quarter two employee cost. But when we publish our segment results and IT services, it was sitting in not in IT Services segment, it was sitting elsewhere. And clearly, that restructuring cost has not recurred in quarter 3 and that has reduced from quarter two to quarter three that much cost in the employee cost line when you look at consolidated Wipro Limited books. Yes, I can quantify it, but you can also see it in last quarter's numbers or Aparna or Abhishek will give you shortly. Hi, thank you for the opportunity. I actually just wanted to get your sense around the margin improvement trajectory, given the fact that over the course of last 18, 24 months apart from acquisitions you've invested in terms of [Technical Difficulty] engine especially when it came to freshers. And now you're getting much more moderated... I am sorry to interrupt. Mr. Taneja, it looks like there's an audio breaks from your connection. If you are on a handsfree mode, please switch to handset and speak, and you might have to repeat the question, sir. Sure, thank you. I am on handset only and I'll repeat that question. So, the question was on margins. Over the course of last 18, 24 months we see transition in our margins because of the investments that we made around are -- around our delivery in terms of -- especially in terms of freshers, as well as some of the acquisitions that we made. So now given the fact that growth actually slowing down and hiring essentially is coming off, is there a timeline that you can -- you would want to essentially suggest as to us getting back to 18%, 19% EBIT margins? Okay. So Manik, thanks for your question. And as you can see, we have made a substantive move on margin in quarter three. Certainly, we will protect this base and make an incremental effort for future. But right now, I don't think we should go ahead and quantify the quarter or year in which we'll reach a particular threshold. Our effort clearly as we articulated in past also, is that we will -- these are not the margin we are satisfied with, from a medium-term standpoint, and our trajectory for our goal for medium term is higher and we'll continue to make an effort. But please be mindful that in quarter three, we have made significant movements, and we'll have to sustain that and on that build it incrementally in next quarters. Hi, thanks for the opportunity and happy New Year. Thierry, in the preparatory remarks, you mentioned about modest slowdown in the discretionary spend, was this comment related to Capco by any chance? And given the fact that you have a solid U.K. European presence. One of your competitors had highlighted that H1 could see some of the deals delayed, these could convert in the first half. Anything that you would like to comment on the same? Thank you for taking my question. When I was referring about to discretionary spend, Abhishek, I was not referring to any units specifically. It's a reality that applies to all kind of discretionary spend. As you mentioned, Capco, let me tell you one thing. The acquisition of Capco that we've done -- when was that now, 18 months ago, was an extremely strategic acquisition. The purpose of this acquisition was to change -- game changers for us in the BFSI market, be able to suddenly completely transform the type of conversation that we're having with clients in order to be able to really engage with them at strategic level and drive larger program. This is exactly what has happened. The performance of Capco quarter-after-quarter over the last 18 months has been very good, actually higher than what we had anticipated or expected at the time of the acquisition and that the nature of the strategic -- the strategic nature of the acquisition is a reality on the ground every day. So that's -- I just wanted to be clear about this -- the Capco since you mentioned it. As for discretionary spend, I think it's -- the type of deals that the clients feel they can stop at any moment in time. And this happened with every kind of clients across sectors. Thanks for the opportunity. Just on the deal related question. So, if I look now press release contain note four, which include we report only gross deal intake and any subsequent cancellation, termination and reduction is not the part of the number. So, do we see any different trend, let's say, over the last few quarters, particularly on the termination and reduction side, which could have implication about revenue growth trajectory, compared to the deal intake trajectory? Second question is about the growth trend or demand trend. If you can provide some sense about communication, BFSI and consumer? Thank you. Okay. Dipesh, thanks all your questions. So, the first one, if I understand, well, is about, has there been more cancellation or termination? Is it what -- that's what I understood, right? The answer is we have not -- let's be very clear. We have not lost one single -- it's not like we -- there was a question earlier in another form about is it structural. It's not -- we have not lost a client. We have not lost a -- there hasn't been a big termination or anything. So, it's not like there's been a particular loss. That's the nature of the discretionary spend or the nature of a slightly slower ramp-up that is more explaining the revenue profile. Jatin you want to add, no you are good, okay. Dipesh, if you are okay, I wanted to also clarify the earlier question by Surendra so that we conclude this call answering every question. Surendra's question was for clarification, I will mention that Q2, Q3, Q4 Wipro's ACV growth was quite high, and that was -- I'm repeating 31%, 22% and 33%. And if I take the average of the three, it comes to around 28% growth in ACV and that -- if you see our â21, â22 growth in revenues was also 28% plus. So, our ACV growth did reflect in our revenue growth. Both numbers included Capco, so they are apple-to-apple. And therefore, we continue to see a strong correlation of our booking business with revenue. And if there are any other questions on this line, IR team will be very happy to take it after the call.
EarningCall_1382	Greetings. Welcome to Eve Air Mobility Third Quarter 2022 Earnings Call. At this time, all participants are in listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. Thank you, operator. Good afternoon everyone. This is Lucio Aldworth, the Director of Investor Relations at Eve. And I wanted to welcome everyone to the third quarter of 2022 earnings conference call. I've got here with me, Co-CEOs Jerry DeMuro, and Andre Stein, as well as our CFO, Eduardo Couto. After the initial remarks, we're going to open the call for questions. We have prepared the deck with a few slides and additional information. And this is available at our Investor Relations website at ir.eveairmobility.com. So please download it for your reference. Now let me first start by mentioning that this presentation includes forward-looking statements, or statements about events or circumstances that have not yet occurred. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business and our future financial performance. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things, general economic, political, and business conditions, both in Brazil and in our market. The words believe, may, will, estimate, continuous, anticipates, intends, expects and similar words are intended to identify forward-looking statements. We take no obligations to update publicly or revise any forward-looking statements because of new information, future events, or other factors. In light of these risks and uncertainties the forward-looking statements and circumstances discussed in this presentation might not occur. Our actual results could differ substantially from those anticipated in our forward-looking statements. Thank you, Lucio. And thanks to all of you for joining us on the call today. We've had an eventful quarter, and have a number of significant events, which we will talk about this morning. They include things like major additions to our partnerships, a very successful simulation in Chicago, continued growth of our backlog, and progress in our product development. Importantly, we've also reached agreement with the Brazilian National Development Bank to significantly enhance our balance sheet. And we're doing that through a financing vehicle that is completely aligned with a foundational reason and the core values of this business, reducing carbon emissions and sustainable environmentally-friendly transportation. Edu Couto, our CFO will discuss the terms in more detail in just a bit. First, I'd like to talk about new partnership, which we announced with United Airlines on September 8. United is one of the largest and most recognized global carriers in the world. They are also a long-term client of Embraer, and this will be a strategically important or important partnership for Eve. It adds to our partnerships with fixed wing and helicopter carriers, rideshare platforms, propulsion and battery management companies, as well as technology providers, and infrastructure Vertiport operators. This will help Eve scale the UAM ecosystem on a global basis. United has invested $15 million, which will go directly to help fund the development of this UAM ecosystem. United is now our largest client with the potential for 400 orders. And this gives us an important foothold among one of the main U.S. global carriers. It will also be strategically important as United standing in the entire flight and aviation arena will help us build out the UAM ecosystem. And Stein will talk a little bit later about our Chicago CONOPS in which, United participated. Next slide, please. Next, I mentioned earlier that we had grown our backlog significantly. As you can see from this slide, we now have letters of intent for almost 2,800 vehicles and a backlog that would equate to over $8 billion, certainly well over our first four years of projected production. In addition to United, Eve has signed with Blade India FlyBlades, an undisclosed customer for another 700 new aircraft. We have also added strategic partners to help us develop our UATM platform and have signed LOIs with Halo, FlyBlade in India, Skyway Technologies here in the Americas, Bluenest in Europe, and Volatus in the United States. So you can see we're also moving out on a global basis with our UATM, that's Urban Air Traffic Management software platform. We continue to take a holistic approach. And with our simple design and Embraer backing, we now have the largest order book in the industry, as I said, with almost 2,800 LOIs for vehicles. Some of our clients are also investors in need. So their interests are completely aligned with UAM development, and we have a long-term relationship. We also have the most diversified order book, not only a number of clients now well over 25, with United being the largest. No single client represents greater than 15% of our backlog. We crossed all sorts of industry types as I mentioned before. We have helicopter operators, fixed wing operators, lessors, ride sharing platforms, and even a defense alliance with BAE Systems. Regionally, we have the largest exposure in the United States with a little bit less than 50% coming from North America. But we have global distribution, and we touch just about all of the populated continents around the globe. Now, as I mentioned earlier, we announced today a new source of liquidity for our aircraft development and certification with a Brazilian Development Bank. I will ask Edu Couto to our CFO to provide some detail. Edu? Thanks, Jerry. These new finance from the Brazilian Development Bank includes two credit lines in a total of $92.5 million. It fits very well to our cash flow profile, and discipline capital strategy with 12-year maturity, grace period, and a favorable interest rate. The first line comes from the BNDES Climate Fund, which is a finance line dedicated to projects and companies that mitigate climate change and reduce CO2 emissions. The second line is an innovation finance, which is a long-term funding for disruptive projects with social benefits. Urban Mobility is one of them. This new funding has an ideal fit for our project, considering its conditions in the BNDES's mission for a cleaner mode of transportation. It also puts Eve with a stronger balance sheet in a more efficient capital structure that translates into long term value to our shareholders. Now with the BNDES line, we're even stronger from a cash perspective with Eve's total liquidity above $400 million, which compared to our cash burn around $100 million to $150 million per year gives us enough cash for multiple years of our eVTOL development. Now I would like to invite our co-CEO Andre Stein to give us a bit more color on the development program and the benefits of our concept of operations. Stein? Thanks, Edu. This quarter, we continue running simulations with conventional helicopters to validate and stress test our concept of operations for eVTOLs in a real urban-air environment and create awareness of what is to come. The most recent experience was in Chicago last December, where we connected a Vertiport in downtown to two Vertiports in the suburbs. The trip took an average of 15 minutes versus an estimate one to one and a half hour by car depending on traffic conditions, about an hour by train. This demonstrated the potential for urban mobility in large metropolitan regions, such as Chicago, the second most congested city in the West. With maybe Chicago and surrounding regions will require approximately 240 eVTOLs by the time the market matures in 2035. And that market will demand 20 Vertiports in over 150 different routes. We are very excited and happy about what it has achieved and to do it with important partners. This was the first urban air mobility simulation in west and it was powered by Blades with a total of 86 flights and 245 different partners to help us collect information to better understand the needs of those flying our partners and the communities when it comes to the use of eVTOLs for urban mobility. As an example, the simulation gave us a glimpse of the most popular routes and times for commuters, and should help operators optimize their fight schedule. On top of that, it gather important information about the entire passenger journey, from experience of purchasing tickets to flying, so there are lessons to be learned for an entire ecosystem that helping to define our eVTOL, our service and software portfolio. Now on to the next slide. As a reminder, we quick start the certification process of our eVTOLs wit Brazil's Aviation Authority, ANAC back in February, and now together with ANAC, have initiated the validation process for type certification with the FAA, which expect to be accepted shortly. At the same time, we're in discussions with EASA in Europe and other certification authorities. And it's important to highlight that you have the primary focus of ANAC, while the certification authorities in the U.S. and Europe will be addressing multiple programs simultaneously. As we noted before, ANAC has a long history of collaboration through bilateral agreements with the FAA, whereby the FAA accepts and validates the work done by ANAC, requiring validation and minimal additional effort by the FAA. We're validating now that this will also be the case with our eVTOL, and that is a major milestone for our certification strategy. We believe this puts Eve on a clear path to certification in multiple domains, especially when combined with our single design or fixed wing, and lift-plus cruise configuration. Lastly, Embraer's support is going to be vital in this regard as well. Embraer brings quite a bit off the table by having certified over 30 aircraft just in the last 25 years. They too, for example, received the simultaneous certification approval in Brazil, the U.S. and Europe, on schedule, we're seeing spikes in budget. Now onto the aircraft itself. We continue to make advancements in our design, and the program as it matures. We continue to follow our proven development practices, and into that, proof of concepts and other types of mechanisms. Validating subsystems to various test methodologies, progressing towards the commercial vehicle. By validating subsystems and airframe features incrementally that are able to ensure rigorous and meaningful testing in each phase optimizing costs and reducing the cost of delay of major chains in later phase of the program. This is a very flexible approach that reduce the development costs of the entire design progress. We can vary components or update their design and configurations as our engineers in that fight alternative solutions. And new solutions on this side that can be incorporated without a major redesign of the entire aircraft. In this approach, we are performing a myriad of tasks and our proof of concepts into the models, rigs, flight simulators and mock-ups. And DNA is to drive for economic solution with the most affordable operation and maintenance profile, which you believe will be achieved through our simple lift-plus cruise design. We have also targeted some partners that are compatible with the highest industry standards at the same thresholds we applied for larger jets, which is to say that there are designer aircraft to meet the highest possible safety standards. Likely, we concluded Phase 1 of our urban air traffic management software package and deployed it to support our Chicago simulation in September. As Jerry mentioned earlier, Eve has now signed LOI for urban air traffic management of several clients. And this business may precede our aircraft deliver revenues, because it will be agnostic solution for the entire airspace. Now on Slide 7, we can see our industrialization strategy is also maturing. As mentioned previously, we partnered with Porsche Consulting to help optimize our eVTOL supply chain, global manufacturing and logistical strategy. We are combining our [indiscernible] and automotive expertise to define an implementation plan that considers all aspects of industrial operations, logistics supply chain, and part distribution to optimize efficiency and productivity. The study addressed scalability and distributed production to meet demand. As the urban air mobility market evolves, it can help us validate that the first production site will be in Brazil. This will help us maximize synergies with Embraer and also maximize the manufacturing learning curve of eVTOL. Is it possible to add subsequent production facilities in other parts of the world to maximize efficiency and logistics? Thank you, Stein. Before talking our third quarter results, I just want to explain why we're reporting so late our numbers. Eve had to restate our previous numbers for 2021 in first half 2022 to properly account for non-cash costs associated with warrants issued to some strategic investors during the business combination with Zanite. Some warrants were not properly expensed at the time of our listing on the New York Stock Exchange, and we read to recognize additional non-cash costs of $87 million related to those warrants. Even [indiscernible] also recognized some due closing costs that were previously allocated at Embraer. It's important to say that all those impacts didn't affect our cash and liquidity that is now even stronger with today's announcement of the BNDES's finance line highlighted in the beginning of the call. Turning now to our quarter financials, I would like to start with the income statement highlights. We invested $14 million during the third quarter 2022 and almost $34 million in the first nine months of 2022 on R&D. The bulk was invested in our eVTOL development, and a portion was used for the development of our service and support solutions and the development of our urban air traffic management system. We're the only eVTOL company with a complete solution, including the vehicle, service and support and air traffic control. In addition to the R&D expenses, we also had $6.8 million in SG&A during the quarter. Including R&D, SG&A [technical difficulty] in non-cash warrant expenses related to the United during the quarter, we reported a net loss of $36.7 million in the third quarter 2022 and $154 million in the first nine months of the year. I would like to take the opportunity and call attention to some of our competitive cost advantages. First, our full access to Embraer's engineers on a first priority basis as only as needed. That means we don't need to bring hundreds of engineers to our P&L which makes our development more cost-efficient. Second, our ability to use Embraer's intellectual property on a royalty-free basis, that's another important source of cost savings. And third, access to Embraer facilities with minor investments and only sharing of facility fees. That also saves a significant infrastructure CapEx at this stage. Now moving to cash flow. Our operations consumed $17 million in the quarter and $39 million in the nine months until September. We ended the third quarter with $330 million in total liquidity. This was relatively flat over the previous quarter as our non -- our cash consumption was mostly compensated by the $15 million investment by United announced this September. Considering our current cash position, and the lines of credit from the Brazilian Development Bank that we can access, we have total liquidity of approximately $400 million. We feel very comfortable with the current liquidity, as it would be enough to cover a good amount of our development and certification costs for the years ahead. Yes, Sherry. Thanks. We do have a couple of questions from Lucas Stella [ph] from Santander. The first one is about certification and I think Andre Stein is better equipped to answer this one. Lucas is asking for updates on the certification process with ANAC and the expected timeline? And the second question relates to the BNDES credit Line. And I think this is directed to Edu. Lucas is asking for the length of the amortization, grace period. And sharing after, we do have these questions answered, please feel free to roll over to the question from other participants in the call. Yes. Thank you, Lucio for the question. So to answer that it's on track with our interim target [ph] 2026. The latest milestones exactly what I mentioned in our deck, which was joint understanding of the requirements between ANAC, FAA. What that means, that has always been our strategy to validate certification, our primary certification organization, Brazil and FAA, as have done with previous aircrafts. And here for a new type of aircraft, that has been the goal. And now we are achieving that. We are validating that it will be the way that will happen for eVTOLs also as well. So that's great news, not only for the primary certification, but also for the FAA certification. Maybe you're talking about the BNDES line, Lucio? I think it's a good question from Lucas. These lines, it financed from the Brazilian Development Bank. It is perfect for [technical difficulty]. It really fits our business profile, because it's long-term, it's a 12-year term. And on top of that, we also have three and four years of grace periods. It depends there are two lines, one is three-year grace period, the other one is four year. But it means that, we don't have to pay a motivation from three years or four years, depending on the line. And we only start to amortize these loan in the fourth or fifth year, which is very good. We're going to need the next three years to certify our vehicle and enter to service as Stein just highlighted. And then when we started to amortize our debt is exactly when the -- we're going to be generating revenue delivering eVTOLs. So as I said, it's a great support from the Brazilian Development Bank, almost $100 million, very long-term, and it creates a lot of value for our shareholders, then combined very well, with the $400 million we raised in equity in our IPO in May. Hey, good morning, everyone. If I might ask, you mentioned the $100 million and $150 million cash burn annually. Could you just talk a little bit about 2023, and if that's going to lower upper end of that? And maybe some of the major milestones expected in 2023? Yeah. For 2023, we expect to be in this range right between $100 million to $150 million in cash burn. So considering our cash position, as I mentioned north of 400. We have multiple years, right, of liquidity to address our eVTOL development. Sure. We're considering to our airports, not only on the big developments advancing in [indiscernible] on our interim service, maturing the vehicle entering more and more into [indiscernible] manufacture, the supplier selection [indiscernible] for the final, finally into service. On top of that, we are working to release the whole ecosystem. We have partners for sure that the bank we are developing fits vehicles as a vice versa. So that's like a big part of these as well. That makes sense that that appreciate that. Thanks, Stein. And then on the production facility. When do you expect to kind of select the sites and then start building that facility, kind of relative to the other timeline? So, Savy, thanks for the question. As you -- as was mentioned earlier, we've done an extensive amount of work with our partner pores not only looking at the site, but also the global supply chain. And the delivery mechanism, which given the likely adoption of this on a global basis will be equally important. To answer your question specifically, by the end of this year, we expect -- I'm sorry, by the end of '23, we expect to be through all of the permitting processes, and have begun the initial development of the facility, which at this point looks like it will be co-located with -- in one of the Embraer facilities specifically. But that permitting will take a little bit of time. And then the major construction reorganization of those activities will occur in 2024. Notably, we're going to build the facility in a modular basis, which will allow us to scale very, very economically. And we can talk a little bit more or Stein can talk a little bit more about that. But we're going to build into this production rate gradually. And, we're going to plan for a base case and have an opportunity by building additional workstations, et cetera, and then ultimately, additional shifts into the production rates of say, 300-300 plus a year. But initially, modules -- manufacturing modules that will be at a lower rate. Sure. So that strategy they are doing it in a modular basis, allow us to really grow together with the market. We've felt excessive investment in CapEx in the early years. So that has been one of the premise, and that has been part of the output of the work we've done with Porsche. Hi, guys. Thanks for the question. Just on the Chicago CONOPS, how did the results of your evaluation and the assessment of 240 aircraft in the city compared to your prior expectations and your 10 assumptions that you've put out in the past? And can you discuss the differences between the Chicago CONOPS, the previous one you did in Rio? Absolutely. So what I've done and that's part of the way we are trying to understand the market, that's the new market. And then it will have been modeling and have developed this tool together with MIT for quite a couple of years, even before we were spinoff from the main company during the incubation period, should look in the market in different ways and to get all the potential KPIs all the econometric models, data from cell phones to understand the orientation from passengers and their value of time to come up with the sizing. And when you apply a concept of operations, it is to validate points like the time, the passenger goes from door-to-door, not only the flying time, but the whole aspect that help us to look again on the same market and add that to the whole equation. What was different from Chicago and Rio? Really the use case we're looking at what there are shuttle. So we're flying from the east side of town to the airport in Rio. In Chicago, we expand in terms of number of routes. We're flying two routes, and both of them are commuting routes from Chicago downtown Chicago Vertiport, to two different Vertiports in the suburbs. Among other things, we look at different levels of infrastructure. So we're flying for on average port with a very high level of infrastructure existing Vertiports with an SBO [ph] and then are refined to one where you add a container to be our reception or for passengers. And the third one is pretty much nothing but a slab of concrete. While you are doing that, we are not verticalized in vertiports, that's not the point. But that help us to understand how the eVTOL operation on ground will be as much as on air. The other aspect have done there as well was to look at medical facilities. We partnered with some drone manufacturers to fly out of the same Vertiport, so we could integrate the air traffic management software that help us to grow there too, to make sure we are -- we have a solution that combined the different aspects of the ecosystem. That's helpful, Thank you. And can you discuss a little bit, your LOI with Bluenest for the UATM? What are the key -- what's the key opportunity there? Yes. So we're going to developing the infrastructure for urban air traffic management. It's applicable for the regulatory authorities, but also for operators and vertiport operators. So we can deconflict airspace at the vertiport level. That's exactly the case there. So this help us to access the market, to create this market also vertiport operators as potential customers, but also to assure that you have efficient ecosystem. We learned a lot on this, just going back to the point of the concept of operations when it comes to the airspace management, how we can make it more efficient. And that's not only to increase the total number of potential eVTOLs, that could operate from one given vertiport or one give given city, but also to make the routing systems more efficient, the flight path for example, to streamline that. And that's -- it is of the utmost interest of the vertiport as well. And we do believe in creating our solutions together with the customers. That's why -- one of the reasons why we're bringing customers for the software platform now. So we assuring that you are developing something that has value for our customers. And I would also add that the Bluenest is in Europe. So again, we're trying to look at a global footprint. You see Blade. We have some North American operations, we'll be announcing some others in the not too distant future around the globe. So Bluenest also brings us a European presence and an understanding of unique features of those markets as well. Thanks for taking my question. And thanks, again for presenting at our conference last month. If I could try a little bit about the United relationship, I guess first, is the investment reflected on the 3Q balance sheet right now, or is there still more to come from an initial cash perspective? Two, can you just discuss and I think you have sense a little bit before but the milestones by which you'll be evaluated to kind of have the orders with the United become more firm? And then also within United being so significantly International you just discussed, whether they're evaluating using those aircraft internationally, or is it just kind of domestically for now? Thanks. So let me take the general scope of this thing. United is looking at the application of these all the way from they're trying to create a user experience from home to destination and back. So I don't think in our discussions with them, they're limiting the application of that, or of the product offering. In fact, Stein and I participated just a couple of weeks ago with a number of the senior executives from the various functional departments at United, really looking at where are the best opportunities for launch cities? How do we get this all the way integrated into even the United app? So they're really looking at a holistic experience and not limiting to North America or Europe. Obviously, the certification of the aircraft will have something to do with that. In terms of the milestones. There are fairly typical milestones in the LOIs, right. As we start through the certification process, we will actually prior to the certification process be definitizing the United LOI, just like everyone else's LOI. And as we mature through that process, they will have to have an increasing commitments of progress payments against final delivery. This year will be very interesting as we work through with many customers around the globe, the actual delivery slots, and then began going from there. So this is very important year in terms of sitting and working with key customers on where are the launch cities and who starts to get those initial slots. It's not too early to be planning in that regard. With respect to the balance sheet, I'll turn it over to Edu, but I believe he did talk to the $15 million cash infusion, essentially offsetting the expenses for R&D and SG&A through the quarter. Edu, do you want to add anything to that? That's correct, Jerry. The $15 million from United came in the third quarter. It offset our cash burn. So we're basically flat in terms of cash in the third quarter. So we have $330 million in cash. And now we are bringing these additional finance company BNDES that gives us north of $400 million in liquidity, which is multiple years of off cash compared to our projected investments in the eVTOL development. Okay. If I squeeze another one in. The R&D expense line accelerated a little bit through the year. Just discuss the pace at which you're using the Embraer engineers. And then kind of drilling a little bit into Savy's question, expected use of those engineers in 2023? Yeah. In rough count, we're probably using a little bit north of 300 today. And that will probably ramp to almost double that next year in the -- when we come back with the full year report. In that call, we'll be making some projections, more specifically on the cash burn. But we expect that number to roughly double. And so, you'll see a rough doubling we think of our quarterly cash burn. And it's almost directly correlated with the development of not only the product, but also all of the other key pillars that we've talked about, the service and support elements, training program, as well as UATM. Hi, everyone. Thank you very much for taking my questions. Two quick questions, the first regarding with the $100 million to $150 million in cash burn for the coming year. When we look at these, approval permitting of the facility in Brazil, I mean, what percentage of -- what amount of these $100 million or $150 million is related to that? If you guys can open that. And the second question is regarding the commercial campaigns. I mean, we continue to see a lot of good news on that term. The company has the largest backlog in the industry. I mean, are the containers still going on? Do you think that the pace of new announcement or growth in backlog could stabilize a little bit now until we see, more milestones on certification? Those are the two questions. Thank you. Marcelo, thanks for the question. I'll turn it over to Edu. But as I was suggesting, we will be coming out with a more precise forecast. As I just mentioned in the answer to David have our cash burn next quarter, but we expect it to roughly double per quarter from where it is today. So I think it'll be closer to the 150. Edu, do you want to add anything to that? No, you're right. Jerry. I was just going to say that these investment right is mostly for the eVTOL development. Of course, eVTOL service and support and urban air traffic management, it does not relate for the facility manufacturing facility itself. As Jerry mentioned, next year, there are some permits and some work done, but it's still minor. So the number for next year is really for the eVTOL development. Yeah. The investment in facility production facilities will be very modest next year. And we'll see a significant uptick in that in 2024 as we begin -- as we're looking at it, the realignment of some Embraer facilities and refitting for our purposes. With respect to the campaign, there's a number of them going on. I mean, we're very fortunate. And that there's quite a bit of demand right now to sign up on an LOI basis. But we're more focused on strategic customers, locations, the kinds of customers similar to United that bring us the same kind of leverage and capability around the globe and internationally. Having said that, as I talked about before, the team will really start to focus on now key customers, launch customers, launch sites, and begin to try and align since there's such high demand in those first couple of years the slots will be precious item. So we're trying to figure out how we're going to allocate those slots. I think you'll see as much focus on that as continuing to build the backlog where it'll be a little bit more strategic. Stein, would you want to comment on that? Absolutely. We you are on the -- you got it right, Jerry. So we are getting closer and closer to our engine service of define our industry strategist. So now we have a very clear view, on the amount of production we have on the first few years to come. We have been working with the different partners, and through this concept of appropriations and more, to have a better understanding of the needs of each different site and each different city. So we can really address that in a much more mature and structured way. And that's the main focus now, right, really assure that our first years of productions are all planned for, including where the aircraft will go, who will be that customer, the infrastructure that needs to be there in place to start operation, the partners that can support this infrastructure as well. That's why we have been mentioning this holistic approach, this overall looking in the ecosystem, everything that can assure a smooth engine service, and make this incredible, and really large market really become a reality. Good morning. Thanks for taking my questions and congratulations on all the progress the past few quarters. So a couple of questions for me. Just at a high level, I suppose. Domestically with the FAA, I think we've seen some updates and changes to their certification process for eVTOL. I was just curious if you could maybe comment on ANAC and how was your discussions with them are going? Are they been more consistent with their view on how to certify? And if you could also just maybe touch on the development milestones or the certification milestones that you're kind of expecting for 2023? Do you expect to get your G-1 paper in 2023 and the outlook that you could provide would be great. All good questions, Marvin. You will note that the FAA has actually put out for comment its certification basis for Joby and we in other manufacturers and OEMs and members of GAMA have submitted our comments there. But for the details, I'll turn it over to Stein in terms of what we have been doing in detail with ANAC and some other milestones. Stein? Sure. Mode of information G-1 that is expected for 2023, just to transfer direct to that. We have been working on ANAC a number of things to together discuss with FAA, how we can move away a validation process, as we refer to, which has been the strategy since the beginning. But now it's the point in time where we need to really formalize that. And that's what we are doing for both organizations. We have been in constant meetings with both of them to define how the -- how this consistence in terms of requirements, between the two of them are to be expected. And as I said, with the formal application of that -- end of the year now. And we are expecting an answer from FAA pretty soon. That's really put us on the right track. Next year, we are getting even closer to FAA and as well as finding a clear path to the follow on certification authorities. That's important, too. That's the global market. I think these are the main points. We are targeting in 2026, as I said before, the best engagement and more continuous meetings, more frequent meetings are expected to happen as well. As we are building the model out together. Terrific. Thank you for that update. Just one other quick question, if I may. Just the update. I understand, it sounds like most of your incremental cash burn is going to be on development and R&D. So should we just put a finer point on the modeling? So the SG&A line should almost $7 million is probably a good run-rate going forward, and we should just think about the additional expenses being R&D related? Yeah, I think that's a fair assessment, Marvin. Will have a more precise forecast for you, as I said, next quarter. But yeah, we're just about leveled off where we will see growth is as we build out our service and support platform. Some of that will provide a nominal increase on the SG&A side. But by the end of this year, we'll be pretty close to where we want to be in terms of headcount on that side. In the interest of time, that will be all that we have for our Q&A session, I would like to turn the conference back over to management for closing comments. All right. Thanks, Jerry. And thank you, everyone for joining us today. We look forward for updating you on continued progress throughout the year. And please don't hesitate to reach out if you have any additional questions, you can just reach out directly to me. And for those who celebrate Christmas, Merry Christmas and a Happy '23 for everyone. Thanks and have a good day. Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.
EarningCall_1383	Good morning. And for those of you web-streaming, welcome back to Citi's 2023 Communications Media and Entertainment Conference. For those of you who haven't met, I'm Mike Rollins, and I cover communication services and infrastructure categories within Citi Research. And before we get started, I'd like to mention that we do have disclosures available at the registration desk, and on the Citi Velocity page from which you're streaming the audio. We're going to work to incorporate your questions into today's discussion. You're in the room, you can light up the microphone and we'll get to your question. If you are online, you can submit your question into the box, and we're going to continue the tradition of using live surveys. They're completely anonymous. They could be accessed on the live polling Q&A section of the streaming site as well as using your connected devices here in the room. So with all that out of the way, I'd like to welcome Matt Mercier, newly appointed Chief Financial Officer of Digital Realty; and Jordan Sadler, SVP, Public and Private Investor Relations of Digital Realty. Thank you both for joining us today. And so we're curious to -- for you to share your first acts now as -- and priorities for CFO of Digital Realty and even just more broadly, how you're thinking about those priorities for the company, maybe differently than what we would have been talking about a year ago? Sure. Well, I've had the benefit of being around digital for a good part of the time we've been public, being behind 2 great CFOs, Bill Stein and Andy Power, and have had the pleasure of being part of the journey we've been on over the last, not only my 15 years, but in particular over the last, call it, 3 to 5, as part of building out the strategy and repositioning the company to where it is today. And so I don't foresee any major shift in the strategy that we're embarking on. If you go back just even a couple of years, I think, Michael, as you know, we've been embarking on strategy, which is encompassed by kind of the 3 key terms that we like to talk about, which is being global, being connected, being sustainable. And in terms of global, as I think, hopefully, most of them know, we've been on that pursuit with and made, I think, great progress in terms of where our portfolio is today. I think it would be hard to us to find some of would tell you that our portfolio isn't stronger than it was 2 years ago and 3 years ago and 5 years ago between our combination with Interxion back in 2020, most recently having -- getting a majority stake in Teraco. So we've been -- and other acquisitions in between there that have been, call it, more network-centric and enterprise-oriented in places like Greece and Croatia. So I think you're going to -- we will continue to embark on being part of the cloud service providers, one of their preferred vendors and partners going forward as well as continuing to, call it, attack and gain share within the enterprise colocation segment as part of that -- as part of our ongoing strategy going forward. And so at the same time, I think what we're -- what we'll emphasize even more is I think at this point, we've -- in terms of global, I think we've not fully checked the box, but I think it's a pretty good check the box in terms of where our portfolio sits today globally. We have 300 data centers across 50-plus markets, 26 countries. I think our view and belief is, we're in the majority of the major markets you want to be in to be a global player and to be able to deliver the capabilities and the deployments that our customers are looking for across both our -- both segments, both the hyperscale, the cloud service providers as well as the enterprise. So I think now then we're looking -- we got the breadth of our portfolio. Now we want to call it, go into the depth in terms of creating and optimizing what we do have messaging and further creating a more powerful value differentiator for customers, in particular within the enterprise segment through our connectivity offerings. We launched ServiceFabric last year, continuing again to make -- overall, make it easier for those customers to do business with us as well as connected with others across the globe. So -- and all of that, I think, comes back to one of our key goals, I think, for going forward, which is all the work that we've done is really accumulating in positioning our portfolio for sustainable organic growth. So that's really what we're targeting to deliver. And I think we've started to see that over the last year with improved pricing, re-leasing of vacant capacity. And we think with where the environment is today, you're going to continue to see continued strength within our organic growth as that becomes a focus of ours or has been a focus of ours and I think we're positive about where those trends are going. And then I'd say second, we're also -- priority is to, call it, restore the balance sheet and bring that to where it was over time. That's really helpful and gives us a lot of topics to drill down into. We'll introduce our first survey question, see what our audience thinks. One question that we've asked before, we're going to ask you again, does Digital Realty need to acquire additional assets to strengthen or expand the global strategy? You were just talking about that a little bit. Curious what our audience thinks. The choices are going to be, yes, expect digital to add new markets through acquisitions of additional platforms. Yes, expect Digital Realty to further consolidate retail-centric data centers in campuses? Or no, Digital Realty has the geographic footprint it needs and can expand through organic development. And just a reminder, these are completely anonymous, and so we'll aggregate those results. And while we do -- maybe you could just talk about a little bit more, since the first time we've been together, since there were some transitions both for Andy and for you, can you just unpack a little bit of just maybe what led to the unexpected timing and process for the management transition and were there any performance issues for the company in the fourth quarter of '22 or unexpected developments for '23 that investors should be mindful of? Yes. I mean just to hit the -- maybe your last part straight, I mean, there's no performance issues or unexpected developments that led to this. I mean this was understandable in terms of like the -- maybe the abruptness of the timing between announced and actual final date. But the -- if you look back, the overall transition plan has been in place for well over a year. Andy was appointed President back in November of last year, with that came additional responsibilities that you would say signaled kind of where the path that we were on behind the scenes which wasn't as visible myself. I've had a lot of the financial operations of the company for not only that period of time, but in some cases, even further beyond that in terms of running the finance FP&A group capital markets, accounting. So I've been in the same boat in terms of transitioning for this point in time. So this was not a -- this was a planned succession plan and understand that my view would be abruptness in terms of timing, but this was something that was put in motion some time ago. That's helpful. And just to share the results of the first survey, so 14% of our audience expects Digital Realty to continue to add new markets through acquisitions of additional platforms; 29%, consolidate retail data centers in campuses; and 57%, that you have the geographic footprint that you need and can expand through organic development. As you think about these choices, do you fall into one specific bucket over another? I mean I think the -- as usually happens, the majority tends to be right. So I think -- look, like I said before, I think we -- looking across where we've been and where we come from a global perspective, we reiterate, we're in 300 data centers across 50 markets. At this point in time, I think we believe that we're in most of the major markets that we need to be in. That side are markets over time that we'll look to expand into. That's obviously not off the table because we want to be where our customers want to be, and that evolves over time. But I think as of now, we're in most of the major places we want to be at this time. So we're just talking about the asset positioning. Can you unpack a little bit of where the sales organization, the support organizations sit. Are those in a good place to execute the sales strategy going forward? Yes. I mean, I would say, looking at it in kind of our 2 buckets, right, the cloud service provider, the hyperscale component, that's a finite limited group of customers that doesn't take a large sales force to be able to attack, that also continues to be a good majority of the business that we're signing anywhere between, call it, roughly 60%, whereas the other 40-ish percent depending on the quarter comes from our enterprise more retail colocation. And we've been -- while we're looking to grow that enterprise footprint, we also have to make sure that we've got the inventory in place to be able to sell it before bringing on excess headcount that won't have the right capacity to sell. So I think as of today, given where we're at and where our inventory profile is, I think we feel pretty good about the sales organization and where it is. We're obviously continuing to look at bolstering our channel partners and having that sales force multiplier. But overall, I think we feel pretty good about the sales organization and where it is. And as we continue to grow and look to penetrate further in enterprise, then we'll reevaluate that. I would just maybe add to that or point out that over the course of the last 4 quarters, 3 of them were record quarters in terms of lease production. So I think the sales force is sort of adequate and it's been pretty mixed across product type too. So I think we feel pretty good about that. It's -- I think, as Matt said, it's an opportunity as we sort of scale and look to go into different product areas and markets, but no sea change. I'm glad you brought the bookings up because that takes us right into the second survey of our time together. And we're going to ask our audience how will average quarterly bookings in 2023 compare to what I recall the last 8 quarter average being around $136 million. So we're just going to simply ask, is the quarterly bookings in '23 going to be higher than that average, similar or lower than that average? And we'll go to the polls in a moment. But while we're doing that, and this might help inform some of our audience on what the right answer should be, according to what you were saying, maybe if you could share a little bit more of what you're seeing in the sales funnel, sales cycle, I recall back on the third quarter, you noted that maybe some smaller customers were seeing some weakness within the channel. If you can give us an update on what you're seeing on that front. Yes. So, yes, overall, we are -- we feel pretty about the demand profile. I mean, as Jordan mentioned, over the last year-to-date, we're, I think, close to $450 million in total bookings. We've had 2 record quarters this year. I think as we've all experienced, this has been a volatile year in terms of macro changes. And as a result of that, in the third quarter, we thought it was prudent to mention sliver where we are seeing some softness. But I think overall, that softness is -- we're not seeing it get any worse. In fact, I think it will be same to improving potentially within, again, a small segment of our, call it, 0 to 1 megawatt that we're attacking. Within hyperscale, we continue to see a lot of demand -- in some cases, I think more demand in certain markets than their supply. So, overall, we feel pretty good about the demand profile, the pipeline and what we're seeing in terms of what we have available. I might just add to that just to come back to the small medium enterprise comment that we made on the third quarter call. This was a decision to basically be transparent with the investor and the analyst community and say, "Are you guys seeing anything? The capital markets are falling apart. Interest rates are up dramatically. Are you seeing anything macro that you would identify or call out because we were already obviously well into October?" That you could say, "There's something going on in your business, how are all of your customers behaving? We obviously have well over 4,000 customers." So we did see something, so we said something. And what we saw was, in this smaller medium enterprise segment of our business, which is, for us, a smaller piece of the business, right? It fits into the 0 to 1 megawatt business as opposed to the greater than 1, obviously. And within the 0 to 1, we sort of subsegment into 0 to 500K dub and 500k dub up to a mega. It was at 0 to 500, where we saw a hesitancy from CFOs and CTOs to make that capital commitment as the quarter came to an end. And it wasn't -- it was an anecdotal comment. And so we wanted to make sure that we flagged that anecdote for folks. Much of that pushed into the fourth quarter pipeline. So there was a hesitation and then we think an execution behind that. But people have to assess based on current conditions, what are we going to do? And I think some people will not want to spend their own capital, they'll look to lean on partners, maybe go to the cloud or bare metal, and others will commit and execute because they need the product. So from the survey, I'll read out the results about 40% was similar and about 60% was lower in terms of the quarterly booking opportunity for '23 versus '22. Given what you're describing about the demand for hyperscale and what you're describing on the portfolio broadly, how would you vote in the survey? Yes. Well, I'll give some context, right? I mean, look, what we're seeing is, we're seeing solid demand. We're seeing that in, like we mentioned, record quarters, 2 of which happened this year. So we're coming off a solid year performance. On top of that, we're also seeing that there are supply constraints in certain markets, one of which being the largest market in the world in Northern Virginia as a result of power constraints. So if you think about just those 2 kind of anecdotes in terms of hard to keep putting up record after record as well as supply constraints in certain markets, I think that will kind of give you an indication of where things might be heading. In terms of kind of getting to the next topic, you mentioned some energy constraints, and there's just higher energy costs, overall, in certain of your markets right now, are you seeing any customer resistance or pushback or change in demand because their total cost of operating in a data center may be higher than it was a year or 2 years ago? No. I mean, we haven't. I mean we've been -- I think this has been telegraphed for some time, right? People are aware of the increase in power cost. We for the customers that we're targeting, these aren't decisions where they can have a data center point or not. These are mission-critical to their business. And as a result, they're maybe not happy about where power costs are, just like probably most of us aren't. But these are necessary deployments that they can't necessarily delay. So we have not seen any material change as a result of pricing -- power pricing increases within any of the major markets that we're operating. And on the other side of this, with some supply constraints and inflationary backdrop, can you give us an update on how Digital is approaching pricing? And what kind of opportunity that is for the organic financial performance of Digital Realty? Yes, yes. I mean, we've -- look, I think, hopefully, as I said in the beginning, I think we feel pretty positive about where the trajectory of pricing is going, and that's across most of our major markets. I think that's been reflected in the fact that this year, I think the first time in several years, we guided to positive renewal spreads -- and we're hopeful and optimistic that, that continues. Part of it is, again, an offset to some degree of limited supply is that pricing could and should go up along with that, and we are seeing that in a number of our markets. In addition, we're looking to include further escalators in where we are pricing even to not only be a reflection of the pricing environment but also some version of the inflationary environment. So I think as we announced on last quarter call, we've got -- we were able to get roughly 40% of our contracts with CPI inflation, which is an adjustment to what we typically have, which is, call it, anywhere between 2% and 3% fixed on average. And so we're -- we feel pretty good about where pricing is trending. We think pricing power has shifted towards the owner/operators hands. And we think that also, back to kind of some of the opening remarks, should then be reflective of an improvement in overall organic growth. So that brings to our next survey question for our audience. Will the potential improvements in pricing push stabilized KPIs for revenue and NOI back to meaningfully positive territory in 2023? And this is a simple no or yes answer. So we'll go to the polls in a moment. But as you're thinking about these price increases and the opportunities for these inflation-based escalators and this might help inform our clients on what the right answer should be here, do you kind of view this as 0-calorie revenue where it's just offsetting inflationary pressures in the business? Or do you view this as an opportunity to get better value and returns out of your portfolio? Look, I think ultimately, we view and our objective is to increase the overall bottom line from pricing, especially from an organic portfolio called stabilized same-store perspective. We're also not immune to inflationary pressures within the operating expenses. But outside of power, which we talked about, which for our business is largely a pass-through. The operating expenses that make up the majority of it underneath that or I think we've been able to control very well. And therefore, as we look to our revenue growth from an organic perspective, we think that we'll see not only improvement at the top line but then, therefore, should flow down to the bottom line as well. And if you take the power pricing out of this question for a moment and you look at the core margin performance, you look at what you're doing with these connected services and these ecosystems that you're building for customers and broadening the sales opportunities -- as you look at the cost structure, should investors expect Digital to be a net investor? Take a little drop in margin to drive more top line, neutral to margin? Or do you have the scale and you have the people you need where now you can actually get that operating leverage and expand margins? Yes. So again, I think the main point is excluding power because depending on how you look at it, that's -- we are expecting an increase in overall power cost, and therefore, reimbursements, which depending on how you're looking at margin, would have an impact. So excluding margin, our view is -- again, going back to our objectives, we're looking to increase our occupancy -- so bring in which we've been embarking all over the last year with moving ready initiatives. And I think you've started to see that even in the last quarter where you saw our stabilized portfolio and our overall portfolio increase in occupancy. And I think that's probably one of the bigger drivers of getting better margin improvements just filling some of the baking capacity that we've had, which we've done a good job of doing. Then add on top of that, better mark-to-market opportunities, which we think we'll see going forward. And I think overall, we're looking at an organic growth profile where we should be able to, I'll say, maintain, if not move in the direction of improving our margin excluding energy. To answer your question directly, back to, do we think we have the investments that we need in most -- I think for the next year, I think we do. I think after that, we'll continue to evaluate year-by-year depending on the profile of the market, the profile of our inventory and our objectives and make decisions from there. So coming back to the question about the KPIs for revenue and NOI to get back to meaningfully positive territory -- and I'll kind of -- I should have included in the question, but I think it is on a constant currency basis, just to take that out of the mix. It was a mixed response, 60%, no; 40%, yes. Curious how you're looking at the opportunities to get these KPIs back to meaningfully positive territory constant currency? And are there any hot holes in the road as you're looking out at the highway that we should just be mindful of, one-timers or special situations and things of that nature? So I think I'm hopeful people look at -- I think we've already started to see some reversal, if you will, in reversal meeting. We are -- we have started moving in a positive trajectory in terms of our stabilized organic growth, both from the top and bottom line. And I think based on all the factors that we just discussed, meaning looking to improve occupancy looking at a better pricing environment overall, I think we're pretty positive that we'll be able to show continued improvement in those metrics. And obviously, we'll come out with guidance on that towards the -- on our fourth quarter earnings call, which will be in, call it, mid-February. And I think that will -- we'll be able to discuss it even further then. In terms of headwinds from that organic, I think we talked about it, most of that as well. So from a power perspective, we feel very insulated. We've had hedging programs. The majority of our contracts are passed through. The ones that aren't passed through, we have the ability or the contract to adjust the pricing as a result of increases in power. So that gives us a lot of comfort from one of the big areas of expected increase, which is on the power side. From other operating costs, I think we've done a great job of with our scale and with our vendors being able to control increases in operating expenses -- and so we're not -- I'm not aware of as of today any major wildcards. Property taxes, it's always something that comes up here and there, but again, at this point, nothing has come to life that gives us any concern on that front. So we feel pretty good about where we stand as of today, in being able to deliver positive message around our stabilized organic growth. And maybe moving over to the balance sheet for a few minutes. You talked about that earlier in our conversation about the focus on balance sheet. Can you walk us through where you are effectively leverage today, where you would like to get that to in the journey of what investors should expect to get to that level? Sure. Yes. I mean our leverage is, I would say, higher than it's been in the past. And we are -- as I think mentioned in the opening remarks, one of our objectives is to get the balance sheet, restore that back to where we have been. Much like it didn't -- it wasn't an overnight journey to be where we are today. I don't necessarily see it's going to be an overnight journey to get back to where we want to be. But I think we have an ability and a number of different options at our disposal that we are working through to be able to bring leverage back down to levels that we've seen historically. I think that will -- again, I think that will take time as we work through that over the next year and maybe beyond. And some of those things that we are working on include things that we've done in the past, which include noncore disposition, outright dispositions is one part. We're also continuing to look at JV and potential stabilized assets where we've got a number of partners that we've done over the course of several years between Mapletree and other partners and also looking to potentially new partners. And the third leg of that is also to look at the potential to joint venture some of our development projects and bring in a form of equity capital for the development pipeline that we have in place today. And as you think about how you got to the current leverage that you're at, was there something that didn't go right in terms of underwriting assumptions or the progression of the business? Or was it simply a function of the investment, the assets that you wanted to bring into the portfolio was worth moving up in the short term to benefit the company for the long term. Yes. I mean, I look at our -- we've -- I'll take sort of -- let's take a rating-agency, if you will, type view on where we're at. I mean, if you look at our company back to 5 years ago, we are more diversified, better customer concentration, fixed charge coverage over 5x. I think our view is it's hard for us to say that our portfolio isn't in better shape than it was some time ago, and therefore, has capacity for slightly more leverage than where we've been historically. That said, I think we're also at a place where we had a lot of volatility in the capital markets in the last year, as I think we all know, and that was part of limiting options that we had available to us historically. And so I think between those 2 things, I think we're at a place that we don't think is -- it's higher than we want to be. But I don't think it's -- when you look at the fundamentals of our business, when we look at our ability and the options we have to bring it down, when you look at the development pipeline that over time will deliver EBITDA and give us an ability to naturally bring it down from that. I think we feel pretty comfortable that we'll be able to manage this effectively over time. I might add, it leverages a static metric as at -- we bought a nonstabilized portfolio in August that has pretty good growth potential and lease-up as occupancy commences or as leases commence. So that will be a nice driver as Matt alluded to and described. And so that will sort of help but also we had a disposition guidance for this year as well. We're not all the way through it. We were not as of 3Q but we're still working towards some of those dispositions and that piece of that. And unfortunately, there is substantial demand for the assets that we own, and we think there'll be ways to continue to monetize portions of the portfolio. Does the -- I'm thinking I'll add with this question, but does the balance sheet on a consolidated basis not barely represent the underlying leverage because you have consolidated assets that you might have less than 100% ownership in, you have joint ventures that you control and manage that are more mature or growing that are not in the balance sheet. So is there -- in some way, does the consolidated, if I just pull up a balance sheet in the 10-Q for you -- is that not the fairest representation of leverage because of a little bit more of a complicated investment structure? My answer to that would be generally no, because the way we -- while you don't see -- the way we calculate leverage that we disclosed and reported is we include our share of joint ventures within the numerator and the denominator. So I think we're -- and we've done that for some time. So I think we're giving investors and analyst community a good and a clear picture looking through not only our consolidated but also our unconsolidated ventures. And I can't remember if it was in some meetings or if it was on the third quarter earnings call, but I think there was an acknowledgment that the team was going to -- as rates were rising at that point, maybe take a different look or different lens on development in 2023. Any updates in terms of how you're thinking about the pace of internal development? And given some of the comments you mentioned on pricing and supply constraints in certain markets, should there be a natural benefit to the development yields when we start looking at those schedules over the course of the next 12 months? I mean I think the simple answer is yes. I mean we have always taken a very prudent and strict approach to how we monitor and how we improve development projects with an eye on our yield and an eye towards what is going to cost us to bring that yield onto our balance sheet. But -- and in light of, I think what everyone's probably should be doing, I mean, we're -- as we said, we're going to an even stricter review of our projects going forward. Again, some of that's going to be natural in terms of -- there's places in markets where inventory is scarce. And so all those things cost of capital increasing some level of inflation, although I think that's fairly contained. And we will be looking at, I think, over time, our goal would be to improve the overall quality of the projects and call it the yield within their -- associated with that within our development pipeline. So in our final couple of minutes, Matt, is there a misunderstanding that you feel is out there that you sort of want to address and raise awareness in terms of what you think that is and how you look at that topic or issue? I don't -- I think -- I might go back to the survey results, and I'll sort of repeat, which is probably the one that I think there -- I think that we'll -- I think there's a view that it's a show-me story, right, in terms of our -- in terms of being able to show organic stabilized growth. And I think we feel pretty confident that we'll be able to show as we -- as I hopefully mentioned a few times, that that's going to be moving, it has been and will continue to move in positive direction given some of the tailwinds that are now, I think, at our back in terms of pricing, in terms of filling vacant capacity, in terms of inventory constraints that are really circled back to a pricing dynamic that should be in the developer's favor and where competition should be and pricing as well. So I think that's a major item. And then the other objective is, again, I think we're restoring where our balance sheet is. And I think, again, showing that we have the ability to do that. And on that last point, just one follow-up. Does the -- are you also seeing a dislocation between private market values and public market values? And is that helpful as you're thinking about private capital whether it's in joint ventures for stabilized assets or for monetization or for even development? Yes. I mean I think that's why we view that, call it, avenue in terms of part of the deleveraging strategy. I think we see that there's still a demand for this type of product -- there's a lot of people out there that are looking to either grow their exposure to the space or just get into this space. And so that's why it's one of the key elements of where we're going to be -- to steal from Andy, have many fishing poles in the water, that's one of the key ones that we're going to target.
EarningCall_1384	All right, perfect. Good morning. Thank you for attending JPMorgan's 21st Annual Semiconductor Technology and Automotive Investor Forum here at CES. My name is Harlan Sur and I'm [indiscernible]. Very pleased to have Chris Koopmans, Chief Operating Officer; and Ashish Saran, Vice President of Investor Relations and Marvell is here with us today. Marvell is one of our topics in the semiconductor sector for 2023, leadership in cloud data center, 5G networking with their networking compute storage and custom basic solutions and the emerging pipeline in the automotive. So gentlemen, thank you for joining us today. I will go ahead and kick it off with the first few questions and turn it over to the audience if you have any questions. So let's talk about the sort of full year outlook. As we enter calendar '23, there are macro headwinds, pressure in certain parts of your business like storage, wired infrastructure, China enterprise networking. That said, though, the team has strategic idiosyncratic programs that are firing this year as well to offset some of the softness. Cloud spending is still growing mid- to high single digits percentage. On the last earnings call, I think Matt had articulated a growth profile for calendar '23, albeit at a lower rate versus the team's prior expectations. Consensus has the team growing revenues kind of low single digits this year. Help us understand, within your growth outlook for this year, what are the programs, end markets, geographies that are going to be driving growth for the team? Sure. Yes. I think first, I think relative to the industry, I think we feel in a very fortunate position, right, given we have good secular growth in most of our end markets and as you pointed out, we have a number of kind of, call it, idiosyncratic opportunities. So maybe I'll start with data center, cloud, in particular, where we articulated a couple of years back, we made a pretty big strategic shift identified in working with cloud customers directly for optimizing solutions. I think of these as custom opportunities. We won a significant number of them last year and we'll start ramping late this year but certainly late last year and then growing to about $400 million in aggregate this calendar year. And then that continues into $800 million the following year. So that's probably the single largest incremental revenue opportunity. Within cloud, we also launched our new 400ZR data center internet program that's ramping 800 gig PAM, again, within our electro-optics portfolio which is really being used for interconnect. So we have a number of independent growth drivers. Our automotive business, as you mentioned, this has been an absolute home run. This is Ethernet connectivity. We just crossed $200 million annualized last quarter going from essentially almost nothing, right, a couple of years back and that continues to grow this year. And then our 5G business, we expect very strong growth, right? It's driven really by broader 5G adoption. India is a new geography turning on the U.S. certainly keeps going. And quite frankly, we have more content gains which will kick in. We'll see some this year but certainly a lot more next year. One of the biggest headwinds is your data center storage business due to inventory adjustments from your HDD and SSD storage customers. I mean the team has noted that inventory correction should last a few quarters for the storage business. It looks like after 2 quarters of inventory drawdowns themselves for your HDD customers, they are anticipating nearline shipments to inflect positively in the March quarter. So is the right way to think about it that Marvell potentially sees the inflection one quarter later, meaning revenue inflection in your storage business in the July quarter? That's the first question. What's the linearity of recovery back to that sort of $800 million annualized sort of storage run rate in your data center business? Yes. I think these things typically do take, call it, a couple of quarters to clean up. So call it -- our Q4 and our Q1 would be kind of in the same zip code, I would say, right? And then you start to see a recovery from that time period and then full recovery sometime in the back half of the year. So I think it's kind of aligned with your time line. I think the one big difference as opposed to past storage cycles where we had a lot more PC exposure and a conversion from HA to SSD where the revenue would go down, it wouldn't necessarily come back up. I think today, it's a very, very different situation. So 100% agree with what you're hearing from our customers. Fundamentally, the need for storage, for bit storage within data centers is going to continue to grow. You're facing a couple of quarters of clearly, there was an inventory situation which has to resolve itself over a few quarters but this is fundamentally a growth business, right? As we look beyond, call it, towards the end of this year. Yes. Certainly, as we cover Western Digital, we cover Micron. Certainly, they're still seeing from their cloud customers, petabyte storage consumption in that sort of high 20s, low 30s sort of year-over-year growth range going forward. So I would agree with it. We would expect unit growth rate within HDDs on the line side. But on top of that, we have a very strong position on the SSD side. We actually won new designs which are yet to launch as PCI Gen 5 and PCI Gen 6 start to roll out over the next few years, that again increases our total content and actually grows our share. So I think overall, our outlook for our data center storage business is very positive. The team, as we've mentioned a couple of times here, is set to drive $400 million of incremental cloud optimized, what we call cloud ASIC programs in calendar '23, $800 million in calendar '24. Help us understand how these strategic programs are trending for your customers? How strategic these programs are for your customers' future growth initiatives and whether these could get cut in the downturn? And my understanding is that the ASIC pipeline includes custom DPUs, video transcode, AI acceleration and some custom networking programs. Is there anything that could be missing from that list? Yes. No, I think you nailed the big parts of it, right? It's a lot of sort of compute offload type of things. And in terms of how critical they are, I mean, most of these programs are replacing or are sort of next generation of existing programs. And so I don't expect that any of them would be the type of thing that were sort of science projects, they would just kind of move on. They're all very, very critical to their overall infrastructure and to them, enabling them to deliver their capabilities to their customers. And so, they're tracking very much on track, very strong and we're really excited about them ramping this year. Yes. Maybe just to add to that, I think you're not going to do these large custom silicon programs really for small projects. This is where you've essentially expanded significant amount of NRE working with us, plus a lot of internal resources. And these really drive down there to TCO, right? And that's what they really care about. So in fact, if anything, I think the pressure on us to execute even faster has increased given some of the financial constraints that we find ourselves under. These programs are actually more critical as it go forwards. Yes. As we've gone through the most recent earnings season, even recently in discussions with cloud customers. I mean you consistently hear them talking about accelerated compute initiatives, right which are highly strategic and things that they're not going to get cut. And obviously, that's a reflection of maybe a lot of these cloud optimized ASIC programs that you're helping these customers to enable. 5-nanometer pipeline is beginning to unfold, right? The revenue ramp again sort of last year as a part of your cloud optimized ASIC-grams and some of your lead 5G customers. 5-nanometer contribution should be accelerating this year. In 5G, in particular, you have 5-nanometer wins with Samsung, with Nokia, with Ericsson, your 5G business is now running at more than a $600 million annualized run rate. India is expected to ramp aggressively starting this year which should provide some benefit to you guys. The team guided service provider segment to grow this year led by 5G wireless. What are the other product or customer or geographic drivers of the 5G growth this year? Yes, I think first and foremost, it is the conversion across the world, right, of what matters to us right now, given we weren't a very significant player in the 4G right cycle. What matters to us is not the total dollar CapEx in aggregate, right? But what matters is how much of that converts to 5G. And that's what's really going to be benefiting us this year, right? So even in the U.S., where clearly last calendar year was one of the bigger years in terms of total spend but you can't upgrade large geographies in 1 year, right? Typically, it's a 4-year process. I think the U.S. is going to be one of the bigger contributors as well. And to your point, I think India is going to be a very large -- they've really held back really their conversion to 5G for a number of reasons and now they're ready to go. So I think you should expect pretty significant growth in that particular space. Korea, Japan have really been kind of already been deploying. So those are more -- think of those as kind of existing runway businesses. But I would say U.S. and India was the one I would look at for this calendar year. I think we will also expect to see benefits from Europe, although I suspect that's probably more next year but it's very important. If you look at the breadth of our customers and you mentioned 2 in particular, both Nokia and Ericsson. And I think given what will most likely be a shift away from Huawei, given they just simply can supply product, right? I think -- and remember, Huawei had almost 30% to 40% share in Europe. So that's a very big amount of dollars available which will shift to customers where we are broadly exposed to. So I think that's all in front of us. 5-nanometer in whole is going to be a big, big revenue cycle for the team, right? And thinking, looking forward, you've been putting in place your next-generation 3-nanometer platforms to potentially commence designs for your merchant and cloud-optimized solutions. Can you just give us an update on 3 nanometers? I mean there's a lot of things to be put in place, right, working with your foundry partners to make sure the manufacturing time lines are in place, you're developing libraries, IP, discussing with your customers. Is the team -- give us an update there on 3 nanometers? And are you already engaged on internal designs for your merchant solutions and/or cloud-optimized ASIC designs with some of your customers at 3? Sure. Yes. As you mentioned, this is really a parallel development, right? I mean, we started our 5-nanometer development, getting all the IP ready and our test chips ready years ago, turned those into products last year which are then turning to revenue this year. So last year, we really -- we had our 3-nanometer IP test chip and we're doing all the development to get all the different IP blocks ready. That's aligned both to our internal merchant solutions as well as what we know is needed for the custom cloud-optimized designs that we're already working with our customers on. It tends to be -- in many cases, it tends to be the cloud-optimized designs that lead the cycle that end up being on the very, very front end of the cycle that have the most cutting edge of these giant compute types of solutions or networking types of solutions. But the merchant solutions are also working right behind that. So it's really all of the above. Any -- I'm going to move on to the data center business but does anybody have any questions so far? No. Okay. So on the 200- and 400-gig optical upgrade cycle with your major cloud and hyperscale customers, the Marvell Inphi team still owns, according to our estimates, 80% plus market share, right? Right now, it's driven primarily by the Tier-1 hyperscalers. The team has confidence that your optical business is going to grow this year, yet you're working through some near-term inventory digestion with your cloud customers here in the January quarter. So what gives the team confidence on the growth for the optical connectivity business this year? Yes, sure. I think first is on 200 and 400 gig. The adoption has been broad but it's really 3 large customers, right? So it is still a fourth large U.S. customer which is completely in front of us in the market. And on top of that, there are obviously the next tier of customers, right? So they will inevitably adopt electra-optics technologies in PAM. It's just a question of time. So that's certainly in front of us. I think there was clearly a much bigger inventory situation on the storage side, given the way that particular market works which is really a commodity product. So when the demand is there, right, there's obviously -- it's considered fungible, meaning whoever supplies it, gets it, right? So everybody rushes and makes products and that's essentially what created that situation. You don't have that happening in the rest of the market, right? These are all one-to-one sole-source relationships. So I think out of, call it, caution, we did guided down a little bit before but it really wasn't a big magnitude, quite frankly, right? And this is still fundamentally the fabric which drives the total bandwidth capacity. So we feel very good about our existing 200, 400 gig business. And on top of that, as I mentioned earlier, we have started ramping 800-gig PAM4. In fact, we've introduced our second ship, right which does that on the DSP side in a new process geometry along with the company TIAs and drivers and then 400ZR which is data center interconnect. When you add it all up together, even if you have a very conservative view on, call it, not getting much help from cloud CapEx this year, we still feel very good about the overall business will continue to grow. And then, of course, as we look even further out in time, CapEx will certainly start to grow at a faster rate. So I think we'll certainly get that acceleration again. The other new product cycle in optical and you mentioned this in your prepared remarks as well as data center interconnect upgrade to the new 400ZR standard, I believe you're ramping into Microsoft now. All of the other Tier 1 cloud hyperscalers have a plan to move to the 400ZR standard as well. Maybe you can provide some color on the revenue ramp profile, your share position? And how should we think about the adoption from the other Tier 1 cloud hyperscalers as we look out over the next sort of 18 to 24 months? Sure. Yes. I think as a lot of people remember, 100-gig DCI data center was kind of the first project which was kind of a proprietary relationship with Microsoft and Inphi back that time which we've now acquired. And then we pioneered the 400ZR which is an open standard. And clearly, the lead customer clearly is the one adopting it but it's spreading to your point beyond that. I think one of the big trends driving it, if you think about it is, if you think back in time, a lot of the cloud customers have these very large mega data centers, very significant ones in the single location. But as workloads are moving more towards the edge, you're seeing a lot more proliferation of smaller data centers, a lot closer to where the end customer is and that is now causing hey, now I need to connect these data centers together. So I think the overall usage of DCI to your point, is spreading to multiple customers. So for us, this is going to be in a ramp phase, I would say, for multiple years. Certainly, I think the revenue is obviously at 400ZR, I would say, is at the level or surpassing that we're at 100 fairly quickly because it's a much higher ASP. And then we still have additional customer adoption completely in front of us. And I think it's not just cloud customers which is drive for the next few years. But over time, you will see the same technology also being used in optical transport, right, in the broader telecom market. So this is really a long, multiyear cycle is my point. The team has mentioned 800 gig several times and it clearly looks like it's a driver to the business. What's interesting about 800 gig is that it's not being tied to -- when we typically think about optical, we think about optical being tied to a particular switching platform, right? But your 800-gig platform is actually not tied to a switching platform. It's actually tied to accelerated compute clusters, right, like Google's TPU cluster and a whole bunch of other different accelerated compute clusters. They tend to seem to be like the first adopters of these new generations of technology. First, is that true that the bigger consumer of 800 gig is strategic AI compute initiatives and not so much the tie between switching and optical? Yes, I think that's absolutely correct, right? You're right. Historically, the first ease of electro-optics was the switch to switch linear [ph] right, essentially typically driven by the 3.2, 6.4, 12.8T cycles, right? 800-gig PAM to your point is being driven completely by AI and we've seen 2 very large customers driving a significant amount of growth. And as you think about the overall CapEx environment, while I know there's concerns about deceleration, the reality is within that. That's just a big number you see outside includes buildings and a whole bunch of other stuff. When you look at the spending profile, the priority which AI and ML projects get, it remains extremely high. So I'm not surprised at all to see the very strong demand we've seen, right, a strong push from customers to enable this product very quickly. So your assessment is spot on. As we look out over the next several years, co-package electro-optical CPO solutions will initially roll out to support 51.2T switching chips and more significant adoption at 102 terabit per second family of switching products given power and cost savings. What are you hearing from your hyperscale customers on their co-package development strategies? And can you give us an update on Marvell's co-package electro-optical portfolio? Sure. I'll start. So certainly, our switching and our co-package optics initiatives, just like the rest of our initiatives for cloud are really being done in very tight partnership with our cloud customers. And so really, we're trying to align to what they need. And ultimately, what they would generally prefer to do is to do pluggable as long as they can, right? And ultimately, the pluggable is just -- it's a very -- a good technology in terms of how they actually run it and deploy it and maintain it in the field. But there is -- absolutely, they're all looking at the move towards co-package optics and Marvell is working very closely with them in terms of which generation they're going to do it. And actually, whether it is at the switch layer first or actually is it at the AI, as I mentioned with 800 gig first and whether that's actually the first place that they're going to really want to start to look at co-package optics. It's not yet clear to me that, for example, 51.2 switching is going to be the first big move for co-packaged optics. And so Marvell's working very closely with each of our hyperscale customers in terms of developing our technology to support those ramps. Yes. I think if you think about the whole discussion we had on 400ZR, I mean that was fundamentally the first high-volume production of a silicon photonics enabled optical solutions. So we've learned probably more than a lot of other people have in terms of delivering this in high volume. So I think our ability to go execute. I think the key thing here is you have to work directly with your customers and basically give them the choice, right which is hey, it's not an OR function, it's more of an AND function. There will be certain applications where they will want to move very quickly to CPO but there'll be a bunch of mass market solutions where they want to keep pluggable going as long as it can for obvious reasons, right upgradability, serviceability. There's a number of very good reasons why. And I think that, I think, is what our customers like the fact will enable both ecosystems simultaneously. Your Innovium cloud switching product was targeted to drive $150 million in revenues in calendar '22. Did the team hit this target? And are you anticipating growth this year in cloud switching? And secondly, all of the revenues are coming from your Teralynx 7 platform which is 12.8 terabit per second which is equivalent to Broadcom's Tomahawk 3. As we look ahead, right, Broadcom is ramping Tomahawk for getting ready to roll out Tomahawk 5 next year, like how should we think about Marvell's cadence and road maps on the Teralynx platform over the next several years? Sure. So yes, we said at the last earnings, I think, that we were on track to hit that number for last year. And ultimately, it was supply constrained for last year for the big customer that we were delivering to. And therefore, it was sort of a back half ramp. And therefore, yes, you should absolutely expect growth in calendar '23 over calendar '22 and that platform, it's doing very, very well. When we made that acquisition, our initial focus was really to make sure that we were able to ramp and support with high quality and significant supply to that initial customer at the 12.8. And then now, again, similar to our other cloud-optimized platform which is working very closely with initially that first customer and then other customers in terms of what their needs are. And their needs really right now are at the 52T and that's what Marvell is working on and aligned not just the switching layer but the 1.6T optics that go along with it, right? Because what's a good having a 52T switch, if you don't have 1.6Toptics if I can't go along with it. So our road map end-to-end is completely aligned with our customer needs and that's really the cadence that we're working on is to -- initially, our focus will be to make sure we hit exactly what that very large customer needs at that 52T. But of course, we will be expanding beyond that customer after that, right? So ultimately, our cadence will be aligned to what our customers need and starting with that initial customer. Before I move on to enterprise, any questions from the audience? So on Enterprise Networking, business is going through a strong inflection by product cycle refresh, new ASIC programs and the strength of the U.S. Tier 1 customers but offset by muted demand from China networking OEMs. Still the business nearly doubled over the last 2 years. Can you just help us understand how much of the growth is strong customer spending versus share and content gains and this is with your U.S. customers? And how do you see your overall enterprise networking business relative to the team's outlook for total company growth this year? Yes. I think this is -- I mean, this has been a business which -- it goes back -- this is all the original Marvell organic businesses, right? And in fact, Chris was kind of heading that business back then, right? So this has been an amazing transformation. I would say the majority of the growth we've seen in the last couple of years has really been a combination of share gains, both in PHYs as well as in switches as well as a pretty shift up in content, especially on things like multi-gate PHYs with ASP significantly higher. I'm not talking percentage points, this is multiples higher, right? And that penetration continues. So the market itself has also grown perhaps higher than typical but it's still somewhere in the single digits, right, the end market from a customer perspective partly because of supply constraints, right? I think they would want to grow faster. They have the orders but there's been multiple supply constraints, including Marvell. Now that's obviously starting to clear up. In the meantime, we did see some of the China demand start to come down which, quite frankly, I think is a temporary phenomenon. Again, we're not saying when it comes back but it will. I mean China is going to be a big -- this is an endpoint-driven market by the enterprise networking and that is a very large population. It's a large economy. So at some point, that comes back. And in the meantime, I think for now, we are now finally in a position from a supply perspective to meet our U.S. customers' demands and that's what the focus is. I think in the long run, what we would go back and say is, look, fundamentally, we think this is a low single-digit to mid-single-digit end market, we will still outperform that, right, perhaps not to the same magnitude of the, call it, 40% to 50% year-on-year growth because we've obviously gained a significant amount of share but I would still say we'll outperform that call in low to mid-single-digit market. Automotive is the next significant revenue opportunity for the team. As you mentioned, you're already driving $200 million plus in annualized revenue run rate. Here, the team is leveraging its strong position in Ethernet networking and gaining share. Much of the auto products are manufactured on older generation technology nodes where the market, I think, continues to be in tight supply. Are the supply dynamics starting to ease here in lagging edge technology, mature technologies in longer term? The team has talked about the auto compute opportunity is a multibillion-dollar opportunity. Maybe if you can give us an update on the progress there, too. Sure. So yes, you're right. Ultimately, we're gaining significant traction with our Ethernet platform. Our Ethernet platform has some in older technology but it also has -- we're all the way into the sort of 16-nanometer generation with our Ethernet technology. So what I would say is generally the -- yes, the older nodes are still constrained for sure. Having said that, because of the number of strategic moves that Marvell has made within our portfolio in terms of moving products between nodes, we actually have what we need to deliver at these older nodes in automotive right now. And we've been very good actually, throughout the entire time of not ever becoming a bottleneck for any of our automotive customers and they've really appreciated that. So -- so that traction just continues to grow. I think we've said we now have 8 out of 10 of the top OEMs, really 100% of the OEMs out there have a plan to adopt Ethernet across their portfolio. They're not starting to move from sort of model by model or model-year type decisions to broad portfolio decisions -- broad platform decisions across their entire set of models. And so we just see traction, if anything, accelerated in the Ethernet. Now for compute, absolutely. I mean, that's a big long-term opportunity. We've talked about compute everywhere and we approach the auto compute market, the way we approach the cloud compute market which is really a custom cloud-optimized type of a model as opposed to here's a generic compute product, let's go out there and try to win share and compete. That's really not our option. We think some OEMs will adopt an off-the-shelf solution. We think other OEMs will want to build their own solutions. And we think we're a great partner with all of our -- not only our Ethernet and our storage and our automotive technology but with all of our compute technology that we're delivering into these other markets such as cloud, we're an ideal partner to help them with that. But it's a long -- I mean that's really a long-term play. Yes. I think in the, call it, near to midterm, right, there's $200 million is going to -- basically, we're going to be adding hundreds of millions of revenue very quickly over the next few years, right? So I think for the next, call it, 3- to 5-year window, I think our Ethernet market, I think we've sized that in that time frame, the entire market at about $1 billion and we said at least 50% of that market. So we have a clear line of sight to a number which is probably north of 500 quite frankly. I think given our share gains, I think 50% is probably a pretty relatively easy target. And then outside that time frame is where I think the compute opportunity starts to make sense where there's going to be large customers in the auto and you've heard them talk about this themselves, right? But at some point, you want to control your own destiny, right? If you think about a car of the future, your differentiation is going to be based on your AI ADAS capabilities and at some point, you want to have that software hardware stack controlled in a single place and I think we can certainly help them with that. On the operations side, on the leading edge, can you talk about wafer and advanced packaging constraints right? Even with the industry slowdown, demand for leading-edge wafers and advanced packaging still seems to be tight and potentially more so for the Marvell team, just given you've got this many -- several different 5-nanometer programs that are going to be ramping this year. How is the team managing through this dynamic in terms of securing supply and also trying to manage the cost profile both near term and longer term? Sure. So yes, I mean, look, the most advanced technology is always constrained. You don't have an excess of the most cutting-edge advanced stuff. There's -- and so they're very careful about where they -- who they partner with, these suppliers in terms of making sure that they prove out the technology. And in prior generations, Marvell wasn't there, right? We weren't one of the leading edge. And so that was a little bit newer for Marvell. However, we have very deep, very strategic relationships up and down within these suppliers. And ultimately, they've seen our vision. They believe in our vision. They've -- in some cases, even talk to our customers and understand -- again, since these are cloud-optimized programs for specific hyperscalers, they know exactly where they're going. And so they're betting on us. And ultimately, we have the supply that we need. I mean, obviously, we have to execute but we have the supply that we need. We have the commitments that we need from our supplier to deliver against the numbers that we've talked about and the programs that we've talked about. And ultimately, enable the success for our customers. And sure, there are certainly cost constraints. But we've built -- there's sort of point-in-time things. I mean, for -- especially for advanced packaging, we've built long-term relationships in -- with several of these sort of interposer substrate type suppliers that give us visibility going out years for the amount of supply that we need and with the cost structures that we need. On the gross margin front, the team is driving 64% gross margin in second half of last year. It's at the low end of your target gross margin range. What is the team's confidence level on sustaining gross margins in the 60% range should we enter into a sharper down cycle? And then on the flip side, coming out of this week period, like what are the key levers that will drive the margins to the high end of your gross margin target range which is 66%? Yes. I think the reality is mix is probably a bigger determinant trying to find gross margin. As our revenue has scaled up, you haven't seen our gross margin significantly change either because I think this is the whole advantage of being essentially a fabless company, right, where yes, there's some fixed cost leverage you get but that's a fairly small amount. So I think that we're very happy that we've been able to sustain our kind of 64% to 66%. I think where we are at towards a little bit on the lower end is more a reflection of the mix, right where the storage is which generally tends to be a pretty good gross margin product is dealing with a couple of quarters and then once that resolves itself right. I think at a high level, I would go back to the end market gross margins we've discussed on Analyst Day where I'd say carrier and consumer are the ones which typically tend to be lower but everything else either in line or slightly above. So I think we remain pretty confident. I think we've done a fairly good job of managing our cost input increases and offsetting them with our customers but just offsetting them. So we're not taking advantage of the situation but also obviously maintaining our overall margin profile. So I think our goal remains, stay in that 64% to 66%. And obviously the focus is drive revenue growth and drive significant operating leverage. And that's what we've demonstrated over the last couple of years and that remains the focus for us. Great. Well, we look forward to monitoring the progress and execution of the Marvell team this year. I want to thank you, Chris and Ashish for participating today. Thank you very much.
EarningCall_1385	Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the H.B. Fuller Q4 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Thank you, operator. Welcome to H.B. Fuller's fourth quarter 2022 investor conference call. Presenting today are Celeste Mastin, President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will have a question-and-answer session. Before we begin, let me remind everyone that our comments today will include references to certain non-GAAP financial measures. These measures are supplemental to the results determined in accordance with GAAP. We believe that these measures are useful to investors in understanding our operating performance and to compare our performance with other companies. Reconciliation of non-GAAP measures to the nearest GAAP measure are included in our earnings release. Unless otherwise noted, comments about revenue refer to organic revenue and comments about EPS, EBITDA and profit margins refer to adjusted non-GAAP measures. We will also be making forward-looking statements during this call. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations due to factors covered in our earnings release, comments made during this call and the risk factors detailed in our filings with the Securities and Exchange Commission, all of which are available on our website at investors.hbfuller.com. Thank you, Steven, and welcome, everyone. Before we begin to discuss our results for the fourth quarter and fiscal year, I would first like to thank the many team members I have engaged with throughout my travels over the last several months. You have been so hospitable and have smoothed my transition here into my role as CEO. Your enthusiasm and passion for our business is energizing, and I appreciate your drive and devotion in serving our valued customers each and every day. Thank you. In fiscal year 2022, we delivered exceptional financial results, driven by market share gains, responsible pricing actions and diligent execution of our strategy. We delivered strong double-digit growth in organic revenue, adjusted EBITDA and adjusted EPS. This is particularly impressive, given the significant headwinds we endured from continued raw material cost inflation, supply chain disruptions, a strengthening US dollar and substantially higher interest rates. For the year, we grew organic revenue by 17%, with strong organic revenue growth in all three GBUs, EBITDA by 14% and adjusted EPS by 15%. We also delivered another strong cash flow performance with operating cash flow up 20% year-on-year. I am very proud of the team's resilience and determination in executing our winning strategy to deliver these impressive results in spite of a very difficult operating backdrop. At the same time, we recognize that we did not finish the year as strong as we had expected. During the fourth quarter, we experienced an accelerated slowdown in demand in Construction Adhesives, driven by inventory destocking actions by our customers. While we were expecting demand to decline sequentially in Construction Adhesives and had a very difficult comparison versus the fourth quarter of last year, destocking actions were more pronounced and faster than we were anticipating. In addition, more aggressive COVID-related shutdowns in China rather than an easing in such measures, negatively impacted growth in our Asia-Pacific region. This was unexpected and contrary to the strengthening demand trend we saw in the first three quarters of the year. And lastly, the US dollar, which had already strengthened quite considerably throughout the first three quarters of the year, strengthened even further during our fourth quarter. These challenges adversely impacted our revenue and EBITDA growth and our financial results fell below our expectations for the fourth quarter. While disappointing, our underlying business remains very healthy, and we believe the conditions negatively impacting demand in Construction Adhesives will abate over time. Overall, given the diversity of our geographic and end market exposure, our pricing execution in 2022 and the expectation of lower raw material costs, we are well-positioned for continued strong profit growth and margin expansion in 2023 and beyond. Looking at our consolidated results in the fourth quarter, organic revenues increased 6% year-on-year. This was driven by strong organic growth in both Hygiene, Health and Consumable Adhesives and Engineering Adhesives. The strength of these two business units more than offset the weakness in Construction Adhesives. Responsibly strong pricing actions taken throughout the year drove the organic growth in the fourth quarter. From a profitability perspective, despite the challenging financial results in Construction Adhesives, we again achieved sequential EBITDA margin expansion in the fourth quarter, marking the third consecutive increase in adjusted EBITDA margin this year. On a year-over-year basis, adjusted EBITDA was up 5% in the fourth quarter to $141 million and adjusted EBITDA margin remained stable year-on-year at 14.7% despite significantly higher raw material costs. Now, let me move on to review the performance in each of our segments in the fourth quarter. In HHC, organic revenue was up 12% year-on-year, with most end markets achieving strong double-digit organic growth. Beverage labeling, hygiene, packaging, tissue and towel, and health and beauty markets were particularly strong. HHC's pricing actions offset lower volume and drove organic revenue growth in the quarter. Adjusted EBITDA for HHC increased 5% year-on-year. Adjusted EBITDA margin decreased year-on-year due to higher raw material costs and lower volume. In Engineering Adhesives, organic revenue increased by 9%, led by exceptionally strong growth in automotive and insulated glass. Strong pricing actions and higher volume drove EA's organic growth. Adjusted EBITDA increased 23% in EA and adjusted EBITDA margin increased 240 basis points year-on-year to nearly 18%. Pricing actions and expense management drove the improvement year-on-year and offset the impact of significantly higher raw material costs. In Construction Adhesives, organic sales declined 20% year-on-year due to customer destocking activities and more challenging economic conditions. The prior year's fourth quarter benefited from the post-COVID demand surge in construction markets, which has since reverted given the current economic backdrop. The decline in organic sales was driven principally by a slowdown in the roofing market. Adjusted EBITDA for Construction Adhesives declined in the fourth quarter, driven by lower volume and higher raw material costs. Geographically, Americas organic growth was up 3% year-on-year, significantly impacted by the decline in Construction Adhesives. Organic growth, absent Construction Adhesives, was up double-digits in the Americas in the fourth quarter. In EMEA, organic revenues increased 13% versus the fourth quarter of last year. Weak economic conditions in the region persisted, but did not worsen sequentially versus the third quarter. In Asia Pacific, organic revenues increased 3% year-on-year. More severe COVID-related lockdown restrictions in China negatively impacted sales development for the region, and this was contrary to the strengthening trend we experienced during the second and third quarters of 2022. Overall, global economic conditions have slowed throughout the year, largely as we expected, but for Construction Adhesives, reflecting customer inventory reductions and slowing end market demand. Europe remains weak and an expected rebound in China has been delayed. Macro conditions in the Americas are also slowing as the impacts of higher interest rates begin to temper demand. Construction Adhesives is being disproportionately impacted in the short-term, given the economic sensitivity of this sector and heavy customer destocking activities. Both HHC and EA are weathering the challenging economic situation well aided by their diverse geographic and end market exposures. While the economic outlook poses challenges, we are prepared and well positioned to control expenses, expand margins and grow cash flow in such an environment. We are beginning to see the rate of aggregate raw material cost inflation slow, and we expect this to continue as we progress throughout the year. Generally, it takes about a quarter for changes in raw material costs to cycle through inventory and impact the P&L. While aggregate raw material cost inflation is beginning to taper, it's not universal. The preponderance of our raw material purchases in November were at the same or higher prices than in the month of October. Accordingly, we continued to increase prices in the fourth quarter, and additional price increases are planned in 2023. The value we generate for our customers as a solutions provider, as reflected in our pricing performance, together with the diversity and scale of our raw material purchases will enable us to expand margins in an environment of declining raw material cost inflation. Following two years of unprecedented supply chain disruption and significantly higher raw material costs, this provides us with a meaningful opportunity to further expand EBITDA margin in the year ahead. Now let me turn the call over to John Corkrean to review our fourth quarter results in more detail and our outlook for 2023. For the quarter, revenue was up 7% versus the same period last year. Currency had a negative impact of 8.7%. Acquisitions increased revenue growth by 1.6%, and the extra week compared to last year positively impacted revenue growth by 7.5%. Adjusting for those items, organic revenue was up 6.4% with pricing having a favorable impact of 11.4% year-on-year in the quarter and volume down 5%, reflecting a slowdown in end market demand, particularly in Construction Adhesives and softness in China due to COVID-related lockdowns. Adjusted gross profit margin was 26.2%, down 90 basis points versus last year, as raw material inflation and lower volumes more than offset significantly higher pricing. Adjusted selling, general and administrative expense was down slightly year-on-year and adjusted SG&A as a percentage of revenue declined 130 basis points, reflecting strong pricing gains, lower variable compensation and overall good expense management. Adjusted EBITDA for the quarter of $141 million was up 5% versus last year, reflecting strong pricing actions, lower SG&A and the impact of the extra week, which more than offset significantly higher raw material costs and unfavorable foreign currency translation. Adjusted earnings per share of $1.04 was down slightly versus the fourth quarter of 2021 and driven by the unfavorable impact of foreign currency and significantly higher interest rates. Adjusting for unfavorable foreign exchange, which negatively impacted EPS by approximately $0.22 in the quarter, adjusted EPS was up 15% year-on-year. Cash flow in the quarter was strong. Cash flow from operations of $208 million was up $156 million year-on-year, reflecting higher profit, reduced working capital requirements, a one-time gain on the maturity of a cross-currency swap and the impact of the extra week. Our results for the full fiscal year were also very strong. Full year organic revenues grew 17% versus fiscal 2021, reflecting outstanding pricing execution. Adjusted EBITDA increased by 14% year-on-year and adjusted EPS was up 15%. With that, let me now turn to our guidance for the 2023 fiscal year. Our geographic and end market diversification is an asset in recessionary time periods and provides us with a meaningful buffer to the volatility in demand in any one particular market. As we assess the economic sensitivity of our portfolio with the conditions present in the marketplace today, more than half of our portfolio has little sensitivity and is well insulated from significant swings in demand. And only about 20% of our portfolio would be more highly influenced by economic conditions, but the drivers impacting recessionary sensitivity will generate different outcomes amongst the end markets. Our diversification will serve us well as we manage through what we expect to be challenging economic conditions in 2023. Based on what we know today, we anticipate full year net revenue to be flat to down 3% versus 2022 and organic revenue to be up 2% to 4%. We expect foreign currency translation to negatively impact revenue by 3% to 4% versus 2022. Fiscal year 2023 will be a 52-week year compared to a 53-week year in 2022, which will unfavorably impact year-on-year revenue growth by approximately two percentage points. We expect adjusted EBITDA to be between $580 million and $610 million, representing a 9% to 15% year-on-year increase, up 11% to 17%, adjusting for the extra week in 2022 as the benefits from net changes in prices and raw material costs and strong expense management more than offset unfavorable foreign exchange. We expect our 2023 core tax rate to be between 27% and 29% compared to our 2022 core tax rate of about 27%. We expect full year interest expense to be $115 million to $125 million, reflecting higher interest rates, and we expect average diluted share count to be about 55.5 million shares. These assumptions result in full year adjusted earnings per share in a range of $4.15 to $4.55. Finally, we expect full year operating cash flow to be between $300 million and $350 million before approximately $120 million of capital expenditures. Based on the seasonality of the business, and the timing of working capital needs, we expect operating cash flow to be weighted to the second half of the year. All of this guidance reflects the fact that H.B. Fuller will have one less reporting week in fiscal 2023 compared to 2022. We estimate that extra week will have an unfavorable impact on full year revenues of approximately 2% compared with full year 2022 and an unfavorable impact on full year EBITDA of approximately $10 million versus 2022, all occurring in the fourth quarter. Taking into consideration low construction demand in the first half of the year and continued disruptions in China as well as the typical seasonality of the business, we expect first quarter revenue to be down low to mid-single digits and to realize approximately 17% to 18% of full year EBITDA in the first quarter. Thank you, John. Since becoming CEO at the beginning of December, I have grown even more optimistic about our future. We have tremendous potential for continued organic growth and margin expansion, and I have confidence in our strategy and ability to achieve our long-term financial goals. As we begin 2023, we do so having successfully expanded EBITDA margin sequentially over the last three consecutive quarters, and we are entering an environment that will be more conducive to further margin enhancement. We have many competitive advantages to leverage, particularly in the current economic environment in addition to our ability to innovate with customers to serve their needs. We have pricing discipline, robust product substitution capabilities and a demonstrated ability to execute. Each of the last three years has brought unique and extraordinary challenges, including a pandemic, a conflict between Russia and the Ukraine, unprecedented supply chain disruptions with raw material cost inflation and a significant strengthening of the US dollar. And in each of the last three years, H.B. Fuller has stepped up to those challenges and delivered for our customers, our employees and our shareholders, while consistently outperforming the competition.\ We expect 2023 to be no less challenging, but we are confident in our team's abilities and resolve â and we believe, based on the improvements that we've made in our business over the last several years and our ability to bring innovation to the diverse set of end markets we serve, that we are well positioned to continue to drive growth and expand margins, while delivering outstanding cash flow. Yes. Good. Thank you, thank you. So, I guess, destocking seems to be a pretty common theme so far this earnings season. You called out Construction Adhesives, which I guess, fits with intuition. But what about the other segments, HHC and even EA? And the reason I ask is, many of the CPG companies that are starting to report, they're reporting pretty significant declines in volumes as well. So I'm just curious as to the risk associated with destocking becoming more pronounced for the other segments as well? Yes. That's a great question, Ghansham. It absolutely is. Certainly, in HHC in the fourth quarter, we saw some significant destocking. And -- it's a little unusual in that CPG -- in the consumer product business, but, yes, that absolutely is the case. Not so much there. Interestingly enough, now we did see our volumes impacted in EA because of this slowdown in China. Over Q2 and Q3, we saw mid-single-digit increases in growth in China. That was not the case in the fourth quarter. Fourth quarter was flat. And our EA business, certainly, that took some wind out of their sales as it relates to volume, but we did not see big destocking actions in EA. Got you. And then, maybe a question for John on the EBITDA bridge between fiscal year 2022 and 2023. I know you gave some parameters about the loss of the week and FX, but what about the other components in terms of volumes and price cost, et cetera? Yes. So I think what we had said earlier, Ghansham, is we have got -- given our pricing actions in 2022, we've got a very nice pricing carryover into 2023. We are seeing raw materials start to ease. You have to kind of look at those two things together. And that's really what's driving the majority of really all of the profit growth. We estimate that the pricing carryover and raw materials easing, that's $130 million to $160 million of profit growth for us in 2023. And that offsets the headwinds we have related to probably a little softer volume, obviously, unfavorable foreign exchange, the extra week and kind of normal inflation on wages and other things. And that's probably about $80 million. That's kind of how do we get to that bridge. Doing well. Thank you. Happy New Year. I wanted to maybe ask a little bit of a different question on the earnings cadence. If I do the math correctly, it looks like you're kind of pointing to $100 million to $110 million of EBITDA for the first quarter. And I guess, I'm just trying to understand kind of what gives you confidence that you're going to -- it means that the rest of the year has to show pretty meaningful growth. Is -- are you seeing the raw material declines happening as we speak? Just maybe talk about the confidence level of better earnings as we get through the rest of the year. And I guess, is that mostly driven by raw material tailwinds? Yes. Thanks for the question, Mike. So, let me -- you're correct, to start with, in your estimation of kind of what EBITDA looks like in the first quarter. We did guide to 17% to 18% of our full year EBITDA, which is -- would be pretty flat with last year. That 17% to 18% is a little lower than what we would normally see in the first quarter. Usually, we're around 20% of full year EBITDA. And it is this sort of, let's call it, kind of fourth quarter hangover. We are still seeing -- in our P1, which was December, we saw a December that still looked a lot like Q4. However, with the beginning of the new year, we're starting to see things pick up a little bit. As to your question about raw materials, yes, we're still -- raw materials are really just plateauing. We were pretty flattish Q3 versus Q4 on raws. And if you look at Q4 this year versus prior year, we're still up. So, we're moving towards that inflection point. We expect that will hit us during the current year. But it's definitely not been here yet. Do you want to elaborate on that, John? Yes, that's exactly right. I mean, yes, raw dynamics will be the big impact. The other impact I'd point out is exchange, right? Exchange -- the dollar strengthened throughout 2022. I think in my prepared remarks, we indicated that it had something like a $0.20 impact unfavorable in the fourth quarter. So, we will annualize as we get through 2023. It will become less of a headwind if exchange rates stay where they are, it will actually be a little bit of a tailwind. So, those are the big dynamics, I would say, Mike, the raw material, raw material dynamic and foreign exchange. Perfect. And then in terms of the Engineering Adhesives business, obviously, very nice performance there. Was there anything unusual or maybe more onetime in nature that drove that margin strength that we might worry about reversing at some point in 2023. I guess maybe my way of asking what you expect margins to look like in that business as we get into next year. Yes, we are really excited about our EA business. Aspirationally in that business, we have continued to work the portfolio. We continue to drive the portfolio in that business, particularly to those highly specified applications, which do carry higher EBITDA margins. So, to answer your question, no, there was nothing one-time. There was nothing temporary that occurred there. That was it's by design and it's starting to work. So, that's the good news. I think as we proceed through the course of 2023, again, EA is a business that is influenced heavily by China. We're forecasting -- in our outlook; we're forecasting kind of sluggish growth in China for the first half. So, we'll see that business accelerate over the course of the year. All right. And if I can sneak 1 more in. On pricing, it looks like if I do the math, that the two-year stack, if I look at Q3 and Q4, were both up around 25%. And so my question is, did you get any sequential pricing, or was pricing pretty flat in Q4 versus Q3? Yes. We got $50 million of price in Q4, Mike. And I think as we move forward, I think it's important for 2023, especially early in the year like this, that we really start talking about price and raw materials as one big bucket, as John described, where we are -- we believe there's $130 million to $160 million of value in that bucket. There's going to be lots and lots of puts and calls. Our top 25 raw materials make up less than 20% of our raw material cost. And we've got pricing actions. We're still increasing price in some cases where we have raw materials still increasing. We've got new product introductions that also kind of makes that a little murky. So collectively, regardless of what happens with raws or price, we think the two of those will generate the incremental EBITDA as we've described. If raws don't come down, then we're going to have to continue to raise price. We're a company that's demonstrated the ability to do that, and we'll do that. If raws do come down, it indicates that we're in a mildly at least recessionary environment, and that's a great place for this business because that's where our customers need us more than ever. We really can enable them at times like that to change substrates in their end products, which is going to save them a lot more money than changing their glue. So we feel optimistic about the year ahead, and I just want to like have you start to think about price and raw material in one big category as we move forward. Yes. Thanks and good morning. I wanted to maybe dig in on that last comment that you made, Celeste, because it really feels like you have sort of a dual strategy where ideally, you're an important technical partner to your customers and trying to increase the value add of your portfolio. But in an environment like this, you're also trying to maintain a portfolio that offers customers that maybe youâre prioritizing costs an opportunity to trade down. But hopefully, without you suffering a margin hit. So I'm just trying to get a sense for, first, how have conversations with customers drifted between those two types of commercial interactions recently? And do you have a sense for how much of your portfolio you feel like today you could protect with a lower-cost product before suffering either a margin mix hit or just having to decide whether or not to participate at all? Yes. I think I chose to highlight there kind of our role in enabling customers to be able to reduce the total cost of their product. We enable that through our technical expertise, most certainly. If someone really wants to buy a lower cost adhesive, we have the raw material substitution capabilities and a number of alternative technologies to be able to provide them as well a lower-cost adhesive, something they can save money on and something that's lower cost to ourselves as well and helps us preserve our margins. So there's a lot of ways that we interact with the customer to help them achieve their goals. I also don't want to minimize the fact that most of our conversations with customers revolve around innovation. We are very focused on bringing new technology, new products to the market. We've got 30 different market segments, thousands and thousands of different customers. And so it's hard for me to generalize directionally if everyone's going in one matter or another. That's -- it's really not the case. It's -- every customer we treat very differently. And our ongoing focus is on innovation first. Okay. Fair enough. That's helpful. And then if I'm remembering correctly, you've had some pretty important wins in HHC, thinking specifically around like consumer beverage and maybe some e-commerce packaging automation technology that you're participating in. Could you maybe give an update on the cadence of those contributions to HHC growth and maybe just in general terms, assuming those sales take a little longer to ramp up? Yes. Let me just speak generally about some of those wins because we have -- that HHC business has really done an amazing job in that kind of solid, steady CPG space to bring new products to market. We've got our sustainable packaging adhesives, which have been really a very big -- been a big hit with our packaging customers, something very unique that enables them to be able to make their products more recyclable. We have had a big hit with our new beverage labeling technology to replace casing that enables recyclable bottles to be returned and cleaned more effectively. So we've seen a lot of share take in beverage label as a consequence. Those are just two. When you think of others, Johnâ¦ Yes, we did just win a big application in the hygiene business as well for a fairly unique characteristics that we can bring to an application there. So -- yes, that is just a constant ongoing focus for us, Vincent. And we're seeing those wins really support not just our HHC business, but our other businesses as well. Got it. Sure. No, that's helpful. I guess the way I'm trying to frame all of that then is over the next year or two, is HHC still a kind of slow steady business given the number of wins that you piled up there? Yes. So the objective with that business is get -- is to get to mid-teens EBITDA margin. That's a good level of profitability for that business. And itâs continue to grow kind of mid single-digit, high single-digit over time. So weâre going to continue to take market share in that space and weâre going to continue to grow through innovation. I think if youâre anticipating kind of mid single-digit, high single-digit growth in the HHC business, you're probably spot on. Okay. Excellent. And then I just wanted to sneak in a quick one, just checking in on a couple of markets in the EA that we haven't talked about. It looks like Chinese solar cell numbers have been really strong this year, but you mentioned glass and auto and not solar. So, I just wanted to see how that was going. And then same question, but on electronics. Yeah. The solar story is really exciting. What we are â our solar business is doing well, and that is a business that we're starting to see migrate around the world. So we are working with big customers to take â leverage our expertise that we have in Asia in solar, and bring it to other parts of the world. And I think that's a great example of a way that we are very strong, being able to take technology and work with big customers, and bring it to new regions successfully, and evolve it for the unique circumstances in those regions is something we're very good at. Do you want to add something there, John? Yeah. I think just to amplify that a little bit, we called out auto and insulated glass. Auto has been a huge growth story for our EA business, particularly electronic vehicles. And we see that, as a continued area that we should be able to drive outsized growth and insulated glass, it's really an innovation play and even despite some softening in parts of construction, and their products go into construction, they continue to perform very well. Electronics has always been a strong performer. It's been a little more â it's been a little lower growth still growing, but because of chip shortages and some of the other challenges. And then in the new energy space, that continues to perform well, and we're seeing the opportunity there from geographic expansion. It's historically been a business that's been sort of China-centric. And we have a strong presence there, but we are really in a competitive advantage as that industry starts to globalize, because we can reach customers more effectively in other geographies than a lot of our competitors. And we have already started to see the benefit of that. Thank you. Good morning. Celeste, on the Q1 guidance and the range itself, what could drive the upper and lower ends of that guidance range being achieved? And by segment, how do you expect the segments to perform within that range in Q1? Yeah, I think that, the range we've expressed there is definitely going to be subject to what happens with volume. Destocking â we were anticipating, we'll be seeing destocking in HHC complete in Q1 with Construction Adhesives. It's going to be interesting to watch that one. I think we're going to start seeing the restocking kind of February, March time frame. What will be interesting is what level are we restocking to that remains the question in the construction business. So, I don't know, John, do you want to add more color? Yes, I'll just kind of maybe help David with how that may look in terms of our different businesses. So, Celeste's comments on China, China recovers more quickly, that could be an upside. If we start to see other economies, maybe start to show a little bit more bounce back from what was a very slow Q4 that could be opportunities. As you think about the core â that guidance for the quarter and how that looks by our GBUs, we think HHC will continue to be very steady, right? EA, which has more of a China exposure, will probably be a little more impacted than HHC in terms of slower results. And then, construction, as Celeste indicated, we think it will take a little longer than the first quarter to see the recovery there. So that's kind of the direction we would see those three GBUs going in the first quarter. No, very helpful. Appreciate that. And guys, just on the cost issue, if you go back to beginning of 2021, how much have your raw material costs increased by? And how much do you expect them to fall by in 2023, just raw material costs? Yes. So they've increased by $800 million. But -- and when you ask how much should we expect them to fall? It's a great question, right? And that's why I continue to go back to wanting to bucket price and raw material cost into one big category for the upcoming year. It's very hard to assume how much those materials are going to come down, particularly because there are so many. We're monitoring 4,000 of them at any one point in time and watching for movements. And none of them is really -- none of them is significant. So that's a great question, and that's why what we've decided is, regardless of what happens, whether raws come down significantly and we benefit by, of course, lower raw material costs, but also being able to support our customers in a recessionary time, or if raw materials don't come down or they move up a little, we'll pass through price increases. So I hate to speculate on what kind of reduction we'll see. And I think the important thing is that the company is preparing itself no matter what happens. Thanks very much. If your prices didn't move from the end of fiscal 2022, how much would your average prices be higher in fiscal 2023? Is it 3%, or is it more or less than that? Okay. Again, it's murky water, because there are so many -- there's indices, we have new product introductions, we have -- I mean, it's a challenging question. And so, again, I want to remind you to -- let's go back to looking at that overall price and raw material cost bucket as one. Sure. It's a little bit on the higher side, Jeff. I would say, we had a couple of items that were kind of unusual and non-cash actually, that probably represented about $10 million between a pension curtailment and a non-cash charge on a legal entity consolidation. So, I think, the number will probably be lower than that, probably between $20 million and $30 million, kind of representing kind of those same areas as far as the M&A-related activity, our SAP implementation and probably some finalization related to some restructurings we've done. Thanks. In the fourth quarter, you're -- in your working capital statement, your other assets were a cash inflow of $46.5 million. In the third quarter, they were -- for the nine months, they were a cash outflow of $40 million. So, there was an $86 million or $87 million positive cash flow change from other assets in the fourth quarter. What was that? Yes, I think you got to look at the fourth quarter, but you're exactly right, Jeff. And I mentioned it in our prepared remarks, we did have a one-time gain on maturity of a cross-currency swap and the impact that you're seeing on other cash flow is almost entirely related to that. So, that's non-repeating. Even if you take that away, it was a very strong cash flow quarter, driven by improving working capital and good profit growth. How much of your construction exposure is new construction versus repair and remodel? I'm sure there's probably differences between flooring, roofing and insulated glass. Yes. So, if you look at our portfolio, about 9% of our businesses in new -- sorry, 14% -- sorry, less than 15% of our business -- I've got to remember your question. Less than 15% of our business is in new construction and then we've got some additional business in the repair and remodel. I think that's what you're asking. Yes. And just -- and when Celeste quotes those numbers, that would include our Construction Adhesives business as well as our other businesses in EA that are construction oriented like insulated glass windows. So, it's -- as Celeste said, kind of all in across the whole portfolio, it's a little less than 15% and then a little -- and then repair and remodel would be similarly sized, but actually a little less than that. Helpful. And then just as you turn leverage kind of to the three times and below, H.B. Fuller has been a consolidator in the industry. How do you see it, Celeste, that returning cash back to shareholders versus M&A? Yes. So, we have a target to hit, three times net debt-to-EBITDA leverage. We're very serious about that target. And we're progressing nicely along the path to get there. Yes. So, we should be going below three times debt to EBITDA in 2023, and would like to stay in that kind of two and a half to three times range. Eric, I think there's -- I think if you look at our strategy around M&A, there's a lot of consolidation opportunity. We've got a robust pipeline for M&A. It's mainly very small bolt-on deals which have worked very well for us. So, we would expect that would be the use of most of the excess cash to sort of keep us in that targeted capital structure range. If we were to move below 2.5 times or we would look at share repurchase, depending on where the stock price is. But we feel like that M&A pipeline is robust enough to really be the use of cash for us as it relates to just maintaining our targeted capital structure. We have no further questions. At this time, we'll turn it over to Celeste Mastin, Chief Executive Officer, for any closing remarks.
EarningCall_1386	Good morning. My name is Katie and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs Fourth Quarter 2022 Earnings Conference Call. This call is being recorded today, January 17, 2023. Thank you. Ms. Halio, you may begin your conference. Good morning. This is Carey Halio, Head of Investor Relations and Chief Strategic Officer at Goldman Sachs. Welcome to our fourth quarter earnings conference call. Today, we will reference our earnings presentation, which can be found on the Investor Relations page of our website at www.gs.com. Note information and forward-looking statements and non-GAAP measures appear in the earnings release and presentation. This audiocast is copyrighted material of the Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. I am joined by our Chairman and Chief Executive Officer, David Solomon; and our Chief Financial Officer, Denis Coleman. Let me pass the call to David. Thanks, Carey and good morning everyone. Thank you all for joining us today. I will begin with a review of our financial performance. Simply said, our quarter was disappointing and our business mix proved particularly challenging. These results are not what we aspire to deliver to shareholders. We generated revenues of $10.6 billion and net earnings of $1.3 billion and earnings per share of $3.32. After nine straight quarters of double-digit returns, fourth quarter performance was certainly an outlier. Results were impacted by several near-term challenges given the difficult operating environment. On the revenue front, underwriting volumes remained extremely muted despite green shoots that appeared at the end of the third quarter. FICC and equity activities - activity levels dropped after a busy and volatile year for many of our clients and our equity investment portfolio saw continued headwinds. We also saw higher loan loss provision and expenses. While compensation expenses were down 15% for the year, quarterly expenses rose modestly versus the third quarter. We always strive to maintain a pay-for-performance culture. With revenues down, compensation was lower. That said we also recognize that we operate in a talent-driven business and we must continue to invest in our people whose dedication is critical to our world class franchise. On our earnings call last July, we first spoke about the challenging operating environment and the proactive measures we were taking on expenses, including slowing hiring velocity and reducing certain components of our non-compensation costs. We have and continue to be incredibly focused on managing our financial resources, especially in light of the worse-than-expected backdrop in the fourth quarter. Specifically, we reduced the size of our balance sheet, further optimized and reduced our RWA footprint and managed down our G-SIB score to hit our 3% target. We have also started firm-wide expense reduction efforts to offset inflationary pressures and right-size the firm for the current environment. We made the difficult decision to conduct a 6% headcount reduction exercise earlier this month. As we said, we had paused our regular performance management-related reductions during the pandemic and also had a period of strong growth in headcount given the opportunity set in 2021. We feel deeply for the individuals that were impacted by these reductions. They are extremely dedicated and talented individuals and we wish them the best. Additionally, we are taking a number of strategic actions to help us reach our financial targets and create shareholder value. For instance, this quarter, we completed our reorganization, which will further strengthen our core businesses, help us scale our growth platforms and improve efficiency. This is an important and purposeful evolution of our strategic journey. We also narrowed our ambitions on our consumer strategy and made some key decisions. We started a process to cease offering new loans on the Marcus platform. We will likely allow the book to roll down naturally, although we are considering other alternatives. In addition, we have postponed the launch of our checking product. At the right time in the future, we intend to offer checking to our wealth management clients. For now, our priority is to strengthen our deposit franchise, card partnerships and GreenSky. Our narrowed approach will allow us to reduce our forward investment spend and rationalize expenses. We are very focused on developing a path toward profitability and platform solutions and we will provide more detail at our Investor Day next month. As you can see from our new segment reporting, we are committed to providing continued transparency for us â for you to hold us accountable. I want to spend a moment on the broader operating environment. The backdrop over the last year has been incredibly dynamic. There were headwinds we expected, like high inflation, but some we never thought we would see like the ongoing land war in Ukraine. There arenât many signs of widespread distress, balance sheets and company fundamentals are relatively healthy, but itâs clear that the outlook for 2023 remains uncertain. In the U.S., central bank rate increases have started to have an impact on inflation, but they are also lowering the growth trajectory of the economy. And the labor market remains remarkably tight with an estimated 1.7 job openings available for every unemployed American. Our clients are thinking a lot about how to navigate this complex backdrop. CEOs and Boards tell me they are cautious, particularly for the near-term. They are rethinking business opportunities and would like to see more stability before committing to longer term plans. Many firms have started preparing for tougher times focusing on factors within their control. Taking a step back, I am proud of the significant progress we have made in our strategic evolution since Investor Day 2020. Despite a more challenged fourth quarter performance, we delivered for shareholders in 2022. We generated double-digit returns in a year where rapid monetary tightening and ongoing macro uncertainty drove significant market disruption with both equity and fixed income markets falling for the first time in over 50 years. We grew management and other fees by 13% year-over-year and grew net interest income by 19%. We reduced our on-balance sheet alternative investments by $9 billion. We also returned $6.7 billion of capital in the form of dividends and share repurchases and we grew our book value by 7%. This brings our book value growth since our first Investor Day to almost 40%, roughly twice as much as our next closest competitor. That said, we remain focused on the work ahead of us and we believe we have a lot to play for. As we go forward, we are executing on three key priorities we have laid out for the businesses: number one, growing management fees in our asset and wealth management business; number two, maximizing wallet share and growing financing activities and our global banking and markets business; number three, scaling platform solutions to deliver profitability. We have a proven track record of navigating a wide range of operating environments and we will continue to execute our long-term client-oriented strategy regardless of where we are in the cycle. We have the people in place around the world to serve our clientsâ broad range of needs with excellence and we are operating from a position of strength with robust capital levels and a clear focus on the path forward. I remain optimistic about the future of Goldman Sachs and confident that we will continue to deliver for shareholders. We look forward to speaking more about this with all of you at our Investor Day on February 28. Thank you, David. Good morning. Letâs start on Page 2 of the presentation. In 2022, we generated net revenues of $47.4 billion, net earnings of $11.3 billion and earnings per share of $30.06. As David highlighted, we have implemented our organizational changes, which form the basis for our earnings presentation today. Turning to performance by business, starting on Page 3. Global Banking and Markets generated revenues of $32.5 billion for the year, down 12% as higher FICC revenues were more than offset by a steep decline in investment banking fees versus record results last year. The exceptional performance of our Global Banking and Markets business over the last 3 years, including the market share gains we have generated has served a strong ballast for firm-wide performance. In the fourth quarter, investment banking fees fell 48% year-over-year driven by a significant decline in both equity and debt underwriting as issuance volumes remain muted amid continued market uncertainty. Advisory revenues, however, were $1.4 billion, the third highest in our history rising 45% quarter-over-quarter on higher completed deal volumes. For 2022, we maintained our number one league table position in completed M&A as we have for 23 of the last 24 years and we ranked second in equity and equity-related underwriting. We also ranked second in high-yield debt underwriting, up from number three last year. Our backlog fell quarter-on-quarter on lower levels of activity, but remain solid, particularly in advisory. That being said, clients are focused on stability and financial conditions, pushing out the timing of transactional activity. While we expect investors will need more certainty before financing markets reopen more broadly, we are seeing some positive signs of activity, particularly in investment grade markets, which have had a strong start to the year in both the United States and Europe. FICC net revenues were $2.7 billion in the quarter, up 44% year-on-year. In intermediation, we saw strength in rates and commodities amid elevated levels of client engagement, catalyzed by increased central bank activity and rate volatility and improved market-making conditions. In FICC financing, we saw increases in secured lending driven by higher balances. Full year FICC revenues of $14.7 billion rose 38%. Equities net revenues were $2.1 billion in the quarter, down 5% year-on-year. The year-over-year decline in intermediation revenues was driven by lower levels of client activity, particularly in derivatives, after strong engagement levels throughout the year. Financing revenues of $964 million were relatively resilient despite a decline in prime balances as clients took risk off throughout the quarter. Across FICC and Equities, financing revenues were up 20% in 2022, consistent with our strategic priority to grow client financing activities. Moving to Asset & Wealth Management on Page 5. For 2022, revenues of $13.4 billion were down 39% year-over-year as a steep decline in revenues from equity and debt investments offset an additional $1 billion of management and other fees and a strong increase in private banking and lending revenues. Fourth quarter management and other fees of $2.2 billion were up 10% year-over-year. Full year management and other fees were $8.8 billion putting us well on track to hit our $10 billion target in 2024. Fourth quarter private banking and lending net revenues reached a record $753 million, up 77% year-over-year due to higher deposit spreads and higher lending and deposit balances. Equity investments produced net revenues of $287 million, driven by $270 million of gains on our $13 billion private equity portfolio and roughly $500 million in operating revenues and gains related to CIEs, partially offset by $485 million of net losses related to investments in our $2 billion public portfolio. Debt investments revenues were $234 million, including net interest income of $360 million. Moving on to Page 6. Total firm-wide assets under supervision ended the quarter at a record $2.5 trillion, driven by market appreciation as well as strong net inflows across fixed income and liquidity products. Letâs now turn to Page 7 where I will review a new page in our presentation focused on our alternatives franchise. Alternative AUS totaled $263 billion at the end of the fourth quarter, driving $492 million in management and other fees for the quarter and $1.8 billion for the year. We remain on track to reach our $2 billion target in 2024. Gross third-party fundraising was $15 billion for the quarter and totaled $72 billion for the year. Third-party fundraising since Investor Day stands at $179 billion. The table on the bottom left shows our on-balance sheet alternative investment portfolio, which totaled $59 billion. Despite the challenging environment, we reduced on-balance sheet investments by $9 billion in 2022, of which $2 billion was in the fourth quarter. We remain committed to our strategy to reduce balance sheet density and migrate our alternatives business to more third-party funds. I will turn to Platform Solutions on Page 8. Full year revenues were $1.5 billion, more than double versus 2021. Full year losses of $1.7 billion were driven by $1.7 billion of provisions as we built reserves to reflect $8 billion of loan growth across the portfolio. We also incurred $1.8 billion in expenses as we continue to build out and run these businesses. This included over $200 million of transaction and integration-related costs driven by the GreenSky and GM card portfolio acquisitions. We expect these costs to also impact 2023 results, though at a lower level and decline materially over subsequent years. As David said, our number one priority for this segment is to reach profitability and we look forward to providing you with further details at our Investor Day next month. On Page 9, firm-wide net interest income of $2.1 billion in the fourth quarter was up 2% relative to the third quarter due to higher rates and increased loan balances. Our total loan portfolio at quarter end was $179 billion, modestly higher versus the third quarter, reflecting growth in collateralized lending and credit cards. Our provision for credit losses was $972 million. For our wholesale portfolio, provisions were driven by impairments and portfolio growth. The overall credit quality of our wholesale lending portfolio remains resilient. In relation to our retail portfolio, provisions were driven by continued portfolio growth, net charge-offs and a worsening of our baseline scenario. We are seeing early signs of credit deterioration that are in line with our expectations. We anticipate further pressure in 2023 given the vintage and nature of our portfolio. Letâs turn to expenses on Page 10. Quarterly operating expenses were $8.1 billion. Total operating expenses for the year were $31.2 billion, down 2%. Compensation expenses fell 15% despite a 10% increase in headcount and were partially offset by higher non-compensation expenses. The increase was primarily related to acquisitions, transaction-based costs and continued investments in technology. In addition, client-driven market development costs were higher following lower levels during the pandemic. As previously discussed, we are actively engaged in expense mitigation efforts. This includes targeted reductions across communications and technology spend, professional fees and advertising costs as well as the recent headcount reduction exercise. We expect that the impact of these actions will become more fully reflected in our results over time, remain highly focused on operating efficiency and are committed to our 60% efficiency ratio target as the right place to run the firm. Turning to capital on Slide 11. Our common equity Tier 1 ratio was 15.1% at the end of the fourth quarter under the standardized approach, up 80 basis points sequentially. This represents a 130 basis point buffer to our new capital requirement of 13.8%. In the fourth quarter, we returned $2.4 billion to shareholders, including common stock repurchases of $1.5 billion and common stock dividends of $880 million. Based on our capital levels at the end of the quarter, we started 2023 with a strong capital position, enabling us to support our clients and return excess capital to shareholders. As it relates to our funding plan based on current expectations, we intend for 2023 issuance to run significantly below 2022 levels, though we will remain dynamic with respect to business needs and market opportunities. In conclusion, despite the challenging operating environment in 2022, we delivered double-digit returns for shareholders, returned $6.7 billion of capital and made material progress on our strategic initiatives to better serve clients and strengthen and diversify the firm. We remain focused on executing on our strategic priorities and creating value for our shareholders and we look forward to seeing many of you at our upcoming Investor Day in February. Hi, thanks very much. So given the capital RWA and expense actions that you have already taken, if 2023 is a little bit better in banking, but itâs kind of the same atmosphere weâve been in because it feels like itâs lingering. Can you all get closer to your return targets this year? I know itâs very difficult in this backdrop but what I am getting at is do we need investment banking to be a lot better to get there or have the actions youâve taken start closing the gap? Thanks. So, thanks, Glenn and I appreciate the question. Obviously, an improved capital markets environment would certainly help in that direction. We talk about our targets in a normalized environment. One thing I just want to make sure people are focused on is we have to do better in asset management. This certainly has been a part of our strategy over the last 3 years is to reduce our balance sheet and asset management. And we have made real progress on that over the last 3 years, but we still have a very significant asset management balance sheet larger than we would like to have. We reduced it by $9 billion this past year and we intend to move forward. But given the disruption in asset prices and the density of that balance sheet, itâs not surprising when you have $32 billion of capital allocated to that segment. And if you look at the fourth quarter, the fourth quarter, it earned zero, even with some businesses in there that are highly profitable, I donât think thatâs normal. I donât think our expectation is that continues exactly the same way. And so I think a combination of some normalization in capital markets activities and a more balanced environment with respect to the asset management balance sheet certainly would have a big impact. Iâd highlight last year, we way outperformed the peer average ROE by about 900 basis points because of kind of the massive outperformance of that balance sheet, given all the stimulus and a bunch of that reversed, and weâre just more sensitive to that. I mean things I might add, Glenn, is in addition to our business mix on the [forward] (ph) I think the reason why weâre taking action with respect to our headcount footprint and some of our non-compensation expenses is to drive efficiency even further. And as you point out, with the capital build that we have as at the beginning of the year, weâre in a pretty flexible position in terms of how we can deploy that either in support of attractive opportunities within the business and/or returning incremental capital to shareholders. Okay. I appreciate that. And then maybe staying up to 50,000, transaction banking is good, but itâs unfortunately a small revenue base. Consumer maybe music to some investors ears is being deemphasized. So I guess my question is, whereas your goal is to build a more durable firm and I share that goal, where do you think that comes from going forward if some of the pieces are either small or being deemphasized from the past strategy? Thanks. Well, I think, Glenn, the big thing in that, and itâs always been a big part of it is the shift from a balance sheet intensive asset management business to a client-oriented fee-based business. Our organic growth across our asset management business on a relative basis was still good in 2022 when you look broadly across the industry. We continue to grow our management fees in the asset management business. Weâre continuing to grow our wealth business. Our wealth business overall grew nicely during the course of 2022. And so itâs that mix change, less balance sheet intensity, growth in asset and wealth management, continued financing growth in our core Global Banking and Markets business, which youâve seen and continue to grow and then getting these platforms that we have to operate profitably, which we believe we can do. We believe they are good businesses at scale, but they are in a different stage of the development. Those things should make the business more resilient, and thatâs not inconsistent with the strategy we laid out 3 years ago, and we will amplify again next month at Investor Day. What I think was an outlier for sure in this environment is the massive quick swing in asset prices and the impact that our capital markets heavy and balance sheet intense business had, of course, with a drag from some of the investments weâre making in other things. Good morning and thank you. I guess maybe, David, just sticking to that, as you make the asset management business less dense in terms of balance sheet consumption, how do we think about the ROTE target you put out last year? Is that still achievable within the 3-year time frame that you had laid out or does that get pushed out given the work that needs to be done and, in a world, where consumer is being deemphasized? I think, candidly, that it depends on the environment. An environment with massive swing in asset prices continues, we will push it out. If that simply normalizes then the overall economic picture of the firm, in addition to the work weâre doing on the expense side that weâve gotten focused on, will show a very, very different picture. Iâm not going to guess on how that will play out. But again, Iâd amplify that I donât think what we saw in 2022 was normal. And certainly, if you go back and look at 15 years of history, it wasnât. Okay. And I guess just as a follow-up in terms of growth in asset management, wealth management, significant asset price dislocations. Does that create some M&A opportunities when you think about inorganic growth in those businesses? Or for the time being is the expectation that most of this is going to be organic? I think at the moment, weâre extremely focused on in 2023, executing on the decisions we made to invest in our platform and moving forward from here, I do think that in the future, there still could be inorganic opportunities to accelerate the journey in asset and wealth management. But certainly, this year, weâre focused on the execution. We made an acquisition in asset management last year. We want to integrate NNIP. We want to move forward with that. So I think this year, we will be focused on execution. So David and Denis, I wanted to start off with a question just on the provision outlook. Admittedly, the loan loss provision came in higher than we had anticipated. And I was hoping you could just speak to, how much of it was growth math related versus deterioration in the macro? And given some of the planned actions youâre going to take for that business, how should we think about like a normalized level of loan growth and provision expectation that we should expect going forward? Good morning, thank you for that So let me help with some color as it relates to provisions, particularly in the fourth quarter. So order of magnitude, the component of that build attributable to growth was about 50%. Net charge-offs about 25%, and the balance attributable to our scenario. I think what you can see in the build of the provisions over the course of the fourth quarter, and we do expect some of this to continue over the course of 2023 is that we began the on-balance sheet originations in our point-of-sale lending platform, GreenSky. And so that obviously brings with it an upfront reserve build. So thatâs something that initiated over the balance of this past year and will continue through the following year. Got it. And maybe just for a follow-up on capital. As it relates to the discussion tied to Glennâs question, I was hoping you could speak to how youâre scenario planning for Basel IV, Basel III end game. I recognize we donât have a proposal yet, but certainly, it has significant implications for future returns you can generate. Youâre running with a healthy level of cushion at the moment. But just wanted to understand how you see it impacting your various businesses? What planned actions can you take to maybe mitigate some of the pain? Sure. Fair question on everybodyâs mind. As you note, we donât yet have the details. But we give it a lot of thought. Weâve taken a number of steps in terms of building out our modeling capabilities to make sure as and when we do get an actual rule that we will be in a position to respond quickly to that. We do have a long-standing track record of responding to changes to regulatory guidance. You can see over the course of the fourth quarter across a number of our financial resources that we were able to maneuver them very, very quickly to build capital and change our RWA footprint, given our view of the environment and some strategic decisions there. So weâre standing by for more detail on the rule, but confident that when we get it, we will be able to manage accordingly. Two questions. One follow-up on the consumer business, I heard you on the markets pull back, youâre going to see originating there. Does that give you more room to lean into growth and we should expect acceleration and the partner card GreenSky, those pieces that you are keeping or is this market pullback going to feed either capital increase or the ability to lean in other business lines like the ISG business? Sure. Betsy, itâs Denis. Iâll start with that. So as we indicated, weâre going to cease the originations in under Marcus lending. And then furthermore, expect for that portfolio actually to roll off or we may pursue other alternatives. That should free up a bunch of financial resources. Weâre continued within the overall asset and wealth management segment where the deposit business is resident within the private banking and lending line. That remains a strategic priority for the firm, and weâve experienced very good growth there. That business is achieving more and more scale. So that will remain an ongoing focus. I think once we have reduced some of the resourcing allocated to markets and lending, we will continue to narrow the focus of our ambitions and our investment spend. And within the Platform Solutions business, weâre now down to three different businesses: transaction banking, the cards platform and our point-of-sale lending business, GreenSky. And our focus is really on just narrowing to drive those businesses across the segment to profitability. Okay. Then separate question just on the expenses in this quarter. I know you had the action of the headcount reduction. Is there a severance embedded in this quarter that we should strip out because, obviously, itâs not ongoing? Or does that hit 1Q? Maybe you could speak to how we should think about that? Thanks. Sure. Thanks, Betsy. Because we communicated the reductions in 2023, any associated severance expense associated with those reductions will be 2023 expenses. It is my birthday, and I couldnât be happier to be on this call with you. But thank you. Thank you for that. You want â Iâm happy to take any question. Any question that you have, Mike. You know that. Weâre happy to take questions both positive and tough. I mean it wasnât a great quarter. So I donât expect all the questions to be easy. Well, I mean, it is concerning in terms of the reorg, I mean we will get more at the Investor Day. And just a comment, I hope you give us more data. Here we have three new sectors, and you only gave us the prior four quarters and the prior 2 years without much detail. So I hope you give us more ahead. But the question is, you present the firm differently, but will the firm actually be run differently other than the more narrow focus on consumer? Yes. And so I appreciate that. And to â two comments. First, just on the transparency and information comment, I think this management team, Mike, over the last 4.5 years has been super focused on increasing the transparency of Goldman Sachs, and we remain focused on that. If you have certain feedback on things youâd like to see, etcetera, we really welcome that, and Carey will reach out to you, and we will take that feedback. But weâre focused on giving our investors more and more and creating the right kind of transparency around what weâre doing. Second, on the evolution and the move to this, what Iâd say, and this has been something thatâs been a journey that we started a number of years ago, but the firm is now organized and presented externally the same way we run it internally. And that candidly is a difference than the way Goldman Sachs has been during my tenure at the firm. In terms of our core business of banking and markets, there are synergies that weâve been driving as these businesses cooperate that we think we can now get more out of in our client orientation across our broad franchise that this organization of those businesses together really helps. I highlight that we feel great about the performance of those businesses since our Investor Day. Itâs long forgotten. But when we did our Investor Day, back in 2020, nobody believed that we could get the ROE of the markets business above 10%. That was a big question on the minds of investors. And we look now at our combined banking and markets business, this business, we think, is a leader. It outperforms in terms of its market share and outperforms in terms of its returns relative to competitors, and we continue to grow it and continue to stay laser-focused on the client experience and also the returns and the performance of that business. We also think there continues to be opportunity to grow our financing business there, and weâre very, very focused on that. In asset and wealth management, weâve worked hard to bring a number of businesses together into an integrated franchise so we can really have transparency and focus on our ability to grow management fees and drive performance and serve more clients in that business. And as weâve said over the last few years, reduce the balance sheet intensity of that. And weâre on a journey. Would I like it to be further along? Yes. If it was further along, there would have been less volatility, particularly in the context of this year in the fourth quarter. But we continue â thatâs something we laid out 3 years ago, and we continue to move at that. The change strategically of a narrowing of our focus on certain things in consumer business, I think, is a change. We continue to feel very good about the deposit platform and the contribution it makes. We think our partnership with Apple will provide meaningful dividends for the firm over time. We think GreenSky is a good business that can be accretive, but the platforms are in a different stage of development than our other businesses. They are small in the overall scale of Goldman Sachs, but we think there are benefits to that for the firm. We will communicate more as we move forward around that, but weâre making progress and we will continue to run that narrow focus in a way that we think can drive profitability. So thatâs a high-level response. I donât know if there is something else you want me to drill into, but thatâs a high-level response. Yes, the follow-up is more specific. I mean, look, you said itâs a disappointing quarter. Your returns are well below where you want them to be, and variable revenues and variable costs, not so much your efficiency ratios go the other direction. So I mean, I think investors would appreciate some detail on some of the benefits of what you might get on the expense side, okay, youâre scaling back consumer as I asked you last quarter, you said you were losing money so maybe you lose less money. The headcount reduction should allow you to save money. So can you ballpark the benefits to expenses from the moves in consumer and the headcount reductions? And along those lines now that youâve moved capital well above the regulatory and your own firmâs target buyback so cost and buyback kind of what to think about for 2023? Sure, Mike, let me take that. So unpacking a couple components. So we exercised a headcount reduction earlier this year, approximately 3,200 employees left the firm. The run rate expense associated with that group was approximately $475 million, and we expect the benefit in 2023 north of $200 million associated with that. Beyond that, we have a series of non-compensation expense initiatives. Weâre setting out guardrails for our business leaders to drive more efficient levels of non-compensation spend. The narrowing of the focus in consumer is important. There are a number of ways in which we could have chosen to expand the offering and capabilities of that. The focus is now narrow. And then finally, as you identify, we have more flexibility with respect to capital deployment, which we intend to take advantage of. Good morning. Thanks for taking my questions. I just wanted to follow-up on some of those questions for Mike. And just really be honest kind of surprised to not hear that there were restructuring and severance charges in the fourth quarter, just given how elevated the expenses were. So I guess, can you provide a little bit of color on the inflexibility, revenues down 20% for the full year. And I understand that, of course, markets are competitive, but the positioning of comp in 2021 was â it was a remarkable year. Some of it even identified or segregated as special and therefore, shouldnât be expected to repeat. So the â was the discipline fully there? Are you doing enough on comp? You have reiterated the focus on efficiency, but the results here in â I get it, nobody is buying Goldman today for 2022 results, but still the results seem to set up sort of a challenging entry point for the beginning of the year. So Brennan, a couple of questions. As for the reasons to take severance expense in 2023, thatâs the accounting rules with respect to timing of our communication to those employees. So thatâs what explains the time frame in which the expenses going to be booked. As it relates to compensation expense, variable expense flexibility in the fourth quarter, I guess I would point out a couple of things. One, the overall comp and benefit expense were down 15%. We had grown headcount by 10% additionally. And when you â thatâs over $2.5 billion of less compensation and benefit expense, so itâs a meaningful number. And if you look at the components of our employee base, we have a very large number of people that earn relatively less money are impacted by inflation and are really important to the overall operation and delivery of our firm on behalf of our clients. And we have relatively fewer employees that are higher earning employees face clients and generate revenue, and we were able to reduce the compensation substantially there in line with the performance. But ultimately, itâs a balance. And we have excellent people. We depend on them to deliver for clients. The market for talent remains really robust, and we had to strike the right balance between taking down that variable expense in respect of our performance while maintaining the franchise to make sure that weâre in the position that we can deliver for clients and shareholders in 2023 and beyond. Certainly, we can have brighter opportunity sets on the forward and we want to make sure that we are positioned to capture that. Okay. Alright. Thanks for that color, Denis. I appreciate that. This one might end up being moved, but I just donât want to confirm it. I have spend some time yesterday looking at previous disclosures of J-curve expectation and whatnot, but it seems as though exiting Marcus and the tone down. Should we not even be thinking about a J-curve for the consumer business? Is that not a consideration here any longer because it does seem as though the cross through from the breakeven even ex-provision has been a lot longer than expected. So, should we just forget about that chart given the pivot, or does that still remain part of the consideration? So, a couple of things I would point out. As people would have seen in the earnings release this morning, the Platform Solutions segment on a quarter-over-quarter basis actually had reduced operating expenses. So, we remain really focused on continuing to drive at the expense of these platforms in aggregate, and we expect to drive a lot of benefit at scale. But as we have discussed and you will observe, we also continue to build our provisions as we scale some of those activities. And so our focus remains singularly on driving towards profitability of this segment, but there will continue to be a period of time during which we lose money until we reach that point of ultimate profitability. And we do look forward to trying to help people understand and map out that progression across the various businesses within that segment at Investor Day. I guess just first one to zero in on transaction banking here in platforms. $325 million for transaction banking and other in 2022 is up 50% year-over-year. So, you guys have really had great growth from scratch just a couple of years ago, but still obviously immaterial. So, I just want to talk a little bit about how you feel like progress is going in that part of the business. Can this get to a multi-billion dollar business just doing kind of what itâs already doing? I know you just launched in Europe there, really just trying to think about kind of the execution roadmap for that part of the business. Sure. Thanks for that question. Now, we are very pleased with the progress of the transaction banking business, and itâs a business that has particular benefits as we scale activities on it. We have our tech platform up and running. We continue to grow our clients on the platform. They unanimously continued to give us the feedback that it is a very differentiated and attractive platform to be part of. And we have taken that business, as you say, from its inception to larger scale. We think there is a lot of potential for that business on the forward. And we are very focused at this point in time in continuing to drive deposit balances, continue to drive our customer count, further penetrate, as you mentioned, our international expansion continues. We have opened in our fifth country. We now have increasing capabilities to serve clients across the world. There are true benefits to the network effect of a business like this with global reach. And we continue to see very, very good opportunities for this business. Okay. Great. Thanks. A follow-up here just on the marketâs financing opportunity. So, thatâs already obviously been a nice part of the story for Goldman. What do you need to do to grow financing further? Is it just a lot of the same kind of blocking and tackling, or are there specific things you could point to that could drive kind of another step function there? And then just kind of more near-term, you talked about prime brokerage balances being down and declining through the quarter. Has that changed at all just to start this year with risk appetite to maybe a bit better today than through most of the fourth quarter? Yes. A couple of comments I would make. So, I think as it relates to the FICC financing, we have a very good opportunity set in front of us. The progress that we have made with the client franchise and our market shares and given the overall backdrop and the availability of financing in the world right now, our clients continue to come to us. And given the capital position that we sit with at the beginning of the year, we have capacity to fuel incremental financing activities in the FICC business. On the equity side of the equation, obviously, asset markets moved around quite severely, particularly in the end of the year, which drives prime brokerage balances. But as you know, we are also working very hard to reduce our financial resource footprint, particularly our G-SIB level. That brought with it significant RWA reductions. And it was not really the environment that we were pushing on growth, certainly in the fourth quarter. I think as we turn the page on a New Year, there is lots of opportunity for us to continue to drive our equity financing activities, and we have less constraints given that we have now achieved the 3% G-SIB target. Thanks. Good morning. I wanted to expand upon the new Slide 7. And as you look at the different buckets and asset classes, how much of these funds are evergreen and open or are going through periodic fund raises and closings? And I was hoping you could maybe provide some context on what the fundraising has been for subsequent funds, meaning the size increase that you have typically seen for second or third funds from the previous one to give us a sense of the momentum you are seeing in that business? Sure. So, we always have a very, very broad portfolio of funds. And we have been in this investing business for a number of decades, and itâs one of the contributors to our position as the number five largest active asset management firm in the world. And across the portfolio of different funds, we have some extremely mature businesses. Our GS Capital Partners, equity investing business, our mezzanine funds, some of our loan funds. We have multiple mature businesses that are frequently deploying successfully and then going back to raise new monies and continue to support sort of the franchises that we have in that channel. And we continued to diversify and expand our offering and open up new strategies in response to what we see are pockets for client demand. So, as we think about the overall opportunity set, we have a global, broad and deep investing platform that has offerings for many different types of investors, many of which are very, very mature in terms of their track record and some of which are newer. Okay. And then just following up on the earlier question around kind of the FICC and trading backdrop. It sounds like you are through kind of the optimization of RWAs, but maybe can you talk about where you see on the broader intermediation side, the backdrop, maybe the backdrop today and maybe where you see market share opportunities into the rest of the year? Sure. So, we continue to focus on market share. Market share data lags, but through the third quarter of last year, it shows that we continued to grow market share in those businesses, sales and trading. So, that remains a very, very core focus of the firm. We continue to make progress, and we think we can make incremental progress. One of the attractive things about that business for us is that we have a number of different business lines, which have enabled us to perform across a variety of environments. The last year, given what happened with rate normalization and energy markets around the world, were a particular tailwind to the interest rate products business, the commodities business. Meanwhile, we had softer performance in credit, mortgages and some of the equity intermediation activities. Certainly, if the new issue debt underwriting markets come back online as early indications on the investment-grade side of things suggest and if the equity underwriting activities are to open up, there is a lot of activity that takes place with investors as they position in advance of and after new offerings that we should be able to capture, given the investment that we have made in the client franchise. So, I canât predict exactly where activity will come from 2023. Certainly, some of it may be a continuation of those areas that were active in 2022. But itâs quite possible that certain activities that were softer in â22 could rotate and become more relevant in 2023. Good morning. You mentioned continued interest in asset and wealth management deals, kind of over time. It sounds more like bolt-on, but I guess just are you more open-minded towards maybe a transformational deal as we think out, not necessarily this year, but just in the next couple of years. I mean to-date, you have â what I would characterize, I think most people had characterized, you have piece-mailed some deals. You have done some organic expansion and mixed results in different areas. But just thoughts on maybe more openness to something transformational down the road. I think we have been asked this question. I appreciate the question. We have been asked it a bunch over time. I think in certain businesses like asset and wealth management, there are significant things that could meaningfully accelerate the platform. We have the fifth largest active asset manager in the world now that we have stood up all the businesses inside Goldman Sachs. And so that scale is real. And there certainly could be opportunities to increase that scale. And certainly, there are opportunities in wealth for us to do things that are more significant. I would say that the bar to do those things is extraordinarily high. There are not a lot of opportunities out there necessarily to do it. Certainly, over the last 5 years, the prices have been eye-popping, maybe we are in a different environment where well, that will normalize. But we are always open to things that we think can strengthen Goldman Sachs, but also as somebody thatâs been an M&A banker for a significant part of my career, I know the barter do that, the cultural issues, the integration issues, the bar has to be very, very high. So, I would say we are always open. But at the moment, our focus is on executing on the plate of opportunities we have in front of us, and we think we can drive good returns, good book value growth, good performance for our shareholders as we look forward in the coming few years with what we have on our plate. Thank you. Good morning. David, in your opening comments, you gave us your three priorities of growing management fees in the Asset & Wealth Management business, maximizing the wallet share and growing financing activities in global banking and markets and then scaling the platform. In your â in the number two, maximizing the wallet share, can you share with us where are you today with the wallet share, both in investment banking and markets? And how are you pursuing to grow that over the next couple of years? Yes. So, we â you can take a look at our performance in these businesses. And you can see that the performance is quite strong. A couple of things I will point to even in this quarterâs performance. You can look at our relative M&A revenue performance. You can look at our relative FICC performance and even our equities performance in whatâs been a tough quarter, the relatives look pretty good. We set out 3 years ago, and this was a big structural change. We had never really thought about client market shares in our markets business. We had always thought about them in our investment banking business. And we really â we brought that ethos into the markets business. And I know everyone on this call has heard us talk about how 3 years ago, we set out to say there are 100 clients that contribute meaningfully to our FICC and equities businesses. And we are top three with only 44 of them. We are now top three with 77 of those top 100. And now we have shifted the focus to really look at okay, top three, but why arenât we wanted to, what are the number of clients that we can be number one and two with, and we think there is more room that we can drive on wallet share by really focusing and ticking equities on that number one and number two position. In banking, the wallet share has really come from footprint growth. That footprint grows candidly has been a little bit expensive when there has been zero capital markets revenue because that footprint growth does tilt toward capital markets activity, but we think that will serve us well if you take a 3-year or a 5-year view looking forward. So, again, there is a lot of attention paid to some of the things that we are investing in. The core of the firm is very strong. Those wallet shares are strong, but we still see more opportunity and we are laser-focused on continuing to execute on it. And I donât think there is any business in investment banking and markets that is as strong and powerful as this business, so we will continue to focus on strengthening it as we move forward. Very good. And then as a follow-up on the shift in strategy in the consumer business, you have been very clear, obviously, on how you are positioning this going forward. I may have missed this, so I apologize. But what went wrong? When you go back to when you guys started to move into these businesses 3 years ago or so, I know Marcus deposits has been around longer than that. But when you look back on what you were hoping to do and how it turned out, what went wrong? Well, I think there are a bunch of things that went right, and there were some things that did not go well. I think we executed well on some things that we didnât execute on others. But the simple thing that I would phrase, Gerard, and I think itâs a fair question, is we tried to do too much too quickly. And of course, in the environment that we are in, itâs hard to go back when we started in that strategy 6 years ago. We obviously built the deposit business, the loan business, and we talked about a much broader platform. And I think we came to the conclusion that there were some changes. One of the big changes that affect the pace of the ability to do this and itâs different in scaling things like this is CECL is a big change. CECL changed the curve on growing these lending businesses at scale from scratch. So, we have had to adjust to that. The regulatory environment has also changed over the course of the last couple of years. But I think it became clear to us early in 2022 that we were doing too much, was affecting our execution. I think we probably, in some places, havenât had all the talent that we have needed to execute the way we have wanted. We are making adjustments on that, but by narrowing down the three core things that we are going to focus on that we actually think are good businesses that can be accretive to the firm. I think we have got it in a place now where we can create a more cogent path forward. And so thatâs what we are doing. And I â the takeaway I would like investors to understand is when we see things, we look at things and we pivot. We are not married to things. We are willing to change. I think when I go back to our 2020 Investor Day, and I look at what we laid out during that period of time, we have accomplished and have executed on the vast majority of things we have laid out. That doesnât mean there is not more work to do. But you know what, we didnât execute perfectly on some. So, we have taken a hard look at those and you make adjustments. And thatâs kind of the ethos of the nimbleness of Goldman Sachs that I want to amplify. We are always willing to make changes. We are always going to be focused on shareholders. And even though everything has not gone perfectly, again, I would point to our 40% book value growth since our Investor Day, and I map that out. Our book value per share growth, I believe itâs more than double the next nearest competitor. And so we are going to continue to stay focused on the medium and long-term. I think we are good at nimbly making adjustments, and we will always be very clear to have when we get things right or we get things wrong. Hey. Good morning. Maybe just your thoughts on the outlook for investment banking, I appreciate Denisâ comments, we have seen a big increase in debt issuance, so some improving liquidity in the debt markets at least. Is that, in your mind, a leading indicator for beginning to monetize backlogs? And just generally, how are you thinking about the outlook for investment banking? Thanks. Yes. Sure. I think that â I think one of the things we are dealing with and itâs over-amplified in our very capital market-centric business is that 2021 was not normal. The second half of 2020 and 2021 were not normal. They were way inflated by the massive fiscal stimulus that created kind of, I would call, on the spectrum of activity, excess activity, pulled a lot of activity forward. And then because of market disruption, we have tightened monetary conditions meaningfully in 2022. Itâs the first year in over 50 years that both fixed income and equity markets were down. We had the S&P down 20%, the NASDAQ down 30%. You had a real change in asset values across the spectrum. And when that happens, it takes a period of time for people to adjust. My historical experience would be that period of time is kind of four quarters to six quarters. And so if you think about it, if somebody had a stock that was trading at $100 and the stock goes down by 30%, certainly, for the next couple of quarters, they are still thinking about $100. But if itâs at $70 for four quarters or five quarters, six quarters, then itâs $70. And suddenly, when you look ahead and you think about either an M&A transaction or financing, you have more realism about the reset of values. So, I think we are well into that journey of a reset and expectations. I think it might have another quarter or two quarters to further reset, but I think we are starting to see some additional improvements, people point to the investment-grade debt market. That would obviously be where it would come first. But my expectations would be in the back half of â23 meaningfully better. And also, itâs interesting, and I will be heading to Dallas tonight with others, but I was watching some of the commentary, the macro commentary. People are softening their view of 2023. And I would say itâs getting a little bit more dovish, a little bit more of a softer landing than kind of where people were a quarter or two quarters ago. And that too, will affect capital markets opportunity because itâs really tied to confidence. So, I think we are going through that. I donât think anything has fundamentally changed. I think these capital markets businesses are still very big businesses. But you shouldnât look at 2022 as normal, just as you shouldnât look at 2021 is normal. They normalized somewhere in the middle. Right. And maybe just a follow-up on the reserve and provisioning. Thatâs obviously been a big drag in profitability as you grow the platform business. But as you shrink Marcus, is there also any desire to kind of slow. I know GreenSky is growing on balance sheet, but the rest of the business is that slow? Do we start to see provisioning slow and given how high your reserve levels already are? Just trying to get a better picture on how to think about that cadence and maybe where your macro assumptions are in your reserve levels? Sure. So, as it relates to slowing growth, we actually did slow origination activity over the course of the fourth quarter. Over the course of the year, we have implemented a number of changes to our credit underwriting, tightening some of those provisions. And so we actually did see a slowing of new originations. That being said, the vast majority of the provision build was attributable to the existing balances as opposed to the new originations. So, thatâs also something that we are going to watch very carefully as things develop. You notice our overall coverage ratio increasing. Thatâs a function of what we have observed in our portfolio, but as well as our macroeconomic outlook. And so we have made some adjustments, which reflect our best estimates for performance in the economy going forward. Since there are no more questions, we would like to thank everyone for joining the call. And certainly, if additional questions arise, please donât hesitate to reach out to me or others on the Investor Relations team. Otherwise, we look forward to speaking with you soon and seeing many of you at our Investor Day on February 28th. Thank you. Ladies and gentlemen, this concludes the Goldman Sachs fourth quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect.
EarningCall_1387	Good morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. We apologize for the long wait time for the call, but we were having technical issues with our vendor. Today's discussion of the company's 2022 results will be led by President and CEO, Thomas Cangemi, along with the company's Chief Financial Officer, John Pinto; and Lee Smith, President of Mortgage. Before the discussion begins, I'd like to remind you that certain comments made today by the management team of New York Community may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and investor presentation for more information about risks and uncertainties which may affect us. Thank you, Sal. Good morning, everyone, and thank you for joining us today. This morning, we're going to focus on four topics: the Flagstar acquisition, the decision to restructure the mortgage business and our operating performance, along with our outlook for the new Flagstar. 2022 was a watershed year for New York Community, culminating in our acquisition of Flagstar, our largest acquisition to-date, which closed on December 1. As you have heard me say many times on these calls and in one-on-one meeting, this is a transformational acquisition for us, and we've already seen some of the benefits you've outlined when the transaction was first announced. The transaction into a dynamic commercial banking model is underway, with a more diversified balance sheet, which was evident at year-end, as commercial loans represented 33% of total loans compared to 24% before the merger announcement. Legacy Flagstar brings a number of new lending-related businesses to the new company, both of which are C&I businesses. All of these are higher-margin businesses, and they are typically tied to floating interest rates. These new businesses include a nationally recognized mortgage warehouse business, where we currently rank number two in the country based on $11.5 billion of commitments outstanding. Building Finance is another great business, where we do business with 70% of the top 100 builders nationwide. These spreads in this marketplace is approaching 400 basis points in that particular business. In addition, Flagstar has a significant wholesale banking operation focusing on several verticals. These loans are conservatively underwritten and also generate significant fee income that legacy NYCB did not have. Going forward, we plan to allocate more capital to these higher-margin businesses. The same is also true on the funding side. Legacy Flagstar contributes a significantly lower cost deposit base, including traditional retail deposits and a large amount of commercial balances related to mortgage businesses, including escrow balances. Additionally, both companies have a very strong market share position within each of the respective core markets, which will aid in acquiring more deposits as we grow. The benefits of Flagstar's deposit base are already evident in the fourth quarter results, as non-interest-bearing deposits increased to 21% of total deposits, compared to 9% prior to the merger announcement. Another important benefit is to our interest rate sensitivity. Our sensitivity to interest rate changes has improved materially due to the acquisition. As you will recall, legacy New York Community has historically been liability-sensitive, while legacy Flagstar was significantly asset-sensitive. On a combined basis, the new company will have a more balanced interest rate sensitivity position, and we will have more flexibility in managing our sensitivity to market rate changes. Given the nature of our new asset classes, paired with lower cost funding mix, the new company will be able to enjoy a stronger margin going forward. As for our mortgage business, we disclosed earlier today actions aim to optimize our mortgage platform. The substantial and aggressive shift in Fed monetary policy over the past year resulted in significantly higher mortgage rates. This rapid increase has cycled refinancing activity and also dampened purchase activity. While legacy Flagstar was proactive throughout 2022 in rightsizing its mortgage business, the mortgage market is expected to remain challenged in 2023, with annual originations volume expected to decline by 25% year-over-year to $1.8 trillion after dropping 46% last year compared to 2021. Therefore, shortly after the transaction closed, we made the strategic decision to swiftly restructure the business, which occurred late last week. To better reflect demand and a line where our strength lies, our distributed retail channel will shift to a branch footprint only model resulting in a 69% reduction in the number of retail home lending offices. Mortgage origination headcount is expected to decline to less than 800 FTEs compared to a high of 2,100 FTEs in 2021. Headcount reduction represents approximately 10% of total employees at the defined company's pre-restructuring. These decisions are among the most difficult our senior leadership team has to make However, they are necessary to ensure the long-term success and viability of our mortgage business. These actions are expected to improve profitability in the mortgage business during the current down-cycle, while still allowing us to participate in the upside in the event the interest rate environment becomes more favorable. Despite these actions, we remain one of the top players in the mortgage business. We are a leading bank originator for the mortgages, the sixth largest sub-servicer and the second largest warehouse lender. In addition, we continue to lend in all six channels and remain committed to the correspondent broker business. Turning now to our 2022 operating performance. Despite the significant shift in Fed policy last year, 2022 was still another record year for the company. On a non-GAAP basis, we reported fully diluted EPS of $1.23 for full year 2022, relatively unchanged compared to the $1.24 we reported for 2021. Net income available to common stockholders, as adjusted, totaled $603 million for full year 2022 compared to $585 million in 2021. Our net income in 2021 was a record at that time, and in 2022, we broke that record. While our financials were impacted by one month of combined results, legacy New York Community performed extremely well with strong organic growth in loans and deposits. Multi-family loans increased $3.5 billion or 10% to $38.1 billion compared to 2021, with virtually all of the growth coming organically. Specialty finance loans rose $912 million or 26% during the year to $4.4 billion. At the same time, organic deposit growth was $7.6 billion, up 22%. This includes about $3 billion in growth during the fourth quarter related to our government banking as a service business. Our fourth quarter net interest margin improved six basis points to 2.28% compared to the prior quarter. Excluding the impact from prepayment income, the fourth quarter margin was 2.24%, up nine basis points compared to the previous quarter, which is better than our original guidance. Our credit quality remains -- metric remain solid, and reflect the strong credit culture of both legacy organizations. NPAs to total assets equaled 17 basis points, while NPLs on total loans were 20 basis points, continuing to rank us among the best in the industry. These metrics are proof positive that our conservative underwriting standards have served us well over various business cycles. This one is a high-quality balance sheet should serve us well in the event of a downturn in the economy. As for real estate trends in our primary New York City market, the residential rental market remains healthy, despite some moderation in the effective median rent due to weaker performance in the luxury market, while our bread and butter non-luxury rent regulation niche remains very strong. Manhattan monthly median rents in November rose nearly 20% year-over-year to 4,033, up month-over-month following three straight months of decline and up -- and was up 15.2% above the pre-pandemic levels. On the office front, Manhattan direct asking rents in the fourth quarter decreased 0.6% from the third quarter to $74.29 per square foot, while the office availability rate was up 18.7% or 30 basis points. Manhattan retail average asking rents recorded a 2.2% uptick quarter-over-quarter to $607 per square foot, the first increase since the fourth quarter of 2016 due to a resurgence in travel and tourism and consumer demand. Also, as of year-end, our capital ratios remain very strong. Accordingly, last week, our Board of Directors declared a quarterly cash dividend of $0.17 per share on the company's common stock. The dividend is payable on February 16 to common shareholders record of February 6, based on last night's closing prices reflects a dividend yield of approximately 7%. Looking forward to 2023. This is what you can expect from the new company throughout the year and into 2024. First, we're going to have one brand across the combined organization. The divisional bank concept has worked well for legacy NYCB, but we're mostly in the New York City metro region. Now that we are one of the largest regional banks in the country with 395 branches in nine states, along with a national presence in several businesses, we are confident that a unified brand will position us to thrive. We will have one bank, one brand, one culture. A new brand will be Flagstar. While the Flagstar name will remain, the associated brand, look feel, logo, purpose and what the name stance will change. We plan to officially roll out the new logo and brand publicly in late 2023, but it will not be fully operational and use externally until systems conversion, which is scheduled to occur during the first quarter of 2024. As for guidance, given the current outlook, we expect average loan growth of 5%, first quarter NIM to expand from fourth quarter levels to a range of 2.55 to 2.65, including prepayments, which are expected to have less of an impact on the NIM going forward. First quarter gain on sale of mortgage loans of $18 million to $22 million; full year non-interest expense range of $1.3 billion to $1.4 billion, excluding merger-related expenses and intangible asset amortization; and a full year tax rate of approximately 25.5%. Finally, I would like to send a big shout out to all of our employees at both banks, none of what we have accomplished so far would have been possible without their patience, support and hard work. Their commitment to our customers and borrowers over the past several years has truly been remarkable. My sincere thanks for them all. With that, we would be happy to answer any questions you may have. We will do our very best to get to all of you within the time remaining. But if we don't, please feel free to call us later today. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question has come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question. Hi. Good morning. Congrats on closing the deal. I guess, maybe the first question, if I heard you correctly, Tom, I think you mentioned systems conversion not until first quarter of 2024, sounds a bit longer than usual. Just wondering if there are any reasons why it's going to take that long to move, do the systems conversion? And secondly, just remind us in terms of the cost savings from the franchise and where you think the expense base resets once you have all the expense savings tied to the deal, maybe as we think about post conversion, what it looks like? All right. Let's start with the latter question for us. And by the way, we apologize for the wrong delay this morning. That was unfortunate, but we do apologize for that. I should have talked about the overall expense run rate going forward. We gave out guidance level, $1.3 billion to $1.4 billion for 2023. Bear in mind, we continue to put these companies together through synergies. When we first announced the transaction, we estimated about $125 million of merger related cost benefits, exclusive of the mortgage business, specifically. So we called that out when we looked at the combined operation. So we're assuming that. Obviously, we're restructuring mortgage going into 2023. That is taking place as we speak. So in addition to that, we also have the ongoing continuation of synergies throughout 2023, and also a substantial benefit, most likely in the first quarter of 2024, going back to the actual system conversion, which we have planned. This is a full-blown conversion of all systems. So this is going to be a substantial undertaking for the bank. We feel very confident that's the right appropriate time frame, but it's going to be our largest conversion. And a lot of, I'll call it, upgrade systems that we're getting on a combined basis will be part of that conversion. So we're taking this process, obviously, very seriously. We want to make sure that we have the appropriate time to integrate. So clearly, first quarter of 2024 is where we're targeting. I would not expect that to become any earlier than that, so first quarter of 2024 is the date. But a lot of work has been done as far as choices on systems; a substantial amount of decision making has gone into what's best for the customer. And we're changing a lot on the NYCB side to upgrade ourselves to be more in the regional bank space into other technology system that we don't currently have. So it goes all into that upgrade. So we're super excited about the opportunity, but it's going to take a little bit of time. And at the same time, I mentioned in my prepared remarks, we're also going to be rebranding into the first quarter as well. So going back to the cost structure, I feel highly confident that that range is very reasonable. But we feel that, historically, the company has been an integrated institutions. We have a great road map here. We spent a lot of time getting to know each other. At the same time, we're building an institution that's going to be very diverse. And in our run rate has some build-out of additional, we'll call, cost centers that are going to drive revenue opportunities on a combined basis. And I think that range is a reasonable range given that we are restructuring mortgage on a combined basis. So I think the range that we gave you, $1.3 billion to $1.4 billion. Hopefully, we'll come in towards the front-end of the range, but we feel pretty confident about that. I guess, given all the investments you're making, and I think it all makes sense, is it fair to assume like that's a steady state? Like you might get some savings towards the systems conversion next year, but then you're also investing in the franchise? That's a fair statement, Ebrahim. We didn't give out 2024 guidance, but you do have that -- a lot of the system conversion will result in significant overlap on technology, as well as the benefits of the cost. Maybe John, if you want to add some more color to that. Yeah, I think that's right. You'll see some of those that $125 million in savings, come through over the next couple of months as part of the process we're going through. And then there'll be more, as Tom just mentioned, that will come once the systems conversion is done in Q1 of 2024. So I think Ebrahim, you're right, that makes a lot of sense as to where we can kind of see a steady state going forward, at least in 2023 and 2024. So, Ebrahim, just to go back to the concept of the conversion. This is really a transformational transaction for the bank. We said that all along. We're moving towards a commercial banking model. And with that commercial banking model, there are a lot of technology tools that we are going to implement as part of the combined NewCo. That's what's pushing out the diversion maybe a quarter or two, and that's why we feel very confident that the date makes sense for us. This is not the historical NYCB thrift model; we are going to a commercial banking model with unique technology tools that are consistent with regional banks of our size. Understood. That's helpful. And just on a separate question. You gave the first quarter NIM guide. How do we think about the net interest margin on the two scenarios in a world where rates just stay higher for longer, how do you think the NIM plays out? And then, if rates get cut, do you still expect the balance sheet to be liability sensitive and benefit from -- the NIM benefiting from rate cuts? Thanks. Yes. I'll start the conversation, I'm going to defer to John. But big picture, we're assuming that we're going to have probably two more hikes coming in the short term and probably a pause and probably -- looking at the forward curve, an adjustment towards November is for the first cut. That's really much playing through the forward curve. But the reality is that, where we stand today on positioning, we're probably maybe 4%, 5%-ish liability census going into this most likely par situation in Q1. We have the capacity to move plus or minus 5% very easily. So, right now, just by putting the balance sheet together, without any restructuring, without any sales of assets, we're sitting here just probably slightly liability sensitive and we have the ability to pivot very quickly. So maybe, John, if you want to add some more color towards the sensitivity on the market rates. Yes. And just to highlight what Tom said, now that we're not as significantly liability-sensitive as NYCB has been historically, it just gives us the opportunity to be able to manage towards a neutral-asset base depending on market conditions. So, slightly liability sensitive now. We are forecasting the two rate hikes in February and March, which is really what's impacting the margin in 2023. That cut at the end of the year really doesn't have much of an impact in the 2023 guide. And Tom, you mentioned the restructuring of the balance sheet, like, should we be expecting any meaningful restructuring once there's clarity on the path of Fed interest rates? Look, I think the reality is that, we put the company together at year-end. We have an opportunity to look at some of the assets that, in particular, mortgage rate that we can structure into a opportunity for liquidity. And liquidity is expensive right now. So if we go into cash or short-term securities, we're not going at zero anymore, it's around -- approaching close to 5%, assuming two more rate increases. So we have flexibility here. We believe that eventually, when the securitization markets open, we have lots of liquidity we can pull through, given the assets that were acquired through the Flagstar transaction, some of those resi portfolios and other asset classes. But the reality is it goes back to the opportunity to really deploy capital into higher-margin businesses. We're being very cautious in respect to pricing. We have a very interesting opportunity in front of us regarding yields. And if you think about our multi-family business, they're averaging in the 3s and the market is closer to 6 right now. We're not seeing a lot of refinance active. We're not seeing a lot of purchase activity, but we are seeing is that we still have about $8 billion over the next few years, repricing, mandatory repricing. And they have to make a decision, and that market is a much higher rate environment. Assuming the Fed holds this for longer, I think our customers will have to just go into a different option, which will be a higher interest rate to do nothing. So we'll manage through that very carefully. We're seeing about half of those loans go right into our new product, which is a sulfur product, which is a floating rate product, which is great for interest rate risk, but we're endorsing that as a company. But we feel very confident that we can move the portfolio to a higher-yielding asset class. At the same time, be very focused on the best yielding opportunities in the marketplace because we have diversification. This bank now has a very well-diverse vertical opportunity. And we're going to make sure that we maximize our capital spend to ensure better margins going forward. Starting the year off at a much stronger margin with the opportunity to redeploy capital into higher margin businesses is an attractive position to be in. Hey guys, good morning and congrats. Tommy, I wonder if you could help us think about total fee income in, say, the first quarter. I know it's volatile given mortgage bumpiness, but help us think about the combined company's fee income capabilities? So look, we have a lot of moving parts here that's new to the company, in particular the capital markets activity. I think that that's going to be -- again, it's not modeled in, it's not anticipated as part of the synergies of the merger, benefits of the merger. But we think that now that we have a capital markets division that's going to look at options for our customer base to put on derivative synthetic positions to hedge their loan products. I think that's going to be a great benefit to the bank. In addition to that, we could also be creative for our multifamily customers as well to offer those similar products. And we're not going to put on long duration of paper without any synthetic position, which drives into fee income. At the same time, I want to refer to Lee Smith, because he's obviously running the mortgage business, and that's always going to be a very interesting opportunity if the mortgage business does start to pick up. But reality is that we're starting at probably low points. So we're hoping it doesn't get much worse than this, but we're starting at the low. Yeah. Thanks, Tom. And we provided this in the guidance. So we're guiding for Q1 gain on loan sale to be between $18 million and $22 million. And then the net return on the MSR asset is -- we're guiding 8% to 10%. I think we'll be at the top end of that range. So if you combine those two numbers, we're in the $45 million, $50 million range from a fee income point of view on the mortgage origination side. And then we've obviously got loan admin income on the servicing side, given our significant sub-servicing business. Now from a GAAP accounting point of view, the reason offset as it relates to the interest we pay on escrows, which should really be up in the net interest income line, and so we're going to get a benefit from that. Even though you don't quite see from a GAAP point of view, when we break out the servicing P&L, you do see that fee income given the significant sub-servicing business we have. Yeah. So with that being said, just to add on to Lee's commentary, assuming there is a Fed pause and it good moves the other way, say, towards the end of this year, that will also generate higher fee income because. Now the cost of that liability becomes much lower as we manage that servicing portfolio. So we're not going to throw a cost number out there, it's ongoing. We feel very comfortable that we've done a ton of work over the past two years now on really setting the NewCo, which is going to be the new Flagstar. A lot of spend has been already taken place. As far as the branding efforts for the future, more towards 2024 than 2023, I'd say where the dollar outlay will come in. But where we stand right now money has been spent on setting up the brand itself, our vision, our mission, obviously, our position in the marketplace. And obviously, there'll be new signage to all of the 395 locations. It's all going to be, as we said, one cohesive brand, one culture, one name, and that will start towards the back end of 2023 and with maybe some marketing dollars going into 2024 run rate. And last question I had for you was on the loan-to-deposit ratio. Is there a level at which you'd sort of cap that wouldn't exceed? Thank you. So Mark, I would say, big picture is that, our passion, as you can see over the past few years, we've done a significant shift in how we're funding the balance sheet, right? There's been a lot more deposit growth. We're looking at alternative solutions to fund our business. That's going to be part of our DNA going forward. We are focusing on funding this balance sheet very differently than it was historically. We want to get away from our dependency on non-traditional funding. We believe that various mortgage-as-a-service businesses, the government-as-a-service business are focused at and really trying to take the embedded nature of mortgage and go after the clientele as a $90 billion organization, could put us in a very unique position to gather more deposits. We were very successful a few years back when we started the mandatory initiative of, if we're going to lend you money, we need to have a deposit relationship. That's going to be the culture going forward. So our passion here is to be less funded wholesale, be funded more traditional in nature and we're doing -- and we're doing -- and weâre looking at all avenues to bring in a mix of funding that, light is better, so we can have a much better cost of fund and better stability on our funding mix. If you think about the magnitude of our wholesale book of liabilities, if you replace that with, we'll call it, true core deposits, it's a game changer for multiple. So the goal here is to be less dependent on mortgage, less dependent on wholesale and focus on multiple expansion over time. And that's our passion. That's our business model every day. It's within our DNA. It's not going to happen overnight. And I said that when I took over as CEO, this is culturally where we're going, and we're making that long-term vision of trying to change the dynamic of the traditional thrift model towards a commercial banking model. Thank you. Our next question has come from the line of Dave Rochester with Compass Point. Please proceed with your question. Yes. Yes, absolutely. Glad to see it. Just on the potable advances you guys have, is it fair to say that the margin result this quarter and the guide for next quarter includes the repricing of all the like $1 billion or so of those advances that you had at this point? So you're not really expecting a cliff repricing of that in 2Q or beyond? Yes. If you look at -- I mean, we do have a lot of borrowings coming due in 2023. So when you look at that amount, we have probably just under $7 billion coming due in 2020 in the first quarter of 2023. And that -- Yes. And that's in the guide -- that's in the guidance. The cost of that is in the $330 million range, $340 million range. So there'll be a bit of a lift there, but nothing significant. There are potable on the books, as you mentioned, but they're spread out on what their lockout dates are. So we don't expect to have that, the cliff issue that we had in the third and the fourth quarter of 2022. Dave, I would just say, to John's point, we want to have some flexibility to go into 2023, depending on our balance sheet renewability, depending where rates start to normalize here and we have an opportunity to really look at the assets that we've acquired and see what assets weâre going to hold. There has been no restructuring as of year-end. We priced -- we looked at the marketplace. We believe when the marketplace becomes more opportunistic for us to think about, maybe reshipping our proceeds into maybe a debt reduction or a debt restructure, that's always on the table, we'll look at what makes sense in the marketplace. But clearly, having the optionality is going to be important, especially, with most likely a pause coming. And perhaps at the back end of the curve continues to be steep like this, we may have some opportunity to take on some cheaper funding, at the same time keep some money relatively short to pay down some debt, because obviously, the short-term money is very expensive right now. So we have that optionality on the table. Yeah. Well, to your point on reducing the debt. Just on the deposit side, you guys have obviously been working on a number of deposit initiatives that you talked about earlier and in prior calls. But I was just wondering if you can size the new opportunities that you now have post the deal close? I know you talked about the warehouse customer deposits that you could go after previously once you close the deal, if you could just size that, how big that opportunity is at this point and then hit on any other areas that you could point to? I always said when we announced the transaction; I envisioned the embedded nature of just mortgage alone is a $10 billion opportunity. I felt highly confident that with Lee Smith's business regarding, the escrow business, the loans that we service for others, as well as the warehouse business, it's a tremendous opportunity in respect to the type of credit facility that we offer some of our clients given our size now. Our balance sheet at $90 billion, managing this business as being number two in warehouse in the country, gives us a good shot at really bringing in real funding opportunities for the bank. That being said, we still have a very interesting opportunity to take the technology that NYCB commonly have that's going to improve when we combine with Flagstar to make further improvements to start banking the mortgage business. I think the mortgage business, given the magnitude of our positioning, could have a lot more deposits attached to it. Maybe, Lee, if you want to add some color to the opportunity here on the mortgage side. But this is really what we saw from day one that we could easily build that up. In addition to the other lines of areas that we're building up, which includes government as a service, doing some technology deposit opportunities, as well as going after the legacy NYCB customers to ensure that we make loans with deposits. So maybe, Lee, if you want to add some color on the lending -- the deposit gathering opportunity on the mortgage side. Yeah. I think to Tom's point, and he's mentioned mortgage as a service for 18 months now. I mean we have, today, about $4.2 billion of escrow deposits from our servicing and sub-servicing book. And NYCB has at least a couple of billion of escrow deposits. And so we can bring more of those deposits in from the people that we're sub-servicing for, not just the deposits attached to the loans that we're servicing or sub-servicing but other escrow deposits that they have with other institutions. And then to Tom's point, given the technology, the New York Community Bank has that we haven't had at Flagstar, there's an opportunity to go and raise core deposits from our TPO base. And remember, we're dealing with about 3,000 TPOs, correspondents, brokers. By having this technology that allows them to do their business banking with New York Community Bank and I think that's a big opportunity, and we can also take that technology to our warehouse customers as well, which we haven't done previously. So I think we can go and bring more escrow deposits in, as well as core deposits as a result of the enhanced technology. Yeah. And like I indicated, we are a major credit provider for some of these clients. And when you get to the point where we are their primary credit facility, we should have a shot at of all of the deposit opportunities that they typically utilize in the marketplace. Not a guarantee, but clearly, the more money you have on the table, the more opportunity you have to really drive the relationship opportunity. In addition to that, thinking about the C&I opportunity, we have a long history here of not being in the market with boots on the ground on a stand-alone basis, legacy NYCB. Flagstar has made that transition. The goal here on a combined basis is to have boots on the ground focused on C&I, mid-market type companies. And given that we've been in this business since 1840 -- the mid-1800s, we have a shot at really catapulting deposit growth initiative when it comes to boots on the ground on C&I side. So, all our C&I activity that's being done at Flagstar is being integrated into NYCB we have, like I indicated in our opening commentary, a lot of verticals here that's going to be deposit driven. As we start focusing on the lending facilities, we're going to focus on deposit growth. And deposit growth is going to be core value to our DNA to improve the balance sheet metrics of this company. Sounds good. Maybe one last quick one. Just back on your comment that you're upgrading systems, what are some of the bigger systems that you're going to be upgrading? I would just -- we're going into a complex platform with Fiserv. We have a DNA platform architect. We'll have a hybrid version of something very unique, best opportunity as our core. But interesting to that, we also have a relationship with -- they have a relationship with Salesforce on a business development opportunity. That could be very powerful the company. I think that's very unique that we haven't had here at NYC that we can utilize throughout the entire organization. For example, even the front-end system on loan process, their front end is very advanced, more in line with the regional bank model. They use Encino, we don't have Encino. So, there's opportunities here that are significantly ramping up ourselves to a regional player when it comes to technology utilization. At the same time, we've also given Flagstar, on the commercial services side, an opportunity to really upstart the treasury function, the treasury capability. Our current relationship that we have with Fiserv commercial services, which is -- it's been very successful for us. We've been really growing our core deposit base for our customers what the commercial services technology platform, where five years ago that was not an offering. And that has changed our ability to solidify the relationship lending on the deposit side. So, that's going to be, I think, a big win for the folks over Flagstar, to utilize that technology. So, collectively, there's a lot of moving parts here. But we, like I said, moving away from a traditional thrift model to more of a commercial regional model when it comes to the tech stack. And there's probably 10 other items that I can't disclose. I did throw a couple of names out there. But there's a lot of moving parts here, Dave, that's going to really enhance the experience of the customer regarding the new Flagstar. Hey Tom, I just wanted to follow up on the expense commentary. I'm sorry if I missed it, but did you -- could you tell us what the cost savings are from the mortgage restructure and the timing of when those kind of work in to 2023? And then separately, kind of what's a good run rate for operating expenses for the first quarter of the year? So, obviously, the first quarter is going to be the highest quarter because it's always the highest quarter of the year with payroll taxes and the like. But we embarked upon the mortgage repositioning and restructuring of that line, that channel, in late January. So, you'll see that benefit going through towards the back end of Q1. The number is significant, as I indicated in our opening commentary, we're taking a ton from around 800 FTEs, where before at the high, in 2021, that was 2,100. So it's a significant downsizing when it comes to a line of business. That being said, there is a benefit there on cost reduction. At the same time, we took into account the revenue offset of that as well, right? So, because you're taking out an unused balance sheet opportunity, so you have to look at the revenue side. And we also went into, I'll call it, shared services tied to embedded mortgages. So, all-in, that number is well of a $100 million stand-alone. But at the same time, we also have our own cost structure that we have to focus on, on a combined basis on just the synergies of the company's combining. And that number is, as indicated back in -- when we announced the deal, is about $125 million. Lee Smith has done a phenomenal job over the past 1.5 years managing a very tough business. He's always managed the business well. But 2022 was a challenging year, so they've been cutting and cutting and cutting at the end of the day, we looked at the business at the fourth quarter and we wanted to make sure that this business is not losing any money. So we think that at this stage of the game, where we focus on mortgage, we're at a position where we have optionality to make a lot of money in the mortgage market change, but we're not going to be losing money in the current environment. That's important as we set the stage with the run rate. And think about the concept I was explaining on the call is that we want to be in a position where our multiple is not tied solely to mortgage and our multiples tied to a balanced revenue stream. Having this unique structure on mortgage, traditionally consistent with a lot of the regional banks of our size, and having an embedded nature in mortgage, we have a great opportunity to look at the multiple as more of a commercial bank like multiple as we transition to a true commercial bank from a thrift model on the funding side. So clearly, we want to focus on multiple expansion. We think this is one of the pieces of the puzzle we get there, and we acted promptly right after the closing, given the conditions in the marketplace. So when it comes to cost structure, like a guidance at $1.3 billion to $1.4 billion, we hope to be on the low end of that guide. But clearly, we think it's a number that's achievable for us and that the cost structure starts to see discernible adjustments starting in February. But there's a lot of moving parts here because you have to look at both mortgage revenue and mortgage expense. Maybe, Lee, if you want to add some commentary on the mortgage -- of this journey, and this is your hard work and effort, which we want to commend for the effort as well. Yeah. Thanks, Tom. I mean it's a significant restructuring. There is going to be noise in the first quarter, because we're still running off the pipeline as it relates to the branches that we're closing down. We're paying severance. And then there's going to be some payments as we exit certain leases. We will isolate that as a restructuring charge. But there's going to be noise in the first quarter as a result of that from a cost point of view. When I think it will be very clean will be April 1. But having said that, and as Tom alluded to, we're going to start seeing benefits from what we've done as soon as February, given we executed on this restructuring last Thursday. Got it. Okay. And Tom, maybe just one follow-up on the expenses. Just given the conversion isn't happening until the first quarter, I guess, what percent of the $125 million should we think about being more 2024 oriented versus 2023? Brody, I'd say half. But again, we've done a lot of transactions in our lifetime. We are going to -- we have hit the ground running hard. We know what we have to do as far as integration. This is typical when we look at transactions. And there's an opportunity here on a stand-alone basis. Like I indicated, we looked at the business ex-mortgage when we announced the deal. We looked at a run rate that was probably like $1.6 billion to almost $1.7 billion in total cost structure, and we tacked on about $125 million ex-mortgage. But mortgages changed, as I indicated, Lee has taken out a lot of cost in 2022. We think this is it. This is where we feel very confident that we're lean. I think this is probably the lowest headcount that Flagstar has had and probably close to -- probably maybe eight, nine years now. So I think we're in a very good position to really capitalize. A lot of investment in technology has been made by Flag, so on the mortgage side we can benefit here. The servicing platform is substantial. There's a great opportunity to think about cross-selling some product on the servicing side, both on a HELOC loan position as well as deposit gathering efforts. So we're in a good spot. It's a difficult decision when you have to make these types of significant restructuring efforts. But at this stage of the game at that type of FTE, with this magnitude of the business and our presence, we have an opportunity here to really drive revenue at the appropriate time if there's a resurgence in opportunity in the mortgage business. Just one other point. The goal here was not to bleed. You don't want to hemorrhage red as we come together. And Lee was challenged last year, every quarter was a challenge when it comes to the changing interest rate environment. And we're going through quarterly repositioning on FTEs to a point where we looked at the business versus balance sheet, versus not balance sheet utilization. We really want to go back to the traditional mortgage banking model, where you had used balance sheet very selectively, and we are getting our gain-on-sale opportunity and we build the servicing portfolio as a revenue stream. So we have a barbell strategy overtime depending on market interest rates. Got it. And then maybe if I could just switch to the deposit base real quick. You mentioned the forward curve a couple of times on the call today, Tom. So I wanted to ask, near-term kind of where do you see your cost of interest-bearing deposits or your deposit beta going as the Fed kind of continues to hike early in the year and then pauses? And then secondarily, just given the back end of the forward curve is starting to head down, how are you thinking about structuring your deposits from a maturity perspective? So yes, if we look at deposit betas, the balance sheet is really broken out into two different types, right? If you're looking at our â our deposits tied to either mortgage as a service, banking as a service and some of the brokered business, that's high beta. It's remained high beta since the beginning of the â of the rate hike cycle. And then if you look at the more retail, the more stable piece from both legacy NYCB and legacy Flagstar, they have been much, much lower betas, of course, than that. They started to tick up. I think like just about everyone have seen, other banks have seen over the last couple of quarters. So we'll monitor that as well. But when you look at where the curve is, it gets I think what Tom was talking about a little bit earlier, we do have a lot of flexibility in the borrowing base as well. So we'll be able to look at both where our deposits are funded and how they're funded, as well as borrowings to ensure we're ready for either of those positionings, right, either liability sensitive, slightly liability sensitive. Or if we needed to move, we could move that to asset sensitivity without too much difficulty with some shrinkage on the asset side. So I think we have the opportunity to do both there. And I think our deposit base, like I mentioned, is kind of split between what's in normal retail and what we have in the banking as a service business. This is Tom, just to follow up on that. I made a very clear commentary probably about 1.5 years ago, that if you go from zero to a much higher rate environment, now we'll just reiterate the zero to, let's say, 5% I don't think you're hiding from people getting paid on excess liquidity. So that's the marketplace. So this is a phenomena in the financial services business right now. That money is very expensive right now and people want to get paid. The reality is that this company we have now is not going to be 20%, 30% liability sensitive, we're going to be closer to neutral. I think that's the game changer for us as we look at this combined business of Flagstar and NYCB, that we're going to position ourselves to not be vulnerable to rates going up. We want to take advantage of rates up and down as a business model. And that's the unique to some of the verticals, the type of assets we're going to have at a floating rate and having a better funding mix. So I think that's really the benefit of the merger that we're super excited about today. And I think, like I said, we put we put the banks together and we're around 4%, 5% liability sensitive without any repositioning or any assets. And we think that we have a lot of liquidity if we want to tap liquidity at the appropriate time, assuming market conditions warrant that. So I think having optionality is good here. And I think that the new Flagstar is a much bigger balance sheet with a lot of great clients that we can service are calling them the five-star clients that we're going to go after and bank them and go after the funding opportunity. But our DNA is going to focus on getting great deposits to fund this institution very differently than the traditional thrift model. Hi. Good morning. You noted the $3 billion contribution from banking as a service product for government entities. Can you talk a little bit more about the growth opportunity there, especially given that those are lower-cost deposits? So we've done a really solid job on partnering with our fintech providers, and this has been a very good line of business for the bank as an alternative solution for funding the balance sheet. This particular program in the fourth quarter was driven off the California inflation stimulus benefit that was out there. We were a bank partner, been the provider along with a very large tech company that partnered into the money network card business. That will dissipate, but that was another program that we rolled up. Bear in mind, we've also made mention that we are the US Treasury been provider for money network cause going forward and anything that the treasury does on the card side. So we have the opportunity to continue to build the business. As well as other municipals at the state level for a lot of the unemployment funds that we process under the money network cards business. So that business is going really well. We have a bunch of onboarding happening in 2023. I will tell you that it's hard to predict what quarter they come in. So we don't really count them because they come in, and they're fairly large. And what's interesting about this model is that not only do we ramp up the opportunity to work with our technology providers, but we're also able to get our bankers into the municipal side of things, so the actual core deposit banking. So some of these relations resulted in a pure deposit relationship, either payroll for a state, doing some operating activity for the state, and it's been meaningful in respect to the deposit opportunity. This is something that we go up and give the top institutions in the country and all the top technology companies, and it's an RFP process. And we've been very successful over the past 1.5 years, but it does take time to onboard. So I don't want to give any, we'll call it aggressive vision of how much can come on. But when they do come on, it becomes meaningful. So, for example, California was about $3 billion average balance and the cost of that was zero. We have some other programs that are coming in this year, depending on how quickly they ramp up US Treasury, that could be depending on what program is actually endorsed by the government, and we would be then the company that's ready to go if the issue cause [ph] at their will when they're ready to make a decision on funding. So it's an interesting program. It's a good line of business. It's one of our three pillars of the banking as a service business that we carved out along with mortgage and tech, and it's been very successful. It started out back during the pandemic and we were a very large balance sheet provider for stimulus payments and we were able to hold some nice balances for a considerable period of time on the cards side, and we continue to leverage off of that. I think, I mean, there's obviously the three components. The one that's very seasonal is obviously escrow payments. When you have mortgages coming in and out, you have tax payments. But we think that's going to be something that we could really drive further deposit opportunity. Like I indicated in my previous commentary, on the Lee Smith's business, there's tremendous opportunity to really be focused on managing the P&I payments and the tax payments for our large customers that we do business with, both on the warehouse side as well as on the servicing side. And that number can -- it goes up and down depending when the payments go back to the municipalities on the tax side, but there's always the P&I payments coming through. And we have a long history under AmTrust Mortgage to manage that. So, I think we have a few billion dollars of pre-consolidation with Flagstar. As we indicated, I think it was at $4 billion. So we're probably around $6 billion now. But I see a $10 billion opportunity there, just by the current client base as we go after it. It's very volatile with respect to interest rates. There's a cost to that. But as things start to normalize on the interest rate side, we have an opportunity to have a different funding mechanism versus traditional -- non-traditional wholesale funding that the bank has been accustomed to. So another source of opportunity. And the ones that we have credit with, I really feel the clients will be a credit with, I feel that we could do a better job on banking that client. And that's what we're going to go after. As we indicated, the true operating activity, that we could be helpful, given our size and balance sheet and our technology offerings as well. Good. How are you, Tom? I wanted to start on NIM. So I appreciate the 1Q 2023 guidance. But, Tom, what does that mean in the release? Here you say you expect 2023 margin above where you ended the year, I would think that would be on a spot basis, maybe consistent with 1Q 2023 guidance. Can you talk through that? I'll give a broad discussion up front and John will go into the details. But we're kind of indicating that we have one month of Flagstar at the fourth quarter going into our current NIM on a historical look-back basis for Q4, and we've been in the low 2.20. Was it 2.28, John. So if you think about our guide for Q1 at 2.55 to 2.65, we have the benefit of a lot more floating rate assets, different verticals that are priced to footing rating indices. At the same time, we have a significant amount of customers that are rolling into their option period. So, for example, in Q4, we had about $0.5 billion of multifamily loans that went to sell for plus 2.25, 2.50â¦ Coming off a 3% coupon, so that's adding to the benefit of repricing. When you think about the choices going forward -- absent the funding side, on the asset side, we really do have a unique opportunity to have a lot more assets repricing into the marketplace, as well as a much more, we call, higher-yielding offering when it comes to the floating rate instrument, and more of a focus to allow our customers to utilize derivatives to finance their long term as an alternative solution and traditional fixed rate terms. So we've been proactive on running out the capital markets activity that Flagstar offers to their customers to some of our larger multi-family players that are doing larger transactions we want to synthetically structure for the balance sheet. So we really do have an interesting series of choices on the verticals to really drive capital into businesses that are high-yielding businesses. That being said, the funding is where you have still pressure. Obviously, I indicated about a 4%, 5% liability sensitivity as we close the books at year-end, but that's going to have a couple more rate hikes. And obviously, the forward curve has a pause for a while, so we're going to deal with that. But ultimately, we think we can move that 5% to neutrality very quickly depending on where we want to position some of these assets. So, I think, weâre going to have higher margins going back to my point. We're starting in the low 2s and we're already in the mid-2s in the start of the year. So it's a different margin business given that we have new asset classes going into 2023. And with the focus of really building out more C&I business as a hallmark for the company, in addition to our legacy businesses, which we're going to support, we'll have a lot more choices, Steven, which will drive margin. Yes. Do you think you can hold in -- because the next quarter is going to be the first quarter where we have the new company, right, for the full quarter? Do you think you can hold NIM in this 1Q range beyond the first quarter through the rest of the year? You're not going to get me to a point to give forward guidance on the margin, but it's a good try. We typically give Q1 -- we give a three-month outlook on margin. I think the unique opportunity here is that we have a different balance sheet, we have a different positioning, we have unique asset classes. We're still challenged, as all banks are challenged, on the funding side. If we could be successful in moving some of these wholesale liabilities into true core deposits, then it's a game changer for our multiple. That's the strategy. That's not going to be an overnight strategy, but we've done a lot of work over the past two and a half years. But we're starting the year very strong with a solid margin compared to standalone NYCB with the benefits of a much higher average margin for the year, knowing that we're going to have probably an increase tomorrow and another increase in March, which will hit all banks in respect to excess liquidity, including NYCB. And we love to contend with our liability funding on the wholesale side that's repricing, and then it'll stabilize. The only other item and we mentioned it earlier on the government as a service deposits, right? We had that program really kick off at the end of 2022. And then we see -- now we start to see really the utilization of those funds that we're seeing that start to roll down as we would have expected in the first quarter, and that is non-interest-bearing accounts. So, that's just another item for -- that we'll see that's beneficial in the first quarter that we lose a lot of that benefit when we go forward. Yes, I would add, internally, when we look at the business even on the multifamily side, going back to 2012, 2013, we had a high fee income opportunity and the actual yield on that asset class is much higher because of the propensity of prepayment. We ended the year this year at the lowest level of prepayment activity compared to the financial crisis. Literally, if you go back, it was significantly lower than we had anticipated. And we had a very strong year. We had another record year in earnings, but you get -- the multiple is what it is. We were liability sensitive. But if you think about where we ended up about $45 million in total prepayment activity, if you go back to 2013, that number was $140 million. So, we're off by over $100 million and the portfolio is probably substantially larger than it is today than it was back in 2013. So, there's tremendous opportunity to really get that coupon from a 3% coupon to the market and be very cognizant of the fee embedded in that structure to drive margin. But we have a very conservative estimate in our forecast internally, even though we don't go out the full year, of how this asset crafts will react. Because the asset class is very stable right now. There is no activity on prepay. There's no large purchase transaction activity. We think that will change once rates start to become more expected based on the borrowing base. Right now, customers are not doing a whole lot. So, we're kind of having a larger balance sheet with lower yields. And as they reprice, we're getting a nice benefit on that particular core asset class. Got it. Tom, if I could also ask, so if I look at the guidance, the average loan growth of around 5% for full year 2023, which doesn't make sense because you have Flagstar for the full year 2023. What's the base that you're comparing that to? Look, we're very conservative right now. It's early in the year. Last year, we had 10% net loan growth on multifamily. A lot of that was driven because market conditions have changed. Like I indicated, we're not going to have the activity until customers are comfortable on pulling down equity and buying and selling asset classes. That's not happening in the marketplace today. So you're going to have a larger asset class for loan growth. But I think we have a conservative model that we're going to be very focused on making sure we get the best economics given the market condition. And Steven, as you know, it's expensive right now to finance short-term. So when you look at, let's say, a three-year average life financing against a multifamily credit to average life, we need to get paid economically. That number is around 6% in the market, 225 off the five-year treasury. And that's where we're holding our line. I think that's the right economics for us as we look at the lines of businesses. So when you think about 5% net loan growth, I think that's reasonable. We always come out with a conservative estimate. If it changes, it changes, but it's early on. And given that most customers are really kind of sitting on the side and trying to figure out what their funding needs are going to be in a very unique changing interest rate environment, I think it's reasonable. Warehouse could change dramatically, dramatically if these rates go down. If for some reason we're in a different rate environment. So at the back end of this year, we have $11.5 billion warehouse book that has about $3 billion outstanding, that number could double very quickly. So we have an opportunity at very high spreads along with some of the other lines of businesses. So we really are being conservative, and we want to be conservative. So 10% was a big year for us on a standalone basis. And if you take Flagstar's held for investment portfolio out of the resi side, they were relatively flat or down slightly for the year given the challenge in the mortgage business. Hey, good morning. Hey, good morning, everybody. John, just to make sure I'm clear on the expenses. The midpoint of your guide is pretty good to consensus, call it, $50 million or $60 million. The amortization expense, need a little help there. It looks like it was $5 million, which would annualize to about $60 million. Is that about the right amortization expense for the year? Yes, it is. When you look at this change in the interest rate environment, not only did it have impacts on the purchase accounting adjustments for loans and securities but also for CDI. I think originally, we expected CDI to be at a much lower number when we announced the deal, but it's definitely changed given this interest rate environment. So yes, when you look at that -- all intangible amortizations that $5 million, that $5 million a month is a good run rate for 2023. No -- yes, that makes sense. It looks like they offset each other. In terms of the accretion, John, any -- what's the accretable yield that might be considered in the guide, or how should we think about accretion income as a margin contributor? Yes. So the way to think about it is we have benefits coming in from accretion from the loan and the security side, and that's partially offset from CDs, sub-debt and the trust preferreds. So you're looking probably on average in the $10 million range, I would say, from an accretion perspective per month. That we'll probably see. The hard part about getting exact guidance on that is when you look at the Flagstar loan portfolio, especially and even some of the securities portfolios, the floating rate pieces are marked pretty close to par, if not really at par from an interest rate risk perspective. Some of the more fixed rate items has much deeper discounts. So it really depends on the speeds that start to come in on those. So we're trying to be conservative as to the speed in which those discounts will come back to us. But you could see some swings in that as payoffs come because you've got to recapture some of those pretty big discounts as you go forward. Yeah. Again, just to put my accounting hat on, offsetting that in 2024, assuming most of the CDs are short-term, and that discount -- that band premium will be gone and you have the possibility of higher accretion in the funnel. Yeah, the CD mark is -- yeah, it's definitely a little bit shorter than the security in the loan mark, yes. Okay. And then I just want to come back to Steve's question, just to make sure I'm totally buttoned up. The held-for-sale loans were about $1 billion. I guess question one, is that about plus or minus where we should think about held-for-sale? And the guide for mid-single digit, I'm looking at your average balance sheet, that's a -- is that off a $56 billion base? Is that what you're using? No -- yeah, it's based off of the spot loan balance at 12/31. So 69 -- so we're doing a 12/31, the 5% 12/31 2023 to get back to the previous question as compared to the, call it, 12/31 2022 spot-to-spot. As far as the loans held-for-sale, so maybe Lee Smith can have some color on the business, on the business, since we got Lee on the call. Lee? Yeah. No, I think that $1 billion that you mentioned, you can expect us to be in that zip code $1 billion, $1.5 billion throughout 2023. Obviously, we're in one of the toughest mortgage markets for the last 25 years and so when we look at where activities now. I think that $1 billion to $1.5 billion is a good estimate for the remainder of 2023 for available for sale. Thanks. Good morning, Tom. Can you just give an update on the capital priorities going forward and maybe some thoughts on share buybacks? I'll start out with the first priority. Our dividend will continue at the current rate. That's been a priority historically, and we're very confident there. Obviously, we had a substantial -- an accounting event at year-end. Markets have changed, and we had to deal with that in respect to capital. So we traded some of the book value benefit to the earnings accretion going forward under the capital side, so that did have an impact. That being said, I'll defer to John specifically on how we're going to get that back. And obviously, where our capital stack currently sits. But going back to my priority is we're going to continue to paying the current dividend rate for the combined shareholder base. And historically, the company has had a multifaceted capital plan when it's -- from payback to shareholders with dividends and years ago, stock repurchases, of course. So first, the use of capital, as Tom said, is the dividend and the second is for growth. So any excess capital that we have after those two things, we would absolutely look at down the road a potential buyback as market conditions dictate. Okay. Thanks. And then just real quick, just on the $3.4 billion OpEx exposure, just can you give a little bit more color on an update from a credit perspective on office? Yeah. Well, both on office and really throughout the CRE and portfolio has been unbelievably strong from a credit perspective. We've seen no transition into the 30 to 89-day buckets or delinquency buckets, really, no real concerns even that have come out of the deferred loan process that we went through. Payments have been as we would have expected. So we've really started to see a little bit of occupancy kick up there as well. So the performance in that portfolio has been better than we originally expected coming out of the pandemic. I would just add to John's comments, a strong sponsorship, a very low LTV, very comfortable with the relationship, long-term relationship, lending tied to some of the multifamily investment as well. So there's a lot of history there on the NYCB stand-alone. We picked up some commercial real estate from the Flagstar folks as well on office, a lot of material amount is maybe about $1 billion, John, total -- is it total, little less than $1 billion. $3.4 billion. And again, it goes back to the history, as John indicated, we're not seeing any negative trends and the LTV is relatively low. And in the event that we have to sit down and deal with a situation that has maybe some of credit deterioration. We think we're well protected as a sponsorship, as well as overall value. I haven't seen any negative trends speeds. It's been very, very solid. And when those loans come up for refinance, can you just maybe updated LTVs or debt service coverage ratios when they come up for refinance? Weâll tell you. I think we had -- we have about $1.23 billion that's coming up in total CRE. That's not off -- And that kind of at the 560 coupon, that coupon is probably closer to 7% and change now. And then next year in 2024 is about another $1 billion. So we don't have a ton of money. Letâs say, it's 50% of the CRE book over the next two years coming due. And next year, I think it's a 5% coupon. So, again, we think we have an up rate potential on repricing them. But when you look at the average LTV, I'm not sure if you have that on you, John. It's a pretty low average LTV. On office. And I think we feel pretty confident that, again, we haven't seen at all any deterioration. As John indicated, a 30-day bucket, the 50 [ph] buckets are all zero. I feel pretty good about that and given the current environment. But in the event -- even during the pandemic, we had a handful of customers that we're thinking about maybe having issues, and we gave them some balance sheet, we gave them some release and ultimately, we got them to the other side. And in the event there was any maneuverability on our end, we're very comfortable on exiting the asset class, and there's plenty of investors, we look at these assets as, we'll call them unique New York City assets that will be well owned, but would love to be owned by investors that are comfortable on taking the keys from the bank, if necessary. We haven't had to have that problem, right, so far. But in the event we do, we have low leverage, and we have strong sponsorship. So, hopefully, the sponsors stay strong. And if they have to kick in some more equity if they keep them going, that's the expectation. We haven't had had this conversation yet, but we're very focused on conservative underwriting, and that's how we look at our book. These are -- we don't have a huge portfolio relevant to the total balance sheet. But what loans we do have, theyâre relationship sponsorship type transactions that we're very comfortable that historically in the past, we have seen customers by checks. We've had a couple of handful over the past six to nine months, and these are very large families that are comfortable on keeping their coveted asset classes in their families business. Good morning. Just to clarify, the $10 million a month of accretable yields -- is that just for the first quarter of -- I'm assuming the fourth quarter of this year, the first quarter of 2023. And if it's not, could you give us some sense for the cadence of accretable yield in 2023? Usually, it's pretty front-end loaded. I just want to get a sense for the cadence there? Yes, I mean it can be front-end loaded, no doubt, but that's the average. That's what I would assume for 2023. You will have, like I said, when you have some deep discounts and you do have some payoffs, you can't have some spikes here and there. But no, I don't expect it to be dramatically different than that in 2023. CD runoff will start in really in 2024, which will benefit. Okay. And then just on the core NIM components, can you give us the year-end spot rate on interest-bearing deposits? And then what are incremental multifamily and commercial real estate yields coming on at today? I'll go to the yield. So, Matt, we're looking at, like I indicated, we're pushing towards 225-ish at the five-year, we're trying to have around 6% on a traditional five-year deal. Commercial is probably another 50 bps above that. We're not really doing a long-term financing. And if we do long-term financing, we're really pushing our capital markets group to sit down with the customer and structure something synthetically, which does change the economics for the bank as well as for the customer. So, we're giving them more choices I indicated a lot of our customers that aren't doing a whole lot. They have an option and the option was a very expensive option. We gave them a third option, which is a SOFR option, which is 250 off of SOFR and SOFR has been rising. So, it's not as attractive as it was six months ago, but it's an alternative, and we're seeing probably half of our customers on the multifamily side opt into that choice, which we like that prefer for interest rate risk balance sheet management perspective, but a much higher coupon. I think I indicated that the commercial side, what's repricing. But in 2023, we have about another $2.5 billion, around $388 million on the multi-side, and if you take in over the next two years, it's about -- but just about $6 billion on multibit $375 coupon and market yields are around 6%, assuming they all go into a five-year structure, not doing a whole lot of seven-year tenure, reluctant to do that as we look at the marketplace and in general, I think people are sitting on the sidelines right now. So, we're getting the benefit of repricing just from the optionality of them making a choice and in very rare circumstances, you've seen in property transactions. So, we're probably -- we could have a higher balance for longer because there's less activity. As indicated in my previous comments, there's very little economic in our internal forecast for prepayment activity. I think we had probably one of our worst years last year. We still had a strong -- it was a record year on earnings. We had $46 million of prepaid going back to the high of about $140 million in previous years going back to 2013. So, we have the opportunity here for a great economic if the marketplace changes. But we're assuming that it's going to be relatively benign. So, we -- even on our first quarter guide, we said the prepayments are not going to be impactful in any meaningful way going forward in this current rate environment. Matt, just one point. So, I want to talk about some of the other lines of business. I mean we have a great builder finance business. That number is close to 400 spread off of repricing for SOFR indices. We have fees involved in those types of businesses. We have the warehouse business, that's a substantial spread in the 200-basis point spread. We look at that as a great opportunity because we know that business very well. We're very comfortable with that business, clearly, a very attractive yielding business. And we have other C&I businesses that are part of the legacy Flagstar coming over that we think we're going to grow very, very nicely on a combined basis. Those spreads are very high. They're not near what we are typically accustomed to their floating rate, they have fees, they have structure behind them, and they have very good incremental benefits to the margin, which is going to be a capital deployment opportunity in 2023 and beyond. That is the game change that we're putting together here. So we're not just at one bank that does one thing. So we have many, many verticals with different opportunities, and we're going to be very cautious given the rate environment to deploy capital to ensure we have the best capital allocation story to talk about as we build a new Flagstar. No. Understood, Tom. I appreciate all that. I did want to also touch on the government as-a-service deposits, just considered it comes in in lumps, and then it sounds like as it's spent, it winds down. Could you give us a sense for the pace of attrition on the government as-a-service deposits? And is it -- is it expected to roll off to a near zero towards the end of the year, or is this something that holds a residual balancing can grow off of that residual year-over-year? So I'm going to start. I'm going to refer to John. We've done a lot of work around on expectation and modeling and doing regression analysis on how this would be active in and we actually have an experience with the stimulus payments and how well they held on the balance sheet, more than we expect that we conservatively model it, which is in our model. So we had a large benefit in the fourth quarter that came from the California stimulus opportunity that we would have been provided for. It's holding better than expected. Probably it will be there for longer than expected, but we model it conservatively. Ultimately, that will go down to a tail to a point and John can get into some details on the tail. At the same time, we have other ones ramping up in 2023, although not the same type of program, there will be consistent with unemployment programs that matters we have a large relationship with Jersey and others. We just picked up a big win recently with California, which will be a substantial benefit for the bank once it gets geared up. But again, it's the timing of it, Matt. If it happened in Q2, Q3. It really is as quick as government gets it up and running and we're ready to react. It's been a good business for us, and there's some fees involved. But more importantly, the average cost of those liabilities are very low, New net to zero in most cases. And John, if you want to talk about some of the trends. Yes, we've tried to model it. It's been pretty close to the modeling we saw with the economic impact stimulus payments. So there is a tail that will sit around, but the bulk of the deposits to go pretty quickly. and then you have like a slow draw after that. So yes, we will have deposits as of -- I would assume at the end of the year, I don't think it's going to be that material of a number by then. But the first quarter will still have a really nice average balance then it will start to come down from there. Okay. Understood. And then what are the remaining one-time costs from the deal and the mortgage restructuring? And then could you give us a sense for timing throughout the year when they'll be taken? Well, let Lee talk about the mortgage restructure and John will get into some guesstimatess on what we think we're going to -- we have left. Lee? Yes, sure. So the cost with the restructuring that we've just actioned, we estimate to be $12 million to $13 million. And that is predominantly severance. But as I mentioned earlier, there are some leases that we need to get out of. So there's some costs associated with that. There's a couple of contracts that we are also going to exit. We're going to isolate that as a restructuring charge, and that we will take that in the first quarter. In addition, we probably need 60 days. That's what we're estimating to work off the pipeline, those loans are a lot that are not yet closed of those offices that we've closed down. So that will take us through the end of March. And that's why earlier I mentioned that even though you're going to start seeing cost savings starting in February, there is noise as a result of the onetime restructuring charge, the runoff of the pipeline and I expect us to have a real clean run rate beginning April 1. And then on the merger-related charges, we'll see some in the next couple of quarters when it comes to primarily severance and just some consulting work to get through the consolidation of the two companies. So you'll see that as well in the coming quarters. And then there'll be some charges when we get to Q1 of 2024 when we get to the conversion date. Got it. Okay. Last one for me is just overall capital levels, tangible common equity at 6.4%. Your total risk-based capital ratio is sub-12%. Should we be contemplating any common equity raise or sub-debt raise to bolster these ratios? That's all I had. Thank you. Yeah. Thanks, Matt. I think given where the capital ratios are, and just given the credit nature of the two balance sheets, two legacy bank balance sheets and the limited risk really from a charge-off and in a provisioning perspective, we're comfortable where the capital ratios are with a common equity Tier 1 ratio over 9%. That's a good spot for us to be given the loss content in those portfolios. So it's something we're going to, of course, continue to manage. And we believe the best use of the capital right now is primarily dividends, then, of course, to fund growth. And then going forward, we can look at other capital initiatives depending on market conditions. Hey Tom and John, I had a similar question as Matt on the capital. So is the $906 million likely to grow from here, or is there a scenario where it may dip a little bit as the balance sheet is considered quarter-to-quarter? Yeah. I mean, the goal is to grow. I mean, it depends a little bit. One of the things we look at when we put both companies together is there's a large portion of the assets but even though they have really low loss content in them, including multi-family, mortgage warehouse, they're 100% risk-weighted assets. So we do have that that we have to work through from a capital perspective. But the goal is over time to ensure our capital ratios are where we want them to be in our capital target. So that's no doubt the plan. Just to be clear, we've traded off capital for accretion on the adjustment given the changes in interest rates. So you're getting a lot -- as John indicated, a benefit as far as the marks on the assets and liabilities. So that does have an impact. You get that back over time. So we think you'll see some nice earnings per share growth as well. Got it. And then last question, John, just has to do with how the banking as a service and government as a service reprices over time. Do you have to have an absolute Fed cut before you can lower those rates thinking out just a couple of quarters from now? Well, the government as a service deposits are primarily non-interest bearing or if there are, they're really specific as to exactly what those costs would be. On the banking as a service deposits to see big cuts, you probably have to -- to see big drops in those rates, you probably have to see some Fed cut, especially in this environment. But times change and sooner or later, the spreads can narrow a little bit on what you're paying for a lot of those products. But I think we have to start to see us a pivot before we start to see some significant savings there. Okay. And are those banking as a service sold by maybe three-quarters or two-thirds of the Fed moves? Is that about right? Yes, I mean, there a range. Some are 100% beta, then some are in that 75% range. So on the banking-as-a-service side it's a range of what's tied to the change. Thank you. Our next questions come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question. Yes, Iâm back. I feel sorry. I know it's been a long call. Just one question, Tom. I think you mentioned multiple times around being becoming a commercial bank, multiple expansion for the stock. Give us a sense of what you think this combined franchise, as we look beyond systems conversion next year? Like, if you have any sense of where you think the bank is from an ROTCE, ROE perspective, what the franchise should be earning in a steady-state environment. Look, I mean, this is obviously going to be a block and tackle year. We're super excited about putting these companies together, the rebranding effort that's going to take place. We are transitioning to some great technology that's going to really assist our customer base. As you move towards commercial banking, we've got to work a lot on the funding side. And the company is going to be, historically, over the past couple of years, and we're earning just under 50% TCE, we should be in the high teens. And, I think, the reality in the high teens on a traditional multiple perspective was return on assets well north of 1%, 1.10%, 1.20%-ish over time. It's going to take some work here, but the reality is that, the balance sheet has changed dramatically. If you think about the lines of businesses that we're going to have, the verticals that will be priced, very different than historical fixed-rate lender that had vulnerabilities to rising interest rates. So we want to be better balanced. At the same time, we're going to get our cost structure right. We have work to do with, going back to 2023 as a block and tackle year and we look at 2024 in hopefully a different rate environment. We'll be able to take advantage of a better funding mix. We're going to go after the deposit funding. If we move that positioning to having better funding as a core competency of our number one priority, that will change multiple. We feel very strongly that mortgage on a percentage basis, because the bank is much larger, will be less of a concentration on total income stream. So we want to have less dependency on mortgage, less dependency on the wholesale finance. And we believe that will give us a better blended multiple. Multiple expansion is going to be key, as we look at the transformation to a commercial bank. We have all the parts in place. It's going to take time to block and tackle, but we have the road map and the system conversion will be done in the first quarter of 2024. At the same time, we're going to be rolling out the verticals, proving to the marketplace that we're allocating capital to different lines of businesses that have better margin businesses. And now at the point, as a company, we're looking at loan by loan detail on a total return basis, and we'll allocate capital accordingly. And that's something very different when you have choice now. We have choice on a combined basis, where historically, we had limited choices when we had our business model. So we're excited about the business model. We think we have a great story to tell. This has been a long time and awaiting, a lot of planning. And we're super excited about launching out the new Flagstar as a new brand. Thank you. That is all the time we have for our question-and-answer session. I would now like to hand the call back over to management for any closing comments. Thank you again for taking the time to join us this morning and for your interest in NYCB. We are creating a unique multifaceted financial services organization that will no longer be reliant on any one particular line of business, with a very exciting future. Thank you all. Thank you. This does conclude today's teleconference. We do appreciate your participation. You may disconnect your lines at this time, and enjoy the rest of your day.
EarningCall_1388	Okay. We're good to go. All right. Great. Good morning, everyone, and welcome to the RBC Canadian Bank CEO Conference. For those of you who don't know me or forgotten what I look like over the years, my name is Darko Mihelic. I'm the research analyst here in Toronto. I cover the large Canadian bank space. And I'd like to formally welcome you all back to an in-person conference this year. Similar to prior years, our presentations today will be in a fireside chat format. The schedule, you should all have a schedule, and each speaker's biography is available on our website. So I don't have to do these long time consuming introductions. And like previous years in-person, there was an opportunity for audience Q&A through an app called Slido. And so what I'm going to try and do today is sort of block off the last 5 minutes or so, of each chat to take the most popular questions that's been upvoted by you, the audience. So if you'd like to submit a question during any of these sessions, just please click on the QR code on your table and log into Slido with a password. And once you're in there, you can choose the room, and you can log your questions in for each session. So I would really appreciate some participation from the audience. I have my own set of questions that I intend to ask, certain angles that I see. But every year, I get surprised by what some people ask and what people are interested in, and I get to learn along the way as well. So please, big encouragement from me for all of you to please type in a question and upvote to the question that is most near and dear to your heart. So without further ado, I think what we might try and do is start this session a little bit earlier and ask the CEO from RBC, Dave McKay to please come up to the stage. Yeah. I was actually tell [Multiple Speakers] good start to the year. Yeah. Hopefully, the weather cooperates for a few more days. For those of you who are in town a bit longer. Dave, I want to ask a bunch of questions, and I think I want to start off digging away at capital because it's been a pretty big issue lately. We've had the domestic stability buffer increased by the regulator, and it elicits a number of questions. So I think right-off talk about it, I just want to start to ask about capital and dig away. And we can take this conversation anyway you want. Why don't we start with your view on how Royal is positioned in light of a higher capital requirement and in light of the fact that you'll be closing an acquisition at some point, and possibly the DSP even rising by that point. So maybe we can just open it up a little bit wide and let you kick-off and talk about your position on capital and how Royal is positioned for HSBC in light of the change? Yeah. I know it's on everybody's minds. It's great to see everybody off the top of the year. Certainly for us, capital has been a strength for a long time. We've managed the organization conservatively for a long period of time. We've always said that the capital has no half-life, and we'll use it well and we felt that we've used it extremely well. So from that perspective, it's given us a lot of flexibility. So as you think about the recent changes to capital levels from OSFI, the announcement of a wider range of DSP, maybe I should just kind of walk you through how our strength and our flexibility and the size of our balance sheet and how we've managed it gives us enormous confidence in absorbing the acquisition having capital for growth and having capital for future acquisitions. So as you know, we finished the year, Q4 with 12.6% CET1 ratio. And as we think about organic growth, and we're going to see strong organic growth, we think this year across most of our business. Therefore, we're looking at a net capital organic generation ability, a little bit below what we would normally run 60 basis points to 80 basis points. But this year, we think we can do around 50 basis points of organic capital build. We have positive impact from Basel IV reductions because we had managed our assumptions conservatively, particularly around LGDs and others, we'll have a positive 70 basis point impact from Basel IV. So we're already looking at a 120 basis point capital build from those two impacts. And then we -- as you saw, we turned on a DRIP with a modest discount, and that will give us around 30 basis points. So we're looking at 160 basis point capital build in 2023, which will take us up to around 14 to pre the close subject to approval, obviously, but I'm running through the hypothetical scenario of the HSBC acquisition, which is going to impact CET1 by around 240 basis points. So if it gets approved and closes in Q3 or if it gets approved and closes in Q4, you'll see us in a range of just under 12% CET1 ratio at the close of HSBC. And assuming it's in, say, Q4 2023, so enormous ability to absorb that acquisition still be well above the threshold of 11% with a comfortable buffer to continue to grow organically. That's in 2023. As you go through and if you make an assumption, if there's further utilization of that DSP range, historically, there's been time to adjust. It doesn't come in and get a significant impact. Like that wouldn't come in and get implemented overnight. Therefore, we'd have time to build into that. So as we look into Q1 '24 and Q2 '24 again, you're going to build capital pretty significantly through earnings through the DRIP as we look through the capital build in 2024 after organic growth, you're going to see 60 basis points to 80 basis points of organic capital build. You're going to see another 40 basis points of DRIP. So as we look through to 2024, we see even by Q2, being well into the 12.5% range, and then finishing the year closer to the 13%-plus range in Q4. So irrespective of what happens with that DSP range, we're going to close, subject to approval, HSBC, well above the current minimums. We'll move well above any type of minimum threshold at the max range of DSP, have capital for growth, have capital for acquisitions. And therefore, the conservatism that we've had, all that capital, the earnings power of the franchise diversified across so many client franchises, it just -- the confidence we have in moving through that and being well above 12.5%, 13% in the next six quarters is, really gives us enormous flexibility to absorb an acquisition to grow and not need an equity raise. So I think off the top, I wanted to give everyone comfort, that's the capital waterfall. And therefore, we have enormous flexibility. Having said that, when you -- there's no having said that, that is kind of our perspective on going forward with a lot of flexibility. If there is a recession that's more severe than the mild recession that we forecasted, this is a cyclical buffer, right? So it's supposed to be built up in good times. And as you'll hear, hopefully, and you should ask Peter this question, [indiscernible] said it publicly many times. Buffer's to be used in a downturn. Therefore, if the downturn is more severe and you're seeing more volatility in earnings and credit, then you would expect that wouldn't be the time that the DSP gets used, used upwards. It should be drawn down from that point. So as we look through scenarios of modest recession to maybe severe recession, if we put up still much lower probability on that, much, much lower probability and we look at where the DSP might go, you have to take into consideration how it's supposed to be used. And if there is a more severe recession, we don't forecast that. You would expect some flexibility in lowering the overall threshold. And that's how we understand the buffers are to be used. So Peter's and OSFI have said that publicly many times, and obviously, should be discussed today. So as we look at those scenarios, we have enormous confidence in the flexibility to absorb any volatility around uncertainty. We have the flexibility to absorb our largest acquisition ever subject to approval and we have the flexibility to continue to make acquisitions to grow our franchise. We're in a great place to continue to create significant shareholder value. And I want to give everyone confidence to do that. I think that's one of the most important -- I know it's in your minds that capital waterfall gives me a lot of confidence and the organization confidence to continue to hire to grow to look for growth. It does elicit a couple of follow-ups. First follow-up would be, what about the level of buffer that you want to run over and above what OSFI sets? Is it now almost necessary to run with a higher buffer just because you never know tomorrow, he could raise it, and he could raise it pretty quickly on you. Does it necessitate a higher hurdle rate for future acquisitions as well? We always run an operational buffer just because you don't want to dip below your minimum thresholds ever, right, and face the need to maybe do something that's off plan. So we always run a buffer above minimums. And you've seen us do that, and it tends to be in the range of kind of 50 basis point buffer just for volatility and uncertainty from quarter-to-quarter. You never want to run it close to the line. Weâve always done it that way. Is there a need for us to? No. We -- certainly, as a G-SIB, as a large organization, we've run this organization more conservatively so we can take advantage of opportunity, which you just saw us do. Capital has no half-life. So you'll see us continue to rebuild that capital for flexibility to other -- continue to grow in the United States is a core part of our overall thesis. That hasn't changed even with the HSBC transaction and to continue. So we'll continue to build with an operational buffer, and we'll continue to use capital wisely. You saw us kind of build capital and hold capital to the right opportunity came along, and we used it just need to create great shareholder value and in organic and inorganic growth, and we'll run the bank the same way while continuing to return capital to shareholders. You saw us pursue share buybacks pre-HSBC. You'll see us continue to do that once we rebuild our capital and there really no change in how we want to manage the capital. We're building capital for the flexibility to take advantage of opportunities to create shareholder value. And there's no change to that and generate strong premium ROEs along the way from our friends. The strength of our client franchise and the cross-sell and the returns and the efficiency and scale that we bring allow us to drive, as you've seen, higher ROEs off a higher capital base. Even with all that capital we're carrying, we're still driving 16%-plus ROE from that. So that's the strength of this franchise, like, even with all that excess capital to still drive premium quartile ROE off that higher capital base. And given the waterfall that you've provided here, it almost seems as though it means that a U.S. acquisition, which sounds like you'd still like to do in the U.S. to build upon the platform, still seems like it's not in the cards for this year. I mean, it looks like you're generating enough capital for HSBC, maybe a little bit for some bumps along the road in case, but it almost pulls you out of the race, so to speak, for an acquisition in the U.S. this year? Yeah. We're tending to focus on smaller technology capabilities right now. But yes, for us to turn around and do something significant on the back of HSBC in the next year, that's not in the cards. Has the mood changed out there for acquisitions? I mean, we're getting Competition Bureau talking, they want to look at the [indiscernible] I think they sent out a tweet. There's lots of push and pull in the U.S. with regulatory approvals with other acquisitions. Has the mood changed a little bit? Has it made it more difficult to make an acquisition? Does it necessitate perhaps going forward smaller acquisitions? Right. I mean, I think there's so much value to be created in growing and adding capabilities that accelerate organic growth, right, versus absorbing a franchise that there's always a good reason to sell, right, versus to buy. So we still see enormous opportunity organically in the organization across all our U.S. franchises, not just City National, but you look at the opportunities within Capital Markets. Coming off a soft year, we're certainly very excited about the capabilities that we've invested in from cash management to more advisory capabilities across the business and that getting traction through the year. The Wealth Management franchise continues to hire advisers and grow and add product and deposits. So very excited. We're the sixth largest wealth manager in the U.S. and continuing to grow. And then City National, obviously, with very strong core organic growth within its footprint, within its customer franchise. We're serving the same types of customers, entertainment industry, the technology industry, real estate. We moved into the mid-corporate area. So there's enormous organic growth opportunities in the United States. And therefore, that -- that is the core focus of what we're doing, and we'll add-on where necessary. But for us, even through Q4, you saw this strong performance across our U.S. Wealth franchise. We're very excited about that. And you always have to debate, do I distract management with something small versus just having them stay focused on the organic growth and continuing to build that franchise. We've taken it from a $20 billion franchise to a $90 billion franchise. And that's by staying focused on customer franchise, staying focused on improving our operational performance. And we're very excited about the ability to improve the profitability of the existing balance sheet and efficiency of the existing franchise as well as growing it. So I always debate to say, if I do something small, it's going to distract management and could detract from the core organic growth capability. So for me, it's rather being patient, waiting for the right opportunity and staying focused in the U.S. on core organic growth. Okay. I want to switch themes. There's been a lot of talk about Canada as a country having a very indebted consumer base and a lot of people have gotten into mortgages with very low rates. You have a very large mortgage book in Canada. So I wanted to talk a little bit about that vulnerability and to sort of flesh out sort of what's coming down for the next year or two on the mortgage front. There's a lot of talk of people hitting their triggers. There's significant increase in mortgage payments coming. Can you maybe share some statistics around your mortgage book that should make us feel like this pig in the python kind of effect is not scary? How many people have hit their point? How many people will have a very big increase in mortgage payment in the next year or so? Is there anything you can flesh out here for us to make us feel better about that vulnerability in Canada? I know, again, it's on everybody's mind. I mean, I think we all have to start by the strength of the mortgage franchise and the mortgage market in Canada, right? Yes, we're seeing significant reduction in core resale and purchase activity down on average about 38% across the country, more in core markets like Vancouver and Toronto in the low 40s. Yes, prices have come off from their peak in March. We're up 14% and are down about 6% year-over-year, but on the back of a very significant increase. But we're still -- having said all of that, when you look at sales to listing ratios, you look at overall demand factors in the core mortgage market, immigration, household formation, jobs, this is still a balanced marketplace with very strong demand supply fundamentals. So we've been saying that for years. That has not changed at the end of the day. Yes, prices moved up rapidly and are going through a correction, a needed correction because the affordability of a home in Canada has never been worse. So -- and that's driven by rates and house price increase. So as you think about the overall structure, we can't lose sight of, this is still a very well-balanced, well-structured marketplace without excess supply with a shortage of supply and continued long-term persistent demand creation from immigration and household formation. So let's not lose sight of that. Notwithstanding that, we're in a cyclical delta here that we have to understand. And I come back to -- so how do we, at RBC sit down and answer your question, because I think it's really important to understand the structural advantages we have in gaining insight into our customers and into that question that you asked. So I'm going to give you a structural answer, and then I'll give you the specifics to our portfolio. Structurally, our two decade investment in core banking and core checking pays enormous dividends to us. One, it's a core source of funding and low beta funding, which I'm sure we're going to get to around NIMs, huge advantage right now, an income tailwind. Two, it gives us enormous data, data that we use to understand cash flow and cash flow stress and income stress and we model off of that and huge data to cross-sell. We have a 50% premium on our cross-sell ratio to the industry average of 11%. We're cross-selling at 18% of our customers have three core products, it's because of the core information and our banking relationship. So when it comes down -- so those three benefits I've talked about for a decade now. And they're paying huge dividends for us and drive our ROEs and drive our premium franchise performance. And I can't say that enough on stage. So when we take the credit benefit of that, so how do we take that information and answer your question. So we apply a lot of AI capabilities and models to all cash flow data. We look at incomes. We look at the stress of inflation on expenses in a household. And we monitor cash flow to interest payments, as you would in any corporation. We do that at every single consumer in our portfolio because over 80% of our clients have their core checking and core cash management with us. So we have deep, deep insight into our overall portfolio. And then we monitor house prices at the MSA, at the street level. And we know our collateral values. So we use AI, and we use all this data to segment the portfolio. When it comes to the variable rate portfolio, which is roughly $100 billion to $120 billion portfolio. We go through that variable rate mortgage portfolio. And we start to segment out what the delta is in the trigger rates and the rate resets in '23, '24 to 2025. We model that cash flow. We model the cost increase from inflation. And we come up with a perspective on this group of clients with these rate resets that are coming at them in each of the sequential two, three years will or will not have a cash flow challenge and we have a pretty clear view of that. We stress that cash flow challenge. We look at a bucket. And then when we get into a bucket that we think you might have a cash flow challenge, we say, what's the collateral value of your home? And we have deep insight in the collateral value of your home. And we put the two together to say which one of our clients has a cash flow challenge. And we stress that against today, no, but in the future, if you lose what's the probability you might lose your job. And then who also has a cash flow challenge plus has a collateral challenge. And that's the bucket you have to be concerned about because if you have -- the customer is unable to make their payments, and you have to take an action with that client to realize on their collateral, which is the last resort. You have skip a pay payment deferrals, you have maturity extensions, whatever it happens to be, you have a lot of ways to work with that client. But then you look at that bucket with your analytics and your AI to say, where do you have a joint problem of cash flow and collateral. We do that actively all the time. And we have a bucket that we're monitoring that has both. And that bucket, I can tell you, is in the low-single digit percentages of our portfolio. And that's the bucket we're managing. And that bucket changes, but it doesn't change by 10%. It changes by $10 million here and there. And that is a very small part of our portfolio. The vast, vast majority of our portfolio has the ability to absorb the cash flow delta because we see their income. We see the volatility of that income over time. We know where it comes from. We see their house and their collateral value, and they have significant equity in their homes. So we watch for the situation where they have -- and we work proactively with those customers. So even if you were to apply a 100 fold increase in default and loss on that portfolio is not meaningful to our overall business when itâs in the low-single digit percent of your portfolio. So the comfort you should get is deep data and deep insight. It still comes -- gives us confidence and where to focus, where the risks are. We have tools to manage that, and we'll work through this. So it's not a big part of the portfolio at all. And that's on the assumption that the vast majority of -- well, the majority of that, not vast, but the majority of them, more than 50% of that variable rate portfolio will have a trigger impact. So we do see a significant trigger impact in the variable rate mortgage product. But the cash flow was there to absorb it, and the collaterals are there to absorb it, to a large degree. And we'll continue to monitor that, but there's significant buffers there. The other scenario you have to look at is we're in a very strong employment market. We still have 900,000 open jobs in Canada. So if there is a displacement from one sector to the next, we still have significant demand in construction, in retail, in hospitality, health care. There is still strong, strong demand for jobs. So if you're displaced in one sector, there is a job for you in this economy, and that's different than other recessions that we've been through. The last piece is there's still the significant excess liquidity buffer in our country. It's coming off, not as fast as coming off in the United States. If you look at the liquidity buffer built up during the pandemic in the U.S. of $2.5 trillion, $1.5 trillion has rolled off already. It's down to about $800 billion, and you're starting to see the credit manifestation of that slowly. It's still nascent, but you're starting to see default bankruptcy manifestation from that. In Canada, we still have roughly 75 -- 70% of that build is still there versus 30% in the United States. We've seen roughly 25% roll off, but a big chunk of that roll-off is in your more affluent customers who are reinvesting for yield versus burning cash because of inflationary cash flow burn. So it's for a good reason, it's a reinvestment reason. So we still built very strongly about the fundamental supporting cash flow, employment even with displacement shocks, with the tech layoffs that are coming, there are other jobs in the economy to continue your cash flow. There's a significant liquidity build to absorb the shock if something's happened to you. And there's a time lag between when you lose a job and get a job. And there's significant collateral in the system, and we have deep insight into that. So from our perspective, the investment in core banking, the investment in data and AI give us this really unique ability to see and understand our portfolio and monitor it continuously and act with our customers to mitigate risk. So I think the structural capability answer is as important as the message I want to leave that low-single digit percent of our portfolio has a payment and collateral potential, but they're still working. So I think that is a really important kind of overall perspective on why we're not blindly going to this. We have deep, deep insight into what's going on. We have deep ability to use AI to stress and to model and to look at it and therefore, confidence in the different scenarios that come out of our portfolio and therefore, a willingness to continue to find those customers and to lend and can support Canadians going forward through this difficult time, which is a difficult time for many Canadians. Really important question and answer. And it's a good thorough answer. And so I wanted to really quickly hit a couple of follow-ups before we hit PCLs and NIM. What if rates go higher? How much can the mortgage book handle if rates get going higher? Yeah. So we've obviously stressed to higher central bank rates and therefore, the problem doesn't shrink. It does grow. But it doesn't grow materially from where we were. Okay. So if you take that low and mid-single digit, you could see a 30%, 40% increase with another 75 basis points, say, go to 5%, but it's still off a very small base of problem. So despite the strength that you see in the economy and the ability to absorb shocks, we're still looking at normalizing PCLs into 2023. So maybe you can talk a little bit about what you see normalizing where. And if I'm not mistaken, the last -- my check was the consensus had you growing EPS at 5.5% this year. Now that's below your medium-term target. That can happen. But I'm just curious if you can talk a little bit about where your PCLs might drift to? Why they're normalizing higher? And is that going to be the big swing factor that maybe the 5.5%, is that reasonable to think in a normalizing sort of PCL world? Yeah. PCL is very difficult to forecast. So what we're forecasting in our base case is a fairly significant increase in unemployment, given the timing maybe mismatch between losing a job and finding a job as we see kind of a reallocation of human capital within our economy. So in our base case forecast, we do have unemployment going up to, I think, we're closer to 6%. So in that normalization scenario is a higher unemployment rate, which is driving that. What we are seeing currently in our portfolio is very low bankruptcy default, and most of it still flow default. So usually, it's about 50% bankruptcy, 50% flow default in your consumer portfolios and we're seeing a pretty consistent flow. And those can be driven by all the other factors from job loss, divorce, health issues. There's still large macro drivers of financial challenge. And those drive kind of your flow write-offs in bankruptcy, we're forecasting because of that expectation of a tick-up may not happen. But in that normalization is built a fairly significant kind of 80 basis point increase in overall unemployment. If that doesn't happen, then you won't see the same normalization. So it's not status quo unemployment that drives that. It's an increase in unemployment that would have to drive that normalized loss ratios of kind of 25 basis points. [indiscernible] want to go? Yeah, that's where I wanted to go. Thank you. And I'm just keeping an eye on time because I want to touch on a couple of other topics. Maybe we can touch on net interest margin, net interest income growth for the year. The bank has had a pretty good expansion of NIM. But are we reaching the peak of it and how should we think about your net interest income growth for -- I mean, it looks like it's -- consensus has it around double-digit growth. Maybe you can talk to expectations. Yeah, absolutely. Again, one of our core strengths. The investment in commercial and consumer core checking low beta capability, low beta deposits continues to be a franchise story for us and will continue to drive NIM expansion into 2023 along with very strong funding levels. So we're still forecasting a range of NIM expansion of 10 basis points to 15 basis points next year, which is really significant to a balance sheet of our size. You'll see a good chunk of that in the first half of the year, and then we'll see where rates go from there. We're still forecasting kind of central bank rates to go up and come down. So a net-net flat is coming, our economics group or forecast. So in an environment of net flat, we're still going to see NIM expansion. We're extending the duration of our portfolio to protect against any downside or limit the downside if rates do correct faster. But when you listen to the narrative from the Fed or the narrative from the Bank of Canada, they're going to have to hold rates where they are to ensure they manage inflation within the target range, and we don't expect to see a meaningful runoff certainly in the near term. So rates should hold for a while. Our expansion is strong. And I think that's a really strong story driving what you just said is, along with good growth, not as growth that we've seen in the mortgage portfolio, certainly in the past year mid-single digit in mortgage, but strong commercial growth. Still you're going to see very strong NII growth from our franchise, so kind of is a good position to be in, right? Funding, NIM expansion, capital flexibility to continue to drive the franchise and absorb our largest transaction. The earnings accretion that comes from HSBC is very, very significant for us and overall drives a mix of very strong, consistent earnings that drive high dividend payout ability. And is there anything that concerns you regard -- I mean, you mentioned the deposits. You mentioned was it 75% of the deposits are still there from the surge from the pandemic? Specific to Royal though, what I'm interested in understanding is, do you see that strength perhaps really fading towards the back end of the year as people absorb higher payments as they pay their taxes as the normal course? I mean, the concern that we have is that this funding advantage shrinks, and then rates fall. That's my worst-case scenario. Can you talk us through why I shouldn't be that concerned that NIMs in 2024 [indiscernible]? The mitigants to that systemic issue or oneâs extended duration in our balance sheet, both in the U.S., really important and in Canada. That acts as a mitigant to the downside, whereas we had the short duration to get the significant benefit on the upside. We're waiting for this for five to 10 years, extend duration, so you don't see the same runoff on the downside. So that's really important to understand. Two, the other mitigant is growth. Last year, we acquired 400,000 net new customers. And that's before we announced the deal in Quebec with Metro, before we announced the partnership with ICIC Bank. And before you'll see a number of partnerships coming forward continuing to invest in our ventures strategy, which is really starting to kick in, and we have great heart for that strategy as a long-term differentiated strategy. So as we think about client acquisition, it will be higher than 400,000 going forward. We're back to where we wanted to be in our Investor Day when we talked about 500,000 a year. So offsetting then the systemic potential runoff and burning of some of that cash -- excess cash is very strong organic growth through our core franchise strategy of leveraging partners, leveraging our network, growing our network, investing in technology and creating value for customers and acquiring us a significant growth franchise. ICIC Bank alone we expect in the first year to do 50,000 more acquisitions. And that's a franchise we're going to continue to build. Quebec, a very important market to us with the partnership, sponsorship with the Canadians, but also with Metro. We're very excited about. We'll continue to grow in a market where we're underpenetrated. We're the third largest bank in Quebec. So we have opportunity to grow there. So when you think about offsetting that duration, growth, cost management, all of those are abilities for us to continue to deliver strong NII growth. Okay. I haven't seen a question show up on my Slido iPad. Maybe I'm reading it wrong. But with that, maybe I always like to give the CEO the last word. So Dave, maybe you can just give everybody here what you're -- what you think the key messages are for 2023 for your shareholders and possible investors? Well, I think just to summarize, we covered a lot of them through your questions, but I'll start with the strength of the franchise. At the balance sheet level, enormous capital strength, ability to absorb our largest acquisition ever, ability to continue to grow, ability to continue to make acquisitions. And that -- we have not diminished that flexibility going forward. And therefore, you could see us be front footed as an organization and taking advantage of opportunities. That's a really important point, right? And through HSBC, creating an opportunity to add $1.5 billion of earnings is a very, very meaningful strategy for us. Liquidity and funding, again, low beta deposits, the funding we get from our core banking or corporate cash management capabilities, the information flow that we get both for risk management and for marketing and understanding of that customer and delivering them the right products and services at the right time and enormous capability and strength from that liquidity profile. The strength of our overall diversification of our overall franchise. So very excited about our retail Canadian banking capabilities, the addition of HSBC, as I said, but also the investment in partnerships, the investment in technology, the investment in ventures, the core organic growth across credit cards, deposits, mortgages, commercial, we feel very strong about. And we exited the year with really good momentum and continue to build on that momentum. Very excited about that. The addition of Brewin Dolphin in the U.K. and now the overall strength of a true global wealth management capability, kind of number one in the Canadian market, number six in the U.S. market, number three in the U.K. market. Now you're starting to see the synergies of putting together a global customer franchise around wealth. That's been our objective. Brewin Dolphin was a key piece, continue to look for opportunities to build out a true global wealth franchise. You've seen significant growth, particularly coming out of the U.S. The U.S. is going to be a very strong contributor to our revenue and franchise growth in '23. Rates really helped, but also organic growth there and just the organic growth that I talked about in wealth. And we're looking -- we've invested in our Capital Markets business. We had an off year last year. We took the underwriting marks. It was a volatile market. We're looking for that business to bounce back. But long-term investments in more coverage, more advisory capability, but also the U.S. corporate cash management investment is a very strong strategic piece for funding, but also for ancillary revenue and cross-sell into relationships where we're already in the syndicate or already -- they're already strong partners. We have a right to ask for the business, and therefore, we feel very good about the long-term perspectives and the short-term perspectives of our Capital Markets franchise. So diversified globally diversified by client. We're focused. Technology is paying off, and we feel really strongly with the flexibility of capital funding, client franchise that partnership investments that we are on our front foot and feeling good about the franchise, notwithstanding that there's a volatility. And that's the benefit of ROI is that through these uncertain markets, good times and bad times, we can manage through that and absorb that and continue to deliver strong shareholder value and strong ROE, so.
EarningCall_1389	Welcome to Signature Bank's 2022 Fourth Quarter and Year-End Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; Eric R. Howell, Senior Executive Vice President and Chief Operating Officer; and Stephen Wyremski, Senior Vice President and Chief Financial Officer. 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] It is now my pleasure to turn the floor over to Susan Turkell, Corporate Communications for Signature Bank. You may begin. Good morning, and thank you for joining us today for the Signature Bank 2022 fourth quarter results conference call. Before I hand the call over to President and CEO, Joseph DePaolo, please note that comments made on this call by the Signature Bank management team may include forward-looking statements that can differ materially from actual results. For a complete discussion, please review the disclaimer in our earnings presentation dealing with forward-looking information. The presentation accompanying management's remarks can be found on the company's Investor Relations site at investor.signatureny.com. Thank you, Susan. I will provide some overview into the quarterly results, and then my colleague, Eric Howell, our Chief Operating Officer; and my colleague, Steve Wyremski, our Chief Financial Officer, will review the bank's financial performance in greater detail. Eric, Steve and I will address your questions at the end of our remarks. At the onset of 2022, we set several goals, including, one, the hiring of numerous private client banking teams and the colleagues necessary to support our geographic expansion, which we did with the hiring of 12 teams. This includes 5 in New York and 7 on the West Coast, of which 3 were in Nevada, marking our entry into that state. We also added hundreds of colleagues across various operational and support areas. Two, launching the healthcare banking and finance team, which we successfully onboarded during the 2022 second quarter. Three, increasing our annual earnings, where we realized great success as evidenced by earning a record $1.3 billion in net income with a record return on common equity of 16.4%. Four, growing our loan and deposit portfolios substantially, although we grew loans by a strong $9.4 billion, 2022 presented deposit challenges. While we expected continued deposit growth, albeit not at 2020 or 2021 levels, 7 Fed hikes during 2022, totaling 425 basis points, coupled with quantitative tightening and the proliferation of off-balance sheet alternatives resulted in the most difficult deposit environment we have seen in our 22-year history. The arduous rate environment, along with the challenges in the digital asset space led to deposit declines, which we overcame a little difficulty given our robust liquidity position. Please take note, thus far in 2023 we are already up $1.8 billion in total deposit growth. This is driven by an increase of $2.5 billion in traditional deposits, offset by a decline of $700 million in digital deposits. Now taking a closer look at earnings. Pretax pre-provision earnings for the 2022 fourth quarter were $451 million, an increase of $65 million or 17% compared with $385 million for the 2021 fourth quarter. Net income for the 2022 fourth quarter increased $29 million, or 11% to $301 million or $4.65 diluted earnings per share compared with $272 million or $4.34 diluted earnings per share for last year. The increase in income was predominantly driven by margin expansion due to rising rates, which led to strong growth in net interest income over the last 12 months. Now, let's take a closer look at deposits. With the frequency and severity of the Fed rate increases, deposit environment remains challenging. Total deposits decreased $14.2 billion, or 14% to $89 billion this quarter, while average deposits decreased 4 billion. Now let's discuss the elephant in the room. As a reminder, on December 6, at a conference, we announced our plan to purposefully decrease total deposits in the digital asset banking space by reducing the size of relationships. This strategy results in a more granular deposit base, which leads to greater stability in this funding source. As part of the plan, we are focused on reducing high-cost excess digital deposits. Our strategy went as expected, and resulted in a decline of $7.4 billion in digital deposits. Respectively, the bank will further reduce these digital deposits by an additional $3 billion to $5 billion by the end of 2023, however, most likely much, much sooner. Additionally, with the seventh Fed rate hike on December 15 and subsequent to the conference, we saw a large degree of rational pricing from competitors on traditional deposits. In general, we decided not to increase rates to these levels on deposits that have the highest rate sensitivity. As a result, $2.3 billion in high interest rate deposits left. Total contribution from both the digital asset reduction strategy and our decision to not match pricing on these rate-sensitive deposits aggregated to $9.7 billion of the deposit decline. These are deposits that we intentionally managed out or manage low. There were several other factors that contributed to the traditional decline. Our mortgage banking and solutions team experiences seasonality due to taxes and escrow payments, which contributed $1.9 billion to the overall decline. We expect this to build back up over the course of 2022. And 1031 Exchange commercial real estate transactions continue to decline industry-wide, and we saw a reduction to the tune of $1.2 billion. So, there was a lack of CRE transactions and as a result, there will be less 1031 deposits available. During the quarter, noninterest-bearing deposits decreased $6 billion to $31.5 billion, which continues to represent a solid 36% of total deposits. The decline in DDA continues to be driven by the challenging deposit rate environment. Before I turn the call over to Eric, I'd like to say that although 2022 was a tough year for deposits, we believe we are a growth story. And as we look beyond 2023, we firmly believe we will return to growing traditional deposits. Clearly, this is difficult given the current environment, but it remains a focus. It is encouraging to see inflows in traditional deposits of $2.5 billion thus far this year from January 13, thatâs only -- after only 9 business days. All right. Thank you, Joe, and good morning, everyone. I'd like to turn our attention to our lending businesses. Loans during the 2022 fourth quarter increased $452 million, or 1% to $74.3 billion. For the year, loans increased $9.4 billion, or 15%. During the fourth quarter, growth continued to come from nearly all of our lending businesses with the exception of capital costs, which were down $2.1 billion as we left passive participations run off as they came up for renewal. Over the next several quarters, we are expecting measured growth out of our newer business lines, healthcare banking and finance and corporate mortgage finance as these teams are still strengthening their presence within their markets. Given the challenging deposit environment, we anticipate declines from our larger, more established lending businesses. Overall, we plan to manage loan growth to be down in the coming quarters. Turning to credit quality. Our portfolio continues to perform well. Nonaccrual loans were down $1 million at $184 million or 25 basis points of total loans compared with $185 million for the 2022 third quarter, and they were down $34 million when compared with $218 million for the 2021 fourth quarter. Our past due loans were within their normal range with 30 to 89-day past due loans at $96 million or 13 basis points and 90-day plus past dues at $55 million or 7 basis points of total loans. Net charge-offs for the 2022 fourth quarter were $18.2 million or 10 basis points of average loans compared with $10.2 million or 6 basis points for the 2022 third quarter. The provision for credit losses for the 2022 fourth quarter increased to $42.8 million compared with $29 million for the 2022 third quarter. The increase was primarily driven by a deteriorating macroeconomic forecast. This brought the bank's allowance for credit losses higher to 66 basis points and the coverage ratio stands at a healthy 266%. I'd like to point out that excluding very well secured fund banking capital call facilities, the allowance for credit loss ratio will be much higher at 105 basis points. Now let's turn to the expanding team front. As we've said before, our core metric for us is the number of teams we onboard, and we continue to realize success in this area. During the year, the bank onboarded 12 private client banking teams, including 5 in New York and 7 on the West Coast, of which 3 of those teams were brought on in the state of Nevada. This marks the entry into a new geography for Signature Bank. Additionally, our newest national banking practice, the health care banking and finance team was launched in the second quarter of this year. Notably, this is the third highest number of teams hired in any given year in Signature Bank's history, which bodes well for future deposit gathering. And our pipeline remains strong. In order to support our team expansion, we continue to hire extensively throughout our operations and support infrastructure so that we can best serve our clients' needs. At this point, I'll turn the call over to Steve, and he will review the quarter's financial results in greater detail. Thank you, Eric, and good morning, everyone. I'll start by reviewing net interest income and margin. Net interest income for the fourth quarter was $639 million, a decrease of $35 million or 5% from the 2022 third quarter and an increase of $103 million or 19% from the 2021 fourth quarter. The decrease in net interest income during the fourth quarter was driven by the outflows of our cash balances in support of our planned reduction in the digital asset banking deposits. This resulted in a smaller balance sheet at the end of the quarter. Going forward, we plan to keep our cash position in the $4 billion to $6 billion range, which is dependent upon deposit flows. Net interest margin on a tax equivalent basis decreased 7 basis points to 2.31% compared with 2.38% for the 2022 third quarter. The lower margin was the result of the rise in our cost of funds, which is primarily due to the replacement of digital asset banking deposits with more expensive borrowings. Over the near term, the bank plans to pay down these borrowings as we see traditional deposit inflows, resulting in a lower cost of funds, which will ultimately be beneficial for margin. Let's look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2022 fourth quarter increased 73 basis points from the linked quarter to 4.18%. The increase in overall asset yields was across all of our asset classes and was driven by higher rates. Yields on the securities portfolio increased 45 basis points linked quarter to 2.53% given higher replacement rates. Additionally, our portfolio duration decreased slightly to 4.23 years due to interest rates going back at the end of the quarter. Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages increased 69 basis points to 4.82% compared with the 2022 third quarter. Increasing yields was driven by our portfolio repricing higher. Since approximately 48% of our loans are floating rate, we expect loan yields to continue to increase as short-term rates continue to move higher. In addition, given the longer duration of our fixed rate loan portfolio, we will continue to see these assets were priced higher even as the Fed ceases increasing rates. Now looking at liabilities. Given the 125 basis points of Fed moves this quarter, overall deposit costs increased 80 basis points to 1.91%. The pace of the deposit repricing is in line with our expectations given the frequency and magnitude of the rate hikes. During the quarter, average borrowing balances increased by $2.3 billion to $4.5 billion, and the cost of borrowings increased to 3.80%. The increase in borrowings was driven by our planned reduction in the digital asset banking deposits, where we added mainly short-term borrowings. In the coming quarters, we plan to pay these borrowings down with excess liquidity from deposit flows and managed loan portfolio runoff. In fact, today, borrowings are $4 billion lower since quarter end given positive deposit flows and other initiatives. The overall cost of funds for the quarter increased 85 basis points to 1.99%, driven by the aforementioned increase in deposit costs and the addition of higher-priced borrowings. On to noninterest income and expense. With our plan to grow noninterest income, we achieved growth of $11.8 million or 35.2% to $45.2 million when compared with the 2021 fourth quarter. The increase was primarily related to FX income and lending fees, driven by our newer businesses and geographic expansion. Noninterest expense for the 2022 fourth quarter was $233.3 million versus $183.9 million for the same period a year ago. The $49.4 million or 26.8% increase was principally due to the addition of new private client banking teams, national business practices and operational personnel as well as client-related expenses that are activity driven and has increased with the growth in our businesses. Despite the significant hiring and considerable operational investment, the bank's efficiency ratio remained relatively low at a strong 34.11% for the 2022 fourth quarter versus 32.31% for the comparable period last year. Turning to capital. Overall capital ratios remain well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet as evidenced by a common equity Tier 1 risk-based ratio of 10.42% and total risk-based ratio of 12.33% as of the 2022 fourth quarter. Today, we are also announcing an increase in our common stock dividend by $0.14 per share to $0.70 per share starting in the first quarter of 2023. Our robust earnings profile generates over $1 billion in earnings a year, which is substantially more compared to when we first set the dividend in 2018. We have long-term confidence in the earnings power of our franchise and are happy to increase our dividend. I'd like to point out that this is our first year in our 22-year history that we reported an annual decline in deposits. Given Fed actions, including quantitative tightening, coupled with the 7 rapid Fed rate hikes totaling 425 basis points, growing deposits has become very difficult. Growth for the sake of growth while ignoring the economics does not benefit our shareholders. Instead, we firmly believe that our decision not to chase a rationally priced high cost deposits as well as our decision to reposition our digital deposit book by reducing concentration will benefit our shareholders in the long run - in the long term. Our focus on this ecosystem was on concentration of deposits, not to lead the ecosystem. Despite the short-term external challenges we face today, we continue to put the seeds in place for future growth with our plans for continued investment in our infrastructure as well as our geographic expansion through the hiring of the teams. These investments will inevitably lead to growth that within our differentiated operating model will lead to higher returns over time. The growing dividend to $0.70 should firmly indicate to our shareholders the confidence we have in our ability to generate substantial earnings over the long term. To conclude, 2022 was a year of many positives. We achieved the following, record net income of $1.3 billion and record return on common equity of 16.4%. And as I just mentioned, the earnings power is allowing us to increase our 2023 dividend while still maintaining strong capital ratios. We had loan growth of $9.4 billion, not to mention 12 team hires with the expansion into the state of Nevada, the addition of another national business line, our health care banking and finance team. And we continue to perform with a best-in-class efficiency ratio of 34. 11%. Finally, yes, we have USD deposits of digital asset clients, but we do not invest, we do not hold, we do not trade and we do not custody crypto-assets. We only have deposits of clients in the crypto [ph] ecosystem- and we are executing on our plan to reduce these deposits significantly for the concentration purposes. In the future, our focus will remain on blockchain technology, which is the reason we decided to enter this space in 2018. We have many other traditional businesses whose positive results are being overlooked. I wanted to start on deposits. You mentioned you had $2.3 billion, I believe, in high-rate deposits left. Are you expecting those will flow out here in the next quarter or two at this point? Or have you already seen some of that flow out that's actually baked into the quarter-to-date growth you mentioned? Well, there's a number of areas we can start with - make my colleagues noises [ph] but we start with EB-5 that's a source of deposits for us. We have about $281 million in deposits or theâ of the new EB-5 program. So we expect another $5 billion in deposits over a 24-month period. So its really, over the next 2 years, where we expect most of the money coming from China and India. That's one area. We also expect to hire additional teams, most on the East and West Coast. We already had a team start in New York on January 2nd, so we hired one team thus far. We expect the new teams this year plus the teams that we hired last year to start bringing over their books of business and their clients that they have and that goes to all the teams, the 130 teams that we have. We expect that they'll continue to do a better job of growing deposits because a number of them over the last several years were under the pandemic. And that certainly heard [ph] their ability to bring clients over quickly. So the West Coast finished strong and probably on the pandemic that should work. Fund Banking is refocusing their growth efforts on deposits. Eric mentioned the decrease that we had in Fund Banking loans, they refocused because we want them to fund a little bit more than they have been on their own loans. So they're concentrating on deposit gathering. And then we have a specialized mortgage banking solutions. They are continuing to grow. We had announced before the credit [ph] deposits - I'm sorry, credit [ph] of taxes and that [ph] slow payment. But we see growth there. We've [indiscernible] some deposits added to that institutional - unmet business that we had because they were high priced. But still by letting go some of the high price that should help our NIM, but we'll be able to bring on more deposits at a reasonable interest rate. So we have the West Coast, we have the EB-5 specialized mortgage bank solutions, fund banking division, refocusing efforts [ph] on deposits, and we have the new teams that we have come on board. That's why we're so confident that in 2024, working towards 2024 for there to be a greater growth in deposits than we've seen in the last few years. Appreciate all the color there. Any - are you guys seeing any growth by any chance in noninterest bearing? Or is that all interest-bearing right now this quarter? Hey, good morning. I guess maybe just following up on deposits to make sure we got the message right. There's about $5 billion in crypto deposits that you expect to exit the balance sheet. Beyond that, is the message that you don't see any other higher cost deposits in any meaningful size left and net-net, you believe you can offset the $5 billion. So we should see net deposit growth as we think about 1Q and beyond? I think it would be difficult for us, given this deposit environment to promise that would be up in traditional deposits, although we're hopeful that we will be. You know, at the $3 billion to $5 billion in digital, we do think that will be relatively flat in the rest of our deposit base. There - we plan to proceed for growth for sure, as Joe talked about, and we do anticipate that we should have growth, but it's difficult to promise. Understood. And Eric, just Steve's point around 35% to 36% NIB, that's where you ended, I think, fourth quarter. Is it safe to say that NIB is kind of leveling off here around $31 billion, give or take? I think it's back to its normal range. Actually, 35%, 36% is probably at the high end you know, where we traditionally have been. I mean, we're usually in the 32% to 34% range, maybe even a little bit lower. We've been as low as 24%, net. But - so I think we'll be in that 30% to 35% range of DDA to overall deposits as we look forward. Understood. And then on lending, I think you mentioned loan growth balance is probably going to be negative. How much more of capital call line participations are yet there that could leave - exit the balance sheet? Yeah. We have a fair amount of passive participations there. So we could - we're going to give a fairly broad range, but we could be down in lines anywhere from $5 billion to $10 billion. And essentially, if you look at what we've done over the last couple of years, we've grown digital deposits and we've grown fund banking loans. So we're shrinking now our digital deposits, and we're going to shrink our fund banking loans and get back and rightsize the balance sheet a bit. Understood. And one last question. So it seems like the balance sheet is going to be shrinking. Clearly, you feel good about capital based on the dividend hike. Is buyback an option or beyond the dividend, any increase in capital do you expect just to build capital right now? Well, you know, we do anticipate that we're going to have growth. We could see growth this quarter, quite frankly. It's going to be tough, right, but it's possible. And we certainly could see growth if we look into the third and fourth quarter of this year. So we've got - we continue to put the seeds and plant those seeds for growth, and we'd rather hold on to our capital to support that growth. All that being said, buybacks are certainly - we have the ability to buy back, and we'll certainly look at that if that growth doesn't materialize. Just given all the moving pieces here between digital outflows and the seasonality of deposits and some of the nice quarter-to-date growth you have in deposits. Is annualizing the 4Q EPS a fair way to think about earnings as we go into 2023? Or are there more puts and takes there? I mean there's a few things you need to consider there is that, as Eric just talked about, from a deposit standpoint, it's going to be challenging. And if we're planning on reducing deposits in the digital space, $3 billion to $5 billion, we certainly will then need to borrow in the short term, which then should lead to NIM and NII compression given the higher cost deposits as we saw towards the end of the fourth quarter. So we continue to expect some short-term pressure there. And then as we head into the end of the year, we should then see some relief is what we're hopeful for and then see NIM expanding and also see some relief from the borrowing standpoint as we see some traditional deposit inflow. So I mean that's the context that I would give in relation to your question there. Got it. That's helpful. And then maybe on the expense side, I know you've spoken about expense growth being at around 20% or so as you invest in the business. But do you have some more room there to offset some of the pressure you're seeing on NIM? So there's a few things to mention on expenses. For the first quarter, we do expect to be in the mid-20s again, it's roughly 25%. We would have been lower had the FDIC not increased its assessment rates. They're increasing every institution, 2 basis points, which for us means about $5 million a month in incremental expense - sorry, per quarter in incremental expense. So that is a headwind. Without that, we would have been in the low 20s. So first quarter, mid-20s, 25%, and then we should trend through the remainder of the year down to the high teens. Good morning. So given you're exiting a large amount of your crypto-related deposits. Just curious how this impacts the Signet platform. If you're doing less volumes now, I would assume the activity volume-driven expenses should be coming down as well. I'm just trying to get a sense, like we're focused on the funding part. So one is like the expense part, I think the discussion about the lower expenses in the later part of the year, it might be part of it. But any sort of fee income that could go away as we kind of consider this with these two factors as well? We're really looking at concentrations in that space. So we're not necessarily exiting client relationships there, but we are lower in concentrations there. And that's - so we're seeing volumes in Signet - actually, volumes last quarter were the highest we've seen even as we were exiting these later in the year. So we don't really expect much of effect on the Signet volumes. There's really not much of a cost for us to operate Signet. So we're not going to see any cost benefit there if we get volumes did come down in that space. From a fee income perspective, same answer, really, we're not exiting client relationships really. So we're not going to see much of a change in our foreign exchange and other sources of fee income there. So ultimately, all we're doing is limiting the amount that clients can maintain in overall deposits at our institution and looking to have more of a granular deposit base, which will allow us to manage liquidity tighter. Okay. Thank you. Just to follow up. I know obviously, the digital ecosystem is the largest on Signet, and you guys have alluded to other ecosystems like payroll, trucking, shipping, that could be utilized. Just trying to get a sense, like as we think of the other like non-crypto areas of the bank, are you seeing any sort of growth in those particular ecosystems, is there any way you can help like size, like what the second largest is on Signet, just to get a sense of you might have other areas that could grow and could be an area of focus? And if not, what kind of like catalysts should we kind of like think about it in those areas that could be growth if not this year, in outward years? Well, the video is actually - the number of transactions on Signet is actually digital is number two, not in dollars because they have large dollars, but we have the shipping industry, cargo shipping industry that is number one on Signet for a number of transactions. And then we [indiscernible] payroll, which is starting to take course and we're getting more payroll companies on. So the key for us is that we find these other ecosystems because we put a payment platform together 24 hours, 365 days a year. And the idea being that we want to attract as many ecosystems as we can to make it beneficial for us and the clients. What we did put together was something that the digital world embrace blockchain technology. And that's why there is number one in terms of dollars that flow in and out. But let's face it. I mentioned that I didn't think that crypto would be in the top 10 once we had other industries embrace blockchain technology. One of our shareholders said it probably would not be in the top 100. So it's just a matter of educating both out there. We look forward to having more non-digital ecosystems, and we'll just through everybody's prohibition towards [ph]. So follow-up just on the loan growth. I want to make sure I understand this correctly. So Eric, I think you said total loans down $5 billion to $10 billion for the year. And then... Okay. All right. So I mean, capital call, obviously, a big part of the loan book, what is the expectation for loan. It sounds like loans are down pretty big in the quarter-to-date, given that you've been able to push down borrowings $4 billion. I guess just a cadence on the loan growth throughout the year and where you expect the loan book to land? Because obviously, - the Street is expecting some pretty decent growth this year. Given that we're reducing deposits to spell, right? And we expect to be down $3 billion to $5 billion in the digital space and really flattish and traditional, although we're hopeful we'll see some growth. But again, I can't promise that it would be difficult for us to expand our loans. So we're expecting that capital call facilities and those passive participations to be down in outstanding is roughly $2 billion to $5 billion. And then for our commercial real estate portfolio to decline, although I'll be - it's not going to decline much. It will probably be flat to down a little bit. And we'll see some growth out of our mortgage warehouse finance business, as well as our health care finance business. Those are two newer business lines for us that we want to continue to see have growth and garner market share and market favor. So we'll have some growth out of those areas, let's say, $500 million to potentially $1 billion over the course of the year for each. So ultimately, when you put all that together, I think you're going to see us be pretty flat on loans to down maybe a little bit. And just to add on your borrowing comment, we're down $4 billion in borrowings. That's being paid down from a combination of cash. We mentioned that cash range of $4 billion to $6 billion, which is a comfortable range dependent upon specific deposit inflows. Deposits â so deposit inflows, cash, security runoff as well as this small amount of loan runoff that we've seen thus far. So it's a combination of all those different items. Okay. Very good. And then just given all the moving pieces here, can you give us some help on where you think the margin settles in the first quarter, any updated thoughts on deposit beta? Sure. So margin in the first quarter, we do expect to be down about 10 basis points, that's a function of what I mentioned earlier in that - in the short term, we do expect to borrow early in the year to replace the digital outflow that we're planning to manage down. And then as we get towards the end of the year, we would expect NIM to then start expanding. From a deposit beta standpoint, we're end of period at 46%, total deposit fall in and our end-of-period deposit costs are 210 basis points approximately. I think we'll be in the high 40s at this point given the high-cost deposits we pushed out. I mean we'll see how much noninterest-bearing pressure we get. But at this point, I would expect it to be in or around where we're at maybe plus or minus marginally. Okay. Very good. And then just lastly, the release mentions talks about geographic expansion. Just any further color on what you're thinking about and which markets? It's really just filling in the expansion that we've had over the last couple of years. We've got teams hired in the California marketplace, whether it be L.A. or Sacramento area as well as Nevada where we'll continue to hire some teams there. Potential for us to maybe go into Southern California, San Diego market, but there's no actual near-term teams in the pipeline right now for that. So, if we work through the expected decline of the digital deposits and then the capital call loans, all in, I'm trying to understand when the balance sheet will stabilize. Do you think most of this is front-end loaded? Do we get to the point in the second half where we should expect the balance sheet overall to be fairly flat? Can you just take us through this year when we should expect to see a bottoming in that eventual growth in the total balance sheet? Yes. I mean, Steve, we're working hard to get through these digital outflows in the first quarter, second quarter. We could see some of that bleed into the third and fourth quarter, but we're really trying to have this done as quickly as we can, right? So we're going to see decline probably in the first and second quarters in the overall balance sheet. By the time we get to the third, we should see that stabilize. And again, we're hopeful that we could see deposit growth which we have it thus far this quarter, which is great. And we're hopeful as we get to the second part of - the half of the year, that we'll see some growth from there. That's helpful. And then on the digital asset deposits, Joe, the original appeal of these deposits was it would be a lower cost funding option, right, which is not necessarily proving to be the case. I'm curious, given the extreme volatility, right, the drawdown, will you be able to lend those deposits out? Is your original case to be in the business still stand? And how do you think about this from a long-term view? Thanks. Well, long term, I think it helps having time. But in the short term, we clearly don't have any evidence or any past history that gives us a comfort level that we should do something long term with those deposits. So we're going to keep them short for now. Yes. We're committed to the business. We think that it's not going away. Let's put it this way. It's not going away. And we have a number of examples that show that it's not going away. If you think about the government, if we can get the regulators and Congress on the same wavelength, they would give us regulations that we could follow and then others could follow. What this ecosystem needs is regulation. We need to be able to function where the economy is confident. Having this FTX situation clearly put a lack of confidence in that ecosystem. Now, what we need to do is to get regulation, get confidence back in the system and we can go from there. It occurs to a lot of people that when you do innovation, you always - in the initial part of the innovation, there's always looked upon initially down upon. And that's what I think is the situation here. There's new financial innovation is being looked out upon. And we believe that somewhere in the next few years, the banking system as it conducts transactions today will not be the way they conduct transactions tomorrow. So, we're very much in tune to wanting to support this ecosystem. Got it. Okay. And if I could ask one final one, just following up on the inflows of traditional deposits you saw, what you're calling out in the release, the $2.5 billion. I might have missed this, but what type of deposits was that you saw such strong growth with those low-cost deposits. Can you give us some context around that? Thanks. Sure. So we've seen some growth in specialized mortgage banking. They've continued to build up their balances after the year-end escrow and tax outflows. Our fund banking business is up a couple of hundred million as well. And then our New York private client banking teams, we're also seeing some growth there as well. To your cost question, we're seeing the traditional 30% to 35% of noninterest-bearing as we add these deposits back. I want to just follow up on the question that you had asked earlier about being in the system - crypto space. Every major bank - well, maybe not every major bank, but many major banks are in the space, maybe more internationally than domestically, but they're all there. And what really should be confidence that the market was, I said, FPX, almost Bernie [PH] made off-line. And that when Bernie made happened that shook the market, this shook the markets. Again, I'll say it again, we need regulations, so we need the regulators and Congress to get on the same page. You know, maybe just a couple of follow-up detailed questions. On the borrowings, you said borrowings were down quarter-to-date, but you're expecting them to go back up. So is that to grow from year-end numbers as we see these deposit outflows? Or just maybe give back some of the flow that we've seen year-to-date? Certainly, Jared, certainly dependent upon what traditional deposit flows are, but all else being equal, that's flat, and it would just end up replacing some of what we've paid down thus far. So I wouldn't expect it to be significantly different from where we ended as of year-end. There's some ebb and floors dependent upon what traditional deposit flows might end up being. Okay. And then can you give us an update on what you're seeing on spot rates on loans, especially the areas that you're growing? Sure. On the CRE front, we're seeing replacement rates roughly in the high 5s, call it, 5.75 range. In fund banking, I mean, certainly, they're reducing, but we're in the low 6s there. Signature Financial, we're in the mid to high 6% range. Securities, any replacement there is at 4.5 to 4.75 range. And then we have some of the folks that were growing. Healthcare banking and finance about 7% and as is commercial mortgage finance in the 7% range. Okay. That's great. And then on the security side, you said that you were using cash flows to pay down borrowings. How should we be thinking about securities as a percentage of assets here? Could that - should that stay stable, should it come down when we look at the absolute dollar level, can we expect that to be trending down as we go through the year? Potentially, it could run down dependent upon where back to the traditional deposit flows. That's really the key here, where the traditional deposit flow go compared to our digital runoff and the timing of all that. So yes, in a situation, we could see some reduction there as they run off roughly in the 750 to $1 billion a quarter in. Joe or Eric, in the release, you talked about the bump up in the reserve due to the macro. One of the topics that comes up a lot in investor conversation is the office portfolio. Could you just remind me the size and a few of the relevant stats where we are at year end? Yes. The office portfolio is about $4 billion. We had zero in nonaccrual as of this point. So it's important to point out. It's also - I mean, it's more critical to point out that we're not a CMBS lender. And all the articles in the news that you've seen thus far is all related to CMBS. I don't think there's anything related to balance sheet lenders, us or any of our competitors. And when we originated these loans, we're in the low 50% LTV range. We were north of 140 debt service coverage. So we've got ample cushion there to absorb whatever we do see come through in that space. I mean don't get me wrong, we fully expect that there's going to be some problems. But quite frankly, we're just not seeing much right now, Chris. I mean we're dealing with well-seasoned veteran operators multigenerational who own many properties and can divert cash flow as necessary to deal with the ones that might be in trouble. And we're just not seeing the demise of New York office anywhere near what people are predicted, I mean anywhere near. Okay. Thanks. Thanks for that, Eric. Is that the portfolio, the number one internally that you guys are stress testing? Is there something else that might drive kind of a reserve build narrative over the next couple of quarters? I mean, it's certainly one of the areas. I mean we've been focused on retail for a long time, really from the Amazon effect well before the pandemic hit. Again, our retail is really in the out of bears [ph] more strip centers that we feel pretty comfortable with, and we're seeing that behave quite well also. I mean we're also focused on the multifamily sector, where you have rent stabilized and predominantly buildings that are mostly rent stabilized where there - it's really tough for them to improve the cash flows there. That's another area that we're looking at. But in all three of those areas, we're really just not seeing much weakness, if any at all at this point. Okay. Thanks for that. Just I guess the last question, just trying to square up all the outlook for margin and balance sheet. Would you - is it fair to assume that the trajectory of net interest income probably is â is obviously down first half of the year, but stable - is stabilization in the back half, kind of the goal? Or just kind of trying to figure out the trough in net interest income? Yeah, 100% accurate on the near term in the first half of the year and second half of the year is stable to potentially up the permier form [ph] with the Fed dose. I wanted to go back, Stephen, to your NIM commentary, you had mentioned in the first quarter, you expect the NIM to be down 10 basis points, but expansion by year-end. Could you just give us some sense for NIM performance in the middle of the year? Are we expecting down 10 bps in the first quarter, stabilizing and then bouncing back? Or is there additional downside in the second and third quarters? I mean it is difficult to say given we don't know what the Fed does. I mean we run various different scenarios. Is there - there likely will be pressure in the first half given borrowings as far as pretty certain on where we're going to be at for the first quarter, but then depending upon where deposit flows come, where borrowings come, that really makes it challenging just going more beyond one quarter at this point, but would see stabilization to NIM expansion in the second half with borrowings rolling down. It is very difficult to project during one quarter at this point. Okay. And then on the expense ramp that falls into these - to the other category, it's been up significantly in the last two quarters. I'm assuming that's related to some of the client costs. Can you give me some examples of what the largest drivers contributing to pretty close to like a $20 million, $25 million quarterly increase? Sure, there's two things. First, it's just general activity levels are up, which we have expenses that are activity based with some of our vendors in addition to the fact that we have ECRs or earnings credits, that's the other component to the driver there. So credits - that clients get based upon balances and activity that they have with us. They might be - might be - it's like a rewards program, if you will. Got it. Okay. And then my last one is just you know, I love your thoughts on the crypto regulatory front and implications to you, particularly on the back of the interagency guidance earlier this month. I'm curious in the wake of FTX [ph] if there's been any reassessment on the institutional client book or the BSA, AML, KYC process front to make sure that there aren't other instances of fraudulent activity. What changes actions have you taken? And what kind of comfort can you give us on the quality of the remaining client book? Well, I'll say this with FTX, it wasn't a matter of BSA AML. Everyone thought that he was [indiscernible] and he ended up being very made offline. So I don't think anyone could say that they knew that, and we catch it. What we're talking about regulation is we just want to know which way you go because we had Signet and we try to make enhancements on it, and some were okay by the regulators and some were not. It puts us in a difficult position as to what we do - what do we do next? And not knowing regulation-wise what's going to happen puts us really at behind everyone else that is in the crypto world. I will tell you this. We've had - we've had a number of discussions with the regulators, and they seem to be waiting for other regulators. So I don't know if the Fed is waiting for the FDIC. The FDIC was waiting for the OCC. But I think they have to get together, meet with Congress because Congress was going to put some before the end of the year. Congress is going to put some of those across to get some loss put on the books for regulation. And they were not things that we thought were good for us or good for the industry. So we need to get them to get on the same level of field and give us some guidance. There's no - I think what happens is when the regulations come out, that will eliminate a number of players. I don't know if [indiscernible], but I would say a number of players couldn't want to look to the regulation, whether it's capital integrate or just doing AML DSA. But again, FTX was not a BMA AML. It was a Bernie [ph] made of like a situation that no one really thought that Sam [ph] was a bad asset. Okay. Sorry. I guess just following up on Joe's comments, how likely do you think it is that Signature gets sort of been snared in any kind of congressional hearings on crypto? It's pretty hard to predict really. I mean, look, we're a highly regulated banking institution. We file a strict BSA, KYC, AML policies and procedures. In this space, in particular, we have hand due diligence and monitoring. We're really not aware of any concerns or issues that we have at this time, and we haven't been involved in any litigation any meaningful litigation to date. So... Fortunately for us, we were not - we had announced that we're integrating the FTX, but we were not integrated yet with FTX. So we didn't have client-related transactions of FTX is happening on our platform. Yeah, so that's certainly good. Okay. And Eric, could you share with us the number of digital deposit clients that you have today and maybe what the actual transaction volume was in the fourth quarter? This concludes our allotted time and today's conference call. If you'd like to listen to a replay of today's conference, please dial (800) 934-4245. A webcast archive of this call can also be found at www.signatureny.com. Please disconnect your lines at this time, and have a wonderful day.+
EarningCall_1390	Greetings, and welcome to the Zions Bancorp Q4 Earnings Conference 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. Hey. Thank you, Joe, and good evening. We welcome you to this conference call to discuss our 2022 fourth quarter and full year earnings. I would like to remind you that during this call, we will be making forward-looking statements, although actual results may differ materially. We encourage you to review the disclaimer in the press release or the slide deck on slide 2, dealing with forward-looking information and the presentation of non-GAAP measures, which applies equally to statements made during this call. A copy of the earnings release as well as the slide deck are available at zionsbancorporation.com. For our agenda today, Chairman and Chief Executive Officer, Harris Simmons, will provide opening remarks, followed by a brief review of our financial results by Paul Burdiss, our Chief Financial Officer. With us also today are Scott McLean, President and Chief Operating Officer; Keith Maio, Chief Risk Officer; and Michael Morris, Chief Credit Officer. After our prepared remarks, we will hold a question-and-answer session. During the Q&A session, we anticipate holding that to about 45 minutes in time. And we expect -- weâd ask you to limit your questions to one primary and one follow-up related question. Beginning on slide 3, youâll see some themes that are particularly applicable to Zions in recent quarters as well as some that are likely to be prominent over the near-term horizon. First, our balance sheet, which is supported by what we think is a very high quality deposit base, has benefited from rising rates, resulting in growth of net interest income, exclusive of the contribution from PPP loans of more than 40% over the year-ago quarter, and 30%, when including PPP income that had a substantial positive impact a year ago, but very little effect in the current quarter. Our deposit cost increased modestly from the prior quarter and remains among the lowest of banks within our peer group. Exclusive of PPP, period-end loans increased $1.8 billion or 3.4% on annualized during the quarter. Weâve achieved strong loan growth while maintaining the same underwriting standards that have allowed Zions to outperform most of our peers in several key credit metrics over the past decade. Weâve restrained growth in categories that are more likely to experience higher loss rates in a recessionary environment. We continue to believe the effects of higher rates and likely a slowing economy will slow portfolio growth over the next few quarters to a rate that is moderately increasing for the full year 2023. The next theme is balance sheet flexibility. We have a loan-to-deposit ratio of 78%, whereas prior to the pandemic, we were running in the 85% to 90% range. We anticipate some further reduction in deposits combined with continued, albeit more moderate loan growth, moving us closer to our historical loan-to-deposit ratio range. As weâve noted in prior earnings calls, our strong liquidity position coming into this cycle afforded us the luxury of being able to prioritize the quality of deposits over quantity. This is reflected in our total cost of deposits, which the 20 basis points this quarter is among the very best of our peers. We believe, weâre prepared should a recession materialize. Our pre-provision net revenue equaled an annualized 2.5% of risk weighted assets. The combination of our regulatory capital and our allowance for credit loss is strong relative to the risk profile of our balance sheet. Weâd note that over the past decade, our net charge-off ratio, which has averaged a very modest 11 basis points over that period, has been 75% better than the industry average, reflecting the derisking of the balance sheet weâve frequently spoken off. Turning to Slide 4, we are pleased with the quarterly financial results, which are summarized on this slide, showing a linked quarter comparison with the third quarter. Adjusted taxable-equivalent revenue net of interest expense increased about 8% relative to the prior quarter, and adjusted pre-provision net revenue increased 20%. Those growth rates are not annualized. Our credit quality is strong and loan growth was solid. We continued to experience deposit attrition as weâve allowed our liquidity to come back into a more normal range. And Paul will spend some additional time on that item. One thing to note on this slide is that we have updated the calculation of tangible common equity to exclude the impact of accumulated other comprehensive income or AOCI. As youâre likely aware, GAAP accounting works to fair value through the equity account, the portion of the securities portfolio held as available for sale while not recognizing changes in the market value of other balance sheet items, including deposits. As a result, this accounting treatment doesnât fully reflect the economics of the business. So, weâll be showing return on tangible common equity and any other measures such as tangible book value per share that incorporate tangible common equity, as adjusted for the volatile impact of AOCI. This also reflects how we use such measures internally. For example, one of our incentive compensation arrangements or profit sharing plan uses such a measure and weâve adjusted our calculations, so itâs not to produce a payout based on unrealistically high profitability. Moving to Slide 5, diluted earnings per share was $1.84. Comparing the fourth quarter to the third quarter, the single most significant difference was the improvement in revenue, driven by the effect of interest rate changes on earning assets and continued strong performance from customer-related non-interest income. The provision for credit loss contributed a $0.14 per share positive variance compared to last quarter as can be seen on the bottom left chart. In both quarters, the allowance increased about 5 basis points relative to loans outstanding. But in the fourth quarter, we recognized net loan recoveries instead of net charge-offs. Turning to Slide 6, our third quarter adjusted pre-provision net revenue was $420 million. The adjustments, which most notably eliminate the gain or loss on securities, are shown in the latter pages of the press release and the slide deck. Within the PPNR chart, the top portion of each column denotes the revenue weâve received from PPP loans net of direct external professional services expense. These loans contributed only $2 million to PPNR in the fourth quarter. Exclusive of PPP income, we experienced an increase in adjusted PPNR of 71% over the year-ago period. With that high level overview, Iâm going to ask Paul Burdiss, our Chief Financial Officer, to provide additional detail related to our financial performance. Paul? On Slide 7, a significant highlight for us this quarter was the strong performance in average loan growth. Average non-PPP loans increased $1.9 billion, or 3.6% when compared to the third quarter. Areas of strength included commercial and industrial loans, residential mortgage and term commercial real estate, as can be seen in the appendix on Slide 30. The yield on average total loans increased 64 basis points from the prior quarter, which is primarily attributable to increases in interest rates. Deposit costs increased during the quarter, but remained low. Shown on the right, our cost of total deposits rose to 20 basis points in the fourth quarter from 10 basis points in the third quarter. Our average deposits declined $3.2 billion or 4.1% linked quarter. For deeper insight into deposit volume changes, please turn to Slide 8, where we break down our deposits by size. As shown here, most of our deposits come from relationships holding less than $10 million on our balance sheet. The 2022 decline in deposits came primarily from larger balance accounts. What is not shown on this page is the operational nature of our deposit accounts. We believe that deposit accounts, which are used frequently, accounts which record many inflows and outflows, are stickier and less rate sensitive than other deposits due to their operational nature. Likewise, deposits invested for yield, including many of the deposits, over $10 million shown on this page are by definition, more rate sensitive. Our operating account balances were relatively stable through 2022 with a slight decline in the fourth quarter compared to the third, which we believe reflects the rising value of deposits as interest rates have increased. The increase in benchmark rates and the widening differential in our deposit rates paid when compared to other investment products created an opportunity for us to have conversations with our more rate-sensitive customers to discuss off-balance sheet products designed for larger and/or less operational deposits. A net 47% of the full year 2022 deposit attrition moved into our off-balance sheet suite of products. This served to maintain a relationship with the customer while keeping deposit costs well managed. Looking ahead, the increasing value of deposits will lead us to adjust our deposit rates accordingly as rate remains the primary lever to attract funds which are less operational in nature. While this will impact our cost of funds, we are confident that the nature of our deposit portfolio, including the proportion of noninterest-bearing demand deposits to total deposits will allow us to keep our overall cost of funds relatively low. Moving to Slide 9. We show our securities and money market investment portfolios over the last five quarters. The size of the securities portfolio declined slightly versus the previous quarter, but as a percent of earning assets, it remains about 9 percentage points more than it was immediately preceding the pandemic. The most significant change to the portfolio this quarter was the movement of bonds from the available-for-sale accounting classification to the held-to-maturity classification. The value of this movement was nearly $11 billion of fair value and $13 billion of amortized cost. This accounting reclassification effectively freezes $1.8 billion of an unrealized loss recorded in accumulated other comprehensive income, which will amortize over the remaining life of the bonds and which will limit the impact on reported accumulated other comprehensive income due to changes in interest rates. We anticipate that money market and investment securities balances combined will continue to decline over the near term, which will create a source of funds for the rest of the balance sheet. Our revenue is primarily balance sheet driven. This quarter, 82% of our revenue is from net interest income. Slide 10 is an overview of net interest income and the net interest margin. The chart on the left shows the recent five-quarter trend for both. Net interest income on the bars reflects the benefit of both loan growth and higher interest rates, while the net interest margin in the white boxes largely reflects the impact of the rising interest rate environment on earning yields, combined with our ability -- earning asset yields, combined with our ability to contain funding costs. The right-hand chart on this page shows the linked quarter effect of certain items on the net interest margin. Overall, earning asset yields improved 64 basis points, while the cost of interest-bearing funds increased 61 basis points, reflecting a 3 basis-point expansion in our interest rate spread. However, nearly half of our earning assets are funded with noninterest-bearing sources of funds. Therefore, the 3 basis-point expansion in interest rate spread is augmented by an increase of 26 basis points in the value of noninterest-bearing funds in the higher rate -- higher interest rate environment. These factors combine to produce a 29 basis-point expansion in the net interest margin in the fourth quarter when compared to the third quarter. Slide 11 provides information about our interest rate sensitivity. As a reminder, we have been using the terms latent interest rate sensitivity and the emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred as well as those that have yet to occur as implied by the shape of the yield curve. Importantly, the balance sheet is assumed to remain unchanged in size in these descriptions. Regarding latent sensitivity, the in-place yield curve as of December 31st, which was notably more inverted than the curve at September 30th, will work through our net interest income over time. The difference from the prior periodâs disclosures of latent sensitivity is the shape of the curve and the accelerated pull-through of net interest income growth, which was attributable in part to our lower-than-expected deposit and funding beta as we begin to increase our deposit rates to reflect the increased value of money and the limited rate movements we have reported so far, our modeling would now estimate a deposit beta of approximately 18% compared to the beta of 5% observed cycle to date. Therefore, given the model increase in interest expense and using a stable sized balance sheet, the latent sensitivity, interest rate risk measure, indicates a decline in net interest income of about 1% in the fourth quarter of 2023 when compared to the fourth quarter of 2022. Regarding emergent sensitivity, if the December 31, 2022 forward path of interest rates were to materialize and using a stable sized balance sheet, the emergent sensitivity measure indicates a decline in net interest income of about 2% in the fourth quarter of 2023 when compared to the fourth quarter of 2022. Again, this change in outlook can be traced to strong recent net interest income performance and the inverted interest rate curve. With respect to traditional interest rate risk disclosures, our estimated interest rate sensitivity to a 100 basis-point parallel interest rate shock using a same sized balance sheet has declined by about 2 percentage points from the third quarter and about 10 percentage points from the beginning of the year. As rates have risen and downside risk to net interest income has increased, weâve been moderating our asset sensitivity primarily through interest rate swaps, while generally maintaining customer operating deposit balances and allowing certain rate-sensitive deposits to decline. The reported change in interest rate sensitivity this quarter largely reflects the recent decline in deposits and a higher net interest income denominator. As a result, this traditional interest rate risk disclosure represents a parallel -- as a reminder, sorry. As a reminder, this traditional interest rate risk disclosure represents a parallel and instantaneous shock, while the latent and emergent views reflect the prevailing yield curve at December 31st. Our outlook for net interest income for the full year of 2023 relative to the full year 2022 is increasing. While there will be seasonality along the way with fewer days in the first half of the year, for example, we expect that by the fourth quarter of 2023, including the latent and emergent sensitivity as well as an expected increase in loans, net interest income will be modestly higher than that reported in the fourth quarter of 2022. Moving on to noninterest income and total revenue on Slide 12. Customer-related noninterest income was $153 million, a decrease of 2% versus the prior quarter and an increase of 1% over the prior year. As we noted last quarter, we modified our non-sufficient funds and overdraft fee practices near the beginning of the third quarter, which has reduced our noninterest income by about $3 million per quarter. Improvement in treasury management fees has allowed us to make up the loss of that revenue. Our outlook for customer-related noninterest income for the 2023 full year is moderately increasing relative to the full year 2022 results. On the right side of the slide, revenue, which is the sum of net interest income and customer-related noninterest income, is shown. Revenue grew by 24% from a year ago and when excluding PPP income, it grew by 32% over the same period. Noninterest expense on Slide 13 decreased 2% from the prior quarter to $471 million. The reduction is primarily due to a net decrease of certain incentive compensation items within salaries and benefits. The total of the remaining expense categories remained relatively flat to the third quarter. We continue to feel the influence of inflation and expect to continue to hire additional staff to support growth. We reiterate our outlook for adjusted noninterest expense to increase moderately for the full year of 2023 relative to the full year of 2022. Another highlight for the quarter was the continued strong credit quality across the loan portfolio, as illustrated on Slide 14. Relative to the prior quarter, we saw continued improvement in the balance of criticized and classified loans. Recoveries from balances previously charged off led to a net recovery of 2 basis points of average non-PPP loans in the fourth quarter compared to a loss of 21 basis points in the prior quarter. Notably, our nonperforming asset ratio and classified loan ratio continue to improve and are at very healthy levels. Slide 15 details the recent trend in our allowance for credit losses or ACL over the past several quarters. At the end of the fourth quarter, the ACL was $636 million, a $46 million increase from the third quarter. The linked quarter ACL increase can be ascribed to loan growth and weakening economic forecast. The reserve ratio to total loans was up 5 basis points from the prior quarter to 1.15% of non-PPP loans. Our ACL will continue to reflect the size and composition of our loan portfolio and evolving macroeconomic forecast. Our loss absorbing capital position is shown on Slide 16. We believe that our capital position is aligned with the balance sheet and operating risk of the Bank. The CET1 ratio grew slightly in the fourth quarter to 9.7%. Although CET1 -- the CET1 ratio remained relatively flat, Iâd like to point out the significant amount of earnings retained over the past year. The balance of common equity Tier 1 in capital grew by over $400 million or 7% in 2022. However, risk-weighted assets during the year grew by $7.5 billion or 13%, primarily driven by loan growth. We repurchased $50 million of common stock in the fourth quarter and $200 million for the year. As a reminder, share repurchase and dividend decisions are made by our Board of Directors, and as such, we expect to announce any capital actions for the first quarter in conjunction with our regularly scheduled Board meetings this coming Friday. Our goal continues to be -- continues to maintain a CET1 capital ratio slightly above the peer median while managing to a below-average risk profile. Slide 17 summarizes the financial outlook provided over the course of this presentation. This outlook represents our best current estimate for the financial performance in full year 2023 as compared to actual results reported for the full year 2022. This is a change from our historical approach where we traditionally provide an outlook for a single quarter one year out. We plan to return to that approach when reporting financial performance over the remainder of the year. Question on the NIM trajectory. It looks like the guide is implying a sizable decline in the near term with the recovery in the back half. Can you maybe talk about your assumptions and the puts and takes there? Yes. This is Paul. Iâll start. Iâll characterize it this way. Our deposit beta so far through the cycle, as I noted in my remarks, is about 5%. Our expectation is that our deposit beta, based on past history and our modeling, is going to have to be closer to -- through the cycle of 18% over the next year or so to match our modeled results. And so, inherent in our outlook is an acceleration of deposit pricing. And in fairness, this may or may not come to fruition, but that is the nature of forward-looking view is that thereâs a lot of uncertainty involved. Got it. Okay. And maybe on the rate-sensitive deposits. Last quarter, you mentioned thereâs about $5 billion or so of those deposits that could flow out. Can you give us an update on those numbers? And maybe what portion of the deposit decline this quarter was attributable to those rate-sensitive deposits? I would say itâs very hard for me to ascribe specifically sort of the categorization of deposits. The point that I was trying to make last quarter was that it did feel like given where rates were on our balance sheet versus market rates, there was a sort of an increasing pressure we could see on rate sensitive deposits. We clearly saw some of that flow though in the fourth quarter, but it would be very difficult for me to specifically ascribe sort of how much of that related to that specific comment. I guess, maybe just Paul, following up on the deposit beta guidance 18% implies about 90 basis points to 1% for total cost of deposits at a 5.5% Fed fund. And Iâm just wondering, when you think about acceleration in deposit costs, have you seen that over the last few weeks or months? Iâm just trying to handicap, is that guidance over conservative, or is there a risk to the upside in terms of where things might go if the Fed ends up holding on to rates for much longer at those levels. So, I would appreciate any color in terms of what youâve seen around deposit pricing over the last few weeks or last few months? Sure. So, Iâll start with that and ask Harris or Scott to join in. The -- where weâve seen the pressure is not necessarily on the rate, itâs been in the volume, which kind of implies that thereâs a rate element attached to that. The 18%, to be clear, while itâs a very precise number, as implied, thatâs sort of a modeled number based on our experience. And itâs intended to capture sort of our best estimate of where deposit rates could be. But to your point, this is kind of a day-by-day challenge. Weâre constantly managing the balance between the rate paid and maintenance of the very valuable deposit franchise on the balance sheet. So, I would love to be able to tell you that it was very conservative or otherwise, but frankly, itâs based on history and based on our models, itâs our best estimate of where we think deposit rates are expected to go. Iâd only add -- I mean, this is my own view is that to the extent that the Fed moderates the rate of increase in interest rates, that is helpful -- likely to be helpful and that it probably allow us to -- weâll still have to do some catching up. But I think itâs going to be little easier to do without the kind of aggressive hikes that weâve seen in the last couple of quarters. Got it. And I guess maybe just another one on -- around rates on Slide 28 layout the swap maturities. Any sense of any additions that you plan to make, I guess, now looking on the other side, protect the name if we get rate cuts, just what is the thought process around that? Yes. So, our strategic ALCO, we meet regularly to discuss our interest rate risk positioning and the use of swaps in managing that. I would say, over the course of the last couple of quarters, our interest rate sensitivity has been driven more by deposits than by things that weâre doing in the derivatives market. So, right now, weâre pretty close to balance from an interest rate risk perspective. So, looking ahead, I think it will be a function of loan and deposit growth. That is what will be the key driver of our swap strategy. On the -- regarding your outlook for NII, you indicated that the change in your view reflects both the shape of the yield curve as well as the pull-through of NII growth. Maybe can you help kind of parse that out how much of the change was attributable to the shape of the curve? Any incremental inversion that weâve seen versus the pull-through of the NII growth? Iâll characterize it this way. If you go back a couple of quarters, we were showing latent and emergent sensitivity, if I remember correctly, of about 15% and 8% for a 23% total. That was sort of a one-year out view of changes in net interest income related to rate. And then, we provided an update to that in the third quarter. If you work through that and do the math, youâll see that the net interest income that we just reported feels like it came much faster than those models would have predicted kind of 3 to 6 months ago. And so, what weâre saying is that the pull-through has been stronger than expected. Some of thatâs loan growth, but a lot of it has been related to deposit pricing. We need to maintain some fidelity to our modeling, which is why we have a forward-looking view that incorporates kind of more aggressive deposit rates. But based on recent experience, what that means is that weâve been able to achieve a lot of the rate -- the value of the rate increases more quickly than expected. Thatâs one part of that. The other is the shape of the curve has changed dramatically in the last 3 to 6 months. And as you know, weâre looking at a fairly positively shaped curve 6 months ago, the yield curve after about what two years is inverted now. So, what weâre looking at now is much less expectation of rate increase with a little more pronounced fall on the back end. And so, all of those things are shaping our view on net interest income. Okay, great. And then, separately, also on the rate front, the noninterest-bearing deposit mix sitting around 50% of total deposits currently, where do you see that trending? And then, separately, if you could just discuss any other actions that you can foresee that perhaps lessen your asset sensitivity as youâre starting to factor in Fed cuts in the back half of this year? Our proportion of noninterest-bearing to total deposits at just over 50% is, in my opinion, kind of remarkably high, given the change -- the rapid change in interest rates, and historical levels. So, it would be very difficult for me to predict that that would increase. That is to say that we would be growing noninterest-bearing deposits faster than interest-bearing deposits. But nonetheless, striking that right balance between the rate weâre paying on interest-bearing funds and the ability to maintain those operating noninterest-bearing deposits is kind of a key part of what we do every day. The stickiness, as I tried to describe in my prepared remarks around those DDA, those operating counts really has to do with the granularity and the operating nature of those accounts. And so, we have a long history, a decade-long history of a very solid proportion of noninterest-bearing deposits to total deposits. And I think that will continue, but itâs based on the nature of the accounts, the nature of the customers we have. Obviously, the deposits are going to drive the size of the balance sheet. But if you look back, Paul, securities pre-COVID were around a little over 20% of earning assets. Is that kind of where weâre going to get to when the unwind of COVID fully plays out in your opinion? The key measure of liquidity that we utilize is liquidity stress testing. So not unlike our capital stress testing models, we have liquidity stress testing models. And I would say inherent in that are the assumptions around behavior deposits and draw-downs on commitments and sort of -- those things that can make an impact, ultimately, liquidity. So based on all of that, a very long answer to your question, which is -- probably requires a shorter answer, is that that proportion that you saw pre-pandemic with respect to the investment securities as a storehouse of on-balance sheet liquidity relative to the total assets is approximately where we would get to all other things equal. Okay, great. And then I noticed more disclosure in the back on the office portfolio, which is great. Maybe just help us with how youâre thinking about where risk in the portfolio lies in â23, the highest risk if you were just kind of 1, 2 and 3. Thanks. Thanks for the question, Chris. The biggest, I guess, issue that we have are what we call repositioned assets where weâre waiting for some lease up, the assets were bought cheaply. And that absorption hasnât followed through COVID. So, thatâs a segment of office that weâre watching. Weâre also thinking about it. Strategically, weâre looking down the road. Weâre asking how will office be positioned? And will there be less office but more space? Weâre looking at all kinds of variations of what office will look like. We have a pretty substantial suburban office mix, which has held up well. Central Business District office isnât something weâre big into. You wonât see us in trophy buildings around the West and inside of our footprint. But weâre very cautious around the asset class right now. I donât see a big change from what we reported in -- for the full year â23 -- or sorry, full year 2022. Thanks. So credit has been outstanding. I was just wondering how are you thinking about net charge-offs in â23? And then, secondly, if weâre at the appropriate ACL ratio, just assuming no change in the economy. Well, Iâm going to start with it. On the ACL, we think weâre through appropriate place having just certified that. I mean, we -- the process we go through, I think, is pretty comprehensive, and we think it reflects the risk that is there today. So, I would say on the net charge-off front, this is Michael. We -- if you look at historical run rates and you look at the last couple of years, weâve also been, I think, really fortunate. And how long that could fortune last is something that we could all speculate about. But I think we have the right credit infrastructure to continue to manage net charge-offs. Well, we get good recoveries. We have a great back office special asset group that goes after charge-off loans aggressively, but itâs hard to say that we can keep net charge-offs as low through what is anticipated to be potentially a milder recession forthcoming. This is Scott McLean. Iâll just add to that that I think the other thing, you just have to look at where do you think risk is really going to come from in a decline. And weâve said pretty consistently that itâs probably going to come in consumer unsecured. We donât have, hardly any consumer unsecured. Itâs probably going to come in construction loan portfolios, and our construction portfolio is about 20% of total CRE. The rest of our CRE is term, which is those are stabilized cash flows with low loan to values. Third place might come in land portfolios. We have very little land. So, I think those are areas. Leverage finance is another area that gets brought up. Thatâs not really disclosed, although we think Moodyâs is going to do a report on that sometime in the first half of the year. And we think, as we did last time, they did one, will probably compare favorable to our regional bank peers. So, itâs kind of like where do you think itâs going to come and do we have that? And the answers are weâre positioned pretty conservatively. Got it. And then, Paul, if I could just ask about maybe the outlook for deposit growth this year, or maybe do you think it would stabilize in the second half of this year? Yes. As I said, the key lever for deposits in this environment, I think, is rate. And so, Iâm not -- itâs very difficult to predict deposit balances because ultimately, itâs highly dependent on customer behavior, but I certainly would expect us to strike maybe an improved balance between rate and volume over the course of the next year. When we consider the alternative cost of funds, our all-in cost of deposits at 20 basis points is fantastic. But also, as Harris said in his opening remarks, we are in a position with a lot of flexibility in our balance sheet, and we feel like there are many levers that we could pull to change the deposit growth profile. I wanted to bring together all the kind of pieces of NII. And your outlook is still talking about a 4Q â23 to 4Q â22 slight increase. And Iâm just wondering, Paul, whatâs the power through point, right? Youâre talking about betas increasing, youâre taking out more borrowings, securities are coming down. So, weâve got the loan growth. And I guess maybe itâs front book repricing. Can you help us kind of understand what are the positives that offset some of the things that youâve spoken to already that would get that NII up on a year-over-year basis looking out to 4Q â23. Yes. The key -- a couple of key items would be the leverage inherent in our deposit book, as I said, our ability to maintain a very favorable cost of interest-bearing funds, in addition to maintaining that book of noninterest-bearing deposits. As reported in our comments, the majority -- in my way of thinking, the majority of our net interest margin expansion this quarter really had to do with the stability and the value of those noninterest-bearing deposits. So our ability to hold on to those is really important as is loan growth, which we talked about. Thereâs a lot of uncertainty in the economic environment. The inversion of the yield curve is not a positive for us and for many banks. And so, if rates kind of stabilize, if that inversion starts to go away, if we get decent deposit growth and we really are able to hold the line on both volume and rate with respect to our deposits, those are all incrementally helpful. Okay. The prefunding point makes the most sense to me on that. And the -- can you talk to us about just loan betas and loan repricing? Like, how does that pull through from here? And how would you put that in context with your -- with the beta commentary on the deposit side? Thanks. Well, we just have a page in here. I donât know if we still have it, James, back in the appendix. Thereâs about a little less than half of our loans ex swaps were priced within the first three months and then after that, you see some repricing out along the curve. And so, to the extent that rates stabilize, youâll see the -- that rate repricing continue to occur. But, as we think about deposit beta, I think oftentimes people are really thinking about the short end part of the curve and the short end part of that repricing. And as I said, itâs kind of between 40% and 50% of our loans will reprice within three months of a change in the base rate. Slide 27, for those of you on the call and have access to the slide deck, is that schedule that Paul was referencing. And there is a lag, as weâve talked about historically that, that lag. If you look at -- if you look at what the yield is on loans in the fourth quarter of â22 versus the average benchmark rates in the third quarter of â22, youâre going to get about a 45% loan yield beta, and thatâs the difference between just measuring it on the current quarter versus the current quarter. The problem with doing is it takes a little bit of time for the loans to catch up to whatâs happened with the benchmark rate, if thatâs helpful. Yes. Great. And can I just ask one more just on expenses. You said moderately off of what was a better year-end result here. Is that a pivot at all from comments that you guys have made recently about what the expected growth rate might look like in terms of your just -- your expense growth outlook for â23? Thanks. I wouldnât call that a pivot. I think that the really difficult inflationary environment and the environment for compensation has kind of changed the trajectory of noninterest expense. But weâve been talking about that for several quarters. And so, I wouldnât characterize that as a difference. What I will say is that the factors that are driving that are also driving interest rates to be significantly higher. And on a net basis, when we think about the funds or the revenue that drops to the bottom line, thereâs positive operating leverage in that environment for us. Thank you. Ladies and gentlemen, this concludes the question-and-answer session. Iâd like to turn the call back to James Abbott for closing remarks. Thank you, Joe, and thank you to all of you for joining us today. If you have any additional questions, please contact us at the email or phone number listed on our website. And we look forward to connecting with you throughout the coming months. Finally, thank you for your interest in Zions Bancorporation. And this does conclude our call today.
EarningCall_1391	Good afternoon and welcome to the Alcoa Corporation Fourth Quarter 2022 Earnings Presentation and Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead. Thank you and good day everyone. I am joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer and William Oplinger, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Roy and Bill. As a reminder, todayâs discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the companyâs actual results to differ materially from these statements are included in todayâs presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to todayâs presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced the earnings release and slide presentation, are available on our website. Thank you, Jim and thanks to everyone for joining our call today. As you saw from the fourth quarter and full year results that we released today, we returned $572 million in capital to our stockholders through buybacks and dividend payments in 2022. We continue to be well positioned with a strong balance sheet, ending the year with $1.4 billion in cash and proportional net debt of $1.2 billion. In 2022, we also progressed strategic restarts of capacity and worked to mitigate the impact of high energy costs. That said it was a challenging year. World events influenced costs for raw materials and energy. Our markets saw significant variances in pricing between the first half of the year and the second half, demonstrating once again why we are so focused on reducing complexity and continuing our improvement initiatives. As we progress through this year, we will continue to act to drive operational and commercial excellence, disciplined execution and rigorous cost management. Before we get into more details though, I want to emphasize, as always, our most important priority, safety. We strive to protect the safety and health of those who work at our facilities or visit them. In 2022, we did not have any workplace fatalities. This however is not an achievement, it is simply an expectation. And we always have areas where we can and will improve. We recognize that maintaining a fatality-free workplace requires constant vigilance to identify and eliminate critical risks. In fact, every employee at Alcoa has the authority and my permission to stop a job and seek help if they are unsure if itâs safe to proceed. There is never any production goal that will take priority over safety. Now on to our financial results. In the fourth quarter, we had a net loss of $374 million and $29 million in adjusted EBITDA. For full year 2022, we had a net loss of $102 million and adjusted EBITDA of $2.2 billion. It is clear from our fourth quarter results that we are confronting a challenging market and operational situation and we are taking action to be sure that we are firmly focused on driving improvements across our operations and company. Bill, who will become our Chief Operating Officer on February 1, will provide the full detail on our financial results in just a moment. Incidentally, this will be Billâs last earnings call as our Chief Financial Officer. Molly Beerman, our current Senior Vice President and Controller, is being promoted to CFO. She has tremendous financial experience and has been a strong leader for Alcoa. She will join me for our earnings calls beginning in April as she takes over Billâs former role and he takes his skill and experience to operations. Now turning to some operational highlights. Last year, we advanced several restarts that will bring economic value to the business. We also acted swiftly to reduce production capacity when and where conditions warrant it. Last month, we completed the safe restart at our Portland aluminum joint venture smelter in the state of Victoria in Australia. And we continued to advance the restart of the Alumar smelter in Brazil. To mitigate the rising cost of gas and electricity, we reduced output at the San CipriÃ¡n alumina refinery in Spain and curtailed one-third of production at our Lista aluminum smelter in Norway. Separately, over these last couple of weeks, we adjusted production at the smallest of our three refineries in Western Australia due to natural gas shortages that continue to persist in the region. We have a strong foundation across this company with the know-how and expertise to drive continued improvement. We are ready to address short-term challenges while remaining focused on our future, one where aluminum will become even more important as the world works to decarbonize. As we progress into the year, itâs also worth reinforcing the work we are doing on our ESG objectives. Alcoa has a clear purpose and a vision that guides our actions and decision-making. We are producing and delivering products that support our customersâ own sustainability ambitions and we are creating shared value for our communities and our other stakeholders. Just recently, in fact, we were once again named a top tier industry producer by the Dow Jones Sustainability Indices. We also continue to pursue growth opportunities via projects that can creep our production. And we are excited about the progressing development of our transformative technologies, which align fully with our vision to reinvent the aluminum industry for a sustainable future. Fourth quarter 2022 revenues declined $188 million compared to the third quarter to $2.7 billion on lower aluminum and alumina prices. At this point in the cycle, input costs were not yet declining and the result for the fourth quarter was a net loss of $374 million or $2.12 per share. Special items in the quarter totaled $251 million and included $196 million of tax items, primarily related to a valuation allowance on Brazilian deferred tax assets, $30 million of smelter restart costs and $26 million from mark-to-market energy contracts. After special items, adjusted net loss was $123 million or $0.70 per share. Adjusted EBITDA, excluding special items, was $29 million. For the full year 2022, year-over-year revenues increased $299 million to $12.5 billion and net income decreased $531 million to a loss of $102 million or $0.57 per share. Adjusted net income changed from $1.3 billion in 2021 to $890 million in 2022 or $4.83 per share and adjusted EBITDA, excluding special items, moved from $2.8 billion to $2.2 billion. Letâs take a closer look at the quarterly change in EBITDA. For fourth quarter adjusted EBITDA compared to the third quarter, the largest driver of the decline was $98 million of lower metal and alumina prices and includes higher raw material costs and higher production costs in alumina and aluminum. Energy improved $9 million as substantial Lista smelter and San CipriÃ¡n refinery improvements were partially offset by CO2 compensation adjustments in Norway of $35 million. Thanks to actions taken at the Lista smelter and the San CipriÃ¡n refinery, Lista and San CipriÃ¡n EBITDA improved to combined $67 million compared to the prior quarter. The other category is comprised primarily of a $25 million ARO charge in Brazil and $22 million of intersegment eliminations. In the segments, bauxite improved $9 million on better volume, favorable foreign currency and broad cost improvement. In the Alumina segment, the $42 million EBITDA decline was due to lower index prices as well as a $25 million charge to increase the ARO reserves at Alumar, partially offset by the $27 million improvement from the San CipriÃ¡n partial curtailment. In aluminum, the $121 million EBITDA change was due primarily to lower metal prices, but also due to broadly higher costs, partially offset by favorable foreign currency and lower alumina costs. Below the segment level, transformation, intersegment eliminations and other corporate expenses increased a total of $27 million. Letâs move to cash flow. The fourth quarter cash balance declined $69 million sequentially to $1.36 billion as releases of working capital, CO2 credits received, and quarterly EBITDA did not fully fund outflows. Capital expenditures, cash income taxes and environmental and ARO spending were the largest uses of cash in the quarter. Dividends paid were $17 million. On a full year 2022 basis, uses outpaced sources by $451 million. Our largest use of cash was returning capital to stockholders, followed by cash income taxes, capital expenditures and increased working capital. Now for our key metrics at year end, return on equity for the full year 2022 was 17.2%. In 2022, we returned $572 million of capital to investors, $500 million of share repurchases and $72 million of quarterly dividends. The balance sheet finished with proportional adjusted net debt of $1.2 billion, while DWC working capital improved $111 million sequentially primarily due to higher accounts payable. Lower revenues kept days working capital flat at 50 days. Free cash flow less net non-controlling interest distributions was negative $49 million in the fourth quarter and the full year 2022 number was positive $177 million. Letâs take a closer look at the cash and liquidity position. We are proud of the improvements we have made to our cash and liquidity position. In the three charts you see over time are cash position, debt maturities and key cash outflows. Year-end 2022 cash on the balance sheet was a substantial $1.4 billion, consistent with the average level for the previous 5 year-ends. After redeeming higher rate debt with maturities in 2024 and 2026, our debt has a lower rate and scheduled maturities are inconsequential until 2027. Our revolving credit facility has improved terms, has been extended to 2027 and has no borrowings against it. Pension and OPEB cash needs were low in 2022 and are expected to remain low in 2023 and beyond and are now mostly OPEB, which as you know, is pay as you go. Turning to our 2023 outlook. First, we are simplifying our reporting structure for 2023. Beginning in January 2023, the company will combine its Bauxite and Alumina segments and report its financial results in two segments: Alumina and Aluminum. In future reports, segment information for prior periods will be updated to reflect the new segment structure. In 2023, we expect alumina shipments to range between 12.7 million and 12.9 million metric tons due to lower refinery production, driven by the partial curtailment of the San CipriÃ¡n refinery and lower bauxite quality at the Australian refineries. The Aluminum segment is expected to ship between 2.5 million and 2.6 million metric tons as increased production at Alumar and Portland is offset by lower buy-resell activity and modern shipments. In EBITDA items outside the Alumina and Aluminum segments, we expect transformation costs to increase to $80 million on higher demolition expense and other corporate expense to be virtually unchanged from 2022 at $130 million. Below EBITDA, we expect depreciation to increase to $645 million primarily due to the weaker U.S. dollar. Non-operating pension and OPEB expense is expected to improve $45 million to $15 million and the $110 million interest expense is comparable to 2022âs level. For cash flow impacts, we expect 2023 pension and OPEB required cash funding to be similar to 2022 at $75 million. The majority of that spend is U.S. OPEB. Our current capital expenditure estimate is $115 million of return-seeking and $485 million of sustaining capital and we will continue to review it based on market conditions. We expect $150 million lower prior period income tax payments in 2023, down to $175 million. Environmental and ARO spending is expected to increase to approximately $195 million. Finally, capital returns to stockholders will be aligned with our capital allocation framework. Looking specifically at adjusted EBITDA, excluding special items for the first quarter and excluding impacts from index sales prices or foreign currency. In Alumina, we expect approximately $25 million higher costs from a Western Australia gas supply disruption to be offset by the non-recurrence of the Alumar ARO adjustment. In Aluminum, we expect alumina cost to be favorable by $15 million. We also expect Norwegian smelter costs to be favorable by $70 million from the non-recurrence of CO2 credit adjustments and lower energy costs. Additionally, we expect $15 million lower raw material costs and $15 million lower production costs. Below EBITDA, other expense is expected to be unfavorable by $45 million sequentially on equity contributions to ELYSIS and lower modern equity income. Based on recent pricing, the company expects 1Q â23 operational tax expense to approximate $5 million to $15 million. Beyond the first quarter of 2023, the company is reducing the available alumina grade at the Huntly mine to provide additional time for an extended mining approvals process. This grade change is isolated to the Huntly mine that supplies the Pinjarra and Kwinana refineries. Operating the refineries with lower-quality bauxite decreases alumina output and increases input costs. Starting in the second quarter of 2023 and continuing through the fourth quarter of 2023, we expect lower Alumina segment adjusted EBITDA of approximately $55 million per quarter in comparison to the fourth quarter of 2022, after excluding $35 million of non-recurrence for the Alumar refinery ARO adjustment and certain other non-recurring expenses in the fourth quarter of 2022. Thanks, Bill. Next, Iâd like to provide some brief commentary about the current global market environment for alumina and aluminum in 2022. Even given the clear change in pricing from first to second half of 2022, these markets were balanced or even in a slight deficit across the year. But differently than we have seen in previous cycles, the cost for raw materials have remained stubbornly high throughout the year, and it is only here in the beginning of 2023 where we are starting to see some minor relief in market pricing. In fact, we saw some of our highest ever costs for raw materials in the second half. All direct materials increased in price since the end of 2021, driven by multiple raw material supply disruptions that have kept market balances tight. In Alumina, we saw a 39% increase in the market price for caustic soda in the fourth quarter of 2022 compared to the same period in 2021. Caustic soda is used in the digesters in our refineries. In Aluminum, we saw more than a 70% increase for the market price of pitch and a nearly 30% increase for coke compared to the fourth quarter of 2021. Both products are used to make anodes for our smelters. Meanwhile, recent smelter curtailments announced across the U.S. and Europe, have only marginally influenced calcined coke prices. We have however mitigated supply chain disruptions by maintaining an agile and diversified global sourcing portfolio, which also closely manages our inventories to avoid market-driven supply disruptions. As far as global supply-demand balances, the market for alumina was mostly balanced in 2022. And in aluminum, the global market was in a deficit, including in China and the rest of the world. China has continued to enforce its 45 million metric ton smelting cap and we saw approximately 2.5 million annualized metric tons of smelting capacity curtailed in the country in 2022 due to power constraints in southern provinces. And we entered 2023 with the likely constructive impacts of a loosened COVID policy in China and the increased application of stimulus measures in China and globally. Next, letâs spend a bit more time on what we are currently seeing in aluminum over a longer time horizon. We continue to see evidence that supports our positive view on aluminum. Although 2022 was an unusual year with global events influencing energy and raw material costs, we remain bullish on the long-term fundamentals for aluminum. Even in a challenging market like what we saw during the second half of last year, there was continued evidence of the growth of aluminum demand for the future. Let me illustrate this point with two of aluminumâs end-use markets, transportation and packaging. Since Alcoa became an independent company in 2016, these two sectors have experienced significant growth rates. First, the share of electric and hybrid vehicles is on a solid trajectory to experience nearly a sevenfold growth rate in a 6-year period by 2023. These vehicles contain more aluminum in their construction versus traditional internal combustion engine vehicles. Electric vehicles, for example, contain approximately 40% more aluminum. Several recent reports from industry analysts have reported on this strong growth for EVs, which is occurring even faster than some had earlier predicted. And key auto manufacturers such as BMW and Ford have taken significant steps to increase their mix of battery electric vehicles relative to their total output. At the same time, China, the largest automobile market in the world, saw one of the largest year-over-year increases in 2022 electric vehicle production with 6.9 million units confirmed. Current estimates would add an additional 2.1 million new electric vehicles to be produced in China in 2023, bringing that total to 9 million units on an annual basis. The transition to these vehicles is also supported by several major countries and regions that have announced bans on new internal combustion car sales in the years between 2030 and 2040, including the UK, France and Canada. The second market to watch is packaging, which is expected to see a 41% growth rate in aluminum can stock consumption between 2016 and 2023. For Alcoa, packaging was one of our best performing markets in 2022 in Europe and North America. Also, more beverage products are using aluminum such as alcoholic seltzers and sparkling waters due to the metalâs lightweight, infinite recyclability and ability to chill beverages quickly. While these markets are meant to be examples, they support continued strength in aluminum demand in the long-term. Now, letâs move to the right hand portion of the slide. Given the importance of Chinese capacity growth over the last decade, one of the most influential factors for this next decade will be Chinaâs self-imposed 45 million metric ton cap. We see continued policy decisions and actions in China further supporting this capacity cap. Any increase in that ceiling would hinder the countryâs well-publicized goals for energy efficiency and decarbonization. While we expect an increase in operating capacity of roughly 1 million tons of metal in 2023 compared to last year, these are added capacities that either transfer existing operating permits from plants that will be shuttered or have outstanding permits complying with the Chinese cap. We have also recently seen Chinaâs actions to limit exports of primary aluminum through increased export tariffs on commodity grade aluminum in 2023, supporting the reality of the countryâs capacity cap. One final point to make on this slide, with the drop in global stocks over the last 6 years, inventories in 2023 are expected to remain near historically low levels of 49 days of consumption. The 10-year average has been 77 days and stood at 70 days of global inventories in 2016, the year we launched as a standalone company. Relative to annual consumption, the projected stock levels in 2023 could be insufficient if we see a rebound from current demand growth figures in China or the rest of the world. This adds support to both the short and long-term outlook for aluminum. While there continues to be significant uncertainties about the global economy in 2023, we continue to expect another year that will remain in relative balance for aluminum. And even more importantly, the underlying fundamentals continue to remain very favorable for aluminum in the long-term. Now, letâs talk specifically about some of the important actions Alcoa completed in 2022 to advance our strategy while also addressing the challenges of a volatile market. First, we worked to offset negative market impacts at some of our locations, including the high cost of energy in Europe, which skyrocketed after Russiaâs invasion of Ukraine. We partially curtailed two facilities, adjusting our production rates to San CipriÃ¡n alumina refinery in Spain due to high cost of natural gas. And we curtailed 1 of 3 potlines at Lista in Norway, our smallest aluminum smelter due to high electricity costs. In July of last year, we curtailed 1 potline at Warrick operations due to workforce shortages in the region and increasing instability. And we have continued to maintain that partial curtailment as we focus on safe and consistent production from the siteâs two operating potlines. Also we are continuing to work toward the planned restart of the San CipriÃ¡n smelter. And we have now signed two power purchase agreements for wind-based electricity although permitting will need to be approved by the regional and national Spanish governments before construction can begin. As I mentioned at the top of our call, we also maintained a strong balance sheet, which is essential, especially at a time when there is still a lot of unpredictability in the world. We reduced our pension liabilities in 2022 by completing a $1 billion transfer of liabilities and related assets to a highly rated insurance company for certain U.S. retirees and their beneficiaries. Our strong financial position also enabled us to make dividend payments and share repurchases while achieving an investment-grade rating on our debt and improving our revolving credit facility, which remains untapped. We made significant strides in growing the business as well at locations on four continents through capacity restarts and creep projects. In Australia, we safely completed the restart of additional capacity at Portland Aluminum in the state of Victoria. In Europe, we announced a capital project now underway to increase capacity at MosjÃ¸en in Norway by a creep project. In South America, we progressed with our Alumar restart in Brazil, which is powered 100% by hydropower and will capitalize on the integration with the co-located refinery. In North America, our Deschambault smelter is working to increase its casting capacity to add standard-sized ingots to meet increasing demand for foundry alloys in smaller formats. With all these actions, we continue to advance sustainably, both in supplying customers with low-carbon products and advancing our breakthrough technologies. In 2022, we continued to see a significant increase in year-over-year demand for our EcoLum low-carbon aluminum, which is part of our Sustana brand. Sustana is the most extensive suite of low-carbon products in the aluminum industry. While still a relatively small portion of our overall sales volume, we saw increased margins and deliveries of EcoLum in 2022. Our sales of EcoLum, in fact, grew more than 4x over 2021, driven mostly by the European market. Two examples of customers looking to us for this low carbon metal were Spira, a global aluminum rolling and recycling company; and Hellenic Cables, a large cable producer in Europe with key markets in renewable energy transmission and distribution. We also maintained an increased certifications with the Aluminum Stewardship Initiative, our industryâs most comprehensive third-party validation of responsible production. We have two additional sites certified to ASI standards in 2022, bringing our total number of sites to 17. We can also market and sell ASI-certified bauxite, alumina and aluminum to customers globally. Finally, we made progress on our road map of breakthrough technologies. This includes work to decarbonize the alumina refining process through our Refinery of the Future initiative, which has support from the Australian Renewable Energy Agency. Also, our ELYSIS joint venture furthered its work to commercialize the carbon-free smelting process first developed at Alcoaâs Technical Center. The actions we took in 2022 helped us prepare for the year ahead. As we start this new year, we are laser-focused on further improvement. We will drive operational excellence and rigorous cost management to meet todayâs challenges while working to promote future growth. We are developing opportunities to create growth via improved margins as a producer of low-carbon products, and our breakthrough technologies provide opportunities that can set us apart from others in the industry. The news that we announced last week regarding our restructured executive leadership team will drive continued focus on our priorities. We have teams across Alcoa that have a proven ability to execute and we intend to deliver. In operations, we are actively managing the issues we face in Western Australia as it relates to ore supply, as Bill mentioned in his portion of the presentation. While the annual mine approvals are taking longer than in prior iterations, we are adjusting our Huntly mine plan to extend mining operations already permitted under our existing approvals. We continue to work collaboratively with regulators to address this matter. Meanwhile, we are focused on improving our overall system processes to drive stability and performance across our facilities. We continue to review our operating capacity to address short-term market challenges and promote operational excellence. This includes monitoring the energy situation that prompted our decision to curtail some production at our Lista smelter and the San CipriÃ¡n refinery and the most recent impacts from gas shortages that led to a 30% reduction in output at the Kwinana refinery in Western Australia. And we continue to progress the restart of the Alumar smelter and prepare for the future restart of the San CipriÃ¡n smelter per our agreement with the workers there. Weâve worked hard over these past several years to improve our companyâs financial position, and we are intent on maintaining that rigor as we further sharpen our focus on costs. We will continue our work to maintain a strong balance sheet, which includes considering more opportunities to reduce the risks from pension liabilities as the market allows. While we focus on the immediate needs for success for 2023, we are also keeping our future programs firmly in focus. Our R&D programs are fundamental for our long-term growth strategy and our vision to reinvent the aluminum industry. Our breakthrough technologies include the ELYSIS joint venture, our Australia scrap purification process and the Refinery of the Future initiative. Our strategy and technology road map are tightly linked and continued innovation will be vital. Today, we offer the industryâs most comprehensive portfolio of low-carbon products, and we are focused on delivering to our customers products that can help them and us reach sustainability goals. Weâve seen year-over-year growth in both margins and volumes for our Sustana line, and we intend to continue this growth. And we see this developing low-carbon market as the key to building this critical demand as our ELYSIS joint venture continues to progress towards production at industrial scale. Due to work across our company, we are well positioned as a supplier of choice, especially in a world that is working to further reduce greenhouse gases. We have a global refining system with the industryâs lowest carbon dioxide intensity, and a significant portion of our smelting portfolio is powered by renewable energy. Underpinning all of our initiatives, we remain committed to being a responsible and reliable producer, working cooperatively with our communities to bring shared value. We also have clear mid and long-term sustainability goals, and we will continue to make progress against those targets. Finally, I have just a few points Iâd like to summarize before we take questions. First, our industry was a case study in contrast in 2022. The first half of the year was very strong with high pricing that more than offset high raw material costs. But world events negatively influenced our markets in the back half of the year. That helped emphasize once again why we operate with an intense focus on cost and delivering consistent operational excellence while we continue to work on projects that can drive future growth. Next, we know the world has experienced unexpected and disruptive volatility. Still, producers everywhere are facing increased demands and assurances of responsible production. Alcoa is quick to adapt and we will not simply wait for a market recovery. Alcoans know how to do the hard work, including managing both the short and long-term opportunities ahead. And finally, we took action in 2022, and we will continue to improve and operate as a sustainable low-cost producer while we work on our vision to reinvent the aluminum industry. The world is working to decarbonize and that provides us an opportunity. We know the long-term fundamentals for our industry are strong. Aluminum is the material of choice, and Alcoa is the company to deliver the products our customers are demanding. My first question is around Western Australia alumina. And perhaps, could you share specifically whatâs driving the delays to the mine plan approvals there? Are these new environmental requirements that have been recently enforced that you now have to address? And is there a time frame in mind as to when you would expect to see those approvals received? Yes. Emily, I appreciate the question. So we have an annual planning cycle. And as you can imagine, it takes time for us to adapt and prepare and put together everything that goes into choosing where we mine and how we mine. And so we also have an annual regulatory and set of connections that we make in order to receive all the permits that we need for operations. And so as expectations have been increasing around how we protect the environment, the amount of information and baseline data that we provide over to regulators has started to increase. And this is particularly in relationship to the Myara area that weâre mining today. It just takes longer for us to be able to receive and then put into place those permits. And so essentially, itâs not necessarily new requirements but a new set of discussions that are necessary and just more discussions that are happening between us and the regulators. And so as we go through that process and because of the critical importance of bauxite that we have coming into the refineries and also just because of how critical Western Australia is to Alcoa as a company, we thought it would make sense from a risk mitigation standpoint really just to step back, give ourselves a little bit of extra time, particularly for the process in play for the coming years and really work through these permits and make sure that we were delivering to our regulators all they needed in order to be able to secure those permits. So I have confidence that weâre going to get to an end point here. I look at this as an intelligent way to make sure that we have the extra time thatâs demanded because of â just because of some of the changing expectations and some of these discussions to allow them to fully happen. Over the course of these next few years, weâre in the midst of preparing for that next big mine move in the Huntly mine to North Myara. That is a larger set of discussions and itâs what we call a Part IV environmental approval, which is sort of a full blown review of how we will access those reserves and connections with communities, etcetera. And so really, this just helps to set us up over the course of these next few critical quarters to be able to manage all those different processes. Again, I have full confidence that weâre going to get this where it needs to be. I find that weâre collaborating and working with all of the stakeholders that are involved in the process. I just felt it was the right thing to do to really de-risk and make sure that we have what we need and that we can operate our refineries smartly. I would add one more thing on top of that, Emily, because I think itâs important. As we look at these next few quarters over the course of 2023, the opportunity we have is also to fine-tune our refineries to make sure that they are managing the â managing these new bauxite grades really smartly. And so I think there are opportunities that we have to learn how to run more efficiently, to manage the mud and sand loads that are coming in and really to make sure that weâre optimizing and running as cost efficiently as we possibly can in Western Australia and across the portfolio. And that points to some of the changes that weâve been making in the organization as well really just to make sure that we are as cost effective as we possibly can be. And so I â again, Iâm confident we will get the permits. Iâm also confident that we can find ways to improve and make sure that weâre driving that â those mine operations and refinery operations as smartly as we possibly can. Great. That was really helpful, Roy. Maybe a follow-up, if I may, and sticking with the cost theme there, but just wanted to touch on what youâre seeing from the lower gas prices in Europe right now. And if there is been any benefit to San CipriÃ¡n going forward for the Alumina segment. I donât think that was mentioned in the release. So yes, we are seeing lower gas prices in Europe for San CipriÃ¡n refinery. San CipriÃ¡n refinery results improved fourth quarter over third quarter. We anticipate that they will improve again first quarter over fourth quarter due to a couple of actions: one, the lower gas prices; two, some of the commercial actions that weâve taken to try to drive some price increases in our NMA business and really trying to optimize the cost of running the refinery at the lower levels that we have at that. Hi, thanks for the question. Let me add my congrats to Bill on the new role. Deserve a lot of credit, especially if you work on the balance sheet. And hopefully, investors will still have a chance to hear from you going forward. Just following up on Emilyâs question on the cadence of cost. You mentioned that at San CipriÃ¡n, you would expect sequentially lower cost in the first quarter. As we look further ahead into the second quarter, would we expect European smelter costs, Norway, San CipriÃ¡n to keep falling, assuming that nat gas is at current levels or keep or falls further? Thank you. Alex, what weâre seeing on the cost structure is really weâre now starting finally to see some reduction in key raw material costs. I think you probably saw in the chart that weâre starting to see coke prices tip over. Pitch is continuing to be pretty high. But weâve guided to a relatively stronger result in the first quarter than the fourth quarter, especially in the Aluminum segment. So in Aluminum, weâre guiding really to $100 million positive, $100 million up from the fourth quarter in the first quarter. As we look out into the second quarter, it really will depend on what energy prices do. And with the volatility in the market, itâs probably too early to give an indication of what energy prices will do in the second quarter of the year. Okay, thanks. And then on the San CipriÃ¡n smelter, what percentage of power is covered by the two PPAs that you signed? And then what are prices they are indexed to, if anything? Are they sort of indexed to market prices or LME? Any color there would be helpful. Thanks. Yes. Alex, I can answer that one. So the â these two contracts that weâve put together over the course of 2022 really add up to about 75% of the total demand for the smelter operating at full capacity. Weâve not talked about how the pricing structure works, but essentially, itâs a fixed price. And then you need to add in transmission charges in any programs that the Spanish government might be running an order on interruptibility and things like that. We look at this as an opportunity to really re-baseline and prepare San CipriÃ¡n for our future. Itâs the reason we put together the agreement with the workforce. We were able to gain the time where we didnât â where we were able to curtail the facility completely and are preparing, as I said in my comments before, preparing for the restart back in January â the start of the restart back in January 2024. Yes. Thank you very much. Happy new year Roy and Bill. And Bill, congrats on your tenure as CFO and all the best in the new role. Just a question regarding the Kwinana run rate, just to continue the discussion on alumina, I guess. You mentioned in the press release, and I think there were some news articles that the gas supply has improved, but yet youâre keeping the reduced capacity utilization there. So what would need to change for you to take the capacity utilization higher in that refinery? That will be my first question. And then the second one maybe related to ELYSIS. What can you tell us there in terms of important milestones? When should we hear an update from you on how the developments are progressing? And when will you be making the decision of further investments? I think there was something around $100 million contingent CapEx depending on the success of the developments that youâre running right now. Carlos, let me give you first couple of answers, then Bill can fill in, particularly on the ELYSIS numbers. Kwinana, just to get started there, so weâve got about 30% curtailed, it was very much driven by the fact we just didnât have enough gas in the state of Western Australia, asked large consumers of gas to look for ways to be able to reduce. And operating on diesel just doesnât make a lot of sense just because of the price differential and for a number of other reasons. So as we looked at that, the right thing to do was to be able to take a series of maintenance activities and bring that down by 30%. At this point, we have seen improvements in how much gas is available essentially up to our normal contracts. Weâve seen an improvement but weâve not yet got back to the stability that we normally have. I would say weâve made good progress in being able to fill in some of the gaps so that weâre now running what we have running fully on natural gas, and weâre not substituting diesel, which is very good and good from a cost standpoint but also good from a stability standpoint. But we need to see continued sort of the return of all the normal operating capacity back before we start making that next set of decisions about whether we bring it back up or not. All intentions or sort of what we had seen before is that by the end of January, we should see some of those maintenance and downtime events in our suppliers start to ease up, the ones that havenât done so already. And so we will be analyzing as we go. And as always, we will keep you informed and let you know as soon as weâve made a decision on that, Carlos. On ELYSIS, just jumping into that second question as well, important milestones, Iâll hit it qualitatively, and then Bill can step in and talk a bit more about the numbers. For me, the next important milestones, the ones that obviously, weâd be talking more about, weâre in the midst of constructing and preparing to start up the first industrial-scale cells. And so that will be happening over the course of 2023. So as you can imagine, this year is very important to see those cells starting to operate and to start to see those initial results. And I would imagine that we will keep the market informed as much as we feel is appropriate over the course of 2023 and 2024 as those cells continue to operate. By the end of 2024, what weâve said is that we want a commercial package available so that we can get started on the first installations of ELYSIS, which weâve not defined where that will happen yet, with the idea that the first operating capacity really will be happening in 2026. And so to me, 2023 is going to be absolutely critical because itâs going to show that weâre â that weâve got the ability to operate, to generate the quality of metal at P1020 or better capacity and to start to work on making sure that we can deliver on the operating efficiencies and the capital efficiencies that weâve got planned. So itâs going to be an exciting year. And on the numbers, Carlos, a couple of numbers to keep in mind. We guided in the â we are guiding in the first quarter that other income will be down sequentially by about $45 million. $35 million of that $45 million is associated with contributions to ELYSIS in the first quarter. So you know the way the accounting for the ELYSIS contributions are is that when we make that contribution, we immediately take the hit in income and that sits in other income. For a full year estimate, including the $35 million of contributions in the first quarter, we would anticipate about $60 million in full year contributions for ELYSIS at this point. Now that will flex based on timing of some of the key decisions, but thatâs our best estimate at this point. Hey, good evening. And happy new year everyone. Wanted to just touch on a little piggybacking on the discussion of kind of what it takes to restart some of your idle capacity but ask a little differently. Looking around the European markets, do you think that there is also the potential for some extensive restarts, given lower gas prices? Or what do you think it takes to see some of those facilities also restart? Timna, I can â Iâd take a first thing at that one and Bill can chime in as well if he wants to. The â operating in Europe is still pretty difficult. So you compare it to prior to the war in Ukraine or maybe even better, take it a year before that because we were seeing an inflation in energy prices even the year before. Itâs still a very difficult place in order to operate a smelter or a refinery. And so those smelters that are operating tend to be ones that have long-term contracts that have been disconnected from the spot prices that we see today. We were able to find a solution on the relatively small â lease the smelter that we have, although it is third curtailed at this point, and that was through some incredible work that our strategy and commercial teams were able to do. But itâs still just not a market where you can justify continuing to operate at spot power rates as you see. And I would extend that over to the Refining business as well when youâre buying spot gas. The current LME pricing for aluminum nor the API pricing for alumina giving you a return given where those rates are. As we see the winter continue and if it continues as mild as it is, I think perhaps youâll start to see some opportunities that emerge but weâre just not seeing that yet. If anything, when I look across Europe, Iâd say that there are still opportunities or potential and particularly where certain smelters might be coming up on end of shorter-term contracts and then are going into the spot market or looking for that next series of contracts. I think there is still some curtailment potential that could happen both on the smelting side. And weâve also heard some rumors about stuff that could be happening also on the refining side that sort of informed the difficulty thatâs happening in the market. Again, we always â when we step back and we look at our facilities and we think about how we run them, San CipriÃ¡n is a good example. The San CipriÃ¡n refinery is a good example of a place where we have been able to make smart decisions and curtail it partially so that we are really only producing the tons that, in fact are creating value for us. It doesnât necessarily fix the problems because we want to be operating that facility at full speed again down the road, but we need to see the more relief on gas before we get to that particular point or more relief coming in from the pricing, the API pricing, etcetera. Just to put some numbers around that, Roy, I was going to reiterate the point that you are making at the end there. We were â we have been consistently surprised that more capacity hasnât come offline in Europe. And you have heard us, Timna, talk many times about 1 million to 1.2 million metric tons that was at risk because of high costs in Europe. We would still say that today, in the month of December, we think that 15% to 25% of the European smelting capacity is cash negative. So, as we look around the world, the majority of the cash negative smelting capacity is sitting in Europe today. To add on, on the refining side, a surprising number is that we would consider close to 85% of the refining capacity in Europe to be cash negative at the December average gas prices. Now, we know that gas prices have changed a little bit in January, but a lot of the capacity in Europe on the refining side is cash negative. Okay. Thatâs super helpful. Thanks for that context and thoughts. My other second question was just on the CapEx, given that your guidance, at least from my recollection, is a little lower than what we have seen before by $50 million. And actually, your 2022 came in I think about $45 million lower than what you had initially said. So, just wondering if any shortfalls there, if that is getting pushed out, any explanation would be great? Thanks. I wouldnât say any things were necessarily getting pushed out, Timna. Given â and you have seen over the years, given the market situation that we are in and the cash generation of the company, we will flex the capital spending up and down. And so I think itâs a good point. The last time we gave you guidance around 2023 was back in November of 2021. And we said at the time, we would spend $550 million of sustaining capital. And that was before we curtailed the smelter in Spain and made some commitments in Spain on capital spend there. So, the $485 million that we are showing you for 2023, we have already ratcheted it down a little bit based on current market conditions. With that said, going into my new role, we will make sure that we spend that $485 million wisely and do the best that we can to make sure that we maintain the assets at the right level so that we can produce the tons in the good times. Thank you very much operator. Good afternoon everyone. And Bill, I hope it wasnât our questions that led you to the new role. In terms of my question, I wanted to follow-up on Huntly. Is the easiest way to think about it, itâs about $165 million impact for 2023 between [Technical Difficulty] and then as we look out to 2024, this issue will hopefully be resolved? Yes. The number you put out there, the $165 million is correct. That is in relation to the fourth quarter and you just need to â we needed to be able to ground you in how much this issue was going to cost us in Q2 through Q4. So, itâs $55 million unfavorable compared to the fourth quarter. But itâs important that you first back out some of the unfavorable items that occurred in the fourth quarter in the Alumina segment. So, in the Alumina segment in the fourth quarter of 2022, we had an ARO charge of $25 million, and we had an incremental one-time set of charges that were some small things in that segment. So, what we are guiding you to is start with the fourth quarter of alumina, add back the $35 million and then deduct the $55 million. So, itâs an incremental $20 million of un-favorability in relation to the fourth quarter. And I hope thatâs clear. We just needed to try to make that as clear as we possibly could for you to be able to model out the impact. Very clear to me. I appreciate that detail. And this would also include all the quality concerns that Roy mentioned in response to one of the earlier questions. It does. Thatâs an inclusive number that includes the loss of tons, but also itâs more expensive to make the tons that we will be making. As we push through lower-quality bauxite through the refineries, we will have higher usages of caustic and other input costs. So, thatâs inclusive of those two items, tons and costs. Very helpful. I appreciate that. And then switching quickly to San CipriÃ¡n, could you run us through a punch list for that restart? I know you spent some time on that theme today, but would appreciate what is necessary there. And if this punch list is not completed by the end of this year, what happens? Do you go ahead with whatever the spot price power is at that time or are there other remediation possibilities? Thank you very much for that color. Yes. Lucas, let me try and answer that, and then if I am not hitting the targets, let me know. So, what we have are a series of commitments that we made that essentially allowed us to idle the facility a little bit more than a year ago. There were a certain number of capital investments, and some of those take longer than others, as you can imagine, and they are meant to set up the facility for the long-term. And so those are ongoing. And also, what we need to do is make sure that itâs ready to restart when we get to January 1, 2024, which was a very specific commitment thatâs inside of the agreement. Our workforce is there ready and waiting. And in fact, we have been trying to help with certain trainings and things like that. But in the end, there is only a certain number of activities that they can do. They have helped with some maintenance and things like that, but they are ready and waiting and ready to jump in to start that restart. So, really, we just need to make sure that we have all of the raw materials necessary, so as 2023 progresses, we will be able to make sure that we have got the coke and pitch or anodes in place so that when we start to spark those pots and bring production back online again, it will be ready to go. From an energy perspective, itâs a matter of, we have got the 75% worth of contracts that are already in place. Those are wind farms still to be constructed. So, those are going through the permitting phases, which connects with both the national and regional governments. There will then be a construction phase. As you can imagine, the construction of wind farms in Northwestern Spain is something thatâs happened often in the past, but it takes some time to be able to bring those up to speed. And so we will need to find a solution for the piece of the â for the remaining 25% plus the piece of the 75% that will not be ready when we get ready to restart those pots. And whether we run that on spot, whether we find a shorter term contract, how we manage that is still not something that we have disclosed or have made a decision on. But as you can imagine, because we have that agreement with the workforce, we will be ready when the time comes and we will be working on that over the course of these next months. Right. That is very helpful. Thatâs exactly what I was looking for, so I appreciate that, and to you and the team, continued best of luck. Roy, could you share with us your observations of what your major customers are behaving like right now as we went into 2023? Is there expectation that the recovery from the pandemic restrictions in China and such and stimulus is going to be a pretty major factor? Is it going to be sooner rather than later, given what your customers are thinking? Yes. I can provide some color, Mike. As always, every customer might be a little bit different, so I will try and generalize a little bit. We are still seeing a lot of strength in the U.S. market, particularly. And so when we look across the different product categories, and I would highlight transportation and packaging is the two places where we are just seeing â we continue to see more demand than probably we are able to fulfill. So, the U.S. market is still running very well. In Europe, I think there is a lot more uncertainty. Some of that uncertainty, I think has started to step back a little bit just because of the reduction in gas prices and the reduction in electricity prices that we are seeing. There has been a certain amount of destocking, so I think that our customers have been taking the position that they are, being very careful what they order. And in Europe, we tend to contract on a quarterly basis. And so you would tend to see those reactions happen a bit quicker than what you might see in the U.S. But I think there is now, I would argue, more uncertainty in the market about whether we will start to see a better recovery. And you have probably seen as well as I have some of the analyst coverage about the potential for recovery in Europe because itâs been such a mild winter and because they are â they have sufficient gas and storage. And so I would say there has been a cautious approach in Europe, but I think itâs also potentially constructive as we see what happens over these next few critical weeks and these next few critical months. From a Chinese perspective, and we donât sell particularly into China, but I think that has a knock-on impact what people are seeing there, I think there is a general expectation that they need to work through this abrupt opening of â or loosening of COVID restrictions. I know there is plenty of discussions about how much industrial activity is able to happen between now and the Chinese New Year. We have also seen a lot of issues on the supply side, particularly when it comes to aluminum, just because of the availability of energy between droughts and hot weather and all sorts of things, it hasnât been an easy time to see stable operations in China, particularly in smelting these days. And all that sort of will culminate then coming out of the Chinese New Year. We are coming into it, and I just saw a headline today saying that we are relatively a very low inventory build coming into Chinese New Year, which then bodes very well if we see that demand recover and we start to come out of sort of what might be the spike in cases of COVID because of the loosening of COVID restrictions. It really does bode well for demand coming out of China and because of the size of the Chinese market that then bodes well for all of the global markets when it comes to aluminum. So, certainly, a lot of the things I have been seeing recently are providing a lot of breadcrumbs that say, âHey, there is still a significant amount of uncertainty.â We come out of whatâs been a relatively small deficit for the aluminum market in 2022 into a market where there is a lot of uncertainty, but I would argue that over these last weeks, we have been seeing more and more positivity come out. Again, thatâs â you always take into account what could happen in Ukraine, whatâs happening across the world when it comes to demand, etcetera. But I look at our business and I look at our customers, and we are still finding good uptake of our value-added products. We continue to see good improvements on our low-carbon offerings as well. And thatâs a piece of the market. Itâs particularly developed inside of Europe. But to me, that sort of gives you good positive signs that we are continuing to see a constructive market. And that even if there are some short-term disturbances when we look into the medium and long terms, I am very positive about whatâs going to happen across our markets. Thank you. Looking at ELYSIS and the Refinery of the Future, what is the likely first location where you would retrofit a smelter or retrofit a refinery? And what year might we look ahead to that? Is it possible for 2025 or sooner or later? So, itâs a great question, John, and not one that we have yet defined and certainly not communicated. And so we are looking across all the jurisdictions where we operate. As you can imagine, there is a lot of excitement about ELYSIS and a lot of excitement about who can be first. Canada of course, is one of the frontrunners because they have been so supportive of the technology, the technology as an investor, as supporting all of the work thatâs being done in Canada right now. And obviously, they have a very attractive energy scheme as well. But I wouldnât count out the U.S. as a potential location. Norway is another great place where we have had a lot of support from the government in a lot of different places. And so I would say that it is still very much open where that first application will happen. And to be quite honest, as we watch the good results come in here over the course of 2023, itâs going to get more and more of an opportunity for us to decide where will that first application be. And as to when that first one will be built, what we have been saying is that by the end of 2024, we want the engineering package in place so that first metal can come out in 2026. So, it says we really need to get started building in â across â24 and â25. So, it doesnât give us a lot of time. It means we are coming up on a decision where that first location will be. It means we need to be interfacing with all of our host governments and our potential host governments and need to continue to see good progress on the actual success of those industrial-scale cells that are being operated today. Yes. As far as Refinery of the Future goes, John, and I will address that one quickly. Remember that Refinery of the Future is really a suite of processes that we are developing. Out of that suite of processes, there are some that we have talked about externally, for instance, mechanical vapor recompression and electric calcination. We have committed to do a pilot of mechanical vapor recompression in 2023 at the Wagerup facility, and we are getting some funding from the Australian government. Out of the $115 million that we are talking about return-seeking capital, MVR is included in that $115 million. So, while we have skinnied down our return-seeking and our sustaining capital, there are a handful of projects that are really critically important for us and MVR is one of them, and thatâs included in those numbers. As far as electric calcination, itâs a little bit farther away, and we need to prove out the technology at a smaller scale. So, itâs too early to say where that would be applied. If I could follow up on Slide 17, Royâs key areas of focus for 2023, a couple of the targets look like they are kind of hard things to do. On bauxite quality, are you assuming that you get regulatory approval, or would you go across the road and buy some bauxite from Worsley or across the lake from Weber or something? And with gas supply in Western Australia and energy for San CipriÃ¡n and Lista, are you essentially seeing the markets soften and that supplies are going to become available that were not available several months ago? So, John, itâs all very important questions. So, first and foremost, and this is something I have learned over the time I have been CEO of Alcoa, we lack easy-to-solve problems. We have lots of things that need complicated solutions that take time and smart ways in order to address them. Itâs why I have got the team that I do. Itâs why I have got a lot of faith as we deal with these things. And to be quite honest, itâs one of the reasons that we made some of the changes in the executive team to make sure that we are focused on the right things to be quite honest. And so we have the bandwidth, we have the right people working on these things. And to be quite honest, particularly on the strategy side, we try and look at things without boundary conditions so that we can find whatâs best to solve for the long-term viability for this business and for our stockholders across the board as well as our stakeholders as well. And so when it comes to bauxite, like I had said in one of the prior answers, I have a lot of confidence that we are going to be able to work collaboratively and get to a conclusion, a timely conclusion so that we can operate these facilities for another few decades. I just â I have full confidence because everything is lined up. We have the right people working on it and I think we have the support of our host government. But that doesnât mean that we canât look at other ways in order to bring in bauxite or to look at other solutions. And so we will continue to do that. When it comes to your point about solving the energy questions around a plant like Lista or San CipriÃ¡n in the short-term before we get to these new contracts for the San CipriÃ¡n refinery, a lot of times, the deals happen as you get towards deadlines and as you build up consensus with communities and with host governments to find shared and common interest. And a lot of times, it can mean that you are working with suppliers, your energy suppliers so that you can provide that base load. Thatâs worked really well in the energy contracts that we have built up with Green Energy [ph] and Endesa for San CipriÃ¡n in the future. We are sort of that base load customer, and we can get a very advantageous cost position, price position for us. But we also have to see how the market develops and then look at what â how the market mechanisms can then come to support those final contracts. So, all that to say, they are difficult problems and there is a lot â itâs a pretty simple slide, but there is a lot of work thatâs going into it. But I think we have the right people working on the right things. And I would just come back to my point that we put a lot of creativity in how to solve these things because none of them are easy problems. And the fact is, is that we need to always step back and say, are we doing things as â with as little complexity and with as much effectiveness as we possibly can. Itâs a really good question, John, and I appreciate it. Thank you, operator and thanks once again to everybody who joined this call. Given his time as CFO of Alcoa Inc. and now Alcoa Corp., I thought it would be good to hear a few words from our good friend, Bill, before we close for today. Bill? Thanks Roy. I will just make a couple of points before we close off. The first point is I am absolutely thrilled that Molly Beerman is stepping in as CFO. When I look at Mollyâs abilities, she has tremendous knowledge of our company. She knows the financials better than anybody out there and she is a great leader. And on top of that, I think she will be a steady hand to help be a business partner for you, Roy. And I am just really happy that she is stepping into the role, so thrilled about that. I guess secondly, to address Lucasâ question, Lucas, this is my 40th earnings call as the CFO of Inc. and Corp., a full 10 years. And I have enjoyed tremendously the interaction with investors, investors, buy side, sell side. One of the highlights of my career has been working with the people on this call. And many of the most enjoyable times that I have had as CFO have been working with the people on this call. So, going on to the new role, I think over time, we may run into each other again. So, itâs probably not goodbye for now, but maybe just we will see you in the future. So, Roy, thanks for the opportunity to address the group. Yes. Thanks Bill. And as you know, he is not going that far away. Operations are critically important to us. He does sit next to me in our Pittsburgh office and we are moving him out and moving Molly in. So, the value of my real estate is definitely going up because of better neighbors. But in the end, not to belabor the point, in the end, I think we have got the right people doing the right thing. Molly is going to do a great job as CFO. Bill is going to do a great job as COO. And we have complex issues but we have got the right team that are working on them. So, I just want to once again reiterate that I appreciate everybodyâs continued interest in the company. I really do believe that we have built, over these 6 years, a strong foundation. And I also believe that we are working on the right things that were driving â continuing to drive improvement and making sure that we are doing things in the right way. So, these next few months will be gone before we know it, so I look forward to speaking with you again in April for our first quarter 2023 results. And we are going to have Molly Beerman at my side answering questions and helping us walk through the earnings. So, thank you to everybody. Have a good night. Stay very safe and we will talk to you soon.
EarningCall_1392	Good morning, and welcome to EnWave Corporation's Fourth Quarter Fiscal Year 2022 Earnings Conference Call. My name is Kevin, and I will be your operator for today's call. Joining us for today's presentation are the company's President and CEO, Brent Charleton; and Dylan Murray, EnWave's recently appointed new CFO. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] Finally, I would like to remind everyone that this call will be made available for replay via a link in the Investor Relations section of the company's Web site at www.enwave.net. Thank you and hello to everyone who have joined us today for EnWave Corporation's Q4 earnings call. Today, we will summarize the performance of our two business units, EnWave and NutraDried, and comment on the outlook of our company through the next few quarters. For those who are new to our quarterly calls, we refer to our proprietary vacuum-microwave technology business unit inclusive of machine sales, royalty generation, and toll manufacturing as EnWave, while we refer to our wholly-owned subsidiary that sells branded and bulk shelf-stable cheese snacks as NutraDried. Following an update on our near-term outlook and fiscal '22 performance, Dylan Murray, our new CFO, will speak to our Q4 consolidated financials, as well as point out notable metrics for both EnWave and NutraDried. Dylan brings a wealth of experience and expertise being a CPA for almost 10 years, having broad operational responsibilities in prior roles, and having worked in the cannabis industry. Now, consistent with our past quarterly earnings calls, this information we present today contains forward-looking information that is based on our management's expectations, estimates, and projections. Our statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions. Please consider the risk factors in the filings made by EnWave on SEDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. At the beginning of fiscal '22, we expected material performance improvement in both business units. In our EnWave business, we had several current and prospective royalty partners operating in the international cannabis industry communicate intent to purchase large-scale machinery only to backtrack when it became abundantly clear that the global cannabis market was contracting. Additionally, we had three current royalty partners that intended to scale up their cheese snack manufacturing capacities pull back from large-scale machinery decisions due to global increases in cheese commodity pricing. Once again, we saw that unexpected external economic factors can significantly impact expectations. Now, for NutraDried, it's primary challenge was the historically high cheese and freight prices, which compressed its margin profile, even though Moon Cheese continued to exceed velocity expectations in the alternative snacking channel. Now, despite these challenges faced, EnWave's technology business performed well, recording positive adjusted EBITDA in back-to-back fiscal years for the first time ever, and producing an all-time best gross margin, of 47%, in fiscal '22. We also managed cash prudently maintaining a strong balance sheet. EnWave continues to track towards breakeven, while NutraDried has primarily accounted for the cash losses in recent quarters. And that being said, I'll provide a more optimistic update on NutraDried's prospects following a summary of EnWave's performance and near-term opportunities. In fiscal '22, EnWave signed 10 new material agreements, either technology evaluation license option agreements or commercial licenses, growing the portfolio of companies committed to REV drying technology. Throughout the year, we sold four large-scale machines and seven 10-kilowatt units generating about CAD11 million in revenue on the machine sales. The most encouraging metric for me is our third-party royalty growth year-over-year. Now, we enjoyed a 47% increase growing our royalty portfolio from CAD919,000 to CAD1.35 million ex NutraDried in fiscal '22. Now, given that we have four large-scale machines confirmed to be commissioned in fiscal '23 and several potential new near-term large-scale purchase order opportunities, we expect continued royalty growth for the foreseeable future. We expect our team to complete the commissioning of the Dole 120-kilowatt and the Orto Al Sole 120-kilowatt in Q2 fiscal. The 60-kilowatt installation for a Japanese royalty partner and the second 120-installation for a U.S. cannabis partner will likely take place in Q4. And all 10-kilowatt machines purchased in fiscal '22 will be commissioned by the end of Q2. There is ample room for EnWave to deliver stronger financial results in fiscal '23. We have completed the facility build-out at REVworx, and are actively working on several projects that should start up in the next calendar year. Our machine sales pipeline is robust, and there is ample opportunity to grow the number of large-scale REV machine orders. The groundwork completed in fiscal '22 in both of these areas should yield results in the coming months. We obtained SQF certification for REVworx critical for export of commercial salable products with large companies, and completed numerous line trials for prospective toll drying clients. We also expect several new machine orders in the near-term as we expect decisions in the upcoming months from current technology evaluation partners and direct-to-license prospects. Based on our current pipeline, we hope to exceed our machine sales performance from fiscal '22, with the majority of sales likely to come from food manufacturing companies. A few projects of importance that we will be monitoring closely this year include Dole's launch of their Good Crunch fruit and vegetable snacking line, the launch of a meat chip snack in the U.S. by an undisclosed partner, a broader domestic snack launch by our largest Japanese royalty partner. And our Italian partner, Orto El Sole's European launch of their ultra-premium fruit and vegetable snack line. Now, success in any one of these projects could lead to additional large-scale purchase orders and cement our technologies' tradition as a value-add option for major companies in the snacking space. Complementary to our machine sales and third-party royalty generation, we expect to confirm substantial new REVworx toll manufacturing contracts in fiscal '23. We estimate that at full capacity utilization, REVworx could generate in the neighborhood of CAD2.5 million in annual revenue. Our strategy is to use REVworx as a platform for potential royalty partners to bring new REV-dried products to markets, prove their business cases, and eventually invest in their own internal REV manufacturing capacity. We are currently working with 10 qualified potential REVworx clients, all of whom have completed product development, have run trials, and are now negotiating contract terms. Of the 10 prospects, two generate more than CAD1 billion in annual revenue, one generates more than CAD300 million in revenue, and the remaining prospects, less than CAD100 million in revenue, to give you an idea of the size of businesses we're dealing with. Now, while we are delighted with the early trials with REVworx's 60-kilowatt production line, there is a limit on processing capacity to service all 10 prospects in short order. And these operators know that, and they are moving quickly towards claiming their new capacity. Now, before moving on to NutraDried, I want to acknowledge that our news fill hasn't been steady in the past quarters, and that's not a reflection of the business development activity that's taking place. Confidentiality is highly valued, and many of our partners just don't want to share the details of their plans with t public, and we have to respect that. In Q4, NutraDried made additional expense reductions to further reduce discretionary spending. Until the business begins to generate reliable positive cash flows and work itself through the rest of its higher-priced inventory, the expense structure will be tightly monitored and remain consistent. For the grocery channel, we have active opportunities to win an additional 4,000 new stores of distribution, ranging from two to four SKUs at each store. As previously mentioned, Moon Cheese velocities are doing well in the alternative snack category, which lends itself well to the selling story. Alongside potential new distribution, new Moon Cheese packaging will be hitting shelves in the spring. This new design came at small cost, and now unifies [Orto El Sole's] [Ph] SKUs in NutraDried portfolio, including Cheese Nut Mix, Pro Blitz Mix, and our Moon Cheese Stick product line. More impactful to a near-term NutraDried turnaround is the possible confirmation of new large bulk sales to companies looking to use our cheese as snack mix ingredient. The contribution margin associated with bulk sales is vastly superior to traditional grocery sales. And the cumulative size of the fiscal â22 bulk opportunity if won would internally change the fortunes of our operating subsidiary. Another variable that bodes well for NutraDried in fiscal â23 is the stabilizing commodity block cheese pricing. Currently the block pricing has come down to just above two bucks from highs of CAD2.40 to CAD2.50 in the May-June timeframe of fiscal â22. NutraDried will need additional production and sales volume to return to profitability. Between the bulk opportunities we are pursuing a new grocery distribution targeted. We have enough new volume opportunities that can get us there, but itâll take some time. Thanks, Brent. Good morning, everyone, and thank you for joining us today. Itâs a pleasure to address the shareholder base for the first time as the companyâs new CFO. Today, we will be taking some time to review our Q4 2022 financial results. Please note that the figures I will going over today can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR. And all amounts are in Canadian dollars unless otherwise noted. I will make reference to adjusted EBITDA which is a non-IFRS financial measure. So, please refer to the non-IFRS financial measure disclosures and reconciliation to GAAP net income, both in the press release and in our MD&A. Also please note that the comparative period I'll refer to throughout is the prior year Q4 ended September 30, 2021. Consolidated revenues for Q4 were CAD5 million compared to CAD6.9 million in Q4 2021, a decrease of CAD1.9 million. EnWave accounted for 57% and NutraDried for 43% of total Q4 revenue respectively. EnWaveâs revenue was CAD2.8 million for Q4 2022 compared to CAD3.9 million for Q4 2021, a decrease of CAD1.1 million. The decrease was due to the timing of revenue recognition on large-scale machine contracts. And in Q4 2021, we had the benefit of reporting 100% of 120 kilowatt machine sale which was not replicated in the current period. During Q4, EnWave confirmed a new 230 kilowatt order with Dole and signed an equipment purchase agreement with an existing royalty partner, a major Japanese snack company, for a 60 kilowatt machine. A large portion of the associated revenues for these sales will be recognized in fiscal 2023. We have many other large scale opportunities in the sales pipeline that we are aiming to close over the near term. Enwaveâs royalty revenue for Q4 2022 was CAD290k, up from CAD245k in Q4 2021 representing growth of 18%. As our royalty partners grow their businesses and increase capacity utilization on REV equipment alongside new REV installations arising from the sales, we hope to continue to see further royalty growth over the coming quarters. For NutraDried, sales were CAD2.1 million for the quarter, a decrease of CAD880k from Q4 2021 sales of CAD3 million. The decrease in revenue was primarily due to lower bulk ingredient sales compared to the prior period. Consolidated gross margin for the company in Q4 2022 was 15% compared to 34% in Q4 2021. EnWave generated a Q4 2022 gross margin of 39% while NutraDried generated a negative gross margin of 15% for the period. The consolidated margin compression is a result of two things. In Q4 2021, a fully fabricated large scale machine was resold for onetime substantial margin that was not repeated in Q4 2022. And two, NutraDried experienced substantial margin compression in Q4 2022 with higher cheese pricing increasing its cost of goods. Cheese pricing for 40-pound Cheddar block on Chicago Mercantile Exchange averaged CAD2 a pound for fiscal â22, and peaked at around CAD2.40 in May of 2022. In Q4, cheese prices continued to fluctuate in ranges above the historical average which compressed margin for the period. When possible, NutraDried uses forward contracts to mitigate the impacts of the commodity price fluctuations. SG&A expenses including R&D were CAD2.9 million for Q4 2022 compared to CAD3.2 million for Q4 2021, a decrease of CAD234k. We reduced G&A cost as part of continued focus on managing non-revenue generating spending while increasing the investment into S&M to further development of the market for EnWaveâs proprietary REV technology. Adjusted EBITDA is a non-IFRS financial measure, so please refer to our MD&A for the reconciliation from GAAP to net income to adjusted EBITDA. Adjusted EBITDA was a loss of CAD1.5 million for Q4, 2022, compared to a loss of CAD223,000 for Q4, 2021, a change of just below CAD1.3 million. The loss generated by NutraDried's higher cost of goods was the primary driver of EBITDA for the quarter. The consolidated net loss for Q4, 2022, was CAD2.3 million compared to net income of CAD1.1 million for Q4, 2021. Turning to our balance sheet, we finished Q4 with cash on hand of CAD6.2 million and a net working capital surplus of CAD11.4 million. Inventory increase because of the additional 10-kilowatt units in fabrication to match the current sales pipeline as well as long lead time parts on large-scale machines currently being purchased. Aside from a small COVID-19 relief loan and our facility leases, our balance sheet remains debt-free. Thanks, Dylan. Our points of emphasis throughout fiscal '23, will be to support our current royalty partners in product development and process optimization in order to elicit repeat machine orders, successfully commissions all REV machinery on order to grow our royalty portfolio, contract our material REVworx capacity to prospective or current royalty partners as early as Q2 of this year. We want to exceed the total machine sales that we had in fiscal '22 and fiscal '23 conservatively, and help NutraDried win new meaningful bulk business associated with some of the partner projects we're working on in the EnWave parent, contributing to margin improvement and helping the business to turn around. And lastly, to generate positive consolidated adjusted EBITDA. Now, over the last few years, we have devoted significant attention to resources on selecting, hiring, and maintaining the best staff in manufacturing, R&D, sales and marketing. This entire team is primed and ready for the challenge in this coming year. There is ample positive energy and a clear plan to follow internally. Thank you. I see a few questions happening submitted through the web portal. And the first is pertaining to past trials that were publicly disclosed in relation to AstraZeneca or any other pharmaceutical companies. So, a brief update on our advances with pharmaceutical market opportunities is that we have been closely working with GEA Lyophil, whom we announced as a joint partner in developing vacuum-microwave technology specifically for large pharmaceutical companies. They acquired one of our machines for placement at their product facility, in Germany, where they have hosted dozens of the largest pharmaceutical companies to come in and test the merits of vacuum-microwave versus lyophilization, which is the industry incumbent. And from those trials, there has been positive feedback. And we are in discussions with GEA Lyophil about prospective commercialization in the coming years. That all being said, we took a strategy of trying to monetize this technology through this partnership with GEA where they would deliver large-scale machinery, and EnWave would reap the benefit as a percentage of revenue derived from those sales in the future. Okay, next question. From Cormark, Liam Dotchison; two questions came from Liam. And the first is on the REV side in regards to guidance for this year in sales pipeline. I mentioned at the beginning of this call, two external macroeconomic factors that affected our ability to close on the guidance that we provided last year. This year, we're not going to be providing guidance, other than we intend to do better than we did last year. Talked about our pipeline and how robust that is, and we're going to try and close as many deals as we can given the circumstances that were presented. The second question here is pertaining to REVworx and capacity utilization. As I mentioned, we do have a number of companies who are on the precipice of signing toll service contracts, we hope. And if successful, that could be anywhere from 25% capacity utilization to 100% capacity utilization dependent on the number of these deals that come to fruition, now that's how much business is on the table for us to win. Next question is about NutraDried, and just an update on distribution pipeline with Costco. So, Costco is always there and as a potential rotation or multiple rotations in different regions for NutraDried. However, there's nothing that has been contracted yet for fiscal '23 that will demand an opportunity for NutraDried to produce products for Costco, but we're always working towards winning different opportunities with Costco. But we're always working towards winning different opportunities with Costco. Next question has to do with the U.S. Army, just acknowledging, obviously, the terrible things that are going on in the geopolitical sphere with war currently, and the importance of armed forces having healthy and energy-intent military rations for use by soldiers, and want an update on the army program. We talked about the army getting approval on funding for additional machinery to meaningfully implement certain components into their military ration program this past year. As we understand it, their new fiscal year started in October, so we're anticipating some time in the next few months to get word on the funding being released. Meanwhile, we do continue to negotiate potential licenses with industry partners with the U.S. Army where that machine would be prospectively placed. So, we still have high-level optimism of moving the army relationship forward in fiscal '23. Next question, from Steve Hansen at Raymond James, how broad is the NutraDried bulk business pipeline, and are we targeting a handful of customers or a broad range. And I would answer that in saying that we are going after a broad range of customers, but there is a handful of those that would be meaningful to the business. And we have very clear vision on when those could come to fruition for fiscal '23, and have incorporated that into our internal budgeting process. In terms of bulk business pipeline, there are, I would say, a few, like two to three that we're close to hopefully confirming. No POs yet because audits that take place at the facility before being able to work with certain companies. But it's looking quite promising. And if we do confirm that business we'll be sure to share that with our shareholder base. Next question, if the U.S. Army buys a large-scale machine how fast can we deliver it? And so, our typical lead times on large-scale machinery is between six and seven months from PO. That being said, we've been proactive investing in longer lead time parts into our inventory which we have available for two large-scale machines in fiscal '23, to deliver them, hopefully, in a more timely fashion. So, if we receive a PO in December or January, it's likely the machine would be delivered some time in the summer of next year, if we're that fortunate. The next question is why wasn't the Dole machine installed in Q4? Well, some things are completely out of our hands in regards to the operations of other businesses, and we follow the direction of our partners as timing sometimes can shift and change. So, it's no indication of our ability to deliver machinery, it's more so that certain companies take a little longer to be ready to receive the machinery. And another question is, are energy prices a problem at the moment for potential customers? Good question. In certain regions of Europe at the moment with rising energy prices, it certainly will add a cost to using vacuum-microwave given electricity is a primary component. However, when we're doing the analysis of the cost of goods sold of primary food products, the contribution from the electrical prices is typically less than 7% or 8%. So, it's not significantly material to the cost profile of products that companies are bringing to market, but it certainly is a consideration. Next question, from Steve Hansen, Raymond James; REVworx, given the strong interest across multiple parties, is there any thought of increasing total capacity in 2024? TBD; first thing is first, secure the contracts in the immediate term. Second is trying to compel these businesses to invest in their own internal manufacturing capacity. And if a company is adamant about working with EnWave longer-term as a toll service provider and is profitable for our business, and we can see a clear return on investment, then certainly we would be looking at increasing total capacity beyond 2023 into 2024. And then last question I have here on the submissions is what does REVworx capacity utilization potentially translate into revenue? Mentioned that during the call, it's about CAD2.5 million we're anticipating with industry-acceptable margins tied to the throughputs that we can get in that facility. Just thanks everyone for joining us today for our conference call, and to all of you we wish you the best for the holiday season, and for a healthy, happy, and prosperous New Year.
EarningCall_1393	Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2022 Textron Earnings Release Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Vice President, Investor Relations, Mr. Eric Salander. Please go ahead. Thanks, Greg, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings, and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.6 billion, up $3.3 billion in last year's third quarter. Segment profit in the quarter was $317 million, up $7 million from the fourth quarter of '21. During this year's fourth quarter, we reported income from continuing operations of $1.07 per share. Manufacturing cash flow before pension contributions totaled $368 million in the quarter, up $70 million from last year's fourth quarter. For the full year, revenues were $12.9 billion up from $487 million from last year. In 2022, segment profit was $1.2 billion up $89 million from 2021. Income from continuing operations was $4.01 per share, compared to $3.30 in 2021. Manufacturing cash flow before pension contributions was $1.2 billion, up $29 million from 2021. Our business closed out the year with another strong quarter. In the quarter aviation grew revenue and segment profit reflecting high record deliveries increased aftermarket volume and strong pricing net of inflation as compared to last year's fourth quarter. Also in the quarter, we continue to see solid order flow customer demand across our aircraft product portfolio ended the year with 6.4 billion of backlog. For the year we delivered 178 jets up from 167 last year, and 146 commercial turboprops up from 125 in 2021. Textron aviation defense delivered 10 T6 aircraft for the year up from five year a ago. Throughout 2022, strong aircraft utilization within the Textron aviation product portfolio resulted in a 16% growth in aftermarket revenues. At bell, as expected revenues were down slightly in the quarter on lower military revenue reflecting the continued wind down on the H1 program partially offset by higher commercial revenue. In December, U.S. Army announced the Bells V-280 Valor was selected as the winner of the future long range assault aircraft program competition. This award is a testament to the hard work of the Bell team that designed built and flew V-280 prototype over the last 10 years in support of this win. The initial flyer contract award of up to 1.3 billion over the first 19 months with an initial funding of 232 million for engineering and manufacturing development related activity is currently on hold pending the outcome of protest was filed at year-end by the competing vendor. On the commercial side of Bell, we delivered 179 helicopters in 2022, up from 156 in 2021. Moving to Textron systems revenues were essentially flat with last year's fourth quarter. During the fourth quarter systems awarded another anti-vehicle munition contract from the U.S. Army. The award is valued at $162 million over five-year period performance. In December, Systems announced the delivery of the Cottonmouth to the U.S. Marine Corps for testing through 2023. This vehicle was purpose built for the Marines Advanced Reconnaissance Vehicle Program. Also in the quarter system delivered to the fixed Ship-to-Shore Connector to the U.S. Navy after the successful completion with substance trials. Moving to industrial, we saw high revenue in the quarter driven by higher volume, both Caltex and Specialized Vehicles, and favorable pricing principally in specialized vehicles. Moving to aviation, we delivered 6 Bell [indiscernible] aircraft in the fourth quarter, including the first unit into Canada. For the year, [indiscernible] delivered 61 aircraft following the completion of the acquisition in April 2022. In summary, we saw strong demand across our commercial product lines and the team as executed well despite supply chain and labor constraints. At aviation, the team executed very well with a full year segment profit margin of 11.5%. It was above the high-end of our original guidance range. Aviation's backlog grew 55% to 6.4 billion at year end on strong border activity and customer demand. On the new product front, we received FAA certification for the Cessna SkyCourier and delivered 6 units to our launch customer, FedEx, during 2022. The Textron Aviation Defense, the Light-Attack 86 Wolverine achieved military type certification from the U.S. Air Force, enabling the first international sale of 8 aircraft. At Bell, the December 2022 FLRAA contract, award has solidified the long-term outlook for the segment and should provide an increasing revenue stream that we expect will drive growth well into the future. On FLRAA, the 360 Invictus is nearly complete, and we expect first flight 2023, pending delivery of the ICAP engine. At Textron Systems, we advanced our weapons programs with the award of our anti-vehicle munitions programs, continued work on the robotic combat vehicle and Armor Reconnaissance Vehicle Development Programs. Systems also obtained airworthiness certifications for 4 additional F1s at ATAC, bringing the total operational F1 fleet to 23 aircraft in support of increased demand across U.S. military tactical air programs. At Textron Specialized Vehicles, the company continued its leadership in the development and production of zero emission gulf vehicles, turf maintenance equipment and ground support equipment to markets. At Caltex in 2022, we were awarded contracts on 14 hybrid electric vehicle programs for our fuel systems. At Aviation, the Pipistrel Velis Electro continued to receive certifications from around the world and is now certified in more than 30 countries. Looking to 2023. At Aviation, we are projecting growth driven by increased deliveries across all product lines and higher aftermarket volume. At Bell, we're projecting revenue growth in 2023 on higher military revenues from the FARA program and higher commercial revenues. At Systems, we're expecting mid-single-digit revenue growth across our businesses. At Industrial, we're expecting revenue growth at specialized vehicles and Caltex. At Aviation, we plan to continue investments in development of technologies and products supporting sustainable flight solutions for unmanned cargo, next-generation electric trainers, EV tolls and general aviation. With this overall backdrop, we're projecting revenues of about $14 billion for Textron's 2023 financial guidance, projecting adjusted EPS in the range of $5 to $5.20. Manufacturing cash flow before pension contributions is expected to be in the range of $900 million to $1 billion. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.6 billion were up $223 million from a year ago, reflecting higher jet and defense volume and higher pricing. Segment profit was $169 million in the fourth quarter, up $32 million from last year's fourth quarter due to favorable pricing, net of inflation of $29 million and higher volume and mix, partially offset by an unfavorable impact from performance. Performance includes unfavorable manufacturing performance largely related to inefficiencies from supply chain disruptions and increased staffing associated with higher production, partially offset by lower selling and administrative costs. Backlog in the segment ended the quarter at $6.4 billion. Moving to Bell. Revenues were $816 million, down $42 million from last year, reflecting lower military revenues, partially offset by higher commercial revenues. Segment profit of $71 million was down $17 million from a year ago, primarily reflecting lower military volume and mix, partially offset by a favorable impact from performance. Backlog in the segment ended the quarter at $4.8 billion. At Textron Systems, revenues were $314 million, up $1 million from last year's fourth quarter. Segment profit of $40 million was down $5 million from a year ago. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $907 million, up $126 million from last year, reflecting higher in volume and mix of $95 million and a $59 million favorable impact from pricing largely at specialized vehicles product line, partially offset by an unfavorable impact of $28 million from foreign exchange rate fluctuations. Segment profit of $42 million was up $4 million from the fourth quarter of 2021, primarily due to higher volume and mix, partially offset by an unfavorable impact from performance. Textron eAviation segment revenues were $6 million and segment loss was $10 million in the fourth quarter of 2022, which reflected the operating results of Pipistrel along with research and development costs for initiatives related to the development of sustainable aviation solutions. Finance segment revenues were $11 million, and profit was $5 million. Moving below segment profit, corporate expenses were $43 million in the fourth quarter. Interest expense, net for the manufacturing group was $17 million. Our manufacturing cash flow before pension contributions was $368 million in the quarter. For the year, manufacturing cash flow before pension contributions totaled $1.2 billion, up $29 million from the prior year despite higher cash tax payments of $284 million in 2022 related to the R&D tax law change. In the quarter, we repurchased approximately 3.3 million shares, returning $228 million in cash to shareholders. For the full year, we repurchased approximately 13.1 million shares, returning $867 million in cash to shareholders. Beginning in the first quarter of 2023, we'll change how we measure our segment results. Going forward, we will exclude from segment profit, the LIFO inventory provision, intangible asset amortization and the non-service component of pension and postretirement income or expense. These items will be separately reported on the income statement below segment profit. We believe these changes will provide a more consistent method of measuring and evaluating business performance across our segments, while also aligning our reporting results more consistently with other companies within our industry. On Slide 15 and 16 in the investor presentation posted to our website, you will find prior year results, reflecting the recast of segment profit. Also effective with the first quarter of 2023 results we will report earnings per share on an adjusted basis that excludes the LIFO inventory provision and intangible asset amortization, both non-cash items. Turning now to our 2023 outlook on Slide 9. We're expecting adjusted earnings per share to be in a range of $5 to $5.20 per share. We're also expecting manufacturing cash flow before pension contributions to be about $900 million to $1 billion. Moving to segment outlook on Slide 11 and beginning with Textron Aviation. We're expecting revenues of about $5.7 billion; segment margin is expected to be in a range of approximately 12% to 13%. Looking to Bell, we expect revenues of about $3.3 billion. We're forecasting a margin in a range of 8.25% to 9.25%. At Systems, we're estimating revenues of about $1.25 billion with a margin in a range of about 10.75% to 11.75%. At Industrial, we're expecting segment revenues of about $3.6 billion and margin to be in the range of about 5% to 6%. At eAviation, we expect revenues of $45 million and a segment loss of $65 million, largely reflecting our continued investments in sustainable aviation solutions. Lastly, at finance, we're forecasting a profit of about $15 million. Looking at Slide 12, we're projecting about $150 million of corporate expense. We're also projecting about $90 million of net interest expense; $130 million of LIFO inventory provision; $35 million of intangible asset amortization; and $235 million of non-service pension income. We expect a full year effective tax rate of approximately 17.5%. Turning to Slide 13. R&D is expected to be about $585 million, down from $601 million last year. We're estimating CapEx will be about $425 million, up from $354 million in 2022. Our outlook assumes an average share count of about 205 million shares in 2023. You've definitely had a busy quarter between FARA. So congratulations on that. And I think you threw in an Aerojet bid and [indiscernible] as well. So I wanted to focus on aviation margins. In Q4, I think you ended at 10.7%, potentially lower, including the recasting for LIFO. How do we think about the walk to the 12.5% margins in 2023? Well, I think, Sheila -- so first of all, the quarter, we knew that we were going to have some headwind with supply chain. And obviously, we brought a lot of new people on board which is a good thing but had a lot of impacts just getting all those folks on and training and those kinds of interruptions. So in the quarter, we did take a lot of those unusual impacts right to expense in the quarter rather than putting it into in inventory. So we did take a hit on that. LIFO was still in there, obviously, in that reported number. So obviously, on a recast basis going forward, that will be there. So I think when we think about what happens as we go into 2023, obviously, you're going to not have the LIFO in there. And I think we're going to see, again, we're guiding probably almost $0.5 billion of higher revenue, and that converts at good margins. So I think we're pretty bullish on our ability to drive higher margins as we go through 2023. And maybe just as a follow-up to that longer term, like how do you think about peak trough margins in aviation? Is it just steady as it goes from here? Can it just be a 20% incremental margin business? Well, as you know, Sheila, based on analyst pressures, we've been striving to get above 10% margins in the aviation business. And we feel pretty good about that. So look, I think it's going to be very much volume driven. You guys know we tend to convert somewhere in that 20%, 25% range. I expect we can continue that as we go forward. Certainly, we're guiding that in our conversion for 2023 and as we go beyond that, we'll just have to see where the market is. The good news is demand has remained strong. The fourth quarter demand remained strong, and with good bookings in Q4. So environment, I think we feel pretty good about. But in terms of what margins do on a go-forward basis. I think we would kind of remain in that neighborhood of expecting sort of a 20%, 25% conversion on our revenue growth. Scott, could you just talk through the forecast at Bell, so up revenue, down margins, decent amount. You mentioned it includes FLRAA. So what exactly is your assumption for FLRAA? Does that assume you win it post protest? Just if you could help there. Sure, David. It does. So the protest period ends at the first week of April. So we've baked that into our estimates, assuming that will be resolved by that period of time. Obviously, the dynamics in terms of margin is that we will continue to see a decline on the military revenue side. There'll be some offset on the commercial revenue side. We've had a good year in terms of bookings and expect to see nice growth on the commercial side. And then obviously, we'll have 3/4 of the FLRAA program coming in, which is good, but that is a lower margin business. I mean EMD programs tend to be lower margin, and that's what we've forecast in our guide for you for '23. Scott, can you say specifically how much revenue is in there for FLRAA? And how would we expect to ramp beyond 2023 in terms of revenue? No. We're not going to break out the specifics of the individual programs, but I think clearly, it will ramp as we go into '24, '25 and obviously, I think probably for quite some time. I mean, I think this program will be a terrific boom for the business. It's going to start out, obviously, with a lot of the CMD, which as we said, is great volume and good revenue, but not a whole lot of margin. And then obviously, we'll expect to see it continue to grow and turn into better margins as you get into production programs and foreign military sales and all the things that we would expect will come along with a successful FLRAA program. Okay. And last one on the aero supply chain. Could you just update us there? And your deliveries, I think, came in a fair amount later for the full year than we were originally anticipating at the beginning of the year. So how many additional deliveries could you have done this year if you didn't have supply chain bottlenecks. Thanks. Well, I don't know if we'll go into express numbers, David. But look, we've been kind of forecasting here since the mid part of the year that we expected we would end up a few hundred million dollars light versus our initial guide based on the fact that we continue to see supply chain challenges and some labor issues. I think labor has certainly improved through the balance of the year, although a lot of that is new folks and training and it has an efficiency impact, but at least we're making some progress on that front. I think we've had a number of suppliers that were challenged or getting better, but you always have a couple out there that are still struggling. So we kind of anticipated that in the back half of the year. That's why we kind of try to provide some color that we expected this to be a few hundred million off of our guide. But I think that we've taken that into consideration. So as we think about next year's guide for '23, there are still going to be supply chain challenges all along the way. But we think we've taken that into proper consideration in terms of the '23 guide. I'll start with Frank. I was wondering if you could give us some sort of walk on the manufacturing cash flow and why you expect it to modestly decline in 2023? Yes. It's a reflection of an expectation that we'll continue to see good performance from a working capital standpoint. But we do have the continuation of higher cash taxes associated with the R&D tax credit change. And also, we're just expecting a slightly lower V in deposit activity from commercial volume. So we're kind of framing it in terms of kind of 1:1 book-to-bill type expectation as it relates to deposit activity, and that kind of has a little bit of a headwind on cash relative to where we have been. Okay. And then maybe one for Scott. Also, been a lot of commentary around about in the business jet industry about some of the lead indicators starting to slow. Have you seen any impact of, say, activity leveling off of used inventory increasing having any impact on order activity for you? No, we haven't seen that, Robert. I mean, I think our order rate in the fourth quarter was consistent with the third quarter. It remains quite healthy. I think when people look at some of these leading indicators, like it's hard to keep track of what -- when you see a little bit of an increase in used available for sale, what kind of aircraft are those? What are their vintages? We think, obviously, the market has been very strong. So people are looking to put some aircraft on the market. They're still at very low levels. So we're not seeing the knock-on effect into market for new aircraft. So we haven't seen a material change in the level of activity that's going out there in terms of order activity. I mean, there's lots of people ready reports. It's frankly hard to understand. Sometimes there's so many comparisons of flying by region, by size of aircraft compared to '19 compared to last quarter, compared to '22 but it's in the round. So we haven't seen any of that have a meaningful impact on order activity. Scott, just circling back on David's question regarding just the supply chain and maybe just tacking and inflation. So it sounds like -- I mean, it sounds like things are holding in there? Or are they getting a little better? And then just also, just could you maybe talk a little bit how you're passing in the higher input costs right now? Well, on the supply chain side, Peter, I think we have some suppliers where we've had challenges, and we clearly see them getting healthy and getting better. But we have other areas where suppliers are still struggling. I mean, I don't want to go into too much detail, but it's very specific components, very specific suppliers. Obviously, we're working with them and trying to get them healthy and do a better job in terms of getting parts into the factory. And obviously, from our standpoint, we do lots of out-of-sequence work and swapping parts around. We'd like to stop doing that. It's an efficiency hit to us. Our guys have to work through every day. So I think it's about the same, right? As I said, there are some suppliers that are getting better but then you got one that's just having a hard time catching up. I don't know that we're seeing a lot of new suppliers coming in and say, hey, I got a big problem. We have a couple there we've been struggling all year, and we're trying to get them back on schedule. They're working at it, but they're just not quite there yet. And again, we factored that into how we think 2023 will play out. In terms of the pricing side of things, Peter, we continue to get price, net of inflation. We're very focused on that. As these input costs increase, we got to drive price to get that back. I think the guys are doing a pretty good job of that. And just as a quick follow-up on systems, I mean, just could you talk a little bit post the [indiscernible] bill and defense kind of looking funding pretty robust as we go forward. How are you looking at, we're showing modest growth for systems this year, but how do you think longer term? Well, look, I think when we look at the [indiscernible] numbers, they seem fine to us. When you look at what came through on the omnibus in terms of this current fiscal year's budget, was in line with our expectations. So I think we're fine. The growth, the good news at systems is it's really kind of across almost all the product lines. It's not just one particular thing. Obviously, we've had some new wins in the munition side, which is great. That's put that business back to growth. Sentinel program continues to do well. Our ship-to-shore, as I said, we've made deliveries. We'll start negotiating the next production by here shortly, but we'll finish the DD&C this year and start production deliveries. The ATAC business has had nice growth. Our electronics business has had a nice growth. It really is kind of across all of the businesses within systems. And the omnibus budget that was appropriated is consistent with obviously what we're guiding to you guys. Scott, fair to say, I think some of your businesses have a cyclical component to them. And I'm just wondering I'm sure you guys see, I think the consensus out there for the macro guys is that we'll have some sort of mild recession this year, maybe later this year. So as you guys see that and whether you agree with it or not, is it prudent for you to maybe even kind of slow the top-line growth in those type of businesses in maybe like Citation, maybe TSV to kind of protect your margins and not over hire? Are you guys thinking about your businesses that way or not necessarily right now? We absolutely look at that, Peter. I mean, as I said, there's cyclicality in almost every business, right? So some have more than others. Those that we think are going to be more recession sensitive we've kind of factored in thinking we'll have a mild recession. I don't think it's going to be dramatic. We're certainly not thinking about something in the scope of back in the 2009, '10 kind of time frame. But I don't think we have an economic situation that's going to lead to something like that. I'd say, look, I think when you look back at previous modest recessions, the area that has always impacted us the most difficult has been a slowdown in the aviation business. And I think we're in a very different place than we've been in those previous sessions because we have a pretty significant backlog. So I think that the nature of that will allow us to -- even if you were to see a slowdown in bookings which is entirely possible. I would expect it if you really go into a modest recession, you'll see a slowdown in booking. But you've got almost 2 years of backlog sitting there that you'll continue to execute on. And I think that will help you ride through it. And we haven't had that for a bunch of years, Peter, as you know. So I think that it's one that would translate to a slowdown in bookings, but not something that would slow us down in terms of our revenue and margin generation. Okay. That's fair. Just one last one for me. Scott, are you guys any closer to signing that AH-1 deal with Nigeria? Well, I mean it's in the kind of government contracting process, right? So that ends up being -- because of the FMS nature of that, that would be signed between ourselves and the U.S. government. And as you know, Peter, that can take a little while. Well, at aviation, aftermarket as a percent of the sales was 27%. So you can kind of do the V based on that, it was 11%. Okay. And Scott, you didn't specifically mention, but I assume you're looking at deliveries based on the revenue forecast for '23, somewhere 200, 205 deliveries. Is that fair? Yes. It's going to be in that neighborhood, George. And we've got a lot of dialogue and think about when you back to '19 and obviously, the mix of aircraft is quite different, right? I mean we're certainly heavier on the super mids and the mids than we would have been a few years ago, but that's -- if you look at our revenue guide, it's probably going to be somewhere around that couple of hundred aircraft. And Scott, I looked at the fourth quarter and even if I added back the $16 million that you mentioned for supply chain issues, the margin was still weaker than the last couple of quarters. So what else was going on there? Well, I don't know where the 16 -- the inefficiencies that we took through and LIFO, which was around probably about $10 million or something impact is largely what drove us to the margin rate that we reported. Scott, you've alluded to it, but your backlog is several multiples of what it was just a few years ago and the production is not. So what's the average wait time at this point? And how are you thinking about managing how long you're making customers wait for an airplane? Well, look, I mean it does vary from model to model, right? When you look at the longitudes and latitudes the larger aircraft in the family, and we think those should be out a couple of years. And that's generally where they are. When you get into some of the smaller aircraft. Those tend to be a shorter cycle order deliveries. But again, those probably should be in that 12- to 18-month kind of window. So when we think about production volumes and what we're laying into our forecast which is then, that then drives what our sales team has in terms of available slots and time frames, that's kind of how we're managing it. Okay. How does pricing that's entering the backlog now compared to pricing that's hitting the P&L now in the aviation jet business? I guess what I'm wondering is, I know you've been taking price as the market's been stronger. Was there a period of time as the market was strengthening, where you were not taking as much price to allow the backlog to extend first before you now take more price? Is that the strategy? Or has it been pretty consistent for the last few years? It's been pretty consistent, Noah. I think like the pricing, obviously, demand is strong, right, which is very helpful from a pricing standpoint. But our opinion, this market has been mispriced for a long time. I mean, this is a business which, as you guys know, it's a lot of R&D. It's expensive to develop these things and get them through certifications and you need to have fair pricing to generate these kind of margins. We always believe the business had to be back as a double-digit profit margin business, and we've been driving price to make sure that, that's the case. Just a quick one. Can you help me think through this LIFO adjustment you guys are making. I mean, isn't it sort of unfair to not include inflation in your costs? Yes. So Ron, that's a good question. Look, just to make sure we understand the LIFO -- so actual inflation is still in the segments. That's very much a cash impact. It remains in the segment. The only thing we're taking out of the segment is this LIFO provisioning, right? So by full accounting, which -- again, I'm just a simple engineer Ron, but the LIFO provisioning phenomenon is that I've bought parts at one price. And now I have a new contract with a supplier. I have a higher price for that part. As soon as that first part shows up, the LIFO provision is basically taking the actual price I paid for those other parts and raising them up to the price of that new part. So it's an accounting provisioning process. It's not an actual cost. So when I get to where that higher dollar part gets consumed by an aircraft, that's going to be in my cost. That real inflation is in the segment. It is cash and it is in performance. It's only that provisioning of that -- the nature of this last-in, first-out accounting that is what we're pulling out of the segment. So I guess another way to frame the question though is if we were to look at your margins pro forma back to GAAP for 2023, what would they be if you didn't do that adjustment? You'll see the total LIFO. But, Ron, there are no one else in our space is on LIFO. So we're on LIFO. For accounting, you need to conform that between tax and accounting. So we derive a benefit from a tax standpoint in an inflationary environment by essentially accelerating those costs for book and tax purposes. But as Scott said, it's not a true economic cost. And we have basically hung up about $600 million of effectively LIFO provision on our balance sheet that was profit never realized because of this accounting that is not consistent with everyone else in the space. So as inflation has accelerated here and LIFO has become a bigger number, we felt it was important to highlight that. And certainly, from a segment performance, take it out of the segment performance because it is not a true economic cost to the business. It is essentially a function of the accounting treatment that we have, but that LIFO inflation will never turn into true economic cost in the business. So Ron, this has been an issue. We've always been on LIFO. Textron has always been on LIFO. So in a non-inflationary environment, it's relatively small. It's always been a bit of a drive. It's a small number. It's not been an issue. But with an inflationary environment, all of a sudden, you have these big non-economic bookings. Again, as Frank said, other companies -- everyone else in our space, does FIFO accounting instead of LIFO accounting. So we get a lot of questions from investors about what are these differences. And so, I think taking this out make sense. And look, the reality is we don't manage the business that way, right? I mean, when we sit down with the business, when we're doing our plans, we're managing, we do our operating calls that like it's not something they control, right? It's not economic. And so, that's not how we manage the businesses, right? We don't look at that. So it makes sense to also not report that in that segment since that's not how we manage these guys either. They don't control that LIFO. They do control and they do get held accountable for actual real inflation on that -- on those higher part counts, right? So that's -- we're not taking anything operational out of the segment but managing it on what they control and the real financial impact. So as Sheila mentioned, allegedly, you guys went after AJRD. You did buy Pipistrel. You've won FLRAA. So it looks like your business is becoming more A and B. If we kind of look at valuations across the space, it looks like valuations tend to be higher for pure plays, either you're doing aerospace, you're doing air conditioning, whatever. So as you think of your business, Scott, are you thinking of any strategic initiatives? At one point, I think you considered spinning off Caltex. How are you thinking about that now? No, Cai, I don't think we're going to talk about portfolio shaping or changes as part of the earnings call. It's something we're always looking at. And I think we'll leave it at that. Okay. Great. And can you give us any help on the -- I don't know, but what Lockheed's -- what the case Lockheed is making as to why they're protesting because certainly, on paper, it looks like your vehicle is very substantially better than theirs. Look, I mean, obviously, that process is going on between the Army and Lockheed. So we probably can't comment too much. I guess I would just say that this -- as you all know, this process has been going on for a decade, right? There's been an enormous amount of work between both suppliers and the Army from design, development, test, prototype, flight. It's been an unbelievably robust process. And so, I don't -- it's hard for me to understand what flaw would have been in the process. It's kind of inconceivable to me, but we'll leave that to the Army and Lockheed. And needless to say, we think they made the right choice. I'm proud of what our team did, and we're excited to get this thing behind us and get on with the program as I'm sure the Army is. Terrific. And the last one is cash deployment. I mean, you've got good cash flow, even though down year-over-year. You've got a good balance sheet. You've basically and heavily focused on share repurchase. I mean, really a lot of leverage there. But you also bought Pipistrel. As you think about where the cash is going, maybe give us some thoughts about M&A versus share repurchase, dividends, all of that. Well, look, I mean we always look at opportunities that are out there, Cai. And I would say relative to your earlier question, comment, yes, we would view our focus in the world to be within the A&D space in terms of most of our capital deployment. Pipistrel has turned out to be a great little business. Bought some great technology into the company and is now kind of important to us in terms of the future of sustainable flight. But if opportunities like that come along, then that's great. We've done some other smaller deals, again, in the A&D space, and we would continue to look at that. But our principal deployment of our capital has been for the last number of years in the share buyback. We've been doing kind of 5%, 6%. We did another 5%, 6% this past year, and I would expect that's probably the track we're on in 2023 as well. Scott, for the demand environment for aviation, can you give us an update in terms of the customer profile that you're seeing that are placing these aircraft orders? Are they corporate, individual fractionals? Are they -- more for growth, replacement? Or are they new buyers? Any additional context would be helpful in understanding the demand environment? Sure. We haven't seen much of a change. It continues to be that same mix. There's still new buyers coming into the marketplace. Fractional is certainly strong. There's a lot of buyers on the fractional side. That's a particularly attractive place for I think for new people to go. It's not easy to necessarily know how to own this asset. The fractionals provide a great option for people that want to get in. That's doing well but we still see robust whole aircraft sales. It's a mix of public companies, private companies, family held companies. It really is kind of our usual customer base, I would say. It remains also kind of the same as we've seen around jets largely being driven by the North American market, probably 70-30 to 80-20 in that range, which is normal. Turboprops are more robust internationally. Again, we see stronger activity, again, like 60% plus international versus domestic on King Air for instance. So the trend in terms of that, who is that customer is kind of our traditional buyers. Great. Thanks for the color. And maybe following up on the supply chain issues that you mentioned. I mean for some of these suppliers that continue to struggle for a few years now, what's the long-term solution? What can you do to mitigate their problems so you can actually deliver on the strong demand for bizjets? Are there other solutions, like you need to vertically integrate your supply chain or anything like that to alleviate some of the pressure? What other actions can you take? Yes, that's a good question. Look, it's a mix. I mean, in some cases, we have some smaller suppliers and technologies where they basically kind of were us and we did acquire them and integrated them as part of our business. We have a good track record of doing that in the past around some critical areas, interiors we did. That's been a home run for us. We just did a deal this past year in the actuation space. Again, a very unique aerospace technology. Most of the volume was ours. It's a critical supplier and a critical technology for us in the future. And these aren't big numbers, but it was a great acquisition. And so far, it's working out really, really well for us. It's helped to get us back on track. But there's always going to be some guys out there that are suppliers where we're a small percentage of their sales. It's very capital intensive. It's a technology that doesn't make sense for us to vertically integrate that. And so in those cases, we just keep working on those folks. I think those suppliers are all trying to get back up to speed. Obviously, it's a good business for them. I'd say we don't have suppliers that I'm aware of that are abstinent or don't want to perform. It's a matter of them getting the resources back in place and some tier suppliers getting in place and those are folks that just take a fair bit of work. But I think they will get there. Again, we've seen some of them have already recovered. But there's still a couple of problem children out there that are working on getting there. I'll just stick to one here. Kind of a follow-up on the last question Kristine asked. I think from a mix perspective, while the deliveries in total are still down from 2019, I think the deliveries to NetJets are probably higher. And so as you think about delivery growth from here, do you think about the incremental growth coming more with that top customer or more kind of diversifying the mix a little bit more? And then, I'd also imagine that like the order for [200] [ph] latitudes, the NetJets has probably come into a conclusion pretty soon. And whether you think about -- how you think about expectations for the next slug of latitudes from them? Well, so first of all, I don't know what percent of sales back to 2019, what it was on fractional versus today. But look, I think fractional, when you think about diversification, the sale of a fractional aircraft is a more diversified sale, frankly, than a single jet. Remember that this is not a concentration of a buyer in NetJets. Remember, NetJets is out there selling that aircraft to eight or so people. So every sale that we make to NetJet is a sale from NetJet to a whole bunch of different customers. So it's quite diversified. So I don't expect NetJets or any fractional for that matter to track wildly different than the overall market demand. If the market is strong and people are wanting to fly private, you're going to see this mix of people that choose to do it through a fractional, which is actually a lot more people because, again, they're buying a fraction of an aircraft, not a whole aircraft. So when I look at our mix, I think of the mix associated with the NetJet business as being very good mix. That's a very diversified sale. It's a very diversified market. And that's kind of that's what they do every day. They're out and working and talking to lots and lots of customers in a broad range of customer base for selling that fraction of an aircraft. And obviously, as you guys know, one of the things we do now is we work very closely with NetJets and looking out roughly about a year that these things come into backlog based on how their sales team is doing out there selling these aircraft. So it's a great part of our backlog, and it's a great part of our business. It is as you guys know, it tends to be at a lower margin because it's kind of a wholesale sale, but they're the ones that are out there, spend the money on sales forces and reaching out and selling to that large customer population. So NetJets remains as through other fractionals as a really important part of the business, and it's a really, really important part of our customer base are these fractional owners. As far as the deal with NetJets, we are in constant discussions in terms of forecasting unit volumes. As you get to where you get towards the end of a particular quantity buy, obviously, we'll work with NetJets to work on what comes next. But that's kind of a business arrangement between the two of us, obviously. But the actual forecast and backlog that's reflected in our numbers is really kind of a rolling one-year process regardless of what the size of the overall arrangement is between ourselves and NetJets on latitude and longitude volumes. I wanted to go back to the discussion around the size of the backlog as it clearly has grown quite a bit over the years. And when you look at backlog as it slowed sequentially in this quarter? How do you compare the -- how do you contrast the demand you're seeing for new aviation sales to basically the wait time that's there? In other words, there's a point where you just flat out are going to lose customers if they have to wait too long. So do you see a constraint on the growth from that at this point? Well, we really haven't seen that. I mean I think the whole industry is in a similar situation. If we were in a situation where you couldn't get an aircraft for 18 months to 2 years and somebody else had an aircraft they can get tomorrow, then yes, you could lose that customer. And I think, obviously, somebody could go buy a used aircraft or something in that nature. But I think right now, the whole industry is in this situation. And frankly, it's where this industry should be. I mean these are complicated assets. There are a lot of times, customers already have aircraft. They need to sell their used aircraft. So look, remember, this industry actually worked like this way for a very, very, very long time. The aberration has been since 2008 to the last 2 years ago where you didn't have much of a backlog in this class. Generally speaking, this industry has been a backlog business. It should be a backlog business. By the time you specify your craft and configure aircraft and customize the aircraft, this is -- really where we're sitting today is what normal should look like, not what we've seen in the past 10, 12 years. Now when you get to the situation, though, which is clearly a good situation, the solution always is to add capacity, and we've seen that happen in past cycles as well. When you look out today, what things would you want to see to make material increases in your production capacity? Look, I don't think it's our production capacity so much. I mean obviously, we're struggling through some of these supplier issues, and you don't hear it tactically. But remember, as we talk about the delivery times, what our team is out there selling as we look at that backlog, they're selling aircraft and serial numbers that are delivered at certain dates. So that's how you manage this backlog and then you've got to make sure that you dial in your production schedule to match what those committed delivery dates are. So if you start to see a softening in the order rate, then you're going to sell out fewer of those slots in the future and then you would adjust your production. If you all of a sudden say, hey, 2025, it looks like you could have 5 more latitudes or 10 more M2s, then you do that and you modulate your production capacity accordingly. But I think as long as you're out there looking at these sort of 12, 18-month, 2-year kind of timelines, it gives you the ability to do that. And again, how this industry has always worked. And just one last thing. When you look at the constraints coming from the supply chain, are there some specific areas right now that you would point to as most difficult? Yes. I mean I can tell you a couple of part numbers that are our biggest challenges. We're not going to do that. I'm not going to throw particular suppliers under the bus. But yes, there's a couple of particular products, a couple of particular technologies from a couple of particular suppliers that are our biggest constraint. I mean there's always a bunch of little stuff going on, but for sure. If you get a couple of these guys back in line, that would be very helpful. And again, that doesn't mean we turn that into, all of a sudden, delivering a lot more aircraft because, again, we've committed dates to our customers. It's a lot more for us right now about getting rid of all the inefficiencies in our production runs where we're having to build aircraft and swap parts around and do things out of sequence. It's very, very harmful running a good, smooth production operation when you've got to go chase all the stuff around. Ladies and gentlemen, this conference will be available for replay after 10 A.M. Eastern Time today through January 25, 2024. You may access the AT&T Executive Replay System at any time by dialing 1-866-207-1041 and entering the access code 4482216. International participants dial 402-970-0847. Those numbers once again are 1-866-207-1041 or 402-970-0847 with the access code 4482216. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.
EarningCall_1394	Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation Q4 2022 Earnings Release 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, Devin, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporationâs fourth quarter financial results. Participating on todayâs call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; and Brian Karrip, our Chief Credit Officer. As a reminder, a copy of yesterdayâs earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during todayâs call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on page three of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Todayâs call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliation of these measures can be accessed in the appendix of todayâs slide presentation. Hey. Thank you, Ryan. We had another very productive year and a good quarter. Our fourth quarter core net income increased $2.4 million over the third quarter to $36.8 million. In fourth quarter, core EPS of $0.39 was up $0.02 per share over the third quarter as well. For the fourth quarter, a $5.7 million increase in net interest income combined with a $1.6 million decrease in non-interest expense to more than offset a $1.6 million decline in non-interest income and a $3.2 million increase in provision expense, despite higher provisioning due mostly to loan growth, credit trends improved on virtually all fronts for the year and the quarter. In the fourth quarter of 2022, ROA was 1.47%, core ROA was 1.51%, core return on tangible common equity was 20.32%, also core pre-tax pre-provision ROA was 2.28% and core efficiency was exactly 50%, both records for the company. Core pre-tax pre-provision net revenue of $55.3 million was up by $6.4 million from last quarter, an increase of 13% and is now approximately 50% higher than it was in the last quarter before the pandemic. Now these results really speak to the culmination to thoughtfully grow our business over the last few years. In a couple of strategies there, we have developed a regional business model, we have added an enhanced customer offerings, things like equipment finance, indirect auto, just to name a few. We have added key talent and leadership, and we have grown our commercial lending teams, we have really increased our digital relevance. So a lot of success there. As we reflect on record profitability, itâs clear that our earnings benefited from an expanding margin and strong loan growth. The margin expanded by 23 basis points to 3.99% as our asset-sensitive balance sheet responded to Fed rate hikes and new higher rate loans replace the run-off of lower rate loans. About half of our loan portfolio is variable, so we will still see some benefits of the Fedâs December rate and January rate hikes in any ensuing quarters. We expect our net interest margin to expand another 15 basis points in the first quarter, give or take, 5 basis points. Our strong loan growth contributed to an increase in spread income to $88.3 million in the fourth quarter, up by $5.7 million or 7% as compared to the third quarter. The loan growth was fairly evenly split between commercial and consumer categories with commercial loans growing by 14.6% annualized and consumer loans growing by 17.2% annualized. Equipment finance balances ended the year at approximately $80 million, with equipment finance getting up to speed, we expect loan growth to be around 10% in 2023, which together with our expanding net interest margin should produce strong growth in net income that will lead to positive operating leverage. After announcing the acquisition of Centric Bank on August 30, 2022, we received regulatory approval for the transaction in November and we are pleased to announce that Centric received shareholder approval this morning. As a result, the legal close is scheduled to take place on January 31st. Centric is a commercially oriented franchise in good markets. We expect to push more consumer product through their branch like chassis, and increase their commercial lending and deposit gathering activity. We believe that we will achieve the requisite cost saves and meet or exceed the targeted 2023 earnings accretion of $0.08 per share. With 2022 in the history books, we can look back on another year of strong performance for First Commonwealth. As I mentioned, we found a terrific partner in Centric with which we can enter the Central Pennsylvania market and leap over the $10 billion threshold. We grew spread income by $33.6 million over 2021, but that includes a reduction of $20.5 million in PPP income, which means that ex-PPP, our spread income grew by $54.1 million. Asset quality measures improved, fee income was down as expected with the slowdown in mortgage and SBA gains, but increased swap activity helped offset that somewhat and our SBA and Equipment Finance originations continue to build momentum. Expenses were up mostly due to inflationary wage pressures that we achieved positive operating leverage and our efficiency ratio fell. Lastly, I would just add that while the majority of our recent loan growth has occurred in Ohio, our Pennsylvania market is growing as well now and has long been the source of stable low cost funding. Thanks, Mike. Since Mike has already provided a high level overview of the quarterâs financial results, I will dive a little deeper into our deposit trends, fees, expenses and then touch on credit. Deposit costs remained low in the fourth quarter. The total cost of deposits did rise in the fourth quarter as expected, but only to 20 basis points, up from 5 basis points last quarter. We calculate our cumulative through the cycle beta through the fourth quarter at only 5.6%. We have previously disclosed expectations of a 20% beta which was informed by our near zero betas through the end of the third quarter of last year, and in fact, our fourth quarter incremental beta was 18%, in line with those expectations. We are, however, revising our cumulative through the cycle beta estimate to 25% by the end of 2023, just to be more consistent with our long-term historical beta. The positive picture for us in the fourth quarter was clouded a bit by our conscious strategy to stay below $10 billion in total assets through year-end. While assets are easy to manage, our concern was that a sudden influx of deposits might inadvertently push us over the $10 billion mark on December 31st and we were able to successfully manage that. So our Durbin impact will be mid-2024 as planned. Midway through the quarter just ended, we did introduce several deposit strategies that have started to have a real tangible impact as the quarter progressed and continue to pull in deposit balances. Fee income was down by $1.6 million last quarter, due almost entirely to a $1.6 million drop in swap income. We feel good about our fee businesses, but fee income will remain under pressure -- remain under some pressure in 2023 due to macroeconomic variables like the housing market, asset values and SBA premiums. Nevertheless, we still expect fee income to be up by about 6% in 2023 over 2022, inclusive of Centric. Non-interest expense improved by $1.6 million from last quarter, in part due to about $800,000 of third quarter expenses that we had identified and previously disclosed that werenât present in the fourth quarter. While the first quarter of 2023 will be noisy due to one-time items associated with the Centric acquisition, we still expect to hit the previously announced 35% cost save figure. Now in the past, we have not parsed out in our comments the difference between operating expense and total non-interest expense, because intangible amortization wasnât that material. But we will likely break these figures out more carefully post acquisition. For the full year 2022, our standalone operating expense without Centric, of course, was $224.7 million, up by 7% from 2021 and we expect that in 2023, it will probably be up by another 7% to 8%. In 2023, however, total operating expense will include Centric and then to get to total non-interest expense, we will have to add intangible amortization. That last figure will include the new intangible amortization from the acquisition, which we will calculate at close and disclose with our first quarter results. Provision expense was up in the fourth quarter, but not because of any credit deterioration, in fact credit metrics improved, roughly half the provision or $4.6 million was due to loan growth. The remaining provision expense reflected about $2 million in net charge-offs, which is lower than last quarter, plus about $3.7 million for changes in our economic forecast. All asset quality measures remain strong. At 11 basis points, net charge-offs are lower than last quarter and charge-offs also came in lower for the full year. Compared to the end of last year, Non-performing loans are down from 80 basis points to 46 points to total loans, non-performing assets are down from 59 basis points to 37 basis points of total loans and the dollar balances of non-accrual, non-performing, criticized and classified loans are all down 30% to 40%. If a credit recession is looming, we have yet to feel it and if it does come, we are starting from a very good position. On a different note, our tangible book value per share grew by $0.32 to $7.92 and our tangible common equity ratio improved by 13 basis points to 7.79% due mostly to our strong earnings capacity, but also reflecting a $4.6 million reduction in accumulated other comprehensive income. Finally, our effective tax rate was 19.98%. Good afternoon, guys. Thanks for taking my questions. Maybe first, just on the margin. I appreciate the guidance for the first quarter and the further expansion. Just a clarification, does that include purchase accounting accretion thatâs coming with the deal? A great question, it does, and thanks for asking so we can clarify it. It does include that that based on our assumptions again at the time the deal was announced. So those -- all those -- it was a different rate environment. So that will change. So I will tell you just a broad your question a bit. The thing that could produce some downward pressure on that NIM estimate is deposit costs. Deposit costs rise as we thought that will -- thatâs why we give some guidance within plus or minus 5 basis points. That will be downward pressure. But we are going to read you all the marks at closing in a different rate environment and we donât have that answer for you yet or where we would give it to you, but itâs likely that that we might provide some upside to the number we disclosed a minute ago. Okay. Do you have a sense or just a guide for what the core margin would be in the first quarter excluding those marks? Well, we are 3.99 now and the guide we are giving is 15 basis points up, so it will be about 4.14, 4.15, plus or minus 5 on either side. Thatâs the best guidance we can give you now and we will just have to revise it once we close the deal and have the final market calculated and provide further guidance as we go. No. Thatâs great. I appreciate that. And then as we think about kind of the rest of the year with you revised your deposit beta assumption cumulative back up to 25%. As we think about that, playing out over the course of the year assuming no other rate hikes maybe after the first quarter, how do you envision the margin moving throughout the rest of the year? Yeah. So we see -- we -- and we have disclosed this before, but we do see a peak in margin at deposit rates eventually catch up. What we had disclosed before is still the way we see it, which is margin probably peaking in the second quarter of this year and then coming down from there. Now some of that is based on our rate forecast, which is based on a weighted average of Moodyâs baseline forecast and an upside and the downside. And our rate forecast, the peak rates are only 4.7%, not much far higher than we are now and the EBIT rate start to kind of come down in the second half. So that informs the key estimate that I am giving you. If the rates go higher and stay higher that the peak might be delayed. But inevitably, with everyone else in the industry deposit costs are going to keep growing catch-up that eventually cause in the peak. Yeah. Let me just add to Jimâs comment, Dan, if I can. Jim mentioned that we could not afford to trip over $10 billion in the fourth quarter. That was really a play and we really feel like we can gin the commercial deposit gathering machine like we did in the prior years where we -- you have seen some of our pie charts before that we are 60% plus of our non-interest-bearing deposits was business. And so thatâs really going to be our focus. It will be a point of strategic focus and goals and incentives. We are running specials and tests that we monitor week-to-week. We just have a good feeling about 2023 what we can accomplish and getting to a point where we can fund our loan growth at 10% and if thatâs a little off because of a bump or a mild recession, those -- the funding pressure might not be the same. Do you have a sense of how much compression that might be, I mean, assuming you are your 25 basis point -- 25% cumulative deposit beta, how much do you think the margin could potentially contract from the peak in the first quarter? Well, based on what we know now, we see continuing -- the peak is in the first one, the peak is in the second quarter, so we will continue to expand active in the second quarter. But then where we see it ending the year is still over 4%, so not giving back on the expansion. So I am a little higher than we are now. And I hasnât to go that far out, because I think the marks on Centric as we calculate the final marks are going to affect this number, and of course, deposit costs and how we manage that, of course. Probably, over the course of the year, this could change. So we will have to update this as we go ahead. But as we see it right now, we see that number staying above 4% by the end of the year. All right. Terrific. Thatâs very helpful. I appreciate it. I know itâs a tough number to get at especially with the marks. So I appreciate you answering the questions. Just on the thinking about the efficiency ratio in the quarter right at 50% and the positive operating leverage for 2023 and the cost base in Centric. So given that you imply obviously a sub-50% efficiency ratio, is that a place you think, as you think about more medium-term maybe that you think you can operate the bank from or I understand an offset will be the Durbin impact in mid-2024? Just wondering your thoughts on kind of longer term where you think you can operate the bank from in terms of efficiencies? I think you used the term midterm, which to me would apply one year or two years. And I think low 50s we are comfortable with because we plan to grow the bank. You have seen us kind of methodically put together a lot of diversified revenue engines and we are going to continue to ramp those up. So we will -- we would like to continue to grow the bank that we have -- the way we have in the last two years and make investments. And of course, we have new territory in Central Pennsylvania and in the outskirts of the Philadelphia MSA. And so I think I donât see us doing sub-50 right away and we want to build out the revenue side of the bank and grow the bank. Okay. And then you -- a lot of talk about the NIM and I am hesitant to ask because, Jim, you said you were hesitant to go out to the end of next year. But as you think about if the Fed, we get a couple of more rate hikes here and then the Fed is the interest rate picture is a little more static for some time. Do you feel like that NIM above 4% is an area where the bank could see -- could operate at, maybe it plateaus there? Are you thinking that in 2024, itâs more likely that the NIM continues to drop to a more normalized level? I guess thatâs what I am trying to search out if you think in a static rate environment a normalized level could be above that 4% figure. Yeah. Itâs a tough question. My -- to use an old joke, my crystal ball gets cloudy when we start getting out to 2024, but we have actually stressed it for the kind of scenario you are talking about, because we realize that -- we using consistently the rate forecast we are using with this. Our approach that as the way, we do our CECL model with it, 40% laid on the baseline, 30% upside downside, using that rate forecast that they might be under overstated. So we try to stress it, and say, well, what happens if itâs wrong, what happens if rates -- the Fed raises rates a little more aggressively here and rates stay up for a while longer. And I can tell you the answer generally for us is that itâs better. The NIM is better. So the margin is better and it stays higher for longer, but the pattern is pretty much the same. You get to a peak and then it comes down. Now in that world, I would tell you that, we end up pretty based what I know now. You have a margin that ends the year well above 4%. What it goes to in 2024, I actually donât have that, but my guess would be that it would drift downward and continue downward if deposit costs play out, because if deposits -- if rates go to 5%, stay there for two years or three years to sell it, eventually deposit rates are going to keep going up and up and up. Got it. Okay. And then just lastly, kind of I was surprised that the consumer continues to be as strong as it has been in terms of the as a driver -- as a partial driver of loan growth. Sorry if I missed it in your prepared remarks, but are you starting to see a slow down or are you expecting a slowdown on that side of things, just given the macro environment with more of a pickup in commercial going forward into 2023? We are. I mean, we did -- we might do 10% less in mortgage this next year, but not 20% or 30%. I mean if we were at 4.70, we might be at 4.30 in first mortgage. HELOC, HELOAN is probably much softer and under pressure, but also we think in our good people in the branches and we have really got to focus on deposits and calling on business customers, small business customers. The indirect auto business looks good and the team has done a nice job of getting our spreads up in that business. Itâs very well managed. And so thatâs a business that can probably help us, but we will be doing some HELOC and HELOAN out of branches, and we will be doing some mortgage and not a lot less actually from maybe the high 4s to maybe the mid or low 4s. And but thatâs also a business that, long-term we like the business, because we get a cornerstone checking account that we cross sell. We get households, a customer for life and so I think the consumer business is something that is important to us. Jane, anything you would add? I know we are all trying to get a sense for the margin trajectory, but I guess I am kind of curious to ask how you feel about core momentum in the bank. I think your numbers look pretty good and you have Centric coming in equipment finance ramping. So how do you feel about just kind of the overall positioning of the bank as you go into 2023 and kind of strategic priorities? Yeah. We just feel really good. I mean we feel like we are positioned in our lending business as well. Even the businesses that are hitting a bit of a speed bump like our fee businesses, we really believe in SBA and mortgage longer term, good, robust consumer lending through our branches. We are really building out our equipment finance platform or SBA. We have got new talent in C&I lending. We feel good about our company. And I think for those of you who have covered us for a number of years, the one thing we do is we get better every year. I mean this has been a march from a 60-basis-point ROA bank and we get 5 basis points, 10 basis points better every year. We are -- we operate with the principle of operating leverage in every budget in every part of our bank. We are just excited about the future of our company, we are excited about the new markets and itâs fun. And we feel like we make a difference with our clients and the value proposition that we deliver. We think we are turning our focus back to funding, but we have always been pretty good at funding and itâs just going to be fun to see how well we can do this year and how much core deposits we can gather. And then we just feel like thereâs a couple more plays left in the playbook at least. We think our regional model starting to knit the bank together in six of our discrete markets, Northern, Southern, Central Ohio, Pittsburgh, Community PA and now this capital region. And I donât know, we are just -- we are excited about the future of our company and thanks for asking. Thanks for the color. And as a, excuse me, as a follow-up too I wanted to ask, what kind of economy are you assuming in your loan growth guidance. I think we all have kind of a different view, but what kind of trends do you see today and what do you need to see over the next couple of quarters to get where you want to be? Yeah. I mean our -- for this year, just because of some downdraft in some places, we have been a little higher but probably 9%, 10% and we think commercial is on a good trick. And then, of course, we have a newer business that everything equipment finance adds $80 million in the second half of the year goes right to growth and higher spread growth, I might add. And so, Jim, anything you would add or Jane? I would say itâs not -- we are not predicating those kind of expectations on a recessionary environment that requires a pullback in lending or the consumers start to it were unemployment is. I can tell you actually officially in our forecast, the weighted average forecast I keep referencing in this call, the unemployment rate goes to just over 5% by the end of the year. But we are not using that and saying thatâs going to result in be pullback in loan volumes. In fact, we kind of see those things working together, because if there is some recessionary pressure on loan volumes slow down a little bit from what our expectations are then that will release some funding pressure and we will be fine that goes into the mix. The only thing that I would add, Mike, is in a couple of the businesses we are still seeing supply chain issues. The car business is still challenged, the equipment finance business still seeing supply chain issues, equipment is taking longer to be delivered and we are also seeing construction delays in some of our residential mortgage and SBA loans. So the economy still isnât completely frictionless. We still see some of the COVID friction in the economy, but itâs not recessionary, itâs just friction. A lot of them have been addressed, but just two quick ones. One, Mike, on the Centric is about to close, most of your peers are saying bank M&A is pretty quiet. Just curious what you are hearing and where your thoughts are at for that heading into the start of this year? We wake up every day and we think about organic growth and how we grow our company and thatâs the highest and best use of our capital. So thatâs where fundamentally we start and we have to be successful there year-in and year-out. And then when we have great opportunities like with Centric, with Foundation in Cincinnati, they have to be right. And Jim always likes to say, we have looked at 60 things to do six. So we are not seeing a lot of activity. And then even if we were, it would have to be right for us strategically and it would have to be right for us financially. And we are pretty picky and I donât -- so anyway, we are not counting on that if it presents itself in a way thatâs really positive for our company and is a win-win and great, but itâs not a key part of our strategic plan. Great. Thanks. And then just within the non-interest income, any -- obviously, the environment on mortgage and investments and everything are challenging. Just curious if thereâs any particular areas that might have more or less upside relative to your forecast, anything you are excited about or more cautious about on the line item basis? Yeah. I will start there and let Jane follow on Jim. But just on the SBA piece, we are a little frustrated, because we really have good volume and we are number one SBA lender in a couple of our key markets. Thatâs a part of our brand. We feel like we are doing good for customers and our bank and but the volume has materialized into fee income, but it will, and that business has been around for a long time. So we are still very bullish on it even though itâs kind of tamped down right now. We have grown that business pretty nicely in the volume. I will speak to that one. I spoke a little bit to mortgage. And obviously, indirect auto too or not indirect auto, but our card business is off probably about 12% and thatâs just consumers not spending as much money and swiping their cards as often, at least in our part of the vineyard. Jane, what else would you add in terms of outlook for fee businesses? There are a couple of things I would add, Mike, that the brokerage business looks good. The Investment Management and Trust business is a little bit soft, because of the market volatility, and we are priced -- we are paid against asset values and the volatility is not our friend. But none of that feels like itâs prolonged, it all feels like a blip. And to Mikeâs point on, we have a couple of loans still in the pipeline, construction loans, which started in early 2020 and they just havenât completed yet and they will. But I have stopped counting the days and I just know they will close. They are progressing. They are just progressing slowly. Can you kind of talk about the loan growth target and explain a little bit more about the mix and then I will dive into the equipment finance group in a second. Yeah. The mix is -- we do it in two ways. We do it with geographically and we do it by product line, and more and more we are running our company geographically. And I would say that Ohio has just been on a tear, probably, average loan growth there of about 20% the last several years and then in Pittsburgh. And our community PA markets have really improved quite a bit. I mean we were leaking oil for a number of years in Community Pennsylvania and I think they grew about or 7% or 8% last year. So thatâs one dimension that we look really closely at is how we are delivering geographically. And then also by lines of business, we expect our commercial to really kind of be at the forefront again this year and kind of carry the day and then our indirect auto is off to a good start. And Jim, you are looking at the actual numbers Yeah. Just like to see -- just one of the things thatâs kind of shifted our guidance, because for a long time we are talking about mid single-digit, once in a while I will talk about upper single digits and choosing on that. But one of the things thatâs just giving us confidence about saying going out there with 10% is the equipment finance business really getting into speed. We built out that business. We talked about that a lot on previous calls. Itâs really kind of -- really coming to speed. As Jane mentioned, there are still equipment issues that affect that business. But even then, thatâs a good chunk of our expected loan growth next year and so that combined with pretty modest or not modest, but moderate growth in the other areas, all together gets to 10%. And technically, we probably should say loans and leases, but even in our equipment finance business, 85% of the business is loans only about 15% interest right now. Yeah. And I forgot to mention on the commercial side, just the backlog we have in the commercial construction business and that will delayered in this year and those construction calls are already beginning to occur. So thatâs another nice driver. Jane, are we missing anything? No. I donât think so. If I am looking at expectations, everybody -- every geography is expected to grow modestly and every business line is expected to grow moderately. And so the combination means somebody can be a little bit up or down and another business line or geography will pick it up. So I feel good about the expectations for growth. I feel good. I donât see any real weakness. Yeah. If I could just add one more thought or follow point. Our line utilization is still not up to where it was pre-pandemic. Itâs gone up a little bit, but thereâs still maybe a little more runway there. No. Thatâs really helpful. Now equipment finance alone, what kind of expectations as a percentage of loans by the end of this year kind of where can that portfolio grow to in the next two years and then kind of what are the yields that you are getting currently? Yeah. So the yields in that business are really strong, really nice. But right now growing over 7% and thatâs really where we like it to be. We didnât build that business to be double-digit yields. We donât want to take on that kind of risk. The equipment is mostly things like trucks and nice bread and butter kind of equipment like that and the yields are really very additive to our overall NIM and to the bank as a whole. In terms of like I think your question was like a proportion of our loan growth next year, itâs probably 30% to 40% of the loan growth next year. We are going to all draw a big picture number of what we expect to be booking this year. We couldnât finance, itâs really additive. So thatâs what we can say. The other businesses are growing at historical moderate growth rates are growing and the equipment finance stayed on top, so they can build -- put the whole picture together and build the whole picture. Jane, if you want to add to that? Sure. We are continuing to add salespeople. And as Jim said, itâs a big portion of our loan growth this year. And I thought I asked -- I heard you ask ultimately whether we see it bank and itâs probably never going to be more than 10% to 15% of the loan portfolio. Thatâs perfect. Thatâs helpful. How many people have you added? How much is the footprint on your employee base in this division? Itâs small. The leader of the group, Rob Boyer, has been very, very careful. We add out a few employees at a time, because we have been very careful about collection and onboarding. And we have been adding primarily salespeople and we, probably, have a couple of dozen people in the group right now. Average loan size is about $160,000. It was up a little bit from our earliest projection just because of the way the market was moving, it might come down a little bit from that. Duration was, I think, 60 months to 70 months or Jane you could correct me on that. One -- but one of the features of that business is unlike the auto business, it really prepays. So the duration is very kind of similar to the stated life. Okay. So then to get to the growth that you are projecting right now, is it safe to assume that you will kind of stay within that average or do you kind of foresee going up in size to help you get there? We donât have any immediate plans to increase the size. We like the space because we like the yields a lot and we like the collateral. So we will probably stay about where we are, at least for the foreseeable future. I do. We assumed initially 75 basis points. As you can imagine, itâs next to nothing. So far the actual losses have been zero. All right. Congrats on that. And then maybe just jumping over to borrowings, in this quarter we saw a pretty substantial jump. Can you maybe give us some color as to how we should think about borrowings on a go-forward basis? Well, like we have been saying, our long-term goal is that we want to make sure that we fund our loan growth and deposit growth. But when in any given quarter, we donât have that, we are able to tap into borrowings, so we have a very large amount of liquidity. So funding our loan book is not a problem. In the fourth quarter, we just had that dynamic there. We didnât want to have an influx of deposits, because of the inflexibility of deposits, assets are so flexible. So if we had gotten to the end of December of last year and we are trying to avoid the $10 billion mark, you can sell a loan portfolio very quickly and pay down overnight borrowings, the same day very quickly. You canât do that if it was funded with deposits, because you canât stuff money in envelopes and then it back to depositors and give them their money back. So that gave us this balance sheet flexibility we really like going into the end of last year. Now like I said, thereâs plenty of money available. The money that we are raising in the market even with CD specials and other kinds of specials is all below our incremental cost of over net borrowings. So thatâs all better for us in the borrowings and the money is really flowing in in response to those specials. So thatâs kind of how we manage and how we look at it. Okay. Good. And then last question for me in terms of -- as I look at your deposits, do you guys have any brokered deposits in portfolio right now? So I wanted to go back to the deposit discussion. I -- Jim, I think, I heard you say that you would like to equally fund loan growth with deposits implying that the loan-to-deposit ratio can stay sub-100%, is that accurate? Okay. And that leads to my next question really, which is we are standing today with 33% non-interest-bearing deposits that compares to pre-COVID levels or I think closer to maybe 25%, Fed funds is obviously very different from that point in time. I am just curious what is structurally different about the non-interest-bearing deposit composition that -- should we expect it to stay at this elevated level versus where it was pre-COVID? I think it will certainly stay at an elevated level compared to this year. I think it will certainly stay at an elevated level with the composition between business and consumer. I think clearly we have an opportunity to leverage a broad business customer base and gather more deposits. And we do that unusually through our branch network. A lot of banks the branch manager does not go out and make calls on small business and in our bank they are rewarded to not only do that, but to bring in core deposits and businesses that grow. So I think thatâs fundamentally a little different certainly than our bigger bank rather than sisters and itâs you need to get customers and not just customers that borrow from you, Jane. I mean, this has been your forte and your drumbeat for the last four years or five years. Do you want to add to that? The only thing that I would add is, our loan portfolio, particularly on the commercial side, looks very different than it did four years, five years, six years ago. The loan portfolio today is overwhelmingly direct clients with whom we have direct relationships and with those clients we expect a depository relationship and itâs made all the difference in the world. Got it. Yeah. Very helpful. Maybe just as a follow-up. As we look at the book today versus pre-COVID just as a reference point. Are you capturing more client wallet share or are you seeing similar granularity, but over more accounts? I would say both. We are capturing much more wallet share. We have spent some money on our treasury management product and infrastructure and we know that we need to be able to deliver. And so that when we ask for the operating relationship we have got a product set that allows us to ask for it. I would just add through our regional business model, we are much more likely to have President or a senior lender much more closely it to the other business lines, whether itâs mortgage, wealth management, retail and really bring other partners out to talk to that client and help them, particularly on the personal banking side, also on consumer lending opportunities and wealth management opportunities. So we are getting a better share of the wallet than we were probably five years, six years ago. Understood. I appreciate all that detail. Maybe flipping to the other side of the balance sheet, could you provide what the roll-on blended loan yields are versus whatâs rolling off at this point? Yeah. So for the quarter as a whole, we were putting on loans in the high 5s, 588 and what was rolling off at 544. So it was a 44 basis point differential. I donât have the pipeline yields all in. But I could tell you that like we are looking at -- what I am looking in front of me just speaking historically for the quarter just ended, those numbers include consistently over every month in the quarter. So the new loan yield is going up, up, up every quarter end. Understood. Yeah. I was waiting -- I was hoping there was a 6% number either at the pipeline or at quarter end, is that... Well, there are -- yeah, there are. So like, for example, a bit like historically different. So some businesses have longer tails than others. So, for example, in the mortgage construction business will be locked in a rate for a loan for someone who is building a house eight months or nine months ago. Thatâs a really low rate. And then in particular, it gets to the power is in the books and itâs a low rate. That brings on the current period, down the term period yield. But for commercial variable adjustable loans, for example, one of our biggest categories, where we originated $400 million. Those new money yields in the fourth quarter were in the high 6s, 667. So that really brings the loan portfolio yield up and thatâs been going very nicely. So the story depends on what portfolio you are talking about. Yeah. Half of all the originations in that category and really helping -- and thatâs a new origination. The existing portfolio also re-priced with the Fed rate increases. So thatâs been really helpful for the bank. Got it. Maybe turning to indirect auto, I mean, I heard you at the onset. It sounds like thereâs really no notable deterioration in credit delinquencies, criticized classified. I did want to hone in and get a little bit of additional color on indirect auto, which we are getting more questions. Could you just give us a sense for the health of that book, the FICOs of the book and maybe just an update on duration? Yeah. Just we brushed up on this before the call. Average ticket is about 30, Jane, as you shared with us, six-year duration and contracted duration, it tends to be shorter than that, two and half years or so. The average payment is up a little bit over the last year about $50 to just over $500. And FICO, do we have that? Yeah. Good. Jane, do you want to add anything while Jimâs finding the FICO. I know thatâs on the report there. Yeah. Thereâs been really no degradation. You keep waiting for it to happen, but thereâs been none. And the used car market is staying very, very healthy, because there are still shortages in the used car market. So few customers are leasing anymore that used car values are holding beautifully, and so far, itâs been magical. We underwrote... I was just going to say we are holding to our underwriting standards, we havenât blinked and we are a paper shop. So our capture rate is a little bit skinnier, a little bit lower than what you might see in other banks. We just donât -- we donât buy everything by any stretch. Okay. Last one for me is just around capital management, hopefully, the worst of kind of any sort of major impact to AOCI is behind us. I am curious, just given where the stock is and how you think about buybacks and if thereâs any level where you would be more interested in that? Yeah. So we have $5.9 million remaining under our previously authorized -- authorization from our Board. We had to stay in blackout while the Centric acquisition was pending. Actually, we had to stay in out of the market technically through today through their shareholder meeting, but obviously, with the earnings out of the market. Anyway, we could go back into the market in a few days with that authorization. Generally, though, as far in our big picture view of capital is that we are generating capital and using it for organic growth and thatâs the primary purpose of generating the capital. So we want to use that capital to fund our organic loan growth. If thereâs excess capital we use that for buybacks. I think with the $5.9 million of authorization we have, if we look at price reaction today, for example, that completes a buying opportunity. We will be in the market. We canât go to the market equally for at least three days from today anyway, so that that would be a buying opportunity and we will continue to use that remaining authorization for buying on those kinds of dips. But, by and large, they are going to use the rest of the yearâs capital generation to fund the organic loan growth. Hey, Mike. If itâs okay, I hate to retread, but I do want to break for just a minute. Back to the FICO score, we can be even more precise that 90% or greater than 700, the average FICO score for the auto portfolio is 770. The average for rec is 785. I see there are no further questions at this time. I will now turn the call back over to President and CEO, Mike Price. I always say this that we just really appreciate the interest of the covering analysts for questions and the opportunity to share our story and our business with you. We are pretty passionate about it. We care a lot. And I hope it shows the results and look forward to being with a number of you over the course of the next 90 days. Thank you.
EarningCall_1395	Good afternoon, ladies and gentlemen. Welcome to the Good Times Restaurants Inc. Fiscal 2022 Fourth Quarter Earnings Call. By now, everyone should have access to the company's earnings release, which is available in the Investors section of the company's website. As a reminder, a part of today's discussion will include forward-looking statements within the meaning of federal securities law. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and therefore, investors should not place undue reliance on them. And the company undertakes no obligation to update these statements to reflect the events or circumstances that might arise after this call. Such risks and uncertainties include, among other things, the market price of the company's stock prevailing from time to time, the nature of other investment opportunities presented to the company, the company's financial performance and its cash flows from the operations, general economic conditions, which could adversely affect the company's results of operations and cash flows. These risks also include such factors as a disruption to our business from the COVID-19 pandemic and the impact of the pandemic on results of operations, financial condition and prospects, which may vary depending on the duration and extent of the pandemic and the impact of federal, state and local governmental actions and customer behavior in response to the pandemic; the impact and duration of staffing constraints at our restaurants; the uncertain nature of current restaurant development plans and the ability to implement those plans and integrate new restaurants; delays in developing and opening new restaurants because of weather, local permitting and other reasons; increased competition; cost increases or shortages in raw food products; supply chain and inflationary factors due to the unknown impacts of the war in Ukraine; and other matters discussed under the Risk Factors section of Good Times' annual report on Form 10-K for fiscal year ended September 27, 2022, filed with the SEC and other filings with the SEC. During today's call, the company will discuss non-GAAP measures, which they believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliation to comparable GAAP measures available in our earnings release. And now I would like to turn the call over to Ryan. Please go ahead, sir. Thank you, Emma, and thank you all for joining us on the call today. As mentioned, you should have access to our earnings release and our annual 10-K filing. We are thrilled to have grown same-store sales at both brands this year while navigating continued labor and product shortages, rising cost of goods and the uncertain nature of consumer behavior in a highly inflationary environment. This year represents a record sales year for Bad Daddy's in the third consecutive year in 10 of the last 11 years with growth in same-store sales at Good Times. As with prior quarters, we remain displeased with the company's profitability this year. However, our high standards prevent us from compromising on product quality or making other decisions that would drive elevated profitability in the short term at the expense of customer satisfaction and loyalty, which we know are the most important drivers of the long-term profitability and success of both of our concepts. Our focus this year has been on organic growth and customer traffic from our existing restaurant footprint. And our investments this year have reflected that mission. Last November, we launched new online ordering experiences at both brands, including a refreshed web experience at Bad Daddy's, the introduction of online ordering for the first time at Good Times and the release of mobile apps at both brands. Sales through this platform continue to increase. Digital sales for which we include orders not just through our own platforms, but through our delivery partners, exceeded 10% for the Good Times concept during the fourth quarter. At Good Times, our digital sales lean heavily on orders originating through our delivery partners. And our goal for 2023 is to begin shifting those into our native platforms and further direct traffic to direct digital, growing our app and web-originated orders. Shortly after the end of the fiscal year, we completed the installation of digital menu boards and modern lane timers at all of our company-operated Good Times restaurants. And before the end of the fiscal second quarter, we expect all but 2 of our Colorado-franchised restaurants to have installed the new menu board, which are a critical part of the modernization of the Good Times brand. We recently completed the first installation of our new signage package at Good Times, and we expect to complete at least 1/3 of the system this year. Back in late 2019, we reduced the menu at Good Times while still maintaining a compelling variety of products to improve our kitchen efficiency and our order accuracy. Though we continue to feature our seasonal and monthly burger and tested flavors, the commitment to a focused menu ultimately remains. We continue to optimize the menu with a dual focus of improving labor efficiency to offset increasing labor costs, but also delivering better product to our customers by serving fresher and hotter burgers and fries at a higher speed than our competitors. We're extremely impressed not only with our sales growth at Bad Daddy's, but at the customer retention and traffic counts, with 3.7% same-store sales and only 5.7% average price during the quarter. The implied 2% traffic erosion is significantly better than the casual dining benchmark as measured by Black Box Intelligence. At Bad Daddy's, digital sales make up about 23% of our sales, and total off-premises sales are approximately 27% of our restaurant sales. Sales through third-party aggregators have been surprisingly consistent even as customers have reembraced on-premises visits. And third-party delivery sales continue to represent approximately 15% of our orders. We offer delivery through our own online ordering and app-based ordering platform. And similar to our approach for Good Times, we're exploring ways to shift traffic from the aggregators to direct ordering. We are dedicated to an elevated level of customer service, but our true focus remains serving up unbelievable burgers with unparalleled customization. During the initial throes of the pandemic and thereafter, we simplified our menu at Bad Daddy's. Since then, we have reintroduced seasonal chef specials at Bad Daddy's to provide momentum for incremental visits to shift mix into above-average margin products, but while at the same time, retaining efficient, highly productive kitchens. Moving into 2023 and 2024. We're planning expansion of Bad Daddy's with one lease already signed in Greater Huntsville, Alabama that we expect to open in the fourth fiscal quarter of 2023 with potential sites under negotiations in Birmingham and Raleigh, and evaluation of expansion opportunities in other markets. Restaurant margins are compressed this year, but we expect them to remain so into the first quarter or first half of fiscal 2023 as we absorb an 8% minimum wage increase in our Colorado restaurants. Wage rate inflation has been intense, but our operators have done an excellent job of managing productivity to minimize the increases in labor cost. Cost of sales have been more challenging for us. During the last quarter of the year, we continue to see extremely high chicken breast costs, which have more recently started to recede but still remain elevated. Beef and bacon were also elevated during the fourth quarter, but have shown moderation in pricing into the first fiscal quarter of 2023. Throughout the restaurant P&L, increased delivery costs, primarily at Good Times or that portion of the business has seen meaningful growth and elevated repair and maintenance costs across both concepts have also been a source of margin compression. Shifting traffic to our direct purchasing platforms is one of several ways in which we're attempting to reduce the impact of high-cost delivery aggregator fees. The current inflationary environment has caused other restaurant groups to reduce or reevaluate aspects of the development program. We have, over the past year, focused our capital deployment in areas where we believe we will attain the best return in assets with predictable cash flow, including both the acquisition of our previously franchised Bad Daddy's restaurant and investment into our already existing restaurants. Additionally, we have continued to repurchase our stock through a repurchase program, which has resulted in the purchase of 316,000 shares under the company's -- of the company's stock during fiscal 2022. We continue to repurchase shares under this program during fiscal 2023. A saying that's been recently posted and reposted on LinkedIn says something to the effect of restaurant jobs have always been hard, it's just that more people are now realizing this fact. And that saying likely applies to the industry itself as well. And that it, too, the industry itself, has always been very challenging. Restaurant companies and concepts often deviate from core strategies and become willing to compromise what differentiates them. We continue to stay the course and are confident about our position in both of the restaurant segments that we operate in. We'll continue to strengthen our brands by creating great experiences appropriate for each concept for our customers, thoughtfully developing new locations and rewarding hard-working team members and leaders for their contributions in building brand equity for Good Times and for Bad Daddy's. With that, I'll turn to Matthew to review this quarter's results. Thank you, Ryan. Total revenues increased 5% to $35.2 million for the quarter. Total restaurant sales increased $1.7 million to $34.9 million for the quarter. Total restaurant sales for Bad Daddy's restaurants increased $1.5 million to $26 million for the quarter, and this increase is due to average menu price increases throughout the year as well as the continued strength of off-premise sales and strong demand for in-person dining. Same-store sales increased 3.7% during the quarter, with 38 Bad Daddy's in the comp base at the end of the quarter. Cost of sales at Bad Daddy's were 32.8% for the quarter. That's a 170 basis point increase from last year's quarter and the result of significantly higher food and packaging costs as seen through inflationary and supply chain pressure. Bad Daddy's labor costs decreased by 110 basis points compared to the prior year quarter to 33.2% for the quarter. This decrease as a percentage of sales reflects improved productivity and lower unit level incentive compensation, the latter of which resulting from lower restaurant-level profitability. Occupancy cost at Bad Daddy's decreased 20 basis points to 6.4% due primarily to the leveraging of higher sales. Bad Daddy's other operating costs were 14.7% for the quarter, an increase of 170 basis points, and that's primarily due to higher increased spending on repair and maintenance expenses, restaurant technology costs, utilities and increases in restaurant supply costs. Overall, restaurant-level operating profit, a non-GAAP measure, for Bad Daddy's was approximately $3.4 million for the quarter or 12.9% of sales compared to $3.7 million or 15% last year. The decline is primarily due to the increased cost of sales and other restaurant operating costs. Restaurant sales at Good Times were $8.9 million, an increase of $0.2 million, resulting from 5.9% comp sales, partially offset by the closure of one restaurant earlier in fiscal 2022. Food and packaging costs for Good Times were 32.3% for the quarter, an increase of 430 basis points compared to the last year's quarter. Again, the result of significant inflationary pressures on food and packaging material, primarily beef, bacon and oil-based products and rolling over unusually low costs for our all-natural beef in the prior year quarter. Total labor costs for Good Times decreased to 31.9% and from 32.5% for the quarter last year due primarily to increases in unit level productivity. Occupancy costs at Good Times were 7.8%. That's a slight increase of 10 basis points from the prior year quarter due primarily to increased real property tax assessments. Delivery sales -- sorry, Good Times' other operating costs were 12.7% for the quarter. That's an increase of 270 basis points and is due primarily to additional delivery service charges, accompanying a higher mix of delivery sales and higher repair and maintenance expenses during the quarter. Good Times restaurant-level operating profit decreased by $0.5 million for the quarter to $1.4 million. As a percent of sales, restaurant-level operating profit decreased by 600 basis points versus last year to 15.3% due primarily to higher costs previously discussed. Combined general and administrative expenses were $2.8 million during the quarter or 8.1% as a percent of total revenue. This represents an increase of $0.5 million versus the prior year quarter. G&A expenses increased versus the prior year due primarily to increased legal fees, training expenses, regional cost and home office salary expense, partially offset by decreased underwriting losses associated with the self-insured employee health care plan and rolling over costs related to our tender offer in the fourth quarter of '21. We recorded impairment of long-lived assets of $1.4 million during the quarter, and that's for the impairment of one Bad Daddy's restaurant in the Atlanta, Georgia market. No impairment costs were recorded in the prior year quarter. Our net loss to common shareholders for the quarter was $1.3 million or a loss of $0.10 per share versus income to common shareholders of $1.3 million or $0.10 per share in the fourth quarter last year. For the full fiscal year, our net loss to common shareholders was $2.6 million or a loss of $0.21 per share versus income of $16.8 million or $1.32 per share in the prior year-to-date period. Adjusted EBITDA for the quarter was $0.8 million compared to $2.5 million for the fourth quarter of 2021. And for the year-to-date period, our adjusted EBITDA was $4.8 million versus adjusted EBITDA of $9.6 million for the same period in fiscal 2021. We finished the quarter with $8.9 million in cash and no long-term debt. And I will end with that I, too, am thrilled that we continue to grow same-store sales at both brands, and we continue to invest in our restaurants, our employees and our customers. And with that, I will give it back to Ryan. I was wondering if you guys can -- if you can't provide detail, maybe some general color on the traffic across both brands. I've watched -- follow a lot of restaurants over the years, and I've watched prices increase and traffic decline -- even before the pandemic, I was watching this pattern. So again, if you can't provide detail, that's fine. A general feel would be interesting, too. Certainly, Brian. As I mentioned during my prepared remarks, during the fourth quarter, we had traffic erosion at Bad Daddy's of about 2%, and that was sitting on price of about 5.7%. We didn't go into this as much on -- in the prepared remarks, but nothing has really changed in terms of our strategy around price for Bad Daddy's, which we've commented before and in our filings have stated that we've tried to be modest in our price increases. And I think you'd find based upon the CPI numbers, food away from home, in particular, food -- full-service food away from home recently came in for the month of November at 8.0%. Our price increases have been less than that. And our strategy is to try and do right by the customer. And in the short run, you've seen that somewhat in our increased cost of sales. That's been our strategy for Bad Daddy's. I would say the price increases across the segment in fast food have been, generally speaking, higher and -- although most recently, the Bureau of Labor and Statistics numbers for the CPI has been slightly under full service. We've taken actually a little bit more price at the Good Times concept. We have seen a little more traffic erosion there. And we're allowing that data to influence future decision-making. I think the challenge we have at Good Times and at 12 of our Colorado restaurants at Bad Daddy's is simply the labor cost that is attributable to the higher minimum wage. And that has driven up, as I mentioned, again, in the remarks, 8% coming in January of 2023 because it's a CPI-driven price mechanism there. So very important to us. I agree with you that it's concerning. Its -- I have seen restaurant companies in the past increase pricing too quickly and beyond the level that's sustainable for the customer and that is -- that goes into our thinking in every pricing decision that we make. Thanks again, Emma. Pressing on into 2023, we're excited about the future for each of our brands and for our company as a whole. With a strong balance sheet, relevant concepts as demonstrated by the strong sales and an amazing group of leaders at all levels of the team, we're poised to continue to create greater value for shareholders. My thanks and appreciation go out to the entire team who take care of their customers. That's whether those customers are visiting in the restaurants or their internal customers who are cared for by individuals here at our home office. With that, we will conclude today's call. I thank you all for joining us today, and I wish you all a safe and happy holiday season.
EarningCall_1396	Good morning, everyone. I think weâll get started here for our next session. Itâs my pleasure to host and introduce to my left, CFO of SolarEdge Technologies, Ronen Faier. As many of you probably in the audience know, SolarEdge is a market share leader in solar inverters. But increasingly over the past several years has expanded its portfolio to include energy storage, as well as EV charging and a few other technologies which we will touch upon here. But I want to thank everyone for joining and definitely thank Ronen for joining us, as well. Itâs New Year. We have to kick off with some views on kind of the outlook, Iâd say. So maybe just, Ronen for starters walk us through your view on broader demand trends heading into 2023. Key geos since you are internationally diversified but also key end-markets because clearly you are doing resi but also very successful in C&I and then there is a venture to move more into utility scale, as well. So, first of all, good morning. Thank you very much for joining and thank you for having me. So, I think as we start 2023 in a very, I would say, different to where we started the 2022 and even 2021 and this is where we see very strong demand in all markets in which we operate. And I think that the biggest difference between 2021 and 2022 is that, if at that time it was post-COVID and everyone was little bit insecure because the value of, at least, photovoltaics was already known and the payment periods were relatively elaborated. 2022 changed to, I would call it, scenery quite dramatically with the war in Ukraine and the results of the energy prices and trends that we see worldwide. So, what we see right now is a world that is thriving for photovoltaics for solar and for storage. And we see it actually in almost every region in which we operate which was the case also in 2022. The biggest interest that we see today is actually coming from Europe. Europe is of course going through the war in Ukraine and energy crisis. Energy prices hiked dramatically over 2022 and you see now measures taken by the European countries such as Germany to actually cap the energy prices on some of the corporations but still the cap is at the very high price compared to whatâs used to be before. And combining this with a relatively lower interest rate, compared to what you see in the United States creates a situation where photovoltaic energy in Europe is very interesting. Payback period of 2.5 to 3 years on a system that will live for 25 years and a lot of government supports, for example starting this week in Germany VAT was eliminated on installation of PV systems which is equivalent to 19% discount on the cost of energy or the cost of the system compared to where itâs used to be. U.S. is also growing, but a little bit more interesting. The NEM 3.0 is expected to impact this market. We understand that everything that will be, at least certified by the end of April still be grandfather in the old plant, but we do understand that there is going to be a little bit more limitation. I think that we see a demand right now, but we see more signs that this could be something that will slowdown over 2023. We do not expect to see smaller solar industry, but we expect to see deceleration in the growth of this industry and we also believe a little bit that the IRA that is stabilizing very much the benefits of the ITC for the next few years do not put a lot of pressure for anyone to do something today when interest rates at relatively high and there is a little bit uncertainty. And when it comes to rest of the world and rest of the world for us as everything that is not Europe and U.S., of course itâs very country-by-country specific but we also continue to see very strong demand in Asia. So itâs Taiwan, that is becoming a very interesting C&I market for us and in general, Japan that is very interesting in the smaller C&I space. Australia that is interesting and other countries like Thailand, Korea, and Singapore that are interesting. So, all in all, it looks like a very good positive beginning of the year. Thatâs great. And then you just unpack a few of those moving pieces for you, I guess, big picture, revenue growth for you this year, I think, for guidance you are going to be somewhere in the 50% range year-on-year. I think consensus has 30% for you top-line for 2023. So just at a high level does that seem reasonable, or aggressive? And then as you think about U.S. versus Europe, it sounds like you are more bullish on Europe growth relative to the U.S. but how would you, sort of characterize Europe in the context of that 30% overall growth expectation thatâs out there right now? So, I think that the biggest issue that we will continue to face in 2023 and I believe into the beginning of 2024 is actually supply rather than demand. We do see that either component shortages are a little bit of restrictions on our manufacturing capacity will not allow us to deliver all of the demand that we see ahead of us. And therefore the growth and the 30% is actually the higher end that we guided for the next years in our Analyst Day is something that will mostly be achievable based on the availability of components rather than anything else that we see in a market. So we believe that this is something that is if it can happen and we also believe that if you are looking to the geographies, Europe will take a bigger portion of revenues in the next year. When we look and when we do our plans for the year, we usually do a bottom up analysis of the markets. Weâve seen markets in Europe that can grow potentially more than a 100% year-over-year, especially around Germany, the German speaking countries and even countries like the UK. So, I am not sure that the U.S., I believe that the analystsâ view thatâs going to be about around 15%, maybe a little bit less. In some European countries we see a potential of a much, much bigger growth and I do believe that you will see this impacting us in two ways. First of all that portion of Europe as a percentage of the overall sales will continue to increase, but also from a mix perspective since Europe is much more C&I inclined in the United States. I think that you will continue to see growth in our C&I business. Fair enough. And then, just on the U.S., you brought up net metering. There is clearly some clarity, but also some moving pieces heading into the New Year with that market. There is, I think an investor perception that you are going to see a big full forward given the April implementation timeline. First question will be, are you seeing that already, or are you anticipating that? And then, maybe again unpack your comments around a slower rest of the year if you will. Is that due to net metering changes? Is that due to a view on the macro with the consumer just sort of where is your, maybe caution if you will on the U.S. market coming from? I am not sure I know where to put my finger on whatâs exactly the reason that that we have a little bit of a less, I would say bullish view on the U.S. market right now. Macro is definitely part of it. The fact is that with the U.S. markets heavily financed through loans, interest rates that are going up and electricity prices that have not hiked so much as in other parts of the world. The payback period is longer. And if you add this to uncertainty around possible recession and people that maybe worried about whether theyâll have a job or not, the tendency to go and put a system on your rooftop where you see a, maybe 7.5 to 10 years payback period is doubtful. And to add to this again, the IRA created the situation because as long as the ITC existed and every year you use to see a declining income tax credit that will come if you are waiting and this is something that maybe drove people to get a little bit of faster decision-making, right now due to the fact that everything is stabilized, there is no reason to hurry. If you think that interest rates will go down, if you donât suffer too much from energy prices, and you are a little bit worried there is no catalyst for you to go and invest a little bit more. So, thatâs one thing. About the first few quarters of the year, we donât see anything dramatically different in the demand right now compared to where it was before, simply because it was very high before and itâs very high right now. I think that the picture is a little bit more complex because even if there is an ability to source a lot of products during the first quarter, the big issue is going to be in U.S. is actually working hands. You do not have enough installation capacity. So, even if we are able to bring all the inverters and optimizers needed to make installations until April and I think that there is also a view that as long as you are permitting the plan before April, maybe you can still extend it a little bit, the problem would be around installations. So we donât see anything structurally that will make the U.S. demand very, very large in the first quarter compared to where it is right now. I am not sure if I missed anything else on this question. I wanted to just touch on storage. I think a lot of your comments, the geos, the end-markets were related to solar. There is a bit of a plateauing in volume growth weâve seen across from your peers in the storage side of the business. Can you kind of specifically talk to some of the trends you are expecting on your storage business into the New Year? Sure and I think that maybe a first note, you know, to my answer, solar and storage should be over time related as one thing. When you see that on one hand, utilities are pushing to more net metering based on time of views and a little bit of bigger difference between the rates that they are buying, the rate that they are selling. Storage is becoming much more interesting. The more you see that houses and households are looking for resilience then solar plus storage becomes a one thing. If you go today to Germany, 80% of the new systems are installed with storage, simply because of the fact that you cannot push electricity into the grid or itâs not very worthwhile to do this and at the same time, people do see a little bit of concerns about whether theyâll have electricity once they turn on the lights. So I think that over time it should be the same, actually to same answer for everything. The plateau that you see I think is mostly related to our peers that are selling in the U.S. most of their energy storage systems and I think that itâs more related to the U.S. situation rather than anything else. Batteries today in the U.S. are simply too expensive. Payback period is very long. The battery prices are relatively high because of either lack of supply or because of the fact that by the way raw materials in storage hiked so much over the last few quarters, I would say. And companies are not willing to sell at a very low margins or itâs a loss. And therefore, as long as prices are not going down, we do not see a very clear economic return on these systems. If you take and compare it against the Europe, in Europe you see today when you put the system with the battery, close to 3.5 years of payback period for the systems plus the battery. In the U.S. again itâs about 7.5 to 10 years. Itâs a very expensive installation that unless you are very worried about the resiliency I am not sure that economic benefit is there. So therefore, this is the reason that we see a plateau in U.S. Hours last quarter actually was a record quarter. We shipped 321 megawatt hour in Q3 and this is mostly coming from Europe. Itâs more than 75% of our battery sales happened outside of the United States in Q3 at least. So, you talked earlier about the outlook for demand is bullish, but you still have a bit of a supply issue. On batteries, it seems like that maybe less of the case because you got to sell it to ramping and you added a new supplier utility. So, 321 megawatt hours a quarter, I think your capacity moving through this year will be much about that, I think 500 megawatt hours plus. So, do you anticipate, irrespective of all of the comments you made around batteries too expensive. Your supply there will allow you to continue to grow even if there is maybe a plateauing that you are seeing elsewhere in the market as such in the U.S.? So, I believe that yes, and again itâs mostly related to our business in Europe that you still have a very high attachment rate of batteries which we have not yet exhausted the abilities to grow. So yes, we see an ability to grow. I also believe that we will start to see battery prices moderating and starting to go down, especially once weâll have a seller to allowing us to reduce also the cost of our battery cells. Yes, we are very bullish about batteries and their ability to grow. Great. I am going to shift gears a little bit to the supply side. Obviously, that was a big issue for a lot of the industry last year, but especially for you guys. Where are still seeing the constraints? I know youâve talked about specific shift to components and maybe even a timeline for when you think that might get back to a normal, if you will. So in general, there is no major change in the last few quarters. And the fact is that the biggest supply constraints that we see today are related to power semiconductors, itâs capacitors and MOSFETs. And here most of the players in the industry are building fabs and until these fabs are built, we will not see major change in the supply pattern. The reason is that these are mostly components that are going either to EVs where we do not see softer demand there. Maybe by the way, when people think about recession, they believe that less cars will be acquired but actually the portion of EVs out of cars is increasing. So therefore we do not see any softness there and when we talk to our suppliers they do not see any softness there. And since this is the case, we will have to continue and wait for fabs to come online and start to release new units. This will start to happen at the second quarter of 2023 and will prolong into the beginning of 2024 where we believe that we will see enough capacity in the markets. What is improving is, on the other hand, the I would call it timing of supplies, sometimes because of COVID there is especially last year, because of some of the disruptions that we saw in China, even if you go to the entire amount of chips that you were supposed to get them, if you got them at the very last day of the quarter instead of throughout the quarter, you were not able to manufacture. So I think that while we do not see tectonic shift in the amount of components that are there, I think that we start to see a little bit more stabilization in the ability to project when they are going to come and the fact that you will be able to operate your manufacturing lines in an organized manner. Is there any way to, I guess, quantify that? I mean we could keep tabs on new fabs that are coming up and getting online, but I think industry-wide lead times are pretty closely followed. Historically, I think normal lead times will be 8 to 10 weeks as they've been out as far as double that 16-plus weeks. So where are we today? Where do you think that trend line can go to reasonably over the next few quarters? So I think that you need to make â to separate here between resi and C&I. On resi, I think that this 13 to 16 weeks is still in place. And I think that it's slightly improving, but not dramatically, mostly around the fact that ocean freight is becoming a little bit more stable and the routes are becoming less long than they used to be few quarters ago. In C&I, there is still relatively high lead times and this is actually related to the availability of components and availability of supply. We take orders today for Q4 2023 and it's not that some of our customers would not like to get products tomorrow morning, simply this is the time that we can actually commit to deliver these products to them. So here, I can tell you that in some cases, you can see even 4 to 6 months of lead time on C&I, especially on the larger systems. And again, this is something that will moderate, but I believe, towards the end of the year and not much before. You mentioned freight, freight has been in focus, particularly as it relates to your margins. So it seems like Q3 was the first quarter in a long time where you got a little bit of relief. But how much more relief is there? What's a reasonable sort of margin recapture that can happen and over what time frame when it comes to the freight side? So, when we ended Q3, the kind of â or actually ended Q2 and then updated in Q3, we said it from the end of Q2 2022 to the end of Q2 2023, there is about a 600 basis points of margin improvement that can come from a combination of freight and actually tariffs that we pay on goods that we brought from China. In Q3, we have basically took about 140 basis points of this 600 basis points and we said at that time, and we still continue to say that we believe that we can take all of this remaining 460 basis points until the end of Q2 although it will not happen immediately, but we'll be more inclined into Q2 of 2023 and the main reason, by the way, is that in Q1, there is Chinese New Year that is still limiting the amount of manufacturing that we can do and therefore, we need to expedite shipments. But the trend is positive. First of all, our manufacturing capacity is growing all the time. Mexico is ramping as we planned. We are increasing capacity now in Sella 1 in Israel and in some of our other factories, the other factories are very much stable, the one in Hungary, the one in Vietnam are much more stable than they used to be. Even in China, the situation is relatively okay despite of the COVID issues that happened there. It's relatively okay. And in general, we see that once we have more capacity, we can move much more to ocean freight and to that end, the ocean freight costs are going down not to where they used to be at the beginning of 2021, but they are getting closer to them. And this is why we see this as a kind of a moderated trend. In addition to this, again, since we have Mexico growing, we have Sella 1 growing, that means that we bring much less products from China to the United States. So the portion of tariffs is going down. So we believe that this trend is on track. Okay. Because of a lot of those inflationary issues, which seem to be reversing a little bit, you had multiple price increases last year. Are we through that cycle? Do you anticipate any more price increases this year? Or do you have to, at this point, maybe even consider reducing prices now that some of your input costs are coming on? What's sort of the pricing outlook here? So first of all, it's very geographic dependent one. We are implementing price increases in Europe these days, as well, because of the various dynamics that we see there. In other areas, we simply look at a competitive environment and of our expected return on the sales of our product, whether we need to adjust prices. We hiked prices last year. This was an industry, and you remember it well that we used to talk all the time about7.5% to 10% of annual ASP erosion. In the last three years - or sorry, up until 2022, it stopped for about two years. In 2022 prices went up. I don't think that the potential of increasing prices is very big right now. But at the same time, I do not also expect to see major price erosions over the next year or so. So I believe that we're relatively stable with a little bit of an up notch in Europe, at least in Q1. Sounds like the manufacturing footprint, you're expanding a little bit. Mexico is going well, which you've articulated since the beginning of early last year. Now this new wrinkle with the inflation Reduction Act, where are you in that process? It sounds like strategically, you're in the mindset of building something for both optimizers and inverters in the U.S., maybe just level set us as to where you are in that whole planning process of the time line? Sure. So the first thing is, by the way, is that we're still waiting for the treasury notes about how to interpret this legislation. In general, we believe that operationally, we should make optimizers and inverters in the same place. It makes much more sense and here, again, the clarification of whether we will be allowed for the $0.11 or $0.065, we believe that we can meet the $0.11 criteria. This will be part of our decision whether we make optimizers here in the U.S. or not, because still making it â making optimizers without this legislation outside of the United States is going to be a little bit cheaper. So in general, we would like to do everything here, but we wait for the clarification. The way that we look at it is that we look at two routes that can be either separate or combined. The first one is a contract manufacturer, which is supposed to be a relatively quick win, meaning to go to one of our CMs to build the line there. That means that we can have products if this happens at the later part of 2023. I am not sure that it's going to be all the products that will be needed in the United States. We are also looking at setting our own factory, a Sella 3 factory in a way here in the United States and this is something that we're still investigating because one of the things that we do see and I must say that I've been spending some weeks on the road here in the U.S. for looking for manufacturing sites is that the art of making electronic manufacturing in the U.S. is a little bit long gone art here in the United States. And we go to places that used to see electronics manufacturing a few years ago to North Carolina and Tennessee and Texas. In some of these places â in some of these places, you don't see electronics made anymore. And when you go to a contract manufacturer, it seems that they have the knowledge, they have the ability, but actually you find that they also have difficulties in finding the right personnel in order to do this manufacturing in the U.S. In some of the cases, they have lost themselves the ability to do it and returning this art to the U.S. is something that will take a while. And this is why I am not sure that the full CM solution is the right one because contract manufacturers by definition would like to hedge all of their costs. And that means that you're taking the risk instead of them, you pay a lot of the CapEx and cost instead of them, and then you let them benefit from the fact that they simply operate the factory for you. So we need to analyze how it works. Both things will work and we'll have to evaluate. But in any case, I believe that once the interpretation will be out, we'll be able to announce what is the route that we intend to take. And it seems sort of like a nomenclature issue, right? They use the language of micro inverter specifically, would it be as simple as just labeling your optimizer as a micro inverter. I mean the name inverter, I don't think is patented. It's just sort of the functionality that's implied in that, but the optimizer does sort of have similar functionality, because there is a discussion point out there that it's very unlikely that they'll change language in the bill. They are just going to provide interpretation? Sure. So first of all, in the bill itself, there is a definition of what is a micro inverter. And the micro inverter is basically a device that has MLPE capabilities, module level power electronics that is fitting into a certain voltage range and into various operational methods, we meet this definition without the name micro inverter, and this is why we believe that we should be eligible to get this kind of legislation. It's not that you just said micro inverters without explaining what is it. We are looking actually for a clarification of whether we fall into this definition. Changing the name, we are a little bit attached to this optimized because this is the nature of technology. And I'm not sure that by just calling something a micro inverter will make it a micro inverter, but actually have the capabilities there. But I think that we work a lot with Sella 3 here, and I believe that it's for the best interest of the U.S. market actually to label our products also as eligible for the$0.11, and we'll see what happens. The only thing that will need it will be change the name. We don't have a lot of religion related to it, I just think that it will look a little bit ridiculous, but. Fair enough. Last question on this, and I'll move on. The â if you were to move forward with kind of that second route you mentioned Sella 3, what would be the time frame on that? So that's â it could be either end of 2023 or beginning of 2024, but it's usually not for â it's for start of production or not necessarily to have it fully ramped up because to have your own facility, by the way, just as to have a manufacturer facility will require a lot of labor to be trained. And usually, when you ramp up a factory, and I see it now in Sella 2 you start from one shift, then you seed the next shift and then the next shift comes and you seed the third shift that needs to come. So it's nothing that grows very rapidly. So I believe that start of production can be ramp up or full ramp up will take at least another year. And this is why, again, looking at a combined route of CM and own manufacturing, which are not necessarily contradicting each other is something that can work. So in all this commentary, it does sound like some of your costs are improving supply chain, while not out of the woods quite yet. You're starting to see a little bit of improvement there as well and then pricing is stable. It doesn't sound like we're going to see meaningful erosion, if any, this year. So, when we put all of that into the context of your gross margins, that's been a key focus for investors over the past year. Do you feel comfortable in getting back to that sort of 30% to 32% consolidated margin target you put out in previous Analyst Days? And is that more of a first half event, a second half event? Any kind of framework you can provide there? So first of all, yes, we feel comfortable. And I think that with the exception of the exchange rate of the euro that can change a little bit, but now it works back in our favor in the sense, plus the price increases that we have implemented, we believe that we should exit the quarter of 2023 with the target margins â gross margins that we've -- this day and by the way, we should exit the year with the operating profit margin that we set as a long-term target in the Analyst Day. I think our impact will be in 2023 is the mix, especially going to be the mix of batteries within the overall product mix and the mix of C&I. These are two products that have usually higher unit cost and lower gross margin. So it does, in a sense, dilute the gross margins, but actually have a positive an increasing impact on the operating profit margin, which is at least the area that we're looking. We're looking at how much money we're counting in the stairs, so to say, after we do our business and I think that we can be there. We feel comfortable. Can you talk specifically about the battery margins? I know you had that framework supply agreement with STI. You've added a new supplier, I think, out of China and then you've got Sella 2 coming online here in2023. Where are you with respect to battery margins in the context of your targets and then how quickly can Sella 2 change that? Sure. So first of all, our targets were 25%. In Q2, we said that we were at about 15% and we said that in Q3 it increased towards the 25%, but was not yet there. We view the 25% gross margin as a target and something that is achievable, but not just because of the fact that we have better supply or having Sella 2. I believe that when it comes to batteries, we are sitting somewhere on the curve of the elasticity of demand to the price. And we truly believe that by being able to reduce reduced battery prices, we can sell and move more volumes that will, in turn, increase our operating profit. And this is why the 25% target is there. I think that it will remain there because whatever we will be able to achieve more in gross margin terms, especially after having sell and some of the new supply. And also, by the way, again, because of the fact that you do see prices of materials getting moderated overtime, I believe that we will try to push this down as also maybe a little bit of ASP declines on battery alone in order to push more units into the market. So 25% is the target. Okay. And then, I waited until close to the end of the presentation to ask about FX, even though FX has been sort of the 1 question for two straight quarters. It was a headwind in 2022. It seems like near term, it's sort of turning into a potential tailwind. Remind us, you had guided 4Q under the assumption of 0.98 and now we're sitting at 105, 106. So, how much does each point again matter to the gross margins? And does this kind of puts you in a position where now that it's a tailwind, you're almost in a position to sort of beat margin expectations? So, given where we are on the fourth quarter, I'll be very careful in my answer here. But in general, the two things that we need to take into account is the fact that when we guided it was already in the middle of the quarter, and at that time, still the $0.90, $0.98 prevailed. So in a sense, it is sometimes not just where we are ending the quarter with what the exchange rate is actually what prevailed during the time that we shipped our product. And again, at least half of the quarter was at $0.98. We said that at the end of Q3, we said that in Q4, the impact of every - again, even every cent will be around 40 basis points and mix both of Europe and C&I. And again, this has had â had you had the exchange rates changing in the very first day of the quarter. So, in general, yes, it was less restrictive than it used to be before. We cannot enjoy all of the benefits, but we do enjoy some of it right now. And also and this is something that will head into more into 2023 and less related to 2022 is the fact that we have implemented price increases on mostly on new orders all over Q3, Q4 and now in Q1. So basically, we will also enjoy these ones throughout the year. So I think that this is something that adds to our confidence that we can meet the previously guided gross margins that we have said in the Analyst Day that at that time, by the way, it was $114 when we gave this projection. It was $114 per euro. And then, maybe just to wrap up the discussion here, because we're running up on time. I wanted to give you a chance to talk about some of the newer products. So utility-scale inverter. Is that something that's sort of newer in the portfolio? You've already had a little bit of traction, but maybe can you speak to whether you see any inflections in 2023, the markets that matter for you when it comes to that product opportunity? And then you also announced just this week some new M&A around the IoT side of the business. Maybe speak to that a little bit as well. Sure. So first of all, from inverter point of view, yes, our 330-kilowatt inverter that we have been testing for the last 1.5 years will be commercially available in 2023 and it's something that's supposed to start pushing us into the small utility. We will not do the 500 megawatts field it will be most likely to the smaller, I would say, up to 100-megawatt field. But this is a product that we do expect to see some traction and we already see a lot of utility installations that we do with our smaller products. So we feel very comfortable with this. And I add to this, the fact that today, again, not only we come with the utility inverter, we come with the offering of our own trackers through the SolarGik acquisition that we did last year and through storage capabilities. So definitely, utility becomes very interesting. We start to see floating C&I and floating utility systems. We've just commissioned another one of those recently, which is a huge one, and we see it as something that will very much advance us. As for the acquisition, I think that, that's part of what we've been saying for a period of time that everyone talks about energy transition and we say that we want to be an energy transition or energy technology company, and this is exactly hits the acquisition of our Hark that we're still waiting for some of the regulatory approvals to conclude it will allow us to go into C&I facilities and not only to generate electricity using PV, but actually look at the consumption in a very easy manner to get connected to the legacy energy management systems of C&I facilities to analyze them, to give a very clear visibility to the owners about what is the energy that is used, where is it going, what elements can be improved. And just by the way, testing the Hark system on our Sella 1 factory, we saw very nice amount of energy savings that we can do in a relatively new factory. And this is something that very much increases our C&I capabilities because not only now we can come with a solar system on the rooftop to increase the green production and also decrease costs. We can give a lot of insight about what is happening inside of the facility and how energy is being consumed and how can it be better utilized in order to better plan for the future? What is the PV needs, what are the storage needs and how this can play into a situation where you see utilities changing rates throughout the day and to make sure that we're also increasing the efficiency of these. So it is â if everyone talks about energy transformation, this is part of what we take as energy transformation capability. Okay. That's great. I think on that note, we'll wrap up this first session. I want to thank Ronen for joining us.
EarningCall_1397	All right. Good afternoon. I'm Jason Bazinet, Citi's Media and Entertainment Analyst. I'm very pleased to have David Gandler and John Janedis of FuboTV, CEO and CFO, respectively. I should have said that. Welcome, gentlemen. Yes, absolutely. I have got some questions that I am going to ask, and if anyone in the audience would like to ask a question, just -- please make sure you hit the button and we can have your question over the internet [ph] otherwise it will be a one-sided conversation [ph]. Well, I just want to start with like a real simple question in terms of competition. I mean if Iâm a consumer, what would you describe as the set of attributes that would cause the consumer to say, Iâm picking fuboTV over something else that might be out there in the marketplace? This is actually very good question. One, I think that can be answered sort of in 3 buckets. One is on brand. We have positioned ourselves many years ago as a leading sports platform. We have 50,000 sporting events on Fubo. On the second bucket, I would say it's product differentiation. We were first to market with capabilities like 4K. We're the only service that has a perpetual DVR. So you can save your famous moments from World Cups of past or Super Bowls, etcetera. We have features like Multiview which is one of the most talked about features. And then on the content side, we also differentiate with, we just recently announced our deal with Sinclair. We have, I believe, the largest -- or the greatest number of local sports networks in the market. So those are sort of the 3 vectors, I think, in which we truly differentiate. And all of this is supported by our -- the recognition we received from J.D. Power with the highest customer satisfaction. So product, technology and brand in short. Okay. Got it. Perfect. Thatâs great. And then how do you see Fubo role sort of changing over time? Is it just a function of these attributes that differentiate you in sort of getting that to resonate with the consumer and sort of taking share? Or are there other sort of bells and whistles or attributes that you see unfurling in the next 2 or 3 years? Yes. I think most people don't recognize the value of our technology stack. I mean we are truly a product and technology company first. We don't just deliver a video to you and collect your money and call it a day. I mean I've mentioned some of the capabilities we've focused on. We have a proprietary technology stack. We are very focused on artificial intelligence. We are releasing a 3.0 version of Fubo that will be tested first in France, at Maletak which is a very similar service to Fubo in the French market. So I think over time, we're going to continue to be a sports-first cable TV replacement service. That is what we are. We aggregate content. I think that aggregation is probably the key to success in the media landscape. We're going back to where we started. It's become clear that churn levels among plus services are continuing to increase. People are starting to deal with switching fatigue, their inability to discover content. And I believe that young companies are around to solve real problems. And this is a problem that I think we'll be solving in the streaming space. So thatâs sort of our positioning. And then beyond that, I would say the type of platform weâre building will really allow us to scale out globally in markets where you have a lot of local media companies that arenât able to derive value from the streaming side, in the same way that we think weâve provided significant value in terms of revenues for our media partners. Do you see sort of -- I think you can correct me if I'm wrong, please. Verizon was talking about its role in terms of sort of bundling mobile services with these apps and sort of presenting sort of the wireless offering with sort of just whatever it is, Netflix or whatever. Is there a role for Fubo there to sort of take your, sort of, digital linear experience and augment it with apps in a way that can play a role? Well, that I think is probably the most important piece of what we do. We are spending an enormous amount of energy getting people to stay on the platform for 100 hours. So if you think of Netflix as sort of the gold standard, I bet that people are spending maybe 30, 40, 50 hours a month on Netflix. So at 100 hours and 2 billion-plus data points that we collect, our ability to run hundreds of AV tests simultaneously, all of these things allow us to better understand our customers and to offer services. And one of the things I would say, the most valuable pieces of why the platform is so valuable is that you're actually amortizing the cost, your acquisition costs when you're able to add more services. So I think what you're saying is extremely true. Obviously, that starts with adding first the content. We attempted to do this, I'm sure there will be a question around this, gaming side as well. But I do anticipate that there will be opportunities for us to add advertising, for instance, capabilities such as if you're watching an ad for Buffalo Wild Wings, for instance, would you be able to order online given all the information that we collect. So there could be some, I would say, commerce point. There could be more content that weâre offering on an a la carte basis. And there could be other services that we can run on the back end as well, just given the amount of value that weâre creating. So certainly likely scenario. Okay, that's cool. So maybe I can dig into just the advertising opportunity itself. And I think there's sort of a well understood, sort of, split between what the content provider would get in terms of ad inventory and what the traditional cable satellite telco provider would get in terms of inventory. But if I remember and John, you can correct me if I'm wrong. I always seem like the ability of the distributor to sort of monetize the advertising was already always sort of impinged a bit because either there weren't enough local advertisers to fill up that demand or they couldn't stitch together enough aggregate, they couldn't aggregate all that local stuff to sell a national spot. How does advertising sort of -- and that opportunity fit into your overall strategy? Yes. So setting the stage, Iâve been in media my whole life. And so I have worked in everything from local broadcast television and local cable. So Iâll tell you some very interesting differences between what we do and what the old cable model is. So one is you may be aware that cable companies had head ends where they would carry -- I think you can only advertise at the time that I was doing this was on 40 networks. So thereâs a limited amount of inventory that you can actually insert into. Now that barrier is gone. We can have an infinite number of networks which as youâll see from most recent news, weâre continuing to add more channels. Two reasons why weâre doing that. One isâ¦ Yes, free ad supported television channels, right? One is because we have infinite capacity, we can actually monetize every available second. That's a very important component of why we think we can take our advertising revenue per user at ARPU to, call it, $15 plus, right? Again, looking back at the cable industry, they seem to have averaged in the $8 to $10 range with real significant limitation. So one is the number of head ends becomes infinite. The addressability those capabilities allow us to actually drive higher CPMs. And the fact that we can actually sell it, these are one-to-one ads, right, versus just a broadcast ad. And so there's a greater pool of advertisers that we can talk to. And I think the most interesting component of sort of advertising moving forward is that the local advertising base if you will, or the regional base is now getting access to self-serve platforms. So they can also participate in programmatic which we have yet to see. So all of this allow us to really tap into as -- call it as a cable replacement service, more networks, more capabilities, infinite number of fast channels, if that's something that we choose to do and a more inclusive base because they have more access to technology. So from my perspective, this makes it really -- and the last piece is because we're still heavy on sports. So you see higher CPMs. Yes. I would add a couple of things to that. One would be just simply in terms of our ad stack and our sales team. And I would say 2022 or last year was a year of heavy investment in both the team and also in terms of our ad capabilities. To Davidâs point, we have been historically heavily programmatic business. We have invested with a lot of sales more people in terms of sales team. Weâve doubled the sales of our sales team. The CPM from direct sales relative to programmatic is materially higher, so there should be a CPM tailwind from that. As it relates to CPMs more broadly, I think that weâre priced well in the marketplace. And so weâve historically said weâre calling the kind of low-ish 20s on a roll-to basis. I think thereâs an opportunity to take the tail higher which then pushes the overall CPM for the overall platform higher. At lower end. Yes, exactly, yes. And then I would also add in terms of your comments before around the fill rate, I think weâve been doing a lot of work on fill. And fill has, Iâd say weâre not always fully sold out but Iâd say the fill rate has been improving over the course of the year and we think that has legs to it as well. I would say -- I mean we said this publicly, I think in first quarter of last year is that we needed to make more investment, been greater investments into the technology -- the ad technology side. And we said that those investments would pay off in the back half of the year. Again, just going through our earnings Q3 numbers, you'll see that, that is exactly what's transpired. And then, I believe John provided commentary around what we were saying during our earnings call in terms of fourth quarter numbers and we felt really comfortable that we were able to continue down that path of strong revenue into the fourth quarter despite all the uncertainty that everyone else has been talking about. So I think the investment in technology and sales force -- Iâll just add one thing to what John said about sales force. Yes, weâve doubled our sales force. But again, coming back from cable, I can tell you, itâs not hundreds of people. Weâre talking about tens of people. So it wonât have a material impact on our cost structure. Thatâs right. And to Davidâs point on that front, weâre highly focused on the cost side from the sales resource perspective, that is a largely commission-based or as opposed to adding fixed cost. Right. And that $15 per number per user per month in advertising, that's sort of an aspirational long-term goal or is that something... Well, I come from the ad business, so I donât like to say itâs aspirational. I think itâs a doable number. Obviously, this is a longer-term number. I think if you back into where we are -- weâre sub-10, okay but well ahead of kind of where we were just 2 years back. So again, just the reason why I provided you the backdrop of where cable altered is because that should give you a baseline for what the ad revenue per user was in a platform that has significant limitations. Got it. Makes sense. A couple of the other management teams that have come through here and talked about it, they sort of say, everyone has been talking about this recession since March of 2022. And outside of digital media, we haven't really seen, so far, a lot of real disappointing ad numbers. But everyone on the buy side is just waiting for when the shoe is going to drop. Do you guys have a view, either a macroeconomic view or things that youâre seeing on the ground that would make either more or less cautious? I don't know that I have a pure macro view. I mean, I read a lot of the same things that you and your clients read. And so -- like when I talk to our sales team around, call it, the macro that is affecting us, what I hear is that the marketplace is for the most part hanging in there. And look, to David's comment earlier, I think that maybe we're a little bit positioned different, right? Meaning mostly live, 90% plus live, 96% or so of our subscribers are sports enthusiasts. As you know, that tends to hold in better when things are softening up a little bit or there's macro concern. And we also have a heavy news viewership which I think has also been holding in better. And then I would also say, adding back to my comment before, having a little bit more in terms of direct sales has also buffered us, I think, to maybe some of the macro headlines that we've seen out there. To my comment on the third quarter call, what I said at the time was that we saw a sequential improvement in our year-over-year ad growth from July and August to September. And then I think what I said was that we continue to expect solid growth, double-digit growth in the fourth quarter. And I think we feel -- I don't have the numbers yet, given that it was wrapped up. But I think we felt pretty good through earnings that the fourth quarter was shaping up well. Have I asked about, say, cancellations among other things, just to see what things feel like, I would tell you that from a cancellation perspective, weâre really not seeing much maybe like 1 or 2 related to supply chain as opposed to macro. All right. That's good. And can I ask some clarifying questions on that 90% of your viewing hours are live. Is there a way to frame that, either in terms of what you think live viewing is for someone that has a traditional cable package or telco package today? And what is -- I'll just start there. Like do you guys feel like you're massively over-indexing at 90% or if I just had a chart of subscription or an [indiscernible] subscription. No, I mean -- I think in my opening comment, I said we're a cable replacement service, right? And there's a value for this type of service. And so I think if you were a cable customer, you're looking for a similar experience, you have channels that you enjoy, whether it's ESPN or Fox News or whatever that you watch. So I think that's the type of service that people are looking for from us. Netflix, obviously, it's been viewing. So you're going to see that. But on the ad side, I just wanted to also clarify, demographically speaking, we skew younger than any virtual MAPD. Yes. So we are sort of, I would say, core users 18 to 49 but we skew closer to sort of that 40, 41 years old. So that's a very important demographic skewing mail, just again, just to highlight the sports component of this. And so that's probably the hardest to reach demographic. And so I think that we have some control over our destiny. There are lots of categories that are looking for this particular demo within premium programming. And the fact that it's on a connected TV makes it that much more valuable. I think on the shoe-dropping side, I think what you're going to see in 2023 is, of course, there's uncertainty for all of us, depending on how shallow or severe the recession is going to be. But it is a self-fulfilling prophecy that when you're a marketer and you see all these bad news, you quickly think, okay, I should probably pull back. So I would argue that marketers are going to pull back. They're not going to pull it out. But as they pull back, I think the requirement is going to be how do I measure attribution? So at the end of the day, the publishers or the media companies, whoever can actually demonstrate that this is working within the modeling characteristics that a lot of the CPGs or autos have, those will continue to have some budgets. So I think you're probably last to get cut. If you will. And I think the numbers around -- most recently discussed around Meta and Google losing their 50% plus market share should also give others comfort that there was actually a way to continue to drive some share. And I think thatâs a really important component, because advertisers are seeing thereâs probably more value outside of those 2 companies and theyâve been earning more than their fair share and have been charging more. So I think this actually is a good thing for the industry overall. The only thing I would add to Davidâs point, right, just going back to the demo for a second, differentiating and attractiveness back to the mouthpiece. Just for reference, I think from the data we look at, call it, the peer or competitive is about 10 years older in terms of demo. 10 year older. Okay. That's great. So you talked about your sport-centric customer base which makes perfect sense. I'd love to just go back to sort of I understand the logic of Fubo gaming but I'd love to just go back to sort of what was it that caused you to sort of retrench from that aspiration to sort of get more involved in online setting. Let me start with why we went into it. So look, the thesis is strong and it's to your question about -- or to your point around Verizon which is offering more services to people within a specific cohort makes a lot of sense because you can now amortize the acquisition cost, right? It's like the way I think about it is if you're an Uber customer, you no longer have to acquire a customer for Uber Eats, right? They're already have the app downloaded; it makes complete sense. And because we're spending upwards of what we like to say is 1 to 1.5x monthly ARPU, that's a decent number for us to acquire a customer with, we want to be able to maximize that. And so that was the genesis of why we should do this. So the sports-centric audience, the amount of video content we have, the increasing subscriber base that we had all made sense. And when you couple that with a macro environment that was conducive to finding efficient capital at no cost actually, free capital, then this made a lot of sense. The risk reward seemed to be where we want it to be. Fast forward 18 months later, because it takes time to sort of build out a lot of this get the licensing done, you have a rate environment that has completely flipped. I like to talk about it from a consumer perspective. I remember rates 18 months ago were in, call it, 2%, 2.5% range on a 30-year fixed, maybe just below 3%. And then when we decided to pull, we saw rates that were, I believe, either just shy of 7% or just north of 7%. And so that and being a public company, where everyone is focused on cash flow and profitability just didn't seem like the appropriate thing to do given our fiduciary responsibility to hundreds of thousands of shareholders. So that was really the decision. We were able to launch our service in New Jersey which was a bigger market. The 2 other markets were so tiny. It was really about trying to tweak the tech. But we have built up some strong technology and the ability to sort of combine those to the intersection of gaming and video. We did see directionally what we were expecting to see. But typically, when you're a smaller company or a start-up, you start to sort of tweak until you start to see the types of KPIs you're looking for. And we were up just there. We had just launched. We had about 7 days of data, maybe. And it was pretty much what we wanted to see. Unfortunately, the macro is the macro. And you just don't have the same luxury you would as a private company. So I do believe that what we already know and what we've already developed, I think there's an opportunity to continue to sort of play in that space, albeit not directly. But we can partner with other players in the space that are looking to access a subscriber base that is 100% into sports. And so I think that there will be a time when we can do that. Right now, we're in sort of conversations with different players. But as I think their marketing costs continue to increase and it's harder to reach users, I think they'll come to us. So we're in no rush right now to do anything but I do feel that we will take advantage of that space in due time, because we own all of the proprietary technology. And which for me has always been the reason why Fubo was so valuable is because weâve built up all the tech. And we are able to sort of control our own destinies and develop capabilities that we think will create value for shareholders, partners and customers, of course. You're totally right that the OSPs are grappling with their own free cash burn, trying to drive their cap costs down, talking about more the national ads to try and get their cost of acquisition lower. So... Yes. But on a platform like ours, I mean, think about it, just kind of look at the calendar sporting event. So you have college football championships early January. So people are betting on that. Then you have the Super Bowl. So you have to go out and remind everyone, "Hey, don't forget to place your bets," right? Then you have March Madness. Another 3-week run where you have to remind people to go place a bet. So that most customers based on our research have 3 to 4 OSP apps. And theyâre playing off the different promos. So you can, on one bet against team A and on the other one, bet against team B and you always come home with a win. Itâs actually quite interesting. So for those that understand how the promos work, youâre always making money. And so for me, when you integrate bedding, you donât actually have to go out and constantly remind people to place a bet. Theyâre already in the environment. Theyâre in the mind frame. They are either for team A or for team B and you can actually start to leverage the casual better which is really, I think, the entertainment value that I thought we were going to be creating by continuing down this path. So there were some retentive value as well in that, so -- but itâs an interesting time. Not directly. When we had our Investor Day back in August, we had already announced that, that business was under review. And so when we gave out our targets out to â25, call it, we had excluded the gaming piece of that because it was unclear where that was going to land, where we were going to retain it, where weâre not going to retain them. So the short answer is that itâs in our model in terms of the savings were already there. But again, they are not insignificant. Okay, all right. Okay, that's great. So in terms of your 2025 targets, you guys pointed to expanding your ARPUs from about, what was it, $73 in '21, was it $95, is that right, by 2025? What would you sort of give investors sort of the bullet points underneath that delta between $71 and $95 that's going to allow you to get there? So there are a couple of things I'll start with and maybe David will fill in some blanks here. So over time, we just talked about, call it, the out-ARPU piece. And so we think there will be several dollars of that ARPU increase. And so call it $5 to $10 of that ARPU over the next 3 years but we expect to be able to take it out of the marketplace. The second thing is we intended to believe that we have pricing power. We get questions every now and again around do we have pricing power given the competitive set. And we -- our most recent price up was earlier in the spring. We priced at $5 for our lowest-end package. And I would tell you that the churn is off of that was below expectation. And then on top of that, was there a talent to potential churn off of a price increase. And we've also said that in the third quarter, we had our lowest churn in the history of the company. And so we think there'll be a combination -- as a result of that combination of price increase at ARPU. And then also, we've done a lot of testing. And David mentioned AP testing. We do a lot of testing around our different packages, right? So we have, call it, 3 packages, our Pro, Elite and Ultimate. And what we've been doing is preselecting these premium or higher-end packages. And we've also seen a good take rate on those. And so that also kind of layers in on top of that an upward pressure organically, if you will, in terms of new subscribers. I think somewhere in the range of around, I think we said a few months ago, most recently about almost half of our new subscribers are coming in at these premium plans, that will also be a tailwind. And then we have also attachments, whether it be, say, some of these premium services that are owned by some of the conglomerates that was also add to the ARPU. Half your new subs coming under these premium plans. Why that seems to counter intuitive given, I donât know, all the inflation duress andâ¦ So I think the 2 things I was going to add which probably align with your question, is the nature of our program. So we are heavy sports oriented. And so when I think about pricing, I think about it on a relative basis. And so if you think about who's left in the cable sort of ecosystem, it's people who love sports, right? And then, if you think about other virtual MVPDs or other streaming services, there is a price ceiling because more than half of their customers are general entertainment customers. The reason why people left cable was because they didn't want to pay. They felt that sports was causing the increases and so they wanted to leave. And here we are with Netflix today. In our situation, almost 100% of our base watches sports. So we've actually raised prices from -- I think it was $6.99 back in 2015 to now upwards of $65, right, on the base side. So that's one. I think that on a relative basis, we have more pricing power because again, as we add more content, our customers are saying, wow, he's giving us more, or they're giving us more sports for our money. So we like that. The other thing is having everything in one place. You're reducing the switching fatigue. People can't find content. Amazon, Thursday Night Football, I think is the, I would say, the perfect example of why we belong in this industry. I can get into that in a second. But the second thing is that I remember when we started raising prices in like '17, '18, I remember people saying, you know what, I'm going back to cable. Because they were like, why, if I'm going to pay more, I might as well go back. The reality is, I was thinking about it over the break, if we had pricing parity, not saying we ever will but I'm just saying that in a theoretical scenario, if we were $120 of virtual -- not Fubo but a virtual MVPD was $120. Would you ever say I'm going back to cable? That's the question that I had. The answer is no. So I do believe there is some pricing power there. I do believe because we're sports-oriented, we have more pricing power. And the third thing is the Amazon point that only people that are, I would say, investors that are given Amazon the benefit of the doubt, they'll say, well, the schedule was weak. Yes and no, the schedule was weak. But if you look at the local ratings for those same games, yes, there were several games, I think, several weeks where the ratings came in but they immediately bounced back. We didn't see that bounce back. And so I believe that there is something called switching fatigue where, at some point in time, the cognitive load required to go into another app to go set that up, to then wait until there's a commercial to have to bounce back out almost negates the value of actually going in. So there has to be an aggregated version of something like a cable bundle in the streaming world that has greater data and greater discovery. So from my perspective, I think that the ability to go from 70% to 90% plus -- as John stated, I think, is doable, just given from some of the things that we're seeing on our end. Right. I'm excited. So one thing I just comment on -- just your last comment on Amazon. I'll take the other side which is I think part of the reason why Amazon has Thursday Night Football is to drive Prime subs. I don't think they care about sports, I don't think they care about streaming. I think they care about getting people into Prime because they find that a Prime user is incredibly valuable purchasing paper towels and whatever. So, I think that's -- the motivation may be different. Same reason why they spend, I don't know, $1 billion for the Lord of the Rings or whatever, like I think they just want to drive prime itself. That said, you now have Google throwing their hat in the ring that they want to go after sports. And so I guess I have a bunch of questions but my main one is, when you think about the value of that sports franchise, it's incredibly insightful the way you said Netflix was created because there's a lot of people who don't want sports, who don't want cable. So that's very insightful. First question is, now that Netflix -- and I'll throw Apple into this as well, now that Netflix and Apple have those huge installed bases that don't have sports, why won't they -- either why don't you combine with them? Or like why won't they become a challenge to part with that one? So first of all, I will agree with you partially on the Amazon piece, on the -- I would say, on the latter point where they don't care about sports that I will agree with you all. Where I challenge you and I will challenge anybody here or on the phone, is you tell me the last time you met a person that said, "hey, I'm getting Amazon Prime because they have the Thursday Night game." Most people already have Amazon Prime. And if you ask anyone, I'm sure if you survey anyone, why do you have Amazon Prime, they'll say it's the delivery. So I'm not sure that Thursday Night Football is driving anything. Now if you would say to me, if it was a market like India or something, yes, I believe that, that is actually possible. But in the United States, there is no reason that, that game is there. And one of the things I said in an earlier meetings is why do people invest in start-ups and how do VCs think about start-ups? Really one reason, is there a need in the market for what you're doing? And I would argue there is no need in the market for a one-night game that is out of right field, on an app where people don't really care. Hence, maybe the reason -- I don't want to turn this into an Amazon call. But maybe that's the reason for the sports app. So -- and then on the second point you made on Netflix and Apple. Well, I'll start with Netflix. Netflix -- so we said the reason why Netflix exists is because people didn't want to pay higher prices for sports. I think Reed Hastings has said, "I'm not sure what we can do for sports." Now I take that with a grain of salt because he also said I'll never see advertising in our service, we have it today. So my sense is it's in a very expensive game. And to your point is that if it's that expensive and no one cares about it and they're all overpaying for it, then I don't think that's Netflix's business. And also there I think they're doing quite well as it is relative to every other plus service. I'm not sure that this is a necessity for them. Of course, they're going to dabble and look at it. I mean I would argue that you should always be looking at everything in terms of video if you're in the space. In terms of Apple, I go back to my points on Amazon. I mean, they're an ecosystem, they want it. The question is, will you sell the 150 million in 1 device because you have sports? I think they can extract positive economics any way they want without actually having ownership. I'm not sure there's any value that's being created. Look, everyone is looking for ways to differentiate today. And I think all of this is actually good news for us because the more fragmented things are, the more likely it is that people will say, again, I go to my switching fatigue point is that, you know what, I get 80% of the content in this one place. I love the Multiview, love the FanView, love the 4K, I love the discovery, I love the perpetual DVR, I love the apps, I'm in and that's it. So I think we're getting to a point in time where the conversation around sports moving to streaming, we were just saying it earlier, it already -- it's being streamed. It has been streamed since 2015. So it's not like sports is going to streaming, wow. It's really a case of like where is it most suited and most valuable. But on the last point you made, why don't you combine with some of these guys. Obviously, that's not something that we talk about. I think we can be a very strong player independently over the next few years because I think the market is actually coming in our direction. There's been a lot of uncertainty and you've seen a lot of changes in media over the last 18 months, as you said, YouTube picking up this peripheral NFL package. And you've seen other moves by other players and combining different media assets into one and pricing promos at $1.99 advertising and in Netflix, all of these things are happening relatively quickly. But I think ultimately, we're going to go back to where we started which was like I make money on the bundle, customers are happy, shareholders are happy. And so I'll leave you with this comment. COVID helped companies like Peloton and Fubo and Netflix drive subs. I will say that the recession will help us in rationalizing our cost structure and helping our counterparties rationalize their businesses which, obviously, the plus world doesn't make a lot of sense for reasons we all know: High churn, low prices, maximum output, hit rates that are below 7% for TV shows. And just the marketing costs of having to market every single program, it's just -- it's insane. So I think that our goal is we have a 2025 outlook that John presented and our goal is to sort of stay within that. Obviously, there'll be some noise quarter-to-quarter but I think over the long term, we think we're, again, positioned well relative to where everybody else is. And the type of platform we have which is platform-agnostic and completely software-driven. So just one final question. Of all of the 2025 goals that you guys have articulated, am I right that the street cares most about free cash flow breakeven? Thatâs probably fair, I think to Davidâs comment earlier, we all havenât talked about and youâve written about this just in general, around the cost of capital and the need for funding, right? And so ultimately, I think, for us, getting to that air point of sub-funding in â25, I think is really important. And to Davidâs point, I think we feel pretty good about being able to get there.
EarningCall_1398	All right. We're really excited here, Umang and myself to welcome Ezra from EOG to this conversation about balancing growth versus free cash flow generation. Ezra, thank you so much for being here today. Yes. It's nice to see everyone, and a lot to celebrate over the last year in the energy sector and hopefully more to come. As we think about EOG, what do you think is underappreciated in the conversation, in the stock and in the value of the business right now? Yes, that's a good question. That hits right at the meat of the matter. I mean, I think what you have with EOG is, we have a very [Technical Difficulty] the rest of the E&P space here. It starts with our multi-basin portfolio. We are -- we see a lot of advantages, a lot of leverage to being able to build and work across multi-basin assets base. That base has been created dominantly organically as well. It's taking information and technology that we have from one basin, applying it to the next. And then as we develop new technologies in the new basin, we extrapolate those back to the previous basin. Much of that inventory has been discovered and found and based and the investment decisions are all based on our premium pricing deck. That deck is a $40 WTI oil price and a $2.50 natural gas price for the life of the asset. And so, as we add new plays, new exploration areas, new basins, you think about that is that we're only adding things that are additive to the pre-existing inventory. And for us, it's not inventory unless it makes at least a 30% and dominantly right now, a 60% direct wellhead after tax rate of return based on that price deck, $40, $2.50 natural gas for the life of the well. I think that's the first thing that's underappreciated. The second thing that's underappreciated is the fact that we support that by being a low cost operator. And we really do that on two ways. We focus on it by utilizing technology to increase operational efficiencies, so sustainable well cost reductions, that's just less time on location is essentially what it comes down to. Drilling, keeping a bit on bottom, not having to make trips. The second thing we do is, we strategically look for opportunities to bring different pieces of the value chain in house. Historically, we've done that with sand, chemicals, water, recent years we've been doing drilling mud and more recently things like drilling motors. The third piece of differentiation for us is our financial policies, our cash return strategy. We're still focused predominantly on the regular dividend. We look to increase in a sustainable manner the regular dividend, because we really think looking forward that's the hallmark of a great company, not just in the E&P space, but across the broad market. That should be telling the investment community what we think the increasing and ongoing capital efficiency of the company is. And we're proud that we're able to raise that 10% this year again. On top of that, we've made a commitment to return a minimum of 60% of our free cash flow every year. This year, we're on track to exceed that. We're able to return just over $5 billion to the shareholders, inclusive of the regular dividend. All of that is also supported by what I think is industry's strongest balance sheet. We have a strong cash position, very low debt. And that provides us a lot of counter cyclic opportunities to make investments that otherwise we may have to think twice about. We're a safety and environmental leader. We're utilizing technology to drive down our emissions intensity. We're using technology to use things like carbon capture and storage pilot project that will be starting up this year. We've instituted some new technology called closed loop gas capture to eliminate flaring. And we also just announced and our rolling out iSense, which is some continuous methane monitoring across all of our assets. And the thing that really is our competitive advantage that really makes us special is our culture. This is ongoing for 30 years now to create a decentralized entrepreneurial, really business minded interdisciplinary group of employees that work and live close into the field where we have our assets. Those are the things I think are really underappreciate and those are the things that really create a very interesting and unique value proposition for the investors. Thanks, Ezra. Let's start on the macro. And I know EOG over the last couple of years has really started to build out some organizational capability around forecasting commodity price and scenarios. Talk about how you're looking at the oil balances in 2023? Yes, there's a lot going on, but at the same time there -- you can boil it down to kind of a few things. We entered this year looking at the operational capabilities of the U.S. to kind of build a model on U.S. growth. We looked at supply chain constraints that were out there. We looked at rig utilization, frac utilization, things of that nature. And we forecasted that growth would be significantly muted from where itâs historically been and that's what we see coming up. And we're kind of looking at that same type of direction going forward into [2023] (ph). On the global scale, on the real macro though, the things that are moving forward that we're looking at, and there's a lot of the stuff that we talked about on the last call, not a whole lot has changed quite yet. But obviously, the Russian sanctions, how are those really going to play out? So we've got crude sanctions in place now. In the first part of February, we should have some product sanctions that we think will have a bit of a bigger role. And then obviously, another one on the supply side, we've got lower U.S. growth, but ultimately the SPR has been a very, very big driver. When you look at what the SPR has done, we're basically at the same level of inventory where we were roughly a year ago. But the SPR has arbitrarily added about 650,000 barrels per day on an annualized average. Now all that really came in the last six months of the year, so basically 1 million barrels a day, and that is finished. There is a small release here, there are a couple more small releases. Predominantly the majority of that is going to be done. And so, on the supply side, we definitely see some tightening. Now on the demand side, it's a little more difficult to see. We'll see what happens with the recession. A year ago, I think many people thought we're going to be here by now. We'll see how the recession plays out on demand. What we've seen over the last, I would say, four, six quarters is that, dominantly energy demand use has been pretty inelastic with recession fears. But then the second one, the big one is China demand and China recovery. With zero COVID being taken off the table now, I can't tell you when China recovery is going to come back. I assume it's going to kind of ebb and flow. But I think it's safe for all of us to assume that China demand is going to come back. And so, what you see is, going out throughout this year while the front months are showing some lower pricing due to what we think is the inventory levels, heavily influenced by that SPR, you're going to get to a spot this year where we're forecasting pretty tight supply and demand balances. [indiscernible] How are you thinking about the setup near term, especially after the weather really spoiled the gas party basically? And then how do you balance that versus your organic growth plans for 2023? Yes, we're very well positioned on the natural gas side with Dorado. And I'll get back to that in a minute. But on the macro gas side, yes, gas is always difficult, right? Because you have to work up your oil macro first, so you understand what's happening with associated gas. And then ultimately, you need to come to what does the weather look like, which is a difficult thing. So as we sit here today, obviously, prices pulled back pretty dramatically in the last month. And a lot of it has to do with two drivers. The first, obviously, it's been a warm start to winter. That's the first thing. The second thing is, not unlike the SPR, but you've arbitrarily had two Bcf a day kind of taken offline for the last six months with the outages down along the Gulf Coast with [Freeport] (ph). That should come back online. So you're going to have right off the bat two Bcf a day that comes back online and helps demand. And then the other thing that I think we all need to keep in mind and we're watching this, we're modeling this is, really what presented itself this past year and especially in the summer has been gas to coal switching and what the relationship is there. Not only has the U.S. retired, ultimately a lot of coal fired generation -- power generation. But you've got an increasing power generation demanding natural gas in light of that also. And this is power generation that renewables can't keep up with. While you've got that going on domestically, abroad you've got increased use of coal fired power generation. And that's really disrupted or altered is maybe a better word for it, the actual trade routes and trade flows for coal. So now we've got a higher coal price. It's come off a little bit from the summer, but still [Technical Difficulty] exporting a lot of coal, plus you got the ultimate [Technical Difficulty] we sit today with gas basically at about the five year average gas price somewhere at the $3.70, $3.75 range. I'd say we're constructive on 2023 and then I would say we're bullish on â25 and beyond. And that's because of the increased demand coming along the Gulf Coast for the increased LNG that everybody's been well aware of. For us, how it affects our capital allocation. You know, Dorado is a natural gas play. We discovered, it's Austin Chalk, upper Eagle Ford and lower Eagle Ford there in South Texas. We've been drilling it for a few years now. We're about 50 wells in that play and we have -- what we think is identified over 1,000 locations. We think it's got the potential to be 20 Tcf ultimately recoverable. If you think about that 20 Tcf number, one way to do the simple math on that is, that would be a Bcf a day produced for 50 years. So it is a world class resource. The finding cost competes with some of the lowest cost gas in the U.S. And obviously with it located in South Texas, the transportation fees are going to be very, very low. It's going to be better positioned to take advantage of the major demand center in the U.S. which is along the Gulf Coast, not just LNG but also petrochemical. For us, that's not -- it's a play that eventually we'll be able to flex on really quickly, right now it's so early. We're honestly still making progress on completions designs. We're still building out some of the infrastructure, sand, waterline, things of that nature. So for the next couple of years, it'll be really investing in that play with two kind of bookends on it. The first is, when would you end up overcapitalizing that? Well, for us, that's simple. It's the same as any other portfolio or any other asset in our portfolio. You overcapitalize the minute, your returns start to decrease or your finding cost starts to go up. That's a simple way to look at it. All you need to do at that point is just pull back a little bit, allow that theme I talked about, the culture of our company, allow them to understand what they're doing, allow them to catch up, give them the tools that they need to either increase that well productivity or drive down the well costs. Now that's on the overinvestment side. Now on the underinvestment side, that's a risk too. Because think about what I just talked about, the culture of our company, it's continuous learning, its continuous improvement. And so, you need to fund each of these assets to a degree so that they're continuing to build out infrastructure, learn about the rock, learn about different landing zones, how to complete the wells and ultimately continue to not only technically learn, but also move further down the cost curve due to capturing the economies of scale, which is always an important thing in these unconventional plays. So given where gas prices are right now and I agree with you that Dorado is very much low on the cost curve. But the long term outlook for gas prices are much more robust. What do you think about pulling back [indiscernible] what gas price would you say. Like, you know what? These assets are much more valuable if I break them on 2025 versus in 2023. Yes, so the premium strategy of the company. It's an amazing thing to think about. It makes us somewhat agnostic to the actual gas price, because we're making our investment decisions based on the $2.50 natural gas price that we run internally. Those Dorado wells, we have line of sight that they'll be generating double premium returns. Which I know everybody thinks double premium is really funny. That's just how we talk about it internally. It's a 60% direct after tax rate of return on, in Dorado's case, that $2.50 natural gas price. So the ultimate thing when we think about capitalizing these projects, Umang, it gets back to the fact that what is the right amount of capitalization for it? First, obviously, you need to look at the macro. But like you said, we're assuming longer term outstanding growth and the market needs the molecules. So then it really does come down to the fact that we want to make sure every single year that asset is continuing to improve. Now it's just $0.01 for Mcf is improvement on that finding cost. So the many you start to go the other way while you could still be generating upfront really high cash returns, those higher costs are going to stay with you. They're going to go into the cost base of the company. They're going to end up raising your breakevens. And we all know that times are good in cyclical businesses, but they don't always last. Things go the other way. And at EOG, we're focused on shareholder value creation through the cycles. We've done a lot on focusing on this premium price deck, basically taking pricing control into our own. A lot of people say that our industry are price takers. What we did is, we basically turned that on its head and we said no, we're going to go ahead and make our own price, we are going to be a price maker and we're going to make our investment decisions based on this price, because we think this price is not sustainable through the cycle. What that means is, we've done as much as we possibly can to decouple ourselves from the inevitable commodity price cycles even though we're an oil and gas company. That's what we do. So in the next 20 minutes, Ezra, let's spend some time talking about the assets and then spend some time talking about capital returns and capital allocation. Just to start on the asset, one of the things we've done with some of the producers is, as the CEOs talk about the walk from â22 to â23, recognize many of you are going to provide official and fine tune guidance in the couple of weeks. But what kind of bread crumbs can you leave us with as we think about â23 off the â22 days? Yes, I think part of it goes back to our story being a little bit different, the fact that we do have multiple assets across multiple basins. And so, when you think about that, part of the way to think about our structure is, where are each of those assets in their lifecycle? So we start with the Utica. The Utica is very early on, so we're still doing a lot of delineation there. We'll be doing some spacing tests, things of that nature. So we talked about on the last earnings call, we'll be drilling roughly 20 wells there is what we anticipate doing for next year. In Dorado and the South Powder River Basin, making fantastic progress there. We don't have all the infrastructure, not necessarily gas takeaway and things like that, but again, sand, water, things of that nature. We understand spacing. We're making -- we understand landing zones where we're tweaking those in combination with the completions designs. Both of those, you can anticipate should be seeing a little bit more activity from what we saw this year. But again, those are at that critical point where you want to make sure that you're not moving too fast. They're what we internally refer to as emerging plays, not an exploration opportunity, but they're emerging, they're headed towards one of our core assets. Obviously, right now, the Permian is core. The Permian is in the sweet spot. We've got our infrastructure. We've got over 5,000 vertical feet of productive opportunities across six different play types. We probably have something like 20 different landing zones in there depending on where we're at geologically. We've got a large asset team out there that lives and works in Midland. They tear apart the data every day. They're planning each of the wells, not through manufacturing mode, but actually looking at the geology, looking at each drilling unit individually and figuring out what the best spacing and targeting is to kind of find that balance between returns and ultimately NPV. And so that one, the thing about the Permian right now though, when you transition from â22 to â23 is, things out there are very tight. They're expensive and they're tight. And so again, we like the level that we're working at. We'll probably -- we've talked about carrying a pretty consistent activity level across the year. And part of that again goes back to -- pricing is up right now. And so even though well costs are up with the inflationary pressures, you still got expanding margins. Why don't you lean in a little bit harder? Well, that is taking the last six years' worth of premium drilling and discipline and throwing it out the window. We want to remain disciplined and move at a pace where even though we've offset a lot of the inflationary pressures out there, we haven't been able to offset it all. And we have been able luckily to increase the productivity gains in some of our wells, which helps to offset the well cost and continue to lower that finding cost and that's what we really want to stay focused on. So pretty flat activity level is probably, let's say, forecast there. And then lastly would be some of our longer -- the assets that are a little bit longer in the two, like the Eagle Ford. The Eagle Ford is not really a growth asset anymore. We've slowed down there. We've put the sales roughly 100 to 125 wells per year. But the amazing thing about the Eagle Ford is, and this is a great example of what happens when these assets kind of go through this life cycle I'm talking about is, it's not unlike the Boston Consulting Group chart where you end up being at cash cow. In the Eagle Ford, even though we're drilling less productive rock than we were six, seven, eight, nine, 10 years ago, in the last two years we've actually turned in the highest scorecard, the highest rate of return results than we've ever had in nearly 15 years of drilling in that asset. And even though the wells are less productive, the well costs have come down significantly. We've learned more about the asset. We've been able to put in infrastructure. Things like water reuse, localized sand, things of that nature do a lot to save not only an operating cost but upfront cost. The last year, if we think about the cross side of the equation, last year if we think about the opportunity set, you talked about super zippers, you talked about moving to longer laterals. There were some secular drivers which could improve the cost structure down. When you think about 2023, what are the things which you're evaluating in a toolkit which can help cost come down as well? Yes, this year -- last year we did make a big shift into zipper fracs, which saved -- yes, super zippers or whatever we need to sign more fracs, whatever they are called. But yes, we made a big shift there and that helped to offset quite a bit. The other thing we did though is, we were able to just actually spend less time on location. Drilled times went down across the board. This year -- every year we have incremental gains like that. This year we're going to lean in on some of the things and they'll be probably to a little bit smaller of a degree, but they'll still help offset much of the inflationary pressure that's out there. Things like drilling motor, our drilling motor program in which originally we took drilling motor kind of QA, QC in house. We've taken out a bit step further. And the big thing about drilling motors is making sure especially in these longer laterals, when you start drilling fast, when you start drilling a two mile lateral in say seven days. If the motor dies when you're in the middle of the lateral and you have to trip out, it's potentially a 12, 18, 24 hour trip time on a seven day well, that's a lot of added costs. It's not just the cost of the motor, it's actually that time on location. So motor program is going to pay off to be a big one here for us in the future. And then we've got some other things like drilling mud. We continue to optimize not only the mud properties that we have, the chemical properties where we need to use, let's say, the [indiscernible] of mud and where we can get away with a little bit cheaper of a mud system. But most importantly is, balancing out the right mud weight. Too much mud weight, not only will break down potentially formation and lose that mud, and mud is made out of oil. So I guess expenses, especially when you're trying to make oil. But the other piece of it is the higher your mud weight, obviously, slower they're out there drilling. So those are some of the tweaks we'll have. Right now, we're forecasting potentially another 10% increase on the inflationary pressure on the well cost side kind of going â22 to â23. Great. Let's talk about some of the assets. You unveiled the Utica recently and we talked a little bit about it in Texas a couple weeks ago. And at first, I think the investor reaction was, is this a gas plan? I think you've clarified, it's actually a liquids play. And given Utica was a little choppy before, what gives you confidence that this time is different? Yes. We've been looking at the liquids fairway here in the Utica well for a number of years, kind of passively and monitoring some of the activity, not only going on in the deep part of the -- hot part of the gas window, but also as you come up into the condensate, you can get close to the liquids fairway. And what we've noticed there is, there's a lot of upside to be applied on the completions. And it's a lot of what we've learned from mechanical stratigraphy of working recently on plays like the Wood Ford, the continued progress we make in the Eagle Ford and some of the work that we're doing on the Leonard Shale or the Avalon Shale. And once you understand kind of the subtleties in these shales and how the GM mechanics work, that introduces landing zones to you and you can combine your completions technology. And we're talking about things like cluster spacing and stage spacing and diverter and the way you're pumping your sand and water, these things that have been talked about in the past. And when you apply those, you can really start to get some upside. We have some proprietary software in-house that we've developed. It's reservoir modeling -- that when you put in the geo-mechanical parameters, the rock type, the processing and permeability, how it's going to break and combine that with some of the completions technologies, you can really start to get a forecast of what you think the well will do. It's basically a predictive analytics tool. And that's what we started using in a lot of our exploration plays, but that's where it really panned out in the Utica. Now the nice thing about the Utica is, there is enough activity up there that we've been watching people drill. We've been watching people land their horizontals, we've been looking at how they're completing the wells. And we've been able to confirm and prove up this forecasting tool that we have. And that is ultimately what gives us a lot of confidence on where that play is going. It's not like the depot Utica. It's a very benign environment. It is overpressured, but we feel that we'll be able to drill three-mile laterals as a standard. Many operators are already doing that. Completions designs are right in our Bailey Wick like I described with the shale structure that it sets up. We have two slightly different geologic environments to the north, it's a little bit thicker, to the south, it's a little bit thinner, but you get more robust frac barriers. In the South, we also -- over the entirety of the trend, we have about 400,000 acres under lease, it's about 200,000 acres in both the North and South. And in the South end, we actually have purchased 120,000 acres worth of mineral rights, which also gives a massive uplift, not only to wellhead rate of returns, but really through the cycle kind of full cycle returns. Going back to your base assets, including the Delaware, EOG historically has had premium levels of productivity. You have seen competitors catch up to you as natural, right, because just the life cycle, how are you seeing the productivity as you compare to your peers into '23? Yes, a lot of it kind of depends on where you're drilling. The first thing to keep in mind about the Delaware Basin is, the difference is from west to east. On the West side, actually, we call that even a combo play, similar to what we were just talking about in the Utica. We've got a Wolfcamp and a Wolfcamp Combo play in there. And it comes back down to the ultimate reserves, how much of it is oil versus oil NGLs and natural gas. And so, when you're looking at productivity, we need to keep in mind a couple of different things. Where are you actually drilling in the basin geographically? And then what are the specific landing zones that you're looking at? For us, we still feel very confident on what we're seeing with our well productivity, our capital efficiency in the base. I think a lot of that -- since that is the main driver for us, you can see that evidence last year on our quarterly performance as far as production and CapEx spend is that everything fell right in line. With regards to the peers, there are a lot of peers out there, and it kind of depends on where you're at. A lot of the wells that are being drilled now are dominantly being operated by independents with acreage and not necessarily the same areas as our Red Hills acreage or anything like that. And the peers that are closer by to us, you just need to look at the different landing zones, the different spacing, the co-development that's going on, because each of us has a bit of a different kind of technique on how we exploit the resource. For us, as I said, our team is focused on every -- each and every drilling unit trying to co-develop and we've been doing this for years, co-develop those targets that are going to be in geo-mechanical communication with one another. And we do it in such a way between spacing, whether vertically or horizontally such that we can optimize returns and NPV of those drilling units. We don't want to leave anything on the table by spacing the wells too wide. At the same time, we don't want to start to erode the returns by spacing those wells way too close. Yes. Let's go back to Dorado. It's a very interesting play. How has the productivity and cost trending to your internal expectations for 2022? And then when you think about Dorado and how it fits into your energy strategy, which is obviously increasing over time, can you maybe expand a little bit on that? And how do you think of your LNG strategy evolving as well? Yes. Yes, it's a great question. So Dorado in general, and the reason I say it's going to command more capital in the coming years is because, the performance on the learning curve has been moving faster, at a faster pace than what we've typically seen in a lot of our, let's call them, again, emerging assets or emerging plays. Our asset team down there has done a great job reaching out across the other basins and basically borrowing every good idea that they've seen out there and implementing it as quickly as possible, which is kudos to them for being interdisciplinary and looking out there and keeping an eye on what else is going on in the company. Well costs have come down. We've done a tremendous effort on there, even though -- well, I should say operational efficiency is coming down, drill times are coming down significantly, it has been difficult with a limited program down there to be able to offset some of the inflationary pressures. And then on the well productivity side, they're fantastic wells. It's amazing the productivity of these, and dominantly, we started out drilling on the Austin Chalk knowing that we had potential in both the Upper and Lower Eagle Ford. Honestly, I thought it was probably going to be a couple of years before we got into co-development down there. And credit to our team, again, the asset team and the frontline employees. There are some areas where they're already -- they've already moved fully into co-development. They're already drilling Austin Chalk, Upper Eagle Ford and Lower Eagle Ford, like I said, probably at least a year before I really thought that we would be there. So if we go back again to what we talked about briefly before, we think it's some of the lowest cost gas, especially to the Gulf Coast with transportation and G&P really across North America. So it's not just how does it play into our LNG strategy. But really, how does it play into the U.S.âs, North America's LNG strategy, because it is a significant resource located in a great spot for it. If you guys recall, we were some of the first movers here in getting some LNG agreements done. We're currently -- we currently have exposure to do140 million a day on an LNG contract, where it's a gas sales agreement. We sell right there, FOB kind of at the dock. And so we don't have any risk. We don't have any exposure to buyers overseas or anything like that. But we are seeing some upside to the pricing. And that's actually with what we saw over the summer, obviously, it's actually showing up in our realized pricing, which is fantastic, it's great to see. And we started negotiating that contract probably about four years ago, honestly, right, when we were kind of early on exploring in Dorado. Since that time, about two years ago, we actually negotiated an extension and expansion of that contract, and that's the one that we announced earlier this year. Again, it's similar. It's a gas sales agreement, and it takes our total exposure on the LNG side up to 720 million a day. And that's commensurate when Sage 3 starts up with Cheniere in Corpus. And we'll have a couple of different pricing contracts on that. We'll have 300 that's getting exposed to international pricing. And then -- I'm sorry, 420 that gets exposed to international pricing and then 300 that's getting exposed to the domestic pricing and getting shipped offshore. So for us, when we look at it, LNG is another way to diversify our exposure on our marketing agreements. And whether it's at the corporate level or at an asset level, one of our strategies is to be able to sell all of our gas and oil into multiple markets. When you think about us at the asset level, we do all of our in-basin gathering, we usually deliver it to a sales point, and that sales point will be an area where we've got two, three, four multiple markets that come in. The reason for that is, we do think that arbitrages are created, and we don't want to have to try and chase arbitrages. We want to be able to be exposed to the arbitrages when they present themselves, because we think the market is pretty efficient, and they won't last for very long. It also allows us to bypass any bottlenecks or downstream interruptions. So part of our strategy is really to have control and diversification, not only diversification regionally or geographically, diversification of product type, but also diversification to the marketing exposures, what we're selling into. And we consider LNG to be the same type of strategy. So Ezra, when you roll this up, you've walked through a lot of different assets, how should we think about your 2023 production profile for -- on an oil basis, gas basis and then or I should say, on a Boed basis? Yes. So what we talked about on the third quarter call and things haven't really changed from then. And so on the oil side, activity level is probably pretty consistent. So assuming things don't dramatically change, which they haven't in our minds since early November. You can probably expect similar rates of activity and similar rates of oil growth to what we saw in 2022. So kind of that low single-digit type of range. On the BOE side, obviously, we've talked today about a little more allocation to the South Powder, a little more allocation to Dorado. We also have talked about -- we didn't talk about today, but we just got a platform in Trinidad, so we will have increased international drilling and that's a dry gas play. So a little bit of increased natural gas down there. And so the BOEs that flow out of that will probably be in that double-digit range. So we've gone -- this whole session we haven't talked about return of capital, and we only have two minutes left, but you are in a net cash position. And so talk to us about the way you're thinking about returning capital to shareholders from these levels. Yes. So there's -- the first thing, let me say is, being in a net cash position is a strategic advantage, and it's a great place to be in a cyclical business with what we can see has been -- can be very volatile, very quickly. It's what allowed us to make strategic acquisitions like in the Utica, when we bought the minerals there. It's what allows us to be opportunistic and pre-purchase pipe that we're now installing down in Dorado, things of that nature. So it's a fantastic place to be. And quite frankly, I think we're kind of unique because we do have a cash return framework out there. It's a minimum of 60% of our free cash flow will get returned. Again, that includes -- that incorporates and the focus hopefully is still on that regular dividend because that's an important piece, like I described at the beginning of this, but not only have we returned in excess of 60% of free cash flow this past year, we've been able to reinvest in the business, which is still, when you're reinvesting at high returns, the best way to create shareholder value, and we've been able to strengthen the balance sheet over the last year. Those are the three things that I think we're in a very unique position to do it. And it's really because a lot of the things that we talked about today, our focus on being a low-cost operator, our focus on being in multiple basins to allow technology and data drive our improvements. The fact that we invest on a conservative, fiscally conservative, fiscally disciplined price deck, and I think that's really, again, what separates us from many of our peer companies. Yes. Very good. Well, great. Ezra, thank you. Thank you for being here in Florida. I wish you a wonderful 2023, and we'll talk to you in a couple of weeks on the call.
EarningCall_1399	Good morning. Welcome to the Prosperity Bancshares, Inc. Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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, ladies and gentlemen, and welcome to Prosperity Bancshares fourth quarter 2022 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next several weeks. I'm Charlotte Rasche, General Counsel of Prosperity Bancshares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Timanus Jr, Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice-Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy and Bob Dowdell, Executive Vice-President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call interested parties may participate live by following the instructions that will be provided by our call moderator MJ. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Thank you, Charlotte. I'd like to welcome and thank everyone listening to our fourth quarter 2022 conference call. Our annualized return on average assets for the three months ended December 31, 2022, was 1.47% and our annualized return on average tangible common equity came in at 16.2%. Prosperity's efficiency ratio was 40.8% for the three months ending December 31, 2022. Our net income was $137.9 million for the three months ending December 31, 2022 and that was compared with the $126 million for the same period in 2021, which represented an increase of 8.7%. The net income per diluted common share was $1.51 for the three months ending December 31, 2022 compared with $1.38 for the same period in 2021, which represented an increase of 9.4%. Our net income was $524 million for the year ended December 31, 2022 compared with $519 million for 2021, an increase of $5 million or 1%. Net income per diluted common share was $5.73 for the year ending December 31, 2022 compared to $5.60 for 2021, an increase of 2.3%. Our loans excluding Warehouse Purchase Program and PPP loans at December 31, 2022, were $18 billion compared with $16 billion -- $16.7 billion at December 31, 2021, an increase of $1.4 billion or 8.5%. Our linked-quarter loans excluding Warehouse Purchase Program and PPP loans increased $518 million or 3%, 11.8% annualized from the $17.6 billion at September 30, 2022. Our deposits at December 31, 2022 were $28.5 billion, a decrease of $2.2 billion or 7.3% when you compare to $30.8 billion at December 31, 2021, primarily due to a decrease in public fund deposits. Linked quarter deposits decreased to $766 million or 2.6% from the $29.3 billion at September 30, 2022. Our period-end and average non-interest bearing deposits saw small increases, but as mentioned earlier, most of the decrease in the total deposits was in the public fund category. Our asset quality, nonperforming assets totaled $27 million or 8 basis points of quarterly average interest-earning assets at December 31, 2022, and that's compared with $28 million or 9 basis points of quarterly average interest earning assets at December 31, 2021. The allowance for credit losses on loans and off-balance sheet credit exposure was $311 million at December 31, 2022 compared with $316 million last year December 31, 2021 and $312 million at September 30, 2022. We are excited about our pending merger with First Bancshares of Texas and Lone Star State Bancshares. The combined banks will add approximately $3 billion in assets and increase our market share in the West Texas areas of Lubbock, Midland and Odessa, as well as provide entry into new markets to us in Wichita Falls, Amarillo and the Horseshoe Bay, Marble Falls and Fredericksburg areas in Central Texas. The transactions are pending regulatory and shareholder approvals and are expected to close during the first half of 2023, although delays could occur. During the fourth quarter of 2022, Prosperity continued to see growth in loans, which we expect will continue into 2023. The growth comes from loans, as well as existing loans not paying-off as fast as they did when rates were low and it was opportunistic for borrowers to repay or move the loans. Consumer spending remains strong, especially in the tourism, restaurant and hospitality sectors. Real estate sales and pricing have been affected by the increase in rates, but we expect that because of inventory levels and the population growth, the impact will be less in Texas and Oklahoma. We believe that the economies in Texas and Oklahoma will outperform other states over the next several years as companies and individuals continue to move to the states because of lower tax rates and a business-friendly political environment. We expect that companies will need more infrastructure and buildings and consumers will need more housing and places to spend their money and both will need banks to finance to grow. While the net interest margin at some banks has improved immediately because of higher rates, we expect Prosperityâs net interest margin to continue to increase over the next several years as our bond portfolio, which yielded 1.96% during the fourth quarter of 2022, reprices to higher yields assuming that rates normalize near the current rate, Overall, we are excited about the growth and future of our company. I would like to thank our customers, associates, directors and shareholders for helping build such a successful bank. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer to discuss some of the specific financial results we achieved. Asylbek? Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended December 31, 2022 was $256.1 million compared with $244.8 million for the same period in 2021, an increase of $11.4 million or 4.6%. This was due to an increase in loan and security interest income of $28.9 million and $25.7 million, respectively, partially offset by increase in interest expense of $43.6 million. Comparing the quarter ended December 31, 2022 to the same period in 2021, the net interest income increased $11.4 million despite having $7.9 million less in PPP loan fee income and $4.5 million less in fair value loan income. The net interest margin on a tax equivalent basis was 3.05% for the three months ended December 31, 2022 compared to 2.97% for the same period in 2021 and 3.11% for the quarter ended September 30, 2022. Excluding purchase accounting adjustments, the net interest margin for the quarter ended December 31, 2022 was 3.04% compared to 2.91% for the same period in 2021 and 3.1% for the quarter ended September 30, 2022. Noninterest income was $37.7 million for the three months ended December 31, 2022 compared to $35.8 million for the same period in 2021 and $34.7 million for the quarter ended September 30, 2022. Noninterest expense for the three months ended December 31, 2022 was $119.2 million compared to $119.5 million for the same period in 2021 and $122.2 million for the quarter ended September 30, 2022. For the first quarter 2023, the new FDIC assessment rate is expected to increase expenses by approximately $2 million. As a result, we expect noninterest expense for the first quarter 2023 to be in the range of $122 million to $124 million. This excludes any potential impact from one-time merger related costs for our pending acquisition, which are expected to close in the first half of 2023. The efficiency ratio was 40.9% for the three months ended December 31, 2022 compared to 42.8% for the same period in 2021 and 41.4% for the three months ended September 30, 2022. The bond portfolio metrics at December 31, 2022 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.2 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Timanus? Thank you, Asylbek. Our non-performing assets at quarter end, December 31, 2022 totaled $27,494,000 or 15 basis points of loans and other real estate, compared to $19,878,000 or 11 basis points at September 30, 2022. This represents approximately a 38% increase in non-performing assets. The December 31, 2022 non-performing asset total was comprised of $25,531,000 in loans, $0 in repossessed assets and $1,963,000 in other real estate. Of the $27,494,000 in non-performing assets, only $767,000 are energy credits. Since December 31, 2022, $6,114,000 in non-performing assets have been removed. This represents 22% of the non-performing assets at December 31. Net charge-offs for the three months ended December 31, 2022, were $603 million compared to -- excuse me, $603,000, compared to $1,780,000 for the quarter ended September 30, 2022. No dollars were added to the allowance for credit losses during the quarter ended December 31, 2022, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended December 31, 2022 was $613 million. Loans outstanding at December 31, 2022 were approximately $18.840 billion, compared to $18.506 billion at September 30, 2022. The December 31, 2022 loan total is made up of 42% fixed rate loans 30% floating rate and 28% variable rate. Thank you, Tim. At this time, we are prepared to answer your questions. MJ, can you please assist us with questions? Yes, of course. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Brady Gailey with KBW. Please go ahead. Brady, your line is open. So the margin took a little bit of a step-back in the fourth quarter. I know longer-term as the bond book reprices higher, that's very beneficial to the margin, but do you think the margin -- when do you think the margin can really start to see some material upside from this dynamic of the bond book pricing higher? Hey, Brady, this is Asylbek. I'll take that and maybe we can add more later. But our story doesn't change, right? It's all about our balance sheet mix. If you look at long term, you're right. I mean, long term looks very positive for us because of a higher interest rate environment we are right now. We have about $14 billion in bond portfolio right now, which is yielding less than 2%. And if you look at our loan portfolio, as Mr. Timanus just mentioned, we have 42% in fixed rate and about 28% in variable, those are going to be repricing over time as well. So that looks very positive on us. And if you look at our bond portfolio, we have about $2.2 billion cash flow coming in every year, and we had very strong loan growth the past few quarters. And if you could just take that cash flow and put it towards the high-yielding loans, which [indiscernible] was 6%, 7% right now yield on loans, that's going to be very positive in the long term. And one more thing I will add. If you look at our IRR model, if you look at 12 months, 24 months, we see expanding NIM, and that's very consistent with what we've done in the last rate cycle. That's more color on the long term. But if you look at short term, maybe the first quarter, I would say our NIM going to be a bit flattish because of still repricing of the deposits. And that's, I think -- the wild card is the repricing of the deposits, especially with the environment we are in competition. But we feel very positive about long-term margin, and that -- I mean, that should expand in the long term. Brady, I'm going to jump in for just a minute, if I can. Based on our models that we have, we show pretty significant increases in our net interest margins starting in the six month period, 12-month period, really nice. 24 months is hard to believe something what the model says sometimes. However, that's predicated on rates where they're at today, and as rates increase, I think they have plugged in, in this model, a 25 basis points increase in January -- I'm sorry, in February and a 25 basis points increase in March. And the model for every 100 basis points increase takes into consideration like on your money market accounts, everyone has a different beta, but we use 65 basis points of that for the increase. So if things went up 100 basis points, we would say 65% in our model. So that's -- I'm just trying to give you some background on it. But -- so that's based on the model. Having said that, the things that always could change if you saw the deposit pressure was there that you had to raise rates faster or more than that in the short term than we thought that could also -- that could change the net interest margin as when you do get it. I guess, that's the point I would make in making it simple, no matter how you look at it, we have a really long way to go in a normalized rate environment with our deal. It just depends on the timing of it, I think. So I think where other banks have gotten most of their net interest margin gain already, ours is yet to come. It's just a matter of when. So the bond book -- the yield on the bond book is 1.96%. When you're buying new bonds today or like if you look at the bond purchases you did in the fourth quarter, what was the new yield on those? We don't have to buy them anymore because our loans have been growing. So we've been putting all in the loans. But the fact of the matter is -- and we -- I think for the short term, I don't see us really buying bonds as much as really increasing our loan portfolio, really. I think we've increased our loan portfolio to $500 million in the last quarter. The first quarter still looks pretty good, too. I know that in some areas of the country they're talking about a recession. But right now, we still see some strength even in the loan portfolio. So if you ask me my gut feeling with the amount of money that we're borrowing right now and what we're doing in loans, I think that most it will go more towards the loans and the reduction in the Federal Home Loan borrowings probably. And I think it would be clearly our preference to put those dollars in loans not in securities at that level. So -- and we've had some success at that here lately. So that's the plan. And on the loan growth, I think you guys kind of longer-term guide to a mid-single digit level loan growth, but as I look at the last three quarters, annualized, you are growing like north of 10%, so how do you think about loan growth for 2023? Yes. Brady, I think part of this loan growth is driven by slower paydowns across the portfolio, and in particular, that structured real estate portfolio that we had at legacy, which is down under $400 million now, so those payoffs are really slowing down on that side. David mentioned the first month of the year was almost behind us, really strong loan growth for this first month, consistent with what we've seen in the last couple of quarters, maybe even a little better than what we've seen in the last couple of quarters -- quarter-to-date. So if I think about the year, I would say somewhere in the mid-single digits to the very high single digits, with the difference being where single-family mortgage origination pricing comes in. At the lower end of single-family mortgage origination, it might make more sense for us to package those things and sell them off for the gain, and we'll make money on the gain versus the loan growth. So if rates are such that, that happens, I would say more towards the mid-single-digit range to the extent we portfolio those, high single-digit loan growth. So that's the swing factor. Either way, we're going to make more money. And we're just cognizant of where the rates are in these things, and we'll be both strategic and thoughtful on whether we portfolio to loans are selling. Hey. Maybe just sticking with loan growth, Kevin, just on the usual update on the warehouse, it looks like the -- not surprisingly, the volumes were a little bit less than what you'd kind of talked about back in October, not surprised just given the MBA's forecast. But any sort of stab in the near term for warehouse volumes. I would probably expect a little bit more downward pressure and then maybe some stabilization, but I would just love your thoughts. Thanks. Yes. And I saw your note this morning, you had me scrambling for our transcript, because I thought I guided right to the number we had. But I'll call you later on that once I confirm. It has trickled down in January. It always does. Michael, we're averaging so far for the quarter exactly $590 million. So it's off from the last quarter average of $729 million, I think, something like that. So I expect this would be kind of the low points for the quarter, and we may rally from here a little bit, but again, depending upon where the 10-year moves, but it seems to be settling in. I'm going to say we're going to average for the quarter somewhere between $550 million and $600 million. Perfect. And then maybe just for David Zalman. Obviously, the two deals announced recently, I know there's a lot of other banks out there, a lot of dislocations. Just any change and update on kind of your thought process around M&A at this point? And would you potentially look to maybe do additional deals here in the next couple of quarters, even if you're still integrating the two that you've already announced? Thanks. Well, I think that M&A is part of our plan. I mean, we always for the last 20, 30 years, our plan has been trying to shoot for about an 8% organic growth rate on the loans and about 4% on the deposits and the rest of double-digit always came in with the M&A. So the answer to that would be yes. I think that -- if you ask me if it's as busy as it was last year, I think that there are still deals out there. We're still getting calls. I think it's more tempered. Something that is more challenging is the AOCI on most of the banks and books right now. I think that's a deal that we'll have to work through on some of these deals. In the past, on larger deals, sometimes you were able to take it and make the mark. And then on some of the smaller deals we marked the mark in the price -- so there's -- there will have to be some discussion and adjustment with regard to the AOCI. But I think there's always going to be M&A, times change, you wake up one morning, they're not the same as it was next morning for people. And there's just a lot of stuff that always goes on. So I think there will always be M&A and we'll probably be a player in that. Okay. And maybe finally for me, just on the buyback announcement, you haven't repurchased shares here recently. Is that just more of a kind of a tool in case there's dislocations? Or would you actually expect to maybe potentially be a little bit opportunistic here? Thanks. Historically, we've used it for dislocation. I think whenever the price gets a little crazy, gets under 70, I think that we've been going back into the market. So in the past, and I would say that -- I'm not saying that it would be just like that. But in the past, we've used it primarily for dislocation. I appreciated all the color on the margin earlier. I was just wondering if you could talk about where your incremental loan production yields are, what you're seeing today. I know the curve has been all over the place. But given where we are today, what are you guys seeing? Got it. So you got a decent amount of upside there from your average yield on the quarter alone over the next few years? We averaged 5% for the quarter, if I remember it correctly. So there is quite a bit of upside available. That's correct. Yes. Sounds good. And then just a quick one on expenses. I appreciate the 1Q outlook. But I know you guys have your merit increases in 2Q, I think, midway through. So if you have any visibility into how much of a step-up you guys are expecting from that in 2Q and maybe into 3Q, we get the full quarter impact by 3Q, that would be great. Yes. I'll take this one. And from the merit increase, historically, we increased about 3%, 4%. I think, from the dollar wise, I think it will be consistent with the increase of what we had last year. So it's going to probably add another $2 million to $3 million additional -- yes. So it's going to be about, I think, calculating about $2 million additional expenses starting in the second quarter. Okay. Great. And maybe one last one on deposits. I was wondering how much in the way of public deposits you guys have left after the decline in 4Q. And then are you guys still thinking about core deposit growth of roughly 2% that you were talking about before? Has that changed at all? And then last one, how are you thinking about deposit betas for the cycle at this point? Thanks. Yes. On the public funds, we ended the year at about $3.3 billion, and that's about where we are right now. I think it's safe to say that we have a good relationship with all of our public fund customers with text pool and other rate payers like that above 4% right now. It's in our best interest, we believe, to let some of that money go at those rates instead of paying that ourselves. That has no indication that we don't have a good relationship with those public funds. We still have their operating accounts, and we still have their day-to-day dollars with us, and we don't see that changing. We do have several bids coming up this year, and that's always a challenge because some banks are -- tend to be overly aggressive and some tend to be reasonable. So we just deal with that on a case-by-case basis. But I think we feel good about where we are on public funds right now. Yeah. I think as far as the 2% increase. I would -- it's hard for me to say that we would grow 2%, because -- just because of the interest rates, some of the rates other banks are paying are pretty high and we haven't chased the rates, so normally I would just -- I would always tell you it's the lay down that we're going to be 2% to 4% organically. But I couldn't tell you that right now and we still want to see where deposits stabilized for our sales, even right now. Yeah. And probably Asylbek is the best guy to answer on. I think you asked about beta as well through the cycle. I think I know where it is but Asylbek on top of that one. Yes. So if you look at just cycle and I'll tell the cycle before the December rate increases. So over 3.75 Fed rate increase, our beta for the interest bearing deposit was like 20 basis points. And if you just look at total deposits like 12 basis points over that period, but it's running less than what we project in our IRR report. But as we know, the betas starts slow and kind of ramps up a little bit -- but we're not even -- at the beta wise, we're not there yet, what we had experienced back in 2015 or 2016 when the rate increased. So we feel very good about that, but I think there's a competition going on, on the deposits, and I think it's going to put a little bit of pressure on us. It's not only deposits with competitors. I don't know, it may be 10, 15, 20 years since we been so I can't give you as much of a scenario where we've not had deposit growth. So -- but people are going out and you can buy a 4.2% treasury for two years. And there's just other options and people are looking at some of that stuff. And that's why it's hard to really -- if historically, we had something to model it on, we could give you a better opinion. We're just watching it and making changes as we need to on a daily basis. But again, this hasn't happened so long in banking -- and then the last previous years, as you know, we've had all the helicopter money that came in at $2 billion and $3 billion a year. So we're trying to see where all lines out and where it stabilizes. Thanks, good afternoon. Credit, obviously, the hallmark for you guys. When I look at that reserve coverage, it's 10 times the nonperforming loans. So the question is, can you guys still keep a zero provision expense this year even with a mild recession? Yes, I can maybe give a little bit of color from then we run the model in -- as we explained before, we have a base scenario, and we also bake in the recessionary scenarios. So what -- based on the two scenarios combined that the allowance levels we have right now is considered appropriate. And I think going forward, we just have to run the models and see where the economy at that time and to see where the allowance will be, butâ¦ Yes. I mean, the first time we used in the model, we had a COVID variant in there, so we were high using that. And then we went to oil with I think at some point, we use that now and right now, the -- there's some talk of a recession in this year. So that allows us to keep more money in the reserve using those variables like that. Yes. I think it's highly dependent on how high rates get and that remains to be seen. And if for some reason, population growth should slow down or even go the other direction in Texas and Oklahoma, that would have an impact on it. We don't foresee that, but things happen in life that you don't foresee. So I think the answer to your question is, certainly, at this point in time, we wouldn't anticipate right away an increase in the reserve. But as the year plays out, we just have to watch some of those things that I just mentioned. Yes. Last thing I'd add and I think Tim covered it in his prepared remarks was that we did move up, NPA has moved up to $27 million from $19 million or $20 million. Most of that was just some loans that didn't get renewed at year-end that have subsequently been renewed. So that number is back down to where it had been. So in terms of stress, we haven't seen any yet. That doesn't mean we can walk out of this meeting and get a phone call that somebody stumbled, but we're watching it, and we feel good about where we sit. That's correct. A wildcard is always the price of oil and gas. And right now, it's good, it's stable. But it never stays the same. If we've learned anything, we've learned that. So next year, we still think it would probably be stable, but we'll just have to see where it goes. Okay. And then just second question, just I realize regulators operate kind of in a black box. But when you first announced the two acquisitions, the thought was you're going to close it in the first quarter, now you're saying in the first half of the year. When does that impact the synergies from the deal, the accretion to the deal maybe pushes out a little bit? And two, are the regulators saying anything that causing change a little bit in terms of the timing of closing the deals? I'm blaming that statement on our general counsel -- from closing the first quarter to the first half just to be cautious on the deal with everything happening, I mean, I think we're still trying to shoot for a first quarter closing. But she felt that we should put first half just because of the way things are in the regulatory environment right now. I think it's important to emphasize, we don't have any answer yet from the regulators. So until we do, we can't schedule a closing. I had a question on NIM and just given the positive dynamics that you have on the security side, how should we think about the potential downside in NIM if the Fed begins cutting rates in the back half of this year? Should that actually be maybe a little bit of a benefit in the near term if deposit competition alleviate and your securities keep repricing higher? I think overall, big picture, I mean, even Fed would decrease rate, and we don't know, we're just speculating if they would and how much. We still are in the bond portfolio, we're sitting less than 2%. So even they decrease. I mean, there's still a lot of upside for us and also on the loan. So even if there is a foreseeable future, you see the decrease, I think we still have upside. And definitely, you're right, I think from the cost perspective on deposit costs definitely helped the decreased rate environment. I think it probably helps on mergers and acquisitions too, it will change the valuation of the loss in the portfolio and the AOCI probably. But for the most part, the yields that we have in the bond portfolio today really reflect a time and period that we've not seen before in banking where interest rates were at zero. So in any type of normalization of rates we stand to benefit on a repricing too. Got it. And then maybe to round out the discussion on the funding side, can you help us with how we should think about FHLB and CDs as a source of funding. So to the extent that deposit pressure accelerates from here, how much room do you have to bring your loan-to-deposit ratios up versus the 66% or so that it's at right now? So first of all, we have the capability to borrow $15 billion if we want overnight just because of our pledging that we have with the Federal Home Loan Bank. But for the most part, and you can jump in, Asylbek, if you want, but we have a certain amount of bonds that just rolls off every year, which is about $2 billion, close to $2 billion. So instead of buying securities like we have in the past, we would take that money and either put them into the loans that we discuss the growth in loans and also the reduction in the debt. Also, the banks that are joining us will probably take a certain portion of their liquidity instead of reinvesting it and probably pay down the Federal Home Loan Bank too. So it will probably be a combination of money that we get from paydowns in our own portfolio and also the banks that join us, [indiscernible] really necessarily have a big portfolio, but the other one, I would have to look and see, but we're looking at doing that and probably using that money just to pay down the Federal Home Loan Bank probably. I think that people are going to move money in CDs over time as -- if rates stay higher like they are. But again, we've not been the type of bank that goes and advertisers in the paper for CDs or high CD rates or really any high rates. That may change. We don't see that right now. But historically, that's just not something -- we've never chased the money before because we've had so much liquidity. And we still have tremendous amount of liquidity when you look at our ability to borrow and the core deposits that we have. I want to drill down on deposit pricing. And I think last quarter you mentioned that early in 4Q, you increased some of the posted rates across the network. And obviously, we saw that in the 4Q results and some of the deposit pricing pressure. Asylbek, you mentioned incremental deposit pricing pressure in 1Q. Any notable changes in the deposit posted rates over the last few weeks or months? Yes. We -- end of December, we increased our deposits a little bit again. But overall, if you look at the third -- fourth quarter, our beta was overall -- on the interest-bearing deposits for the fourth quarter was like 30 basis points. So right now, we sit there, we might increase a little bit rates on deposits, but we don't have a specific on how much of an increase it will be. If you remember our last meeting, Matt, our last time, I said that probably we saw interest rates going up, and really our money market rate was hardly at anything, what, 50 basis points at that. And I mentioned that be prepared that our net interest margin would probably go down five basis points or six basis points, which it did, because we did take our money market account all the way up to 2.25%. And we also offered -- and one of the CD products, if you went for 22 months at 3.5% on that. So those are the two things that move. I would say, if we go up some more, it would be -- we see a quarter of a point increase in February and a quarter of a point in March, our model has it that we're going to go up 65 basis points of that. So what's 60 times -- 6% of 50. So that's another 30 basis points or something like that. So you could see us still raise in our modeling that could go up to now. If we saw something that really changed and there was so much competition in the money just going out of the bank or something, we might have to make a different, we may have to go up more or something like that. But again, I don't think any of that changes our modeling. We've never been a quarter-to-quarter player. We've been a long-term player. Our net interest margin over time, no matter how you cut it, it's still real positive. And the reason we raised rates last time is because we had core customers, and we want to be more fair with them and give more to them. And even if that happened again, we would do that. But again, it's still not going to change the longer-term outlook of the net interest margin. Yes, Matt, this is Kevin. I'd just add with the cash flows coming off the bond book and our loan-to-deposit ratio sub 70%, we've got a little room to let that loan-to-deposit ratio drift up and protect margin at least in the short run. Brian? I think it even improve your margin, just if you can keep up your loans, too, just I'm not even saying 10%, you pick up 2% or 3% on a couple of billion dollarsâ worth of loans, you really improve your margin dramatically. And sticking with the deposits, I was encouraged that you're -- on the average basis, your noninterest-bearing deposits were pretty flat in 4Q from 3Q. Most of your competitors are seeing some pretty big pressure there. Any color on your depositors and maybe how they're unique versus some of your other public bank peers in Texas? I just -- we see some of our depositors. I think there was a lot of money that came into the banks with the helicopter money and people who had investments everywhere else. Nobody was paying anything. So you see some depositors some -- I think it's really some of your bigger depositor like I watched I was in a trust committee meeting day before yesterday, and I saw where this customer could add $15 million with us in the bank, but he moved it over to our trust department because our trust department was hiring another higher rate from a Goldman Sachs or something like that. So we are seeing some of that at the same time. Greater percentage of retail deposits, more granularity drives some of that for us compared to some of our Texas peers anyhow, but maybe more commercial deposits. It's these small towns where we have really big market shares and granular portfolios where we're getting pressure or people that ask us to come off of our rate sheets tends to be from professionally managed money, bigger company that's got $50 million, $60 million, $70 million in the bank that's got a CFO that's keeping track of things andâ¦ Right. There's only a handful of those, and they're willing to work with us. It's kind of, we don't have to go all the way to the market. That's usually a conversation between either Eddie and David, Tim and myself. But hey, let's take these guys to 2.50 or 2.75 if our rates is 2.25. And thus far anyhow that kept most of the money with us. Yes. I think what you've just said, Kevin, is 100% correct. I would say when I said previously that we have a good relationship with our public fund customers, I think that's the same with all of our deposit customers. And they don't tend -- if they feel like they need a higher rate, they don't tend just to take money out of the bank and put it somewhere. They tend to contact us first, and we talk about it. And while we do have to go up sometimes, we typically don't have to go for and above, at least that's been the case so far. So I think there is upward pressure on deposit rates, but I don't see it getting out of hand. I think it's relatively stable. And I think we have the kind of relationship with our customers where it can be managed. Yes, I said this on the last call, too, in this rate environment, from a guy who ran a 95%, 98% loan-to-deposit ratio bank ex the warehouse. So with the warehouse, it was running 110%. I'm glad to be sitting in this room. Okay. I appreciate all the color, guys. And then just one more on loan growth. It looks like the drivers of that 4Q loan growth was from construction and single family. Kevin, you addressed a single-family portfolio kind of driven by yields as far as kind of the factor in 2023. What about construction? Is that going to be the primary driver of the loan growth in 2023? I think we're going to see it in construction, which is funding up projects that we've approved. We've got a big, very large unfunded and funding up construction book of really good customers, underwritten for rates being materially higher than they are now, and we feel pretty good about that portfolio. And I think we're going to continue to see some success this year on the C&I side. Yes, some of our markets really have some unfunded loan commitments that are really strong right now. Our Houston market had probably over $700 million and Central Texas had -- how much, Eddie did youâ¦ $300 million or $400 million. So if those hold up our book, it looks pretty good. But again, anything can change. We just don't want to tell you something that's going to be this glorious because if you do go into a resection or something like that, that can all change. Overall, I think the guidance that Kevin gave a while ago is a really good guidance to stick with really. I'm probably not going to ask about deposit pricing, but I guess how -- just stepping back, how optimistic are you on the longer-term margin? You talked about putting on loans at 6% to 8%. And certainly, securities yields are higher, and you're saying that you're not overly worried about deposit pricing. I mean what could this margin look like in 12 or 24 months with that kind of increase in earning asset yield? I'd give you what the model said in front of me, but somebody may shoot me if I did. I think I would take away from it. It's not a question whether the net interest margin has a lot of a big increase in it. It's just when it happens. I mean, if we stick with not having to increase rates a whole lot more than where we're at right now, you start seeing pretty good increases in six months, 12 months and 24 months is huge. On the other hand, if we're something -- for some reason -- if for some reason, if you -- if the competition come back or we just saw tons of deposits going somewhere else that we had to change overnight, that would change the duration when this net interest margin would increase. But overall, it looks extremely positive. It's just a matter of managing it really. You got an inversion factor here, right now, too. To me, that's a really big deal. I mean -- I mean when you're 10 years span 3.5 and your two year treasuries span 4.2. There's an inversion factor at the same time. So I don't want to be evasive on what you're asking, Jon, just it's really -- we're trying to manage through it ourselves. But again, I've always used the term parking the Queen Mary out in the parking lot, we parked it quite a few times. So we're probably in that process right now navigating parking the Queen Mary right now. It ties into my next question, but I agree, I think a pause would be great for you guys and just if they held it there. This kind of goes back to the, I guess, the Queen Mary and parking lot. I'm thinking of Sugar Land. But when you're -- you talked about the marks on M&A targets. What are you seeing there? Is this like SMB type issues? Is it that bad yet? Or do you expect it to be like that, where you're going to have bigger opportunities longer term? How big of an issue is that? And what are you seeing from some of these potential sellers? What's the message? I think the real challenge on AOCI is if you're talking about a real large merger partner. The smaller ones you can deal with and really in some of the smaller ones, that we've done, we mark-to-market, what it is. So the seller actually takes the hit on the loss. I think it's really the bigger ones that we're really looking at. And it's just one of those sayings Iâd say. And it's hard to pay what they wanted in the past, I would say it like this and not -- and if you have to mark-to-market on a bigger deal, it just hurts your -- it hurts your capital, your tangible capital ratio, and it's not something that we're willing to go down on that much. There's going to be some give and take on the seller and the buyer, I think, in the future if it's a bigger deal. Yes. The earn back part isn't -- it's very capable, right? Yes. But the goodwill sticks forever. And those are -- these bigger deals, it runs into a big goodwill number that you don't get rid of. I mean from an earnings standpoint, when you look at one of these deals when you model it out, the earnings are just if you mark everything to market are just phenomenal. I mean because the bond portfolio may be like us instead of waiting two and three years to get all that money back, you're marking it to market right there. And so the earnings for the first two or three years just look phenomenal on a deal like that. But the problem is really on the tangible capital issue, I think. I wanted to follow up on your comments around why your noninterest-bearing deposit mix has held up materially better than many other banks. I appreciate all the color that you gave. I wanted to ask if you could also discuss how much of a role earnings credit adjustments play in your relationship with some of your commercial customers? And has that been entering into the discussions more? I'll start it off. The earnings credit were again, we've been raising that. I think we raised it 10 basis points this morning. But again, we continue to raise that. I think the granularity is really the reason for the noninterest-bearing accounts. We don't have -- we don't have like 10% or 20% of our customers that control almost everything in the bank. It's -- we have so many businesses and small businesses around the state just because of -- we're in metro areas, we're in small communities. And I think it's just extremely granular. And there's not one person -- there's not one person owns the bank, I guess, you could say. It just made up of a bunch of immigrants, I guess, from everywhere -- so all of that makes it more granular, I think. Yes. And on the ECR, while we get rate requests for off-sheet rate requests, Frequently, the ECR doesn't come up all that frequent, and it's that professionally managed larger corporation that's got a bunch of money with us, which we can count on a couple of hands where those CFOs are thumping on us for ECR. But we haven't had to move nearly as much as you would think. I can take the one client that has been pretty adamant about us keeping pace. And that's the only phone call I've received in last couple of months. It was friendly pressure. It's like, hey, did you mean pathway on this thing and we'll just call it a day and I think specifically in that case, Tim and I had a conversation came up with a number and went back to the CFO and he said, "I'll take it. We're good. Talk soon." Yes. That makes a lot of sense. That's super helpful color. Thank you. Separately, I wanted to circle back on the commentary about the expected improvement in NIM over the next several years as the bond portfolio reprices. I wanted to ask if there's any way you consider putting on swaps to potentially lock in some of the benefit of the higher rate environment to the extent that we do start to think about the scenario where the Fed ends up cutting before you have the opportunity to fully see that repricing benefit show up. Curious what your thoughts are around potentially putting on swaps or otherwise using [indiscernible] Historically, and again, things change all the time. Historically, when we would look at doing swaps by the time you pay the premium to do the swap and everything, your profit was all gone. And in our business, primarily -- our business is primarily monitoring risk and taking risk and that's -- we've made more money taking risk over periods of time and understanding what the risks are than paying it to somebody else. I guess that may change at some point in time. But again, from what we've looked at, we've been able to bite and beat the insurance guy a couple of times. I've had a couple of theoretical questions, thought processes and discussions around that. Nothing that's caused us to pull the trigger on anything. Yes. I mean if you look historically, and things don't always repeat themselves. But historically, we've been able to manage all types of environments without really going to derivatives in an all-in way. I think we've been able to do that, though, Tim, because of the makeup of the bank and the depositors, there's so many. I think if you had so much of your money in high-yielding money markets or CDs. And if our customer base wasn't so granular and so mixed, I don't think we can do it, but because we're so mixed we're able to do that, I think. A lot of the banks aren't. That's really helpful. If I may squeeze in one last one. In an environment where rates do stay higher for longer as the Fed proceeds with QE. I'd love to hear David from you and the rest of the team, how you're thinking about the risk that the mix of noninterest-bearing deposits may not just go back to sort of the 2019 pre-COVID levels, but could potentially overshoot back towards even pre-GFC levels. And of course, back then, everyone's noninterest-bearing mix was much lower. I don't know that ours was a whole lot lower. What are we a 30-something percent right now, what do we have? 38% probably before that, we were probably averaging about 30%, 35% or something like that. So I don't see a tremendous amount of change. And again, I just think it's a real granular deal so I really don't see that happening. I think it will change, though. I think that I think you're going to see depositors take money out of sometimes out of checking accounts or even interest-bearing checking accounts and smaller accounts are going to start when these rates stay where they're at, they're going to go into CDs and stuff like that. So I do think you'll see a mix where you had less than 10% of your money in CDs. I don't think we'll get back to where it was at one point. At one point, we had, what, 20% or 30% of our money on CDs. I don't see that -- I don't think it would be unreasonable to say that you could have 20% of your money in CDs again one day if rates stay up where they're at like this. This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks. Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

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